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Now it's time for us to start Tokyo Electron Financial Announcement for the Third Quarter of Fiscal Year Ended on March 31, 2023. Thank you very much for joining us today despite your busy schedule. I am Yatsuda of IR department acting as a moderator for today's session. Now I'd like to introduce today's attendees Mr. Toshiki Kawai, Representative Director, President and CEO; next, Mr. Hiroshi Kawamoto, Vice President and General Manager, Global Business Platform Division Finance Unit. Prior to the presentation, let me explain the flow of today's conference. First of all, Mr. Kawamoto and Mr. Kawai will make presentation. After that, until 6:30 Japan Time, where we'll have a question-and-answer session where we take questions from the audience. This meeting will use two channels on Webex for the simultaneous interpretation to Japanese and English. As we explained in our e-mail, you are kindly requested to use apps on PCs or mobile terminals, if you plan to ask questions. But if you are not going to ask questions, you can use telephone. In addition, since this conference is intended for the institutional investors and analysts, we would appreciate your understanding that we receive questions only from institutional investors and analysts. We will post the audio contents of this conference in Japanese and English on our website within a couple of days. It will be appreciated if you could also visit our website. So now I would like to present financial summary of the third quarter. In the third quarter, we generated net sales of JPY467.8 billion, 34.0% decline from the previous quarter. By segment, SPE net sales were JPY458.8 billion. FPD net sales were JPY8.9 billion. Gross profit was JPY203.9 billion and operating income was JPY114.7 billion. Since the manufacturing -- sales was rather high in the second quarter. Therefore, compared with the previous year sales was declined relatively speaking. The manufacturing cost to sales ratio increased. As a result, gross profit margin was 43.6% declined by 2.7 percentage points from the previous quarter. Operating profit margin was 24.5%, declining by 8.3 percentage points due to the increase of manufacturing cost sales ratio and SG&A sales ratio. This is the graphic representation of financial summary of the previous page. Really appreciate if you take a look at it. This slide shows segment information. For SPE, we generated net sales of JPY458.8 billion and delivered segment profit margin of 29.5%. Just like the overall company results, since manufacturing cost to sales ratio and SG&A sales ratio increased along with the decline of net sales, segment profit margin should decline from the previous quarter. For FPD net sales were JPY8.9 billion and segment profit margin was minus 3.7%. As for the composition of net sales in the third quarter, SPE sales accounted for 98%, while FPD sales accounted for 2%. This shows the SPE sales by region. As you can see, the SPE sales declined from the previous quarter, mainly in China, the pink portion; North America, purple portion and Japan, the blue color. Next slide, please. This slide shows SPE new equipment sales by application. On the right, the third quarter. From the bottom of this chart, sales to logic manufacturers accounted for 69%. Non-volatile memory accounted for 16% and DRAM accounted for 15%. Proportion of sales to non-volatile memory manufacturers declined while that of logic and others showed an increase. This slide shows Field Solutions sales. In the third quarter, sales amounted to JPY117.5 billion. The sales declined from the previous quarter, which is attributed to decreased sales of used equipment modifications and also drop of part sales due to the lower utilization of our customers' fabs. On the other hand, sales of the service in Field Solutions remained strong. Next, this slide shows the balance sheet. The total assets were JPY2,092.7 billion. Cash and cash equivalents were JPY389.4 billion, accounts receivable and contract assets were JPY454.4 billion. Inventories were JPY632.0 billion showing an increase from the previous quarter due to strategic procurement and manufacturing doubling. Liabilities was JPY658.3 billion, net assets were JPY1,434.3 billion. The equity ratio was 68.0%. Now you can see the cash flow. The cash flow from operating activities was JPY53.2 billion. The cash flow from investing activities was minus JPY13.8 billion due to the investment to the fixed assets. And cash flow from financing activities of minus JPY134.6 billion, primarily due to the dividend payment. The free cash flow was JPY39.3 billion. This was all about the consolidated financial summary of the third quarter. Finally, this slide shows the announcement of stock split that we announced today. I'd like to briefly touch upon this issue. On the record date of March 31, Friday 2023, Tokyo Electron split the shares of common stock with the proportion of one share into 3 shares. The purpose of this stock split is to create the environment to encourage more investment by lowering minimum investment in order to expand our investor base. For giving comprehensive consolidation to various factors, including the trend of stock market, our shelf life, share distribution and shareholder composition, we intend to pursue a proper unit of investment for us to further enhance our corporate value. As for the dividend, through this record dated March 31, 2023, we will pay the year-end dividend based on the number of shares issued before the stock split since the effective date of this stock split is April 1, 2023. Good afternoon. I am Kawai once again. So now I'd like to talk about business environment and financial estimates. First of all, let me start with the business environment. Driven by progress of digital shift in the society, the WFE market has grown from $65 billion in 2020 to $92 billion in 2021 and about $100 billion in 2022. Though the WFE market is currently under adjustment due to the impact of macro economy and geopolitical developments, such as inflation, interest rate, COVID-19, utility costs and sluggish final demand, we expect that the WFE market will start coming from the second half of this year and reach about $80 billion in the full year of 2023. Beyond 2024, the WFE market is expected to enter the stage of further growth driven by emergence of new CPUs and data centers, which are likely to be put with the advanced DRAM, DDR5 and 3D NAND with three access layers including more memory capacity. It is also expected that the data centers built in around 2017 and 2018 will be replaced by adopting innovative semiconductor devices with higher energy efficiency. Growth of Metaverse starting full-fledged service in 2025 and beyond, spread of electric vehicles and recovery of smartphone demand are expected to strongly drive expansion of the WFE market. Next, this slide shows business progress in the third quarter of fiscal year ending in March 2023. As for SPE in calendar 2022, our SPE business generated net sales of JPY2,161.1 billion on a calendar year basis, hitting the record high. Our new equipment sales recorded an annual growth of 22%, outperforming the WFE market, which grew by 8%. I believe such positive results were achieved by the maximum effort we made to address the customers' demand, supported by our resilient and strong supply chain despite the lingering procurement uncertainty and disruption of logistics. The maturation of our strategic products and acquisition of PORs in the customers' development line, which leads to our future growth have been on course well-aligned with midterm management plan. In SEMICON Japan held last December, we released a new single wafer cleaning system, CELLESTA MS2. This new equipment is able to simultaneously clean both surfaces of the wafer without reversing it, which realized higher productivity and lower running costs. Conventionally, during cleaning process pure water or gas was used to protect the wafer surface, which has not been cleaned. CELLESTA MS2 has eliminated such needs of water or gas, which also contribute to the lower environmental footprint. We are determined to strive for development of technologies to address our customers' needs. And we have decided to reform our organizational structure in an attempt to promote technology development for application-specific semiconductor devices, which have grown considerably in recent years and expected to grow further in the future and to expand business opportunities furthermore. Application, leveraging such application-specific semiconductor devices include Metaverse, Autonomous Mobility, Green Energy, IoT & information and Communication. Our company calls these applications MAGIC market in short and will place more focus on these areas. Key elements in MAGIC market includes semiconductors such as power device, CMOS image sensor, and RF, devices embedded into semiconductors, such as Waveguide, micro LED and silicon photonics and also displays. For evaluation those key elements, broad range of technology innovation is essential. Leveraging the leading-edge technology, we have developed so far and experienced based on wealth of installed base, where we enhance our responsive capability. In the domains of MAGIC, displays play extremely important lows interface in order to enhance our technology innovation capability and seamless customer responsiveness by leveraging our know-how for optical devices, and we have cultivated through FPD manufacturing. Commencing April 1, 2023, we will merge Field Solutions Business Unit and FPD Business Unit to newly established Diverse Systems and Solutions Business Unit, or DSS BU for further business expansion by efficiently mixing resources to MAGIC market where significant growth is expected, which will maximize business opportunities. As for the FPD business, Capital investment in FPD fabrication equipment, TFT array process is expected to decline by 30% to 40% in calendar 2023, as a round of large amount of investment to LCD and OLED was completed. As for the future FPD business, we will focus on high value-added areas such as etching. For the inkjet printing system, we have suspended the development project by taking account of its growth potential. For the inkjet printing system, our technology is advantageous, particularly in large-size OLED, and we have evaluating the technology together with leading FPD customers over the past few years, along with the difficulties caused by COVID-19 spread, however, need for [IT] (ph) mobile display, rather than need for life flat TV have grown recently. And accordingly, our customers have revised their products strategy. Consequently, our customers are shifting their focus of capital investments to micro LED, micro OLED and [ITOLED] (ph). This micro-OLED is one of the devices in the MAGIC domains that I explained before. Based on these backgrounds, we have decided to reallocate our resources to those areas with faster growth potential so that we can maximize profits. As I said earlier, Field Solution business unit and FPD business unit will be merged in fiscal 2024. And accordingly, we will not disclose financial performance, specific to FPD segment because those two business will operate altogether. Next, I will present the financial estimate for fiscal year ending in March 2023. In November 2022, we revised fiscal 2023 financial estimate. This time, we scrutinized the results of the third quarter and estimates of the fourth quarter again, and we are going to revise the financial estimate upward by JPY70 billion. On a full year basis, we expect net sales of JPY2,170 billion, gross profit of JPY946 billion, operating income of JPY580 billion and net income attributed to owners of parent of JPY433 billion. This slide shows SPE new equipment sales forecast in the fourth quarter. Compared with the third quarter, there's little change in application mix and slight growth is expected in sales. As I said earlier, SPE new equipment sales in calendar 2022 from January through December were JPY1,689.6 billion, growing by about 22% on a year-on-year basis. On a fiscal year basis, we also expect about 11% growth. In calendar 2023, we will work hard aiming to outperform the market again. This shows our plan for R&D expenses and CapEx. The plan remained unchanged. As we announced before, over the five years to go, we plan to invest more than JPY1 trillion in R&D and spent more than JPY400 billion for capital investment, mainly in evaluation tools. To achieve the midterm management plan we will continue proactive R&D and capital investment. My last slide shows dividend forecast. For interim dividend, we paid JPY857, which is record high interim dividend, along with the revision of our financial estimates year-end dividend is expected to be JPY531. As I said in the previous meeting, while celebrating our 60th anniversary this year, we are planning to -- planning a commemorative dividend of JPY200 per share at the end of this fiscal year with our sincere gratitude to the shareholders who have warmly supported our growth. I'm Nakamura. For WFE market, I would like to learn about how to look at the WFE market 2023? That's about 20%. The second half is you expect recovery in the market. So what sort of application will drive the recovery in the WFE market first? And 2024, you have any forecast for 2024? In the previous meeting 2024 will exceed the result of 2022. That's what you've said in the previous meeting. As of today, what sort of latest viewpoint you have for the 2024 market? For WFE market is $80 billion, around $80 billion. So our present adjustments are just being conducted. We are just in the middle of adjustment period. So 20% is what we can -- 20% decline in this year. But actually, we are very close to the bottom. So we can see the sharp increase from now on. As a result, we can achieve $80 billion. That's how we view the WFE market. So memories are now under adjustment as we presented in previous meeting and that condition remain unchanged. So proportion up until recently, last year or two years ago, with the proportion was about 64%, Logic, 60%, and memory 40%. That is the kind of proportion between logic and memory. But last year, from the second half of last year, 72% to 30% and investment in the first half of this year, namely investment will be reduced. Maybe 80% is divided into 80% to 20% between logic and memory. That's how we view the WFE market. So in the recovery -- so in the second half next year, especially the fourth quarter, we expect some recovery in memory. As for the [indiscernible] of the recovery, actually, customers are now reducing their utilization ratio of their fab. So because that may have some impacts on the balance between supply and demand so slightly DRAM might be a bit earlier than NAND in terms of recovery. But depending on the utilization ratio of customers' fab DRAM and NAND may recover at the same time. So this is our view for the WFE market. For 2024, the direction in 2024, as you know, there are various factors. We need to closely recap. By 2024 and 2025, the recovery trend will continue. That focus remains unchanged. In particular, high-speed CPUs and DDR5 -- 300 they are three times layers 3D NAND and 2025 already, we have seen some emergence of the Metaverse and Metaverse will start full-fledged servicing near 2025. So new servers in low-power consumption devices with high speed were coming out. So 2016, 2017, we hit the bid. So data center will be replaced with the new innovative semiconductors with high energy power efficiency not only 2024, but 2025, you can see the growing trend. Last year, WFE market hit the maximum almost the same or more than last year WFE market will grow that much in 2025 in our viewpoint, I can say our view doesn't change. In that sense, 2024 and 2025, the COVID-19 impact. We had the strong demand for PC or mobile, we had the strong demand during COVID, in COVID spreads, and we may see some replacement demand for the PC and mobile phone as well. I am Yoshida from CLSA Securities, Japan. So for this year's guidance, so now you revise the financial estimate upward. So now you have the new equipment -- Field Solution. I think your focus is upward, especially for Field Solution. What sort of background are there to increase your focus? As for new equipment. By application, maybe the logic and DRAM increases and NAND dropped a little bit. So I want to see, which was the driver to revise your financial estimates upward? Thank you very much for your question. About your question, JPY70 billion upfront revision was made. And your question is what is the major reason for that upward revision of JPY70 billion. Is my understanding correct? So partially, for logic, next fiscal year, April and onward, we had some expectation of sales. But actually, those orders are put forward to this fourth quarter of this fiscal year in the two companies in logic area, two logic manufacturers and also the America China trade conflict. So the October 7 last year, the American Government announced their export control and customers -- American two vendors are not able to deliver to the China customers, and we incorporated the impact of first trade export controlled at maximum level. Of course, the export control had some impact but compared to the worst scenario, there was not so much drastic change in the China customers, the CapEx plan. So that is the reason why we made the upward revised by JPY70 billion. So for China, in particular, as you said earlier, so DRAM is from China -- China's impact mainly. Is that correct understanding? So all of the items covered by the American Government export control, I wonder maybe the customers' CapEx plan might be changed, actually, not only DRAM. Actually, I want to just give you some overall answer rather than specific to the DRAM. So how about Field Solution? Maybe you have revised the financial estimate for Field Solution upwards as well. So what is the major reason for that upward revision for the Field Solution? In the previous meeting, there have been no changes in principle. So Kawamoto San just answer that because of the microphone, by and large, for Field Solution, there have been no changes in our financial estimates. I am Hirakawa from BofA Securities. My question is a kind of follow-up question of previous question. So 2022 and 2023, WFE market so the impact of the American trade regulation, what is the proportion of the impact of the American regulations and Tokyo Electron calendar year 2023 and/or fiscal year 2023? What sort of impact are you suffering from that can you say, regulation imposed by the American Government? So geopolitical issues are hot topic right now. So as one company, we are very careful making some comments, honestly speaking. So as a company, I would like to refrain from making specific comments on those issues. Last year, we reported some facts and based on that, WFE should be $80 billion. That's our current prospect that we want to report to you this time. So I would like to ask some questions. So in the second quarter, you revised the second half financial estimate by 20% and 50%, 50% between the China market and the memory adjustment, so now 10%. Half of that, less than 10% impact is smaller than 10%. Is that correct understanding? Well, there are still many factors which have some influence, and we do not see the clear direction in the future. So if we receive some new information, we try to respond to that new information appropriately. As for your question, we didn't conduct such kind of calculations. So please allow me to refrain from answering that question. Thank you very much, Mr. Hirakawa, for your question. Next question is from Mr. Wadaki of Mitsubishi UFJ Morgan Stanley Securities. I am Wadaki. I have one question. So toward next year, 2023, 20% digitalization is expected. And I think the drastic decline might be expected depending on some tool [indiscernible] developer or diffusion furnace. For those decline do you expect for each one of those tools, equipment? For memory, and logic proportion, I said 80% to 20% between logic and memory. That's what I said earlier. In that sense, for example, 3D NAND will use the long etching processes. The investment in that area compared with last year will be decreasing. On the other hand, for logic, in the case of our company, in particular, last year, about 55% increase was recorded for logic sales last year. In that sense, DRAM and 3D NAND as well as logic, you can see a very good balance in orders that we received so far. Therefore, by product, there is no drastic drain. We don't -- we have very limited impact because there is a good balance in orders among different products. So there is no big change in the proportion of the applications among our -- within ourselves. So for other two vendors, for example, ASML, so they are very bullish [indiscernible] good. And also [indiscernible] made a great announcement on the cleaning is very good. On the other hand, NAND research as well as the others 3D NAND is not so good. So the diffusion furnace might be very difficult. Don't you feel that sort of impression? So for 3D NAND, you can see some significant effect and for logic, we do have high share in the logic area, and that area is growing. Therefore, we don't see the drastic kind of increase or drastic decrease for some of the products. Mr. Wadaki, thank you very much for your question. Next question is from Mr. Shimamoto of Okasan Securities. Mr. Shimamoto, please. I am Shimamoto from Okasan Securities. So 2023 -- second half of 2023, you can expect some recovery in the market. So I see vendors also mentioned to the very similar perspective for the future. And the accuracy probability of our forecast so application, you said smartphone demand will be increasing, but there are some risks in 2023. There are any areas which might have slower recovery in 2023? Are there any concerns or are you prepared for some of the negative estimates? On the current situation, now you can look at the macro-economy, inflation, geopolitical development, which increases the energy or utility costs. And memory inventory is now under adjustment -- so these factors are there and also PC and smartphone replacement demand. We also have the problem or impact of the energy cost increase. So the consumers are not so much active in replacing their PCs or smartphone. Interest rates, generally speaking, I think interest rate might have some kind of a mild change and industry adjustment, mainly manufacturers are very aware of the inventory -- so there might be some acceleration. So we need to closely watch the condition of macro-economy and adjustments in the market. Having said that however, last week, the SEMICON Korea was held last week and now I have many opportunities to talk with various customers, taking those opportunities. So in the second half of this year, the memory market will start recovering and accordingly, the new [indiscernible] trend of the investment will start from memory as well. So now we have [indiscernible] era and we must pay attention. So we cannot ignore the situation of United States, China trade conflict. So by and large, we need to take consideration of those risks and maybe $80 billion should be the appropriate number for the refi market. There might be some increase or decrease, and we should look at the progress to make adjustment to that amount. But as for now, $80 billion should be the appropriate number. So 2024 and 2025, the market trend will be increasing. We are now in the middle of the bottom. So we should be prepared for the positive change in the future. We may see surge start-up. We must be prepared for the very prompt recovery in the market. That's what we need to give more attention closely, and we are now focusing on that area. Thank you very much, can you hear me? I have a question regarding WFE market. In the previous meeting, Kawai San made comment the second quarter should be the bottom in the market and from the third quarter, some recoveries stands. That's what Kawai San said, and we agreed each other. But now earlier, Mr. Kawai said, we compared with the initial financial estimates, the utilization rate of the wafer fab has been declining. So therefore, certain increase, what recovery is expected in the future. And you said you need to prepare for the certain recovery in the market. So if you said that, so then when you look at memory market and memory market is deteriorating, and many of the manufacturers are now very close to below the breakeven point. So right now, the utilization rate of customers' fab as a whole, how much decline do you see? And from Mr. Kawai's viewpoint, when you can see some surge in the recovery of the market? So that's what we are trying to locate the timing. We try to find out the right timing. And not only our company, but also our customers are very careful to find out when the markets start recovering precisely. But roughly speaking, the memory imbalance maybe in June and onward. Memory is expected to recover little by little in June and over it, that is a general trend. So we have some increasing CapEx accordingly, not only the demand, supply-demand balance, maybe you can see innovation or generation replacement takes place every 1.5 years to two years, and we can also expect some investment to prepare for the next generation. But the quarter level, for example, calendar year third quarter or fourth quarter in the calendar year or in the fiscal year -- would it be in the second quarter or third quarter? The quarter-based estimation is a bit difficult to be conducted. But what we can say is now you can see some increasing trends in the future. Therefore, we must be prepared for the future recovery trend. So procurement should be properly done because we know what sort of products are sure to be delivered. So we need to have some inventory for that area to have a good procurement. When the COVID-19 pandemic started, we increased inventory to some extent. And similarly, now, we are now preparing for the future growth. So the utilization rate in the industry, how much decline do you see in the utilization rate of the wafer fab? And are there any technology innovation going on in parallel to eliminate or offset the utilization rate decline, so 20% WFE. So maybe you can see the V shaped recovery from the bottom. That is the presumption you have. So you haven't changed your market forecast. What slight changes in the market forecast? Actually, our focus hasn't been changed drastically. We just -- if that is the case, so maybe the V-shaped recovery starts from the July to September. I wonder whether that is starting from July to September or next quarter. It's a bit difficult for us to say something precisely now. But three months -- we shouldn't can we say, jump by quarter-by-quarter, and we need to think about the leveling of the manufacturing to be prepared. We can see this increase. We don't know when, which month the recovery starts -- rather than pinpoint when -- which month you barista we should come up with big picture when we run the company. I'm Nakanomyo from Jefferies Japan Limited. I have similar questions. I'm very sorry for that. Once again, the second half of next year, you can see -- expect demand recovery. But now you have some -- you take orders in accordance with your production lead time. So if in July to September rather than recovery -- I think that in terms of shipment, if you can see some increase in shipment in July-September period, then you may see some increasing trend of orders now -- this is my understanding. So this time, there is no clear change in the orders. In some cases, some projects are pushed out or orders are not certainly increases in all of sudden, that's what I feel personally, but how do you view the recovery trend? So now there were some disruptions in logistics. So customers are now preparing for the future recovery. Some customers are doing that. And on the other hand, there are some customers putting their foot on the break, all of sudden. So utilization rate of sales has been declining in some of our customers. So there are varied situation -- situation is varied from one customer to another. So even if you ask us when to recover, specifically, I would like to refrain from giving you some specific answer, but we are now facing the bottom in the market, and you can see some recovery trend in the second half of this year, so we must be prepared for that future recovery. So memory, the balance in memory, we must take a close look at the balance of memory, but we don't change our view that the markets start recovering from the second half of this year. So we will report it once again. So we will see some trend of recovery in the future. One more question, may I ask? So 2023, the memory proportion declined drastically. That's what you said. So far, relatively speaking, your sales in -- the memory manufacturers is rather big. By 2022, memory customers purchase decreased to 2023, again, the drop on memory demand might have some impacts, but still you can outperform the market. Yes. As I said earlier, last year -- as for last year for logic, accounted for 55% -- sorry, logic growth grew by 55%. Logic grew 55%, coater/developer also increased and etching sales also increased. So a broad range of our products are purchased by the logic lines, logic manufacturers and cleaning equipment and metallization -- metal disposition area, you can see some increase in demand, so you can have a good balance in receiving orders. So now even if the proportion between memory, logic and memory changes from 60 to 40, 70 to 30 by 80 to 20, that sort of difference or change in proportion does not have a big impact on our sales. One -- now you can see the proportion of our sales over the past one year or two years, our sales proposition, as you know, the logic foundry is dominant compared to these memories. So compared with other competitors, our sales is well balanced. So memory proportion is not so high. I understand that point. By 2021, when you compare with 2021, I think your proportion is higher than the market average. So this is determined by the customers' CapEx, proportion of customer and CapEx. And our sales composition is determined by customers' proportion investment. And as you can see, that is a very good balance. I'm Yasui. For China, the sales to China 2023, WFE, how do you view the sales to Chinese customers? Could you share your idea? For example, Samsung, China factory that should be the [indiscernible] companies in China and also local China customers, do you see some increased logistic trend in the Chinese market in 2023? So as for financial estimate, we don't announce the financial aspect by region, but 26% for China for a full year basis. In the first half of this year, about 80% is for the local Chinese customers and 20% is the global customers in China. So over the past few years, the capital investment by the global players decreases in China. And next year 2023, so as for the financial estimates, we do not announce or present the financial estimate by region. So please allow us refraining from answering to your question specifically. I am Shibano from Citigroup Global Markets. As for the profitability, I would like you to share your idea with us, up until third quarter, now the net sales declined. Against that, you have maintained relatively high profitability. But when you look at next fiscal year, WFE will decline by 20%. So along with the market trend, your sales are expected to decline several percent. So when it comes to profitability, for example, this fiscal year 2023, do you see profitability will decline in fiscal 2024 or do you have any potential to maintain the profitability in next fiscal year? Could you share your idea with us, please? So as for budget, we are now reviewing or discussing the budget right now for next fiscal year. Therefore, I would like to make some announcement in next quarterly review meeting -- quarterly meeting for financial announcement. We need to closely look at the current status, and we prepare the appropriate plan for next fiscal year. And we'd like to announce that plan in the next meeting for financial announcement. So short term, now we are in the bottom, and we will see some recovery. So preparation for recovery is what we are working on right now. So we need to take comprehensive consolidation, we must make appropriate action. My second question is about -- I'm sorry, I'm so persistent -- year 2024 WFE market trend. So far, you said memory demand will recover from the second half of next year, this year. Now 2023, now we said the forecast for next fiscal year. So memory top vendor is a bit bullish compared with some expectation in terms of capital investment plan because now there might be some prolonging balance utilization. In 2024, there might be some decline in the capital investment toward year 2024. So we discussed with our customers strictly exchange information with our customer. As I said earlier, many of our customers are now trying to find out the right timing for recovery. That means many of our customers expect the recovery in the market. So Gartner, Semi, many organizations are reporting WFE financial estimates. And many of them announced the recovery trend in the WFE market compared with last year, what happened in next year. As far as we are concerned, we think equivalent or better. That's how we view the market in the future, equivalent, more better. And that view does not change -- remain unchanged. So now I -- this is my second question. So I want to ask a question about Rapidus. I want you to give us some comments. So your former Chairman, Mr. Higashi is now the Chairman of Rapidus. So now the semiconductor -- so from the viewpoint of the Korea IC vendors, Rapidus should be the competitor. So I think your position is rather sensitive. So from the customers, what would you do to take care of those different customers? So Mr. Kawai, how -- what sort of things do you think? And how do you answer to your competitive vendors? So Rapidus and Tokyo Electron are independent each other, nothing linked between two. The Tokyo Electron is a global manufacturer as you know, our sales, 80% of our sales are from outside of Japan. So we should remain fair all the time, and we -- the basic position remain unchanged. So Rapidus is one of the very important customers, and we will address the important customers. So far, we have cultivated the relation of trust. And that trust relationship will remain unchanged. And Tokyo Electron is trusted by our customers. Our turnover ratio is rather small. So Tokyo Electron is trusted by our customers because we have very high levels of information security, and we maintained the high level of information security from now onwards as well. Mr. Higashi is Chairman of Rapidus and Mr. Higashi has used to be our Chairman, but in the history. So there is no special relationship between our company and Rapidus and we are expanding global business. So Rapidus is one of our important customers, overseas customers, Korea, Taiwan and American customers. So all those customers are trusting us. So now since there seems to be no more questions, we'd like to conclude today's financial announcement. Lastly, we'd like to continuously improve our IR activities based on your precious feedback. So we appreciate your kind cooperation in heading up question before you accept your Webex. Thank you so much for taking time to join this conference despite your busy schedule today. Thank you very much.

EarningCall_1

Now I would like to present to you the results for the fourth quarter of 2022. First, please refer to Page 3. This is a summary for Q4 2022. There are five key points to share with you today. The like-for-like net sales, which excludes the impact from FX and all business transfers was an increase of 1% year-on-year. EMEA, Americas, and Travel Retail recovered the continued uncertainty from COVID in China. Even though the China’s shipment sales trended low in Q4, impacted mainly from the market slowdown of Double 11, the market share experienced solid growth. In Japan, the recovery of mid-price range continued its recovery trend, yet the sluggish first half affected the full year result to keeping flat to last year. By brand, Cle de Peau Beaute and NARS, as well as fragrance remained strong. E-commerce was impacted by the slowdown of the Double 11 market, yet the overall performance sustained its positive growth, primarily due to high prestige brands and product lines. E-commerce sales ratio continues to grow at 33%. Core operating profit was up by JPY8.8 billion. For sustainable growth in the mid to long-term, the company has executed additional strategic investments already showing positive impacts in certain areas. Also, the continued company-wide agile cost management production of fixed costs from structural reforms and FX impact from yen depreciation all contributed to the positive profit. In terms of transformation, the company is capturing steadfast progress. The business transfer of professional business has been completed and the transfer of personal care manufacturing businesses in Kuki and Vietnam are also on track for closing in 2023. The net debt to equity ratio was a multiple of 0.05, keeping the sound financial position for growth. Next is Page 4, executive summary of P&L. The core operating profit was JPY51.3 billion, up by JPY8.8 billion. On the other hand, the operating profit was JPY46.6 billion or minus JPY54 billion versus last year. This is mainly due to the non-recurrent items a minus JPY62.8 billion versus previous year. Last year, there was profit of JPY58 billion from transfer of personal care business. However, this year, the impairment loss from transfer of the personal care manufacturing business is partially offset by the profit from professional business transfer, resulting the non-recurrent item to be minus JPY4.8 billion. Profit before tax was JPY50.4 billion from finance income and share profit of investment accounted for using equity method. The profit attributable to owners apparent was $34.2 billion or minus JPY12.7 billion versus last year. Also the EBITDA was JPY102.4 billion, an increase of JPY7.9 billion versus last year. The EBITDA margin is about 10%. Next is Page 5, performance by brand. On an annual basis, many skincare brands struggled due to the China lockdowns, market slowdown impacts and saw recovery of Japanese market. However, Cle de Peau Beaute, NARS and Fragrance captured strong growth. Cle de Peau Beaute captured stable sales within China's high prestige market by strengthening the appeal of product efficacy throughout the year. Even though the Double 11 in China had a slow trend in Q4, the brand continued to grow -- continued to the growth led by the holiday collection. New products from NARS and narciso rodriguez continued to perform well driving the growth. Elixir continues to have strong growth with the new lotion and emulsion that was launched in September. However, the sluggish performance in Japan's mid-price range market and a tough market environment in China in the first half impacted the whole year to end in a minus. For the year, Drunk Elephant was a slight minus, but it had a significant shipment growth in Q4, shrinking its negative number. On consumer purchase basis, the brand continues to have a very strong growth momentum from Q3 that we predict the shipment to have stronger recovery in 2023. Next is Page 3 (ph), the net sales year-on-year. The like-for-like for the year is an increase of 1%. In the two regions that have the high sales ratio, Japan was flat to last year and China was a double-digit negative. The growth in other regions offset the overall sales to result in positive growth. As you can see on a quarterly basis, Q3 had positive growth driven by shipments from the renewed Elixir in Japan, as well as EMEA in Travel Retail. However, the fourth quarter was highly affected by the slowdown of the China market and suspension of shipment to Russia in the EMEA region, resulting in minus 1%. Compared to 2019, the global performance for the year was minus 6%. Japan still has a big negative, but since the second half, the negative is improving. Asia-Pacific turned into a positive in Q4 from the recovery in Taiwan. Also globally, Q4 turned into a positive showing our solid reached trend. Next is Page 7 about Japan business. Now please be noted that the underlying numbers are numbers for the full year and numbers without an underline are the three months of Q4. First, in Q4 for Japan, the low price range continued to grow driving the overall growth. The mid-price range is sustaining modest recovery trend from Q3. In such environment, the high priced Prestige brands expanded its share, contributed by Cle de Peau Beaute’s 40 anniversary holiday collection, Shiseido's holiday collection, a new product launch from Bio-Performance Series, and skin filler with the state-of-the-art hyaluronic acid technology. For Elixir, the renewed products in September have been successful, bringing in new users from low price and high price range capturing many new trial users resulting in high-single digit growth. Brands such as PRIOR continue strong with new product launches contributing to the overall recovery trend of the overall mid-price range. E-commerce sales was a mid-single digit growth for the year. The member service app that launched in September, Beauty Key, has exceeded the number acquisition target and continuing to grow already proving contribution to sales through app and CRM. We will continue to grow the number of app downloads, build loyalty user base and evolve to strengthen the OMO platform. Next is Page 8 on China. Despite lifting up the zero COVID policy in December, the marketing environment continued to be tough, including the subsequent confusion in the market. In addition to the impact from intermittent lockdowns in many cities and logistics infusion, the overall market slowed down more than expected in Double 11, the biggest selling season. Amid such business environment, our market share increased with continuous solid sales of high Prestige category, including Cle de Peau Beaute [indiscernible] series and Shiseido Future Solution, bought by additional strategic investment among other factors. E-commerce sales were down in the fourth quarter due to slowdown in Double 11 market and also a shift of investment to normal times in order to enhance brand equity. However, on a full year basis, e-commerce sales recorded positive growth. We will continue to aim at increasing sales driven by brand values. Next, Page 9 on other regions. In the Americas, market expansion continued in all categories and our sales also continued to be strong, driven particularly by NARS. In EMEA, market growth continued in all categories, and we maintained strong momentum centered on fragrance. In Travel Retail, despite slight slowdown of Hainan Island, the recovery trend continued in the Americas, EMEA and in Japan showing good signs backed by recovery in the number of travelers globally. In Asia Pacific, Taiwan continued to face difficulties amid COVID-19 until the third quarter, but turned to the recovery trend in the fourth quarter contributing significantly to growth. Next Page 10 on COGS ratio. The COGS ratio in fiscal year 2022 was 30.3%, but excluding impacts from MSA and impairment losses on business transfers, the like-for-like COGS ratio was 23.6% year-on-year improvement of 1.5 percentage points due to favorable product mix from business transfers, as well as lower inventory write-offs from improved accuracy, inventory management despite increasing cost due to launch of Fukuoka Kurume factory and higher raw materials and logistic costs. Next, Page 11 shows core operating profit by segment. Japan core operating profit decline mainly due to the impact of personal care business transfer. In China, despite agile cost control in response to the market trend, core operating profit decreased due to lower margins from declining sales. Americas and EMEA, core operating profit increased, thanks to higher margins from sales growth and lower fixed costs due to a structural reform. Travel Retail achieved core operating profit growth due to higher margins on increasing sales. Decrease of core operating profit in other is mainly attributable to decreased shipment from headquarters in line with lower sales in China as well as enhanced investment in new factories and DX. Finally, Page 12 on cash flow management. Free cash flow for the year was JPY5.4 billion. Excluding the impact from the income tax paid in 2022 associated with the personal care business transfer in 2021, free cash flow would have been exceeded JPY50 billion. We continued capital investment for future growth such as investment into Fukuoka Kurume Factory in Japan and investment into IT and DX, while maintaining strong financial positions. DSI, one of our KPI’s decreased from 200 days in 2021 down to 150 days, which reflects the impact from product supply after business transfers and impairment. Excluding those impacts, on a like-for-like basis, DSI is around 210 days, we are making steady progress against the 200 day target. That’s it from me. Hello, everybody. I would like to take this time to reflect back on the past two years as we've pursued WIN 2023. I will begin with achievements. For the company to thrive and to grow again amid the uncertain times, we have decided to execute selection and concentration in areas such as skin care in consideration of profitability and what our strengths are. To divest or the goal of businesses that continued negative performances or that did not have very high priority resulted in a difficult structural reform about JPY200 billion in size. But we had -- what we had planned for 2020, we thoroughly executed. It resulted in big improvement in the long struggling EMEA and Americas business contributing to the consolidated results of the company. Also, the sales ratio of brands such as skincare brands exceeded 70% strengthening the profit base for the future. And in the past, we have had inventory shortage. But in order to avoid the opportunity loss by inventory shortage, again, we built three domestic factories and Kansai Logistics Center even during COVID, which was a total of about JPY150 billion in investment, which was completed on schedule. We actively improved the productivity with use of investments. We strengthened the financial base by repaying debt from cash generated by business transfers. On the other hand, what remains a challenge is the Japan business. There is so considerable delay in the growth recovery than initially planned. Of course, there are reasons that caused the hardship. COVID impact was more than two years longer in the Japan market compared to the EMEA or the Americas than what we predicted. And wearing masks have become a norm from the Japanese people and inbound have significantly decreased. However, we are aware that this cannot be the excuse for the Japan business to continue negative performance for three years. Fortunately, we have been seeing light of recovery through some of the enhanced activities from last year such as Elixir. But we will be looking into the -- to reviewing the main brands, other main brands and continuous market execution, channel strategy, a cost structure such as SG&A and thorough organization structure and culture and will do a fundamental reform so that we can generate profit over JPY50 billion in 2025 three years from now and in order to realize a sound and healthy company foundation where the employees are motivated. As for China, as mentioned earlier, after China suddenly changed the policy, we hope to see the bringing the back -- bringing back of the economic activities as much as the infected numbers coming down in international travel making a full comeback. But we should know more in another month or two to see what this trend will look like. About a year ago, the war that started in Ukraine, the war still continues. And there continues to be significant uncertainties in the world, unknown to all of us, what kind of challenges it may bring to us. We have always targeted the core operating profit of 15%, which we felt was an important profitability benchmark to be a good leading global company. This number is something that we will continue to target as confirmed with the Board of Directors and for all of us to continue to aim for. However, we do have to face the reality in front of us that I have just mentioned. And once again, we will position the next few years for foundational business reform once again. We will look at the next three years to build a concrete path by proactively investing competitively, having structural reforms. We will have details explained by Fujiwara-san after this. The big vision for the business strategy is to become a personal skin beauty and wellness company. So it will be a company that will provide a comprehensive skin beauty and wellness. Of course, our strength is skin care. And this skincare, as you can see here, there's various segments and it continues to evolve. And we want to touch upon all these segments when we say skincare. And furthermore, for sun care, we want to achieve number one in the world. And for makeup and skincare, will we ignore those segments? That's not that -- we've had that discussion in the company, but that's not what we are thinking. Of course, all of the comprehensive skin beauty value will include makeup and fragrance as well. And furthermore, when we develop this, we will look into developing more of the inner beauty business, meaning the internal care, sleep and stress which affects our skin and physical health. So that we can capture synergy with the existing businesses. To ensure this horizon expansion, we will build a digital platform in order to improve better consumer experience and more excitement. And we've touched upon makeup as part of skin beauty. Well, there has been a very big hit product that leveraged the accumulated technology learned from skin beauty into a makeup product that's the NARS light reflecting foundation, which has been a global hit. And it has ranked number one sales in the Americas Prestige beauty category last year. So with this in mind, NARS as a brand exceeded JPY1.2 billion or about JPY150 billion in sellout, significantly growing to a profitable global brand. From 2023, we will shift from defense to offense, making proactive investment for top line growth. We will make strategic investment in three focus areas, which are brands, innovations and people. As for brands, we will establish our portfolio Shiseido, Cle de Peau Beaute, NARS, Drunk Elephant. These four brands, we make them global focused brands in all regions. In Asia, Elixir, Anessa, which is number one in Japan, we will geographically expand those brands -- centered on those brands. The mega brands era is set to be over, but consumers are diversifying. And also, we are seeing localization among consumers. So paying attention to such aspects bound (ph) from Japan, natural sustainability oriented brand and Ule from Europe have been developed locally and available on guest marketing basis. So we will enhance a development capability of original headquarters. Furthermore, we will target men's market in a multifaceted approach in anticipation of a huge potential growth and develop men's skincare and makeup markets. So to enhance equity of these brands and achieve organic growth, we will make additional marketing investment exceeding JPY100 billion cumulatively over the next three years. In addition, in areas where we cannot fill with our own development or when we need speed, we will explore M&A opportunities selectively like what we hit down with [indiscernible] last year based on the conditions that they fit with our strategy and return on investment can be expected. To fully leverage our development capabilities in the world, basic researches enhanced at global innovation center of Japan headquarters and at the same time, development centers of each regional headquarters will be expanded to further strengthen the R&D global network. For this purpose, we will continuously make investment into R&D at 3% of sales, which is roughly JPY30 billion per annum. Another important thing, which is a high quality from Japan, we will further improve Japan's high quality and to enhance productivity and cost efficiency. We will increase utilization at three factories in Japan with the use of IoT and robots in the state-of-the-art Kurume Factory is improving productivity of production lines by 300%. We will roll it out to other factories. As explained earlier, transfers of Kuki factory and Vietnam factory to CBC on track. Next, on talent development. We will fully pursue people first management philosophy globally and further strengthen our efforts for global competitive advantage. This global leadership team is our global management team, as you see on this slide. As you can see, we value diversity with female accounting for 43% and non-Japanese for 39%. We will further evolve and aim at being an enterprise that attracts global excellent talent regardless of gender, nationality and race. To accelerate our efforts as a project to commemorate the 150 year anniversary. Renovation is underway to convert our headquarter building in Ginza into Shiseido Future University, a human resource development center. It's going to be a unique city where our people are able to learn about Shiseido heritage, [indiscernible] and human capacity as leaders among others. It's going to be a base to develop people who will read the next 150 years. It's also intended for Japanese young talents to be inspired by having contact with the world view. I will also serve as President of the University, which is scheduled for opening in autumn this year. I will briefly touch on our mission purpose and ESG initiatives. Based on our mission, beauty innovations for a better world. We will proactively engage in solving environmental and social issues through our main business. We are targeting to be recognized as the most trusted beauty company in the world by promoting activities on sustainability. We are making steady progress against the CO2 reduction and water consumption targets. And an important initiative, which is a refill, which account for 60% or more for Elixir (ph) now. And plastic usage will be decreased by 85% and CO2 reduction of more than 80%. This is a very fantastic practice in Japan, which was introduced also in China two years ago. And we are now seeing 6% of refill penetration. We would like to expand such efforts globally And we are announcing today to start demonstration test in April for an extremely innovative circulation model of plastic packaging, BeauRing. From the beginning, we wanted other cosmetic companies to join this project because it aims at making contributions to the whole industry and the Japanese society. Pola Orbis Holdings agreed to support the model and agreement was signed to jointly promote this project. In addition to this project, we together with an Pola Orbis will explore various collaborations in the area of sustainability. This demonstration test will be done in Yokohama. And after demonstration tests, we plan to open up the door for many other cosmetics companies to join us. Next, diversity, equity and inclusion. Pressing ahead with promoting diversity, equity and inclusion or more strongly is an extremely important challenge for the country as Japan ranks this honorable 116th position in the world in a gender gap index. Creating a friendly workplace for women should be considered as having a good workplace for men and anyone. From a viewpoint of eliminating in equity women at management level at Shiseido headquarters and in Japan, account for 38% now, which we aim at improving up to 50% before 2030. I often talk to top management of different companies at various locations. And I get the impression that there is still lack of understanding why diversity is necessary. So I think that companies need to know the value created by promoting diversity. So with that in mind to do research and make presentations on the calls and in fact relationship, Shiseido D&I Lab was established. As a Chair at 30% Club, we called for other Japanese companies to join, and now 33 companies have participated in the club to share best practices with active engagement of the top management. Among these companies, the ratio of women on the board has improved up to 22% on average against 8% or 9% on average for other companies in Japan and achieving 30% is in sight. And moreover, now please take a look at the image video of Shiseido Future Beauty touched upon earlier. That brings me to the end of the presentation. My name is Fujiwara, and I have been appointed COO from this January. Now I would like to present the mid-term business plan. Our company runs our brand business and in order to achieve sustainable growth in such uncertain market environment, I believe it extremely important to establish a business model that can create an even higher added value through proactive and continuous investments in brand innovation and people just as Uotani-san has mentioned. With these as a driver, we will aim to achieve 15% in core operating profit in 2027. In order to reach this target in the next three years, we will grow the core business and realize a value added base management model by 2025, so as to build a cost structure that generates investment fees and to achieve core operating profit ratio of 12%. This year 2023, the first year of this three year plan, we will make it a year to build a firm base for growth momentum and to make investments for the mid-term growth. We will target like-for-like sales of plus 11%, net sales of JPY1 trillion and profit rate of 6%. By completely executing the plans in 2023, the profit generated from growth will directly contribute to the company profit in 2024. Therefore, we believe that the operating profit ratio of 9% can be realized. On the other hand, the investments and restructuring to evolve with the environmental changes have almost been completed in WIN 2023. As a result, along with the profit growth, we will continue to realize improvement in EBITDA margin, the power to generate cash. In order to pursue this target of continued stable growth and conversion into a high profit structure, the point of focus will be to recover the growth momentum in Japan. The most important market for the company and to restructure the profit base. Next, to increase the share with the significant size market of the Chinese people, to expand the business size. Furthermore, position Americas and EMEA, the world's number one beauty markets as the next growth pillar and build the growth foundation. We will also proceed to develop new markets for the future to realize the growth of our global businesses. In terms of value added base management model, we have intangible assets such as global brands, innovation and high quality services. We aim to elevate these assets by further enhancing these values that is unique and cannot be found elsewhere and continue the uncompromised quality and safety, allowing us to realize high gross margin and premium pricing. In order to do this, we will innovate the value creating organization and processes and structure a company-wide KPI setting and monitoring system, which will enable us to build the value added base management model for the regional businesses and brand holders to perform together as one team. In detail, on top of the financial targets, we will set a common KPI for brand value for the brand holders and regional businesses. That will allow a definitive direction for the company in mid to long-term, enabling us to hold constructive discussions between brands and region so that the company can continue to grow both sales and brand value. The most important market Japan cannot expect a big growth of the market size itself, but we are seeing positive tailwinds to further push the growth of the company this year. On top of the growth in share in our core competing target, the premium price range, the mid-price range has started to recover and inbound is starting to come back. Also, as the mask regulation will be relaxed in Japan soon, this should encourage consumers to actively go out and have more socializing occasions. We will make sure to capture these opportunities strengthen our activities to support and encourage consumers for more happiness as a beauty company. Japan will shift to aggressive marketing. Proactive investment to skin beauty will be made and we will especially strengthen the value of innovation to expand the loyal user base for expansion in sales and share. We will also continue to create new business opportunities and beauty propositions by capturing the new consumer needs and demands. In terms of profitability, we will watch the balance of growth and profitability realizing the optimal brand and channel mix to maximize the gross profit margin. Also along with these growth realizations, we will make continuous efforts to reduce cost to achieve a cost structure with low 60% in SG&A. We see the inbound market recovery to be additional profit contribution and we will make sure to seize the opportunity when it comes. On the other hand, not just to pursue efficiency for growth, I believe it's necessary to fundamentally review the cost items for Japan business, which has been experiencing continued negative performance. In 20 23, Japan will be proactive to market launches with various innovations for growth. For the mid-price range, the renewal of Elixir performed well, proving that if we can build value higher than the price growth is possible. The power of R&D that enables products with higher value than the price matched up with optimized marketing power to communicate to the consumers, we were able to acquire new consumer base from the low price range, promoting an active trade up. Therefore, this year, we will continuously launch innovation that exceeds the price expectations to drive growth. For Prestige brands, along with innovation of the core skincare, we will enhance the makeup category to acquire new loyal users as we aim for the non-mask society ahead of us. Also, the brightening market, in which we excel greatly in technology, we have plans to launch innovative products that uses the latest research results, so please look forward to the announcements. In the mid-term, we will continue to research changes in consumer sentiments and behaviors and launch product innovations proactively in the core business. As the next growth category, we will make enhancements into Pure & Derma, and new market creation through inner beauty. Through fulfilling the skin beauty portfolio, we will build a structure where the personal beauty partners can provide authentic wellness proposals to consumers. And to support we will pursue building a digital platform to support their activities as well as to provide a seamless beauty experience between online and offline. Along with this digital platform and the company's R&D technology, we can realize new beauty lifestyle proposals to be a new growth engine for the Japanese market. In terms of cost, structural reform that generates investment funds on top of concentrating on skin beauty to maximize gross margin. We will reduce returns and excess inventory as well as lower inventory and warehouse fees by shortening manufacturing lead time. Also, we will review the logistic costs with items such as delivery efficiency improvements, and we will aim to contribute to sustainable society along with cost reduction. For maximizing human capital, we will reorganize the offices, implement focus, reform work style and process to promote efficiency. We will also continue selection and concentration to ensure profit improvement. As a result, we will target to build a cost structure with the low 60% in SG&A in 2025. The turnaround of Shiseido Japan's cost structure, I feel it to be one of the highest priorities for the growth and profitability of the future of Shiseido group. Along with Japan business CEO, Tadakawa-san, I will learn about what is really happening and even consider a fundamental structural reform if needed. Now in China, the market situation is not stable yet after the lifting of zero COVID policy. But stable growth is expected over a medium to long term perspective due to policies aimed at achieving an economic recovery driven by consumption. The competition in the cosmetics market continues to be intense and also market continues to undergo dramatic changes such as diversification and consumer needs. Additional platforms along with price competitions and rise of local brands. Although, China is a market which is difficult to predict without being dependent on changes in the market, we remain committed in implementing marketing reforms that I will explain using the following slide to realize growth in China and strive to grow an improved profitability by cross-border marketing across regions including China, Japan and Travel Retail. The key element of marketing reform is brand building. To be honest, we have been a short sighted and based on a short-term ROI, we had concentrated our investment on driving traffic and doing marketing centered on top products and driving sales growth in large scale promotions. From the second half of 2022, we started to change our marketing activities with an eye on increasing loyal users for our brand and generate returns on a medium term perspective. Some of the examples include strengthening brand experience, developing the second and third star and hero items under the same brand, developing a product exclusively for China and implementing CRM utilizing company's own consumer data pool. As a result, our market share increased in Q4 following Q3. By controlling excessive investment in large scale promotions, our sales decreased year-on-year in Double 11. However, we achieved the overall market share gains due to driving growth through activities at normal times. We will keep pushing ahead marketing reforms in an effort to build a foundation for sustainable growth. As enhancement of brand equity in China will lead to overall growth and profitability improvement across regions, we will continue to make proactive investment. But we will also work on reducing the COGS ratio by strengthening high priced skincare products and expand the fills, while benefiting from economies of scale. We will push ahead with digitalization to improve profitability. We will utilize -- and we will improve marketing ROI by using data such as consumer skin data. We will also lower costs by improvement of inventory management capabilities with focus that went live as of January this year. We will also optimize offline basis in stores and improve a beauty consultants productivity by digitalization. By further consolidating distribution centers and centrally doing indirect material procurement we will improve profitability. And in 2025 compared against 2022 at achieved a 5 points improvement in the core operating profit margin like-for-like, excluding the impacts from transfer pricing and others. With respect to brand portfolio, we have introduced these brands from 2021 in response to diversifying consumer needs. To further solidify the skin beauty area, we will work on capturing new domains over medium term, like medical beauty, sensitive skin and inner beauty, while at the same time, nurturing a new brand that were launched. From here, I will walk you through our strategy for other regions. Starting with Asia Pacific, we will build a business foundation seeing Asia Pacific as promising market. In this market, economy is growing centered on Southeast Asia, India is experienced growth with a huge population and e-commerce channel is expanding. We will work on establishing a business foundation for the future in this promising market by strengthening a Prestige brand portfolio developing business in response to [indiscernible] in diverse multicultural markets. We have also decided to roll out NARS in India from the second half of this year. Travel Retail business is expected to grow in step based recovery in travelers. In particular, since Hainan Island has become established as a shopping destination with expectations for further development, we will strengthen efforts to appeal travel retail as test points for brand experience and aim at achieving business expansion by stimulating consumers -- consumption of travelers with limited edition and differentiated products meeting the needs of travelers. In the Americas, the world's biggest beauty market structure reforms were completed and going forward, we will move ahead with building a foundation for future growth, for America to be the next growth pillar. The market is recovered from COVID-19 and achieved double-digit growth, in all categories, including skin care, makeup and fragrance in 2022. Although there is a risk of recession, we anticipate Prestige market in which we do our business will be resilient. Together with [indiscernible] or NARS and Drunk Elephant, whose home market is United States. Those brands are positioned as core brands, and we will focus on further developing those brands and promote local innovations. Moreover, using cutting edge digital environment, we will evolve consumer engagement led by the Americas. EMEA also achieved substantial profitability improvement with the completion of structural reforms. We predict that the market will be solid. And as interest in sustainability is high in EMEA, we believe efforts in responses as interest will create growth opportunities. We will drive growth by continuously positioning Brand Shiseido and NARS as core brands and by strengthening Drunk Elephant, and Cle de Peau Beaute to enrich our skincare portfolio, while pressing ahead with expanding sales and profit contribution of the fragrance business, including brands like narciso rodriguez. New brands Ule and Gallinee, which were developed in response to growing interest in sustainability are still small in business size. But in anticipation of potential growth in the future, we will invest in those brands to cultivate our new skincare domains and aim at developing them to become global brands in the future. We will continue to accelerate DX globally by leveraging digital and innovating beauty check experiences, we will provide optimal beauty experiences for each individual consumer. In 20 25, we target to achieve 40% of sales generated from e-commerce globally. We anticipate upside potential in regions, including China, Japan and Asia Pacific. Digital ratio in the media spend will be kept at 90% with a focus in Japan and EMEA. We will put efforts in enhancing digital illiteracy of our people globally by encouraging them to take part in the Digital Academy, academy particularly targeting people at headquarters in Japan. We have been steadily accumulating consumer data and by utilizing them, we will realize more personalized CRM. For instance, we will build a beauty wellness platform to support not only AI driven skin diagnosis and skin care, but also support inner beauty, through DX, we will work on expanding business opportunities. This brings us introduction of a global unified ERP system. The project started from 2019. Forecast had already been introduced in the Americas, Asia and China. Forecast introduction is slated for completion in all regions by the first half of 2024. And with that, data process and system standardization will be completed globally. Furthermore, in Focus 2.0, we will proceed with introduction Focus at all factories and R&D facilities by the end of 2025 in a bit to globally integrate the value chain. In areas where Focus is introduced, we expect to see a wide ranging effect such as inventory optimization reduction of inventory write-off due to improved accuracy in demand supply planning and finance supply chain and marketing. Cost reductions due to streamlined operations at three globally standardized processes, better data visibility and enhancement marketing ROI. Now I would like to talk about the financial strategy. First is a summary of financial targets. The overall direction will be to improve profitability empowered to generate cash through sales expansion by strategic growth investments in cost reduction. Net sales will be based on the 2022 sales of existing businesses excluding the business transfers at JPY0.9 trillion as a starting point. The three years to 2025 will aim for CAGR of 8% and two years after that will aim for 6% in growth. By 2025, we assume that the market growth will be normalized after high growth rate post COVID recovery in Japan and China. The company will aim to acquire market share above market growth in the next five years. With the strong sales growth along with the cost reduction initiatives explained by Fujiwara-san earlier, the core operating profit ratio targets 12% in 2025, 15% in 2027 and for EBITDA margin 18% and 20% respectively. The core operating profit ratio of 15% from WIN 2023 will continue to be our target. Now onto the financial target and improving the capital efficiency. We have reduced interest bearing debt with cash generated by the large scale structure reform and built a strong financial base for regrowth. And now is the time to utilize the sound financial foundation to drive further growth. Based on that thinking, the 2025 targets are as follows: the most prioritized KPI for capital efficiency in our company is the ROIC and we will aim for 12% in ROIC by profitability improvement. We will target 14% in ROE. Free cash flow is JPY100 billion after a cycle of big investments for structural reform and manufacturing factories. In terms of sound financial position, we target approximately 0.2 for net debt equity and 0.5 for net debt EBITDA. We do not change the policy to keep A rating in order to procure financing for necessary growth investments at a low cost and in a timely manner. We will carefully watch over capital efficiency and manage the optimal leverage level. Next is cash allocation. With profitability improvement through growth investments, to our value creation drivers, namely brand, innovation and human capital. We target a total of JPY400 billion cash inflow in three years. Cash generated will be used for CapEx for focus, IT, DX and energy saving equipments in factories as well as M&A and new business areas. We will also build a positive cycle to further accelerate the profitability improvements. Based on the principle of stable cash dividend for shareholder returns, we will continue enhancement of returns along with profit improvement. In parallel, we will take appropriate measures for optimal financial leverage. Page 47 shows the sales growth contribution by region. The CAGR to 2025 is 8% driven by Japan, China and Travel Retail. On top of this, the business scale expansion in EMEA, Americas and Asia will generate additional sales. The market assumptions for the sales targets are as follows: Japan will grow through recovery post-COVID in both local and inbound. China will transform into stable growth from the rapid growth it had in the past, but China being a huge scale market with growth stays unchanged. In the short term, we assume the COVID recovery to happen from Q2 of 2023. Other regions assume a stable market trend. Next on the cost structure. In 2025, by lowering the COGS at 21% and SG&A at 67% we will achieve the core operating profit margin of 12%. The COGS ratio will come down to 21%, 2.6 points improvement from 23.6% in 2022. By improved accuracy of inventory management through the introduction of Focus, we will reduce returns and inventory write-offs and further improvement in product mix, productivity improvement with cutting edge facilities, reduction in outsourcing ratio, reorganization of supply networks are major drivers. SG&A remains flat from 2022 at 67%. The marketing investment ratio will be increased by additional investment exceeding JPY100 billion cumulatively over a three year period from 2023 to 2025 to enhance brand equity. On the other hand, we will strive to reduce personnel expenses and other SG&A through productivity and efficiency improvement with focus and reduction and optimization of fixed costs. Finally, I will go over the outlook for 2023. We are forecasting net sales to be JPY1 trillion, up 11% like-for-like. By enhancing marketing investment in each region, we plan to expand our market share and outperform the market growth. Core operating profit, which is the most important profitability KPI for us is forecast to be JPY60 billion, up JPY8.7 billion year-on-year. In 2023, to ensure the growth momentum, we will enhance marketing investment and for medium to long-term growth, investment is also made for Forecast and other areas with a view to building a foundation for bigger profit growth in 2024 and beyond. Profit attributable to owners of parent is forecast to decrease by JPY6.2 billion year-on-year due to a plan to record non-recurrent losses of JPY16 billion associated with the transfer of personal care production business. EBITDA is forecast to be JPY120 billion. We plan to increase ordinary dividend by JPY10 year-on-year, up to JPY60 per share, which is at the same level as pre-COVID 2019. Allow me to provide supplementary explanation to the core operating profit. The year-on-year increases JPY8.7 billion. However, excluding the impact from losses related to brand transfers, the like-for-like profit growth is around JPY20 billion. There are special product profit decreasing factors from 2022 to 2023. First, sale for brands to be transferred JPY180 billion in 2022 will decrease down to JPY20 billion double in 2023. As a result, we will incur an impact as cost for resources, which was allocated to those brands in the past, to be reallocated to continuing operations. Second is a cost increase due to IT investment hitting peak in line with Focus introduction and increase in salary along with record high inflation. Our plan is to realize around JPY20 billion profit growth from continuing operations by offsetting these negative factors by higher gross profit from increased sales. 2024 and 2025 due to the absence of such major cost increase factors profit growth is expected to be higher. 2023 is a year of shift, changing gear from the structure reform more to growth. Capacity of our people and resources, which had been allocated to push ahead structural reforms and realized smooth business transfers will now be allocated to solidify -- to solidly achieve increasing sales. To establish a gross momentum for 2023 to 2025 while realizing reduction in SG&A ratio. Furthermore, we will reduce costs by more than JPY10 billion over the next three years and worked toward achieving the core operating profit margin of 12% in 2025 and 15% down the road. That's it from me. Thank you. Hello. This is Hiroshi Saji from Daiwa Securities. One thing, I just want to confirm some numbers and maybe you could share with us in the mid-term plan. Page 27, in 2024, you're aiming for 9% of OP margin. In 2025 is 12% and CAGR was 8%. And if we calculate this, calculated starting at JPY900, but 20%, 25%. I think we're looking at about JPY136 billion in profit. If in 2024, CAGR is 8%, I think it's about JPY95 billion. So I think this year, top line is about JPY60 billion but in the next fiscal year, JPY95 billion and then the following year, JPY136 billion. Is this the right assumption? I won't go into the detailed numbers necessarily, but as the sales grow as plant, the like-for like-sales continues to grow. The 12% will happen in 2025. But the normal -- if we can't -- this is a number that we cannot capture with the normal growth in sales and profit. So that's why we need to have a cost reduction about JPY10 billion in order to achieve this 12% CAGR or 12% margin. The risk factor, of course, I want you to achieve this number, but what will be the risk factors that could avoid you from reaching this target? With management, of course, we have discussed various risk scenarios. For example, if there is a huge recession in the Americas, kind of like the financial crisis, the Lehman Shock. If that happens, of course, that could change something. We don't have that into our assumption. The assumption we have in place is, if there is a small scale recession, as Fujiwara-san has explained earlier, if it is a short term recession, the beauty market could stay resilient. And looking at last year's December or January, the beauty market, beauty market has been quite resilient. So in that sense, if it's a short term, we don't see a big impact. However, if there is a big so we have not incorporated a big geopolitical factor. So if any of these happen, that could be the big risk factor. I know I'm not supposed to ask too much, but so the numbers you presented here, you're quite confident that it is achievable? Okay. So you're determined. Thank you. Anything from the CEO or COO in terms of the target that you have on the mid-term plan, if you can? Well, no, we have these numbers to commit to it. The management commits to this. It is true that if you calculate like you have done, yes, we do understand that and we have than that. So it's 15%. We wanted to aim that for 2023, but we've had to push that back a little bit. But we will continue to target this 15% and if we look at the target that can allow us to go to 15%. We have come up with these numbers looking at the reality of now. External factors and risks, that's something that we cannot control and we don't know what could happen. Like COVID, nobody had expected that. But in an external factor, aside from that, I think it's all about innovation and we're trying to do a lot of investments, proactive investments, but how much can we do that and execute that for growth? Japan, which is seen to be a difficult market, we are growing as in certain brands and that's something that all the brands and companies are experiencing. So we want to make sure to compete and focus on to make sure we can grow in this market. Thank you. This is Kuwahara from JPMorgan. Thank you very much for the presentation. Looking at the all cost structure, without the recovery in Japan, there won't be sustainable growth for Shiseido. Based on that, , I'd like to have a -- I have a question regarding the speed of reform. We do a math and calculation based on numbers. The sales of JPY240 billion, the loss is JPY113 billion. It can be possible in the cosmetics business to that JPY50 billion. How much losses do you expect to reduce in Japan? Do you expect to achieve breakeven? And with the sales scale and losses, I think that you can't wait to reduce fixed costs. And by the end of this year, can we expect to see progress in fixed cost reductions? So those are my two questions. Thank you. The reform of Japan, as you pointed out, of course, we can't wait. Looking at numbers with the level of sales, and you might question why the profit is so small. But as for last year, there were some factors including personal care, business transfer, et cetera. So you can interpret the last year's number as our real capability. But looking at last year's numbers, bit by bit, the efficiency is improving. It's day on day for instance has improved by 2 points or 3 points. So internally, we have done whatever we could. But without growth, we can't see acceleration So this year, as I explained earlier, we'd like to put business on a growth momentum. And eventually achieve profitability improvement. Having said that, that's not enough. So we will review all cost items to find optimization and efficiency improvement and we will work on them immediately. So this year, we like to make sure to achieve profitability in Japan. As you explained, we can't expect much of the market growth in Japan, then creating markets or creating new category, I think, is necessary. So looking at your investment in the past and investment going forward in Japan, what changes do you expect to see in terms of how do you intend to create new categories? Do you have any clues? Thank you for your question. Well creating market is something that we need to work on is the job we need to tackle. But looking at the growth short-term, as I explained earlier, [indiscernible] is a good example. Mid-price segment, there was a question mark regarding the growth of the mid-price segment, but from last year, by delivering value, in this price segment, we have seen the shift from 40% of the customers shift from lower price segment to the mid-price segment. And we learned lessons that we are able to create markets. And last year, even though it's not a new product, new retinol, with new retinol through new communication, we were able to achieve growth. So we learned that with -- new communication, we're able to drive growth. So in the mid-price segment, and also in Prestige, we will work on innovation and also in brightening. So we will make sure to communicate values to consumers. And over a short period of time, we expect to drive sales. And in terms of creating markets, that's something that I would like to work on. Well, there'll be relaxation of restrictions of wearing masks and what that means for consumers when we will consider -- we will get insights to be -- so that we are able to propose new beauty habits. And under -- based on skin beauty, not only skin care, but inner beauty and new beauty solutions, will be combined to be a personal beauty company to continue evolving. My name is Wakako (ph) from the Mitsubishi UFG Trust. Thank you for your presentation. One thing, I want to ask about the ROIC. In the midterm plan, as I look at your mid-term strategy, the marketing costs grow the top line, reduce the cost and improve the OP margin, is how I read it. So efficiency, and as an important KPI, you've mentioned ROIC. But your investment -- return on investment, looking back in the past two, is really efficient. That's something that I'm personally skeptical about. So including the management of the returns, how are you going to improve the efficiency of the investment. And in order to achieve the ROIC target, by area, I'm sure there are areas that would not meet the ROIC target. But for those areas, would you consider taking further measures? And is that your view to managing ROIC So I just want to hear more about how you manage and how you assess your ROIC. The target for ROIC by region, we do not give each region a ROIC target. So we have the ROIC [indiscernible] and each have their levers. So for example, the supply chain will be trying to reduce the inventory, et cetera. There's key KPIs within the ROIC, within these division, and they will target that. And then what about fixed asset? What about investments? If it's from a certain price point and above -- will be raised to myself or Fujiwara-san or Uotani-san. They we'll look at the business case and see if it makes sense what's the payback within how many years the payback, is there enough returns? And that's how we will assess if it turns into a certain level and above. For marketing ROIC, what we see from the head office to the marketing investment, how much sales were we able to generate. That will be the granularity of what we see at the head office. But if by brand and by country or region, by doing that such an activity, how much marketing KPI could increase or improve And would it lead to the actual purchases? Each of the regions and divisions will do that, but we don't manage to that level of detail at the head office. But that is what we do within the whole company to look at the ROI. Thank you. Uotani-san, can I get a comment from you in terms of how you see the marketing efficiency? Maybe looking at reflecting back on the last three years. You've done a lot of different investments and you've change the way of investment is including in China. So how do you feel the results or the impact of these investments? I think there's two things. One is the direct, what we need to see in a quantitative manner. For example, what's the -- so we increase the marketing advertisement fee by this. And then awareness grew up by this, the trial grew by that and the sales grew and they continue to be users and that we can see, for example. So we can see it from that fiscal year, for example. But as you know, marketing, when we invest in marketing for the consumers, you can't just see it for that fiscal year. It's an accumulation of it. It's an impact that continues on and some of the impact carries over to the next year. So it's hard to say, if we cut in investment cost this year, that it will impact us next year and onwards, for example. So in the short term, just like Yokota-san has mentioned, if we do something in certain region, each of the P&L is managed by each of the regions. So by this brand, your region has this profit. And that's something that we always, of course, track. So if we increase something in investment, then we will see with something grew, the gross margin goes the bottom grows, et cetera. If there's a certain reason and if it makes sense, we can push through and execute even if the bottom line turns negative. But anyways, we will try to balance. But it is true that the impact of the overall return on investment cannot be seen in the short-term. And so it has to be planned. It takes few years to see the actual results of something that we invest in and that's something that we continue to track. Just as an opinion, since you are raising the 2020 – since you are looking at these numbers, if you could see more details of the ROIC and if the company can continue to look more in detail of the ROI so that we can have a clearer view of the return on investments. Very true. You have a point there. But unlike the mass business, this business is especially in the Prestige area. It's a very high margin business. So that's why we have organized the brand portfolio and that's why we focused on brushing up on the brand portfolio. For example, in order to get 100 million in sales, what is that? And then the gross margin will be JPY800 million, for example. And some are within 60% et cetera. And in order to graze the top line, what kind of impact does that come, what does that impact the margin? And that is the important activity that each of the region is responsible for. This is Kawamoto from UBS. I have questions regarding Japan and the recovery of the mid-price segment. October to December, I'm sure that you have seen the fruit contribution from the renewal of Elixir, which is in the Premium segment. On a full year basis, it was on par with the previous year and Q3 it was also flat year-on-year. So it looks that the Q4 was also flat. So other products in the mid-price segment, I think we're not growing outside of Elixir, right? And I think that Elixir attains high margin. So in Q4, I expected margin to improve in Q4, but the profit was negative JPY6.1 billion and how should we look at this number? You plan to increase 16% in Japan year-on-year this year. Could you share with us your assumptions? Other than Elixir, other premium brands, your question was regarding other brands in premium segment, right? Other brands in the medium price segment outside of Elixir, to be honest, yes, we are struggling a bit. For instance, a REVITAL and BENEFIQUE, in Q4, they struggled. But Elixir and MAQuillAGE makeup brand have trended steadily. And this category has high penetration in the market. So brand margin is high. So as I explained, putting these brands on a growth trajectory will contribute to profitability. Elixir, is a big brand for lotion and milk, renewal was quite successful. And other areas, other brands are seeing some negative trends, so they are offsetting each other. But we will take measures this year for two to three, we need to spend two to three years to develop a nurture brand. So we can't adjust the overall trend just by looking at the last year's number. China was negative and that represents the overall figure for global. But Elixir in China where I used to base. China saw a negative growth, slightly because Tier 3, Tier 4 recovery was lagging behind. So it's true that we have struggled a little. But based on a quantitative survey, Elixir mid-price segment at around JPY3,000. What we've focused most is that leveraging collagen technologies, et cetera., in promoting Elixir. It's three months and since the relaunch, based on value, the prices are attractive against value. Because much of technologies are incorporated in the product. So customers really understand that aspect. So for other products and brands, we will renew this year, next year to nurture our brands over the next few year period. Question again, in Q4, what's the reason for profit decline against the sales growth? What's your assumptions and what's your assumption for inbound for the New Year in Japan business? As for inbound, as you may know, from October 1, last 2022, travel restrictions were lifted, and we started to see inbound tourists in Japan. And the inbound sales has been growing low-teens percent in Q4. Chinese travelers have not entered Japan yet. So we expect to see continuous trend of inbound sales going forward. As for Chinese tourists, we expect them to start coming back from the second quarter to gradually make sales contributions, so that's our assumption. Those are our assumptions. Answer is that in total, we are forecasting 16% sales growth. As for local consumer growth, we are forecasting high-single digit percent, and inbound, we are forecasting 70% growth year-on-year. Mitsui Sumitomo Asset Trust Management, [indiscernible]. For myself, I'm going to step aside from this performance? And maybe ask more about the new structure of the CEO, COO. In the press conference that was -- that had announced of this new -- the management structure, I want Mike (ph) to hear -- I would like to hear once again from the CEO and COO structure. In the website, in order to change to the offense. The two of you will work hand in hand with partnership to lead the company for further growth. So I would like to hear from Uotani-san directly, what you have in mind? I'm sure there are things you will do together. There are things that you each of you will do separately in Elixir in separate ways. And so I would like to hear that from Uotani-san. And for Fujiwara-san, you have been selected to two takeover to be the COO and President. What would you like to continue doing? What would you like to further develop? And with yourself, with your new leadership, what would you like to achieve? Thank you for your question. As have been expressed, I said it's – this structure will be the next two years. This is year one. So this year and next year, I'm sure that how we get involved to make change. And I want to make sure that after the two years, I can completely hand over to Fujiwara-san, so that he can plan things in the next two years. But for this year, for year one, he was overlooking just Japan sorry, just China region. So he's not had much involvement in the Japan business and America's Travel Retail and those businesses used to report to me, myself directly. So to learn about the global business or the reality of the global business currently is something that Fujiwara-san needs to focus on and to learn from. And of course, we have the and for myself, I don't need to attend these monthly meetings with the regions. And of course, there's a big reason and big problem. Of course, I would need to be involved. But if there's a really good news, of course, I want to hear immediately. But even with the Japan region, Fujiwara-san is talking with Tadakawa-san directly to figure out the real challenges and what kind of problems they have. And I want them to really run this feet and learn about what is happening in reality of the global business. And so for myself, I look at more of the longer term. For example, skin beauty in the longer term was mentioned in the presentation. But these segments that will come in when we talk about skin beauty, we going to develop? Is there going to be further R&D? And what kind of investments? What kind of M&As can we look at? So I want to look more from the longer perspective in terms of business planning for the company. And I mentioned a little bit about sustainability, and that is something that is common between myself and Fujiwara-san. And it's not an activity that only myself is doing because I'm thinking about it, but of course, we need to actually implement it into the company. So that's something we work together. Corporate governance and Board of Directors meetings and related corporate governance, Fujiwara-san your grandson has not had much experience in that. So that's something he will continue to learn from myself. And so in that sense, I will continue to lead these corporate governance structure and gradually build the experience and expertise and knowledge. And so the next year I can hand over many of the things I work on in terms of corporate governance Fujiwara-san as well. And for myself, as a new COO, the global company that represents Japan or to be a global company, I believe, can be one of the companies that represents Japan. And I myself have been very touched by those phrases, and that's what I had been focusing on while I was the head of the China business. I believe this company has the ability to be a leading company that represents Japan in the world. And I think this beauty company has that ambition and that has that vision is a very aspiring thing. And we I'm sure that with that great vision, we can bring in great talent too. And that those words are also very some -- those words are very touching to the overseas regional heads too. And they believe that we as a company can be even a bigger company in on a global stage. So that's something that we will continue and I personally will continue to pursue. And one thing that I will want to make sure that -- what I would like to make sure to be focused on is what could -- what is the challenge now? What could be a problem in the future? I don't want to leave the issues and challenges and problems to the next generation as much as possible. And that's something -- and that's a key phrase that we talk about, not just myself, but within the management team, the executive team right now. Any of the challenges that we have, we want to try to resolve it so that what we hand over to the next generation, we are able to hand over a great company and quality of a company. Thank you very much. It's very difficult to hand over such a big role. And a lot of companies struggle to hand over to the next generation. So I look forward to the a great handover. And Fujiwara-san and I are the same generation, so I look forward to a lot of activities. Well, myself and Fujiwara-san were really next door in the office and we feel that communication is very important. We can knock on the door and we go to lunch together. And I know a lot of different companies and company leaders too. But, it's very different when you work by yourself and you carry the information by yourself, it's often easier to share the information. And as the company members would know, I love seeing people in my emails so that we all know what is happening. I think it is important for one person not to hog all the information, but that all this information is shared upon each other. It is almost time, so we would like to move on to the last question. This is Miyasako from Jefferies. Medium term management plan you presented today, sales and profit by region, I can't really see sales and profit by region. China, you only expecting 5 percentage points improvement. What kind of profit improvements and growth you're forecasting? And at the time of normalization in 2025 or 2027, how do you view your business and growth? Well, as for China, In 2022, against last year, more than 5 percentage points improvement is forecasted by 2025. To realize that, we will -- we need to generate marketing fund to -- and we will improve efficiency, SG&A to fund for marketing investment to drive top line growth. So that's the basic thinking. That goes for all the regions basically, gross is a key. And to fund marketing investment, we need to cut costs in other areas. And enhance marketing investment to drive top line growth. So similar thinking compared against Vision 2020. As we explained earlier and as Uotani-san explained, JPY50 billion in Japan or more, we will generate by 2025 in Japan and by 2025, in the [indiscernible] just by cutting costs, we can't achieve a 12% margin. So we will be saving costs by more than JPY10 billion globally. There are many reasons to believe like global one IT and IT cost reductions and the biggest factor that project focus. Finally, in Q4 2023 or first half of 2024, Focus will be introduced in all regions, linking all the regions and data visibility and integrated planning will become possible. And the processes will be changed to be more efficient to reduce cost. We need to work on that. Otherwise, it's going to be difficult to achieve 12%. Once we work on those, in 2027, assuming that the beauty market to grow 5% globally. By taking market share, we achieved 6%. Then naturally, we can expect to see 15% margin. So those are the assumptions for our medium term management plan. It's not 5 percentage point by segment. We expect to achieve high profitability also in China. Basically, the basic thinking is that in each region, against the market growth, we will outstrip by 1 percentage points or 2 percentage points against the market. So that we enjoy and achieve the market share gains. By 2025, in principle, we will focus on core brands and core businesses and we will outperform the market growth. In terms of size, as you can see, Japan, China, Travel Retail represent bigger share incrementally. And in our medium-term management plan, creating new markets. We'd like to take on new challenges. For those initiatives over the next three year period, we will explore where opportunities lie. And if possible, we will do incubation so that they start to blossom (ph) after 2025. And we will invest some to those new areas to ensure profitability after 2025. We will be closing today's earnings announcement. After this, IR team will be sending a questionnaire. Please fill in the question note, so that we can improve our IR activities. ESG, HR and people, are very important factors for Japanese companies to compete globally. And we really appreciate feedback on those points as well. Thank you very much.

EarningCall_2

Before we begin, please take a moment to review the Safe Harbor disclosure on Slide 2 of the presentation which is available on our website, along with the earnings release. Now during the presentation, we will be referencing non-IFRS measures and we define these on Slide 3 and we provide reconciliation tables to the nearest IFRS metric in the earnings release and on our website. Let's go straight to the highlights for the year, starting on Slide 5. On the left, you will recognize the value creation framework that we presented at our Investor Day almost 1 year ago today. Back then, the global economy was bouncing back strongly from the pandemic and the economic outlook was quite positive. That changed quickly after Russia invaded Ukraine, energy prices spiked and inflation and interest rates moved up sharply. Despite this abrupt change, we have stayed the course and continue to execute on our plans. We're actually quite used to executing and delivering through uncertain times. And that's what we did in 2022. We delivered on our objectives with a good outturn for the year, as you will see during today's presentation. Operationally, we focused even more on our customers and we invested further in our networks and into our people. All of this produced strong financial results. Organic OCF growth was a strong 8.4% and equity free cash flow all in was $171 million. All of this is consistent with our plans. And as we said we would, we used that cash flow to reduce leverage. Our leverage was down to 3x at year-end. We also made very significant progress in our plans to carve out our Towerco portfolio and remain on track for a transaction later this year. Tigo Money continued to execute on its own plans to accelerate growth which we expect will generate interest among potential investors who can bring expertise and capital to help the business flourish and get to the next level on its own. And finally, 2022 was a big year for us on ESG. Our science-based targets were validated formally and we also made important commitments towards diversity and inclusion. These and many other actions have further strengthened our Tigo culture and are helping us cement our position as an employer of choice in the region. In 2022, we ranked number 2 in Latin America and number 5 in the world in the Great Place to Work survey, alongside other global household names like DHL, Hilton, Cisco and Salesforce. So we're entering 2023 from a position of strength and with great confidence on the strategic plans we laid out a year ago. So let's get to some detail. Please turn to Slide 6 for a look at service revenue in 2022. Service revenue grew 2.3% during the fourth quarter and 3.5% for the full year. As expected, growth slowed in the second half with the change in macroeconomic conditions. When you look at the full year picture on this page, you can appreciate how strong our business is with every business line and almost every country growing despite a much more challenging macro environment. As I mentioned last quarter, there are some shifts in the way we're achieving our growth and this is consistent with the general trends in our markets with slower growth in home, offset by stronger growth in mobile. And we believe that this is at least partly related to increased mobility and less dependence on home broadband as kids have gone back to in-person learning and parents have returned to their offices. And this is happening in the context of a weaker economy where consumers are having to cut some of their spending. And yet, meanwhile, B2B continues to perform very, very well, as you can see in more detail on the next slide. Service revenue from our B2B business grew more than 5% in 2022, accelerating from only 1% in 2021. As a reminder, we revamped our B2B team, our strategy and refocus our product offering for Tigo businesses just a few years ago. And with a pandemic now behind us, this is paying off with stronger customer growth, especially in the SME area and very rapid revenue growth, with about 40% coming from high-end digital services that make up close to 20% of our overall B2B business now. This part of our business has continued to perform strongly in the second half of the year. We have created a strong pipeline of new projects which gives me a lot of confidence that we can continue to drive solid growth in B2B going forward. Now let's look at our mobile business on Slide 8. As I mentioned earlier, our consumer mobile business grew more than 3% for the year and postpaid has been the main driver of this growth. We added 0.25 million new postpaid subscribers during last year and this drove 9% service revenue growth for the year. About half of these customers are migrations from our prepaid base. We do this with selective segmentation and based on consumption relos and payment histories and we will continue to increasingly use data to drive our personalized offerings to drive our postpaid penetration. Note that postpaid still accounts for only 16% of our overall mobile customer base but it now contributes 35% to our mobile service revenue and 20% to our overall total service revenue. Final point I want to make on mobile is that we continue to implement price increases in most of our markets to catch up with inflation and we're encouraged by the competitive response so far. We're starting to see this translate into our improvements in some countries. ARPU improvements indeed will be a very important area for our focus in 2023. Now let's talk a bit more about home on Slide 9. As I said earlier, the softer net adds that we saw in Q3 continued in Q4. This was caused by: one, the post pandemic shift in demand from home back to the office, as I described earlier; two, the more difficult macroeconomic environment, importantly, including civil strikes in Bolivia during the quarter and throughout the year; and three, we're choosing to remain disciplined on price. We continue to implement price increases and to charge installation fees even if some competitors do not. This dampens net adds in the short term but builds a much better and stronger business for the long run which is what we're all about because we remain very optimistic about the long-term growth potential for residential broadband in our markets. And that's why we continue to invest to expand our network and to strengthen our content offering. As you can see on this page, this year, we accelerated our home build to add more than 800,000 homes passed and about 40% of those were FTTH. On the content side, we told you last quarter about a deal with ViX which gives us access to Spanish LaLiga sports content. We're very satisfied by the early results we're seeing, particularly now that the World Cup is overrun our customers focused shift back to the local and international soccer leagues. Now let's look at 2 of our largest markets. Starting with Guatemala on the left, we continue to invest in sales, marketing, content and our network to maintain our market share, especially in the prepaid market, where competition picked up some intensity last year. We're very pleased with our results. Our prepaid market share remained unchanged from a quarter ago. And meanwhile, all of our subscription businesses, postpaid Home and B2B continued to perform very well, showing acceleration in the quarter compared to Q3 and we also had some positive help from the World Cup this quarter. So overall, another year of solid performance from our largest operation with very robust and sustained market share positions and strong free cash flow generation. In Colombia, the story hasn't changed much since Q3. We continued to gain share in mobile, especially in postpaid. The shift in mix to postpaid is driving ARPU higher. And the good news is that ARPU for our prepaid segment is now also growing nicely and contributing to the 15% mobile service revenue growth we're now seeing in Colombia. As we saw in Q3, the growth in mobile more than offset the softer trends in Home, as we discussed previously. And overall, service revenue growth was almost 7% for the year in Colombia, a strong performance considering the challenging macro environment we have been facing. Now please turn to Slide 11 for a summary of our network investment in 2022 and the recent years. On the left, you can see that we have now upgraded and modernized all of our mobile networks that all of our markets are now 5G and SA ready. And in fact, we already launched 5G in Guatemala during the year. Because of this, as we have said before, launching 5G SA in our markets when that happens, will be within our existing CapEx envelope, as we just in Guatemala over the past year. On the fixed side, our network is very new and fiber deep and increasingly so. We now have over 12 million home passes with HFC, already including 730,000 of we passed with FTTH across 6 of our markets. And last week, we announced the completion of a new fiber network that connects Paraguay and Bolivia. Importantly, this provides a new key fiber route linking the Pacific and Atlantic oceans. This is a combination of a multiyear project that will improve quality and lower the cost of connectivity in South America. All of this investment has been undertaken within our stated CapEx embed of about $1 billion per year which translates into a healthy CapEx to sales ratio of around 18% on average over the last 3 years. Now look at TigoMoney on Slide 12. 2022 was a breakthrough year for this business. Over the past 2 years, we've invested in the business, first, by building a strong team and bringing new and expert in tech talent. During the past year, the team was very busy redesigning, rebuilding a new, more robust digital armband fully scale. We launched a new app and have been rolling it out across the footprint to drive adoption and we're now starting to see the results. Digital users, that is those people who transact online using the new app almost tripled and we're monetizing that growth. Revenue from these detailed users more than double. It is still early days and our digital user base is still small but we're very satisfied by the early take. Meanwhile, we're also working on driving increased engagement with our digital user base, rolling out our new merchant platform. And in the last several months, we have signed up about 45,000 new merchants. That's up from close to zero,1 year ago and expect to add a lot more merchant in 2023, leveraging our Tigo business relationships. Over the last several months, we have been piloting our new lending business, originating more than $100,000 in annual loans. The average loan size is about $40 to $50 and the average maturity is only about 20 days. Clearly, there's a big opportunity for us in this area and we're using this pilot to fine-tune their algorithms before being this out more broadly later this year. And finally, we also signed an alliance with Visa, giving TigoMoney customers access to the Tipo Money Visa card, allowing them to use their TigoMoney wallet balances anywhere Visa accept. Now please turn to Slide 13 to review the progress of our Tower company carve-out. By now, you all know the reasons why are doing this can create a lot of shareholder value. We've made a ton of progress over the past year and the key message here is that we're on track with the timetable we shared with you 1 year ago. We continue to expect the transaction towards the end of this year. The project and the company now has a name as it's coming to life. It's late [ph] which will see the light of day very soon. Last but not least, I want to take a moment to comment on the important progress we made on the ESG front during 2022, as you can see on Slide 14. On societal programs, we continue to focus on providing tools for employment in the digital economy, training key socioeconomic sectors such as women, children and teachers. On the environmental side, we validated and announced our science-based targets, committing to reducing Scope 1 and 2 greenhouse gas emissions by 50% by 2030 and to achieve net zero over the long term. Our achievements in 2022 were made possible for the dedication and the effort of our 20,000 employees and I have no doubt that the continued hardware will contribute to even more success for our business in 2023. We continue to closely monitor the macroeconomic situation in our countries. On the left, you can see how inflation has been tracking over the past year or so. It peaked at 8.5% in July and has fallen to about 8% in December. And on the right, you can see the latest GDP growth forecast from the World Bank. Our markets on average are expected to grow about 3%, with all of our largest cash generative markets in excess of 3%. This is faster than regional peers like Mexico and Brazil which are expected to grow less than 1% which I think speaks to the resiliency of our markets in the face of a potential global recession. Now, let's look at our Q4 performance, beginning on Slide 17. Service revenue was $1.3 billion in the quarter. That's up nearly 11% year-on-year due to the Guatemala acquisition. Excluding the acquisition and the impact of FX, organic growth was 2.3%. Our mobile business grew just over 2.5% and contributed about 2/3 of the overall growth in the quarter. And for a second consecutive quarter, all of the mobile growth came from postpaid which has had its best performance of the year, growing at 9.6%. Investments we've made to some of our mobile businesses and networks in recent years, especially in Colombia continued to yield positive results. Adverse FX trends impacted our revenue growth negatively this quarter and largely due to the Colombian peso which depreciated 18% on average during the quarter compared to a year ago as well as the Paraguayan Pirani which depreciated about 5%. Drilling down further on Slide 18 to service revenue by country. Mauricio already talked about Colombia and Guatemala, so I won't cover those again. Elsewhere, our performance in most of our other markets was solid. El Salvador continued its strong performance during 2022 and was up 7.5% in the quarter, with every business line contributing to this growth. Nicaragua also maintained their strong momentum with growth of about 5%. Paraguay grew for a seventh consecutive quarter and was up 4% with solid performance in mobile and B2B. Panama had flat growth against a tough comparison due to some large B2B contracts in Q4 of last year. Bolivia was down 4.5% as we felt the impact of a change in regulation on mobile overage rates that went into effect in August as well as a strike in Santa Cruz region which impacted economic activity and our install capabilities during the quarter. Honduras which we don't consolidate, had its strongest quarter of the year, growing almost 5% with growth across all business units. Okay. Turning to EBITDA on Slide 19. EBITDA of $548 million was up 19% year-on-year due to the consolidation of Guatemala. Organically, EBITDA was up 1.8% as revenue growth was partially offset by the net effect of higher direct costs and lower OpEx. Direct costs increased due to the higher content costs related to items such as soccer rights, both our new agreements with ViX and the World Cup. And we also saw our bad debt expense increase over the past year as this largely reflects growth in our postpaid and B2B subscription businesses. Operating expenses declined due to lower selling and marketing spend which offset the impact of inflation on our energy and labor costs. Now looking more closely at EBITDA performance by country on Slide 20. And El Savador and Nicaragua both had very strong EBITDA growth from operating leverage and we saw margins expand roughly 200 basis points over the past year. Paraguay returned to positive growth this quarter, posting an almost 7% growth. As Mauricio mentioned previously, Guatemala had a stronger Q4 with EBITDA growth of 2.6%, although revenue from the World Cup contributed to some of the sequential improvement. Colombia was up 4% and margins were just shy of 31% which is our highest level since the entrance of the new competitor in Q2 of 2021. We remain very focused on improving profitability in our second largest market. We continue to gain scale in mobile and we are also taking steps to adjust to our cost structure and mitigate the effect of the 16% increase in minimum wage that went into effect in January in that country. Panama EBITDA was down slightly in Q4. Again, this is because of some large B2B contracts in Q4 of 2021. Our full year performance is more representative of the trends we are seeing there. And on a full year basis. Panama EBITDA was up more than 6% which was a good result in the year where our main competitor was not allowed to raise prices under the terms of their merger approval and our OCF increased over 20% during the year in a dollar-raise market. Bolivia EBITDA declined almost 12% as we saw a full quarter impact of the regulatory change from last quarter which dropped straight to the EBITDA line. Additionally, results were impacted by the strike in the Santa Cruz region, with slow commercial activity during the quarter. Honduras which we do not consolidate, had impressive growth of 13%, reflecting both improved revenue trends in Q4 of 2022 and an easy comparison against a muted performance in Q4 of 2021. Honduras is the one country where we recently upgraded our mobile network, as Mauricio outlined earlier and we have seen revenue growth accelerate nicely in the second half of the year in this market. Looking at EBITDA margins on Slide 21. Margins were broadly stable and even improved compared to last year's Christmas selling season of Q4 of 2021. We achieved this despite the investments in our carve-outs and the tougher macro situation. Energy costs were up almost 11% on average during the quarter. We have seen higher minimum wage increases in our footprint given the inflationary environment. We continue to invest in preparing the carve-outs of our Tigo Money and Tower call businesses, although this impact moderated somewhat in Q4 as we begin to lap some of the earlier investments in Tigo Money in particular. Meanwhile, we continue to implement price increases across our businesses in Q4 and we will continue to focus on price increases in 2023. Finally, we are starting to implement our efficiency program, Project Everest which we expect will help us achieve our financial targets. Let me spend a moment providing more details on Everest. As you can see from this slide, Everest is a very broad-based efficiency program that will touch every part of the business and in every country, including our headquarters. This will include revenue initiatives around convergence, commercial OpEx savings from improved churn and customer base management and truck roll costs, network OpEx savings from energy optimization and not consolidation, IT savings from simplifying platforms and CapEx avoidance with improved reverse logistics. So this is not simply a cost-cutting exercise but improving the way in which we operate. We have been working on this for the past several months and the program is the result of a very detailed bottom-up assessment of all of our operations and we are now implementing Phase 1. We expect savings from Project Everest to ramp up to an annual run rate of more than $100 million by the end of 2024. So it will be a key pillar of our EBITDA and OCF growth over the next couple of years as we focus on delivering our equity free cash flow targets. Moving to Slide 23. You can see our operating cash flow, that is EBITDA less CapEx performed in 2022 compared to 2021. OCF more than doubled during the year to $1.264 billion mainly due to the consolidation of Guatemala. Organic OCF growth was 8.4% which adjusts for both the acquisition of Guatemala as well as for the OCF that we spent in Africa prior to exiting in April 2022. Excluding the one-offs we called out in the previous quarters in both '21 and '22, organic OCF growth would have been 8.6%. This organic growth was due to organic EBITDA during the year as well as lower CapEx as we completed some key investment projects that began during the pandemic. Slower home customer growth also means that we spend less than expected on installs and customer premise equipment which typically is one of the biggest components of our annual CapEx spend. Now let's look at equity free cash flow on Slide 24. As Mauricio outlined, we generated $171 million during the year, in line with the guidance that we gave you during our third quarter call. This was the first year that we provided guidance on the metric. So I wanted to provide you a bit more visibility on all the main line items that go into our equity free cash flow which reshow describes as being after everything. Starting with EBITDA of $2.25 billion. We then deduct cash CapEx of about $960 million. This was a bit below our guidance of around $1 billion which reflects the variable nature of a portion of our CapEx related to CPEs for customer home additions. There was about $1 billion of fixed charges for financing, leases and taxes. There's another $200 million for working capital and spectrum and these items can vary somewhat from year-to-year. Finally, we add back repatriations from our Honduras joint venture which was just north of $80 million in 2022. I should point out that we own Tanzania through early April. So all the numbers above include about 3 months of Africa. So we removed the net effect of that down at the bottom to give you equity free cash flow from our current footprint. Now please turn to Slide 25 for our usual debt bridge. Net debt is down $1 billion in 2022, with a reduction of more than $200 million in Q4 due to the very strong equity free cash flow generation during the quarter. We ended 2022 with $5.8 billion of net debt and net debt to EBITDA after leases of 2.94x. This is down more than 30 basis points from 3.28x at the end of 2021. if we include lease obligations of just over $1 billion, our leverage was 3.04x at the end of Q4, well aligned with our deleveraging targets. Thanks, Sheldon. We'll now move to the Q&A portion of the call. [Operator Instructions] As most of you are aware, we published a press release on January 25, in which we confirm that we are having discussions with Apollo Global Management and Cloud Group about a possible or potential acquisition of all outstanding shares in Millicom and that there is no certainty that a transaction will materialize nor as to the terms timing or form of any potential transaction. And we have no new updates on this topic today. And for legal reasons that should be clear to most of you, we cannot and will not be taking any questions on this topic. So you mentioned the Everest project efforts to increase prices across the regions. We wanted to understand what are the key levers for the further free cash flow acceleration into next year? What is the main source of that acceleration? And if we could expect a similar seasonality as the one that we saw in 2022? And the second question would be if you could give additional color on the competitive environment in Guatemala mobile market and what has the impact been on prices? Thank you, Froy. Michael, you scared me more than all the lawyers or the last a few days with those comments. So we got a CFO here who's been around now for a pre year. So we can fully tackle number 1, Froy and they don't talk a little bit about Guatemala how about that? First of all, just on our equity progression, we're not giving guidance specifically on for 2023 versus 2024 in our 3-year range. So I think what you picked on what's underlying or underpinning our 3-year equity cash flow target is ultimately sort of our 10% organic OCF growth that we expect over that 3-year period. And the key levers there. I think you hit pick that one of the most, at least what can we do on the top line or what we expect on the top line price increases will be a big component of that. It's something we started introducing in the second half of 2022. It's something that's going to be a big focus in 2023 and beyond. So that will be a key piece of driving that as well as that approach how we drive margins. Project Everest is going to be a big component of that. We'll get to, as I said, exiting 2024 at 100 -- in excess of $100 million of benefits. 2023 will be ramping towards that now. I wouldn't say it's exactly a straight line ramp. The recent one-off costs, probably a bit more in the beginning part of this exercise versus what you'll probably see in 2024. So it will be exactly a straight line to that $100 million exit but that will be a big contributor for both years and [indiscernible] 10% organic OCF growth over the 3-year period. All right. And then on the beautiful country of Guatemala, you get history provide the context, of course, as you all know, for the pandemic period, we took a lot of market share. We were just active on investing as we did the acquisition of the asset have about 15 months or so in row, we had expected that our competitor would launch some of that back. So compared to the value for that, we invested through sales and marketing and network and launch 5G policy to make sure that in Guatemala remains healthy as we are now. So the updates on that. If I can take them holistically Froy this is your specific question is none, Q4, so no deterioration much water in a competitive environment being prepaid, as you know, specifically your question. That's a result of the way I think we have built the value for the year. So the market remains in Q4, stable on prepaid. I believe the way we responded work smart and presenting long-term health of the business but it also allowed our competitor to not be in a position or they needed to escalate and they have not so we return to a more stable prepay market there as we imagine. The second point, the other businesses called them the subscription businesses on postpaid, they all continue to grow. And although there are now out of bases in Guatemala, they're growing very, very well. Point number 3 which is, I think, from this kind of important to bring up since this is a year-end call. just kind of take stock of the year working as a whole. And it's also been about 15 ranks it seems really about 100% of it. So it's a good time to kind of figure out how we're doing. Point number one is that sessions -- we've sustained market share, same market share we obviously. Number two, it's actually improved our number to a better network than the day before. We launched 5G throughout the year where the first room strictly to do that. It's NSA 5G as I've said a number of times, so it doesn't change the CapEx in the normal CapEx envelope to create a capital in -- we've actually improved a spec position. We were able to impair 700 spectrum. We have bought from model on. A lot of us the wide options 100. So we now have to say market share, better able to improve spectrum position and most importantly, sustained equity cash flow, as you just show out of Guatemala with our ability to do more debt down which, of course, is increasing equity in Guatemala. So we are very, very happy with the key outcomes in Guatemala. And there's 3 things that are also important for the long-term nature. We like 90% of the tower portfolio there. So that makes actually be reliable; two, as you've seen, our day-to-day business is something our emphasis on and now it is about Guatemala portfolio because the great the product streams to 100% of it. And we're relaunching all money in Guatemala again, easier when you understand the business and it can be incorporated everything or stream. And all of those things were part of the acquisition plan, also say, 15 years -- 15 months into this, it's all working out according to the acquisition of plan. So that's Guatemala the offshore manner. Stephan. So I had -- hopefully, can hear my question. I was going to talk to the -- build our plans. You have clearly accelerated the practical buildup. We had 800,000 homes passed which is a target of around 1 million homes did have not taken off way lower than the target overall. I know there is some heightened back-to-work defects in order to accelerate the -- and without better would you consider slowing down your network build until demand peaks up. I'll stop with that and then I can go short questions. I think our -- the connection was not helping. And as good as my Swedish is right now, your English is far better, Stefan. So I think the connection was not helping out. But I think we got a gist of the question, this around whole build, the penetrations, our commitment long term. So I think we got most of that. So kind of short term sort of what we're seeing this year and why be the slowdown in the net adds and how that makes sense in the context of us continuing to build for the long term. So the slowdown, we think, is due to one macro. And you can see that because the slowdown out in terms of the second half of the year. That makes sense to us. People are watching their consumption every -- and number two, that's also consistent with what I call [indiscernible] mobile versus home and context coming out of the pandemic the demand shifted from their own towards the office and that's consistent as people are in the context of number one, slower macro volumes. And there's also some specific country issues which relate to Bolivia where the strikes were not just the last quarter throughout the year, they were going to be minor in or to sell install -- is kind of really the a few are on 20,000 were. And the most important one of all of these is we've been extremely price-disciplined -- whereas some of our competitors, we may have not quitting price increases, we have. Whereas some of our competitors may have not postal installation costs we have. And we think this is a serve as a long-term healthy mix of if we take some short-term pain but we have to explain to you on the net adds in conservative body areas mix going forward. And that gives you an idea of why indeed we keep the tons because we think that it alone will look on home than you normally do on our businesses because those penetration will come. The underlying factors for that build partition population, adopting digital household formation, middle class formation and low penetration would all generate increasing demand for broadband services and in long term and we want to build the network as we have been doing that cater to that and fulfill that demand. So we're very happy with it to build. Now do we need to abjure according to the demand. Yes, in the short term, yes, we need to slow down according to the demand. So we don't need a lot of capital. We don't cut it off out there, it's something for media news. But overall, you'll see, as you have seen now for a few years that we will manage the business so that we sustain the economic of the residential program which is 30% to 35% network penetration. And we're always in just to try to get there and I'm going to have ourselves or behind it ever since. And we're happy with what we're seeing in terms of deploying that network, 800,000 is a good rating. 40% of that is already fiber. It's a pretty good number with in. We've done the logistics to work. That's not an easy thing -- etiologists to work in 6 of our markets, we will not be any tier. And of course, as we've said, think going forward, will be to ramp up the percentage of that fiber till we get to the 90's very quickly. All of this simply to say, we remain extremely volition company and deploying fiber and residential broadband services is directly for the business. I won't even go into FMC which will remain growing levels as a company. I didn't get it Danielle's going to have to go on. I think give us as sort of where we are in AFS revenues as we're seeing this year versus what we've been talking about historically of $50 million. Is that the question? Yes. Okay. Okay. So we haven't disclosed the numbers but we're growing at sort of high single digits to low double digits year-over-year. At this point in time, I think the important point to note around MPS is we've essentially spent a lot of this year as recently say in the prepared comments on establishing the new platform and rolling out the new platform this year. That rollout was really happening in the second half, frankly, the latter part of the second half of the year. So a lot of the benefits from that, it hasn't really been never to realize at this point in time. But I think it's -- we've been encouraged by sort of the digital adoption and the like on this platform but it hasn't sort of translated into sort of within your revenues in 2022 or something amort. This is why where I would have wanted to give you Q4 numbers but we would have been really persistent and everybody during the presentation to be like how doing talking about full year in Q4 because it's really in Q4 actually November, December and you see the runout that MFS is high because you see the digital subscribers coming in, the merchants coming the revenue coming and significantly, the NPS really staying on very, very high in some really, really good results on our trials or through the entering. Sorry, submissions with the new patent here in Stockholm. So no, I was only going to ask questions on the acquisition but Michele's scared me a bit to here, so I'm going to avoid that. But you Compliance guys give me your med card. And you have those over line, you just showed it and I was like, okay, that works... It's a good gesture, I think, for sure. A couple of follow-ups, I guess, on Stefan's question on the CapEx levels. So I mean, you had cash CapEx of roughly $960 million in 2022. You guided for $1 billion previously. I guess that's been the kind of headline numbers, I guess. And that's kind of despite inflation being what it is to a certain degree and just the impact that, that is having. So I guess it's partly due to a slowing momentum in home during this year. But I think with Project Everest, I mean you're guiding for kind of additional CapEx cuts. But then on the flip side, you still want to invest in the home business. Could you maybe talk about some of the kind of puts and takes within the CapEx older? Is this a sustainable level in the long term? Or what should we be expecting in absolute CapEx spend over the next few years? So I'll give you some color and maybe Sheldon can bring it down to ones just to some more specific in a time -- we've been investing, as we showed in the presentation, we usually see around $1 billion, just to give that lack of a number. Obviously, we're coming in below that number with under names an extremely healthy CapEx-to-sale ratio CapEx intensity over the last 3 years. And that's because [indiscernible] investing a bit in the business cost in sale of the group to the board, we're coming out of a big investment cycle. Most of the big things that are not variable in nature are behind us. That's important. So what are those things? We modernized the down, will show you, all of them in the last 3 years. We put 5G [indiscernible], I'm talking about now and the same quarter in every operation. And that's important, not only the current port there but also because it is our view that 5G would be any same in the meeting. That's a very important point because it means that the CapEx associated with it, is similar to consistent with what you would expect us doing on priority mortgages [ph]. We've also spent the last few years expanding average. That 80% coverage is important because what it means is going forward is less coverage finance on a more variable happens for capacity CapEx, if you will, should have traffic revenue associated from here. And of course, as you surely know, we are almost done with the Colombia 700 that were built which is in the past. And on fixed, we actually had a bit of a tag with Stefan's question. Our bill continues to be heavy immune fixed. We're now almost 13 million passes, 700 million of those are already fiber and we have the ability to build high working many patients. The most important thing that we said in our Investor Day is that -- our existing network is fiber dip with deep, deep capacity. All of the copper upgrades, remember those are done. We've got maybe 200,000, 300,000 homes still with copper that we just get tricky in a trickle manner with our radio. So on fixed, it's really -- and we've ramped up the FTH for the FTTH machine which means we're going to get our reverse logistics to start to be better. So all of the -- for lack of fixed heavy lifting, if you will, on CapEx is sort of behind us. And from year on, it becomes a lot more variable. We even did this year with [indiscernible] fiber which we're very happy about. It's not only relevant for us -- but first in the network on the business. I would just add a little on project net risk. I mean from a CapEx perspective, I would expect to see a lot of savings on the CapEx side, at least in terms of what ends up in terms of being our bottom line number that we're reporting. I mean, there's some opportunities around CapEx. I think that also just need sort of more from what we're spending than actually a reduction in spend. So we'll be getting more -- I think, more bang for our dollar on the CapEx side. And then just the other point of CapEx kind of we've been mentioning kind of throughout the call. I think the other variable on our spend for next year is going to really come down to the demand and pace of our home net adds. That was a little bit lower this year, therefore, anisole spend on that in terms of what we reported this year. And Everest is all about doing things more efficiently, better or digital is what you would expect us to be doing over the long term. It's not about cuts, it partly but it's about efficiency going forward. All right. No, very good. And then just a quick follow-up also on that side but the other line, I guess, on the spectrum and licenses part because there you're also tracking a bit lower than what we were kind of expecting since the CMD. Is this the kind of full level? Or again, what should we kind of expect on that side? I think we said spectrum under our Investor Day we track 100 to 150 kind of where we were from a were before. I'll tell you as the structure is very lumpy. Any given year, you have depends on whether something and didn't happen -- didn't get delayed. So don't read too much into any given year and rather take the averages and go back some time. I'm sure part of your question has to do with the Colombia spectrum. I would imagine there's a large chunk of that. And just the question is going to come up later and use yours is a good segue to go into it. We're in the middle of those negotiations this year as you're very well aware. So I'd rather not comment too much, only to say that we're not really expecting enterprises against our targets over the long term because we've been conservative in that regard as we should be. It does not need to say class that spectrum prices in rodent we mean how we should be for international began. It just means that we are conservative and realistic in our approach to forecasting as a result. We don't expect surprises. So I had 3 questions, please. The first one was if you could give a bit of color in terms of your pricing activity in the different markets. You've talked about some of them already. But when I take a step back, look at the inflation, look at your service revenue growth, it seems that it's hard to catch up with inflation. So maybe if you could help us understand a bit more how that's playing out? Are the price increases front book, back book, are you seeing spin-down? So that's the first question. The second question was on Everest. I just wanted to clarify that the $100 million annual savings, that's something that should enable you to reach the guidance or potentially even go above the guidance. And within that, although it's maybe not part of Project Everest, I imagine that the higher financing costs due to the high interest rates could also have an impact on your free cash flow. So maybe you can comment on that. And then the last question which may give Mauricio the opportunity to use its threat card; I feel a bit safe [ph]. But the question is when you consider the deal, are you -- do you need to follow the U.S. rules, the Swedish rules, both? How is the context there? Definitely, that is going to be used for that fourth well. We're not going to be going there. But the first 3 are good for you, Mauricio. All right. So I'm going to hand over the ends to our Everest expert. Right? Give me actually in that time at risk by the way. So we'll hand one and I'll take the pricing one right after that. I'm not sure what third one was? Just on [indiscernible] does that kind of propel us, I think, beyond sort of what we're talking about the network free cast range? Or I think I kind of mentioned some of the earlier comments, that hops underpin the 10% organic operating cash flow growth that we've been talking about. So that is -- that just help support the company that targets not to the supplemental to that target. With regard to the interest expense cost, look, from that perspective, I comment quite rightly, we're pretty well positioned in this environment of increasing interest rates. More than 80% of our debt is fixed rate. So we have a very low one that's actually floating and exposed to that. We don't have a lot of debt maturities here in the near term which you've shown in our maturity profile. So there's not a lot of need for us to be going out the repricing destinies current environment. So we thought that's positive. And then of course, even better than that, we've generated some good cash here that were going to be used to reduce leverage and you would probably even reduce our need to go out and the capital markets for financing. So on a deleveraging standpoint which is a positive from that perspective too. So we think we're pretty insulated and well positioned in the strategic issue. So let me let me try the pricing math in a constructive manner with a little bit of detail and also some big pictures to share with that. So let's split the question in the segment. So you get a better feel for what's going on state whether you're doing prepaid favor, residential broadband book. So prepaid because it's dynamic pricing at on a daily basis or as some as our new top office fans and comprise market, it largely is done, of course, on the gross basis. In most of the markets, we've been adjusting as much as we can. And they should there, of course, is price sensitivity. And as one elasticity with the exception of also market where we've been more careful like I already talked about, of course and Bolivia, where our competition has kept competition significant on prepaid. We've not been able to do that. So with the exception of those 2 markets, everywhere else, we will be pricing up to the new offer as much as we can in general terms. When you look at postpaid, the same is true, we focus with the price increases on the new offers rather than under base, we're a lot more careful with the days because you don't want to create a big massive difference between the two. And generally, we've been very good at doing that, particularly in El Salvador, Paraguay and we see in the results. We're actually being able to do that in Guatemala as well. And we've held back in Panama, the reasons that I think Sheldon mentioned. And we're also being a little bit more careful for the same reasons [ph]. So that gives you an idea on that. And then on home, I talked about has been very price spin. So we've been slowly putting price increases. And we do this on a poll, right? We don't do it to everyone in the same day. We do a small regime. And this is across the region in a measured way with some delay in Bolivia to get the position back to do. Now your question had an element to okay, what's the mismatch, I think it is a word you use of this one I wrote down, there's a [indiscernible]. So inflation which is part of your question, it hits the cost base immediately it hinges that and we've shown you the impact on energy which we've been able to observe on labor which we've been able to observe on the bottom line but we're not able to pass on inflation on pricing with the same level of experience in terms of timing. So there's a mismatch in time and as I think I showed them referred to us managing ARPU a little more into next year. That's part of managing that site. Now being careful with expectation, we all know that this using does not have elastic [ph] inflation into customers. There's some screen or some of varieties, et cetera. And that's just part of this initiative. So I hope not giving me a lot of color point on the timing of it and some expectations on it's difficult to base. Absolutely. Just a follow-up on the home, just to make sure I understand clearly, you are also increasing the front book and the back book, both. I have a couple of questions. So it's been a year since you went to the Investor Day and gave some guidance. So I wanted to understand where we stand on a couple of issues there. First, we expect -- at the time, we expected that organic service revenue growth would be mid-single digit. Is it still viable now? Or is it that the project are would offset any weakness there? The second one is, I know we saw that the share buybacks would be expected to commence in 2023 was what we had received at the time. Is that in the plan? Or it's still too early to say anything -- so I'll ask other questions later. I think just the first year just as in sort of the underlying -- some of the targets we had at the Capital Markets Day and sort of are we reiterating that. I think that's the key one we mentioned were just the one in the press release and we mentioned earlier in the call, right, the operating cash flow of organic cash flow growth of 10% over the 3 years year. And then of course, the debt free cash flow over the 3 years of $800 million to $1 billion. So those are the ones that targets we've pointed to. There's also the deleveraging target. There will also be bioscience 2.5x by year. This is by 2025 and then down to 2x thereafter. We did comment at the Capital Markets Day about an intention to do share buybacks in 2023. I would say that's still our ambition. Clearly, a lot has changed in the world over the last 12 months and we're now operating in a higher risk environment, kind of tougher capital markets and higher interest rates and the like. But February, let's see how the year plays out. And in the immediate term, we're going to continue to prioritize deleveraging and paying down our debt because we think that's the appropriate allocation of capital for the business to ensure we meet those deleveraging targets but near-term buybacks remain our ambition. My soccer coach used to say never forget that soccer games have 90 minutes. Holidays a little bit more on the new rules and make sure you play all the way until the end So the other question that I had is regarding the repatriation from Honduras. I mean it's kind of making more than 50% of your equity free cash flow. I think you had $88 million of repatriation from Honduras, I believe. So is that sustainable going forward? Or what is in your target for the next couple of years? Well, look, we're not giving guidance for revaluation for specific segments. I would point out but I think your comment is about 50% of our equity free cash flow. But we've talked about in the past that Guatemala actually generates $450 million plus of equity free cash flow. So that's -- you can't, I think, isolate one single country's contribution because there's also interest costs and cost essentially in the center of the center that needs to be absorbed. So I just want to caution you against that point to try to think that's part of our great cash flow is not really dependent on Honduras which is that's not big. It only looks that way because of the accounting, right, on those in reality, a countries are contributor, as you know, exception in Colombia and they will give them ten and they all came on twit headquarter costs. And then we do it looks like that nicely, right? That's just the way looks not reality of 30% of our initiation -- it's 10% of other I think the question to help us clarify that. We're been worried on whereby the way, looks -- thank you for your question. And just a final question on the fixed competition. As you said that the competition is not responding to your price increases. Is there any specific market that is not responding? Or is it a broad-based kind of a response from the operators? Any specific markets or competitors? Yes. Just if you have more questions on our board, if I'm good. So we talked about what the area Colombia which is very important, we will talk about this, the market has in now. And I already talked about 6 in Colombia. So mobile in Colombia has been recomposing in pricing significantly over the last few quarters. And you see that our prepaid ARPU in local currency is up our memory up 6%. And postpaid is also up. And both of those lines and businesses, prepaid and postpaid are now contributing to our mobile in Colombia which is growing 13%, 15%. That's more volume but also pricing soaring in Colombia is being recomposed. That's an important element of that. You see on [indiscernible]. There's a fair amount of good behavior in the market which is consistent with the notion that it's a 2-player market in which market shares are healthy for it. We expect that like Guatemala and Panama, that will be to say a healthy market share market. We talked about Panama as well in the same that there have been a pullback on any price movements in we monetize our sell market. So we'll see what 2023 as to earn our regard. Paraguay, very constructive in nomadic and also reconstructing on one pricing or nature pricing. We've seen that now Paraguay had now 6 or 7 consecutive orders of service revenue growth, margin expansion and restructuring of this cements -- and what am I missing olive talked about, so I don't think any go back there. So I think I'll cover them all. Okay, that's it. We had an investor call about a year ago, we laid out a number of initiatives. And as you do point out, we gave a 3-year outlook that is composed of 3 key targets, 10% of rating cash flow both in average for that period derivative equity free cash flow of $1 billion and reducing leverage to 2.5 by 2025 2x by long term. All I need to say is that the first year that consists on track. And that's really the summary on this. The second point is we've made a couple of big acquisitions over the last few years, both Guatemala and Anima. Both are working. As I hope you can see, after a year Guatemala and about 2 years Panama that they are on track to our acquisition plans in [indiscernible].

EarningCall_3

Good afternoon, ladies and gentlemen and thank you for waiting. We would like to welcome everyone to Bradesco's Fourth Quarter 2022 Earnings Conference Call. This call is being broadcast simultaneously through the Internet in the Investor Relations website, bradescori.com.br/en. In that address, you can also find the presentation available for download. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements. Hello, everyone. Thanks for joining our call for the fourth quarter 2022. We have here in the room Octavio de Lazari Jr., our CEO; Cassiano Scarpelli, Executive Vice President and CFO; Moacir Nachbar Jr., Executive Vice President in charge of Risk; Oswaldo Fernandes, Executive Director; Carlos Firetti, IRO; and Ivan Contijo, Bradesco Insurance Group CEO. Thank you. Hello, good afternoon, everyone. Thank you for joining our conference call for the fourth quarter '22 results. We posted a net profit of BRL20.7 billion in 2022. BRL23.7 billion excluding the impact of the full provisioning for a specific large client. These numbers are below the levels we want to deliver and below what we consider to be the recurring levels Bradesco is able to show. We are certainly not satisfied with them. Our investors can be sure that we are working to change it as soon as possible. We are confident that we can return to levels of performance we used to produce in the past. Our goal is to return to a sustainable ROE above 18%. The dip in profit and returns in 2022 can be explained mainly by 3 factors; the negative impact from the fast Selic-rate hikes on our asset liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies, and additionally, provisions amounting BRL4.9 billion in [Technical Difficulty]. Okay. Sorry, we were temporarily disconnected. So returning here, the dipping profits and returns in '22 can be explained mainly by 3 factors. The negative impact from the facility rate hikes on our asset and liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies and Additionally, provisions amounting BRL4.9 billion in the fourth quarter related to 100% of our exposure to a specific wholesale clients. In our expected performance for 2023 reflected in our guidance. The main effect on our results still comes from the increase in loan losses provisions. In the Retail segment, credit provisions should be higher in the first half of the year and should decline in the second half, growing full year in line with the loan book. Provisions in the wholesale segment will remain low but we are not going to have reversals as occurred in 2022. Part of the recovery in the bank's return will occur naturally and gradually up to the end of 2023 with improvements in market NII and cost of risk. Asset liability management results is rebounding with the renewal of the fixed rate loan portfolio with new loans at rates adjusted to the current scenario, leading to improved results throughout the year. In terms of delinquency, we adopted the necessary measures to control the behavior of the individual and small companies' portfolios revisiting models and our risk appetite. Consequentially, provision expenses shall reduce in the second half '23. Looking back it seems clear that we should have tightened our credit policy and risk appetite earlier on the retail portfolios. Elevated inflation since mid-'21 has led to much faster and stronger income loss for our clients over '22 than we expected, mainly with the rising food and fuel prices. Bradesco has historically had an important exposure to low-income and small business segments as a result of our regional positioning and by serving all segments of individuals and companies. We believe that this market positioning is correct from a strategic point of view, even if at this point in this cycle, we are suffering more from nonperforming loans. We think that it will prove once again correct in the mid- to long term. Another part of the improvement in performance and returns will come from implementing measures focused on efficiency and expansion in areas that we consider strategic. We continue with the process of optimizing our branch network and we will maintain our personnel and administrative expenses growth in line or even below inflation. The bank's digital transformation continues in a fast pace. Bradesco is now above all, also a digital bank presenting growth in the number of transactions, credit origination and in all products and service we offer digitally. Due to the clear changes in the business environment, we are seeking efficiency in our digital initiatives, promoting higher integration with the bank looking for cost efficiency and potential consolidation of initiatives. Our focus is on client profitability. We are leaders in wholesale banking and are among the top investment banking market, a business with a high return on capital. We will continue to develop, invest and grow in these areas. In hindsight, we also remain focused on the purpose of delivering the best experience to our clients with a complete portfolio of products and with a pleasant and simple journey. Our investments specialists are focused on advisory, understanding and respect in the moment of life and needs of our customers. Finally, we highlight our strong focus in all levels of our organization in placing customers at the center of all actions, a strategy that reinforces our purpose and create even stronger links with our clients. We will continue in this path. Moving to Slide 3, we present our key numbers. We reported net income of BRL20.7 billion in 2022, a decrease of 21.1% compared to the previous year. The expanded portfolio grew 9.8% in the year. Tier 1 capital closed at 12.4%. I will go for more details in these lines ahead. Turning to Slide 4, we illustrate our main impact in the earnings performance in '22. The main positive is in client NII, followed by insurance and fees. The negative impact comes from higher credit provisions, market NII and the provision for the large corporate clients. On Slide 5, the expanded loan portfolio grew 9.8% in the last 12 months, 1.5% in the quarter and companies growth was 7.9% year-on-year, with 9.7% in the corporate portfolio. For SMEs, loan growth reduced to 4.6%, mainly as a result of the slowdown in small companies due to lower risk appetite and focus on lower rate of operations. For cards, quarterly growth can be explained by seasonal effects in the period. The annual growth of 20.5% is still strong but pointing to a slowdown. In credit originations, we can see an increase in corporates and a decrease in individuals and small companies as a result of tighter credit policies to control delinquency. Turning to Slide 6 now. Credit provisions expenses without the amount related to the client from the wholesale segment reached BRL10 billion in the fourth quarter, representing 4.5% of the portfolio in that quarter. Considering total provisions, it reached BRL14.9 billion in the fourth quarter or 6.7% of the total portfolio. We should remain with high cost of risk throughout the first half of '23, with reductions expected for the second half '23. Our night days NPL coverage ratio remains healthy at 204%. On Slide 7, you can see that our 90 days delinquency ratio showed an increase of 40 bps with 40 bps in individuals and 8 bps for SMEs. Large companies remain with a very low delinquency. 15 to 90 days delinquency ratios rose 50 bps with an impact mainly from small companies. NPL creation in the quarter reached BRL8.1 billion. We continue to provisioning well above the NPL creation. We are now showing delinquency information considering the index without the effect of portfolio sales. As shown in the chart, over 90 days would be higher but the trend is similar to the one without sales. In fourth quarter, we sold portfolios totaling BRL2.8 billion. The rationale for selling portfolios is purely economic. We are able to sell at values above our recovery estimate and free up time of our staff to work more on portfolios with higher probability of recovery. Turning to Slide 8. We made material revisions in our risk appetite, making changes in the credit policy throughout 2022 which reduced our approval rates. Comparing to the new loan approval rates, we had a reduction throughout the year of about 33% between December '21 and December '22. As a result, 30 days delinquent for cohorts 4 months on the book have already reduced in the last data available by 38% compared to cohorts of December 31. We see similar trends in most of individuals' credit lines. In our internal estimates, we still expect NPLs under pressure in the first half '23. Now we turn to Slide 9 on which we present a breakdown of provisions expenses between retail and wholesale. Total provisions reached BRL32.3 billion in 2022, including BRL4.9 billion related to the provision for the wholesale clients. Without this amount, it would be BRL27.4 billion at the top of our guidance. We had BRL33.2 billion in provisions for retail, while in the wholesale, we had reversals of BRL5.7 billion. In the last years, the Corporate segment has presented a very good performance in terms of credit quality which allowed the release of part of the excess provisions in the segment. In 2023, we expect a growth of provisions in retail in line with the portfolio growth higher in the first half than in the second half, as we said and partial normalization in wholesale provisions. We expect cost of risk in '23 to reach 4%, considering the guidance compared to 3.2% in '22 without the provision for the specific clients. We turn now to Slide 10. The renegotiated portfolio represented 5.2% of the loan book growing 10 bps in the quarter. Provisions for this portfolio represented 63% of total renegotiated loans. On Slide 9, we show that total NII grew 3.8% year-on-year in 2022 with a strong growth in client NII of 22%. On the other hand, market NII was negative in the year. As we can see in the chart, our total NII has inversed tied to the movement of interest rates, it's liability sensitive. The current sensitivity points to an increase of BRL1.58 billion total NII for reductions of 100 bps in interest rates and a similar reduction in NII for rate increase. The sensitivity refers to the NII variation in 12 months after a parallel shock interest rates and are based on our Pillar 3 report. Turning to Slide 12. Our market NII has a history of positive results as you can see in the chart on the bottom left, no net less in '22, it posted a negative result of BRL1.4 billion due to the effects of rising Selic on our asset liability management positions. Our portfolio has an average maturate of 1.5 years and reprices itself in that period. what contributes for the improvement of this line in '23, especially in the second half of '22. On Slide 13, a we discussed our fees and commission income. It grew 4.7% in the annual comparison, primarily driven by cards, mostly it change. The other lines remain under pressure. We have important initiatives in molding these lines and hope to revert the trends so. Card transactions continued to grow, reflecting the increased penetration of cards in the high-income segments and inflation in client spending. We reached 77.1 million cards, a growth of 3 million cars in the year. We believe that our ongoing strategy of strengthening the high income segment will produce growth in fee lines as one of the key benefits despite other important initiatives. Turning to Slide 14. Total costs grew 4.7%, well below inflation. The other net operating expenses line contributed to a reduction due to less provisions and some reversals. Our costs have demonstrated growth well below inflation since 2020, as you can see in the chart in the bottom left. In '23, other net operating expenses will negatively impact total expenses, mostly due to the low base of comparison we had in 2022. On the other hand, personnel and administrative expenses should continue to run in line or below inflation as we will continue looking for gains in efficiency. On Slide 15, we present data from our insurance group. Premiums grew 16.7% year-on-year with the improved operational performance, income from insurance operations expanded 28.9% and net income grew 27.2% year-on-year despite the claims ratio challenges and service costs. We highlight the performance in administrative efficiency ratio and the financial results. The insurance group continues to grow and improve its operational performance with keeping its disciplined in terms of underwriting. Now we turn to Slide 16. We bring the discussion on capital. Tier 1 capital remains at 12.4%, a very comfortable level. The reduction this quarter was primarily driven by the normalization of the treatment of trucks credits arising from our hedge of assets abroad, greater prudential measures the payment of interest on capital that amounted BRL10.2 billion. Additionally, the provision for the specific clients reduced earnings and therefore, impacted capital by almost 30 bps. We see capital ratios spending throughout 2023. On Slide 17, we present figures on our footprint. The growth in digital channels and client service platform helped us to continue our optimization efforts. We have reduced our footprint by 1,400 points of presence since 2018. In 2023, we plan to reduce between 200 and 250 service points. Today, 70% of our clients are predominantly making transactions digitally. We also -- we are also focused on optimizing our digital initiatives, making them more connected to ensure that the experience continues evolving. We turn now to Slide 18. We have created a new structure for the high income segment in Bradesco, what we call which we call Bradesco Global Wealth Management, led by [indiscernible] with extensive experience in this segment. We combine our local and U.S. investment platforms, investment distribution and our banks in U.S. and Europe, aiming to deliver a complete investment and banking experience for our clients. Clients will be covered by relationship managers and financial advisers. Today, we have close to 2,000 financial advisers and both of them will work together, the relationship managers and financial advisers. We have also advanced in the unification of the content available to our customers with investment recommendations aiming to align risk profile and financial goals. We turn now to Slide 19. In 2022, we performed within the reviewed guidance range, except for insurance on which we were above. In credit provision expenses, excluding the specific clients, we were at the top of the range. For '23, we have the following expectations. We expect loan growth between 6% and 9.5%. For NII, we now provide guidance for total NII. We expect growth for the line between 7% and 11%. In fees, we expect a growth between 2% and 6%. Operating expenses should grow between 9% and 13%. But in personnel and administrative expenses, we expect to grow only around inflation or less. The line order should bring the negative impact in total expenses for 2023. The line of insurance operations will grow between 10% and Finally, for credit provision expenses, we expect to be between BRL36.5 million and BRL39.5 billion. We believe this guidance still implies a return that is below our potential. As we stated before, our strategic objectives to once again reach a level of return on pace with our track record or at least 18%. We understand the bank's ability to generate recurring returns remain intact. So we believe we can go back to those levels we reached before. As we pointed, part of the recovery in the bank results will come from the normalization some lines. Other parts will come as a consequence of the execution in topics we highlighted such as the expansion in high-income segment, efficiency and innovation initiatives. Finally, we highlight our focus in all levels of the organization in placing customers at the center of all actions, a strategy that reinforces our purpose and create even stronger links with our clients. We will continue in this path. Placing customers at the center is a key topic in our strategy focused in the long-term sustainability of the organization. With that, I conclude my presentation. Thank you for your attention and we will now move to the Q&A session. Thank you. A couple of questions actually. I guess, first, just help us understand what's -- what do you need to see or what needs to happen to get back to that 18% ROE and time frame that it would take to get there? I mean, do you need interest rates to come down? Obviously, some normalization in terms of asset quality, do you need NPLs to come down? Even expenses and I know it's part of it, the other expenses given the expense guidance above inflation but just to help us think about the path to returning back to those normalized ROEs? What it would take to get there? And then the second question, just to understand a little bit on the provision guidance. You said cost of risk to grow kind of -- or provisions grow in line with the retail portfolio growth and I know corporate provisions are kind of normalizing. But does that -- do you expect the deterioration that we've seen in the retail portfolio to continue at the same pace that we've seen sort of the last 2 quarters? I know part of it is your exposure to lower income segments. But when does that -- I know you said it will peak in 2Q but when do you think that starts to sort of deteriorate at a slower pace? Just to help us think about the evolution of that. Okay. Tito, thank you very much for the question. I think the path for the recovery in ROE is the one I mentioned in the presentation. We believe that part of the reduction is related to things that will improve with time for sure, considering the actions we have taken, I mean, the asset liability management results that are included in the NII. This will improve throughout the year with the repricing or renewal of our loan book, especially the fixed rate loan book and it is already happening. The internal rate of our books is improving. And as the time goes by, it will take this rate closer and closer to Selic and this will drive the market NII upwards. It's -- today, the results and the asset liability management are still on the negative and we see them going to close to 0 at some point in the second half. The other part is the normalization in NPLs. We are at a moment in the cycle where NPLs are already higher than we believe is the more normalized level they should be through the cycles. And the cost of risk is already high. So this is something that will take our ROEs closer to 18%. I'm not -- we are not even at this discussion counting on actually going back to material gains in the asset billet management. But also, we think in parallel, we will be running and we are running some initiatives in terms of efficiency. We have been moving many initiatives in business areas like, as I mentioned, the investment initiatives in the high income segment. So I think altogether is behind these views, I would say, a meaningful part are related to the first 2 items I mentioned. In terms of time, I would say we believe we will close the year already with a higher level of return than what we have right now, maybe not exactly the -- what we think is the sustainable levels and we'll keep progressing in '24. I would say, at some point in '24 on a quarterly basis, it's possible we can get to those levels. That's what we view. Regarding the deterioration. As we pointed in the presentation, we have already seen the performance of new vintages of loans, especially in the consumer, consumer loans, retail loans improved, improving materially. We believe that keep going with those trends considering we have tightened meaningfully our credit policies, it will lead to a stabilization in NPLs as we pointed probably at the end of the first half, second quarter, let's call it and I think this is kind of the trend we expect. Okay, great. That's helpful. Maybe just one follow-up, if I may. And just to understand a little bit on the deterioration and I know part of it is your lower income exposure but just thinking of other peers that have perhaps a similar exposure, the deterioration hasn't seemed as severe, at least until now. I mean, we're still getting more data on that. But just kind of curious, if there was anything specific to Bradesco that had your deterioration at least looking worse than peers in the industry? Tito, we believe we have more exposure to low income. We have -- we are -- given our presence, given our historical positioning, we think we are fairly well-positioned in this segment. And we think this is a strength and I mentioned even at this moment, we are suffering given the cycle. But it is a segment that we believe have very high prospects in the future. The low-income segment in small companies, in our view, suffered more than any other segment in Brazil and considering that probably we are more exposed with suffered more. We admit that probably we took longer than we should for tightening our credit policies. Probably that made us to suffer a little bit more than we should. But anyway, I think we have more exposure to the sectors than our peers. I think there are some peers that are expanding their exposure but we are already there. We are already playing with small companies. We have credit limits with low-income individuals. We are a bank that has a strong presence there. I think that's probably the difference. But again, the message here, Tito, is really that we see the trends in credit quality already improving. And we believe we're going to make this path soon. So 2 questions. Can you share with us the macro outlook that you have for 2023 and what is driving, right, like so that we get a better sense for your guidance, if you can share GDP growth and employment, inflation, that would be helpful. And then finally seeing the impact of that on the corporate. So if you could make some comments on how do you see corporates in general? I know you talked about like you don't expect to have reversals of provisions but if you can help us understand like if there are any specific sectors that you're most concerned about or should we get -- start getting concerned about like a more significant, more pronounced deterioration in the corporate segment in Brazil? Mario, regarding our economic forecast, actually, we have recently increased a little bit our forecast. For 2023, we expect 1.5% GDP growth right now, IPCA inflation around 5.7%. Selic at the end of the year at 12.25%. So I think these are the main figures. In terms of unemployment, fortunately, I don't have it here in front of me but no major changes in the trends in terms of unemployment. I think this -- I'd say, even when we talk about unemployment, we can say that over the past year, unemployment has really improved. But what we see is basically in this segment, especially low-income segments and small companies, this was not really a driver that really changed the trends. I would say the low income, the loss of real income was probably the main factor. In terms of the small companies I would say it was possibly a continuation of the trends that started with the pandemic, remembering the lockdowns and all the suffering that some small companies had during that time. In terms of corporates, we still see what's going on as more like specific cases than a big trend. We believe companies in general or large companies in general have enjoyed a long period without any major CapEx programs with a big liquidity in the market, in the bond market, actually low spreads for some -- for many years and also no Selic for some time during the pandemic. So we think, in general, they are in a healthy position. So most of the cases we see are sometimes cases that somehow we're already in the radar or had some other best pest problems or in this -- in the case of the specific client, it was totally out of the radar. So I think the good news is we have a very strong level of provisions in our balance sheet for corporates. The coverage ratio for corporates, if we dividend put it in the presentation because it's like 7,000%. Basically, as you know, it's -- it doesn't make much sense because delinquency in corporates is more based on some one-offs than really something more continues. So we don't see a trend. We see some cases after a period and we didn't have any major case. Some of them might be related more to the kind of reduced liquidity we have seen capital markets for the past year than actually the level of interest, interest rates. Okay. No, that's helpful. So just let me follow up then on your loan growth guidance of 6.5% to 9.5%. It basically reflects no real loan growth than in 2023. Can you specify or give us a little bit more color on what kind of growth are you expecting for each segment, like broken down between individuals, corporates and SMEs. We will grow less than the average implicit in the guidance for SMEs, especially because we have tightened the origination model or the credit policies more in small companies. And I would say most of our SME book is made of small companies. We should grow more or less at the same pace in individuals and corporates. But individuals, comparing to the recent test, there is a change. We should grow less in clean credit lines and more in other collateralized lines. Actually, I just have one. I was following the conference call in Portuguese and I just wanted basically to shift the conversation here to the regulatory front in Brazil. First, I would like to hear from you about the FGTS loans because A lot of noise emerged during these recent weeks related to the termination of the products. So I just wanted to hear from you about what does the bank, I mean, think about the future of this product, the cash loans? And if you could share with us what is the market share of Bradesco in terms of origination of this product, it would be helpful. And a follow-up on this. I would like to know more about the government program called Disney Hall, I mean I just wanted to hear from you as well what does Bradesco understand about how will be the shape of this program, the format of this program for renegotiating loans from loan income segments? Okay. Olavo [ph], related to the loan. I'd say, in theory, it was a good product but there is not much at all much to say. I think there was a regulatory change. It will not existing more. We haven't played in this segment on a material way. We have some loans in Digio but it's a very, very small portfolio. So it's not operations which we have done anything in the bank. And as I said, our portfolio considering what Digio was doing and what is very small. Can you remind me about your second question is renegotiation? Yes. We still have to hear more about what is the final shape of this program. It's still under discussions. I think the banks are talking with the government. But probably the program involves more than only banking loans. It probably will involve utility bills and other debt. We believe it is potentially a good idea. And the fact that there would be some sort of guarantee to create an incentive for doing it if it is well structured. So we are looking at it and we think it's an interesting idea but still not much in concrete to talk about, I would say. I had a couple of follow-ups, first, on allowances. You mentioned that they should be more firm low higher in the first half. Can you give us a sense of that magnitude like how much should we expect, say, in the first quarter? Gilberto, I'd say we're not going to provide quarterly or partial guidance on the provisions. I think, overall, I think it was fair to give this guidance but that view of what would be kind of the flow of these provisions. But as I said, it should be more in the first half than in the second half. Also because, as I said, we believe NPLs might be peaking around the second half [indiscernible] other part of the provisions happening in the first half. Okay. No, that's fair. And on market NII. As you mentioned, it is moving in the right direction. Do you expect it to be positive for the full year? Again, we moved our guidance to total NII, Gilberto. The idea is really focusing on the total NII. As I said, we have the guidance for total NII between 7% and 11%. What is implicit there and is that market NII improves throughout the year with the asset liability management, getting bad getting improving in the second half but I will not provide guidance for the parts of the margin anymore. But as I said, we are going to continue reporting them. But just for modeling and for the analysts to follow it. Okay. Understood. And a last one, if I may, on your guidance for expenses, it's significantly above what you have been posting the last years. Is this more of a sort of catch up? Or is it more about projects that could help you come back to lower expenses in the next years? The main reason for the range for the guidance in expenses is the line other net operating expenses. In this line, we have a low base of comparison in 2022, considering that we had some reversions of provisions, mostly related to things like lawsuits and other events. And this reduced the line in '22. So the causes of its variation in '23 is a normalization. If we isolated the personnel and administrative expenses line. we would see this group growing like inflation or even below inflation. We have important efforts to reduce costs there. So the driver is the other line. My question was actually also related to market NII. So you may not be able to answer so maybe let me paraphrase it separately. Can we assume that the negative -- the most negative from market was in Q3 and that once we start to see interest rates being cut that will be turn positive just given that sees showed of the 1.5 billion per 100 basis point move? So whatever you can say would be great. Yes, Brad, the market NII line is composed by a few components. One of them is the working capital of the bank. Also the treasury business like trading, flow trading, mostly flow trading, not really risk-taking positions and the asset liability management. There, this line is based to the net fixed rate exposed of our balance sheet funded by the regular cost of funding of the bank that is mostly floating. That is what makes it liability-sensitive as shown in the sensitive analysis from what we published. So it shows 400 bps reduction in rates. Our NII increases BRL1.58 billion. It's looking to the trends. We -- even if we don't have a reduction in rates, the market NII should the asset liability management continues repricing, given that old loans mature, new loans come at the rates already adjusted. So we believe by the end of the year, this component of the asset liability management will be already zero in terms of results on a quarterly basis, looking during the quarters. And it would benefit if interest rates go down at any moment after that. Thank you very much for the question here as well. A little bit on OpEx, please. Guidance for 9% to 13% year-over-year. I realize that's got some other effect in it. But I wanted to see if you guys have given some thought to maybe boosting up the profitability lever via efficiency if there's room within personnel all the digital bank initiatives that you guys have done to understand your combining brands and looking to downsize some stuff? Anything there that could help us understand a little bit what you can do maybe for profitability via costs, OpEx would be much appreciated. Thank you for the question, Pedro. We are always very attentive to opportunities in terms of cost efficiency. As you mentioned some, we are really looking to our digital initiatives. We think we can extract some synergies there basically in terms of as I said, combining and even merging some of these initiatives are making especially then closer to Bradesco, taking advantage of marketing of client acquisition and other benefits we can get. But also, we mentioned in some points of our presentation, one of the key things for us going forward is really a reduction of the cost of serving our clients. We think we have to get more and more efficient on that. We have -- we still believe the brains are useful, brains are a very good vehicle for doing business to contact clients but they certainly will be different and probably less costly in the future. So that's where we have a big focus right now in reducing the cost of serve our clients. I think this is really a big point we have been exploring a lot here in the bank. My question is related to the competition in the low-income individual segment. So can you talk about how you see the competition in this segment now? And how this compares to what was happening in 2020 and 2021, 2022? And also, what is your expectation for how the competitive environment may evolve in 2023 and 2024? And what opportunities that they have for you? Okay, Juan. I think the competition in the low-income segment or is very strong. We have not only traditional banks but especially digital banks. We believe we have some advantage. We position ourselves in a more complete way. We still believe that our position with points of contact with the clients with brains has value in that process. We believe also that having corporate relationships and relationships with entities where we can have the payroll of companies, of and have a stronger relationship with these clients from the beginning is an advantage for Bradesco. And also the credit relationship. This is exactly right now is kind of a pain in the sense that we are suffering with NPLs. But we have this relationship through credit as our one of our strengths in the relationship with clients. And we believe this will continue even if we have temporary adjustments in our credit policies. So this is the way we play in positioning ourselves in the market. And one more question but this one is related to capital and dividend. So given the current level of capitalization and the expectation for earnings for 2023. What can we expect in terms of the payout ratio in 2023? Juan, we're not going to commit specifically with the payout ratio. But as we had said in the Portuguese call, we expect to pay the interest on capital IOC at full. For sure, we're going to look at capital, we're going to monitor but we believe, considering our expectations that our capital will grow even with the payment of interest on capital. And that will take the payout to a relatively high level if it happens. We think in our estimate, as I said, even with that event, we would see capital still growing in 2023. Thank you. Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for their closing remarks. So, thank you all for the participation in our conference call. Our Investor Relations team is available for any further questions you might have. Thank you very much. Have a good afternoon. That does conclude Bradesco's conference call for today. Thank you very much for your participation. Have a great rest of your day.

EarningCall_4

Ladies and gentlemen, welcome to the Ceragon Networks Q4 and Full Year 2022 Earnings Call. Our presentation today will be followed by a question-and-answer session [Operator Instructions]. I'd like to hand over the call now to our first speaker today, Ms. Maya Lustig, Investor Relations. Please go ahead. Thank you, operator, and good morning, everyone. I am joined by Doron Arazi, Ceragon's Chief Executive Officer; and Ronen Stein, Chief Financial Officer. Before we start, I would like to note that certain statements made on this call, including projected financial information and other results and the company's future initiatives, future events, business outlook, development efforts and their potential outcome, anticipated progress and plans, results and time lines and other financial and accounting-related matters constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended, and the Securities Exchange Act of 1934 as amended and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Ceragon intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements. Such statements reflect only current beliefs, expectations and assumptions of Ceragon management, but actual results, performance or achievements of Ceragon may differ materially as they are subject to certain risks and uncertainties, which could cause Ceragon's actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in Ceragon's most recent annual report on Form 20-F and as may be supplemented from time to time in Ceragon's other filings with the SEC, including today's earlier filing of the earnings press release, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, do not purport to be predictions of future events or results, and there can be no assurance that they will prove to be accurate. And Ceragon undertakes no obligation to update them. Ceragon's public filings are available on the Securities and Exchange Commission's website at www.sec.gov and may also be obtained from Ceragon's website at www.ceragon.com. Also, today's call will include certain non-GAAP numbers. For a reconciliation between GAAP and non-GAAP, please see the table attached to the press release that was issued earlier today. Thank you, Maya, and good morning, everyone. We had a very good 2022 in terms of the strength of our business, as reflected in our annual bookings. Our bookings to revenue ratio was well above one. We ended the year with a strong backlog. Fourth quarter bookings were softer than prior quarters, but this is similar to fourth quarter 2021, largely reflecting seasonality factors in doing business in the last quarter of the calendar year. At the inception of 2023, we are seeing again, strong demand for our products and services. Financially, the fourth quarter of 2022, despite being at the lower end of our revenue projection was a good quarter for us in many aspects. We ended the quarter with 33.1% gross margin and $3.2 million in operating profit, which reflects a growth of 113% over the fourth quarter of 2021. When we look at the second half of 2022, we see significant improvement in our revenue levels and profitability. This we believe is mainly thanks to a combination of two factors. First, is our relentless execution of our growth strategy, and the second is the changing market dynamics, especially in supply chain, which continues to head in a good direction. Our fourth quarter 2022 revenues would have been even higher by a few million dollars were it not for a policy change by one of our leading customers regarding equipment received prior to year-end. The gap was also impacted to a lesser extent by a delay in a specific component that pushed certain equipment delivery out of fourth quarter 2022 into the first quarter of 2023. As of today, we are mostly caught up with these deliveries. Without these two factors, our fourth quarter revenue and profit would be stronger. Throughout 2022, we made significant headway in the productization of our new system on a chip technology, and we are on track and expect to finish productization in 2023 and launch our new product line in 2024. We strongly believe this system on a chip will drive strong demand and have a transformative impact on the industry and on our market share and performance, mainly due to two to three years' time to market advantage we expect to have over our competitors. Assuming supply chain dynamics continue to head in the right direction, together with strong business traction, diverse and growing use cases for Ceragon solutions and the new products in development, we expect to launch, we are excited about the growth opportunities we anticipate for 2023 and beyond. I'd now like to give you an overview per region. In North America, in the fourth quarter of 2022, 5G build continues to be strong. We received first orders for the DISH 2023 deployment. We also saw significant traction in the critical infrastructure sector in certain states with multiple RFPs. We continue to invest and intensify our sales efforts and services infrastructure in the region, and we intend to continue with this investment in 2023. Our bookings were softer than our expectations as some of the orders were not received on time in Q4 2022 and were shifted to Q1 2023. Our revenues were also lower than our expectations due to the year-end policy change by one of our clients. I'm happy to report that we already caught up on a major part of the slippages. We expect a strong first quarter in this region. India is a saturated market in terms of end customer demand, which means operators are increasingly turning to upselling and cross-selling to improve customer experience and drive engagement. Indian telcos continue to invest in 4G technology, while they start deploying 5G in different regions. They augment their network capacity with additional fiber and wireless E-band and multiband to meet the demand for high speed. Coupled with the growing affordability and availability of 5G smartphones, we expect these developments to fuel consumer adoption of 5G in 2023 and beyond. In Q4 2022, we continue to deliver our products for 4G networks as well as started delivering our E-band multi-band solution for 5G networks. We expect this trend to continue in 2023. In Europe, we had a good quarter despite macroeconomic challenges seen in this region. We signed an agreement for a new turnkey project in Italy worth $4 million through which we replaced competition. We won the first project in partnership with a leading open RAN vendor composed of the full IP-50 family, including IP-50 FX. In general, our open network architecture solution continues to get traction as we are invited to more labs of Tier 1 operators, continue field trials with others and participate in RFQs. In APAC, 5G deployment is still unfolding, though at a different pace in different parts of the region. Australia, Japan and Korea are well advanced in 5G rollout, and those are increasing the focus into the rural regions. Indonesia, Vietnam and several others are behind. We are well positioned primarily in Australia, where we are providing turnkey services as well as in South Korea and Japan. We continue to see traction and interest in our IP-50 product series, especially for wide band and open network use cases. In Q4 2022, we received the first significant order from one of the largest operators in APAC, which includes our IP-50 FX. We also delivered the first phase of a private network in Taiwan, which is an emerging and promising use case for us. In Latin America, the continued instability of economies and governments may delay 5G rollout, government projects and the overall expected telco business. We continue to see competition primarily driven by Chinese vendors, and we continue to focus on offering our managed services, getting very strong traction. We also continue to focus on private networks. In Africa, business was slow in 2022, as many projects NPOs were moved to 2023. We enjoyed recurring business in managed services in Nigeria and Congo. To summarize, while 2022 was a good year overall, it could have been better were it not for our supply chain changes, especially in the first half of the year. While these challenges are less intense today than they were a month ago, they still exist and impact our operations. Despite the said challenges we reached new milestones in 2022, achieved successes in key areas of our business, advanced the productization of our new chipset and gained traction on our managed services offering. We did all that while improving our gross margins and profitability. When we look into the future, we expect a strong 2023. Given the positive business traction and our operational momentum, we expect to continue our growth in the leading regions we operate in. We anticipate substantial growth coming from our E-band sales, especially with the new coming cost-effective product that enables covering a broader market base. We also expect that our sell-side routing and managed services businesses to increase in 2023 and beyond. Before I turn the call over to Ronen to review the financials, allow me to acknowledge our new Chief Revenue Officer, Alon Klomek. In this newly created position, Alon will oversee the entire revenue materialization from prospect to order delivery and collection. We believe that with this addition to our team, we'll be better able to fulfill our strategic goals. I'd also like to welcome aboard, Dima Friedman, who is joining us as Chief Operating Officer. Dima will work on further strengthening our operations. With these changes in place, our goal is to optimize our organizational structure and implement our growth strategy with further success. Thank you, Doron, and good morning, everyone. I will now share a detailed review of our fourth quarter and full year 2022 financial results. To help you understand the results, I will be referring mainly to our non-GAAP numbers. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's press release. Let me now review the actual numbers with you. Revenues were $75.5 million, a decrease of 3% compared to $77.8 million in Q4 2021 and 4.1% compared to $78.6 million in Q3 2022. The decrease is mainly attributed to a policy change by one of our customers regarding equipment received prior to year-end. Our strongest regions in terms of revenues for the quarter were India and North America, with $21.6 million and $17.2 million, respectively, in line with the continuous strong demand we see in these regions. Our third strongest region in terms of revenues was Latin America with $13.2 million, followed by Europe with $10.1 million. We had two above 10% customers in the fourth quarter. Gross profit for the fourth quarter on a non-GAAP basis was $25 million, an increase of 10.7% compared to $22.6 million in Q4 2021 and a decrease of 10.6% as compared to $28 million in Q3 2022. Our non-GAAP gross margin was 33.1% compared to 29% in Q4 2021 and 35.5% in Q3 2022. When we take the trailing 12 months view, our non-GAAP gross margin was 31.8%, an increase compared to last quarter's trailing 12 months gross margin of 30.8%. I'd like to emphasize that the majority of our business is still project-based, and we see continued lumpiness in our revenues and gross margin from quarter-to-quarter. That said, the upward trajectory of our gross margin is very encouraging and reflects our ability to increase margins when we execute on our strategy and operational efficiencies. As for our operating expenses, research and development expenses for the fourth quarter on a non-GAAP basis were $7.9 million, up from $7.7 million in Q4 2021 and up from $7.2 million in Q3 2022. Sales and marketing expenses for the fourth quarter, on a non-GAAP basis, were $8.6 million, down from $8.7 million in Q4 2021 and up from $8.3 million in Q3 2022. General and administrative expenses for the fourth quarter, on a non-GAAP basis, were $5.4 million, up from $4.6 million in Q4 2021 and down from $6.1 million in Q3 2022. Operating profit for the fourth quarter was $3.2 million, up 113.3% compared to $1.5 million in Q4 2021 and down 50% compared to $6.4 million in Q3 2022. When we take the trailing 12 months view, our non-GAAP operating profit was $9.3 million, a 20.8% increase compared to last quarter's trailing 12 months operating profit of $7.7 million. Financial and other expenses for the fourth quarter on a non-GAAP basis were $2.9 million, impacted by an increase in interest rates and fluctuations in certain currencies. Our tax expenses for the fourth quarter on a non-GAAP basis were $0.5 million. Net loss on a non-GAAP basis for the fourth quarter was $0.2 million or $0 per diluted share compared to $2 million or $0.02 per diluted share in Q4 2021 and compared to $4.1 million of net income or $0.05 earning per diluted share in the previous quarter. As for our balance sheet, our cash position at the end of 2022 was $22.9 million, and our short-term loans stand at $37.5 million, leaving us with additional $12.5 million available unused facility. Our inventory at the end of Q4 2022 was $72 million, up from $64.2 million at the end of Q3 2022. The increase is expected to reduce risks in fulfilling the demand we are witnessing mainly for our new products, including the E-band products. Our trade receivables are at $112.3 million, down from $115.9 million at the end of Q3 2022. Approximately 11% reflects a debt from a single customer for which we have recently initiated legal proceedings. While we believe we are taking effective measures in collecting this debt, we continue to closely monitor this situation. Our DSO now stands at 139 days. As for our cash flow, net cash flow used for operations and investing activities in Q4 2022 was $10.6 million, mainly related to the investment in inventory and the onetime expense related to Aviat's hostile attempt recorded in Q3 2022. In 2022, revenues came in shy of the lower end of our guidance. As Doron explained, specific factors were critical, including a policy change by one of our customers regarding equipment purchase prior to the year-end and to a lesser extent, a particular delay related to one specific component, which pushed deliveries from Q4 2022 to Q1 2023. Our 2023 revenue guidance of $325 million to $345 million remains unchanged as we see improvement in the supply chain and component shortages challenges and anticipate this trend to continue. We are more confident in our ability to navigate these challenges and expect to maintain our profitable growth trajectory. Perfect. Let's just start off with the obvious. Can you explain what policy change occurred and how that manifests into your numbers and the component delay? Can you give us a little bit of a sense of was it just a temporary thing? Have you gotten those components in? Or are you still experiencing it? So as we said, we already caught up with these delays that reduced our revenue for Q4 versus our original expectation. So all these revenues were already basically taken into account in Q1 after we have delivered the products. Now there were two issues. The first one is one of our big customers, we usually receive material and equipment almost until the last minute at the end of the year, at least in previous years. And this year, at a certain point, they decided to make a change and to push the expected equipment delivery into Q1. The other point was referring to a specific component that came late by a couple of weeks. And obviously, as a result of that it created a delay in our production line. We're trying to catch up, but eventually, a few million dollars slipped into January. So generally speaking, as I said, we already caught up with these revenues. If I were to look at the policy change, what magnitude impact did that have on the quarter? Was it $2 million to $3 million kind of number? Or what was it? I see. So the policy change sounds like it wasn't a policy so much as it was a timing of the desired delivery. Am I wrong in that assessment? And when somebody says I just wanted the next quarter, it's maybe more of a timing of their spend and recognition of their cost as opposed to say, a policy implementation where it's a change in accounting or any other element in that sort. Yeah, when talking about policy change, what I mean is that they have kind of more focused on certain KPIs such as the level of their inventory in their warehouses at the end of the year. And as a result of that, obviously, the organization is focused on making sure that the level of inventories at the end of the year will be the minimal possible. I would say that generally speaking, our visibility has increased. Obviously, when looking on the second half of 2022, all-in-all and the booking we received, the visibility has increased. And your gross margins have now moved up the most recent year around 33%. Is that a function of mix and therefore, that's kind of the new range? And also as you're starting to shift more to the U.S. and EMEA, where margins tend to be higher, is that a reasonable thought process on the new range? Yes, hi, Alex. It is a combination, both of the North America improvement and also the reduction in supply chain costs, PDAs and sourcing of components, cost of. And then if I were to look at your OpEx, obviously, you've got some big moving items here. You've got increases in your compensation that has to happen every year, but you've also got the shekel swing. I had two other companies report out of Israel this morning. And they both said they were benefiting enough to offset the rise in costs and both guided to essentially flat OpEx. Can you give us some sense of what your OpEx is expected to do over the course of '23? We do expect the OpEx to increase a bit. According to our growth trajectory and also the improvement in the gross margin, we will also increase a bit the OpEx. But of course, the ForEx impact will improve. So two last questions, and I'll cede the floor and they're both related. Do you think at this point that you would expect to be profitable throughout the four quarters of '23? And do you expect to build or eat backlog in '23? Thanks. So first of all, yes, our expectation is to be profitable throughout 2023. In terms of backlog, basically, we just finalized our AOP for 2023, just 1.5 months ago and the plan is, on the one hand, to leverage the strong backlog and hopefully improve our top line as supply chain issues continue to ease up. But at the same token, we are putting a strong and high target for booking. So all-in-all, we want the situation to be very positive for us at the end of 2023, where the backlog would probably, maybe stay the same or even grow a little bit, but not because of revenue conversion issues, but more because of more bookings and more business. All right. So let's talk about the flow of orders here. Obviously, fourth quarter orders were all the way back in when you announced your third quarter would be down from the third quarter rate and you had a big, big slug of orders in the third quarter. But with that order decline, the question is the back half, I think your backlog increased, can you give us some sense of where your backlog is as a percent of four quarter product sales? It sounds like it's still running at something over 50% of the full year for 2023. Yeah, I think 50% is a good rule of thumb for the level of backlog we are having at the beginning of 2023. And if you were to look at your pipeline of deal flow, you've good orders over the course of '23, duration stretched a little bit. As parts become more available, do you expect any change in the time line for the expected delivery dates to have an impact on order rates? Or do you have such a strong pipeline that, that's not an issue for you? I think that some of the behaviors we have seen during '20 and -- sorry, '21 and '22 would probably change a little bit. As you are actually may be alluding, obviously, when people are understanding that the time lines are improving, they will not be in such a rush in order to secure time lines. Said that, we be a very nice funnel. And therefore, it's hard for me to say that there will be a specific impact as a result of this change in behavior on our bookings and our ability to convert into revenue. So if I were to look at the expectations going into the first quarter, are we expecting orders to be a book-to-bill at or above 1? Or is this seasonally a very tough quarter to call, obviously. Maybe you could look at the first half, give us some sense of what to think the book-to-bill might look like in that time frame. So I think, first of all, it's good that you are trying to look at it from a longer period because a single quarter can change dramatically. Just an order from India that was delayed from 25th of March to, I don't know, 10th of April could make a big change for us. And when we look back, we saw quarters where Q1 was very strong and we saw quarters where Q1 was weaker and Q2 was much more significant. But all-in-all, based on our current expectations, we believe that we'll be able to see a book-to-bill ratio that is above 1. And my recommendation is to continue or to start getting used to a 12 month or 12 trailing month trajectory because we believe it's a better measurement for our business. Okay. Two more questions on the income statement, which are kind of tough for us to look at externally. It does sound like you had some FX in the December quarter. So what are you thinking here in the March quarter and for the year on the interest income and other expense line? Is it going to be pretty much at the levels that it was at in 2022 or down here because FX is a little bit of less of a headwind? Can you just give any guidance on that? So interest expense has increased. And for now, it continues to be in the same level as in Q4. On the other hand, ForEx fluctuations are very difficult to predict. We are trying to hedge and to minimize that, but it could fluctuate between quarters. So assume no for FX, what would the number look like because we can't -- we have to assume flat exchange rates? I think that the trajectory of the tax is not so, I would say, significant as compared to what you saw in the last year. Right, okay. So maybe 1.5 kind of thing in the tax line. As we look at 2023, how do we think about -- obviously, you said you're going to be profitable, but what about on the cash flow side? Are we going to be able to generate enough cash to get back to a positive net cash position, bring down your debt and improve the balance sheet here in '23? Or does that require us to go all the way out to '24. I'm sure that's the case. But do you think you can get to a net cash position as opposed to a net debt position over the course of 2023. Great. And when I look at the U.S. operations, you've made a pretty big investment to go after the service market and even starting to go after government and enterprise markets. That's a new initiative for you. It sounds like that's running a little bit ahead of target. Obviously, there was some costs associated with setting that invested ahead of revenues. Can you give us an update on where that's going? So generally speaking, yes, we decided to invest in this part of the segment of the market in the U.S. I think we made very good progress there. As we speak, obviously, we are looking into ways to even accelerate this part of the business that we believe is very important for us, and we think that we have a very good offering. Obviously, for a company that was not in this business in the past, at least not directly because we sold via channels, and we've now kind of made a change in our strategy, and we are taking also more and more direct deals where we need to provide with the whole solution, it takes time to ramp up. But we're quite encouraged from the progress we made in 2022 -- and actually, our targets for next year are basically to even double the achievements of 2022. Obviously, I cannot comment to that level of specifics and provide with the numbers. I actually got a couple of questions from investors that they wanted me to pass along, almost like it's a fireside chat here. This is a hypothetical question, and I will answer it, obviously, hypothetically. I believe in this case, we would probably get closer to 34%. So I will start with possible details about litigation. Actually, I cannot provide any details. The process is under strict confidentiality. The only thing I can add is that we believe that this process together with some other measures could be very effective. But obviously, we are monitoring closely. And at this point, we cannot assure our success. Yes. So regarding inventory, of course, it is derisking our ability to fulfill the backlog. But we are working on that from quarter-to-quarter to ensure first that we have as less risk as possible. But on the other hand, to convert it as soon as possible into cash. I would just add one comment on the inventory. Guys, for us, it's very clear that this level of inventory is on the high side. However, when we see opportunities for very significant business and especially in cases where some of the components are still, I would say, a challenge to attain, we take these business decisions -- obviously, we are looking in all aspects, cash flow, God forbid, obsolete inventory in the future and so on and so forth. But these are decisions that can be made actually within the quarter, without even anticipating that this will happen at the beginning of the quarter. All-in-all, it's our intention to start gradually, take the level of inventories down, and obviously, subject to the supply chain market, assuming it continues to get better and better. He wants also an answer about the AR. So again, the AR, we have targets to reduce the DSO, and we will continue to push for that. For example, in Q4, our collection was higher than the revenues. Okay, great. Thank you. Sorry if I'm repeating the question, I missed part of the call. But can you talk about the short term and medium term targets for gross margin with inflation easing, and as the supply chain does begin to improve for you? What are the puts and takes that can drive improvement from, say that hypothetical in 4Q? So first of all, hi, Brian and obviously thank you for joining the call. So the trajectory, as Ronen said, is a positive trajectory. Still within quarters, there could be some fluctuations because of revenue mix between regions. But the general trajectory is to continue and see the percentages going up. So if we ended up on, was it 31.8% for 2022. I think as a target, we want to increase 2023, by at least 1%. Do we have a chance to do better? Yes, but this is a target taking into account all aspects and factors that are impacting our gross margins. In a period where inflation maybe is modest, obviously, not today, in a period where the supply chain is not a challenge at all to you, is the long-term goal to be above 35%? Yes. We said that already. We put some sort of a range last time that we discussed that because the situation was much more turbulent than it is now. And obviously, the more we see the market stabilize, the more we feel comfortable to aim towards the higher end of the range. Originally, we're indicating 34% to 36%. So already kind of indicator of 35%, there could be very probable scenarios where we, in the long run, go beyond 35%. Okay. My other question is if you could discuss at a high level the M&A pipeline? Is this going to be an area of focus for the company? And if so, what is it you hope to accomplish? Is it more international expansion? Is it complementary technologies, increased scale? Thank you. Yeah. So obviously, this is something that I cannot discuss very freely. All I can say is that our strategy is basically to increase our portion, especially in the segments of private networks and small operators. We see huge opportunities there. And in order to take a bigger market share, we will look for either a faster attainment of customers' M&A or for some augmenting technologies, products that can help us provide end-to-end network solutions to these players. So these are basically the main focus areas when we are looking into potential M&As. Hey, good morning. Good afternoon, Doron and Ronen. Thanks for taking the questions. I just wanted to get some clarification on the sequential outlook. It sounds like there was $2 million to $3 million that slipped out due to customer delivery schedules. And it sounds like another $2 million to $3 million in terms of component availability. So is that correct? We had about $5 million or so slip out. So as we're looking into March, what are you guys thinking about in terms of the sequential progression. Typically, there's seasonality where it's down. Do we not see that now because of what sounds like you've already recognized in the March quarter?? And then for all of 2023, the guidance of 10% to 17% growth is very healthy. I wonder if you could give us some color in terms of the geographies, specifically where you're kind of seeing a lot of that strength. Yeah, so first of all, you are right on spot. We expect that Q1 will be stronger than the usual. So the seasonality that we usually have will be by far lower, if not even kind of evened out due to the slippage of this level of revenues that you just mentioned. So generally speaking, we believe and we plan for a strong Q1 in terms of revenue. As to the other question, can you remind me? Sorry, look at the growth expectations for this year in that range. Where are you really expecting the geographic strength from end market, sounds like private networks are growing for you as well? So first of all, we plan to continue the increase in our business in North America, for two reasons. First of all, the Tier 1 operators, at least as we see it now, continue to roll out the 5G. And we expect to have a strong year in this respect as well, at least as of now. And obviously are starting to kind of enjoy the fruits of our investment in the private networks and the smaller ISPs. The second region or maybe even the first one is India. We see a lot of traction for both E-band and the traditional microwave. So we believe that India will also be strong and even slightly stronger. Now in terms of other regions, let's not forget that, first of all, Africa was very, very soft this year, and we expect a certain level of rebound there that can help us obviously to grow. And also, APAC as well as Europe are showing some initial signs that could give us some level of hope that they will look better than 2022. But the leading regions are North America and India. Very helpful. And lastly, if I could, on the ASIC time line, thank you very much for the color on that front, right? It sounds like you'll be taping out this year with design win certifications kind of as you're going into '24. So I guess the question is two. It's when do you start to see meaningful revenue coming from those platforms? And is it second half of '24 is earlier in '24. And I think that has a favorable impact on the gross margins as well. So when you're talking about 35% as your long-term target, what are you kind of assuming from an ASIC adoption and penetration standpoint? Thanks. So as we all know, introducing new products even if they are available takes time. We hope to start selling but not at large volumes towards the end of 2024. I hope that we'll get surprises and the volumes would be by far higher. But definitely, the bigger impact could be in 2025. Now in terms of cost structure, bond [ph] cost and so on and so forth, I must tell you that with the new series of the 50 EX and 50 CX, we are already coming with a big portion of the savings on the bond cost. So in this respect, I expect the upcoming new products in 2023 to contribute to the improvement in the gross margins already. So we don't need to wait that long for the new chip in order to get better gross margins. The new chip would add some additional level of cost reduction. But I think the message would be about performance, the message would be about a very, very, very strong radio capabilities, which obviously is our bread and butter. I'd like to underline the excellent execution of our growth strategy, which has led us to achieve strong traction across different regions with different solutions. The improvement in our annual gross margin and operating profit are testaments to the effectiveness of this strategy. We expect an even better 2023, barring unforeseen developments. Lastly, we will be at the Mobile World Congress in Barcelona on February 27th through March 2nd. We will be showcasing our solutions at our booth, such as AI network insights, open transport, longest haul [ph] and flexible network services. Come and visit us at Hall 5, Booth Number G61.

EarningCall_5

Good day, and welcome to the Topgolf Callaway Brands Fourth Quarter and Full-Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. Thank you, operator, and good afternoon, everyone. Welcome to Topgolf Callaway Brands fourth quarter and full-year 2022 earnings conference call. I’m Lauren Scott, the company’s Director of Investor Relations. Joining me as speakers on today’s call are Chip Brewer, our President and Chief Executive Officer; and Brian Lynch, our Chief Financial Officer. Jennifer Thomas, our Chief Accounting Officer; and Patrick Burke, our Senior Vice President of Global Finance, are also in the room today for Q&A. Earlier today, the company issued a press release announcing its fourth quarter and full year 2022 financial results. In addition, there is a presentation that accompanies today’s prepared remarks and may make it easier for you to follow the call. This earnings presentation, as well as the earnings press release, are both available on the company’s Investor Relations website under the Financial Results tab. Most of the financial numbers reported and discussed on today’s call are based on U.S. generally accepted accounting principles. In the instances where we report non-GAAP measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description. Lastly, to make sure we can accommodate questions from each of our analysts, we ask that you limit your questions to two. Thank you, Lauren. Good afternoon to everyone on our call, and thank you for joining us today. 2022 was a very strong year for Topgolf Callaway Brands and for the sport of golf more broadly. The Modern Golf ecosystem, which is comprised of both on- and off-course golf had another record year. According to the National Golf Foundation for the first time U.S. golf participation exceeded 41 million people, up from 37.5 million people in 2021. On-course golf grew by just over 500,000 participants, an excellent result coming off of strong performances in the last two years. At the same time, off-course golf increased by 3.1 million participants and is now larger than on-course golf. With our increased venue count and same-venue sales growth, we believe the off-course golf growth was largely driven by Topgolf. And this is a growth trend that we have a high degree of certainty will continue. As our venue growth alone should add approximately 3 million to 4 million new unique off-course visitors annually. With this, we can now clearly foresee a pattern of structural growth for the Modern Golf ecosystem with Topgolf Callaway Brands positioned squarely at the center of it. Now, looking at our financial results. Full year 2022 revenue was just under $4 billion and full year adjusted EBITDA was $558 million, up 22% and 25% year-over-year on a 12-month or full calendar year basis. We are very pleased with these results, and I’d like to thank the entire Topgolf Callaway Brands team for helping us deliver them. Turning to the fourth quarter. We had a strong quarter, but a rare miss relative to our quarterly guidance. This was due to both more aggressive internal forecasting combined with some short-term volatility in weather and expense timing. We see no change in major trends, our earnings potential, or the health of our consumers. We continue to take a long-term view when assessing our performance and feel very good about the trajectory of our business. We remain on track or ahead of our long-term financial targets. We also have increased conviction that our unique collection of brands provides us a competitive advantage in the Modern Golf ecosystem. Shifting to our segment overview. I’ll first start with Topgolf’s results. 2022 is an outstanding year for Topgolf, and I’d like to thank the entire Topgolf team, especially all the playmakers at the venues for making this possible. We delivered over $1.5 billion in revenue and $235 million in adjusted EBITDA, growth of 26% and 31%, respectively, on a 12-month or full calendar year basis. This growth was driven by strong same-venue sales growth, up 7% for the year compared to 2019, continued excellence in opening new venues, and improved venue operating margins. Most importantly, based on what we learned in 2022, we have more confidence and believe there is a bigger opportunity for this business than we did a year ago. As we enter 2023, we have ongoing brand momentum and the Topgolf consumer continues to be engaged and strong. During the fourth quarter compared to 2019, same venue sales grew by 11% with traffic up 7%. The trends in the event business remained strong, including in corporate events. These quarterly growth rates, while good were a little below our internal forecast as the business was impacted by venue closures due to extreme cold weather during our peak holiday season in late December. Also, during the quarter, we opened six new venues for a total of 11 new venues in 2022. We finished the year with 81 owned and operated venues in five franchise venues. Two new venues of note are the Boise and Wichita venues, both excellent examples of a new size and format focused on our small to midsize markets. This new model is a more cost-effective way to serve our 50-day to 72-bay markets and one we believe can unlock additional markets for expansion and ultimately increases the total addressable market in the U.S. from 200 venues to 250 venues. Looking ahead, we expect to open 11 new owned and operated venues again this year. The mix will be similar in size to last year, skewing large to medium, and like last year, it will be back-end loaded with only two venues planned to open in the first half of this year and eight planned to open in Q4. The growth in operational improvement initiatives that Artie spoke about at our Investor Day remain on track, the most impactful being the digital bay management platform, a proprietary system we internally call Pi. This new platform is essentially an inventory management system that will help our venue operations team utilize the bays more efficiently and also allows for a more advanced reservation system. We believe this system will improve the guest experience and also increase profitability. It also builds a stronger digital relationship between Topgolf and the consumer. At the time of the merger, 10% of the Topgolf business was digital. Now, it is 30%, but it should be more than half, and this digital platform is key to getting us there. The Pi system was in 18 venues as of the end of 2022. We expect to have it in all venues by the end of 2023. We also continue to make strides on the international front, a significant milestone will be this spring’s opening of China’s first Topgolf venue located in the interior city of Chengdu. This will be a massive 104-bay facility built, owned, and operated by our national franchisee there. As you’d expect, China represents a massive long-term opportunity for Topgolf. And as both we and our franchisee are excited to get our first venue up and running. Toptracer opened a little more than 2,300 bays for the quarter, delivering just over 7,000 for the year. On the technology front, Toptracer continues to innovate and recently unveiled a new product specifically designed to elevate the golf coaching profession through an immersive data-driven experience. Toptracer is also gaining recognition as the number one product in driving range tracking technology and recently entered into a partnership naming us the official range tracking technology of the PGA of America. We believe this partnership will further strengthen our U.S. green grass pipeline for this business. Moving to the Golf Equipment segment, the core golf consumer remains strong and engaged throughout the year. For the full year, our global Golf Equipment segment revenue was up 14% year-over-year or 20% currency-neutral. Focusing on the U.S., our Golf Equipment revenues were up 17% year-over-year, thus outperforming U.S. hard goods shipments, which were up 9% according to the National Golf Foundation. Clearly, a strong year for the industry and an even stronger year for Callaway Golf. And although I quote U.S. metrics here for convenience, we had global success in 2022. Japan and Korea had particularly strong years though partly masked by currency headwinds. Our U.S. ball share ended the year at 20.5%, a new record. And our golf ball sales eclipsed $300 million for the first time in our history. Our U.S. club market share was also up, finishing the year at 24.3%. Looking forward to 2023, from a marketing and innovation standpoint, the new paradigm, family of clubs represents a complete shift in performance and has been extremely well received, both in the marketplace and on tour. Paradigm is a full line of product, driver, ferry woods, hybrids, and irons. The driver features a proprietary 360-degree carbon chassis, as well as a new version of our Jailbreak Technology and an AI design phase. On tour, the Paradigm driver has had an amazing start winning four out of the first five PGA Tour events of the calendar year. At Callaway, we talk about product that’s demonstrably superior and pleasingly different. And the entire Paradigm line is a great example of this. In conjunction with the launch of the new products, we also announced new partnerships with Good Good Golf, an engaging inclusive golf content platform; and Niall Horan, a famous singer, songwriter, and avid golfer; as well as a multiyear extended partnership with Stephen Curry. These partnerships underscore our interest in broadening our reach within the Modern Golf ecosystem and engaging with golfers of all levels. Turning to the Active Lifestyle segment. We’re pleased to report that the segment surpassed our $1 billion revenue goal for the year. This milestone was driven in large part by TravisMathew’s increased scale, continued momentum, and increased profitability. TravisMathew delivered excellent results across all channels, including key wholesale partnerships, green grass pro shops, e-commerce, and our own retail stores. Focusing on our own stores for a moment, during 2022, TravisMathew opened 11 new retail doors and delivered double-digit same-store sales growth for existing stores. In 2023, we plan to open another nine stores for a total of 50 by year-end. While we don’t plan to provide financial detail by brand on a regular basis, we are happy to announce that the brand also exceeded the $300 million revenue and $50 million adjusted EBITDA targets shared at our Investor Day. The momentum and growth prospects for TravisMathew remains strong. The Callaway branded Apparel and Performance Gear business also had outstanding years globally. Jack Wolfskin had a challenging end of the year with COVID-related shutdowns in China, as well as consumer softness and unfavorable weather in Europe. Although the business is a smaller part of the total Topgolf Callaway Brands story, we feel good about this business as a market positioning, as well as what we believe are improving trends in both brand and product, belief that is supported by recent industry awards and recognition at both Europe and U.S. trade shows. With this, we remain optimistic about the long-term potential of this business. Turning now to our outlook for 2023. We’re updating and expanding upon our previously disclosed guidance. For the full year 2023, we now estimate revenues will be approximately $4.45 billion, up approximately 10% to 12% and an adjusted EBITDA will increase approximately 11% to 15% to $620 million to $640 million. On a segment basis, our full-year outlook assumes continued success at Topgolf with approximately $1.9 billion of segment revenue and approximately $300 million to $320 million in adjusted EBITDA. With this forecast, it’s worth noting that Topgolf is now forecast to account for approximately half of our total company-adjusted EBITDA. As mentioned, the Topgolf consumer and brand momentum remains strong. As a result, we’re projecting a high single-digit same-venue sales growth for 2023 compared to 2022, with about a third of the growth coming from traffic and two-thirds from ticket or price. For Q1, the same venue sales growth is expected to be higher than that of the full year due to the impact of Omicron in Q1 of last year. Our Golf Equipment segment revenues are expected to be approximately flat relative to 2022. We feel very good about our relative position and competitiveness in this segment. However, in our forecasting, we’re also taking into account the inventory catch-up that occurred in 2022, some potential economic pressures, and more competitor launches this year versus last. And lastly, Active Lifestyle should continue to grow at a low-teens rate compared to 2022, with TravisMathew continue to grow at a faster rate than the segment at large. Additionally, we want to emphasize that 2023 is expected to be a significant year for the business as we transition to being cash flow positive for both our parent company, Topgolf Callaway Brands, and the Topgolf division itself. Our overall legacy business remains strong, plus we made a big bet on Topgolf that’s paying off faster than expected and should continue to ramp from here. With this, we’ve continued to strengthen our earnings and expand the growth potential of this unique business even in the face of macroeconomic and foreign exchange headwinds, and we remain on plan or ahead of the 2025 $800 million adjusted EBITDA target laid out during our Investor Day. Now I’d like to turn the call to Brian to discuss the financials in more detail. And as a native son of Philly, I’d also like to add, go, Eagles. Thank you, Chip, and good afternoon, everyone. We are very pleased with our results for 2022, the first full year following the merger with Topgolf. It has been exciting to see the transformation of our business, both financially and culturally, as we collectively work to expand our reach and tap into the structural growth taking place within the Modern Golf ecosystem. My remarks today will be focused more on our fourth-quarter performance and forward-looking guidance, but I want to start with a few key highlights from the full year. During 2022, we generated record net revenue of $3.996 billion, a year-over-year increase of 28% or 32% on a constant-currency basis, driven by broad-based strength across each of our operating segments. This sales growth is despite our $148 million negative impact from changes in foreign currency exchange rates. Full-year non-GAAP operating income increased $42 million to $297 million, an increase of 16% year-over-year. This metric was heavily impacted from changes in foreign currency rates during the latter part of last year. On a constant-currency basis, operating income increased 44% and operating margins increased 74 basis points compared to 2021. Lastly, full-year adjusted EBITDA was $558 million, an increase of 25% or 42% constant currency compared to 2021. This is on track or ahead of our goal of $800 million in EBITDA by 2025. With that brief overview, I will now review the quarterly results in more detail. For the fourth quarter, net revenue was $851 million, an increase of 20% compared to Q4 2021 or 25% constant currency. This performance reflects increased revenue across each operating segment, product category, and region. Our fourth quarter 2022 non-GAAP seasonal operating loss was $25 million, a 42% improvement compared to Q4 2021 due to the strong revenue growth. As a reminder, we have historically recognized a loss in Q4 due to the seasonality of our business. On a constant-currency basis, non-GAAP income from operations would have increased 73% and operating income as a percent of sales would have improved 476 basis points compared to fourth quarter 2021. Non-GAAP loss per share was $0.27 on 185 million shares compared to $0.19 per share on 186 million shares in the fourth quarter of 2021. Please note that a fully diluted share count, which includes shares associated with our convertible notes, only applies to periods with net income, and therefore, our basic share count was used for Q4. Q4 adjusted EBITDA was $37 million, up 156% over Q4 2021, or up 250% on a constant-currency basis. At the segment level, Topgolf contributed $410 million in revenue in the quarter, a 22% increase over 2021, reflecting strong same-venue sales growth and additional new venues. Adjusted EBITDA for Topgolf was $43 million, down $3 million compared to Q4 2021 due primarily to higher preopening and marketing expenses. Golf Equipment capped off a very strong year with Q4 revenue of $190 million, an 18% increase over Q4 2021, or a 25% increase on a constant-currency basis. Segment operating income increased to 103% to 700,000 of income compared to a $25 million seasonal loss in Q4 2021, as pricing and volume benefits more than offset higher input costs and foreign currency headwinds. Lastly, our Active Lifestyle segment had revenue of $252 million, up 17% or 28% on a constant-currency basis compared to Q4 2021. Segment operating income increased approximately $2 million year-over-year to approximately breakeven. This increase was led by continued momentum in the TravisMathew and Callaway Brands that were partially offset by macroeconomic issues facing Europe and China, Jack Wolfskin’s largest markets. Turning to certain balance sheet items. We remain in a strong financial position with ample liquidity. At December 31, 2022, available liquidity, which is comprised of cash on hand and availability under our credit facilities was $415 million compared to $753 million at December 31, 2021. The decrease from last year was due to continued investment in Topgolf and working capital increases in the Golf Equipment and Active Lifestyle businesses, which will support our growth this year. On a year-over-year comparison, we note that last year’s working capital was abnormally low due to the disruptions in supply chain related to the pandemic. At quarter-end, we had total net debt of $1.88 billion, excluding the convertible debt of approximately $258 million compared to $1.12 billion at the end of last year. This increase relates primarily to incremental new venue financing and higher working capital. Our net debt leverage, which excludes the convertible note, was approximately 3.4 times at December 31, 2022, compared to 2.5 times at December 31, 2021. The increase was due to the new venue development and increases in working capital. Consolidated net accounts receivable was $167 million as of December 31, 2022, compared to $105 million at the end of the fourth quarter of 2021. The increase was due to higher revenues in our Golf Equipment and Active Lifestyle businesses compared to Q4 2021. Our inventory balance increased $959 million at the end of the fourth quarter of 2022, compared to $534 million at December 31, 2021. Days inventory on hand are only slightly higher than pre-pandemic levels due to receiving the launch inventory earlier than normal. Also, please remember that 2021 was abnormally low. Overall, we feel good about our inventory levels and expect inventory levels to normalize by the end of the year. Capital expenditures for the full year were $357 million net of venue financing reimbursements. This includes $281 million related to Topgolf for the full year. Topgolf CapEx was higher than originally forecasted due to the timing of venue financing reimbursements. For the same reason, 2023 Topgolf CapEx is expected to be lower at approximately $175 million, net of venue financing reimbursements. Total company CapEx for full year 2023 is expected to be approximately $255 million, which includes $80 million of CapEx for the non-Topgolf business. Now, turning to our 2023 outlook. Our estimates are based upon foreign currency exchange rates as of the end of December 2022 and early January 2023, which is when we implemented our hedging program for 2023. For the full year, we estimate net revenues will increase approximately 10% to 12% to be within the range of $4.415 billion to $4.470 billion. Topgolf segment revenue is expected to be approximately $1.9 billion, driven by new venue development and same-venue sales growth. Golf Equipment is expected to be approximately flat year-over-year, and Active Lifestyle should increase at a low teens percent compared to 2022. The total company revenue estimate includes a $15 million negative foreign currency impact. We expect full year 2023 adjusted EBITDA will increase approximately 11% to 15% to be within a range of $620 million to $640 million, with Topgolf generating approximately half of that adjusted EBITDA, the total company EBITDA estimate includes a $20 million negative FX impact. For the first quarter of 2023, we expect net revenue will increase approximately 9% to 11% to be within the range of $1.135 billion to $1.155 billion. We expect Topgolf segment revenue of just under $400 million, driven by same-venue sales growth and the revenue benefit from Topgolf venues recently opened in Q4. The total company revenue estimates include a $30 million negative foreign currency impact. We expect Q1 adjusted EBITDA to be within the range of $135 million to $145 million, which is below Q1 2022 EBITDA of $170 million. The decrease is driven primarily by the impact of foreign currency, which we expect to have a $25 million negative impact on EBITDA for the first quarter. The Topgolf segment adjusted EBITDA in the quarter will be slightly below the $42 million we generated last year, driven by higher marketing expenditures and a return to full staffing in the venues. The first quarter for the company will also be impacted by the full-year impact of corporate investments we made during 2022 to support our larger business. We also want to note that we are in an inflection point in our business, where we expect that both the total company and the Topgolf business will be cash flow positive in 2023, a year ahead of plan at the time of the merger. We are proud of our results for 2022 and very grateful to the team of employees around the world who helped deliver them. We remain excited about the growth prospects of our business and are confident that our competitive positioning across each segment and the embedded growth within our business will keep us on track to deliver on our long-term outlook and to create meaningful shareholder value. And finally, I would like to emphasize what Chip said earlier, fly, Eagles, fly. That concludes our prepared remarks today, and we will now open the call for questions. Operator, over to you. All right. Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause for a moment to assemble our roster. Our first question today will come from Randal Konik of Jefferies. Please go ahead. Hey, guys. Good afternoon. I’m a Jets fan, so I’m a little jealous, but good luck on Sunday. I have two questions. The first one I want to talk to or discuss the Golf Equipment industry – just want to get your perspective, Chip, on just how you think about industry inventory levels in the channel sell-in versus sell-through? And then how you think about pricing power in the year ahead or a couple of years ahead? Just want to get your thoughts there on the industry of Golf Equipment first. Thanks. Sure, Randy. So, the Golf Equipment business remains healthy, which is clearly demonstrated in our results. And although there has been various periods of time of conversation of potential reversions or things like that, the business has had an excellent year. We’ve outperformed the business, but the market itself has remained strong. The Golf Equipment consumer remains engaged, participation stats show growth. So, we’re very pleased with that. Inventory largely caught up last year. So, if you look at months of supply in the field, they’re at normal levels consistent with where it would have been in 2018, 2019. So, that normalization did occur during 2022. And then your last question, Randy, was around pricing power. And our consumer in the Golf Equipment business is candidly not that sensitive to price. They really – we really compete more around product that’s pleasingly different, demonstrably superior. Nobody has to have a new driver. We’re really able to deliver product that makes the game more enjoyable for them, hopefully, delivers advantages, and is part of the joy of the games because buying new equipment in itself is a fun rite of passage for spring, et cetera. The consumers are passionate, they’re engaged. So we feel good about our pricing power and have been able to demonstrate that over a long period of time. I am waiting for my Paradigm driver in a couple of weeks. So, money well spent. The second topic or my last one here, it’s just more on Topgolf. When you look at the same-store sales numbers of over 10% and then you’re guiding to high single digit, I believe, in 2023, you broke it down between traffic and price. When you think about those numbers, they seem to be much stronger than what the economic model was thought of a few years ago was kind of a low or very minimal up single – low single-digit kind of comp growth for these businesses as they get out of the honeymoon phase, if you will. So, I guess my question to you is, do you think the store volume numbers you gave last year at the Analyst Day for a small, medium, large, would have you venue, are those kind of just – not obsolete, but kind of have – now have upside to where they should be on a more mature basis given what you’ve seen? And then the other thing I wanted to ask about is you talked about, I think, in your remarks about these smaller venues where you’ve seen better costing to build. It almost feels like you can get more density with these units, i.e., could have more units in the United States than you may think or maybe have given us again last year at the Analyst Day. So, I just want to get your thoughts on how you think about that, the venue maturity curve or the top end of it and then long-term kind of unit density or unit opportunity for Topgolf. Thanks. Sure, Randy. Yes. There’s a lot there. Let me take some of it in course here. So, first of all, yes, our expectations are – the results we’re delivering on same-venue sales, we’re very proud of. That was something that we had to solve when we – at the time of the merger and the team at Topgolf, I just want to commend them on doing an amazing job of delivering great consumer experiences. The brand is clearly building momentum. You’re seeing same-venue sales ramp up consistently, and it’s clearly an unlock for the business. The business is a much more profitable long-term opportunity than what we had originally expected as we are demonstrating our ability to drive attractive traffic, price, same venue sales growth, and open venue successfully. The store volume numbers do have upside relative to what we presented at the Investor Day as our – I was looking back in preparation for the earnings call. And I think our initial expectation was low single-digit same-venue sales growth for last year. So, obviously, we continue to drive improvement. And then, yes, there is some real significance to these new types of models that we’re doing, Boise and Wichita being prime examples of that. They will unlock a lot more markets for us, more mid- to small markets specifically. There – we think they’re great consumer experiences. And when we talked about U.S. initially, we talked about 200 in a TAM for venue count. And we now believe that is 250. Hi. Thanks for taking my question. Just first, it seems like the Topgolf EBITDA may have come in a bit under your expectations in 4Q despite pretty strong same-venue sales number. What were the key drivers there? Was this weather-related impacting high-margin corporate events that sort of getting maybe pushed into January? And then also, the 2023 guide for Topgolf implies a nice increase in segment EBITDA margins. What would be the key drivers there? Is that some of the dynamic pricing, the labor productivity initiatives, the project Pi, what’s sort of driving the increase in the segment EBITDA margins for Topgolf in ‘23? Thanks. Hey, Alex. This is Brian. I’ll answer the first question and then let Chip jump in on the second one. For the – in the Q4, the flow-through for Topgolf is not what we would normally expect in a normal quarter. But in this one, we had a lot of incremental preopening expenses. They opened six new venues in Q4 of 2022 compared to only one in the prior year. And then on top of that, this last year, we also launched the national marketing campaign down there, so you have a lot of incremental marketing expense related to that. And then there’s just some catch-up of overhead investment that we had done throughout the year that caught up by Q4. And then, Alex, this is Chip. Relative to the guide, the miss at Topgolf was strictly weather. I mean, it was – they had a very extreme or majority weather, 70%, 80% of it. And in December, if you remember back, there was literally life-threatening cold weather in roughly the third week of December and broad swaths of the country. We had to shut down 30 venues and then another 18 were impacted. And so, that affected the revenue and the flow-through relative to the missed relative to our guide. And then when you look at the – in a strong EBITDA margin improvement and at Topgolf, you’re seeing that happen consistently by the way. That’s been continuing to leverage and scale. You are seeing it being driven by the same venue sales growth by the initiatives we’re putting in place with Pi and the ability to open the venue so successfully. We’re optimistic on the marketing program contributing to that. And as mentioned, these venues are increasing their overall operating margin as well. So, a really virtuous cycle of good results from the venue business at Topgolf. Yes. Hey, good evening, everybody. Chip, I wanted to follow-up actually on that last answer you gave to Alex’s question on Topgolf, can you be a little more specific? I’m curious when, timing-wise, you plan on implementing some of that dynamic pricing when Pi starts to go into effect on window timing. And then just are there any other labor productivity opportunities you guys have found now that you’ve had Topgolf under your belt for a year? Sure, Daniel. So, Pi has been an initiative that the team has been working on now for a year-and-a-half. But it was only in 18 venues at the end of 2022. And as mentioned, we’re going to have it in all of the venues by the end of 2023. So, that will unlock increased reservation capability, increase the management capability, and improve operating margins. We think it’s a great opportunity. And we also think, in fact, we know that the consumer likes the ability to make these reservations and to know that they have a specific time to enjoy beta. So, that is a very significant driver of the improved results and we expect. But we’ve been driving improved operating margins. As we previously mentioned, the operating margins were historically EBITDAR at a venue, 29% when we acquired the business. We told you at the Investor Day, we thought we could exceed 32%. We have exceeded that, and we’re telling you we can now continue to drive further improvement. That’s helpful. Thanks. And then I wanted to just touch on the overall kind of company guidance. I think you raised it roughly, call it, $30 million at the midpoint. Obviously, FX has gotten better. I think the footnotes point to about $45 million of better FX from a few months ago. So, just kind of curious what the puts and takes are on the core business as to what maybe we’ve had a solid preorder sale paradigm, Topgolf obviously doing well. So, kind of what are the puts and takes in that core guidance ex FX that have changed from a few months ago? Hey, this is Brian Lynch. The increase from the $600 million we previously guided to now really reflects all FX adjustments. If you bake in the FX rates, change in the FX rates, you bake in our hedging program, everything that’s the all-in number. Isn’t the FX $45 million better than a few quarters ago? So, I just was wondering what the core it looked like maybe drop of 10% to 15%, kind of what was accounting for that? Well, when we said approximately 600, it was a little bit under 600 last time when we snapped the chalk line, but we were giving pre-guidance. And so, we’re within rounding of all of it being FX and all of it going into the number, Daniel. Thanks. Hey, guys. Good afternoon. First question on Golf Equipment. You mentioned you expect segment sales to be flat this year. I guess, first, how much benefit did you have last year from channel fill, trying to figure out how much you have to anniversary. And maybe secondly, how do you see the overall Golf Equipment industry spend in ‘23? Is it sort of flattish with last year as well? Yes. Joe, good questions. We estimate that channel fill provided a one-time benefit last year of about $80 million to $100 million, and we won’t be furthering that this year. And then overall Golf Equipment, we’re expecting the market to be approximately flat there, maybe down a couple of points. We generally hold ourselves and our standard is to be a little bit better than the market we expect to do that again this year. But we think the market will have a solid year, although we’re not, at this point, forecasting significant growth for the industry at large. That’s helpful. Maybe on Topgolf, you mentioned a new format you’re seeing – you’re using in Boise and Wichita. How should we think about those additional 50 venues? Is that at the end of the plan? Or is that maybe 15 a year rather than 11? No, we’re still holding to our 11 per year, but we just believe we’ll have more years of growth out there at this point, and they’ll scatter into the plan. We’re not going to break down when we’ll see large, mediums, or this new version into the mix. But – no real change in the number of venues, but a larger TAM and expect more opportunity for growth out of the business. Hey, guys. Good afternoon. I just wanted to touch on Toptracer range. I think you had about 7,000 bay installs in ‘22, and I think you’re calling for another 7,000 plus in ‘23. But I think at the time you acquired the business, you had expected something like 8,000 additions a year as kind of the run rate. Maybe it was a sense of why that’s been pulled back a little bit. Is that just – still just supply chain challenges? Or is there something more structural to why you’re not planning to grow that fast going forward? Sure, Michael. Good question. So, you’re correct. We did just over 7,000 in 2022. We expect to grow that from that 7,000. So, that puts us within rounding of that 8,000 for this year, not a material change on our forecast for 2023. And we’ve had great success, in fact, exceeded our expectations on covered range bay conversions where sales have been outstanding. The ramp on the green grass market has been a little slower than what we initially expected. We’re making investments there. And it’s sort of what we’re finding a little bit like Golf Equipment. Green grass is a channel that just takes a little longer to get into, but it’s a really valuable channel, and we certainly have the infrastructure to do that. We think the PGA of America partnership and endorsement will help us on that. The coaching platform that we introduced at the PGA show, where we’ll be able to partner with golf coaches, particularly PGA professionals will certainly lend us to that. And we still feel very good about the Toptracer business. Thank you. And maybe just a follow-up question on Topgolf. I think you said it’s going to be another heavily weighted development year in the fourth quarter. Any way you can sense of – presumably, those won’t be extremely additive to 2023 from a revenue or profitability standpoint. But is there any way to think about the annualized benefit from your eight locations that would be going in, in the fourth quarter? Is that $200 million, $300 million? I’m just trying to get a sense of how much that would add to ‘24. Patrick, you can jump in here, if you can correct me. But I think when we add them in Q4, they’re pretty neutral or negative on an EBITDA basis for the year because of the preopening expense and other start-up costs, if you would, preopening should cover most of that, but – so it’s not particularly additive on the bottom line for the year, but we obviously have the six that opened last Q4 that will be additive for the year. But the eight that are opening this Q4 probably don’t help us this year. That’s right. And maybe, Michael, what it does add the next following year, right? We don’t have a perfect way, but we told you what a representative venue does from a revenue and a four-wall margin. The ones that we’ve opened in ‘22, and we told you in ‘23, a little larger than a representative, and we also tell you that the first year is – generally, the first full year is one of their best years. So, you could probably use some of that to help you understand what that next year’s impact of those new venues at the end of the year would be. Hi. Good afternoon. I would check your guidance for the first quarter looking for order cancellations from Kansas City Country Club based upon what you… A lot of good questions have already been asked. I’m going to ask a couple more. In light of your sort of flattish year-over-year Golf Equipment guidance, but you’ve got great market share growth and now covered $300 million in Golf Ball. And Golf Ball is such a volume-driven business, as the volume goes up, the margins expand dramatically. How do you push that business further and get it – you took a long time to go for 15 to 20? How do we now go from 20 to 25? And what could that do to profitability on the Golf Equipment side? Yes. You got great points there because we’ve been really proud, Casey, of how we have steadily grown that market share over six, eight years, right? So, this has been a prolonged run of continual growth in market share in the Golf Ball. We now are just over $300 million. We’re record over 20%, which is a cool threshold. And we’re hopeful that we’ve had momentum in that space and doing the things that we’ve done over the last several years continuing on the path will deliver that same level of steady three yards in a cloud of dust growth. And that growth also tends to stick with you when you do at that. We’re building great relationships at green grass. We’re building and have invested quite a bit into the Chicopee facility to build what we think is the best Golf Ball in golf. The Jon Rahms, the Xanders that are using it on tour. We’re obviously working and investing in new capabilities. So, we’re very committed to the business, excited on the results, and we think that the formula that we’ve used over the last several years will be – will continue to serve us well going forward. And my follow-up is – I’m curious about your comment about Toptracer. Because obviously, at the PGA show, you made a very great effort to connect Toptracer with the PGA professional. But is the difficulty at green grass the fact that he’s often not the decision-maker, right? I mean, the decision maker on capital expenditure, things like that is often a committee, and committees can be a lot harder to convince than an informed single decision-maker. No, you’re right. And that may be one of the things that we’ve learned over the last year because that’s where our business has gone a little bit slower than what we anticipated. But as you could tell at the PGA show, Casey, we’re connecting with the PGA professional. There’s an energy around that business. It makes sense. It is going to be the future of driving ranges, both covered and uncovered. And although the Director of Golf or the PGA professional may not be the only decision maker as momentum builds around range conversions and our product and relationships get stronger, it’s certainly nice to have a strong advocate there. Thank you. Two questions, I guess. One, following up on the rollout of the reservation and variable pricing system throughout the network by the end of the year, how should we think about the cadence of that rollout during the year in those venues coming online? Maybe kind of what benefit you baked into guidance in terms of when that happens and how much benefit this year versus maybe more of it next year depending on that timing? I think, to the best of my knowledge, Eric, it scales throughout the year. So, we only had it in 18 venues will – it will go in almost on an equal-by-quarter basis throughout the year. Got it. And then second question, you saw an email promotion today kind of one of the more recent ones been offering a bonus in TravisMathew for spending at Topgolf. Maybe talk a little bit about where your focus this year and kind of boosting awareness kind of between the various customer groups of the different brands, I mean, to kind of drive initial revenue synergies between the segments? Is there a different focus this year? Or kind of where were you putting your attention? Yeah, Eric, thanks for noticing that, and I’d highly recommend that you might want to take that up for the loved ones in your life. That’s a promotion where if you buy a – I think it’s a $50 gift card for bay time at Topgolf and what Valentine wouldn’t love that. You get a $25 gift card for TravisMathew, his or hers. So – but it’s a great example of cross-brand promotion that we have such a wonderful opportunity of – but we’re building out the digital assets for that. The marketing teams are coming together. Early days, you would see some logo exposure putting Topgolf on Jon Rahm’s sleeve, our tour bags, you’ll see more and more opportunities where we’re able to cross-promote different loyalty programs. We had our launch event at a Topgolf for paradigm drivers. It’s just an exciting opportunity to use the power of these brands together. And we’re going to continue to lean in on that. Hey, everybody. Thanks for taking my questions. So, first one is just you ended the quarter with close to $1 billion of inventory. And I’m just curious, what is a normalized level? And when do you think you can get there? George, you’re right. Inventory is up currently year-over-year at the end of the year. Almost all of that is – a great percentage of that is current year product. It’s just arrived earlier than expected with the supply chain channel – challenges earlier with the pandemic, people started pushing product, ordering product earlier to make sure we get it. And then all of a sudden, the supply chain caught up and shipped it earlier. But it’s all current and you will see start to normalize in the back half of the year. Our days in inventory on hand are just slightly higher than pre-pandemic levels. And we feel good about it. So, it just has to work its way through as we launch product. Okay, understood. And then second question, I’m just trying to understand the reservation sort of rollout of the better. So, a few topics I was hoping you could maybe cover a little more in detail. But the team that you’ve already implemented this system, and can you quantify what you’ve seen at all? I’m assuming it’s mainly a pricing impact so far, but any kind of quantification would be helpful. And then secondarily, when you put this system in place, is there a lot of kind of education that you have to do to consumers or do folks know about it? And is there still a lot of like several years of kind of penetration as you educate your customer base about it? And so, it’s not just that it needs to roll out everywhere. It really needs to sort of – there needs to be an education process as well that will take longer. So, in terms of the education, in terms of the metrics, George, we’re not going to, unfortunately, give you specifics on those, but we have seen improvements in the venues where we put this in, both in sales metrics. So, if you would, it’s more better same-venue sales, better bay utilization, bay turn times, et cetera., and improved consumer satisfaction. So, we see very tangible and attractive metrics from it. And I think your point on the education is very sound and a good one. So, it requires some education of the consumer. But it also requires a lot of training and education from the playmakers, right, because it’s a whole different way of doing business. It’s reserving a bay time getting a different methodology where you – we have to have the consumer understand that they have the bay for a specific period of time. They don’t stay indefinitely, but you reserve to have a two-hour block, if you would. We’ll have to have the consumers be aware that they can make these reservations. They want to do so because the biggest complaint that we had at Topgolf, and I know this sounds silly, but it’s – was that the weights were too long. And so, for a person like myself, I don’t want to wait four hours to go anywhere, quite frankly. And the – if there’s an opportunity to reserve that time, even if they charge me a little bit more for it, I’m all in and I think many are. But we’re going to have to teach the team to – how much to release in terms of the reservation system anyway. I got to tell you that the Topgolf team is embracing it. They fully understand the attractiveness of this, and both the management and the playmakers are just doing a wonderful job. We couldn’t be more proud of them. They’re making a big difference. They’re continuing to delight the consumer and now they’re transitioning in some of their approaches consistent with this Pi, and we think it’s a great unlock for us. And at this time, we will conclude our question-and-answer session. I’d like to turn the conference back over to Chip Brewer for any closing remarks. Well, I want to just thank everybody for their time. Obviously, Brian and I are diehard Eagles fan. So, we’re routing on one side of the equation this Sunday, but we hope everybody has a great Super Bowl weekend, and we look forward to updating you on the start of our year on our next call. Thank you so much for attending this one.

EarningCall_6

Good day, and thank you for standing by. Welcome to the Coherent Corp. FY2023 Second 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] I would now like to hand the conference over to your speaker today, Mary Jane Raymond, Chief Financial Officer. Please go ahead. Thank you, Kevin, and good morning. I’m Mary Jane Raymond, the Chief Financial Officer here at Coherent Corp. Welcome to our earnings call today for the second quarter of fiscal year 2023. This call is being recorded on Wednesday, February 8, 2023. With me today on the call is Dr. Chuck Mattera, our Chair and Chief Executive Officer. After our prepared remarks, both Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Materials Segment; and Dr. Mark Sobey, the President of the Laser Segment, will join us during the Q&A to discuss the unique benefits of our strategy, our results, and the exciting prospects across several broad markets. For today’s call, the press release and the investor presentation are available in the Investor Relations section of our website, coherent.com. Today’s results include certain non-GAAP measures. Non-GAAP financials are not a substitute for, nor are they superior to financials prepared in accordance with GAAP. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today’s documents. I remind you that during this call, we’ll make certain forward-looking statements. These include, but are not limited to, statements regarding geopolitical and macroeconomic trends, expectations for our revenue, our market trends, and our expected financial performance, including our guidance. In addition, we’ll discuss our progress on integration, including our delivery of the projected synergies. All forward-looking statements are based on today’s expectations, forecasts, and assumptions. They involve risks and uncertainties that could cause actual results to differ materially from our comments today. Our comments should be viewed in the context of the risk factors detailed in our most recent Form 10-K for the fiscal year ended June 30, 2022. Coherent assumes no obligation to update the information discussed during this call, except as required by law. Thanks, Mary Jane. Thank you all for joining us today. Coherent Corp. posted a record revenue quarter of $1.37 billion, consistent with the midpoint of our guidance and grew 70% year-over-year and 2% sequentially. Looking close up at legacy II-VI. Impressively, organic growth was 23% year-over-year and 4% sequentially, while the consolidated pro forma growth was 15% year-over-year. Regarding the composition of our sales by the four major markets: industrial accounted for 33%, communications 44%, 15% from electronics, and 9% from instrumentation. Turning to the distribution of our revenues by region. The second quarter was similar to the first quarter. North America accounted for 55%; Europe, 18%; Korea and Japan combined were 13%; China was 11%; and 3% to the rest of the world. Our non-GAAP EPS was $0.95. We continued our disciplined approach to capital allocation during the quarter. We generated $220 million in cash from operations and invested $106 million in capital equipment for $114 million in free cash flow. We also paid off $133 million of the debt. Our investments in our silicon carbide platform were nearly half of our total capital investment as we execute our multiyear road map for the electrification of transportation and renewable energy infrastructure among our commitments to sustainability. Last week, during Photonics West, we had a strong showing of our broad portfolio of new products and technology innovations that are enabling a wide range of applications across our four end markets. Our thought leaders presented at various events, workshops, and technical sessions, and we had several significant new product announcements. These included the introduction of Python, our next-generation OLED-annealing solid-state laser targeted at new Gen 8 OLED fabs. This is the culmination of four years of innovation and development that retained Coherent’s position as the annealing process of record while improving performance and significantly reducing cost per panel. We believe our innovations in this system will drive adoption into more price-sensitive displays, such as tablets, laptops, and high-end monitors. To further secure our position as an industry leader in ultrafast cutting of OLED panels, we introduced two new ultrafast lasers. We also introduced our next-generation pump laser diodes for fiber lasers with the first semiconductor chip in the industry, to our knowledge, to achieve 50 watts of output power. And we showcased our fully automated contactless laser system for texturing and marketing implantable medical devices. Turning now to our performance by market. Our revenue in electronics grew 131% year-over-year and 11% sequentially, setting another record by hitting the $200 million quarterly mark. Growth was driven primarily from sensing and the seasonal tailwinds of a new product cycle, which we described on our last call. This is the second of the seasonally high two quarters, and in the second half of the fiscal year, we will enter the seasonally low period, during which we expect to have considerably lower revenue when compared to the first half. Our customer intimacy in this market gives us optimism that the future opportunity in consumer electronics is still much broader than just VCSELs for 3D sensing. We believe that sensing will become ubiquitous in metaverse hardware and wearables and LiDAR and other emerging applications. Our strategic engagements are growing across them all. For our silicon carbide power electronics and wireless semiconductor business, we continue to invest in silicon carbide substrate and epitaxial capacity to accelerate the pace of our shipments as demand continues to exceed our ability to supply. In the electric vehicle market, EVs represented 10% of all vehicles sold globally in calendar year 2022. As EVs continue to grow, industry estimates expect the adoption of silicon carbide electronics will also grow but at twice the rate of the overall EV market. We are steadily gaining share in what we believe will be an underserved market for many years to come, perhaps even through the end of this decade. Communications revenue grew 18% year-over-year and 3% sequentially, led by both telecom and datacom, each of which achieved record revenue. Telecom growth was led by broadband initiatives, which in turn drove demand in the metro edge to access networks. We are encouraged by the opportunity that we expect to result from the U.S.’ planned $65 billion investment in broadband access from the Infrastructure Investment and Jobs Act. We expect that it will be a major catalyst for optical communications and specifically our telecom business at all levels of the value chain. As access networks grow, they drive upgrades in the metro, long-haul and submarine networks, all requiring our Coherent transceivers and ROADM integrated product solutions. Our datacom business also hit a quarterly record. Our industry-leading position in 200G and above remains strong at 51% of our datacom transceiver business, compared to 33% a year ago. Our leadership in this area stems in part from our vertical integration of our high-speed lasers, optics, and electronics in our transceiver modules. In addition to our growth of 200G, 400G datacom transceivers, we continue to see accelerated deployments of 800G transceivers, enabling open AI and machine learning applications. We are ramping our full capacity to meet the growing customer demand over the next few quarters. Our optical communications business was honored yesterday ahead of the Optical Fiber Conference in March with awards for three of our products that the 2023 Lightwave Innovation Review singled out. First, our 100G ZR QSFP28, which will enable service providers to upgrade millions of 10G Ethernet links to 100G at the optical network edge; second, our 200G indium phosphide electroabsorption-modulated laser, which is critical for next-generation data center interconnects; and third, our Wavemaker 4000 programmable optical spectrum synthesizer. These awards showcase our innovation leadership across our broad optical communications portfolio. Revenue into the industrial market was mixed. EUV grew 38% year-over-year. Also, we achieved record revenues from products related to precision manufacturing of electric vehicle batteries. In flat panel displays, one less large Excimer line beam system shipment accounted for almost all of the quarterly change in the Laser Segment revenues. We saw sequential declines in the advanced packaging and interconnect markets, such as printed circuit board via hole drilling and back-end semiconductor applications such as marking. This was offset, however, by strength in the semiconductor front end where we set another quarterly record for shipments of lasers for wafer inspection, as well as wafer annealing for logic devices. We also delivered the first full laser and optics subsystem to an industry leader for an exciting new memory application, which had previously been a non-laser-based solution. We had a record quarter for our advanced materials and metal matrix composites into the front end of the semi-cap equipment market. These novel materials allow customers to push the performance limits of their wafer fab equipment, including for immersion and EUV lithography and for wafer stages and wafer chucks. We’ve worked hard throughout the last few years to scale our capacity and our output to allow our customers to mitigate the semiconductor shortages by increasing tool capacity. So, we were delighted to be recognized by Applied Materials, the world’s leader in wafer fab equipment, with their Supplier Excellence Award for a collaboration. We also had record Excimer laser revenues for a pulse laser deposition equipment, a rapidly growing product line serving the semi-cap equipment market. Customers are leveraging this new enabling technology for diverse applications from high-temperature superconducting tape for next-generation fusion reactors to 5G filters in mobile phones. We are a market leader and a pioneer in pulse laser deposition. This technology has the promise of enabling the production of novel semiconductor materials through the engineering of atoms and photons, a great example of the synergistic power of our combinations. Our instrumentation business sustained record levels, growing 2% sequentially. While PCR-based COVID testing is tapering off, our growth in bioinstrumentation from other applications allowed this market to maintain the higher level of revenue achieved during the growth for PCR testing. We also had strong revenue for our products in advanced imaging applications for neuroscience and disease studies. These applications require ultra-short pulsed lasers, part of our portfolio where we excel. Before I turn it over to Mary Jane, I imagine that you all have now seen our other exciting news today: our move to list our stock on the New York Stock Exchange on February 23rd. NASDAQ has served us well since our IPO on October 2, 1987, and we are very appreciative of that support. With our recent growth, our continuing aspirations to be the best at what we do and our global platform, we believe that the New York Stock Exchange complements our new Coherent brand and is the right place for us to be at this time alongside many of the world’s most prestigious companies. Thank you, Chuck. Our revenue of $1.37 billion was negatively affected by $6 million from currency compared to Q1 FY ‘23 with immaterial effects on the EPS. Our backlog was $2.9 billion at 12/31 and remains solid as customers return to more normal patterns of ordering and inventory management. Our Q2 non-GAAP gross margin was 39.8%, and the non-GAAP operating margin was 20.3%, both negatively affected by $3 million in currency or 20 basis points compared to Q1. Supply chain costs were $10 million and are not excluded to arrive at the non-GAAP results. At the segment level, the non-GAAP operating margins were 19.4% for networking and 26.2% for materials and 15.7% for lasers. GAAP operating expenses, SG&A plus R&D, were $403 million in Q2. Excluding $90 million of amortization, $29 million of stock comp, and $16 million of transaction and integration costs, non-GAAP OpEx was $268 million, or 19.6% of revenue. Our total stock comp is expected to be $30 million to $32 million per quarter for each of Q3 and Q4. Synergies have now reached $30 million on an annualized basis, and we are making good progress in all categories. Quarterly GAAP EPS was a loss of $0.58 and non-GAAP EPS was $0.95, with after tax non-GAAP adjustments of $217 million in total. The diluted share count for the GAAP results was 139 million shares. And for the non-GAAP results, the share count was 150 million shares. The GAAP and non-GAAP EPS calculations are on Tables 6 and 7 of our press release. Interest expense in the quarter was $71 million. And for the six months ended December 31, interest expense was $132 million. Our original outlook for interest cost in August was $274 million on the basis of the one-month LIBOR reaching 4.2%. It is now forecast on the yield curve to achieve 5.1%. Should that happen on the schedule expected, our goal, along with our debt repayments, will be to limit the change in our initial estimate to $5 million to $7 million for a total of $279 million to $281 million. Our December 31st balance of cash items was $913 million, an increase from the prior quarter of $15 million. After paying down $133 million of debt in Q2, our total debt position on December 31 was $4.6 billion. Using the trailing 12 months of adjusted EBITDA on a pro forma basis for the combined company at December 31, the gross leverage was 3.6 times, and the net leverage was 2.9 times without the synergy credit. Including the synergy credit of $235 million that is allowed by our credit facility definition, the gross leverage is 3 times and the net leverage is 2.4 times. Note that 15 million of synergies are already in the results. The effective tax rate in the quarter was 32%. The non-GAAP tax rate is 19%. We expect the tax rate for the remainder of fiscal year ‘23 to be between 18% and 22%, assuming the current mix of earnings and no adoption of new or additional tax rulings. Returning to – turning to the outlook for Q3 fiscal year ‘23. Our outlook for revenue for the third fiscal quarter ended March 31, 2023, is expected to be $1.32 billion to $1.37 billion and earnings per share on a non-GAAP basis to be $0.75 to $0.90 per share. With respect to our expectations on full-year revenue, we expect revenue to range from $5.35 billion to $5.55 billion. Our non-GAAP EPS estimate assumes the effects of purchase accounting, which are all still preliminary, will be added back to GAAP EPS other than the depreciation that is about $5 million in Q3. The share count is 152 million shares for the entire guidance range. The EPS calculation, including the dividend treatment, is detailed on Table 8 of the press release for the guidance range. This table also shows the earnings at which the Series B preferred stock is dilutive. All of the foregoing is at today’s exchange rates at an estimated tax rate of 19%. For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amounts of $140 million to $145 million, consisting of $95 million in amortization, $30 million in stock compensation, and $15 million to $20 million for transaction integration and restructuring. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, the purchase price accounting, and the share counts are all subject to change. As a reminder, our answers today during the Q&A may contain forecasts from which our actual results may differ for a variety of factors. These include changes in the mix, customer requirements, supply chain availability, competition, and economic conditions. Yeah. Good morning, guys. Yeah. Congrats on solid results and ongoing strong execution. Thanks for taking the questions. Two quick ones if I could. Chuck, are you seeing any, I guess, what you would consider to be meaningful softening in any of the businesses – in any of the meaningful businesses? And then could you give us an update on supply constraints? And then I have a quick follow-up. Thanks. OK. Well, Ananda, thanks for your question. Let’s take the supply chain first. In the second quarter, the supply chain constraints affected us to a level of $67 million. And so, that will give you some sense. It’s considerably lower than it was a couple of quarters ago. It’s definitely getting better, but it did have an impact on us. That’s first. Second, I tried to give you the color – all the color we could about the markets, about the regions, about the products in our prepared comments. And I would say from the last 90 days, if you look at our revenue guidance, the only thing that you can see which is different is that we have a greater confidence on picking up the bottom end of that revenue guidance, and we shaved just a little bit off the top end. And all of that takes into account our best judgments today. And wherever there are small pockets or pockets of slowdown, we have the versatility, the resiliency, the backlog, and the determination to blow past them. Okay? That’s very helpful. And as a follow-up, would just love to get a sense where you guys believe legacy Coherent is in the display business cycle? And that’s it for me. Thanks. Hi. Thanks for the question. I think as we discussed in our prior call in November, the Excimer annealing business, represents between 20% and 25% of our quarterly revenue, and we’re still very much in that phase. So, I think the forward-looking growth opportunity that we see in IT displays, specifically tablets and laptops, is in front of us, probably one to two years out. But we’re in a pretty steady phase. Thank you very much for taking the question. I appreciate the details today. I wanted to see if we could dig into your updates on your exposure to the hyperscalers or webscalers. I’m estimating that they’re probably close to 10% of total revenue, maybe a little bit below that, following the integration with the old Coherent. But given some of the capital spending trends, I’m wondering if you can update us on your thoughts of how much of your business is coming from there and what your expectations are for the balance of calendar ‘23. Thank you. Thanks, Chuck, and thanks, Simon, for the question. So the – of course, it does change the percentage of the exposure to hyperscalers quarter-by-quarter. But roughly right, it’s about 30% of the total. We said this in the past, it’s about, let’s say, 30% hyperscalers, 30% what we call cloud, about maybe a group of 30 customers. And then a long tail does the rest, the rest of the 30%. So, we have not really seen any slowdown whatsoever in the – at least for the second half of the year. We don’t really see any slowdown in demand. That could be explained by a number of factors. I probably – one is the fact that the higher-speed products, let’s say, 200G and above, now almost they represents 50% of our total, okay? So, that’s where most of the investments are growing. Particularly, of course, with the hyperscalers, we tend to innovate and introduce higher data rates and obviously the general cloud or even the long-term of the customers. So, that’s one reason. The other one, as I said earlier in previous quarters, we see still an opportunity to regain share that we think the – we lost over the past, let’s say, three years between the transition from Finisar to II-VI and now Coherent. So, we – there’s still pockets of markets we think we can to continue to grow our share. So, the two combined explains why we don’t see any slowdown. If anything, we’re very – we’re quite bullish about the near-term future. Just wanted to talk a little bit more about the laser business in that we saw a step down in laser operating margins. I was hoping you can give a little bit more color around what’s contributed to that. Sure. Generally speaking, what affects any of our segments on the margin is that – we – I would say that that is probably a little bit more pronounced in the laser segment, but it’s generally true across all the segments. And the line being that you alluded to that contributed to some of the mixed results in industrial, is that a case where that ELA tool is slipping a quarter, or is that potentially going out a little further? And maybe what contributed to that? Is that just customer site not being ready, or is there some change in potentially seeing some signs of changing demand in the display market near term? Jim, this is Mark. That’s a good question. It wasn’t actually – it wasn’t a pushout. We knew we were anticipating to ship one large landing system less during the quarter. So, there was no – it was really based on customer demand, and so no change there. We had anticipated being able to offset with some other upside business, but as you heard, we still had some supply chain balances that affected some of our other business. Thank you. Good morning. Just wanted to clarify about your comment – Giovanni, your comments about telecom versus datacom. So, it’s 50-50 between telecom and datacom, is that what you said about Simon’s question? Okay. Got it. And then my question is on the backlog. So, it was down a little bit from $3.05 billion to $2.9 billion. Just wondering if sort of backlog apparently peaked already. If you can talk about the expected decay rate, when does it normalize? And also, can you provide the composition of the backlog? So, we don’t normally give the composition of the backlog, number one. But two, Dave, you may remember on the last call as well as in various conferences, one of the things that I noted was that investors should not be worried if the backlog starts to go down, we don’t necessarily consider it a decay because the goal was to start to ship what’s in that backlog. So, we are seeing customers returning to more normal patterns of ordering, and that’s exactly the behavior we saw in the second quarter was exactly what we expected. And I would add, Mary Jane – I would add, Dave, I think that asset to normal ordering patterns will take place over the next few quarters. Got it. And my follow-up is, Chuck, your commentary about deceleration in some of the – your end markets. Just wondering if you can specify which end markets are decelerating or expected to decelerate. Thanks, Dave. I would point to the industrial section in my comments about the back end of the line for the semiconductor equipment. Like that gave you some sense for a little bit of a slowdown as it relates to lasers for via-hole drilling and for marking. And I also balance that with the really substantial growth that we’ve seen both in EUV, on the industrial side and battery welding on the industrial side. And then, also, in our materials for front end of the line equipment in semi-cap. So, it’s a mix, and I said so, that’s probably the best example. I also – in my commentary, Dave, I also pointed to the fact that in the first two quarters of our fiscal year, we have seasonal tailwinds. And I also made a clear remark about the second half of the year that we expect to be considerably lower than the first half. Okay? Yes. Sure, Chuck. Dave, of course, the demand is not something that we have seen slowing down. There’s – that’s why we talk about seasonality. Seasonality, it’s all about introduction of new products from our customers and we follow the pattern. So, it’s completely unrelated to demand. Hi. Thanks for taking my questions. I have a couple. Maybe if I can start with a question on backlog. And totally understand your sort of view in terms of the backlog will start to moderate a bit as supply improves and order patterns normalize. How are you thinking about backlog related to sort of exiting the year? Does this remain elevated? And just trying to match that up against sort of the decision to take some of the high end of the revenue guide a touch lower. I mean, how does that sort of match up with the backlog still remaining quite high at this point? And I have a follow-up. Yes. Sure, Chuck. Thanks. I would say that, on the one hand, while not necessarily, I know we only have a half to go here forecasting the backlog. Last quarter, I had indicated if we saw a resting backlog over time, not necessarily by 6/30, but over time coming down more toward 2.5, 2.6, I wouldn’t be surprised. But I don’t necessarily think it will be at that level by 6/30. So, that’s the first thing. I would say they’re probably, really in some ways, unrelated to each other. We just – the backlog does remain very high. But do keep in mind that, that backlog is over 12 months. And as we’ve indicated in the past, typically, the individual items that are in the backlog are timed. They may not necessarily all be times to being shipped by 6/30. So, we have some customers who routinely will give us relatively long-dated orders going across the entire 12 months. So, it really has nothing so much to do with the backlog coming down a little bit, the change in the top end. It’s just more truing up the forecast as we’ve gone along here. Got it. And for my follow-up, I think, Chuck and Mary Jane, you both talked about sort of the mix in – mixed sort of end-market outlook that you’re seeing with certain markets remaining very strong, certain sort of pockets of weakness. If we aggregate all that together, like how is the book-to-bill looking, particularly as you sort of go through the last few months of the quarter? Like are we continuing to see sort of a step down in the aggregate book-to-bill? Or is that because of the diversification that you have remaining quite robust? Well, again, the book-to-bill is not nearly as relevant really right now as the backlog itself. I mean, customers are changing their ordering patterns. But, generally, I would say there are variations certainly in bookings in particular areas where customers have had given much, much longer-dated orders in now, say, 12 months when their historical ordering pattern is more like six, so they’re returning to six. But generally speaking, I would say that we’re very, very positive about the outlook for the company given the strength of that backlog. Chuck, would you like to add anything to that? No. I think what we said stands. Over the next few quarters, we can expect it to – the book-to-bill ratio as we see it to get to more normal patterns that we would have seen before the last couple of years’ events, including where the supply chain shortages started. Thank you for the question. I just wanted to talk about – you said that the supply constraints again impacted sales by $67 million. I’m wondering how that broke out between networking and lasers. It was mostly networking – thanks for your question, by the way. Good Morning, Mark. It was – yes, it was nearly all networking, but there was an impact to the lasers segment. I just was wondering in terms of other expense, it’s jumped around the last couple of quarters. Do we expect other expense in the March quarter to be similar to what you saw in December? I would say that it’s probably going to be somewhat lower, probably closer to plus or minus $1 million. It does move around for an awful lot of things, some of which are still related to purchase accounting. But it’s probably for Q3, plus or minus $1 million. Hi. Thanks, and thanks for taking my questions. I just have one and a follow-up. I guess, Mary Jane or Chuck, did I hear correctly from a CapEx split, the 50% was going to silicon carbide? Could you just clarify that for me? Probably in the neighborhood of 35% to 50% is going into silicon carbide. It’s a significant part of our CapEx for the year. Got it. And then I didn’t hear you talk much – and maybe I’ve missed this, but it seems like you have a truly differentiated position with high-quality 200-millimeter, whereas rest of the market is struggling with 150 other than one other competitors. So, I’m just curious if you could elaborate on sort of what you have that may be different or the – without getting into process, et cetera., that I’m sure you wouldn’t be entering. But just what would you like to say about sort of the strategy around 200. And I think in your recent presentation, you even talked about getting to 300-millimeter. Okay. Good morning, Jed. Thanks for your question. Jed, just quickly, and at a very high level that’s all that’s required, we have designed a process technology for growing substrates – silicon carbide substrates around a set of materials and equipment, which we design in-house. Our equipment, crystal growth equipment, allows us to scale such that we can grow 200-millimeter substrates in the same equipment that we grow 150. We announced in 2015 the first high-quality 200-millimeter silicon carbide substrates introduced to the marketplace, that’s eight years ago. So, I would say the one thing that we have is proprietary advantage, second is a scalable platform, third is nearly 10 years of experience. And we are dedicating some part of our capacity today, which is overwhelmingly in demand for 150-millimeter substrates. We are still dedicating capacity to improve and scale and position us for the 200-millimeter market. So, it’s not a question of technology. It’s really a question of capacity. And our investments in even more capital, again, another tranche later this year and then again next year, we’ll have both the market opportunity and the market demand in front of us both for 150 and 200, okay? Hey, guys. Thanks for taking my question. Maybe kind of a two-parter here in your broader sensing category. I guess, the first part of this is, Chuck or Giovanni, how do you see the share position with the kind of 3D sensing when you get into the next generation? Do you see an upward or downward bias to that? And then maybe can you paint us a bigger picture on the broader sensing category outside of 3D sensing? How do you see this ramping applications and kind of the thought process and timeframe when that becomes a lot bigger than it is today? Hi, Richard. Thanks for your question. So, I think it’s hard to exactly measure the share. We think that we’ve been growing our share, generally speaking. And due to – thanks to the level of [indiscernible] integration, which we think is still unique, let alone the scale that we have, so this has been very, very favorable to our ability to be very competitive, scale-wise, cost-wise, and most importantly, quality-wise. And we think that we have reached a point where we believe we are the share leader in many ways. And so we have a number of opportunities in front of us for new designs, new applications, new markets, new – also new technologies that should be able to let us continue to enjoy this share leadership, not only in 3D but also, as I said, in optical sensing, particularly optical sensing enabled by semiconductor lasers. So, there’s a number of new applications emerging, which we are working on. All of them, they are all obviously applied in many ways. And we can’t really talk about all the details. But we think we are very well-positioned to continue to enjoy a very close partnership and with our key customers, generally speaking. Okay. Fair enough. Thanks for all the details, Giovanni. A follow-up on a specific topic within datacom. You’ve talked about in the last few conference calls about 800 gig here. I guess it’s probably my assumption, I think most people would assume that’s a very small piece of your datacom business. Maybe you can just verify that’s still the case or kind of give us a sense of where it’s at. But I think the bigger question here is thinking about share in that category. I think you’ve had to battle back from a disappointing start in the 100, 200 to 400-gig generation. But where do you sit in 800-gig? And when does that become a more noticeable part of your business? Is that – will that happen this calendar year, or is it more of a ‘24 story? Thanks. Yes. Thanks, Richard. Well, 800G is very early, as you know. It’s still small compared to lower data rates. But we are shipping 800G today. We think we are very competitive solution. Thanks to – as you know, the integration of our electronics, photonics, and all the assembly and automation that we have, we have – we think we have the most competitive platform out there. And it’s definitely not going to – something that’s going to be material this fiscal year. But next year, we’ll ramp up very rapidly. And I think we’re well positioned, as we’ve been in the past, to support the demand primarily – as we said earlier, primarily for hyperscalers. So, we have – I think we are very well positioned to get the larger share of the market there. Hi, good morning. Wanted to talk about kind of overall growth expectations heading forward and specifically, in fiscal ‘24 and moving forward. I think you’ve talked in the past about expectations for a double-digit growth rate for Coherent. I wonder, given some of the macro stuff that you’re seeing, whether that remains the case or if you can give us any color on that. And then along with that, as you look at your major segments across networking materials and lasers, how do you expect those three to contribute to the baseline of growth that you’re expecting? Thanks. Hey, Tim. Good morning. Thanks for your question. Tim, we are determined to continue this leadership position in the market. We have another few months to play out as it relates to collecting up the new orders working on the backlog, positioning the portfolio. So, we’re not going to give an FY ‘24 guidance today, but we are determined to outpace the growth of the market. And even with some of these pockets of softness, we have to determine whether or not we’re looking at a one-quarter or a two-quarter effect. And we’re intensely engaged with customers now. So, I would say we’re enthusiastic. We’re making all the right bets in all the right places. We’re taking full steps and making good progress even with new customers as we try to stitch together the advantages of, for example, the materials in the lasers portfolio and it’s coming along. So, I would just leave it at, yes, it’s true that our aspiration is to grow double-digit into ‘24, but it’s going to take us another few months to sort through that. And we’ll provide an update over the course of the next 90 days, probably as we head into May and then possibly into August, okay? Great. Sorry, if I can follow-up real quick, and I appreciate that answer. On the telecom side, you seem to put up some pretty good sequential growth there. I imagine a lot of that is driven by supply improvement. But are there any particular product categories within telecom where you saw either strong demand or improved supply to drive that sequential growth? Thanks. Tim, thanks. I’ll take that one, too. I think you hit on all of them. It really was a nice mix we have had and have a good backlog, that’s true. Parts of the supply chain constraints were broken, that’s true. And we do have demand across the entire telecom portfolio, Coherent transceivers, wavelength selective switches and the ROADMs, all three. So, it’s just a question of timing – order timing and then execution of the – through the operations, taking into account improvements, and in some cases, not so much improvement in the supply chain situation. That did hold us back somewhat on telecom again this quarter. Good morning, guys. I apologize to you and others on the call if these were already asked and answered. My line dropped. First off, I assume your previously stated 38% to 42% range but goal maintaining over 40% gross margin hasn’t changed. And, Mary Jane, any color you can provide us as to the various positive and negative levers? And I think last quarter, you cited an $8 million FX impact on gross margin. I may have that wrong, but did you mention any appreciable FX impact this quarter? So, a couple of things. One, our range on the gross margin has not changed. The effects on the margin last quarter, I think, was $6 million positive. This quarter, it was $3 million negative. So, the currency is – there’s a little havoc being played with the currencies, which is a little bit challenging. And, secondly, our cost to obtain short supply parts also increased a little bit. But having said that, it is still absolutely the company’s goal to continue to push this gross margin. And, absolutely, every operating leader in our company both knows that and is behaving as a very great partner in helping to make that happen. Mary Jane, I think virtually every company in this earnings cycle has cited ongoing supply chain challenges, but visibility as to improvement with quite a number indicating that the tougher before resolution calendar ‘23. Any thoughts you can share on that? And then I’ve got one quick follow-up. I think, based on what our guy is saying, too, that it’s actually a fairly decent chance that by the time we get to what would be our fiscal year ‘24, which is the back half of ‘23, that we may start to see most of the issues behind us. So, I think we still have a quarter or so to go here on it. But I do think probably by the end of the year, if not the 9/30 quarter, we should see that starting to get behind us. Okay. And I appreciate the more challenging macro environment. I know it’s still precisely early with respect to the Coherent acquisition. But are there any early data points as revenue synergies with Coherent? And perhaps, Chuck, Giovanni, Mary Jane, you all could compare it to our progress with Finisar. If I recall, I think it was within three quarters of the close of that deal that you got that Sherman facility qualified and up and shipping on the VCSELs. I think at the time, Finisar had little, if any, presence with hyperscalers. And I think you now have three of the big four, and you just said it’s 30% of your datacom, 15% of comms revenue. Any early signs of that nature that would speak to enhancement of Coherent’s competitive position and wallet share with customers? Thanks, Paul, for your question. I’ll go first and if Mary Jane or Giovanni like to – or Mark would like to add, they can. I think as it relates to your question regarding revenue synergies, it’s clear that, of course, there are revenue synergies that don’t exist in the networking business. But across industrial, life sciences, semi-cap equipment, and our aerospace and defense business, there are those opportunities. And between the key account managers, between the strategic marketing team and the product managers, especially in the businesses that Giovanni and Mark lead, there are lots of engagements that are happening, including driven by our customers themselves who are desiring to pull us together to understand how the combined portfolio can help them enable yet another disruption. So, those conversations are happening and the markets that I just described to the markets that we’re focused on. And, Giovanni, would you like to add anything or Mark? No. Chuck, I think you summarized it well. There is no doubt, it’s a very synergistic deal combination to begin with, which we really used to explain the rationale of the combination since the beginning across those four verticals that Chuck mentioned. So, I think it’s – every day is a learning opportunity for us to really figure out substantially more synergies than we ever thought during due diligence just because we were somehow limited by our relative antitrust lawyers to really talk too much about it. And so, now, we are discovering the incredible set of combinations that we can leverage to grow the business even more. Chuck, I would just add – it’s a great question, actually. I’d just add, just specifically in our instrumentation space to use that as a really easy example, our two leading customers that we typically engage with both companies separately prior to the acquisition. We might get an audience, maybe 10 or 15 people and maybe some vice presidents. And we recently at Photonics West show had meetings with two of our leading instrumentation customers with over 40 participants from each of the customers. And we essentially got executive suite attendees there that we would previously have not done. And I think several of our customers have commented that they like the fact that they see as much more as a strategic partner rather than just maybe a leading vendor. So, I think we’ve got early indications in multiple markets and in multiple spaces. But that’s just an easy example based Photonics West in the last few weeks. Thanks for taking my question. I wanted to revisit your silicon carbide opportunity. First, with – how much did silicon carbide contribute by way of sales for the December quarter? How much did it grow year-on-year? And how do you think about the growth outlook this year? Okay. The revenues – Vivek, good morning. Revenues grew about 10% or so sequentially. And Mary Jane can at least range the revenues maybe with the best view for the full year. They are growing. We expect them to continue to grow. They’re capped at the kind of band of revenue that we have today on the basis of the capacity that we have – installed capacity that we have in place. That capacity is being added tranche by tranche, large numbers of furnaces at a time. And we’ve given some guidance over the last couple of calls as to how we expect that to evolve. Mary Jane, do you want to give a range for revenues in the… So, the revenue is about 3% to 4% of the total company. And if you think about that having been 5% of the previous company, which was a smaller size, it showed some very, very nice growth with, as Chuck said, 10% growth year-over-year. The addition of capacity is very, very essential, as Chuck just described. And we’re looking forward to that coming online, so that we can continue to deliver on the demand that we’re right now capacity-wise for. And is there an opportunity to appeal for whether it’s CHIPS Act funding or other state or federal funding? Because when I look at a number of your competitors, they are building out a lot of capacity as well. So, as much as I know you are spending a lot in your CapEx, half of your CapEx or at least a third of it is going toward this opportunity, but there is a window right now to be investing in this, assuming that this is a market that you want to be a big player in. Then why not try to spend more or try to get more funding from these government agencies, so you can really take advantage of what could be a meaningful growth area for Coherent? Look, Vivek, this is a meaningful growth opportunity for us, and we couldn’t be more excited about it. So, we’re focused on that. That’s for sure. And to your point, we are in discussions with both elected officials and with government agencies, both at the federal government level in the U.S. and at the state level. And these discussions are ongoing and growing more intense here most recently. Great. Thanks for squeezing me in. Just in terms of the China reopening, just any impact or kind of step back in what you saw in terms of supply chain challenges or just production capability, demand? Just anything to kind of note there and whether you’ve seen kind of getting through that past any maybe COVID waves that I’ve passed through there. And then as a second question just for Mary Jane, any changes to kind of minimum cash that you would want to keep on hand just given macro? Or should we still consider use of cash primarily debt pay down and CapEx in the near term? That’s it for me. Thanks. Mary Jane, I’d like – Mary Jane, if you would, I’ll go first just on the environment in China and then if you would address the financial question. Meta, I would say as it relates to this last – let’s call it, the last 60 to 90 days or so, for us, for all intents and purposes, it’s pretty much the same as it’s been for the last two or three years. It’s been one story: resilient, flexible, agile, enthusiastic, and able to confront whatever headwinds come and let them just blow right by. The operational team and the team in China have really just done a fantastic job despite the challenges. And they’re already on to – looking forward to the opportunity over the next few quarters or so to position our company there as best as we possibly can. With respect to the cash question, I’m pretty sure you’ve never met a CFO that didn’t want more cash. But generally speaking, there’s really no change in the minimum cash we have. And as we indicated last quarter, and you just summarized very well, we have changed our thinking a little bit to include debt paydown during fiscal year ‘23, as well as CapEx priorities. That does not slow down the speed with which we’re starting the synergies, and we’re going to continue along that path. Hey, guys. Thanks for taking my question. I just wanted to dive into the electronics segment here. Could you break down, within electronics, how much of that segment is 3D sensing in the December quarter? Thank you. Okay. And then I think Giovanni made some comments, and I think Chuck echoed them as well that on the consumer side, the second half of the year tends to be a lot weaker than the first half of the year. There’s just obviously a large cyclical customer there. But when you look at your fiscal year guide, you have an acceleration in revenue to get to your full year. Could you just talk about what other end markets are accelerating that can offset the seasonality of the electronics segment? Thank you. Well, it’s pretty much the same thing we’ve seen for the last couple of years, at least on the legacy II-VI side, which is that the fourth quarter tends to be the strongest quarter in general. It is perhaps less enormously strong than it had been prior to 3D sensing being – or the sensing market being in the numbers. But, generally, I’d say we would expect to see kind of typical seasonality and some strengthening in the other end markets. Tom, this is Giovanni. Just want to add, new features, new functions, new technology gets in and out of products all the time. What we have seen is that, generally speaking, consumer automotive, general, anywhere, there is a need for interactivity with the machine. Lasers and photodiodes imaging, generally speaking, a very powerful way to sense the world and provide an AI engine inside the machine to respond and make decisions. So, that’s a trend, which will continue and will also increase in terms of the actual ability to, again, sense in broader terms, not only physically, but also from a – for example, from a target perspective, they need different type of sources. Depending on the application, there’s a different level of power, et cetera. So, we have seen and you guys have seen, as the number of lasers, a number of photodiodes, the number of solution that get added to consumer electronics products and then automotive, inside or outside the cat, it just will keep increasing. So, it’s not whether or not – of course, there’s going to be more phones, more cars sold eventually and maybe more phones. But it’s even assuming that more phones have saturated as a number, we think that the adoption of this technology will continue to grow. And so, you can expect future products to be adopted to enhance the functionality of these products. Also, let me just clarify something. I should have helped Chuck here more. On our silicon carbide growth, the answer is that it’s 10% – the growth is 10% year-over-year. And it’s pretty flat sequentially for exactly the same reason Chuck gave, which is the capacity constraint. Thank you. Chuck, a lot of detail so far. But if we could spend a minute on – there’s a comment in the press release around the pricing and thoughtfully increasing pricing in some areas. Obviously, the – with the business becoming more diversified, wondering if you could just kind of maybe give us a little bit of detail around how you’re seeing the pricing environment evolve, especially in the context of input costs and supply constraints improving. And then I guess you talked about positioning the portfolio of the diversified company and how that’s playing into how you’re thinking about longer-term pricing strategy, that would be helpful. Thanks. Okay. I’ll start – thanks for your question. I’ll start, and then, I’ll ask Giovanni to add on to it and provide even more color. In these last six months, we put the entire product management team of the whole combined company through a fairly rigorous training cycle. And those product managers in conjunction with the global sales and service organization have had a strategic imperative to improve the operating margins and to position us for competitive pricing that reflect the true value that we bring to the marketplace. Those conversations have been going on even long before we combined with legacy Coherent, but we really stepped it up in the last six months. And whereas you’d like to do it across the Board, it’s not practical. And so, you have to be focused on it. You have to have a strategy for it and an intimacy with the customers with regard to a long-range value proposition and a long-range partnership, which we always focus on developing. And, Giovanni, do you want to point out one or two examples of success in the last six to 12 months? Sure, Chuck. Yes, we had – we’ve been quite successful in a very cooperative environment with our customers, understanding that some of our costs, particularly in those products that require transformation, so we talk about material processing, material transformation, where there is a significant amount of energy needed, we have been able to increase price in a reasonable way. And I think that the customers have been very pleased. In some cases, we have been offered price increases to – by the customer to secure share in this kind of environment, where they realize that there could have been a risk of supply. So, it’s been a combination of us – asking us to increase prices, which we’ve been quite successful with. And then, customers, in some cases, offering price increases to again continue and secure – they continue to supply for some of these products, which, again, have been affected by a number of inflationary effects that we all know, particularly around energy supply. Thanks so much. Thanks for squeezing me in. First question, now that we’re in the good part of the 400G data center transceiver cycle, can you talk a bit [Technical Difficulty] 400G versus 100G, if it’s meaningfully different? And then, importantly, is there are any technology moats that you can build in 400G versus 100G because of the greater investment needed in the technology? Thank you. So, first of all, just for the sake of clarity, as you know, we say 200, 400, 800, 1.6G. As far as we know, it’s all about 100 gigabits per second. And then you’re talking about data rates. So, we have to distinguish between – speed and data rates are not exactly the same. So, even at 400G may actually be four times 100. And 200, maybe two times 100. 200G, we have wireline 200G. We just announced an EML at the European Conference last September. It’s best in the world, we think, and eventually will be a significant shift in bits per second, not necessarily as a data rate, but as a speed. So, all of those complications of combining 100G optical lanes into 200, 400, 800, they have several solutions, several standards. It’s – we have potentially the ability to support all of those form factors, all of those data rates. And we, obviously, own a substantial vertical level – sorry, vertical level of integration in terms of the lasers, in terms of the ICs, in terms of the optics that go into those products. So, I wouldn’t necessarily claim – and nobody could claim that there is a strength in 400G, but there is no strength in 200G or vice versa because the strength is at the bit rate level – sorry, the strength is at the speed level, not necessarily at a bit rate level. So, I think we are well positioned at 100G. We are already well positioned for 200G speed. And so, all of the data rates from 200G and above, I think, we’re very well positioned to, again, as I said earlier, to continue to gain share in the marketplace. We are seeing – just to give you an – just last year, we were at about maybe 15%, and it went to 30%. And now, we’re about 50% of the total datacom sales are actually at 200G and above, which is a sign that we are really focused on the high end of the market, thanks to the – again, the combination of the portfolio, component level that we own and we are better integrated with. Great. Very helpful. If I could follow up, just another question on the R&D path. Your name is Coherent, but I’m not aware of any DSP products or for 400 ZR or any DSP products at the company. Do you have R&D in DSPs? And what are your thoughts on adding DSPs going forward? Yeah. We should probably take it off-line because we did announce in the past of our own DSPs, and we have – of course, we have several Coherent products. We have an entire division around it. And we’ll walk you through all of the offerings. We are very well positioned. We have started with our own – we have our own DSP design team based in Germany. And we have started with, I would call it, a simple product. And we’ll eventually migrate to more complex products over time and be as basically integrated as we can be with our own DSP. That’s our plan. We have to – we started. We are on a good path. The most significant of the products, of course, the 100G ZR, which adds its own DSP in it, and we announced couple of quarters ago. And so, that’s an example. But we’ll walk you through when we are one-on-one with more details if you like. And I’m not showing any further questions at this time. I’ll turn the call back over to Mary Jane for any closing comments. We want to thank all of you for joining us today. Thank you for being patient with the time. Thanks to Chuck, Giovanni, and Mark. And we’ll talk to you soon. Have a good day.

EarningCall_7

Good morning, everyone. I would like to welcome you all to the Credicorp Limited Fourth Quarter 2022 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp's website. Today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. There will be opportunity to ask question at the end of today's presentation. [Operator Instructions]. Thank you, and good morning. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Reynaldo Llosa, Chief Risk Officer; Dario Ferrari, Head of Universal Banking; Francesca Raffo Chief Innovation Officer, Cesar Rivera, Head of Insurance and Pension; and Carlos Sotelo, Mibanco's Chief Financial Officer. Before we proceed, I would like to make the following safe harbor statements. Today's call will contain forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed event or circumstance. Gianfranco Ferrari will open the call and will comment on the key milestones achieved in 2022, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance and provide our guidance for 2023. Gianfranco, please go ahead. Thank you, Milagros. Good morning, everyone. Thank you for joining us. While we reported a solid quarter, I would like to reflect on some of the key accomplishments of the year. First of all, I am closing my first year as CEO of Credicorp. As you know, when I came into the role earlier in 2022, I had already spent many years with the group, and in particular, at BCP. I had worked as part of the prior leadership to establish the foundation of what are the key strategic initiatives that guide us today. In particular, I am very proud of the important work we've done in advancing our governance and operating structures over the last three years aimed at ensuring that sustainability would remain an important part of how we do business. Today, sustainability is being integrated into our strategy, propelling our ability to become the changed agent that we aspire to be and driving positive impact in the countries in which we operate as sustainability becomes more inclined with the core of our business strategy, which is present in how we think and act every day. We have shifted the way we operate in record time because our purpose and commitment have been embraced from top down to bottom up, leveraging our competitive advantages to be a key enabler of financial inclusion and financial education in the Andean region. We've launched multiple initiatives across our subsidiaries. I would like to highlight that in 2022, we have financially included more than 1.1 million people through Yape and our financial educational web series from BCP surpassed 47 million views. This year has also been a year of learning for me and an opportunity to flex my strength. I reinforced my knowledge of all our businesses, including insurance and wealth management, which were newer to me. Moreover, I lend a hand to our overall digital transformation strategy based on my experience at BCP where we are more advanced in this area. Fundamentally, our digital strategy is aimed at facilitating our ability to live our purpose and achieve our sustainable growth objective for expanding our total addressable market and strengthening our operational drivers. We highlighted our Digital Day in March of last year, the innovation initiatives that are taking place through innovation labs were disrupting ourselves and expanding our tech capabilities and data-driven approach at each of our subsidiaries. Our more mature disruptive initiatives such as Yape keep growing exponentially and are positively impacting society. At the end of the year, Yape had over 11 million users in Peru initial daily part of Yapero's life solving their financial needs. To give you a sense of how prevalent Yaperos are in Peru, approximately half of the low population in Peru use Yape. We are on the track to be the payment network for Peru. Now please turn to Slide 1. Overall, we have had a very positive year, not only based on our solid financial results, but most importantly, I would say that as a holding, we have already absorbed the negative impacts due to COVID. On a full year basis, our net income grew almost 30% and ROE was 16.7%. We maintain our prudent stance in managing risk and our cost of risk is on the road to normalization. We go into 2023 with a very strong balance sheet to both support our initiatives as well as navigate any near-term volatility in front of us. It is important to highlight that despite continued political stability, fundamentals in Peru remains strong, including the relatively low levels of debt to GDP, important levels of international reserves and an independent central bank led by a technical and experienced board. Having said that, there are some important highlights of the year that I would like to point out. First, the very strong performance of BCP turning in an ROE of 22% for the year. Second, Mibanco is on track to deliver the ROEs we expect from that business. And finally, Pacifico, a business where you have to express reservations in the past, has now reached an ROE of 19.2%. We are optimistic about our ability to keep increasing the levels of penetration of this business. On the other hand, we still face a challenging environment for investment banking and wealth management, requiring us to redefine our strategy going forward to reach the ROEs we aspire with these businesses. I expect that we will be able to share more details on this regard during our next call. Before I pass the word to Cesar, I do want to acknowledge how concerned we are that, again, the continued political turmoil and the social unrest we're experiencing in Peru after the failed coup on December 7, has resulted in near-term headwinds, not only to our businesses, but most importantly, to Peru and its citizens. We, at Credicorp, remain focused on fulfilling our purpose and take very seriously our responsibility and obligation to step up, speak up and more proactively work to solve the fundamental structural issues in the countries we operate. We are accelerating our agenda of inclusion and financial allocation key factors related to poverty alleviation. Through greater inclusion, we aim to offer to those vulnerable granular levels of security through savings, income generation and economic independence. Thanks, Gianfranco, and good morning, everyone. We are closing a very good year where the fourth quarter reflects less favorable macroeconomic perspective in Peru, which translated into higher provision and the habitual seasonality expenses at year-end. I want to start by highlighting some key quarter-over-quarter dynamics. The structural loans grew 0.8% measuring average daily balances, driven primarily by retail banking at BCP and Mibanco. Deposits contracted 3% due to a drop in demand deposits in a context marked by lower liquidity across the financial system. Low-cost deposits which have fallen in recent quarters after having increased significantly in 2020 due to the pandemic relief measures still represent a significant proportion of our funding base weighing in with 50.7% share at quarter end compared to 49% at pre-pandemic levels. In terms of asset quality, the structural NPL ratio edged up to 4.95% after a financing growth in wholesale banking, particularly in real estate and tourist sectors, as we expected. The aforementioned was partially offset by the improvement of Mibanco and Consumer segment NPL portfolio. In turn, structural cost of risk increased by 85 basis points to a stand at 2.06%. At BCP, growth in provisions was driven by an update to our estimates for key macroeconomic variables such as inflation, interest rate and GDP growth and also reflects the negative impact that rising inflation has had on payment behavior in the Consumer segment. Provisions at Mibanco also increased materially this quarter due to an initially low comparative base and to an increase in the low portfolio default ratio. This evolution was driven by maturities of specific vintages, which led us to change our credit policy in the second quarter of 2022. From a year-over-year perspective, net interest income registered very strong growth of 30.9%, driven by 10.4% expansion in structural loans measured in average daily balances, ongoing repricing of our portfolio in a context of higher rates and a very competitive funding base. Gains on FX transactions increased due to improvements in products and channels. Fee income decreased due to a drop registered in investment banking and wealth management, which was partially offset by growth at BCP stand-alone. Provision expenses increased materially over a typically low base last year. Asset quality remains adequate, and we continue to maintain a strong allowances for loan losses which are equivalent to 5.6% of structural loans. Our coverage level or structured and nonperforming loans remained substantial at 112.2%. In the insurance business, the loss ratio fell significantly to 65.4%, which although close to pre-pandemic levels, still reflects the impacts of COVID-19. In the aforementioned in context, Credicorp registered in the quarter ROE of 15.3% and continued to maintain both, a sound capital base and a diversified business portfolio. Next slide, please. At the beginning of 2023, conditions for emerging markets improved due to two main drivers. First, inflation in the U.S. to the surprise of many is trending downward and is now far from its peak in June. This has raised expectations that the pinwheel has slowed down the pace of rate increases even further in what is already it's most aggressive rate hike cycle in four decades. Second, the Chinese government shifted gears and eased its highly restricted COVID-19 stands and move to shore up the real estate sector seeking to propel economic growth. Both of these factors have had a positive effect on metal prices. Prices for copper, Peru and Chile's main export product reached the highest level in 7 months of around $4.2 per pound. Gold, another of Peru's primary exports, shipped a nine-month high. As inflation decelerates, U.S. treasury yields have dropped which generates a more favorable environment for emerging markets as a whole. Next slide, please. Peru's GDP is expected to grow around 2% this year and social unrest ceases this quarter. We believe that GDP in Colombia will decelerate to 1.3% after posting one of the highest growth rates in the world in 2022. Chile in turn, is expected to contract 0.5%. LatAm Central Banks have been decisive in preventing the anchoring of inflation expectations. In the context of a slowing inflation, Chile Central Bank maintained the same monetary policy rate in four consecutive sessions. Colombia Central Bank, on the other hand, instituted rate hikes at a strong pace given the inflation shows no signs of peaking. In Peru, upside risk to inflation have emerged recently in a context of social outrage. As such, Central Bank decisions, indemnity in future are likely to be influenced by the impact of the current scenario, which may mean that record high interest rates continue longer than previously expected. Next slide, please. Despite the challenging context, BCP continues to deliver a strong profitability. Regarding key quarter-over-quarter dynamics, results were driven by an increase of 8.4% in core income. This evolution was skewed while 12.2% growth in net interest income which rose despite the fact that the average daily balances of a structurally long registered little variation. Our disciplined approach to pass through in the context of rising interest rate coupled with our ability to lever as a transactional funding base to mitigate the impact of rising funding costs has bolstered our results. This quarter, gains in FX transaction growth as we leverage intelligence capabilities in a volatile FX market. Nonetheless, income fell this quarter after fees were eliminated for transfers between different cities in September 2022. Accordingly, transactional fees paid to third parties were up due to higher volumes. The aforementioned growth was offset by an increase in provisioning mainly in retail banking due to new macroeconomic perspective for inflation, reference rates and GDP. Additionally, payment behavior in the consumer segment was impacted by raising inflation. Finally, provision expenses increased in wholesale banking over a low base last quarter. Operating expenses were also up due to seasonality in this context, return on average equity stood at 20.4% on a full year basis. Growth in net income was skewed by a 28.5% increase in net interest income, which was bolstered by raising interest rate and a 12.2% increase in structural loans measured in average daily balances. Wholesale Banking grew 12.3%, while retail banking expanded 12%. Additionally, fee income increased 11.3% fueled by an uptick in transactional levels, particularly through digital channels and POS and growth of 12.4% in the net gain in FX transactions as we manage FX volatility and roll out improvements in products and channel offerings. Loan loss provisions increased 55.6% driven by the Consumer and SME segments. In the Consumer segment, payment behavior was affected by higher observed inflation and an unusually low base in 2021. In SME-Pyme, higher provisions respond to growth in higher risk segments, particularly through the new digital offer, which correlates with higher interest rates. Operating expenses grew 13.4%, driven by growth in variable compensation which was in line with higher income, an uptick in IT expenses bolstered transactional capabilities and an increase in investments in disruptive initiatives. In this context, BCP's efficiency ratio stood at 40.7% and ROE at 22%. These indicators reflect improvements of 270 and 230 basis points, respectively. Now please turn to the next slide. Yape has more than 11 million users and 8.1 million active users. If we consider users that make at least one transaction per month, Yape is closer to reaching its 2026 target of 10 million active users. Currently, 42% of Yape's active users generate revenue, and this number is on the rise. We continue to see positive trends across most of our metrics, including the measurement of our transactional volume which grew more than 2.6 time this year to reach PEN66.2 billion in 2022 with 19.5 monthly transactions per active users. Yape are trending upward and reached 9.8 million in December. This translated into market share of 25% of total pop-ups in the Peruvian market. As one of Peru's most important distribution channel, Yape is creating new sources of income for Credicorp through Yape Promos and Yape micro loans. By 2026, we expect 5 million affiliates will have access to financial product through Yape. Next slide, please. Mibanco registered a drop in profitability this quarter, which was primarily driven by growth in provisions. I would like to look at the key quarter-over-quarter in dynamics. The company hit a record high for disbursements, an uptick in disbursement yield helped us mitigate growth in the cost of funds. Nonetheless, results were impacted by higher provision due to two factors. First, as anticipated, we registered an initially low base last quarter after methodology improvements were incorporated to the model; and second, specific vintages mature which increased the portfolio default ratio. The higher risk reflect on these vintages was expected and drove our decision to review our risk appetite in the second quarter of 2022. Mibanco's structural NPL ratio dropped due to an uptick in write-offs and stood at 5%. As a result, Mibanco's quarterly earnings dropped 68% quarter-over-quarter from a full year perspective. Net interest income grew 15% in 2022, driven by an increase in structural loans and in disbursement rates. Provision expenses rose 15% in 2022, which was attributable to loan growth and a variation in our risk appetite. Operating expenses grew 7% year-over-year, driven mainly by marketing and IT expenses and by variable compensation, which reflected growth in earnings and fulfillment of commercial targets. In this context, the efficiency ratio dropped to 51.3% in 2022, while ROE stood at 16.5%. At Mibanco Colombia, pricing strategies and significant loan growth were challenged by a quick rise in the cost of funds, which reflected the evolution of market rates. Provision expenses were well controlled and operating expenses grew in line with portfolio expansion and initiative to develop new capabilities. Next slide, please. Grupo Pacifico's net income is decreased 25.4% quarter-over-quarter. In the Life business, net earning premiums decreased over a particularly high pace due to seasonal effects. This dynamic was partially offset by a drop in net claims of COVID-19. In the PC business, net earning premiums increased primarily in commercial lines due to an uptick in renewals. This evolution was partially offset by higher claims in commercial lines from a full year perspective. Grupo Pacifico's net income rebounded driven by both the Life and PC business. In the Life business, net earning premiums increased driven primarily by Group Life through price adjustments and an increase in sales of the complementary insurance for occupational risk product and secondarily by an increase in the affiliate base in disability and survivorship. This positive dynamic was accompanied by a drop in COVID-19 claims which were substantial in 2021. In the Property & Casualty business, net earning premiums increased primarily in personal lines due to growth in sales of car protection products through bank assurance and oncological products via medical assistance. Claim growth, particularly in the commercial line after economic activities normalized. These dynamics led the total loss ratio to stand at 67%, which is close to pre-pandemic levels. In this context, Grupo Pacifico's return on equity stood at 19.2% this year. Next slide, please. The investment banking and wealth management business, while still challenged by market conditions has registered a slight recovery in recent quarters. On a quarter-over-quarter basis, earnings rose driven primarily by capital markets where gains were registered in the proprietary fixed income portfolio and secondarily by corporate finance where a number of deals were closed at year-end. Asset management and wealth management remained flat. From a full year perspective, assets under management dropped 18.7% driven by fund outflows in Peru and Chile and decreasing market value of funds. In this context, income fell 13.1% primarily in asset management. This reduction occurred over a high base last year when we registered a strong gain from anticipated redemptions and third-party upfront fees due to migration to offshore products in a context marked by political risk. The change in the market environment lets us to initiate a strategic review for this business, which is close to completion. We have identified key levers to achieve long-term profitability and are determining which business represent the greatest opportunity for row and which can be used as platform to capture efficiencies. Next slide, please. Now we will talk about Credicorp consolidating dynamics. On a quarter-over-quarter basis, our interest earning assets fell 3.1% due to a drop in available funds, investments and Reactiva loans and structural loans grew 0.8% driven by Retail segments and Mibanco. Amortizations in wholesale banking clients partially offset this growth. Our funding base dropped 4.7% is skewed mainly by a decrease in demand deposits. The positive impact of asset repricing and higher yield assets structurally offset the increase in the funding cost in this context, the yield on our interest-earning assets rose 65 basis points versus an expansion of 29 basis points in the funding cost. On a full year basis, interest earning assets and funding follow trends similar to those in this quarter. On the asset side, there was a shift in the mix where higher yield structurally launched name in micro finance and consumer loans reduced a higher growth than that seen in other segments. In terms of our deposit base, the mix tilted to higher cost products, where time deposits were up 23%. These dynamics and the fact that we maintain a large share of the market transactional deposits led to increase in our asset yields to obtain growth in the cost of funding. Next slide, please. Now I will discuss the evolution of core income. On a quarter-over-quarter basis, core income grew 5.6%, driven primarily by an increase in net interest income. Consequently, the net interest margin rose 42 basis points to stand at 4.73%, while structural NIM stood at 5.95%. Risk adjusted NIM fell 6 basis points to stand of 4.44%. Moreover, the net gains FX transactions also increased. Nevertheless, fee income fell 2% driven primarily by the elimination of fees for intercity transfer and the decrease in fixed pay for third parties, mainly due to higher transactional volumes. On a full year basis, core income grew 17.9%, fueled by growth in net interest income which rose 23.1% in line with an uptick in loan volumes and interest rates. NIM grew 97 basis points and reached 5.07% in 2022 risk-adjusted NIM stood at 4.27%. Net gains on FX transactions grew 17.5% and also boosted the core income result. Fee for growth 4.2% driven by an uptick in POS transactions, higher fees for personal loans disbursements and an increase in bank-to-bank transfer. The 9.4% increase in banking services fees was partially offset by a drop in fee income from mutual funds. Next slide, please. I will now move to Credicorp's structural loan quality dynamics. On a quarter-over-quarter basis, our structural NPL volumes increased slightly. NPL volumes in increased mainly in wholesale banking after some clients in the retail and hotel sector abated of financing after having been reprogrammed during the pandemic. And SME-Pyme due to overdue loans of clients in a segment with higher risk profiles, but also higher margins. Asset quality in each segment remains within our expectations and provision levels remain adequate. The aforementioned increases were partially offset by a reduction in NPL volumes at Mibanco and in consumer loans due to write-offs. Year-over-year, similar to quarter-over-quarter, the increase in NPL volumes was driven primarily by wholesale and SME-Pyme. Write-off in SME-Pyme and Mibanco are expected to continue given that regulatory restrictions or charge-off of loans to clients that possesses both structural and Reactiva loans has been lifted. Credicorp's structural NPL ratio was basically flat at 4.95% after decreasing NPL volumes, while it was offset by higher loan balances. Next slide, please. Now let me explain structural loan loss provisions dynamics. On a quarter-over-quarter basis, growth in structural provisions was driven mainly by BCP and Mibanco. The main drivers at BCP were updates to macroeconomic projections for inflation, interest rate and GDP, which impacted retail banking in particular. The impact of high inflation on payment behavior in the consumer segment at Mibanco, the main drivers were an unusually low base last quarter and the maturity of specific vintages which led to the fall ratios for the portfolio to rise. On a full-year basis, the structural provision expenses increased 38% over an exceptionally low base and are moving towards normalized levels. In this context, the structural cost of risk stood at 2.06% this quarter and 1.26% this year. The structural coverage ratio stood at 112.2%. Next slide, please. As mentioned last quarter, a significant portion of our annual expenses are registered in the last quarter of every year. To base our analysis and comparable figures, we explained the evolution of efficiency in accumulated terms. Operating expenses grew 11.5% on a full year basis, which reflected an increase in administrative expenses and in salaries and employee benefits. Growth in administrative expenses was driven by an uptick in IT expenses related to cybersecurity new functionalities, a significant higher digital-transactional volumes, and an increase in expenses for fees which reflect growth in transactions; and finally, the acceleration in destructive initiatives. Salaries and employee benefits grew 10.5% driven by growth in variable compensation by an uptick in hiding of specialists for disruptive projects and IT. In this context, Credicorp's efficiency ratio improved 150 basis points on a full year basis, driven by higher core income and BCP stand-alone and Mibanco. If we exclude investments in disruptive initiatives such as Yape and Krealo, the efficiency ratio for the year stands at 41.6%, which represents a difference of 290 basis points from the reported figure. At BCP and Mibanco which accounts for a significant part of operating expenses, operating income grew faster than operating expenses in 2022. In this context, BCP efficiency ratio fell to 170 basis points and Mibanco 410 basis points. Next slide, please. Credicorp's full year profitability was fueled by better results at Universal Banking and microfinance and a solid recovery on the insurance front. In addition, profitability was impacted by lower results at the holding level mainly due to a decrease in net financial results and higher expenses for withholding taxes. Net financial results at the holding were impacted by an increase in the negative carry of the senior bond in line with the devaluation of the investments made with the use of these proceeds. Regarding tax expenses at the holding in 2022, the provisions for withholding tax increased, reflecting higher expectations of dividend payments. As a result, ROE for the full year stood at 16.7% this year, 276 basis points above the level of 2021. Finally, note that ROEs for the first and second semester were somewhat higher than the full year figure even the equity balance at the end of June was lower. This reflected dividend payments and the accumulation of unrealized losses at the end of the first half of the year. Now I will move on to the outlook. Despite current political volatility and social unrest, Peru's macro fundamentals remain solid, and we expect Peru GDP to grow between 1.8% and 2.2% in 2023. In terms of our loan portfolio, we expect our structural loan portfolio measured in average daily balances to grow between 6% and 10% driven mainly by retail banking. The evolution of total loans will depend on the pace at which Reactiva balances are amortized. High levels of interest rates, the shift our loan growth toward a higher yield mix and our competitive funding base will positively impact NIM. Accordingly, we expect NIM to stand between 5.8% and 6.2%. The cost of risk guidance is between 1.5% and 2%. This range reflects higher uncertainty and an ongoing trend back to pre-pandemic figures at the segment level and the shift of our loan portfolio mix towards retail. In 2023, we will continue to invest significantly in digital transformation and disruptive initiatives to bolster our long-term competitive position. In this scenario, the efficiency ratio is expected to situate between 44% and 46%. In the aforementioned in context, we expect our ROE to situate around 17.5%. Finally, please consider that this guidance is based on the application of the IFRS 4 accounting standard. This may lead us to adjust these numbers in May as we implement IFRS 17 in the insurance business. Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question comes from Roberto Durono [ph] with Bank of America. Please go ahead. Hi, good morning. This is Gabilondo [ph] from Bank of America. My first question is on operating expenses and the digital investment strategy. We have seen a trend in the region that is focusing in profitability versus client growth, and also looking for an accelerated pathway to monetize the client, experience in the region has been to have digital deposits and digital loans to monetize the clients. And I think it has been coming from both, not starting with the asset or the funding side. Also, we have seen that digital payments, digital wealth management, the marketplace, digital insurance or more elementary products that are not enough to monetize the clients. We have seen Credicorp has been investing into neo banks in the digital payments exploring to launch unlike a place and has investments in some fintechs and among other initiatives that you have. However, considering that Peru is still not safe in fintech competition like in Brazil, in Mexico or Colombia, wouldn't it be reasonable to refocus the digital strategy on accelerated profitability and then maybe use those earnings to invest in multi-initiatives? I would like to hear your thoughts on this and how should we expect in terms of the operating expenses and the digital investments? Thank you. Hi, good morning, Roberto. Thank you for your question. As we mentioned in -- I don't recall if it was the previous call or two calls ago, we do see the new competitive environment as positive -- for the exact same reasons you mentioned as positive for incumbents like us because of, what I call, happy money has somehow dried up for new ventures. Regarding our strategy, we do believe that the current strategy we have is the right one. As Cesar mentioned, I believe, 280 basis points out of the cost-to-income of Credicorp was expensed in -- sorry, in digital initiatives. That's within the range we provided which is up to 300 basis points of cost to income and up to 150 basis points of ROE. So we're on track. We don't believe that we need to change our commitment regarding digital ventures. Having said that, what we're seeing is because there's no more -- there's less new money coming into these ventures, the path to monetization is going to be faster. The more mature -- the most mature venture we have, which is Yape is right on track in that sense. We're very positive with what we're seeing. We shared with you the number of active users. We keep increasing the number of usage per -- the number of transactions per user and also the number of users already generating income which is at a faster pace than we originally planned. So we're on track. Obviously, some of these ventures diverge, we will make the right corrections. Then my second question is on asset quality. I don't know if you can give us how much of the provision charges of the quarter were related to the section of rate impacts. And when we look into your culture risk guidance, it seems wider when compared to the ones you guided in 2022. So you see like a realistic cost of risk would be around 1.7%. And then your guidance is conservative to the 2% in case question on rent increases. I wanted to hear your thoughts on that. Yeah. This is Reynaldo Llosa. Yes. I mean, as Cesar has explained during his presentation, there are several reasons that are impacting the total risk and the guidance for this year. Basically, the return to normal levels as we have mentioned in previous calls, also the fact that the macroeconomic environment is challenging due to what we've been watching in the country in the previous months actually, and also for the fact that we are growing faster in the retail market than in the wholesale market. Having said that, I mean, there's still a lot of uncertainty for the following months. So that's why we have provided a guidance that is open between 1.5 and 2. And we -- it will be reasonable that we will be some point in the middle, but I would say, it's a little too soon to have a precise number or the final number for the year. Hi, good morning. Thank you for the call and taking my question. I guess my question is on your guidance, I guess, particularly the ROE guidance. Just to try to understand how they get to that 17.5% that you're expecting for this year? I mean, I know margin is looking better than expected, but that cost of risk seems to be increasing and just taking the 4Q number of 1.9% and given the uncertain macro and political outlook, it does seem like you would be closer to that higher end of the cost of risk, if not even above that. So just to try to see what you're thinking and get you to that 17.5%. And maybe if you can provide some -- what do you think like on fee income growth or expense growth that will maybe help you achieve that? Thank you for the question. I think the numbers that we provided in the previous guidance where coherent as a whole. But as you can see, we had, at the end, a little bit more cost of risk that's in the middle of the range. So that explains the 16.7%, basically. And for the 2023, I will argue that we are modeling something similar, in the sense that the combination of the different factors lead us to have around 17.5%. And I would like to stress by the previous call that is an around, it's not exact figure with decimal points. Regarding the specific question regarding risk, as Reynaldo already mentioned, we have during the year that was expected to come back to more pre-pandemic levels and at the same time to shift a more retail portfolio. If you see as a whole, it doesn't look that the shift is radical between wholesale and retail. But within retail, we have been growing significantly faster in Consumer and Pyme than in whole mortgages, for example. So the risk profile has changed. We expect the same behavior during 2023. So if we take out the specific events that impacted the fourth quarter we consider that the range of cost of risk between 1.5% and 2% is reasonable according to, and I'm going to review the general trend and the come back to the risk profile on a segment level, the shift towards more retail portfolio, the specific short-term impacts of the political rates that are going to impact the last quarter of last year and the first quarter in this year. And I will say, if you put all of this in a package led us to believe that this range is reason. I don't know if this helps you. Yeah. No, that's very helpful. Maybe just to try to triangulate everything. Any color you can provide, like on the fee income growth and also expenses. I know you gave the guidance for efficiency. But just any color just on the specific growth in those segments, particularly, I guess, on expenses because just given all the IT investments that you're doing, any color you can give on the growth that you expect in those lines? Yeah. Probably, additional comments. In terms of fees, we mentioned at the beginning of last year that we have experienced a significant rebound in specific lines of fees related, for example, in Mibanco to the comeback of disbursement that are aligned with the specific commissions in the case of BCP transactional activity that rebounds very significantly well above pre-pandemic levels propelled by our digital capabilities. But this significant rebound has already occurred. And now what we are going to have is an increase more aligned with business volumes in the asset side and increased digitalization and transactional capabilities on the deposit side, but not at the same pace that at the beginning of 2022. For this reason as a whole, the fee income is going to grow less than the net interest margin. And in terms of expenses, I think the general trends are going to be similar but with different rates that in 2022 and a slight increase in variable compensation and a significant increase in two or three accounts. IT expenses to increase product offering, transactional activity, volumes that are growing significantly and market associate expenses. And lastly, the disruptive initiatives that are growing income faster than expenses, but as a whole still impacts the core -- the efficiency ratio being more significant in relative terms. Hello, thank you very much for taking the question. I wanted to dig in a little bit more detail into the Mibanco vintages that you mentioned. Can you give us a little bit more detail on those loans when they were originated, what the characteristics of the customers were and also help us understand why are we seeing the increased provisions now if it seems like this has been a known issue for a couple of quarters new adjusted underwriting I think you said back in the second quarter? Thank you. Yeah. In terms of the specific vintages, we had -- as you have seen in the first semester, quite important growth in the Mibanco portfolio. And we're quite optimistic on the evolution of the performance of those segments in the market. Having said that, we identified by the end of the first semester, some specific risk increase in the quality of those segments. So we decided to put us out on our strategy on the second semester. Our growth expectations for the portfolio helped by that event. And that's basically what has happened. These vintages have been maturing and we are ending up the process of identifying the losses associated with those segments. That's basically what has happened. Thanks Gianfranco, Milagros. I had a question with regard-- just a follow-up on efficiency. When we look to your guidance, the margins are very strong, right, like you have structural loans growing 6% to 10%, meaning extending the midpoint of 90 bps. And when we plug this to your NII, this imply, I don't know, like more than 20% NII growth, if you assume interest earning assets will grow at the same pace as low, right? So it's a very solid top line, but looking to your efficiency guidance, they are kind of flat versus this year, right? And this year, I guess, we had about 11%, 12% expenses growth, BCP leading and it's totally clear. It's the digital information. I think we're doing a good job. But given your main revenue line, NII should grow those 20%, assuming our calculation here is correct. What's going to happen to expenses? Like are you calling for such an increase in expenses? Like should we see expenses are approaching those 20% levels or no, it's a combination of fees as we were discussing previously? I'm just curious a little bit here to understand these expenses because I get it, you have this investment plan. But given the revenue that should be so strong, I'm not getting like if we should consider G&A accelerating as much? Thank you. Yeah, Yuri. I think it's a very sensible question. I think it's a very reasonable one. I just try to explain this way. Think in the P&L, we have the net interest margin. As you mentioned, driven by the NIM and the volumes is going to have an important increase, the combination with volume and higher average NIMs through the year. The second source of income is fees. And for the reason that I explained previously, the fee income is going to grow at a slower pace than before, more attached to the volume of a number of specific clients that this significant rebound that we experienced at the beginning of last year and also in FX although we continue to deploy significant capabilities. Last year, we have a number of specific volatility events that we capitalized on that we cannot project that are going to cure again. So summarizing the income part, very solid in terms of margins and a slower growth in terms of fees, okay? This is part of the explanation. The second part relates to expenses. As you point out, we plan to continue investing heavily in developing capabilities inside the business units and in the disruptive ones. Inside the business units, the growth is going to be in line with the expansion of a client transactional activity and so on. And in terms of the disruptive initiatives, what is going to happen is that although the income of these initiatives are going to grow at a faster pace than the previous year and starting to see significant contribution, the cost base are also going to increase, and the relative weight of the disruptive initiatives are going to be bigger than the previous year lets us a very simple example and the figures are not exact at all. If I have an efficiency ratio of the disruptive initiative of 150% to say something because we still lose money. But the total size is 100 impact less than when we have 110% efficiency ratio that is a significant improvement but relative size have been double. Do you -- I am clear? So the combination of these four quarters explains why we're having a significant increase in net interest margin, we still expect to have an efficiency ratio that if you see the margins are not very different from the 2022 actual figures. No, that's super clear, and thank you for all the color and explanation. And just a final one on efficiency like -- and I guess already discussed this in previous calls, but what should be the target, let's say, two years from now, like do you see this efficiency going to 40? Like -- because, as you said, there are some components here. They are kind of -- they are not structural expenses, right? You were doing some kind of CapEx and developing products. So at some point, we should see G&A coming down to more inflation like levels, right? So when that happens, what is the level we should expect for Credicorp? Yeah. I am going to provide you a figure that reflects that we have already communicated to the market on the Digital Day and is around and around 43%. That reflects a number of changes in our composition, including the relative weight of the disruptive initiatives in our P&L that continues to have the factor that I mentioned more efficient by itself, but bigger in relative terms to the whole portfolio. Hi, good morning. Thank you for taking my question. My question is related to deposits and funding. So the deposits had been relatively flat year-on-year in 2022. And at the same time, we saw low cost deposits decreasing as a percentage of total funding and interest-bearing deposits increasing. So how should we think about deposit growth and the funding breakdown evolution for 2023? And what role do you think Yape can play in the deposit growth and breakdown? Okay. I think to understand the short-term dynamics, we need to come back to the pandemic period. Because previous to the pandemic, we had a certain structure in the funding base and the relative sizes of the low-cost deposits in the financial system and during the pandemic, that was a significant infusion of low-cost deposits if I can remember in relative terms. We have the impact of Reactiva. As you remember, we're almost PEN 60 billion of Reactiva with PEN 50-something billion funds of the Central Bank that is recirculating the economy and end up being very much transactional deposits, significant short-term imposed from that. Another source was the impact of -- the releases of the Peru pension funds, five releases. A lot of these funds temporarily went to short-term deposits. And finally, during some period of time, the people who had income didn't have the opportunity to spend much money due to the restrictions in the economy. The combination of these three factors increased the floating, the transactional deposits in the economy and at record high levels, and we capitalize that using our transactional capabilities. So we not only captured our share, but we increased our market share. When we start to normalize the economy, all these factors are starting to dilute or reverse. For example, the people started spending money again. There were not significant disbursement from the pension funds. And more importantly, the Reactiva were paid. So at this point, around 50% of the initial Reactiva funds, 55% Reactiva funds has already been paid. That is liquidity that you take out of the market. And in addition to that, we have a significant increase in interest rates, so the opportunity cost for the people who have excess deposits increases from 0.25% to almost 8%. So the composition and general terms explained for that. What we expect is that the figures are going to come back, not to pre-pandemic levels but something between the very high temporary levels and pre-pandemic levels promoted for our digitalization, our transactional capabilities. What role play Yape in all of this, we have measured. And when you digitalize money, in instead of going to the bank and take out the bills, you let the money in the bank and you make your payments only with electronic transfers. And the average figure that we have identified is that around, we can maintain 25% or 20% of the average transactional volume of our client as an additional transactional deposits. So it's a significant and valuable contribution. We measure that to measure the performance of Yape as a whole. Yes, good morning, gentlemen. I have three questions, just going to go one by one. The first one regarding loan growth. So you said your guidance is for structural loan growth of 6% to 10%. But of course, that -- what I'm interested in is total loan growth which I would guess would be around 0% or 1% because Reactiva announced 7%, I think, of your total loans. So implicitly, you believe that Reactiva loans would be fully repaid. So that's structural of 6% to 10%, let's call it, 7.5%. Once Reactiva is repaid is more or less zero. Is that the correct assumption or no? Yeah. This is Gianfranco. So your assumption is correct. So basically, it will be very flattish in terms of total loans. As Cesar mentioned, Reactiva loans have basically no margin. So the impact on margin is completely different. Okay. Okay. Good. So that was actually my next question regarding the margin. So if I look at you again, your guidance, you're assuming a pretty significant NIM expansion, and you said that Reactiva impact of that, if anything, it's margin accretive because these are very thin margin loans. But I guess how much of that NIM expansion that you are assuming is coming from the mix shift to retail, and we spoke about within retail, you're going to hire Pyme and things like that. So how much of that is structural, which mean by like mix shift? And how much of that is still from the interest rate -- delayed impact of interest rate increases? I think the direct answer is that the rates are a significant contribution because the average rates of 2023 we expect are going to be higher than the average rate of 2022, even though the trend is different. During '22 was an up target trend. In 2023, it's going to be at some point a downward trend. But the average of the year is going to be higher. So this is going to be a key component of the expansion of the NIM. Okay. Okay. Got it. And then the final question with regard to this Mibanco. So here's what I'm not understanding. So you just spoke, and you have a slide in your presentation that maturity of specific vintages led to the default ratio in this portfolio to rise and that lets you to increase the cost of risk, which is shown on your slide. But then when I look at your presentation, in your earnings release, there is a chart there that shows -- I think it's on Page 19, that shows the cost of risk or structural NPL -- sorry, structural NPL ratio for your various businesses and that one shows that Mibanco has actually declined in December 2022 to 4.96%. So it's gone anywhere from 7% in '21 and it's been on gradual decline, and it's already like under 5%. So my question is this, how can I -- how should I think about the disconnect between your NPL ratio trajectory and your cost of risk trajectory with respect to Mibanco? Yeah. Basically, I mean, the improvement in the NPL ratio basically in response to the aggressive write-off strategy we've implemented in Mibanco and that basically reflects credit -- loans already 100% provisions. And remember that besides the specific things -- the specific case of the vintages I mentioned before, it also reflects the challenging macro environment we are facing in 2023 that is incorporated in our projections of the expected loss calculations for the year-end 2022. So there are like two mix factors. Okay. So I just want to be very clear. So you're saying that the reason your NPL ratio has declined is because you've written off some loans which are nonperforming, right? So you accelerated your write-off policy with respect to those loans, correct? Correct. An important percentage of those write-offs were basically due to the fact that we have also written off the Reactiva loans. And we write-off the whole positions, Reactiva loans plus the positions they have directly with Mibanco funds, not guaranteed by the government. Okay. Okay. And then regarding the cost of risk you're saying because there's higher inflation and higher -- potentially like higher defaults, right, because people maybe squeezed in terms of income, you now think that your model or your cost of whatever, your IFRS model is telling you that your cost of risk for this loan should be higher, right? That's like an assumption, like whatever you fit into the model spits out higher cost of risk, essentially, right? Okay. And then the very final question, I heard something very brief mention about -- you said something about IFRS 17 implementing in your insurance business. Like, first of all, what that's all about? And second is how big impact is it? Is that even material or not? Thank you for the question. No, we believe that the initial impact of the IFRS 17 will not have an important or material impact in credit cards equity or in Pacifico's equity. Only as a reference, Pacifico's equity represents 8% of Credicorp's equity. And our first estimations are around -- we will need an increase in around 2% of their reserve or 8% of total equity in Pacifico's equity. So the impact at the end won't be material at Credicorp's levels. Good morning to all. And thank you for the presentation. My question is regarding your asset quality outlook vis-a-vis Peru's current political and social environment. Which areas are you concerned about? You before mentioned on tourism as a scenario that may suffer in the current context. So I would like to understand better where do you -- are you concerned about if this situation prolongs beyond the first quarter that you mentioned, which pockets of your business may start to suffer be that this exposure to industry or how concerned are you also on your microfinance exposure? Thank you. Yeah. Basically, in the wholesale market, I mean, we are somewhat concerned what might happen in the tourism industry as well in the commercial real estate. Having said that, those portfolios are well collateralized. We have real estate behind it. So it's a matter of patience and providing those plants with the necessary helps to go through this crisis. And we hopefully will see better times in the following months. That's basically on the wholesale market. In terms of retail, of course, the specific low segments of both consumers and SME portfolios are the most affected, but we did in the pandemic contacting them very aggressively to provide them the necessary help in different ways. I mean, the experience on the COVID crisis helped us a lot in defining some different alternatives that at the end resulted in a much lower default revenue than we initially expected. So those are the segments that probably are going to be most exposed to this current crisis. But I remember, as Cesar mentioned, those are loans that generate better margins than the traditional segments on both consumer and SME portfolios. Thank you very much. And on that, the dimension on the tourism and commercial real estate, how much of your loan book is exposed to these segments? It's not -- I don't have a precise number today, but this is not that big. I mean, there are specific cases and we have basically hotels all over the country, but basically concentrated in Lima. So I mean, we -- the effect is quite manageable for the industry as a whole. And as we've seen before, it's basically a matter of time and providing them the necessary time to go through the crisis. Hi, good afternoon. I have two questions. The first is a bit of understanding of the provision flows. So we have around PEN730 million provisions in absolute terms this quarter, which is higher than last quarter, which was around PEN460 million. But the overall stock of allowance for loan losses on the balance sheet has gone down to 7.87 billion from 8.03 billion. And the write-offs also on a consolidated Credicorp basis is lower than last quarter by 754 -- at PEN754 million. So we have higher provision but lower write-offs and lower allowance for loan losses. So could you please help me understand where the extra provisions have gone? That's my first question. I'll come back with my second. Thank you. I don't know if I got your question correctly. Basically, I mean, we've grown with the provisions because of the reasons we have explained. Remember that some of the provisions that are required for specifically the wholesale segment it's well collateralized, we have guarantees and a good coverage ratio, requires less provisions than the retail segment. And at the retail segment, it's usually written off a lot faster than the other portfolios that have collaterals behind. So that's basically the general macro explanation of the questions if I got it right. Understood. And can you comment on the recoveries and upgradations from the stressed loans and how the post rate of recoveries have been this quarter compared to the last one? I mean, basically, we've seen -- we have like a stable level of recoveries of written off loans and so basically, we haven't seen an important change in that number in the last few quarters. Thank you. And my last question is on dollarization level, specifically in the SME loans at BCP, it has gone up to 36% from 26%. And is that a sustained trend? And do you think that's because of the current difficulties in the macro/political environment? And is there any chance this higher levels of dollarization will spill over to other portfolios as well? Maybe I can take that one. Regarding the funding in progress, there's no limit whatsoever because of the current political situation. If I go in price, you said 36% of the SME for $1,000, that number -- sorry, I'm checking the number, but -- SME business, that's the mid-market companies. We have -- that's a quite -- has gone from 26% to 36% over the last year. That's basically because those are the companies that have dollar exposure are related to dollar-generating businesses. Either they export directly or they are suppliers to exporters. So we have no concerns regarding the foreign exchange exposure in that segment. Hello. And thank you for taking my question. It's more on the economic and political side. How concerned are you today? And what impact the current disturbances has over your operations on a day-to-day basis? And again, do you see the situation better or worse today than you did 6 or 12 months ago? Carlos, this is Gianfranco. I was going to answer you how much more concerned or less concerned am I today as compared to yesterday. It's a really difficult question. There's a lot of volatility in terms of political noise and turmoil and so on. This is a very personal opinion, and I'm not -- I'm sure all of the people that are sitting at this table today may not have the same opinion. But I do see light in the end of the tunnel. Unfortunately, the prior government was -- this is a lot of -- this is based on public information. There are a lot of judiciary processes on the President and its ministers and the executive power and so on because of corruption. On top of that, the lack of capacity of execution was very high. So I would say, we are more positive in what we see going forward. Obviously, there's a lot of political turmoil and social unrest today, which is generating the troubles we've been talking about over the last few minutes. But overall, we are more positive today as compared to, I don't know, six months ago or even three months ago. In terms of operations, we have had some -- two answers there. We have had some operating issues at BCP, which we've managed correctly. Basically, we've had to shut down some branches on a -- even on a hourly basis on a daily basis. But that hasn't had a major impact whatsoever. Mibanco has been -- since Mibanco operates in much more rural areas because of the microfinance business, two of Mibanco's branches were burned. Those branches are closed today. And luckily, no personnel impact in terms of our employees. Nothing happened in terms of personnel impact. What we're concerned there is a tiny -- it a small portfolio around 80 million solid [ph] and we're somehow concerned because of the lack of capacity for our clients of logistic problems, were to pay and on our side on how to collect. So those are, I would say, on the operational side, the major impact. It appears there are no further questions at this time. I will now turn the call back over to Mr. Gianfranco Ferrari, Chief Executive Officer, for closing remarks. Thank you all for your questions. Despite the near-term outlook, which involves more uncertainty, we will keep delivering based on our purpose, executing on our strategy and advancing the many initiatives we have underway throughout 2023. However, we will be prudent as we have always been in managing risk given the current local environment. Although it's still early to accurately estimate the potential impact of current social unrest in our economy and our businesses, our guidance of maintaining our ROE in the high teens in 2023 includes our best estimate based on the information we have today. We expect NIM will continue to increase as the period of high levels of interest rates could be prolonged, and our loan portfolio continues to shift towards retail. Cost of risk will continue to normalize towards pre-pandemic levels. Finally, we expect to register high single-digit growth in the loan book. And to make this possible, we will continue investing in digitalizing our traditional businesses and disruptive ventures. I am hopeful that the next general election brings the stability needed to rebuild the country in an environment of peace, democracy and inclusion. Peru still maintains the institutional framework and macroeconomic fundamentals, which led the country to 14 consecutive years of poverty reduction prior to the pandemic. We hope that those that are elected protect those fundamentals and prioritize solving the structural problems in Peru, widespread poverty and an equal access to health and education. We are committed to contributing to achieve the goal of poverty alleviation, which is closely tied to increasing financial education and inclusion. By accelerating our financial inclusion agenda we can support the efforts of those that are the list included, women, the elderly, people living in rural areas as well as those of lower social economic and education levels to achieve greater levels of security through savings, greater income generation and economic independence. We also believe that Peru has an important opportunity for advancement in the context of the global energy transition process. The prior government have wasted the opportunity of positioning our country as a leading participant in this process. The energy metrics will change fundamentally in the next five to 10 years due to environmental and resulting policy changes with investments shifting away from fossil fuels through renewables. Global demand for metals is growing exponentially as governments commit to advancing energy technologies capable of addressing the climate change. And the Andean region should be a key supplier of these required metals. If only our governments can focus on stability on strengthening our fundamental infrastructure needs, then we can realize and reach more quickly the tremendous potential in front of us, therefore, having a positive impact on poverty reduction and improvement in education and health services.

EarningCall_8

This is Muneaki Tokunari, CFO at Nikon Corporation. I do appreciate your precious's time to start your business schedule to attend our financial results briefing today. I would like to explain our financial results for the third quarter of the year ending March 31st, 2023, as well as our outlook for the full year. In the third quarter and year-to-date, revenue increased by 12.2% and operating profit increased by 7.8% year-on-year. As shown in the lower right of the slide, the effect of Yen's depreciation was a major contributor. Profit attributable to owners apparent increased only slightly by 1% due to the impact of the absence of the gain on valuations of investment securities, which was recorded in financial income in the previous fiscal year. Slide four shows the cumulative third quarter results by segment. As you can see around the percentage change year-on-year, shown on the far right, operating profit in the imaging and the healthcare businesses increased substantially in more than 2x year-on-year, and all businesses except for the precision equipment business, posted operating profits higher than the previous year. Now, I'd like to go through the actual performance using slide five and onward, I will begin with imaging products business. Revenue from imaging products business increased by JPY48.4 billion, year-on-year to JPY184.4 billion and operating profit increased by JPY22.4 billion to $41.2 billion. In addition to the effect of the year-end depreciation, average sales in price increased due to the advanced shifting to mid high-end models for pro harvest. In the area of interchangeable lenses, sales of high price lenses for full frame cameras was strong, contributing to higher revenue and profit despite the declined volume of low priced lenses. For your information, we achieved much higher results up until the third quarter due to the fact that the planned R&D and other expenses were deferred to the fourth quarter. Slide six shows precision equipment business. Revenue was down JPY29.4 billion year-on-year to JPY133.5 billion. Operating profit was JPY14.6 billion down JPY18.8 billion year-on-year. Revenue and profit from FPD lithography in the systems declined as units sold fail sharply. This is a sharp contrast to registration in the previous year when we had installations coming back so rapidly after the big impact of COVID-19 pandemic. On the other hand, sales of semiconductor lithography systems increased compared to the previous year when the investment period of major customers was in the off season and both revenue and profit increased. However, sales volume failed short of the plan due to the requested postponement coming from our customers, including the lack of utilities. Now, slide seven on healthcare business. Revenue was JPY72.1 billion and the operating profit was JPY7.2 billion showing a significant growth year-on-year. Both revenue and operating profit reached record highs and operating margin was in the 10% range. This was due to the strong cell biological microscopes and retinal diagnostic imaging systems, mainly in North America, as well as the positive impact coming from the cheaper yen, slightly shows component business with the revenues being JPY38.1 billion and operating profit being JPY13.3 billion. The segment also in post the growth, both in revenue and the profit. In addition to EUV and related components. Semiconductor related products such as optical parts and optical components, as well as importers. And the photo mask substrates for FVT expanded and operating profit margin remained in the 30% range. Now Slide 9 shows industrial metro and others. Revenue was JPY27.8 billion. Then an operating profit was JPY2.4 billion in showing growth, both in revenue and profit. In the industrial meteorology business, we had rather strong sales of video measuring systems and industrial microscopes. Next I would like to explain our full year forecast. Please refer to Slide 11. First of all, all the exchange rate assumptions and shown in the second row from the bottom are JPY130 to the US dollar and JPY135 to Euro for the fourth quarter. I will explain our full year earnings forecast based upon these exchange rates assumptions. At the top, we have revised down our full year revenue forecast by JPY15 billion from the previous forecast to JPY630 billion. Operating profit is unchanged from the previous forecast at JPY55 billion, profit attributable -- to owners of parent is also unchanged from the previous forecast of JPY42 billion. Next -- for shareholder returns, the annual dividend remains 40 year per share unchanged from the previous forecast. Regarding the share buyback, we have a purchase 17.56 million shares for JPY24.9 billion. As of the end of January, we'll continue our buyback operations up to the maximum of JPY30 billion through March 24 this year. As mentioned in the topic section, following the completion of the tender offer for shares of SLM Solutions, the company became our consulted subsidiary as of January. We are presenting our full year forecast, including the impact of this acquisition. Please refer to Slide 12. This table shows the main numbers of the full year forecast, including comparisons vis-a-vis ear near and the previous forecast. I have already and explained the outline. Slide 13 shows the full year forecast by segment along with year on year and the previous forecast comparisons. I will go through details of segment by segment. First image in our products business as the market scale is recovering, we will continue our strategy of improving profitability focusing on mid high-end cameras. We maintain our previous and forecast of 700,000 units for interchangeable lenses for digital cameras. On the other hand, the sales of interchangeable lenses are expected to be lowered by 100,000 units to 1.15 million units due to the weak plant sales of low unit price, single focal length lenses. The average sales and prices are settling in the rising, especially in the formula lesson cameras and the interchangeable lenses. And the revenue is expected to be JPY230 billion up, JPY51.8 billion year on year with no change from the previous forecast. Operating profit is expected to be the JPY42 billion up 9 JPY billion from the previous forecast based on the results through the third quarter. We are now revising up JPY9 billion from the previous forecast to JPY42 billion as significant increase as much as 2.2 times. Slide 15 shows precision equipment business revenue being JPY210 billion down JPY20 billion from the previous forecast. In -- in the systems due to the impact of the rapid pension of COVID-19 infection in China for a certain period of time. The completion of installation of one unit for large panels and has been postponed to the next fiscal year, starting from April. And the annual sales volume is now expected to be 29 units. The FB lithograph in the systems market is expected to the bottom out in the next fiscal year and due to the slowdown investment by customers and the deferred installations in response to the sluggish panel demand and we believe it'll start to recover in 2024 and beyond. In the semiconductor lithograph in the systems market, installation of 11 units is expected to be postponed to the next fiscal year by the request of our customers. This is due to the delays in the redness and among some customers due to labor shortages, supply chain disruptions, material shortages, and other factors. In light of these factors, we have lowered our full year on the revenue forecast by JPY20 billion for precision equipment business as a whole. Operating profit and has also been lowered by JPY6 billion from the previous forecast to JPY24 billion reflecting FPD lithograph in the systems and the semiconductor lithograph in the systems being postponed till the next fiscal year. We have assumed since a year ago, when we formulated the medium time plan that the bottom of the operation equipment business and it would be reached in the next fiscal year starting from April due to the supply demand cycle. But we now expect the bottom to be much deeper than we had expected, particularly in the FPD lithography business. On the other hand, there are some results that will lead to a better future. For example, more than 80% of cells of APF lithography in the systems in the semiconductor lithography business were previously concentrated in one major customer in North America. But our efforts over the past several years to diversify our customer base hub borne fruit, and this fiscal, we expect sales volume from customers other than this major customer to exceed half of our total of sales. We believe that the fact that in our customers are diversifying into other Asian countries will help stabilize the pro -- building of our ambition equipment business in the future. Please see in slide 16, revenue from healthcare business is excluded to be JPY93 billion up JPY19.8 billion year-on-year. No change from the previous forecast. Operating profit is also expected to increase by JPY3.7 billion year-on-year to JPY8 billion in line with the previous forecast. Sales both biological microscopes and retinal diagnostics imaging systems have been rather favorable on the back of strong orders. The risk in the healthcare business is parts procurement, although there is an improvement trend, we will continue to monitor the situation closely from the fourth quarter onward, and strive to ensure the stable supply of products. Slide 17 shows, the outlook for the components business. Revenue is expected to increase significantly to JPY53 billion up JPY12.2 billion year-on-year with no change from the previous forecast. Operating profit is also expected to increase by JPY5.3 billion unchanged from the previous forecast. Solid cells are expected for EUB related components optical parts and optical components for same conductor related products in quarters, and the photo mask substrate for FPD are expected. Slide 18 shows the forecast for industrial metropolitan and others, others include production subsidiaries and others. Revenue in this business segment is expected to be in a JPY44 billion, an upward revision of JPY5 billion yen from the previous focus and operating profit is expected to be JPY3.5 billion a downward revision of JPY1 billion from the previous forecast. The estimated impact of the consolidation of SLM Solutions from January to March is reflected in the latest forecast. SLM Solutions has been performing well. We have done EBITDA expected to be positive for the last three consecutive quarters, excluding 1x amount a related expense. Nikon intends to develop the materials and processing business and ask the next pillar for Nikon's growth strategy center around SLM Solutions. That is all for the explanation of our business performance and the numbers, but today as Nikon’s Director in Charge of Sustainability, I would like to briefly report to our shareholders and investors on the current status of ESG and the sustainability of Nikon Corporation. In fact, Nikon’s sustainability activities have been highly evaluated by third party organizations surpassing those of other companies in our industry. For example, Nikon has been selected for the [Indiscernible] in the climate change Soviet by the non-profit organization, the CDP for four consecutive years, since FY2019, and in the Dow Jones Sustainability Industries, one of the was a leading ESG investment industries. Nikon has been selected as a component of the DJSI -- world and the DJSI AsiaPac Pacific for the five consecutive years. In particular, this year, Nikon received the number one score in the entire world for the industry group to which Nikon belongs. In addition, Nikon shares are included in old in five of the GBFS ESG investment industries, including the Japan Empowering Women Index and in Carbon Efficient Index. Behind this high evaluations are our steady and positioned efforts to respond to societies expectations with trust in the area of the environment, social and the labor affairs and the governance. And we are getting results, if I may say so. In the current midterm management plan, we will also now take on the challenge of contributing to a sustainable society through creativity by leveraging our light utilizing and precision technologies. The recently announced Green Jet and as initiative for 787 to improve fuel efficiency and radio CO2 emissions by applying a shark skin finish to the surface of its aircraft is just one example. By solving our social and environmental issues with uptakes and precision technologies, we hope to contribute to realize a sustainable society and at same time, like to enhance the sustainability of Nikon as a company. Finally, I would like to say a few words. In summary, our business performance and app to the third quarter has been favorable in terms of both operating profit and profit attributable to owners of parent. However, in the fourth quarter, we have not changed our previous forecast of JPY55 billion for operating profit due to our own expenses and to be incurred in the imaging and the risk of the systems currently under installations to be postponed till to the next fiscal year in precision equipment business. Over the next fiscal year, there are the risk factors such as concerns about economic recession, the impact of inflation, and the reduced effect of the depreciation, as well as uncertainty in the FBA panel market. However, that enhancement transformed into a much more resilient corporate entity than in the past. In other words, the imaging business is strictly growing in the mid-high end mirror less market. The position equipment business is diverse from its customers, particularly in semiconductor business and the businesses other than imaging and precision equipment such as the component business, which is expected to generate JPY18 billion in operating profit, and the healthcare business, which is expected to generate JPY8 billion in operating profit, are firmly growing as our earnings pillars. Furthermore, now Nikon will aim for the further growth in the next fiscal year, including the launch of digital manufacturing business. Sending around the acquired SLM Solutions, we’d like to ask for the continued understanding and the support of our shareholders and investors.

EarningCall_9

Good morning. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the ARC Resources Fourth Quarter and Year-End 2022 Earnings Conference Call. [Operator Instructions] Mr. Lewko, you may begin your conference. Thank you, operator. Good morning, everyone and thank you for joining us for our fourth quarter and year-end results conference call. Joining me on the call today are Terry Anderson, President and Chief Executive Officer; Kris Bibby, Chief Financial Officer; Armin Jahangiri, Chief Operating Officer; Lara Conrad, Chief Development Officer; and Ryan Berrett, Senior Vice President, Marketing. Before I turn it over to our executive team to take you through our operational and financial highlights, I'll remind everyone that this conference call includes forward-looking statements and non-GAAP and other financial measures with the associated risks outlined in the earnings release and our MD&A. All dollar amounts discussed today are in Canadian dollars, unless otherwise stated. The press release, financial statements and MD&A are also available on our website as well as SEDAR. Following our prepared remarks, we'll open the line to questions. Thanks, Dale and good morning, everyone. I'll keep my prepared remarks relatively brief before I pass it over to Kris to touch on the financial results. As I reflect back on the past year and look ahead at what's to come, there are 3 key items that stand out. First is a look back on 2022. It was a record year for our company on several operational and financial measures. Second is an operational update, focused primarily on Kakwa and year-end reserves which are both positive stories. And finally, I'd like to share my perspective on the agreements reached between the BC government and several Treaty 8 First Nations and what this means for our development activities in Northeast BC. Looking back at 2022, what I am most pleased about is that we stuck to our guiding principles and remain disciplined. Asset diversification was critical, allowing us to shift capital from BC to Alberta and surpassed 26-year records in production and free cash flow, both on an aggregate and per-share basis. From a production standpoint, we delivered record annual production of nearly 346,000 BOE per day and record fourth quarter production of around 360,000 BOE per day, an increase of 16% per share year-over-year. Paired with strong commodity prices, ARC generated record free cash flow of $2.3 billion which is equivalent to 25% of our market cap today. ARC's market diversification and balanced commodity mix were pivotal in managing risk and maximizing free cash flow. ARC realized $8.31 per Mcf, roughly 50% above the AECO benchmark in the fourth quarter. This was mostly driven by our 170 million cubic feet per day exposure to Malin, where the daily price averaged $14.42 per Mcf. Over the course of the year, we also reached some significant milestones that have important implications when I think about asset quality and future LNG potential. First, at Dawson, we achieved 1 Tcf of natural gas produced, proof of the quality and scale of our asset base. To put this into perspective, Dawson has 23 Tcf of gas in place. This really shows how we are at the very early stage of development in Dawson. In ARC's Northeast BC assets, we have 100 Tcf of gas in place alone which bodes well for our future LNG aspirations. Second, we strengthened our business in 2022 by entering into a natural gas supply agreement with Cheniere that will commence with the start-up of the Corpus Christi Phase III expansion. We are excited about this agreement with a high-quality counterparty and the diversified exposure it provides to global natural gas prices. Moving forward, we'll continue to evaluate additional commercial opportunities that leverage our investment-grade credit rating, scale and ESG leadership, all competitive strengths that make these types of transactions possible. Third, at the end of the year, we also advanced our status as an ESG leader. In December, we achieved Equitable Origin's EO100 certification on 100% of our assets and in doing so, we now have the largest production base certified under this global standard in Canada. Operational excellence is a guiding principle and it showed through in our operational performance and reserves. This past year, we executed our largest capital program on record and most importantly, we did it safely. I would like to thank our staff for their continued focus on safety during this period of tremendous activity. Safety will always be our number one priority. As it relates to our capital program, we made the decision early in 2022 to divert activity from BC to our Kakwa asset in Alberta and target condensate-rich areas and this decision paid off in a big, big way. We increased production to about 190,000 BOE per day and it generated $2.1 billion of free cash flow at the operating level in 2022 alone. Since we acquired this world-class asset in 2021, we have reduced well costs by approximately $1 million per well. Inflation has offset that in 2022 but the savings are permanent. Meanwhile, well performance is exceeding expectations with Kakwa delivering some of the strongest condensate wells in Canada. And finally, we have confirmed that wider spacing implemented last year is improving long-term well performance. Pairing this with well cost reductions, we achieved a lower sustaining capital and further improved capital efficiencies at the largest condensate producing asset in Canada. The improved well performance at Kakwa resulted in an excellent year for reserves which really highlights the depth and quality of our Montney inventory. First, we grew reserves across all categories by 14% to 22% per share as a result of strong well performance, PDP reserves at Kakwa specifically increased by 17%. Second, for the 15th consecutive year, we replaced greater than 140% of production with 2P reserve additions. And third, the pretax NPV of 2P reserves of $34 per share is based upon development of just 17% of our internal estimate of drilling inventory. Attachie specifically comprised just 4% of total 2P locations. We look forward to booking the reserves associated with Attachie as the project is developed. These are all important to us as we think about inventory duration and our long-term strategy. Now turning to BC. I'm pleased to report that we have regained operational momentum in the province. Today, we have 2 rigs actively drilling and the level of activity will increase over the course of the year. In Q4 of 2022, we started receiving permits on freehold lands which sets us up to efficiently execute our 2023 program. As it relates to the regulatory environment, the agreements executed between the BC government and the Treaty 8 First Nations are a positive step forward. As an industry, we produce some of the lowest emissions, lowest cost natural gas in the world. Establishing a new framework to sustainably develop that resource is critical. For ARC specifically, we continue to engage with the indigenous communities neighboring our operations and work alongside the BC government and the energy regulator to ensure we have clarity in all aspects of the process. I know many are wondering about Attachie and when we'll move forward on this landmark development opportunity. Let me be clear, Attachie is the best development project in our portfolio and sanctioning it is a priority for us. We anticipate to be in a position to sanction the project this year. A couple of additional observations worth mentioning and reminding our listeners. First, the agreements executed between the BC government and the Treaty 8 First Nations pertain strictly to Crown lands. All our existing production in BC is on private or freehold land and we continue to receive permits there. Therefore, we have a clear line of sight to fully execute the 2023 program as planned. Second, there are high-value areas identified in the agreement with the Blueberry River First Nations that are of critical importance to the nation and puts limits on future development. These are identified in the map on the screen. As you can see, all of ARC's assets are outside of these areas. To close, we are excited to be back in BC and the establishment of a new framework is constructive. Given the strengths of our relationships and the merits of a project like Attachie, we are well positioned to build on this momentum and capitalize on the investment opportunity in front of us. Thanks, Terry and good morning, everyone. As Terry mentioned, we closed the year with a record quarter. Production, funds flow and free funds flow per share registered 2% to 7% above consensus. ARC invested $383 million into our assets and generated approximately $600 million or $0.96 per share of free funds flow. On a full year basis, ARC invested $1.4 billion which is within guidance and generated $2.3 billion of free funds flow. Our results yielded a 35% return on capital employed. Strong commodity prices certainly contributed to our record results. However, our competitive strengths were also evident. First, market diversification, as Terry mentioned, was critical. In periods of regional price dislocation, ARC has historically captured strong margins and this quarter was no different. This was due to physical transportation agreements put in place years ago that are frankly impossible to replace today. The benefits of our market diversification, a low-cost structure and a diversified commodity mix, in which revenue is split approximately 50-50 between natural gas and liquids, contributed to a 67% margin in the quarter. This can be easily overlooked in a strong pricing environment like in 2022 but it is paramount in generating profits throughout the cycle. On that note, ARC realized $107 per barrel for its condensate in the quarter, with light oil and condensate production of 86,000 barrels per day. Condensate fundamentals remain constructive in both the near and long term. In Western Canada, consumption is roughly 700,000 barrels a day, demand is growing and production is approximately 400,000 barrels per day. There is little, if any substitutes and import pipelines are nearly full. And while the economic incentive is there to grow supply today, there are limiting factors to the pace of growth. We look ahead to 2023. Production and capital spending guidance remain unchanged. We intend to invest $1.8 billion to deliver average production of 345,000 to 350,000 BOE per day. First quarter production is expected to be lower than fourth quarter of 2022 due to unplanned third-party pipeline outages impacting our production in BC. These are anticipated to be fully restored this month. Offsetting the third-party outages is stronger-than-forecast base production which will support consistent production growth over the balance of 2023. Included in the 2023 budget, we invested $140 million in water infrastructure at Kakwa. This will expand margins by reducing corporate operating costs by approximately $60 million per year or $0.50 a BOE once fully commissioned in the second half of 2024. In 2024, we would expect capital spending to decrease by roughly 15%, excluding Attachie, while production is expected to be flat or higher than in 2023. The decrease in capital spending is due to several factors. The completion of the Sunrise expansion and water infrastructure investment at Kakwa, the absence of onetime investment to restore production in BC and lower anticipated base declines at Kakwa. ARC continued to strengthen its balance sheet in the fourth quarter by reducing debt by an additional $240 million. At year-end, net debt was $1.3 billion or 0.4x funds flow, inclusive of the $1 billion of investment-grade senior notes outstanding. In 2022, we initially put forth the free funds flow allocation framework to return 50% to 80% of free funds flow to shareholders and executed to that plan. Through growing base dividends and repurchasing our shares, ARC returned 71% of free funds flow to its shareholders with the remaining 30% used to further strengthen the balance sheet. As debt was reduced, we increased the range of returns to shareholders to 50% to 100% of free funds flow and anticipate that we'll be at the middle or top end of that range in 2023. We will continue to execute on our strategy of per share growth through disciplined investment in our asset base and a meaningful return of capital to optimize total return. Thanks, Kris. Last year, once again, we did what we said we would do. We executed to plan, on budget and delivered record results. I'm excited about where we are headed. First, we have identified ways to make our largest condensate asset even more profitable. And second, the operational momentum in BC is going to enable scalable investment opportunities like Attachie that will significantly enhance our free cash flow. Third, our best attributes, scale, asset quality, operating track record, ESG leadership and financial strength continue to open up commercial opportunities like LNG. To close, we are focused on delivering on our strategic priorities of, first and foremost, retain a strong balance sheet. This is critical in our business to capitalize on opportunities through the cycle. Second, grow free cash flow per share. We will do that through disciplined investments in our assets by executing on margin expansion opportunities like LNG and by reducing the share count when it's accretive to do so like it is today. And finally, grow the base dividend as we execute on these priorities to provide an attractive total return that is sustainable for our shareholders. These are our priorities and I look forward to sharing our progress on them in the quarters to come. So just a couple of questions about Attachie. So the first one, I guess, if you did sanction it this year, would it be a situation where everything is incremental to the current budget, so for instance, contracting new rigs, et cetera? Or could you move some of that equipment from Alberta where most of your fleet is working now as things kind of quiet down there? Just trying to get a sense for some of the logistics on flows of equipment. And then also just on the capital for the project kind of unchanged at $700 million. I guess we would have expected that to go up a bit just on inflation but is that a case where you had sufficient cushion baked in? Or would you need to refresh that when you go to Board approval for that project later this year if it goes that way? Thanks, Michael, for that question. It's Terry here. So good questions on Attachie. So from a logistics perspective, we have 11 rigs active today. We will move some of the -- our rigs -- we are moving rigs into BC and we will allocate the rig from their current activity into their. We potentially would look for another rig depending on timing. But I think we can manage it within the portfolio of rigs that we have today. So that's kind of -- and the other services within our portfolio right now, we can actually manage that and pull some of that over from Alberta into BC. So that's well laid out. Armin has been now working on that plan in anticipation of this. So we're set up to do that. As for the capital amount, just as a reminder, we increased the capital from $600 million last year for Attachie up to $700 million to incorporate the inflationary pressures we knew that we've seen last year. And so we're comfortable with that number today. Once we get to sanctioning, we'll look at that again and make sure that we're clear on that number. But as of right now, we feel comfortable with the $700 million. There are savings that we haven't baked into the project here from the learnings in Attachie -- sorry, from Kakwa into Attachie on the completion side of it. So that's where we're trying to figure out those finer details but that's kind of where we sit. It looks like you built up a sizable backlog of drilled uncompleted wells at Kakwa in Q4. How should I think about the cadence of bringing these on stream in 2023? Aaron, it's Lara Conrad. Thanks for the question. We don't really intend to have a backlog of drilled uncompleted wells. So you'll see those get completed and brought on stream here right away. It's really just about timing, keeping our rigs active and making sure we're managing our overall services in an effective way. And so look forward to bringing all of those wells on production in the near term. So to follow up on that, should we expect a production tailwind in the first half of the year as you tie those wells in? So when you think about Kakwa, managing a gas field versus managing a liquids-rich field is a little bit different. So when we put our forecast out for Kakwa, in particular, we look at the overall annualized but you bet month-to-month, we're going to see some fairly big swings in production as is typical in liquids-rich fields. So I think we'll see some bigger volumes out of Kakwa in parts of H2 which will offset other moments in time when we maybe have lower production as we have well shut-in for frac offsets. But overall, we're very confident with our annual forecast for that property. If I could ask a follow-up question. I guess this is probably for you, Terry. You're often asked about acquisitions but is there anything noncore left in the portfolio that you look to divest? No. That's the beauty of our asset base. Everything that we have is core and makes it simple because we've done a lot of the cleaning up over the years on this but that's where we sit today. We're good with our asset base. We like everything that's in there. So no is the answer. Okay. And one final question for me. You mentioned in the press release you're evaluating the details of the agreement signed between the BC government and the Treaty 8 First Nations. Could you may be shed some light on what some of those specific details are that you're looking at? And is there anything beyond what was released at that public press conference? Aaron, this is Armin here. So we are getting bits and pieces of information as we go through this from governments. ARC has been engaged, I guess, with the Ministry of Mines, Energy and Low Carbon Innovation in BC as well as BCOGC. The intention is for us to understand the process more so than anything else. We understand some of the basic details that is involving the agreement. But logistically, we want to understand how the permits will be issued and how the process -- what is the process in terms of getting the projects moving on. So that's really what we are waiting for. I just have a couple of questions on Kakwa. You mentioned the strong performance revisions at Kakwa in your year-end reserves. Can you -- and I know you were, I believe, on the whole targeting more higher CGR wells in 2022. Can you just comment on the revisions on the conde versus gas? Were they sort of -- was it more of a positive provision on the conde versus the gas for Kakwa in 2022? And I just have another follow-up on the inventory at Kakwa. So specific to Kakwa, as far as the performance, you're right. So we did see some strong technical revisions from the base performance at Kakwa and that's really a result of us widening our inter-well spacing. And so that's what was driving those increases. As far as the conde versus gas, we saw positive technical revisions in both categories for Kakwa. And so again, really just talking to that stronger performance, lower decline and the result of widening that inter-well spacing. So overall, very pleased. The property is performing as predicted which is why, as you could see, we came in on our guidance. And yes, very pleased. Okay. And then on the Kakwa well inventory, it looks like in your updated slides, there's maybe about 1,000 wells left. What -- if you just wanted to hold things flat there, how many wells do you think you guys would need to drill every year? As far as drilling at Kakwa, I want to say the sustaining well count is sort of in that 60 to 80 well count dependent on which area of the field. As you say, the CGRs are different so if we talk about holding flat on a BOE basis, I'd say it's in that range. So as you can tell, we have a very strong inventory to keep Kakwa sustained at the 180,000 to 200,000 run rate that we're running it at right now for many years to come. Well, so we -- and it depends exactly when we sanction it because there's some winter construction that has to happen. But we believe 18 months is our timing. So 18 months from the sanction and then we need a couple of months to, I guess, commission and ramp up the production on that. So that's kind of our timing and we've been consistent on that. Solid reserve report and driven by Kakwa there, maybe just to build upon what Mike was asking on the inventory. The 1,000 locations that you have there, including sort of what's booked and what's unbooked there. What does that consider currently in the Lower Montney? And is there any potential upside to that number going forward here? So when we talk about Kakwa, we're very much focused on the Middle Montney. That is our proven layer. So when you think about what's in our reserves report, that will be entirely focused on the Middle Montney. The Lower Montney really isn't playing a big component in those reserves -- or in those well counts. So you're correct that if we see value in that and a way of developing that as a separate layer, you would see those inventory counts come up. And I know going back to the days when Seven Generations was operating the asset, they did have a few lower Montney pilots at the time. Are you able to provide any sort of update on the learnings that you've had since acquiring those? So we have drilled some lower Montney wells. Our view is that they need to be codeveloped, that if you come in after having drilled up the middle Montney, those are not actually fully separate layers. So if you think about our Sunrise asset, we knew from very early days we had enough vertical separation and frac barriers within that reservoir that we could come in and develop the lower Montney and it was completely isolated from the upper and middle Montney. At Kakwa, the layers are a little bit closer together and we don't see that same segregation. So our view is, you either have to codevelop it or once you've developed the middle Montney, you really are already impacting the reserves out of that lower Montney. So we think about our overall development plan as a 3D development plan. All right. Thanks, everyone, for joining the call. We look forward to connecting with you on any further questions you might have in the future. Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

EarningCall_10

Good day. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Motorcar Parts of America Fiscal 2023 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Thank you. Thank you, Rob, and thanks, everyone, for joining us. Before I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the Company's Chief Financial Officer, I'd like to remind everyone of the safe harbor statement included in today's press release. Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during today's conference call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and are subject to change based upon various factors. In particular, expectations about anticipated future growth and opportunities with customers may not be achieved. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the Company's business, I refer you to the Company's various filings with the Securities and Exchange Commission. Thank you, Gary. I appreciate everyone joining us today. Let me begin by addressing factors that impacted our results, and then I will address our expectations for the near future. Before I begin, despite our softer-than-normal sales for the quarter, let me assure you that there were no customer or shelf space losses. There were two major items impacting our sales for the quarter. First, a certain customer reduced orders by approximately $14 million compared with the same period a year ago. In addition, we were impacted by delays in new business from certain other customers, representing approximately $17 million of deferrals for the quarter. As a result, our sales targets for the quarter and nine-month period were affected. We are now experiencing a resumption of ordering levels in the current fiscal fourth quarter, with orders expected to gain further momentum throughout our next fiscal year. As a result of the lower sales volumes, we temporarily reduced production, which impacted overhead absorption, which in turn impacted gross margins. As sales and production volume increases, we expect to incrementally benefit from increased overhead absorption. I should emphasize that in the normal course of business, customer returns remain relatively constant. As such, when sales decrease, returns as a percentage of sales increase. Returns as a percentage of sales were higher for the quarter, which in turn further impacted gross margins. Gross margins were also impacted by inflationary costs not yet covered by price increases. We expect to realize the full benefit of our price increases in the current fiscal fourth quarter, with further upside from expected order volume improvement, operating efficiencies and cost reduction initiatives that we continue to implement across the entire organization. These initiatives, including an ongoing company-wide strategic analysis of opportunities to realign our resources and cost structure to enhance profitability and cash flow. Clearly, our results were not acceptable and not what we expected when we hosted our fiscal second quarter call, primarily due to specific customer-related ordering activities and some macroeconomic headwinds, as I just noticed. We experienced some supply chain challenges, primarily due to shortages for certain components, which impacted production of some products. Fortunately, sales that were impacted by supply chain issues last quarter are improving. This will also help mitigate the impact on gross margins going forward. Higher interest rates continued to have a significant impact on profitability, primarily due to rates related to long-established customer supply chain finance programs. David will discuss these items shortly. As you know, we are a major supplier of critical non-discretionary automotive aftermarket parts. We are working with our customers to address the sharply high interest rate environment, which impacts both MPAA and our customers as well as companies doing business with the leading automotive retailers. It's an industry challenge that requires practical solutions and further action. Now let me address our future outlook. We expect sales to increase by $52 million annually, just from a resumption of expected normalized order volume from two key customers, starting in the current quarter. In addition, we expect to add incremental sales of approximately $15 million from additional committed new business. We also expect to more than double our business for brake pads and rotors in the next fiscal year. Equally important, our gross margins will be enhanced by approximately $20 million of incremental price increases that start this quarter. In addition, as we ramp up for an all-time record fourth quarter, we expect to see margin accretion from efficiencies related to the higher volume and cost-cutting initiatives. As noted in our press release today, we have revised our annual guidance to reflect the actual third quarter results and our optimism for the current fourth quarter. While we don't provide quarterly guidance, given our revised update, one can easily calculate it. We expect record sales for the fiscal fourth quarter between $183.6 million and $191.6 million and record profitability of adjusted EBITDA between $27.5 million and $32.5 million. With respect to cash flow, our expectation is to continue to make progress to generate cash. We are committed to maintaining strong organic growth while focused on enhancing our gross margins and cash flow. In short, as a result of all these initiatives, we believe the company is well positioned for sustainable top and bottom line growth for parts and solutions, and our partnerships with our customers will be mutually enhanced. Now let me expand a bit further and discuss the other drivers to support our ability to achieve our longer-term financial targets. Our brake-related product lines are growing with expected operating efficiency improvements as volume increases with further fixed cost absorption opportunities. We believe our brake-related business will exceed $300 million in annual sales, above our fiscal 2022 reported results, within the next four to five years. We are continuing to expand sales in Mexico with multiple product lines as our customers experience increased demand for aftermarket parts, which currently includes rotating electrical, wheel hubs, brake boosters and brake master cylinders. All major automotive retailers are continuing the rollout of our rotating electric benchtop tester, and we expect sales from this opportunity to reach a cumulative $80 million in the next four to five years. We also expect additional revenue for maintenance and add-on services. Our Electric Vehicle contract testing center in Detroit, Michigan continues to attract customers, including a leading agricultural and construction equipment provider and leading EV automotive manufacturers, to support the design and development of electric vehicles. This contract testing is an initial entry into Software-as-a-Solution. In short, we are well positioned to address both the internal combustion engine market and the emerging electric vehicle market with product functionality and applications across both markets. We expect continued strong demand for ICE, internal combustion engine applications for decades, notwithstanding electric vehicle growth, which still represents a small percentage of the overall car part. In summary, we have a broad line of non-discretionary aftermarket parts necessary to service the car population of approximately 285 million vehicles on the road, representing an uptick based on recently issued industry data. We remain excited about our opportunities, notwithstanding the headwinds we experienced for the quarter. I can assure you, we are working diligently every day with our customers and suppliers to meet the demand for our products as well as addressing the inflationary pressures we are all facing that I touched on earlier in my remarks. Thank you, Selwyn, and good morning, everyone. I encourage everyone to read the earnings press release issued this morning as well as the 10-Q that will be filed later today. Let me now provide a review of our fiscal third quarter and nine months financial results. Net sales for the fiscal 2023 third quarter were $151.8 million compared with $161.8 million in the prior year. Fiscal third quarter results were sharply impacted by a certain customer reducing orders by approximately $14 million compared with the prior year and delays with other customers for new business of approximately $17 million. Orders have resumed in the current fiscal 2023 fourth quarter, and we're expected to continue through fiscal 2024, as Selwyn mentioned earlier. Gross profit for the fiscal 2023 third quarter was $21 million compared with $32.6 million a year earlier. Gross profit for the quarter was impacted by non-cash items as well as cash items. Let me provide details for each, and then I will provide further details on the impact on each additional line item so you can further understand underlying fundamentals between periods and the opportunities to enhance profitability. The non-cash items reflect core and finished group premium amortization and revaluation of cores on customer shelves, which are unique to certain of our products as required by GAAP. The total for these non-cash items in the quarter was approximately $3.9 million. A more detailed explanation of core accounting is available on our website, and I would encourage anyone with questions about this topic to review the video. We also incurred transitory supply chain disruption costs of $2.4 million compared with $4.3 million a year ago, as referenced in Exhibit 3 of this morning's earnings press release. We are encouraged that these costs are decreasing. Third quarter gross profit as a percentage of net sales was 13.8% compared with 20.1% a year earlier. Gross margin was impacted by 2.6% on the previously mentioned non-cash items as well as 1.6% from the previously mentioned cash items from transitory costs related to supply chain disruptions. While global supply chain challenges seem to be improving, we are still experiencing challenges and continue to assess COVID-19 and global geopolitical situations. In summary, in addition to the non-cash and cash items explained previously, gross margin for the fiscal 2023 third quarter compared with the prior year was impacted by inflationary costs not yet covered by price increases, temporary lower absorption of overhead costs due to lower production volume and changes in product mix. Gross margin improvement is expected to be enhanced as the full benefit of certain price increases is realized and with higher sales volumes in the current fourth quarter in fiscal 2024. Operating expenses were down $6.4 million for the quarter to $17.5 million from $23.9 million in the prior year period. This included a non-cash gain of $4.3 million for the foreign exchange impact of lease liabilities and forward contracts compared with a prior year non-cash loss of $385,000. The remaining $1.7 million of operating expense decreases include cost-reduction initiatives. We reported net income of $1 million or $0.05 per diluted share, as detailed in Exhibit 1 this morning's press release. Results reflect the impact of non-cash items totaling $484,000 or $0.02 per diluted share. Cash items that impacted results included transitory costs related to supply chain disruptions totaling $2.8 million or $0.14 per diluted share. In addition to the above non-cash and cash items, as previously mentioned in the gross margin discussion, results for the quarter were impacted by inflationary costs not yet covered by price increases, temporary lower absorption of overhead costs due to lower production volume and changes in product mix. Results are expected to be enhanced as the full benefit of certain price increases is realized and with higher sales volumes in the current fourth quarter and in fiscal 2024. I should note that we have implemented cost-reduction initiatives throughout the company, including travel, outside services, labor costs and overall cost-saving opportunities, which are expected to enhance profitability. Additionally, results for the fiscal third quarter were also impacted by $7.5 million or $0.29 per diluted share of higher interest expenses, primarily due to higher market interest rates compared with the prior year. Interest expense was $11.5 million compared with $3.9 million for last year. Of this increase in interest expense, approximately 98% resulted from higher market interest rates. I should further emphasize that the large interest expense incurred in the third quarter was primarily driven by a sharp rise in interest rates of 4.5% compared with the prior year for the accounts receivable discount program offered by our customers. This increase is more than triple the discount rate the company paid in interest expense in the prior year period. As a critical supplier of non-discretionary automotive parts, we are committed to arriving at a satisfactory solution to this issue. Additionally, we are focused on improving cash flow to pay down borrowings. Additionally, income tax benefit was $9 million compared with $1.6 million income tax expense for the prior year period. The income tax provision reflects the expected benefit from tax losses. I should also mention that the effective tax rate for the nine months was affected in part due to the inability to recognize the benefit of losses at specific foreign jurisdictions. However, we expect these losses will be utilized against future profits, which will benefit future tax rates. Net income was $3.1 million or $0.16 per diluted share in the year-ago period. Results a year earlier were impacted by non-cash items totaling $4.8 million or $0.25 per diluted share and cash items totaling $3.7 million or $0.19 per diluted share, primarily transitory costs related to supply chain disruptions. EBITDA for the third quarter was $6.6 million. EBITDA was impacted by $646,000 of non-cash items as well as $3.8 million in cash items, primarily due to the transitory costs related to supply chain disruptions. EBITDA before the impact of non-cash and cash items mentioned above was $11 million for the third quarter. In addition to the above non-cash and cash items, EBITDA for the quarter was further impacted by inflationary costs not yet covered by price increases, temporary lower absorption of overhead costs due to lower production volume and changes in product mix, as previously mentioned. In summary, EBITDA improvement in the current fourth quarter and fiscal 2024 are expected to be enhanced by the full benefit of certain price increases and with higher sales volume in addition to cost-reduction initiatives. EBITDA for the prior year third quarter was $11.9 million. EBITDA a year ago was impacted by $6.4 million of non-cash items as well as $4.9 million of cash expenses, primarily transitory costs related to supply chain disruptions. EBITDA before the impact of non-cash and cash items mentioned above were $23.2 million for the prior year third quarter. Now let me discuss the nine months results. Net sales for the fiscal 2023 nine-month period were $488.3 million, representing a 3.2% increase compared with $473.1 million in the prior year, which excludes $13.3 million in core revenue due to a realignment of inventory at customer distribution centers with sales benefits evolving as product mix changes. Gross profit for the fiscal 2023 nine-month period was $77.8 million compared with $92.1 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2023 nine-month period was 15.9% compared with 18.9% a year earlier. Gross margins for the fiscal 2023 nine-month period was impacted by 2.4% of non-cash items and 1.8%, primarily transitory supply chain disruptions as detailed in Exhibit 4 in this morning's earnings press release. In addition to the non-cash and cash items just mentioned, gross margin for the fiscal 2023 nine-month period was impacted by various items discussed previously for the quarter. We expect gross margin improvement to be enhanced with the full benefit of certain price increases and with higher sales volumes, as I noted in my previous comments for the quarter. Net loss for the fiscal 2023 nine-month period was $5.7 million or $0.29 per share compared with net income of $7.7 million or $0.39 per diluted share a year ago. Results were impacted by non-cash items totaling $9.6 million or $0.50 per diluted share and cash items totaling $9.5 million or $0.49 per share, primarily transitory costs related to supply chain disruptions as detailed in Exhibit 2. In addition to the above items, results for the nine-month period were primarily impacted by various items discussed previously. Results are expected to be enhanced as a result of the various initiatives I discussed earlier concerning price increases and higher sales volume. EBITDA for the fiscal 2023 nine-month period was $22 million. EBITDA was impacted by $12.9 million of non-cash items as well as $12.6 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $47.5 million for the current period. In addition to the above items, EBITDA for the nine-month period was impacted by various items as referenced previously for the quarter. In summary, as I discussed, for the quarter, we expect EBITDA improvement as the full benefit of certain price increases and higher sales volume are realized along with cost reduction initiatives. EBITDA for the prior year fiscal 2022 nine-month period was $33.6 million. EBITDA was impacted by $19.9 million of non-cash items as well as $14.2 million in cash items. EBITDA before the impact of non-cash and cash items mentioned above was $67.7 million for the prior year period. Now we will move on to cash flow and key corporate items. Net cash used in operating activities during the fiscal third quarter was $4.5 million versus $2.2 million cash provided by operating activities in the prior year period. This reflects working capital requirements, support year-to-date sales growth and expected record sales for the fiscal 2023 fourth quarter. We expect to generate an increase in operating profit on a quarter-over-quarter basis for the fourth quarter supported by organic growth from customer demand, introduction of new product categories, price increases and operating efficiencies from our footprint expansion. I should point out that due to record sales volume, we expect our accounts receivable balance to increase significantly in the fourth quarter, which will result in further enhancement to cash flow in the next – in the new fiscal year. It should be noted that our days outstanding receivable is approximately 45 days. Our return on invested capital on a pretax basis at December 31, 2022, was 13.3% compared with 23.1% a year earlier. As our investments bear fruit, we expect to realize further benefit from the expansion of our Mexican operations and the launch of our new brake categories, with expectation of increased returns from both new and existing product lines. Our net debt at the end of the quarter was approximately $176.3 million while total cash and availability on the revolving credit facility was approximately $70 million. Lastly, we recently entered into a fifth amendment to our credit facility to modify the covenants to match the timing of implementing price increases to address inflationary costs and the tripling of interest rates. For further explanation on the reconciliation of items that impacted results and non-GAAP financial measures, please refer to Exhibits 1 to 5 in this morning's earnings press release. Hi, guys. Good morning. I guess I'll just start off with my traditional first question, which is, David, if you could provide the breakdown of revenue between rotating electrical wheel brake products and other? Yes, Matt, for the third quarter, rotating electrical was 66%, wheel hubs was 10%, brake-related products was 20% and others was 4%. Okay. Got it. Very helpful. And then just trying to understand the – it sounds like you called out two different buckets of headwind in the quarter, one being delays in new business, the other being reduced orders from an existing customer. Is that all coming from one customer in particular? And is that all in rotating electrical? Maybe if you could just give a little color on why exactly that reduction, which looks pretty stark kind of on a year-over-year basis? Yes. So it comes on that. It comes from two – a couple of customers predominantly. I mean, it's a mix between rotating electrical and brake calipers, brake rotors and brake pads, really, it's all of those four. And really, the good news is that those orders have started coming back in, in this quarter. So we're seeing it now. And if the $35 million just gets to normalized reordering patterns, which we expect it will, I mean that should just give us an organic lift next year, not about new business, just about existing business performing to what our expectations. And then the other piece is new business changeovers that have been committed to us, and we had a little bit of a slowdown in the extreme weather and some softening in the base, but that seems to be coming back as well. So that should give us, again, organic lift of that approximately $17 million. And then we've got additional business. We've got additional business that – new business that will come on board next year that's already committed and quite frankly, some visibility of even more than that. So... I guess I'm just trying – Selwyn, I'm just trying to understand it in the context of like you have a decent-sized customer that's reported results today. And inventory looks like it's up mid-teens for them. Comps are super healthy and yet, we're seeing a reduction overall in rotating electrical revenues. I'm just trying to square the two and understand sort of why rotating electricals should be down in that context. Again, relating to one particular customer, I mean, we can't talk about who it is or what it is or why it is. But no market share loss, but we expect that to come back, just really based on their initiatives really more than anything. Sorry, Matt.. And then just on the – okay, so the other thing I wanted to understand is the sequential guide, if I take the implied EBITDA guide at the midpoint for the fourth quarter, it's a big step up. We're looking at close to 900 basis points of improvement that you guys are guiding to. Maybe just if you could give us some confidence in the gross margin versus OpEx split in the fourth quarter, how to think about gross margin improvement on a sequential basis. And how much of that is coming from price versus volume. It would be super helpful just to understand a little bit more about what's embedded in your assumptions. This is David. So we can talk about the three items we called out during the prepared remarks. So the inflationary costs, that will be addressed by the price increases that are going in. The large price increases have already started at the beginning of this quarter. So that's going to address the inflationary cost. The lower overhead absorption costs that we talked about due to lower production of volume with now higher sales and growing production volumes, that should also address the lower over absorption. Now we did also have product mix. So product mix, we do expect growth in all of our categories. That should help the product mix a little bit. Another item that Selwyn mentioned was the returns. So returns are constant with the lower sales volume in the December quarter. Returns as a percentage of sales was higher. Now back to higher sales volumes, those returns as a percentage of sales will now turn back to normalized levels. Lastly, we do have one product line that, during the December quarter, was impacted by shortages of critical components. We're already seeing that those sales are back up. So with those higher volume product lines, that will also benefit the gross margins. Okay. All right. And then just – you mentioned price, David, maybe someone or David on this one. Can you talk about the rounds of price increase? I think last time, you mentioned there was one in October. It sounds like that really didn't benefit the third quarter at all really from a margin perspective. And so there was another round that you had mentioned in the last call that was supposed to take place in January. So I'm assuming you're referring to that as kind of the last round of price increases. And that's what we're counting on to sort of improved gross margins in the fourth quarter, along with volume and then some of the lower return rates that you mentioned there. But just – am I understanding that correctly? And – or is there more price that you're embedding beyond the January actions? No. So, so far, I mean, that is correct, Matt. Those are all committed price increases that have gone into effect. We continue to evaluate our business and market conditions, and we'll evaluate what we'll do on price as we go forward. But as of now, that's where we are. I mean that includes – the sort of the annualized leftover is $20 million, $20 million on our existing revenue base, about $20 million of price increase. And some of it just started maybe a little more there. But around that, that's left to go into effect on an annual basis. Okay. Got it. And then in the press release, I think you mentioned brake pad and rotor product line, net sales is expected to double in fiscal 2024. That's not overall brake products revenue as a whole, is it? I mean, we should be taking the run rate around this year and doubling that for next year, but maybe just give a little color on what that implies for overall brake products growth as we head into fiscal 2024? Yes. Well, I think you're going to see overall brake products growth north of 30%, maybe even 40% for next fiscal year. We haven't really given guidance yet on that, but the pads and rotors is fast becoming a big part of that. We've also got other brake-related products in there that are all growing. So we're up to continue to be optimistic there. And margins are starting to unfold there, where we're just getting through some of that start-up margin headwinds and starting to get to a more normalized level, but they'll continue to improve as this volume continues to grow. So my first question, just with respect to the sales disruption in the quarter, I think it's probably a follow-up, to some extent, to the prior question. But just to get to be clear, I mean were the – are these sales – in your view, are these sales just simply delayed? Or is there a component that is lost because of this? It sounds like one competitor, the adjustments they've made. I think they are lost. Having said that, that I think this customer will step up orders and to maintain its competitive position, well, I shouldn't say will, are, they are to maintain their competitive position in the marketplace. And so I think we'll see an elevation and a return with them as they increase their inventory levels. But I don't think those are recoverable. The changeover revenue, that $17 million, that's just a deferral. And then so – and I followed you. I mean, I've watched your company for a while now. I don't remember something like this happening in the past. So I guess the question is, does this happen? Is this unprecedented? In an event like this, could it be a leading indicator of something else? It's unprecedented. We have not seen it at the size before. I think it's an indicator of strategy. And again, we can't talk about any of our customers and their strategies. But I think it's an indication of a short-term strategy that's being reversed. Got it. And shifting gears a bit, just on the supply chain. Looks like here – I think, David, I think you were making comments here, but just with regard to the ongoing disruptions. So I guess my question is, we've seen broadly speaking, supply chain challenges for your company, for your sector, even more broadly abate, but there's still some out there. Are we still thinking that most of the supply chain issues are more or less transitory in nature? Are we getting now to the point where maybe some of these disruptions will just simply persist or have now become structural? No. I think they're transitory. We're seeing it getting better and better. As this COVID and factories become more predictable and are able to stay open on a more predictable basis, which we had a massive outbreak of COVID in China and some delays prior to Chinese New Year and coming out of Chinese New Year, but it looks like – and I'm, by no means, an expert, but it looks like the COVID, while the outbreaks may be luminous, the severity of it seems to be passed. And it seems like – and again, it's not over yet, but it certainly seems like for us that, as it passes over the predictability of our factory and supply chain, we'll get much better. And we're seeing that already. I mean I'm cautiously optimistic. I do feel like we have to continue to watch what happens in China or in particular, both with COVID, which I think, again, we're able to see it now. And I think it – hopefully, we're getting through that. And then hopefully, there are no – I'm not sure what the other political ramifications will be as we go down the road, just the whole geopolitical situation in the world now is a little crazy. But I think it's stabilizing. Freight seems to have stabilized, and that's a transcontinental freight that seems to have stabilized. We still have a lot of headwind in local freight. And – but hopefully, capacity in the roads will catch up and that part of the freight equation will get better. But for now, that's sort of a headwind and then predictability on semiconductor chips and some of these Chinese factories are still – there's still some headwinds there. Hi. Thank you. Relative to the $17 million of new business that was delayed, did we hear you correctly that, that is now coming back or ramping up here this quarter that has already begun? Okay. Thank you. And then next, relative to the delayed orders kind of the $14 million, given that you have price increases that were taking place at the beginning of the fourth quarter, what would cause a customer to delay the shipments? It seems as though they're just instituting a price increase on themselves by doing that? That's a good point. No question about that. And again, very – we just can't talk about what our customers are doing, unfortunately or fortunately. I mean, it's just – it's something that's up to them. This is just so extreme that we felt was appropriate to call out. So I mean, I prefer not to go down that road, but the comments that I can make are, yes, that orders that are coming in now will be at a higher price. And yes, the orders have resumed coming in. And we feel like they have a strong strategy going forward and that we should benefit from it. And we'll be keeping a close eye on it as it progresses. So counter to what one would normally expect to see, which is orders in advance of a price increase, they just ignored that. And it sounds like you did not give them a special deal where they were able to have the old price but a later shipment? Thank you. And by the way, thank you for not giving them a special deal. Also, where are you all at from a back to work in the office, hybrid versus work from home? Where are you at in that whole scheme of things? That differs by department. A number of people are back in the office on a full-time basis. Some of the people, more of the analytics and data-driven people are on two days a week mandatory, but many of them come into the office. And so we have flexed schedules by department. And are you at all feeling like it may be time to have people in the office more frequently given these external challenges that are coming at you and that may be more quickly and readily addressed if there's more person-to-person contact? Yes. I think that the meetings are extremely effective remote and hybrid as people in and out the office. But I will say, just as COVID settles and as we get through the winter months, I mean, we'd be evaluating a full-time return to the office in the spring and summer. And if I may ask one more relative to the vendor finance programs. What progress has been made at finding a solution there? And there are no further questions at this time. I'd turn the call back over to Selwyn for some final closing comments. Thank you very much. I appreciate everybody's questions. And I appreciate the interest. I will say that sort of to summarize where we are, that notwithstanding the headwinds that I discussed this morning, we are excited about our future. We have built a solid foundation for both topline and bottom line growth for our existing product lines. And it is supported by strong demand for replacement parts and an aging car part. In closing, we have great team members, and I appreciate their dedication to the company and our customers. We appreciate your continued support and we thank you again for joining us for the call. We look forward to speaking with you when we host our fiscal 2023 fourth quarter and year-end conference call in June and at investor conferences in the future. Thank you.

EarningCall_11

Greetings, and welcome to the Advanced Energy Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edwin Mok, Vice President of Strategic Marketing and Investor Relations. Thank you, Edwin. You may begin. Thank you, operator. Good afternoon, everyone. Welcome to Advanced Energy's fourth quarter 2022 earnings conference call. With me today are Steve Kelley, our President and CEO; and Paul Oldham, our Executive Vice President and CFO. Before I begin, I'd like to mention that we will be participating at several investor conferences in the coming months. If you have not seen our earnings press release and presentation, you can find them on our website at ir.advancedenergy.com. Let me remind you that today's call contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially and are not guarantees of future performance. Information concerning these risks can be found in our SEC filings. All forward-looking statements are based on management's estimates as of today, February 8, 2023, and the company assumes no obligation to update them. Medium-term targets and long-term aspirational goals presented today should not be interpreted as guidance. On today's call, our financial results are presented on a non-GAAP financial basis unless otherwise specified. Excludes our non-GAAP results are stock compensation, amortization, acquisition-related costs, facility expansion and related costs, restructuring charges and unrealized foreign exchange gain or loss. A detailed reconciliation between GAAP and non-GAAP measures can be found in today's press release. Thanks, Edwin. Good afternoon, everyone, and thanks for joining the call. We delivered strong results in the fourth quarter, taking advantage of healthy demand, improved component availability and solid manufacturing execution. For the full year, we achieved record revenue of $1.85 billion and record earnings per share of $6.49, thanks to robust demand across all of our markets and improved execution across the company. Sales into each of our markets grew 20% or more in 2022. Overall, our operational performance improved throughout the year due to better component availability, successful qualifications of alternative parts and redesigns and good manufacturing execution. We doubled the number of new product launches in 2022. By and large, these new products employ leading-edge technology and are proprietary in nature. These products led to additional design wins in 2022, particularly in the industrial, medical and semiconductor markets. Moving forward, we expect design win activity to accelerate in 2023 as customers shift their focus from supply chain issues to product differentiation. We believe our leading-edge power delivery solutions enable our customers' new products and will fuel our profitable growth for years to come. In 2022, we successfully integrated SL Power into Advanced Energy. SL expanded our position in the medical power market where we are now one of the top players. In addition, we are adding capacity and capability at the former SL Power factory in Mexico to accommodate customers who prefer a North American manufacturing site. Now I'd like to provide some color on the current supply chain environment. Scarce components are still gaining revenue in the industrial, computing, telecom and networking markets. Power ICs and FETs are the two most significant constraints. These trailing etch products are widely used across the electronics industry, particularly in automotive and industrial applications. In semiconductor equipment, we are seeing fewer parts shortages. This has allowed us to reduce lead times for some of our products, which in turn has enabled our customers to normalize their order backlog. Now I'll provide more color for each of our end markets. In semiconductor, the fourth quarter revenue increased 30% year-on-year to $232 million, in line with our expectations. For the full year, Advanced Energy revenue in this market grew over 31%, much faster than overall WFE. In the fourth quarter, we secured new design wins in wafer inspection and remote plasma source applications. We also introduced new technology platforms for Advanced etch. In the industrial and medical markets, fourth quarter revenue grew more than 20% year-on-year to $119 million. Despite those record shipments, our industrial medical order book still increased in Q4. In the medical market, we secured several new wins in surgical, medical laser, diagnostic and life science equipment. In the fourth quarter, we launched FlexiCharge, the industry's first high-voltage capacitor charger and low-voltage power supply in a single integrated product. We designed this product to meet the power needs of medical laser applications by combining our industry leading high voltage and configurable power supply technologies. Initial customer feedback has been enthusiastic. In the industrial space, we secured design wins in 3D printing, industrial laser and test and measurement applications. Now moving to our computing, networking and telecom markets. Fourth quarter revenue from data center computing customers totaled $95 million, a new record for the company. Telecom and networking revenue grew 15% year-on-year to $44 million. Our upside in both markets was driven by improved component deliveries late in the quarter, coupled with our ability to quickly turn those scarce parts into revenue. Now I'll move to the 2023 demand picture as well as our priorities for the new year. We expect that 2023 will be a down year in the semiconductor market and are taking actions to lower our cost structure to adapt to this new demand environment. Even though overall semiconductor revenue will be down year-on-year, there are pockets of strength, including our service business, our high-voltage ion implant products, and recent design wins, which are still ramping to volume. Because of these pockets of strength, we believe that we will perform better than the market in 2023. Outside of semiconductor, we believe the 2023 revenue should be relatively stable year-on-year. We carried a large order book into the first quarter due to a combination of healthy overall demand, and lingering parts shortages. Also, we believe the variety of markets we sell into will have a smoothing effect on the aggregate revenue in our non-semiconductor markets. Now moving to the priorities for 2023. Our first priority is to maintain our new product and design win momentum. We want to be the technology leader in every market we serve. To do that, we intend to maintain our investments in R&D and push our development teams to move even faster. The second priority is to improve the efficiency of our manufacturing and supply chain operations. We made a lot of progress in 2022 and can make even more in 2023. We will optimize our factory footprint and streamline our network of subcontractors and component suppliers. We learned a lot about the strengths and weaknesses of our supply base over the last two years and intend to concentrate our business with the best performing suppliers. The third priority is to increase our engagement with customers across our markets. We have a large talented sales and applications team and a strong network of distributors and value-added resellers. We intend to use this worldwide team to focus on the needs of fast-growing small and medium-sized customers while maintaining high service levels at our larger customers. Finally, we will take special care to control discretionary expenses in 2023. I would like to close with a few parting thoughts. First, we just wrapped up one of the best years in Advanced Energy's history, delivering record financial performance and a record number of new products. Second, we are carrying that momentum into 2023. We will go full speed ahead with our R&D efforts and improve our efficiency across the company. Finally, we believe that our increased participation in a variety of high-value markets, coupled with our pockets of strength within the semiconductor market will allow advanced energy to perform substantially better than in past semiconductor market slowdowns. Thank you, Steve, and good afternoon, everyone. We delivered strong financial results in the fourth quarter and a record 2022 as we secured additional supply of scarce components and began to leverage our backlog and low channel inventory to perform better than the market. Fourth quarter revenue of $491 million, an EPS of $1.70, both reached the second highest levels ever for the company. Overall, revenue grew 24% year-over-year and 18% organically. In the fourth quarter, backlog declined to $875 million, down from $1.1 billion at the end of the third quarter. Approximately 40% of the sequential decline came from the China-based semiconductor customer orders which we moved out of our reported backlog but were not canceled. The rest of the reduction in backlog reflected lower demand and changes in ordering patterns from our semiconductor customers as we improved our lead times. Backlog for non-semi markets remain unchanged quarter-on-quarter despite robust shipments. As we further resolve critical part issues, we expect to work down our total backlog over the next several quarters to a more normalized level of $400 million to $500 million. Now let me go over our financial results in more detail. Revenue in the semiconductor market was $232 million, up 30% year-over-year, but down 13% from a record Q3. Roughly half of the decline was a direct result of the China-based export control regulations announced in the quarter. In addition, our customers lowered their build plans in response to the current environment, which was partially offset by our ability to largely restock customer inventories back towards normalized levels. Revenue in the industrial and medical market was $119 million, up 21% year-over-year and flat with last quarter's record level. We continue to be parts constrained in this market and believe we have upside as component availability improves. Data center computing revenue was up 18% year-over-year and 8% sequentially to $95 million, a new quarterly record. Telecom and networking revenue was $44 million, up 15% year-over-year and 4% sequentially. Fourth quarter gross margin was 36.6%, down 90 basis points from last quarter due primarily to less favorable revenue mix, lower volume and continued higher material costs. Although we began to see some moderation in premiums and recoveries towards the end of the quarter, we expect higher material costs to continue to impact our gross margin through the first half of 2023, with gross margins gradually improving in the second half of the year as premiums abate and historical costs flow through our inventory. Operating expenses were $101 million, up slightly from last quarter, mainly due to timing of programs and infrastructure investments. Operating margin for the quarter was 16%. Depreciation for the quarter was $9 million and our adjusted EBITDA was $87 million. Non-GAAP other expense was $1.1 million on better interest earnings, partially offset by foreign exchange losses. Given higher interest earnings on our cash and the benefits to interest expense on our swap, we expect our non-GAAP other expense to be in the $1 million range, plus or minus, going forward. During the quarter, we initiated a restructuring plan and recognized $5.6 million in restructuring costs, primarily associated with the integration of SL, consolidation of certain production into our higher-volume factories and other targeted reductions consistent with lower volumes in 2023. In addition, we ceased production at our Shenzhen factory at the end of Q4 and will fully close the facility within the current quarter. Looking forward, we expect another $1 million to $2 million of restructuring in Q1. As a combination of these actions and attrition, we expect total headcount to be down approximately 10% by the end of 2023, mostly in our factory operations. Our non-GAAP tax rate was 17%, driven by the level of annual earnings, geographic mix and true-ups to year-end tax positions. For 2023, we are modeling our GAAP and non-GAAP tax rate in the 18% to 19% range. Fourth quarter EPS was $1.70, up from last year's EPS of $1.36 and down from the record third quarter EPS of $2.12. Now let me quickly touch on our full year results. In 2022, we delivered record revenue of $1.85 billion, which was up 27% year-over-year. Excluding the SL Power acquisition, organic revenue grew 23%. We achieved record revenues in the semiconductor, industrial and medical and data center computing markets. On the other hand, we paid over $100 million of material premiums to secure critical parts. Although, we were able to recover a portion of these premiums from our customers, our gross margins were negatively impacted. Despite this sizable cost, our 2022 non-GAAP earnings reached a record $6.49 per share and our annualized second half earnings surpassed our EPS aspirational goal of $7.50. Turning now to the balance sheet. Total cash and marketable securities at the end of the fourth quarter was $461 million, with net cash of $88 million. Cash flow from continuing operations was $71 million. Inventory days were 109 and turns improved to 3.3 times, up slightly from 3.2 times in Q3 as we began to consume inventories of non-critical parts. DSO ticked up slightly to 55 days and DPO declined to 49 days, down from 61 days last quarter, largely due to timing of purchases and lower inventory levels. As a result, net working capital increased to 115 days from 106 days last quarter. During the fourth quarter, we invested $19 million in CapEx as we began to incur the cash expenditures for many of the infrastructure and capacity investments initiated earlier in the year. Looking forward, we expect CapEx to run approximately 4% of sales on timing of project completions and investments to optimize our footprint and scale our structure. During the quarter, we also made debt principal payments of $5 million, paid $3.8 million in dividends and repurchased approximately $700,000 of common stock at $69.16 per share. Turning now to our guidance. Based on this decline in the wafer fab equipment market, we expect our semiconductor revenue to be down in the high-teens sequentially with the impact of the market decline partially mitigated by our pockets of strength and our ability to complete the restocking of customer inventories to normalize the levels. While demand is stronger in our other markets, revenues continue to be gated by supply of critical components. As a result, we expect first quarter revenue to be approximately $415 million, plus or minus $20 million. We expect Q1 gross margins to be in the low 36% range on lower volumes and modest improvement in material cost premiums. We expect Q1 operating expenses to be down slightly from Q4, but to increase modestly for the balance of the year on inflationary factors and continued investment in critical R&D and growth initiatives. As a result, we expect Q1 non-GAAP earnings per share to be $1.10, plus or minus $0.25. Before I open it up for questions, I want to highlight a few important points. 2022 was a record year for Advanced Energy. Our semiconductor revenue growth substantially outperformed the wafer fab equipment market and each of our end markets grew 20% or more year-over-year. While this will inevitably result in tougher comparisons in 2023, we continue to expect to perform better than the market over the course of the year. More importantly, we believe our diversification into multiple markets, larger and more stable service business and healthier backlog and customer inventory positions will enable us to perform substantially better than in previous market cycles, demonstrating the benefits of our long-term strategy. While the supply chain remains dynamic, we expect improvement in deliveries of critical components over the course of the year, which coupled with lower material premiums and improved operational efficiency will allow us to gradually improve our gross margins in the second half of the year. During this time, we will continue to accelerate new products and scale the company while controlling our discretionary spending and optimizing our footprint. As a result, we expect Advanced Energy is well positioned to outperform during the cycle, emerge stronger as markets recover and continue to grow revenue and earnings over time. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Quinn Bolton with Needham & Company. Please proceed with your question. Hey, guys. Congratulations on the strong finish to 2022. I guess, maybe Paul or Steve, I guess, kind of a big picture question. It sounds like margins are going to stay fairly flattish in the low 36% range in the first half of the year with only modest improvement expected in the second half of the year. I guess, what do you think it takes to get back to the 40%, 41% gross margins envisioned by the aspirational model? Yeah. It's a good question. I'll take that one, Quinn. So clearly, in the near term, we continue to be impacted by higher material costs. And we expect those to begin to abate largely in the second half. We'll still see those through the first half, just given the timing of these costs rolling through our inventories. Now we do expect to see them to start to pick up in the -- later in the year, which will give us some improvement certainly as we have an exit rate to 2023. But the offset to that is we're not anticipating any pickup in volumes from these levels. In fact, our second quarter may even be down a little bit from this quarter as we won't get some of the restocking shipments we expect in the first quarter. So based on that, we'll see headwinds from volumes. But as volumes begin to recover and as the actions that we are taking over the course of the year to optimize our footprint take hold, then we expect that we'll be back on that track to get back to 40% or greater. Got it. And then I guess, I think you kind of hinted at the answer to my next question, but just give us a sense where you are in terms of the jet bins (ph). It sounds like you had an opportunity to begin restocking those in the fourth quarter and you expect to restock perhaps more in the first quarter, but it sounds like am I right to assume that by the end of the March quarter, you're probably back to normal levels in terms of jet bins or inventory levels at your semiconductor customers? Yeah. That's right. We definitely saw some benefit of that in the fourth quarter. And as I said, in my comments, we've been able to largely restock those. Now there's a little more to go, so we'll get a little more benefit in the first quarter. But we anticipate that, that will be -- customers will have the inventories they would like on their shelves by the end of the first quarter. Hey, same thing. Congrats on a good finish to the year. Couple of questions, so you're looking -- the backlog where it is, you're looking to bring that to -- I think you said -- you either said $400 million to $500 million or down -- I think you meant maybe I misunderstood down by $400 million to $500 million. Could you -- how does that -- how does that play out? I'm sorry, I just missed that when you said it. Yeah, no worries. We expect that backlog, we'd like to bring it to about $400 million to $500 million. We think that's a reasonable target level. That would actually be probably a little more than historical levels. But just given the nature of the markets, these days, we think that's a more normalized levels. And as we said, we expect that to happen over the next several quarters. We continue to have a very healthy backlog. As we mentioned, our non-semiconductor backlog actually increased for Industrial and Medical and was about flat for the others. So it's actually continues to be an opportunity for us as we get some of the critical or scarce parts in to be able to bring in our lead times, bring that backlog into more normalized levels, and we expect that will happen over the next several quarters. Thank you, Paul. And then can you just remind me the -- or maybe just tell us the $875 million, how does that split by business? Yeah. We haven't historically broken that out. But as I mentioned, the backlog reduction this time was largely concentrated or entirely concentrated in semiconductor, in part because we removed some backlog out of our reported backlog, the China orders, that was about 40%. And the rest was really a rebalancing in our semiconductor markets. We were able to fill in some of the bins, as I mentioned in my earlier question, we've been able to bring our lead times down. And of course, our customers have reacted to the lower demand environment and brought their orders down. So if you look outside of semi, our backlog was about flat from last quarter, reflecting really stronger demand across those markets and continues to represent an opportunity for us to bring that more in line and either buffer lower demand if that happens in the future or deliver some upside if we can get additional parts as we go forward. But our goal would clearly be to try to bring that backlog and therefore, our lead times more in line with that $400 million to $500 million target. I got you. And then last one for me, just a quickie. The gross margin guide for the first quarter, low 36s. I'm surprised you didn't mention mix as one of the key components of the delta. Where does mix fall in that? Yeah. I think mix does have some impact, certainly, as we go from the second -- from the fourth quarter to the first quarter. But if you look at overall sort of the combination of the actions we're taking a little bit fewer of the PPV recoveries, we still expect to have higher material costs but less recoveries. Those things tend to -- are kind of tending -- and the actions, like I said, we're taking are kind of offsetting the impact of the lower volumes overall. So net-net, we expect to be down a little bit. It's actually, we think, pretty good from a delever perspective to hold margins, I'll say, down a little bit or down to flat. And it's a function of the actions we're taking and some improvement in material costs offsetting the other items. As we think as we look forward, we think we can probably hold gross margins and trough margins around 36%, I'll say, plus or minus, depending on volumes and where the markets go. But that's kind of how we're thinking about it. And as was asked earlier by Quinn, particularly in the second half as these material costs subside, the impact -- full impact of the actions we're taking to optimize our factory footprint. Those should help to see a little margin improvement in the back half of the year, but really position us in 2024 to see either continued margin improvements at sort of the similar lower levels or if we see revenues pick up a little bit, be able to kind of accelerate back towards our 40% target. Yeah. Hi. Thanks for taking my question. I had a couple of them, too, Paul, just to follow up on your earlier comments. You mentioned second half gross margins should improve and some of these cost reduction and other factors should offset volume declines. I'm kind of curious, what is your visibility today? Because if I try to triangulate your answers, it seems to me that the brunt of the revenue decline happens in the first half and it kind of starts bottoming Q2 or Q3 on a sequential basis and improve into Q4. Is that the way to think about linearity of revenues this year? Yeah. We have to -- obviously, we're operating in this market where semi is down this coming year. But as we look at overall, we expect semi to be down and we expect our other markets to be generally about flat or relatively stable overall. And so from an operating perspective, the way we're planning is -- you're right, we expect most of the brunt to be here in the first quarter, perhaps a little more in the second quarter, particularly as we won't have the benefit of the inventory stocking on the semiconductor side. And to kind of bounce around those levels for the balance of the year. I think that's generally consistent with how people see the market right now. Obviously, it's hard to look out that far and know for sure. But that's our operating assumption. And the gross margin color I give sort of reflects that type of a revenue projection. Got it. Then I had two other questions. One is obviously, last year, you guys did really well outperforming WFE. Typically, component company center underperformed WFE during down year. So I'm just kind of curious if you think WFE is down, pick a number, 20% or 25%. How to think about your semi revenues relative to where WFE ends up this year? Would you be in line, worse, better than that? And then I had a quick follow-up. Yeah, Krish, I'll jump in here. I think the first thing we should talk about is the fact that AE now is 50% non-semi as well as 50% semiconductor revenue. As we said before, we think the non-semiconductor revenue we could hold that flattish year-on-year. So that's quite a cushion for us compared to past semiconductor downturns. And within semiconductor, we think -- we do have pockets of strength in our service business is much larger and stronger than it's been in past downturns. We've got a very good position in ion implant. And as you know, there's still a lot of demand for ion implanters out there as people try to address the power IC shortage. And then we've got a number of new product ramps that are happening across the application set in semiconductors, which serve to offset to a certain extent, some of the downdraft in semiconductor. Got it. Thanks, Steve. And then just a final follow-up on the backlog. I think, Paul, you mentioned normalized backlog of $400 million to $500 million. Is it fair to assume you probably get to those levels in a couple of quarters if revenues continue to decline? And at that level, is it roughly a 50-50 mix of semi and non-semi? I don't know how long it takes. It kind of depends on the demand environment, but we've already seen sort of I'll say, a pretty good reset of the semi backlog this quarter. We took out the China demand, and we've normal-- we've adjusted that basically to our customers' outlook at this point. So the balance, if you think about where most of the rest of the backlog is in our industrial and medical areas, which I said, despite kind of, again, near record shipments, that I&M backlog was up again this quarter. So it depends a bit of a function on the demand, how well the demand for these other markets continues. We think that looks relatively stable, all things considered. And then our ability to solve critical parts and actually eat into that backlog and bring our lead times down. So that's a little bit how we think of it. My sense is, it will take a few quarters to roll that down. I doubt that, that's going to get to our target range in a quarter or two. Hi. Thanks for taking my questions and nice execution. First, Steve, if you can talk about what you're seeing on the data center market and maybe if you have color enterprise versus cloud, we have been hearing about moderation in that market. Your comments on backlog indicate that you're seeing stability in that market. So what are you seeing in the data center market? Yeah, it's interesting. We obviously have strong participation in that market. I could say that we have not seen major changes in demand. In fact, we're still supply constrained in that market. And our customers in the hyperscale market are constrained by power supply manufacturers like us, quite frankly. So what we're seeing is continued pull from the customers but we're also seeing a transition happening. And it's moving in our favor basically. We see the move to 48 volts. It's starting to accelerate. We are the leader there. We were the first and we're still the best technology for 48-volt type hyperscale applications. We see a strong move to higher efficiency as the cost of electricity go up and the environmental concerns become more prominent, we're in a good position because we have the most efficient solutions. And finally, we see a strong move to artificial intelligence which increases GPU and memory intensity. And it really places a premium on power density, and that's also an area where we excel. So I think over the medium to long term, we're well positioned to gain share because of these technology advantages we have. In the short term, we see demand still being pretty strong, but gated by component availability. Great. And a follow-up for Paul. If you can touch on restructuring and are there opportunities for fixed asset optimization as you guys head into a downturn and eventually come out? Are there areas where you can prune some products or businesses to lift up to those gross margins? Thank you. Sure. So as we announced a plan for restructuring, this is largely around optimizing our footprint and a few targeted reductions around the company. We do think that our goal as part of this isn't just to try to match headcount to some level of production or output but is actually to improve our footprint. So we want to move products from some of our smaller factories and leverage those around our larger factories. There's areas where we're going to make some investments. As Steve mentioned, we'll expand our newly acquired footprint in Mexico because we think that's an attractive place and gives us some strategic benefit in North America. And our larger factories will continue to optimize those around efficiency and capabilities. So we would expect to come out of this with, I'll say, maybe a little bit smaller footprint, certainly from a headcount perspective, but a more efficient one and an ability to scale better as we move into the next upturn. And just to address your question about exiting businesses, we have no intention of exiting any business. And we had some concerns about the computing and networking businesses a couple of years ago. And I could say we've done a really good job improving the bottom line performance there. So I'm much less concerned than I was two years ago. We've also done a good job refocusing our resources on proprietary opportunities within those market spaces. And so between a better job managing our pricing tactically and a better job focusing on higher-value opportunities, I think that business is looking much better. Thanks. For the expected acceleration of new product wins and design wins this year, do you expect more traction from modified standards or full custom solutions? And can you talk about how those compare just from a time to market and margin perspective? Yeah, Steve. I think it's a combination of both, quite frankly. The important thing is that we're introducing a lot more new platforms. That's across semiconductor, industrial and medical as well as in the high-volume areas like data center. And what happens with those new platforms, it goes one or two ways. The customer will say, hey, this meets our needs, but I need a few changes, and that's a modified standard or the customer will say, you're pretty close, but I need some significant changes. And I'll leverage what you have but I need this other feature as well. And that's more of a custom product. But either way, we're happy with it because at the end of the day, it ends up being a sole-source product and a source of revenue for many years to come. Not really. So the full custom products tend to go to large customers, so they're higher volume, typically. So they require more engineering investment upfront, but then the volumes and the dollars will be higher with those types of products. The modified standards tend to be more towards small and medium-sized customers. The engineering effort is much less. But the gross margin percentage for both of those products is similar. Got it. And you said there's a strong network of distributors and value-added resellers. Are you fully covered in those channels, especially in the newer markets, medical and industrial, in terms of geographies? And can you talk about the mix impact of having more product go through those channels versus direct sales? Yeah. If I look at our position relative to our competitors, I think we have more of a worldwide footprint than most. So we have strong organizations in Asia, Europe and North America. That said, there's a lot of improvements we can make, and we're doing that. And so we've held sales conferences in the past year in all regions and really tried to align our internal sales teams with our external partners and make a much more concerted effort trained to penetrate industrial medical customers. So I have high hopes that we could do a lot better this year and in 2024. Thanks for taking the question. Given the macro headwinds on the demand side that you've outlined today, I'm curious if the M&A landscape in terms of kind of prospective target-rich environment is perhaps offering better opportunities now than it was in happier times 12 or 18 months ago. Yeah. I'll take that one, Pavel. We think the environment today for strategic buyers is better than it was last year or in 2021. So that's a positive. I think many of the companies that operate in our space, have been handicapped from the past two years due to the part shortages. And so I think some of those shortages are starting to go away. And I think they're probably going to realize this is about as good as it's going to get, right? So there's some demand challenges, but the financial performance they come up with in 2022 will lead to I think, more reasonable valuations as we engage with those targets. So yes, the bottom line answer to your question is, I think it's a more favorable environment, and we'll take advantage of that. And from a balance sheet perspective, I think the last two quarters, you had kind of de minimis share buyback and not much M&A recently. So you'll be pretty soon in a sizable net cash position. What are your thoughts on kind of openness to lever off the balance sheet if needed for the right opportunity? Yeah. You're right, Pavel. We have a good balance sheet. We have net cash, again, after a brief time when we were about cash and debt equal. And we should generate cash during the downturn here. And we're fortunate that we have a very good credit agreement in place that's relatively low cost that we can extend either through a line of credit or through some accordion features that are within it. So I think we have capacity if we saw the right opportunity to be able to use both our balance sheet and our credit position to make that acquisition. At the same time, we're going to balance to make sure that's the right return. Money cost more these days and also ensure that we don't over lever the company. So we, in general, have a target of not going beyond 3 times a leverage ratio. And so you would manage all those things to make sure that we add value through any M&A that we did. And then just lastly, a quick point of clarification. With the shutdown of Shenzhen, what is the manufacturing footprint of the company right now? Yeah. It's really three main areas where we have large factories. We still have one in China. We now have a large and very good factory in Malaysia, and we have footprint in the Philippines. We also have a handful of, we call them, kind of boutique factories in different places aligned with local engineering teams for some of the acquisitions we've done over time. [Operator Instructions] There are no further questions at this time. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

EarningCall_12

I am Hiroshi Shibaya of Sumco Corporation. Thank you for your participation today. This is the results briefing for Q4 of the fiscal year ending December 2022. Before starting the presentation, allow me to confirm today’s materials, which consist of three items. The brief statement on consolidated financial results for Q4 fiscal 2022, the announcement regarding revision to dividend forecast and the presentation deck entitled results for fiscal year 2022. This will be a roughly 1-hour briefing, which will end at 5:00 p.m. Next, a disclaimer. The estimates, expectations, forecasts and other future information discussed here and shown in today’s materials were prepared based on the information available to the company as of today and on certain assumptions and qualifications, including our subjective judgment. Actual financial performance or results may differ substantially from the future information contained in this material due to risk factors, including domestic and global economic conditions, trends in the semiconductor market and foreign exchange rates. We will have presentations today from Representative Director, Chairman and CEO, Mayuki Hashimoto, and Vice President, CFO, Michiharu Takii. Hiroshi Itoh, General Manager of Accounting is also on hand. Chairman and CEO, Hashimoto will discuss our forecasts and operating environment, to be followed by an explanation of the financial results by CFO, Takii. We have set aside time for a Q&A session as well. I am Chairman Hashimoto. I will start with the overview on Slide 5 of the presentation. These are the Q4 results. Q4 sales were ¥117.4 billion, operating income, ¥29.7 billion, ordinary profit, ¥27.9 billion, and net profit attributable to the owners of the parent was ¥18.5 billion. The results were well ahead of our forecasts at all levels. The only divergence versus our forecast was the dollar-yen assumption. The yen was slightly stronger than we had expected. Turning to our Q1 forecast, we are guiding for sales of ¥105 billion versus Q4’s ¥117.4 billion. We expect operating income of ¥23 billion and ordinary income of ¥25 billion. For net profit attributable to owners of the parent, we are guiding for ¥45 billion, reflecting extraordinary gains of ¥30 billion in the form of negative goodwill we expect to incur related to the acquisition of Mitsubishi Materials semiconductor polysilicon business. CFO, Takii will go into more detail on this later. Our guidance implies a ¥6.7 billion Q-on-Q decline in operating profit. The background is first of all a ¥5.2 billion impact from the ForEx assumption. This accounts for the majority of the decline. In addition, we have factored in higher costs. Overall volume is expected to decline slightly as a result of the absence of the Leap Year Day in February this year as well as lower production levels owing to regular maintenance at Nagasaki. The market correction is challenging, especially in PW. PW is the main product for a subsidiary FST. So, volumes at FST are likely to be down slightly. Having said that, the FST volume decline will not be that large. These factors should be offset by higher prices, which will have a positive impact of ¥5 billion. The combination of the various factors is projected to lead to a Q-on-Q drop in profits of ¥6.7 billion. Next slide please. Given the strong performance in fiscal 2022, we have chosen to raise the annual dividend guidance to ¥81 per share. This represents a dividend payout ratio of 40.4% versus our previously stated target of around 40%. Next slide please. This is the market environment for silicon wafers. First, looking back to Q4, demand for 300-millimeter wafers varied quite significantly by customer. I have been involved in this business for a very long-time, but one key feature of the current correction is this variance by customer. Typically, when the market had been weak, demand from all players had been similarly weak. And when the market was strong, all of the players showed strong demand. This time, however, the variance between customers has been marked. Some players have been relatively resilient, while others fell sharply resulting in a large gap between individual companies. For 200-millimeter, automotive demand has remained strong. Although there are industries where there are demand corrections, Sumco’s wafer production remained at virtually full capacity utilization and we have continued to be able to sell everything we produce. In contrast, for 150-millimeter and smaller diameters, there has been a strong correction in consumer electronics applications slightly depressing demand. On Q4, prices for both 300 and 200-millimeter LTA prices are being firmly maintained throughout the industry. There is not much change in spot prices either, although Sumco does very little spot business. Turning to the outlook for Q1 of fiscal 2023, on 300-millimeter, I commented earlier on this in talking about the situation at FST, but we are seeing a strong correction in memory. On the logic side, however, we had already been seeing a variance in demand by customer. That said, overall, we expect the correction to be relatively mild for logic. If we look at automotive, demand coming from chipmakers focused on auto applications has remained firm. For 200-millimeter in Q1 smartphone demand is of course weak, but demand from automotive and industrial applications remain strong. We expect the trend to be relatively flat in Q1. For 150-millimeter and smaller diameters, the correction in end demand in consumer applications is ongoing. We expect the correction to continue. On price trends for Q1, as appears to be the case for our peers, we expect LTA prices to continue to be maintained. However, there might be some pockets of slight weakness for spot prices. However, Sumco doesn’t have much in the way of spot to begin with. So, spot trends are unlikely to move the needle for Sumco. Looking at the outlook going forward, for 300-millimeter, we expect that first half will be the bottom for the correction in memory, but we expect second half to be relatively lackluster as well. For logic, the situation is very different from customer to customer. We expect that the correction will be relatively short in duration lasting only through the first half and subsequently showing a relatively smooth recovery. Automotive and industrial application demand should maintain the firm trends seen so far. Overall, we expect Sumco’s production to remain firm given solid demand. Automotive and industrial application demand in 200-millimeter should also remain firm. The correction in 150-millimeters and smaller diameters is relatively large. We expect this to persist for some time. Next slide please. Slide 8 shows the wafer trend for 200-millimeter by quarter. The red line is the trend for last year. As you can see industry production remains capped at the ceiling. I believe this level of 6 million wafers per month probably represents the limit. The fact that volumes are largely unchanged from last year suggests the industry is running at full capacity utilization with the potential for further improvements in productivity having reached their limit. Given this situation, the industry is not able to increase production volume in response to demand, so conditions are likely to remain stable. Next slide please. This is the same chart for 300-millimeter wafers. On this chart, you can see that there was a step up in volumes in Q1 2022, but since then, you can see that volumes have remained largely flat at the ceiling. This reflects the fact that the industry has reached the limits of brownfield expansion. The next increase can only come from greenfield expansion. So, until greenfield capacity comes online in 2024, it continues to be the case that volume is unlikely to increase significantly even if demand picks up. Next slide please. Recently, we have seen many countries indicate a strong interest in developing local leading-edge semiconductor manufacturing capacity. What are we talking about when we say leading-edge? The current leading-edge is 2-nanometer and the current mainstay technology is FinFET, which is the second from the left. But going forward, gate-all-around is considered to be necessary to make progress beyond 2-nanometers. This is a very challenging technology. At this point, only the top three are able to do this and even within the top three, there were differences in technological capabilities. The technology to achieve LDP miniaturization exists, but for gate-all-around, debris or crystal defects are much smaller and the contamination tolerance is quite restricted. Front and back surface flatness is also viewed as very challenging. However, for gate-all-around crystal orientation is yet another consideration. So, achieving this will be a high hurdle indeed. My impression is that things will change dramatically. Next slide please. This shows demand for server use 300-millimeter wafers based on server unit volumes. Servers are also being used in data centers, so unit volumes should show relatively solid growth. What is weak now is PCs and smartphones. Data centers are growing. Near-term wafer demand from servers is around 1.7 to 1.8 million wafers per month. In 4 years time, demand is estimated to be at around 2.5 million wafers, a hefty increase of 700k or 800k. Next slide please. This shows demand forecasts for smartphone use 300-millimeter wafers. In contrast to servers, smartphones are seeing a relatively large correction. At the same time, there is the ongoing transition to 5G. 5G silicon consumption is 1.7x larger than 4G. These two opposing trends cancel each other out. So the decline in terms of wafers is likely to be relatively mild. 2023 is likely to be down year-on-year, but there should be a recovery in 2024 with unit volume showing steady growth thereafter in our view. Next slide please. This slide shows auto sales forecasts broken out by vehicle type. Automotive remains firm, but if we look at EVs, they are expected to account for more than 50% of auto sales by 2026. ADAS adoption is also similarly expected to pickup. Next slide please. So, what is the difference in silicon consumption between ICE and XEV? Roughly speaking, an ICE vehicle currently consumes about 10 square inches. This compares to silicon consumption of around 3x higher for XEV combined with ADAS. As noted earlier, XEV sales and ADAS adoption are expected to increase. So this growth trend should remain unchanged. Next slide please. So how much wafer demand is represented by automotive devices? Currently, automotive demand for 300-millimeter wafers is estimated at around 500k to 600k wafers per month. In 4 years time, this is expected to rise to 1 million wafers per month. So, automotive will drive an increase in wafer demand of 400k to 500k. So if we think about overall wafer demand, it is likely to increase by around 1.5 to 2 million wafers per month over the next 4 years. Next slide please. This shows current customer wafer inventory levels. As you can see, there has been a sharp increase in inventories. Although I can’t really say too much about it, if you look at inventory levels for each chipmaker, there are companies where inventory is up sharply and others where the increase is not that large. There is significant variance in inventory levels between individual companies. Next slide please. This shows customers 300-millimeter wafer inventory broken out into logic and memory. The bar charts seem to suggest that the increase in wafer inventory and memory makers is more moderate than logic with inventories rising sharply at logic players. However, we are seeing a clear divergence between the winners and losers in logic. Conditions at individual logic makers differ widely. This makes it tough to generalize. This is where logic and memory are at this time. I think it is better to explain the situation using the graph on the next slide. So how should we analyze what is happening with inventory? This chart plots trends for inventory price and demand for 300-millimeter logic use epi wafers. The orange line is inventory volume on a monthly basis. The rising blue line reflects trends in consumption or demand. What this chart tells us is that for logic, even in the event of a correction, the magnitude of a correction tends to be relatively shallow and generally only lasts for four quarters before a recovery. Near-term, we are entering a slight correction phase although there are differences between individual companies. But even if it is a correction, the level of inventory compared to historical levels is not that high. So even if there is a correction, we would expect the correction to be of relatively short duration and modest in terms of the magnitude of the downturn. Next slide please. This is the same chart but for polished wafers. If we look at historical trends for polished wafers, when there is a correction, the duration is typically longer at around six quarters. As well, generally, a recovery is very sharp. If we look at the current correction, we can see that inventory levels compared to historical levels are quite elevated. This also suggests that a correction could be more prolonged than logic. We believe that first half 2023 is likely to be the bottom, with the market starting to pickup sometime in the second half. However, our view would be that it would be tough to have high expectations for this year. That said, I would expect to see a solid rebound sometime in Q4. One feature of PW is that any rebound tends to be quite sharp, which means that it is necessary to be prepared near-term the market is in the midst of a relatively tough correction. Next slide please. This is the outlook for supply demand including historical data, which we always share with you. We expect 2023 to be flat reflecting current brownfield capacity. The industry will start to ramp up greenfield capacity, but the new capacity may be slightly surplus to requirements this year. However, delaying CapEx now would mean that the capacity would not be ready if demand surges in 2024. I believe given this that everyone in the industry will execute on CapEx as planned. This completes my section of the presentation. I will hand over to CFO Takii to talk about details of our earnings. I, Takii, will present the earnings in more detail. Next, slide please. As touched upon at the beginning of the presentation, both sales and operating profit were up year-on-year. Full year sales rose ¥100 billion year-on-year to ¥441 billion, largely in-line with our expectations. OP doubled year-on-year to ¥109.6 billion. Ordinary profit also roughly doubled to ¥110 billion. As discussed previously, the corporate tax amount increased in the absence of offsets, as a result of the depletion of cumulative loss carry forwards. Also, the net loss attributable to non-controlling interests widen as a result of the strong profitability of FST, which led to an increase in deductions. CapEx was ¥130.8 billion also doubling year-on-year mainly related to the start of greenfield investments, such as utility facilities and the construction of a physical shell, which came up for verification during the year. Depreciation also increased. OPM for the full year was 24.9%, EBITDA margin was 38.4% and ROE was 13.9%. The average ForEx rate for 2022 was ¥131 to the dollar. Please turn to the next Slide. This is the analysis of changes in operating income. First, the sequential analysis, sales and operating profit were virtually unchanged Q-on-Q so no major moves. Costs rose ¥1.7 billion, mainly the result of increases of around ¥0.5 billion each for labor costs, maintenance costs, materials costs and electric power costs. Depreciation was also up Q-on-Q. Sales related variance was impacted by regular maintenance conducted in November at the mainstay 300-millimeter plant, which depressed volume. However, on the back of the weekend, there was a positive contribution from ForEx, in particular in Q4, when the yen weaken beyond ¥140 to the dollar, resulting in the ¥3.1 billion positive. On the right, we showed the year-on-year change for the full year. Sales increased ¥100 billion year-on-year. The large increase can in part be attributed to ForEx, which contributed ¥40 billion to the top line. There was also a contribution of more than ¥30 billion from higher selling prices. Volume also increased for an impact of around ¥30 billion year-on-year. We show the analysis of change in operating income in the bar chart below. OP increased ¥58.1 billion year-on-year. Costs increased ¥20 billion. Labor cost increases were a major contributor at ¥8 billion. This is due to frontloaded hiring for greenfield expansion. We increased headcount to expand production for an impact of ¥5 billion. And per employee costs also increase on higher bonus payments as a result of improved profitability, pushing up labor cost by ¥3 billion. The next largest element was electric power costs which rows ¥6 billion. Surging materials prices raise costs ¥2 billion, and maintenance expenses were up ¥4 billion. Effectively costs related to increased production and unit prices for electric power are rising and materials costs were also up. Depreciation was up ¥8.2 billion. On sales related variance the contribution from prices was ¥33 billion as mentioned before, with volume increases contributing another ¥20 billion, a combination of both 300 and 200-millimeter ForEx had a sizable positive impact of ¥33 billion. Next slide please. Slide 25 shows the balance sheet and cash flow statement. As a result of higher profits, cash and time deposits on the balance sheet increased ¥34.7 billion. Accounts receivable finished product and work in progress also increased on the back of higher sales and increased sales volume. Raw materials and supplies rose ¥0.5 billion. The reduction in polysilicon inventory within this was ¥9 billion, which was offset by an increase of around ¥10 billion in materials inventories, which we considered important from BCP standpoint, given we’re running at full capacity. Tangible assets rose ¥73.5 billion on the back of higher CapEx. Other liabilities increased ¥58.8 billion while interest bearing debt was flat. We discussed this previously, about our joint venture subsidiary in Taiwan FORMOSA SUMCO TECHNOLOGY took in advance payments and deposits on LTAs of roughly ¥26 billion. Also, on tax expenses. We discussed this when talking about the profit/loss statement, but the actual tax payment will happen in the next fiscal year. So the increase in other includes hefty ¥15 billion increase in income tax payable. If we look at the capital account, retained earnings increased ¥49.3 billion, reflecting the impact of ¥70 billion in net profits after deducting the payment of dividends. Down below optically the shareholders equity ratio appears to have fallen slightly, but equity per share improved to around ¥1500. The DE ratio is as shown here. On the cash flow statement, operating cash flow was ¥179.4 billion, while investment cash flow was an outflow of around ¥130 billion. Free cash flow was ¥53.1 billion. After dividends paid and other adjustments. We get to the net increase in cash and time deposits highlighted earlier of ¥34.7 billion. Next slide please. These are the forecasts for Q1 on a Q-on-Q basis. We expect sales to decline around ¥12 billion. We also projected drop in OP to ¥23 billion. The projection for non-operating income and expenses is positive. We had put on ForEx contracts through Q1 which will generate currency gain. We project ordinary profit of ¥25 billion. Under extraordinary gains we expect to incur negative goodwill on the acquisition of Mitsubishi Material’s polysilicon business. We estimate a difference of ¥30 billion between our acquisition price and the NAV of the business we are buying, which we will recognize in Q1 as an extraordinary gain. After deducting for corporate tax, we forecast net profit of ¥45 billion. We project depreciation of ¥14.5 billion down slightly year-on-year. This reflects the fact that we are into a new year and have made progress on depreciation. We show a number of management metrics at the bottom of the table. Next slide please. This is the analysis of change in operating profit. Sales are projected to fall ¥12.4 billion Q-on-Q. This breaks down into ¥10 billion negative impact from lower volumes. A ¥7 billion negative from ForEx impact, but a positive ¥5 billion impact from higher selling prices. The result of a step up in LTA prices with the start of a new fiscal year. On the back of this OP is expected to fall ¥6.7 billion Q-on-Q, the main factor is higher costs, we expect cost increases to persist into this year. Inflation continues to push up raw materials prices for an impact of around ¥1.5 billion. We also expect the unit price for electric power to also continue to rise and have factored in ¥1 billion increase. We also expect to see increases in R&D and labor costs. Base wages are expected to rise but that will happen in April so not Q1. In total, we therefore expect costs to rise ¥3.7 billion, depreciation is expected to improve ¥2 billion as a result of progress on depreciation and the start of a new fiscal year. Under sales related variance the positive impact of higher selling prices of ¥5 billion due to 300-millimeter LTAs is expected to be offset by ¥5 billion resulting from lower volumes. The drop in volume is partly a function of a lower number of days in February, as well as the impact of regular maintenance. Project a negative ¥5.2 billion ForEx impact as a result of yen appreciation due to setting our ForEx assumption at ¥131 to the dollar. Looking at the analysis of year-on-year change for Q1 on the right, the year-on-year negative impact of costs is expected to be a sizable ¥9.8 billion. Materials and supply costs are expected to rise ¥3 billion year-on-year. We expect electric power unit prices to rise for an impact of ¥3.5 billion. Labor costs will raise ¥1.5 billion year-on-year. Repair and maintenance costs are expected to increase ¥1 billion year-on-year. Effectively, all costs are rising. Depreciation is also expected to increase. For sales related variance we expect ¥4 billion positive reflecting the positive ¥5 billion impact of higher selling prices with the start of a new fiscal year. We expect a ¥6.6 billion year-on-year positive from ForEx for Q1, based on an assumption of ¥131 to the dollar. All of the above factors combined contribute to largely unchanged OP year-on-year for Q1. Next slide please. As you can see on Slide 31, you can see the trend has shifted to a slight decline in sales and profits for Q1 that said EBITDA remains elevated. This completes my remarks. I would like to know if the 300-millimeter LTAs are functioning properly, with demand weaker in the March quarter, particularly for memory are the LTAs ensuring the customers respect their volume commitments? For example, our customers merely extending delivery to sometime later this year, I suspect the customers will respect the LTA prices, but please comment on how well the LTAs are working? With regard to volume commitments under LTAs, we are seeing some slight adjustments from customers, particularly memory players. We aren’t really seeing customers ask for lower prices, but what they are asking for is to push out the shipment timing for a portion of the volume. In our case, FST is being impacted by a decline in volumes from Chinese customers, but this is unrelated to the LTAs. A customer is now unable to buy even replacement parts for fabrication equipment. As a result, they have reduced production levels significantly, which has led to a decline in wafer demand from this customer. Apart from this particular customer, however, most appear to expect a recovery at some point. Some have pushed out deliveries to later this year. There are others that have asked to push out volume by effectively adding to the term of the LTA, there have been a variety of responses. However, customers are respecting the overall volume of the LTAs although at the fringe, they appear to have been some shifts between customers. It appears that this is also the case for our peers. Under the terms of the contracts, it is possible to force customers to take volume even if they have cut production levels and have full warehouses, but we prefer to engage with our customers to find common ground. In Q1, we intend to maintain production levels without reductions. To-date wafer makers inventory levels have been very low, so there is a need to raise inventories back to more normal levels as well, so as you can see, that has been the extent of the correction to this point. In looking at your Q1 forecast, I believe that you are assuming a decline of around 10% for 300-millimeter wafers in-line with your peers. If we look at past history, in the March quarter of 2019, there was an overall decline of around 4%, followed by a more moderate correction. This time, I believe the overall decline to be quite large. However, Sumco’s significant business with the chipmakers considered to be amongst the winners. So relative to your peers, I think you are better positioned. Compared to the last downturn, the March quarter drop is quite large. How are you thinking about the slope of recovery in Q2 and beyond? Also, do you still expect customers to feel that wafers are in short supply in 2024 and beyond? Please talk about how to think about a recovery? As you know, we have very good relationships with chip makers that are strong in automotive. These players are actually saying that they want to increase wafer intake rather than reduce it. However, the situation appears to be quite different depending on sector, the situation for memory appears to be very tough, with many announcing production cuts, we are seeing some impact from this. That said, the proportion of memory use at Sumco is lower than at our peers, so we aren’t seeing a large correction, but we are impacted by China. For logic, the magnitude of the correction is not that large, with the exception of one customer. What is happening with this customer is not so much the impact of a correction. But instead, this customer may be falling behind. I think what determines winners versus losers, is a subset of each player in the market. Overall, for logic, I think the correction will be mild, and that there will be a recovery in second half. From that perspective, I think the 10% decline expectation is for the total market, including 150-millimeter and smaller diameters, where the decline is likely to be acute. If you look just at 300 millimeters, I don’t think the correction is that large. I think that there isn’t much of a correction in 200 millimeter either. 150 millimeter, on the other hand, is very tough. In terms of the outlook for 2024, I don’t really have any concerns as far as logic goes, but memory may need more time to work down inventories. I suspect memory may be relatively weak for 2023 only really rebounding in first half 2024. Understood. I have one follow-up. On Page 22, the demand forecasts for 2023 is flat, should we interpret this to mean that you expect a decline in first half, but a recovery in second half? I think first half will be the bottom. I expect logic to rebound in second half. Memory should also improve in second half, but I don’t expect memory to show as strong a recovery is logic. That’s because inventory levels for memory are elevated. My question is about the grey line for price trends that you show on Pages 20 and 21. When you look at the last 5 years, although demand was down, the price trend on this chart suggests prices did not fall. In actual fact, I suspect there were times when prices did fall. This time, should we expect price trends to be similar because of the LTAs? Please comment on the actual price trends. When you look at the chart, it clearly shows the prices prior to 2013 were volatile, but with the introduction of LTAs prices remained stable and were not impacted by supply-demand changes. My sense is that customers are respecting the LTAs. I say this because if you look at the peak in 2018, there were customers that signed LTAs. Although it was rare, subsequently there was a customer that did not respect the LTAs. However, at the next peak, this customer was unable to source wafers. We understand that this customer went on an apology tour, but I believe this experience was a lesson to customers that they need to respect the LTAs in times of volatility. I think there has been a broad acceptance that this is the case. With regard to Greenfield investments, you mentioned that a delay in investing would mean you could not keep up if demand in 2024 recovers. Given this, I expect that you will continue to invest in line with your initial plan. Are you still expecting a gradual stepwise ramp up from Q3? If so, will depreciation increase from Q3? If possible, can you talk about the scale of CapEx, you expect next year. We are executing on CapEx spending exactly in line with our plan. However, FST is lagging slightly as a result of issues in procuring materials. Japan CapEx is exactly on schedule and I have no intention to slow down. On CapEx spend, I will defer to CFO Takii. As you can imagine CapEx activity will be at a high level with facilities and equipment being brought on site. As such, total CapEx spend for 2023 is likely to be high. There will be a wave of investment in 2023. Japan CapEx spend for this year is likely to be around ¥200 billion. Taiwan is likely to be ¥100 billion this year. Referring to Page 25, how should we think about costs? You indicated your intention to raise base salaries. For this fiscal year, can you provide a range for how much you expect costs to increase, I do understand that there will be some variables that may change. You also just touched upon depreciation, but can you give us a sense for the scale of depreciation on a full year basis for the new fiscal year? Also in Sumco’s case, I understand that it is your policy not to pass on increases in fuel and raw materials costs, even with LTAs, which is different than your peers, can I confirm that your policy in this area is unchanged? Obviously, given the expected installation of significant facilities and equipment, CapEx levels on a verification basis will also be relatively high. Depreciation last fiscal year was around ¥60 billion, I would expect to see an increase of around ¥20 billion year-on-year. Obviously, this will depend on utilization levels. On the question of the degree to which cost volatility is reflected in prices, I think it is the same for our peers. We don’t have commitments down to the level where we agree in advance to tie a certain increase in prices to a fixed scale of cost increases for items such as electric power. That said, if there is a huge surge in costs for items such as transportation costs, we can and do engage with our customers and make adjustments. With regard to the acquisition of the polysilicon business, does this mean that you will see polysilicon prices decline, or given you will need to invest in R&D, should we temper our expectations? Please talk about the impact that the polysilicon business will have on Sumco. If we look at the historical trends for polysilicon, once every 12 years to 13 years, the market experiences shortages. Polysilicon is a process industry, so when shortage is hit, everyone rushes out to expand capacity. The last time was in 2009. At that time, some cobalt very large amounts of polysilicon ending up with a huge inventory which was a bad experience for us. We are starting to see shortages in polysilicon now. For instance, for relatively simpler solar grade polysilicon prices used to be around $10 to $15. But at the peak last year, it was over $40. So, we are starting to see shortages on an overall basis. So, first of all, although the acquisition does not fully cover all of our needs, it does ensure that we have access to a steady supply. It also gives us a good idea of costs and allows us to make plans. When the market gets tight, polysilicon tends to see dramatic price action. In 2009 prices got as high as $80 or $90. As prices rise, it can lead to panic buying. By having internal capacity, this means some code does not need to engage in such behavior. Also, when dealing with leading edge, the requirements for polysilicon are very demanding, so quality is a major issue. Rather than having to make detailed explanations to vendors every time and pay a premium for product or run the risk of losing knowhow to external parties, having in-house capacity is a positive. Going forward, we will be able to make high purity polysilicon in-house. Obviously, we have an understanding of the business so costs would not get that high, although vendors would want to charge a premium. Having this capacity in-house will be an advantage in R&D. Also, the situation for trichlorosilane is precarious. Only two companies in Japan can supply it. One is Mitsubishi and the other is Tokuyama. Because it is a hazardous material, it’s almost impossible to import from overseas. If Mitsubishi were to exit that means that Japan would only have one domestic supplier Tokuyama. Given that a significant proportion of what we produce is epi, a situation where there is only a single source would be a problem. So, we also wanted to lock in a supply of trichlorosilane. I expect that there will be moments when we will be glad to have the capacity and other moments where we might feel that having the capacity in-house actually leads to higher costs. When the market has an oversupply, suppliers will say that they are willing to sell cheap. When the market is tight, they press for higher prices. The polysilicon makers could have their customers over a barrel. Without polysilicon we can’t even make a single wafer. Given our experiences, although it doesn’t fully cover all of our requirements, having this capacity in-house is a good thing. There will be better stability in prices and supply. I believe there will be big benefits to having this operation in-house. My question is about 300 millimeter wafer demand. Volume is expected to decline 10% Q1 Q in the March quarter, but your demand forecast for 2023 is flat. Hypothetically, if March quarter volumes fell 10% and you assumed that there will be a recovery in second half, that suggests that you would need to see growth of around 20% in second half on and a half-on-half basis to achieve flat volumes on a full year basis. Based on what you know of customer inventory, do you believe that this is achievable? If we look back at the previous cycle, the bottom for semiconductors was early 2019, but the end of wafer inventory adjustments only came in 2020, so there was a gap in timing. This time should we expect that there won’t be much of a time lag between the recovery in semiconductors and a reduction of inventories. If you have a 10% decline in the first half it is possible to achieve flat growth on an annual basis if second half grows 10%. Our view of 300 millimeter is that the correction is not as large as 10%. If you are looking at PW, then the magnitude of the correction could be larger. But actually PW for discrete components for automotive applications, or IGBT are actually up. So, not everything is down, what’s down is memory used wafers. Within logic PC and smartphone use is down, but demand for industrial applications and datacenter use is strong. The current situation is not one that lends itself to generalization. My sense is that the decline is not as large as 10%, if we assume that it will be flat on an annual basis. In Sumco’s case, the proportion of logic is high. We don’t necessarily have full visibility for the overall market, but that is my view. Customers are also saying they expect a rebound in second half, although this doesn’t apply to memory. Also, only a few logic customers are reducing production. Putting it all together suggests that volume in 2023 will be flat. When you say flat year-on-year, I would like to confirm that you are not saying that it will be flat versus the fiscal year end level, but instead flat compared to a monthly average for the last 12 months. Can you provide an image of the direction of quarterly profits this fiscal year based on what you have said so far, you are expecting volume to rise in second half, but have also said that spot prices may come under slight pressure and depreciation will rise in second half. I am assuming that the Q1 ForEx assumption remains constant. Probably depreciation will rise significantly, so I don’t think we can hope for a performance similar to last year. The reason why we don’t expect sales to fall that significantly is because we benefit from the impact of higher selling prices, given that LTA prices step up in the New Year. So, even if there are slight push outs, I don’t think sales would fall that much. That said, given that we have been executing on our investments, depreciation will definitely be up obviously. The increase in depreciation will weigh down profits, which is likely to mean, we can’t match last year figures. We expect to see a positive contribution of ¥5 billion per quarter as a result of selling prices rising for ¥20 billion contribution for the full year. But this is likely to be offset by an increase in depreciation of ¥15 billion to ¥20 billion. The remaining question is what happens with cost increases. But if volume were to increase in second half that might mitigate the impact of cost increases. I would like more color on the acquisition of the polysilicon business. On Page 11, when you refer to gate all around you mentioned crystal orientation. Is there any relationship between this and your acquisition of the polysilicon business? On Page 11, you discussed gate all around and the transition to 2 nanometer. In addition to crystal orientation, I think there is also added value in layering. Given that Sumco has strengths in epi layers, I believe that you can achieve significant added value. Can you comment on this, or is it still too early to say? Wafers for gate all around are technologically very challenging. Only two companies are able to supply wafers to the one company that is furthest ahead on gate all around. Other players aren’t even capable of providing samples. This suggests that the transition will represent a very significant change. We are certainly strong in epi and have been able to provide wafers to the customer. We understand that the customer is adding further layers to the leading edge wafers we provide. So, it is necessary to supply layers to support this process. There is also significant process in 3D driving demand for carrier wafers or interposers, so we are also seeing diversification of wafers. Gate all around is very difficult. We struggled, but were ultimately able to develop a wafer. This will be a very challenging era. Thank you, Mr. Yamada. Thank you to everyone. We are grateful for your participation today. We will end the meeting here.

EarningCall_13

Greetings, and welcome to the Azenta Q1 2023 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, February 08, 2023. Thank you, operator, and good afternoon to everyone on the line today. We would like to welcome you to our earnings conference call for the first quarter of fiscal year 2023. Our first quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investors.azenta.com, in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled “Safe Harbor” Statement, our safe harbor slide on the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. We may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with the GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. In addition, we may refer to certain estimates of COVID-based impacts. These figures are estimated based on our insights to customer applications and/or product types indicating such demand or constraints on regional demand or ability to deliver. On the call with me today is our President and Chief Executive Officer, Steve Schwartz; and our Chief Financial Officer, Lindon Robertson. We will open the call with remarks from Steve on highlights of the first quarter. Then Lindon will provide a more detailed look into our financial results and our outlook for the second fiscal quarter of 2023. We will then take your questions at the end of the prepared remarks. Thank you, Sarah. Good afternoon, everyone, and thank you for joining us. Today, we're speaking to you from our new headquarters location in Burlington, Massachusetts, and we're pleased to share with you the progress we've made over the past 3 months. Our Q1 results were solid and in line with our target as we delivered revenue growth of 28% year-over-year. Organic growth, excluding COVID, was 7%, a result consistent with our 2023 expectations and a signal that the adjustments we've made to the business are taking hold as planned. Today, all of my comments on growth will be organic growth rates, excluding the impacts of COVID. Looking at the business by segment, we saw a strong performance in our products business, which grew 15%, reflecting another quarter of double-digit year-over-year growth in our automated stores business as well as some promising stability in our C&I business, which contained no COVID revenue and was up slightly quarter-over-quarter. On the services side, both Sample Repository Solutions and GENEWIZ genomics performed well. A particular highlight was double-digit growth in our core storage business of SRS. When we first got into the SRS business 7 years ago, occasionally, we'd handle up to 1 million samples in a quarter. Today, we touch more than 1 million samples per month, and the number continues to increase as more and more customers see the value in our offering. And as we continue to automate, we're more able to satisfy the heavier transactional aspects of our customers' sample management needs, especially around the critical steps in the clinical trial workflow. This high volume individual sample tracking capability is a highly differentiated offering that's valued by customers and necessary for their future needs. In genomics, we began to recognize the positive impact from the retooling of our go-to-market approach and we're confident that the continued execution of our plans is the right strategy. Specifically, once again, we delivered a record quarter for Next Generation Sequencing and Sanger Sequencing was steady. Perhaps most importantly, we're seeing early signs that we're beginning to recover some lost momentum in our Gene Synthesis business as we saw double-digit growth in China, which is a positive indicator in terms of what we can do in the global market now that our logistics issues are behind us. To be clear, we're not declaring victory here as there's much more to be done in sales staffing, but we're confident that our actions and plans are providing the remedy, and this is all about investments in proper execution, which has the focus of the entire leadership team. One particularly bright spot in the quarter was our performance serving cell and gene therapy customers. Over the past few years, we've observed steady 20% to 30% growth from CGT across our portfolio of offerings. But in Q1, we recorded nearly 60% year-over-year growth, bringing cell and gene therapy sales to approximately 10% of revenue, not including Barkey or B Medical Systems. This was up 30% quarter-to-quarter. Contributions to this growth came from GENEWIZ genomics especially from NGS and AAV services for products, particularly cryosystems and instruments and from SRS. From a geographic standpoint, the key top line drivers I mentioned, NGS, automated stores, SRS and C&I, drove growth at varying rates across the globe. The U.S. remains a steady grower. Europe is making progress, and China remains a highlight even amidst COVID noise. B Medical had a record revenue quarter of $42 million and secured the commitments we had anticipated. That said, we saw one large order get pushed out, which landed us below the $45 million we'd initially anticipated. We shared with you that quarterly revenue would be difficult to predict for this business, but we'll continue to refine our forecasting to the street. The good news is that the business is won and we're still confident that we'll deliver $130 million in revenue for the year. In addition, our long-term key human health initiatives are underway, and we remain encouraged by this unique head start in a fast growing emerging markets opportunity that's ceded by B Medical's expansive footprint and outstanding reputation. And though it's still in the early days, we're already in discussions with pharma companies on how we could leverage B Medical's technologies and beachhead to access patients in hard-to-reach geographies. All in, the base business is stable and exhibits signs of strong momentum. Even in a more challenging macroeconomic environment, we believe our opportunity is significant and it's ours to capture. Q1 was a quarter of positive proofs that our position is solid in products and SRS that our initiatives to accelerate top line growth, especially in our genomics business are proving to be the right ones, and we'll continue to drive these forward. Specifically, we're accelerating our investments in additional sales talent for coverage of accounts but also specific genomics technologies with emphasis on synthesis. We continue to recruit for additional regional sales coverage where we have known gaps, and we're not slowing our investments in development of innovative new products and services, which are key to our future outperformance. It will take time for some of these initiatives to impact the top line, but they're necessary for our long-term success. We're optimistic that these actions will support continued progress toward the low double-digit growth objectives in the second half. We'll fund these investments through cost reduction measures that come from a realignment of our internal operations that target efficiency and enhance focus on value-creating activities. In total, we'll take out about $20 million of annualized cost. The net impact of the actions we're announcing today are expected to remove about 200 basis points of cost. Most importantly, these are the right next steps to ensure both our near-term and long-term potential. We believe the end result will be tighter coordination between business units and sales and will take advantage of recently implemented enterprise solutions to automate and streamline internal activities. And finally, we continue to identify opportunities to grow the business. Last week, we completed a tuck-in acquisition of Ziath, a leading provider of 2D barcode readers for life sciences applications. The Ziath portfolio fits perfectly with our consumables and instruments business and enhances our portfolio of high throughput offerings designed for laboratory automation workflows. This is a great example of the types of transactions we can do where we have the opportunity to take a company with a great product portfolio and put Azenta's commercial reach behind it. In closing, I want to address a few key points. First, we believe we have a unique portfolio of best-in-class products and services that gives us a chance to secure the pole position in all things sample management and sample measurement, and our Q1 results and traction give us confidence that we're properly addressing issues that will allow us to regain our outsized growth profile. Second, we're adjusting our operations to match our current portfolio and profile. Specifically, we're prioritizing strategic sales investments to drive the top line while protecting our bottom line. We'll continue to monitor and measure results of actions taken and support all key sales initiatives with the objective to turn the corner in Q2 and to see the progress in our results in the second half of this year. And we're investing for growth. We have a strong balance sheet with more than $1 billion in cash available for opportunistic additions to our already powerful portfolio. In all, we're very positive about our momentum and where we are at this moment. We have high conviction in the value that we bring to customers and our strong market leadership. We look forward to continuing to update you on our progress throughout the year, and we thank you for your interest and support as we work to deliver value to our customers and shareholders. Thank you, Steve. I now refer you back to the slide deck available on our website. Turning to Slide 3 for some highlights. First quarter revenue was $178 million, up 28% year-over-year and up 30% sequentially. This is up 7% on an organic year-over-year basis when you exclude estimated COVID impacts. In products, we delivered 15% organic growth, excluding COVID, driven by 23% growth in automated systems and 16% growth in C&I. In services, organic growth, excluding COVID, was 4%, led by our Sample Repository Solutions business up 10%. And within our genomics business, our Next Generation Sequencing business was up 12%. On a sequential basis, the significant expansion in the quarter was driven by the addition of B Medical, which closed on October 3. The B Medical team achieved a record level of revenue for their business with $42 million in the quarter. When I consider our Q1 revenue results, our base business came right in the range of our expectations. And while B Medical had a record quarter, it was a bit short of our expectations. As we have described previously, revenue in this business can fluctuate each quarter due to project funding dependencies. Non-GAAP EPS was $0.12, flat year-over-year. GAAP EPS was a loss of $0.15 and adjusted EBITDA margin approximately 7%. As Steve discussed in his remarks, we're taking several decisive actions to best position the company for long-term success. In light of continued inflationary and margin pressures, we recently initiated actions to fine-tune our business structure, removing costs in certain areas while making targeted growth investments in others. We expect to net approximately 2 points of cost reduction to contribute to margin expansion for the second half of fiscal 2023. You should expect to see the impact of these actions in our third quarter financials. Moving to an update on capital deployment. As we announced during the last call, we entered into a $500 million accelerated share repurchase program, which we expect to complete by the end of the third fiscal quarter ending June 30. In total, we still plan to return approximately $1 billion to shareholders within this calendar year. Beyond share repurchases, we remain focused on capital deployment in the form of investment in M&A. After the expected $1 billion return to shareholders, our balance sheet will still have over $900 million in cash resources available for strategic investment. In all, we have a strong portfolio, a well-established in high-growth markets, and we believe the actions we are taking should position us to deliver results over the near term and into the future. Let's move on to Slide 4 to address the first quarter results. As mentioned, revenue of $178 million was up 28% year-over-year and up 30% sequentially. To the right, we have provided a table to show the color on the reported revenue. From reported revenue, we removed 4 points of foreign exchange headwinds and revenue of $46 million from acquisitions, which provides an organic decline of 1%. From there, when we remove the impacts of COVID, which was an estimated $11 million of revenue in Q1 of fiscal 2022 and was approximately zero in this quarter. On a year-over-year basis, organic growth when excluding the estimated code-related impact from each period, was 7%. Looking at the P&L on the left side, total GAAP earnings per share was a loss of $0.15 compared to a loss of $0.07 in the fourth quarter of fiscal 2022. Compared to the prior quarter, increased expenses include costs associated with M&A, our accelerated share repurchase program as well as the amortization impact of purchase accounting adjustments. Now let's look at the non-GAAP P&L on the right side of the page. The revenue increase of $41 million quarter-to-quarter carried higher gross margins, up 150 basis points to 45.4% primarily driven by the services segment and the addition of B Medical. Operating expense increased $23 million quarter-over-quarter with $13 million of the increase coming from B Medical, $7 million coming from the annual reset of stock compensation and variable compensation accruals and the remainder due to various corporate and commercial expenses, which translates into approximately 7% adjusted EBITDA margin. Now please turn over to Slide 5 for a review of our Life Sciences Products segment results. As you can see in the results today, we have determined that the B Medical operations will be reported as part of the products segment. With that, Products segment revenue totaled $90 million for the quarter. The acquisitions of B Medical and Barkey contributed $42 million and $4 million, respectively. First quarter revenue was up 80% year-over-year on a reported basis, substantially driven by the B Medical and Barkey acquisitions. Products segment organic growth, excluding COVID, was strong, up 15% year-over-year. This was supported by large-automated systems, which grew 23% year-over-year during the quarter and was supported by robust bookings, which we have noted in recent quarters as those bookings have begun to translate into revenue. In consumables and instruments, our business most impacted by COVID, we are starting to show some demand improvement from new and existing customers, resulting in a quarter-over-quarter increase of 3% in revenue. Organic growth, excluding COVID, on a year-over-year basis for this business was 16%. We have one more quarter of tough compares from COVID-related revenue, but the ex-COVID growth in Q1 is a strong indication of the growth capability in this business. Products' first quarter gross margin was 43.2%, up 300 basis points quarter-over-quarter. Excluding B Medical, gross margins were roughly flat from Q4. Operating income was $3 million for the quarter compared to income of $4 million the prior year. This year over year decline is due to gross margin softness on lower revenue as well as increased SG&A expense. Adjusted EBITDA margin was approximately 8%. Next, please turn to Slide 6 for a review of our Services segment results. The Services segment generated first quarter revenue of $89 million, a decrease of 1% year-over-year. The organic growth for the quarter, excluding COVID, was 4%, reflecting 2% growth in genomics and 10% growth in Sample Repository Solutions. The genomic services performance was led by Next Generation Sequencing, which grew 12% year-over-year on an organic ex-COVID basis. We saw notable growth in some larger accounts, which are increasingly recognizing the value of our customizable solutions that offer industry leading speed and convenience. In Sanger, first quarter tends to be seasonally lower, and we saw that in our results this time as well. In Gene Synthesis, we continued to see softness as well as modest impact from the China COVID outbreak. The logistics challenges in Gene Synthesis, that we discussed last quarter for business shipped out of China have largely been resolved, and we believe the sales initiatives we have in place will continue to gain traction over the coming months. Sample Repository Solutions organic growth, excluding COVID, of 10% year-over-year was once again driven by our storage revenue, which grew 18% and continues to expand our recurring revenue base. This quarter, our storage business benefited from addition of another large biotech customer. This win similar to others we have mentioned in the past, demonstrates the value we bring to customers in our core capabilities in and around our sample management. Services business delivered 47.6% gross margin, a 170 basis point expansion quarter-over-quarter, driven by next-generation sequencing with a year-over-year drop of 360 basis points still reflecting inflationary pressures as well as lower volumes in Gene Synthesis. Q1 operating loss was $3 million due to the lower gross margin as well as higher operating expenses. Adjusted EBITDA margin was 4%. Let's turn over to Slide 7 to review the balance sheet. As of December 31, we had $1.4 billion of cash, restricted cash and marketable securities with no debt outstanding. As noted previously, we completed the B Medical acquisition for $424 million in cash, $43 million of which was B Medical debt that we paid down in fiscal 2022 ahead of the close. In late November, we used $500 million of cash to enter into an accelerated share repurchase program. We remain committed to returning an additional $500 million to shareholders this calendar year for a total of approximately $1 billion in cash to shareholders. Beyond this, we continue to invest for growth, both organically and through M&A with a clear lens toward deals with returns that exceed our weighted average cost of capital within 5 years. The balance sheet changes significantly due to the addition of B Medical. You can see this in areas including goodwill and intangibles, but also in property, plant and equipment with the addition of B Medical's manufacturing assets and their rotomolding [ph] capability as well as inventory, receivables and payables. Let's turn to the final slide for our guidance. Revenue is expected to be in the range of $156 million to $171 million, with a midpoint supporting growth of approximately 13% year-over-year. This includes an organic growth rate, excluding COVID of approximately 2% at the midpoint. We estimate the foreign exchange impact to be a headwind of 3 points and the revenue from acquisitions to be a total of approximately $30 million. That is approximately $4 million for Barkey, and we expect B Medical Systems to contribute approximately $24 million to $27 million. We expect products revenue, including acquisitions, to be in the range of $72 million to $79 million as we expect the base business to increase a couple of million quarter-to-quarter and B Medical to show a decline quarter-over-quarter as it comes off of its December quarter, which tends to be the busiest of the year for vaccine cold-chain orders. In all, the products guidance supports a low teens organic growth rate when excluding the impact of COVID. We expect services to be in the range of $84 million to $92 million reflecting roughly flat quarter-to-quarter revenue in both SRS and genomics at the midpoint of our guidance range. Adjusted EBITDA is anticipated to be approximately $2 million. Non-GAAP earnings per share is expected to be breakeven, plus or minus $0.04 per share. And as you can see in the guidance, our second quarter is stable in the base business and reflects the lower March quarter for B Medical. From a profitability perspective, we anticipate second quarter to be the low point in our fiscal 2023. We expect the cost actions as well as the strategic investments to show tangible progress starting in Q3. And together, we expect these efforts can support our full year expectations for revenue and that we exit the year above 10% adjusted EBITDA margin. In conclusion, we continue to see indications of momentum, and we are taking actions in our cost base to set ourselves up for success and to deliver profitable growth. And lastly, we will continue to return cash to shareholders while maintaining an active stance on the M&A front. As always, we will continue to provide updates on our progress throughout the year. Thank you. [Operator Instructions] And Your first question will come from the line of Jacob Johnson with Stephens. Your line is open Hey good evening everybody. Lindon, maybe just to start on the guidance that you just touched on. I think you're still kind of targeting the same 30% revenue growth, but it seems like maybe margin expectations have been pushed out a little bit and you're talking about taking some costs out of the business. Can you just talk about kind of what's changed now versus the 4Q print in terms of kind of cost and margin expectations? Yes. Jacob, I think you captured the top lines right, that being we still see ourselves getting to 30% of revenue growth for the year. With that said, we do see the margin pressures in the first half being a little heavier and partially in reaction to that, also an opportunity to gain some efficiencies and effectiveness in our operations. We've taken some actions. And as we do that, that's going to enhance some of that cost equation, offset those actions in total. We're taking about $5 million a quarter or $20 million of cost out. And at the same time, we'll be proceeding with some fairly selective and specific investments to continue to drive growth. So with that said though, with the margin pressures we have in the first half, you're right. Previously, we had identified that we would be about 10% or better on EBITDA margins for the year. Here we're saying we'll be at 10% or better by the fourth quarter. Okay. Thanks for that one. And then Steve, if I heard you correctly, it sounds like you've seen -- you saw kind of an acceleration in growth from the cell and gene therapy end market. I think this earnings season, I think that market is relatively healthy, but there's been some pockets of weakness. And I think we've seen some other companies where maybe growth decelerated a little bit in that end market. So can you just talk about kind of what you saw from that end market and what drove the pickup in growth from cell and gene therapy? Sure. So actually, Jacob, we were surprised a little bit by the magnitude of the increase. But I think we attribute it to some new offerings that we have. We have some AAV services that we're able to provide the team, has been really aggressive going after the opportunities there. But the breadth of the offering, we think is great. About -- in rough terms, 60% of the cell and gene came from the genomics GENEWIZ business, roughly 30% from products and roughly 10% was from SRS. So the complete offering is -- it seems to be pretty attractive. We do believe that these -- the offerings are necessary. We'll see as we win projects, this might be a little bit lumpy. But in general, we've added customers. We think this is a sustainable type of momentum, and we're really pleased by the performance. I don't know what to expect for the next quarter, but the engagement with customers is stronger with each quarter just because of the value of the scientific offerings that come from the GENEWIZ team. Yes, Good evening guys and thanks for taking the questions. Maybe I'll start with SRS. The storage part of that business was really strong. I think you said 18% going from 1 million samples a quarter to now 1 million per month. So just wondering kind of how much visibility do you have in that storage part of the business? And is kind of high teens a good starting point in terms of revenue growth for that storage part for the year? Yes, David, let me start, and Steve will add some color on the customer demand side. But first, you're exactly right in your reference, I'll just add the clarity for everyone. We highlighted we saw 10% organic growth ex-COVID in SRS year-over-year. Inside of that, we have multiple elements of service delivery, but the largest piece is storage, pure storage. That includes primarily off-site storage, that's being sample stored on our locations, also includes a little bit of on-site storage where services that we perform for customers at their site. It's getting to be more prevalent. But with that said, the total of that grew 18%. And the nice thing about that is that represents samples going into the freezers, which is our recurring revenue base. So now you asked about the line of sight. The nice thing about that is, once samples are in the freezers, we know they tend to stay there. So it gives us a more solid recurring revenue base. So that part of it is clear. I've often described this as a business with seasons of high-growth, seasons of low growth simply because we're accumulating millions of samples. And so each period where we show growth, that's growth on a pretty large base of samples in the freezers now. So you can see that this is a momentum of really an outsourced adoption rate business where the outsourced demands are increasing. And so the line of sight is good on the base revenue. Seasons of higher growth, lower growth are going to still continue. I would not highlight high teens as being a starting point. I think the 10% organic growth on the total store SRS business is probably a good starting point, plus or minus to that overall. But there will be times we're up in the teens. And if you recall, if we went back a couple of years ago, we said we said it wouldn't be as usual to show us in the mid-teens. So certainly, some may be projecting that. I think in these environments, the outsourced adoption rate seems to have momentum. So somewhere between that 10 and mid-teens. Steve may add some color to the types of demands we're seeing here. So David, I'll add a little bit. I think as Lindon mentioned, when we first got into this business, most of the SRS business was archival storage. And the capabilities we have to manage samples in a way that's really beneficial to customers has changed. It allowed us to change the business pretty dramatically. We talk about automation and our ability to handle samples. Now we're able to participate in clinical trials. We can help the customers by doing [Indiscernible], by moving samples in and out much more frequently than we did before. So we are an element of what they used to have on site or they maybe had done historically at a CRO. And our ability to touch and manage the samples on an inbound and outbound is an efficiency play for them, and a pretty dramatic change to the nature of what we're able to offer to them. So a significant amount of touches, a large increase in the storage revenue and our ability to store. But one of the reasons we're getting more storage business is our ability to literally manage the transit, the traffic and the samples for clinical trials. So it's a pretty dramatic expansion. And it's one of the reasons you hear us talk so much about automation. Our need and ability to handle not just 1 million samples a month, but eventually millions of samples a month is going to depend on our ability to handle these samples. So in terms of line of sight on the dock, in freezers, at the receiving area of the facilities, we always have line of sight to what's there. But our challenge has been to process those as quickly as possible, get them into storage and the management on a short cycle for customers, and that's where we put all of our focus. So we anticipate the direction of the business is good. The volumes will increase and the better we get at it, the more customers will continue to allow us to participate in their workflow, not just in archival storage. And that's the transformation that we've seen. Okay. Yes, that's super helpful. And then maybe on M&A, I mean all the M&A has been on the product side so far. So I just wanted to ask, is that because you'd see more portfolio gaps on the product side? Or is that just where the deals cross the finish line? And then going forward, how should we think about where you're focusing on adding through M&A? Thanks so much. Yes. So I think your observation is correct. Things have been on the product side. And those are more about being actionable. We have a pipeline that's equivalent on the genomics side, and we're interested. And I think -- you could imagine that we're active in both areas, and there are capabilities that we'd like to add. And as they become actionable, you'll see us participate. Thanks Lindon and Steve, could you talk to the -- is what percentage of revenue was cell and gene therapy? Is it 10%? Yes. Overall, we're at the 10%. We're just starting to cross over there. And I should highlight that we haven't captured that for B Medical, so that's excluding the B Medical revenue equation. Okay. And then obviously, the Life Science Services was the slower growth portion, and I'm guessing that's part of going to continue in March. Is it oligo production, specifically the slowest part of the business? And what's the trend there? Yes. So Paul, you could imagine, I think you hit it right on the head. We're -- NGS was another record. The Sanger is a little bit seasonal, but that's really steady as we have thousands of customers. We've been slower in the synthesis side of the business. Oligo production is a small portion, the business is Gene Synthesis. That's been a little bit slower. We've got some green shoots that show that activity is good. We've got a lot of capability, a lot of capacity, high-quality capabilities, and this is where we're focused with our sales initiatives and sales efforts to get that back. So we're encouraged by where we are. It's just going to take a little bit of time, but the offerings are particularly strong, and we're bullish that we'll get this back on a good growth path by the year-end. But indeed, that's been the soft spot for us on the genomics side. And China you said was what, mid-single-digit growth? And the follow-on to the China question is I know you had expanded in China to expand oligo production. Are you kind of getting to normal in China and oligo production in China? How is that? Yes. Paul, I'm going to keep bringing you back. The oligo production is mostly as a raw material for our synthesis business. We have oligo businesses. It's relatively small. But the production capability is very strong. This is about customers and engagement and getting back to customers. The growth in China on the synthesis side, both the oligos and the Gene Synthesis was strong in China, in particular, in light of the COVID environment. And Paul, I'll highlight, we actually just struck a low double-digit growth in China, and that was supported on the services side as well as products side. When I say that growth on both sides. And it's encouraging on the Gene Synthesis site there. We're quite competitive on the round where we weren't exporting. As we mentioned on the call, one of the things that's held us back in other areas were some logistics issues in the COVID environment. But we've overcome that now, and we're putting sales power behind that again. I think we're starting to see just beginning signs of recovering some of those accounts. Hey guys thanks for taking my question. Lindon or Steve, I just wanted to understand some of the numbers. If I look at just total revenue growth, up 28%. And I think your guidance is for maybe 12% in 2Q at the midpoint, right? And when I look at your annual guidance of 30% growth that would imply a 40% growth for the back half, just given where first half is shaking out. What drives this second half acceleration? When I look at the organic guide for 2Q here, I think that decelerated ex-COVID from the 7% in 1Q to 2%. What's driving this deceleration in 2Q? And what gives us the visibility here for the back half guide? Yes, Vijay, it's a really reasonable question. Let me say, we feel like in the first quarter, we delivered really right on our expectations. So let me break it into 2 pieces. Our base business, excluding B Medical was right on our objectives. And both businesses saw some signs of strength. There, what we're counting on in the second half, and this is consistent when we shaped the guidance last quarter is that we would have low single-digit growth on the organic basis, ex-COVID starting, but that it would move toward low double digits or through low double digits I said, to achieve that. And I think that's what we're seeing. We're seeing signs of momentum. We've got -- we actually -- we truly believe that the investments we're making are going to help further fuel that. And the efficiencies we're creating, I think, will also fuel that in the coordination of our business. On the other piece of the business in B Medical, we fell just a bit short of the number we had in our midpoint. Still as you said, it reached us up to 28%. But two reminders here. Lumpy business, so that attributes to why we were just a touch short, but we're not concerned because we know the projects and demands there are still there. It's just timing. The other aspect of this is that we highlighted, the December quarter every year in that business is the peak of the calendar year. That means you're going to drop off in the March quarter and then you're going to be lumpy, and you can't project that it's linear at all, but that you've got fuel to carry you through the next -- the rest of the three quarters. And that's what we see, particularly with some significant orders that we know are coming but didn't come in the first quarter. So another way to talk about B Medical is if you look at what we've inferred in our guidance, we'll be about half achieved in B Medical by the time we get through the second quarter of that year that we've described for them at $130 million. We'll be pushing that needle. So we feel pretty good about that first half. The second half will show more growth in B Medical year-over-year. We obviously on a year-over-year basis, but it's not that it's out of the woods relative to what we'll have delivered in the first half. Sorry, just to clarify that, Lindon. So with B Medical, $130 million of revenues. It looks like that you guys are reiterating the $130 million, is that right? And I wasn't clear on the second quarter, 2% organic. What drives that sequential deceleration ex-COVID from Q1? I don't think the comps get harder. So I'm just trying to understand 2Q, whether it's timing or anything else that's going on. So one, to separate it again, so B Medical first. B Medical, it's a natural drop-off from a December year-end where budgets and project funding drives the December quarter, but less so in the first calendar quarter. On the base business you're right, there's some deceleration of overall year-over-year comparison on an organic basis ex-COVID. But in that, you're going to see -- if you break it apart, you're going to see that the products business is still low double digits ex-COVID. But the services business is in single digits still, and the genomics business is still lagging, the Sample Repository Solutions business. I expect when we finish the second quarter, we'll still be talking about strength in SRS and the momentum that we see signs of momentum that genomics is still picking up. But both of those businesses, we'll probably be talking about low -- I should say, single-digit growth territory. Understood. And if I could just maybe squeeze one more. Operating margins here, EBITDA margins, it looks like Q1 was maybe 0% margins. What's driving this year-on-year declines, right? I think last year, I had you guys had high single operating margins. And this 2Q, are we looking at negative operating margins, Lindon? Because when I look at that EPS guidance of flat zero EPS at the midpoint, is that indicating negative operating margins in 2Q? Yes. So first up, you're correct on the observation that were down year-over-year. Those projections or I should say those trends year-over-year really were gross margin pressures. And of course, we've added structure to the business two or more and to take on B Medical. But you're exactly right, gross margin pressures are there. We haven't made that up in -- and with the actions we're taking, as I said, we'll take about $20 million of annual cost out. That will be about $5 million or a couple of points -- we'll net a couple of points, net of investments in the second half. So that's somewhat reaction to that, but also to position us for more efficiencies. When you're looking at the second quarter, you will be looking at negative operating profit in total, and that's very cognizant of our part. And again, it will be a low point in the fiscal year as I made in my commentary, we're confident of that. We've got two convictions very strong. One, we are seeing the signs of momentum on growth. We're going to continue to invest. We're not pulling back on that. But secondly, we're reinforcing it with the cost actions and we are set on making it a more profitable base business and set it for leverage going forward. Thank you for taking our questions. Maybe you have covered part of this. So for genomic services customers, if we break it down to government and academic institutions, Big Pharma and then Biotech. Have you seen different customer behavior change over the last quarter? What I would say is we wouldn't indicate a significant difference there. We have read, we see -- could we align academics to have a little bit slower spending? Are there constraints on spending budgets? I think there's a touch there, but it's a little difficult for us to call out a trend. In general, what we have seen is acceleration in NGS, and we see that across the board. But pharma, biotech, and academics are -- participate in that space for us. So Yuan, I just -- I wouldn't call out a particular sector driving this weakness. We see this as somewhat market centric. I'll highlight that the Americas has continued to be stable, and China grew pretty nicely overall. Europe is still lagging a bit in this space for us. And again, I don't know that, that reflects markets. It could. I think challenges in Europe are certainly heavier, but we also see that we're a small player in -- relative share-wise leader in capabilities, but still small share-wise. And so there's lots of opportunities for us to win. That's where we'll be putting our investments in each market. Got it. Maybe can you clarify on how you plan to reconstruct the sales regional structure. Does it mean more sales in a certain region, so that they have more focus of their own? Yes. Yuan, this is Steve. Indeed, we have more -- very specifically, more genomics-focused in some critical regions, and we're hiring and training but it requires -- there's a special talent there. So we're -- but we're aggressive in our hiring. And in addition, we're making sure that the teams are intact right now and each one is filling out their specific positions. We do have a couple of regional gaps, and we're working hard to hire there. So we're -- I think we're making progress. We're pleased with the really exceptional talent we've been able to bring, but that takes a lot of work to find just the right people. And there are no further questions. Mr. Robertson, Mr. Schwartz. I'll turn it back to you for closing remarks. Thank you very much. Thank you, David. Thanks everyone for tuning in with us. These are really key times for us. We're in a mode as much of the markets I know that you're analyzing and looking to find the right investments in. We're at a juncture where while growth moderated, we're seeing positive growth. So we're talking about why our growth is positive, but not as strong as it could be and what it has been in the past. We expect that we're making the right investments. We're headed toward I believe acceleration, and that's our intent and objectives here. I'll highlight relative to some of the questions, we are tuning the sales team for that performance with investments. We're putting more demand generation dollars behind that as we rightsize some of our structures, and so we're going to facilitate that market by market and facilitate it also with the talent and skills that Steve outlined in his remarks. So with that, I look forward to not just delivering on the second quarter, but being able to talk to you about the progress that we see out of the second fiscal quarter headed into, I think, a stronger second half. And that's been our objective, as we talked to you about that three months ago and where our convictions are today. Thank you very much. We look forward to keeping you abreast of our progress as we move through the year, and we'll talk to you soon out on The Street. Thank you. And that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your line.

EarningCall_14

Welcome to the RXO Q4 2022 Earnings Conference Call and Webcast. My name is Michelle, and I will be the operator for today's call. Please note that this conference is being recorded. During this call, the Company will make certain forward-looking statements within the meaning of the federal securities laws which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the Company's SEC files, as well as the earnings release. You should refer to a copy of the Company's earnings release in the Investor Relations section of the Company's website for additional important information regarding forward-looking statements, and disclosures and reconciliations of the non-GAAP financial measures that the Company uses when discussing its results. Good morning, everyone. Thanks for joining today's earnings call, our first since our spin-off from XPO. Joining me today in Charlotte are Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. Our first quarterly report as a standalone company was a strong one, despite the challenging macroeconomic environment. We reported adjusted EBITDA of $64 million. Our Q4 results were driven by another quarter of profitable volume growth in brokerage, despite a muted peak season. Our complementary services, including last mile and managed transportation, also performed well. Overall, our gross margin remained strong at 19.6%, up 250 basis points year-over-year. Our tech-enabled brokerage business continued to significantly outperform the industry, take share and grow volume profitably. We set a new volume record in the fourth quarter. Brokerage volume was up 4% year-over-year in the fourth quarter of 2022. For the year, we grew brokerage volume by 12%. We are proud of our sustained volume growth. Since the fourth quarter of 2020, RXO's brokerage volume has increased by 27%. And since 2019, our brokerage volume has increased by 56%. We are focused on continuing this momentum, and we are confident that we will deliver. This is profitable growth. In the fourth quarter, brokerage gross margin was 17.9%, an increase of 290 basis points year-over-year. Many of our complementary services also performed well. Our managed transportation pipeline is especially strong right now, and the business won several contracts with large, new customers. In above-market, large shippers are more likely to outsource their transportation departments to RXO. And when they do, they stay with us for years to come. Additionally, last mile performance in the quarter was strong, despite the difficulties facing the retail and e-commerce sectors. December 2022 was our strongest December in terms of stops since 2019. In freight forwarding, ocean and air rates have declined as expected. We have done a good job of diversifying this business, and domestic offerings now comprise approximately 50% of freight forwarding's profitability. These domestic services provides synergy spend to other parts of our business. RXO's business model is capable of generating significant free cash flow, and our balance sheet remains strong. Jamie will talk more about that in a few minutes. We have a playbook for every stage of the market. At this point in the cycle, we are focused on taking market share, while maintaining our best-in-class profitability. Our contract volume is growing, though rates are declining. Additionally, there are limited opportunities in the spot market, and these dynamics are putting pressure on the gross margin per load in the first half of the year. But this is my favorite part of the cycle. RXO is positioned to win as customers consolidate their carriers. They are choosing RXO because of our track record of delivering results for our customers, our best-in-class technology and our massive capacity. This positions us well for when the market inflects. Jared will discuss the market cycle in more detail. Our financial performance was underpinned by our winning sales strategy and best-in-class technology. Our sales team continued to expand business with long-standing customers, while on-boarding new blue-chip companies. New customers are coming to us at an impressive rate, and our sales pipeline is stronger than it has been in several years. RXO bid on about 70% more brokerage revenue year-over-year in the fourth quarter driven by annual bids. Existing customers continue to grow with us. For the full-year, the number of brokerage customers who generated over $1 million of revenue with us increased by 14% versus the prior year. The number of customers generating more than $1 million of revenue has increased by 66% over the last two years. Our customers see value in our unique portfolio of services. In 2022, about 62% of revenue came from customers that utilize more than one of our services. Customers also choose RXO because of our best-in-class technology. In the fourth quarter, 87% of our loads were created or covered digitally, the most ever for us. The RXO Drive app has been downloaded more than 920,000 times, representing 45% growth year-over-year. We will continue to invest in our technology to push for even more adoption. Relative to the market conditions, we are performing well as a stand-alone company, and have significant volume and bid momentum heading into 2023. I'm pleased with how smoothly our new leaders are integrating with those that have been with RXO for years. We've assembled some of the best minds in the business, a strong combination of seasoned leaders, best-in-class operators and cutting-edge technologies. We have a great company culture, which combines the experience of an industry leader with the energy and entrepreneurial spirit of a startup. We are proud of what we were able to accomplish in the fourth quarter. And while we are executing well in a volatile macro environment, we are also planning for a variety of scenarios. Our business thrives during volatile times. We have the playbook, the technology and the people to outperform the industry, and I'm confident that we will grow brokerage volume again on a year-over-year basis in the first quarter. Our January volume supports our confidence. RXO's January brokerage volume grew year-over-year and accelerated when compared to the fourth quarter of 2022 volume growth rate. RXO remains strongly positioned for long-term growth, and we are on track to meet the long-term targets we set at Investor Day last year. Thank you, Drew, and good morning to everyone. In our first quarter as a stand-alone company, we generated $1.1 billion in revenue compared to $1.3 billion in the fourth quarter of 2021. Profitability remained strong with a 19.6% gross margin, up 250 basis points year-over-year. Our adjusted EBITDA was $64 million in the quarter compared to $77 million in the fourth quarter of 2021. And our adjusted EBITDA margin was 5.7%, down 10 basis points from the fourth quarter of 2021. We are very pleased with these results given the overall economic environment. Adjusted earnings for the quarter was $0.28 per share. Our results were driven by another quarter of profitable market share gains in brokerage, as well as good results in our last mile and our managed transportation service offerings. Importantly, we continued to outperform the industry. Despite a muted peak season, we grew brokerage volume by 4% year-over-year and 6.5% sequentially. We are pleased to report that we set a new volume record in the fourth quarter. From a profitability standpoint, brokerage results were again best-in-class with brokerage gross margins up 290 basis points year-over-year. Below the line, our interest expense for the quarter was $5 million. Our adjusted effective tax rate was 21.5% in the quarter, lower than our expectations, driven by discrete non-recurring tax items. Regarding cash, we continue to have a strong balance sheet, and we had a strong cash collections in the quarter. As I will discuss the cash today, I would like to refer you to Slide 10 of the investor deck for reference. We ended the quarter with $98 million of cash. This is consistent with our internal expectations as we had non-recurring cash outflows of $27 million post-spin, which was completed on November 1. $21 million of the cash outflows were related to the spin-off, including items such as rebranding costs, banking and financing costs and tech-related CapEx. The remaining $6 million of cash outflows, which repay the final portion of money received in the prior year related to the CARES Act. Taking these unusual items into account, our ending cash balance would have been $125 million. This translates into a free cash flow post-spin of $25 million, which was very strong. This represents a more than 60% conversion of EBITDA to free cash flow. Prospectively, we expect our EBITDA to free cash flow conversion to continue to be strong, and we expect to grow our cash balance sequentially. We anticipate approximately $10 million to $15 million of spin-related and restructuring costs in 2023, weighted more heavily in the first half of the year. Approximately $10 million of these costs are expected to be cash outflows. Available capital remains strong with approximately $600 million in liquidity, including our $500 million revolver, which remains undrawn, and our December 31 cash balance. Our net leverage at quarter-end was 1.2x adjusted EBITDA, which remained at the low end of our stated target range of 1x to 2x. Regarding 2023 modeling assumptions, we expect depreciation and amortization in the range of $70 million to $75 million, interest expense between $33 million and $35 million, and an adjusted effective tax rate of approximately 25%. You should also model an average diluted share count of approximately 120 million shares. Overall, we are pleased with our financial and operating results as well as our balance sheet position. Now I'd like to turn it over to our Chief Strategy Officer, Jared Weisfeld, who will talk more about our long-term outlook. Thanks, Jamie, and good morning, everyone. It's a pleasure to be with you on our first earnings call post-spin. I'd like to start with the structural profitability of our business. We have gained market share with best-in-class volume growth enabled by our technology. Importantly, we have done this profitably, more than doubling our adjusted EBITDA since 2019. We often get asked about our current gross profit per load relative to historical levels. Within our brokerage business, our Q4 gross profit per load was roughly in line with our three-year average. The diversity of our business helped us outperform in the quarter. While our retail and e-commerce volumes declined as expected volumes in automotive, home and building materials, professional services and healthcare, all grew solidly on a year-on-year basis. Our technology also helped us outperform and optimize our profitability and contracts and spot mix. This quarter, we again had a favorable contract mix with contractual volume representing 75% of our business in Q4, up 200 basis points sequentially and 600 basis points when compared to the fourth quarter of 2021. Our technology is also fueling our continued market share gains. In Q4, 87% of our loads were created or covered digitally. This was the result of continued adoption of our technology in addition to a platform capability within RXO Connect that was not previously captured by this measure. We expect the percentage of loads created will cover digitally to grow sequentially into the first quarter. The RXO drive app has been downloaded more than 920,000 times, up 45% year-over-year. Average weekly users increased 30% year-over-year in Q4. Registered carriers increased 42% year-over-year. And importantly, seven-day carrier retention was strong 74%. Looking into Q1, we are cognizant of the broader macroeconomic environment, and where we are in the freight cycle. I wanted to provide some perspective. Historically, at this stage of the cycle, we've seen quarters represent anywhere between high single-digit and low-20% of full-year adjusted EBITDA. We still expect our brokerage business to continue its outperformance in Q1 and grow volume again on a year-over-year basis. We have a strong sales pipeline, and our non-retail verticals are growing year-over-year. This volume growth will be mitigated by a continued reduction in gross profit per load, but it positions us nicely for when the cycle inflects. I thought it would also be helpful to provide some puts and takes for the year. Our brokerage business exited 2022 with significant momentum, and we feel confident that 2023 will be another year of volume outperformance supported by the strong January volumes that we referred to earlier. Additionally, some of our customers are telling us that significant retail destocking that occurred in 2022 could lead to restocking in the second half of 2023. However, similar to Q1 dynamics, gross profit per load in 2023 will moderate when compared to 2022, as the cost of purchase transportation stabilizes, and lower contract rates come into effect. It is important to note that even though our gross profit per load is moderating, we are still operating at best-in-class profitability levels. We have a playbook for every cycle, and RXO is in a strong position to gain market share profitably. That brings me to our five-year outlook, which calls for $500 million of EBITDA at the midpoint in 2027, an approximate 60% increase versus the last 12 months. We remain confident in our five-year outlook. This guidance not only contemplates an uncertain macro environment, but it also embeds the moderation of gross profit per load through 2027. It assumes modest EBITDA margin expansion with increased employee productivity. The incremental growth embedded in our guidance is 100% organic. RXO's asset-light business model and its highly variable cost structure provide us with significant free cash flow generation capabilities. Prospectively, we are confident that we will continue to achieve a strong free cash flow conversion relative to EBITDA and adjusted net income. Our priority is to use excess free cash flow to grow our business organically. It's important to note that within brokerage, 100% of our growth over the last six years has been organic. We intend to stay within our 1 to 2x net leverage target, and we are currently operating at the low-end of that range, providing us the flexibility to deploy our balance sheet effectively. To summarize, we have taken share profitably. We operate in a $750 billion market with plenty of room to grow. We plan to generate meaningful free cash flow, and our strong balance sheet provides us with flexibility to deploy our capital effectively. We have a small share of an enormous market, a proven team and a winning strategy, and a long runway for profitable growth. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Stephanie Moore of Jefferies. Please go ahead. I wanted to touch on just the volume outperformance. Clearly quite strong in the fourth quarter, just continuing into the first quarter. Also, I think what stood out to me was just the increase in bid opportunities, despite the softer market in the fourth quarter. So maybe you could talk a little bit about some of the volume wins that you're seeing, really what you've seen in terms of some large contract wins that might be driving this outperformance? Or if you could kind of pinpoint any other major drivers for the strong results? Thank you. Yes, absolutely. So thank you for the question, Stephanie. This is Drew. When you look at our volume outperformance in the market, we've got great relationships with our customers. Our top customers have been with us for 16 years on average. They come back to us year after year, and they continue to grow with us because we provide a great service, we create solutions for them that contribute to their supply chain efficiency and their transportation budget, and we've got the best technology in the market that helps them decide things like what day of the week they should ship something, what mode of transportation they should use, will even help customers decide where they should place warehouses as far as to efficiently route their transportation. So when you look at why customers are choosing us, is because of the service that we offer, is because of the capacity that we bring, is because of the technology. When you look at in the fourth quarter, our bid revenue was up 70% on a year-over-year basis, and that's even with revenue per load coming down. And we did that with 30% more customer count. So we've got a great momentum on the sales side, and we're positioning ourselves well for when the market inflects. Thank you. And then just a second question for me. On share repurchases, I am just looking at the slide and the repayment of the CARES Act, which I didn't realize was something that are didn't account for. Is that – would that preclude you from being able to do share repurchases until that's fully paid? Just any commentary there would be helpful. Thank you. No, that would not prevent us from doing that. And this is the final piece of the CARES Act – payroll deferment that happened a couple of years ago. So we're totally done with that. But it should not require – prevent us from doing anything there. Hey, good morning, and congrats on the first public quarter. Drew, I guess, maybe you could talk a little bit more on Stephanie's question on the bid season. How do you – maybe can you quantify or talk about, how we should think about volume gains into the year? Is it still too early to talk about that? You obviously are confident on volumes being positive for the first quarter. Is there any insight thereafter? And when you say 87% created or covered digitally, can you kind of pinpoint what is fully digital start to finish, so we can understand, how much of it is just fully on the system? Yes. So Ken, when you just look at the overall macro environment that we're in, it's still a tough macroeconomic environment. So we're proud of the fact that we're going to be able to grow volumes again in the first quarter. As you look towards the back half of the year, some of what we're hearing from our customers is their conversations are shifting from where they were six, nine months ago towards destocking, and now talking a little bit more about restocking. That's not something that's unique to us. That's something that will be – potentially be a benefit to the entire industry. What is idiosyncratic to our business is the pipeline and the sales momentum that we have in the quarter. So for that, that's why I'm positive on when the market inflects, we positioned ourselves very, very well. This market that we're in right now really separates the haves from the have-nots. And what I mean by that is customers are consolidating the number of carriers that they're working with. They're looking for carriers that provide solutions for them to contribute to their supply chain efficiency. They're looking for carriers that have technology to integrate with their system, and they're looking for carriers who have access to a lot of capacity and can service them at scale. That's something that we check the box on all of those for our customers. So we're excited on that. The second part of your question is we were 87% created or covered digitally. That's what we feel is the most important metric. The created or covered is something that we continue to gain adoption of, and it's a significant portion and continuing to grow, but not a number that we're disclosing at this point. We think it's important to look at half of the order being carrier, half of the order being customer. And what part of that – what life of the cycle of the order is fully digital. Just to clarify, when you talk the share wins in bid season, is that intending gross profit per load. Should we read that as using pricing to win those volumes to outpace the market? Or I just want to understand the message we should read through that in terms of winning that share? Absolutely not. We price in line with the market. And we feel because of our technology, because of our pricing algorithms, we are able to operate at best-in-class gross profit percentages, what you saw in the fourth quarter. We operated at 18% gross profit percentage in brokerage, which is actually up 290 basis points on a year-over-year basis. So for us, we price business to be able to go and take market share, but to do it profitably. Thanks, good morning. Jared, any color on – you talked about gross profit per load sort of near historical averages. How much would it have to decline to get to historical troughs, once I assume you get there sort of around the bottom of the cycle, when spot rates start moving up. And then you made some comments about 1Q EBITDA can be high-single to 20% of full-year EBITDA. Should we think about that as a comment relative to sort of the $300 or so million of EBITDA you did last year? Or how should we – what percentage of what, I guess, we're not really sure how you're thinking about full-year EBITDA. Sure. Good morning, Scott. Thanks for the question. So with respect to your second question, I'll take that first. So first quarter as a public company, and we wanted to give you some additional color of current cycle dynamics. We thought it would be helpful and instructive to give you context based on historical results at this point of the cycle. I can certainly appreciate that it's a wide range. But historically, we wanted to give you some color that we've seen quarters represent anywhere between, call it, high single digits and low-20% of full-year EBITDA. And that's referring to where we are from a cycle dynamic perspective. In terms of your first question with respect to my comment that we're currently operating in Q4 at a gross profit per load in line with our three-year historical average. I just wanted to give you that as a sense as it relates to the fact that ultimately, we have seen our gross profit per load moderate. We wanted to give you context of where we're punching at relative to our three years on a go-forward basis. As Drew mentioned in the prior question, we continue to bid and that we're bidding for profitable growth. These are gross margins in the current quarter, up about 300 basis points year-on-year. I'm not going to go into the dynamics in terms of where we are relative to trough, but you should certainly think about – as we think about the year playing out, we are cautiously optimistic into the second half. We are hearing from our customers that there's the potential for restocking in the second half, and we'll see how that plays out. Okay. And then just on your commentary on January volumes, it strikes me that most companies have had probably better than expected or maybe better than peers January commentary. Just your perspective, is this – are we seeing new signs of the market bottom? Is this just we had some favorable weather? Any thoughts on this better trend in January? Yes, January it was a strong month for us whenever we look at it on a year-over-year basis. And like Jared said in his comments, that we actually grew that faster on a year-over-year basis than what when we grew volume in the fourth quarter on a year-over-year basis. And for us, it's more of idiosyncratic to us and where we're at and the relationships that we've got with our customers. We expect our Q1 volume to be an outperformance in the industry again, and we expect to be able to go out and take market share. Right now, we're at the point in the cycle, where we are positioning ourselves for the point of inflection. And this is what separates carriers for customers, and the service that we have given them over the last five years has put us in a great position. Thanks very much. Good morning. I just want to circle back to orders covered digitally. Could you give any covered or created digitally? Could you give us a feel for maybe mix of how much is shipper side and how much is driver side covered just within that? I know you want to disclose it fully. But any sense of magnitude in that? And then as a follow-up on that topic, are you measuring – how is productivity per employee looking if you measure by this metric or any track with this technology enhancement, how is that productivity looking? Do you – can you give us a sense of how that metric looks now as opposed to maybe a few years ago? And what type of trajectory you expect there? Thanks. Yes. I'll start off, and I'll let Jared take the second portion of your question. When you look at the created or covered, we have made a lot of inroads on the customer side. It is a greater percentage on the customer side for where we're at in the cycle. We still have a little bit of room to go on the customer side. And on the carrier side, as we're working with these smaller owner-operators or small trucking companies, we've got a lot of green space to be able to continue to go out there and drive adoption in the business. And on the – Scott, on your second question. With respect to brokerage productivity, it did improve in Q4 relative to Q3 from a brokerage standpoint, so we're very proud of that. We're anchored to and what we're focused on is as we look at our long-term guide of 2027 and $500 million of EBITDA at the midpoint, about 60% higher from current levels. That's going to continue to yield increased productivity going forward. So we're certainly looking forward to executing on that. I think it's also important to realize that within our brokerage business, we're staffed for capacity. When we look at the ability for our – our ability to respond to a dynamic environment, we can respond to 10% to 15% upside in volumes, if we need to. Thanks guys. Appreciate that. For my follow-up, I'm going to switch it over to last mile. Obviously, with peak season, that was a meaningful part of the mix. Just curious, how you're seeing pricing trending there? I would imagine you have an opportunity. But just that and takeaways from this peak season, and how that – that's going to carry through to how you approach the business in 2023? Thanks. Yes. First, Scott, there really wasn't much of a peak season. And so that's why we're so proud of the performance of what we had in last mile and having our best December since pre-COVID times. When you look at who we are and last mile, we're the leader in the space. We have been for a very long time. When customers are doing business with a national footprint, they want to talk to us because we got facilities that put us within 125 miles of 90% of the U.S. population. So for us, in last mile, we've got a lot of opportunity to continue to be able to grow and grow with large customers. In your second part of your question on the pricing, that's an opportunity for us, as we head into 2023. We're in some of those bid negotiations right now. And we think that, that should be a tailwind. As we're the leader in the space, we've got great service. We want to be compensated fairly according to the services that we provide. Yes. Good morning. I wanted to ask you a bit about revenue per load. I'm thinking about the comment that you were 75% contractual loads in 4Q, but you still saw a pretty big decline in revenue per load, something on the order of 25%. So how do I think about revenue per load if you look at 2023? Do you think that as the bid season goes through and you have contracts repriced, that there's further step down that's meaningful in 2Q, 3Q? Or would we think about your revenue per load more being driven by spot rates that maybe as you see spot market kind of bottom out, say in 1Q, that your revenue per load might stabilize more quickly? Yes. Thanks for the question, Tom. When you look at our performance in the fourth quarter, we're proud of our performance in the fourth quarter, and especially of having a gross profit percentage up 18% and brokerage. In regards to the revenue per load declining. When you look at that, there were three reasons for it. And the first is spot volume and spot rates are down. They're at a low. You look at contract pricing, we talked about this in the last quarter. And I told you last quarter that we expect a contract pricing on a full-year 2023 basis to be at the midpoint, somewhere down around 10%. We're still holding to that number. And then the third thing is length of haul. We have to be able to shift with our customers. We've done a great job of answering our customers' demand, and we saw our length of haul reduced on a year-over-year basis in the fourth quarter. So – but I guess in terms of the forward look, how would – do you have any thoughts on when revenue per load might bottom for you? Is it – 2Q do you think you stabilize? Or should we think about contracts shifting down that maybe you fall further as you look in the second half? Yes, Tom, we didn't call the top towards the bottom in the previous market. We're not going to call it in this one. We're confident that we'll be able to go out and take share and outperform the industry overall. And the point to anchor to is for full-year, we expect contract pricing to be down roughly 10% on a year-over-year basis. Okay. Yes, fair enough. Second question would just be on headcount. Obviously, you guys have nice momentum on volume growth in 4Q continuing in January. Are you adding headcount this year, just to support that growth? Kind of how are you thinking about the resource versus volume in 2023? Thank you. The biggest thing that we look at for headcount, as Jared said, is being able to be staffed for growth. And continue to be staffed and where we felt like we could grow volume 15% to 20% overnight, if we have to. And those are good conversations to be able to have with your customers to talk about having the capacity to grow with them, as they grow their business. So for us, we're looking out to be able to continue to staff up and gain efficiencies within our employee base through technology, but we want to stay staffed for growth. Hi. Good morning. I'm going to ask about the carrier retention. You talked about the seven-day being in the sort of that mid-70s range. Is there any color you can give us as we expand out maybe that timeframe, three to six months, what that trend has been? Has it been above or below that? Just trying to understand, if there's been any shift there? Thanks. It's roughly in line with that, Allison. And for us, that's an important base because whenever you're talking about smaller carriers coming back to do business with you, they're coming back to do business with you within a week. And that tells you that a lot of times their next load is coming from RXO Connect. And RXO Connect is an easy system for them to be able to use, is something where, as an owner-operator, you can pick up your cellphone, you can book a load, you can negotiate, you can do all that with little to no human interaction, while getting access to our RXO Extra program, which just carries discounts on things like fuel, tires, roadside maintenance, the things that matter most and a truckers life, we've built a system around that. So that's why you see such a high retention rate and it pays dividends for us. Great. And I want to go back to sort of that capital deployment question earlier. Leverage is at that lower end. I know there's some cash outflows in the first half. But as you think about maybe revisiting, can you maybe talk about how you're thinking through sort of those capital deployment objectives as we sort of get towards the end of 2023 here? Thanks. Yes. Allison, this is Jamie. Thanks for the question. We did – we had a really good strong cash quarter. We entered the year with a really good balance sheet, as you know. Capital deployment, organic growth is our top priority. As Jared mentioned, the last six years, 100% of our growth is organic. So we're going to be focused on that. We still have a lot of good opportunities there. If you think about our overall framework, M&A is not a top priority. We will look at it. If things came along that made a strategic sense, we take a look. If you look at capital returns in the form of a buyback or dividend, something that's also in our framework that we're going to look at as the market dictates. But organic is our number one priority right now. And we're going to have a really good, strong quarter with cash. And so we're going to look at all those things. But I think the keyword I'd leave you with is, we've got a lot of options. Hey. Good morning. Thanks for taking the questions. So Drew, I know you don't want to talk about on the bottom of the market or the topic of the matter, but can you just give us some context in terms of your carrier base is a pretty choppy December, January, strong December, weaker January. What are you seeing in terms of people turning in their keys? What's the retention look like? Are you still adding more to that base? How do you feel about the support you got there on the supply side as you go into 2023? Yes. Carriers, we actually added carriers again in the fourth quarter to our RXO Connect platform. And it's something that we're proud of carriers want to come to us to do business because we're a company of scale, where they can book their next load without having to lead the system to be able to find it. We've got a great rewards program for us. So we have not seen that from our carrier base as far as turning in the keys overall. Okay. Good to know. So I think the other comment that you mentioned on integrating some – I guess, people who are maybe from the outside. Maybe I'm reading too much into that. But could you just talk about hiring from the technology side. There's been some account reductions across the space. Are you picking up any talent that you find interesting and attractive on that front? Or are you able to kind of do what you have internally and not looking to add more talent above and beyond what you would consider normal? We're always looking to add great talent to the organization. It's one of the things that is part of our DNA, is we want to have people who make us better. And when you look at our technology space, we've hired the best technologists, not just in the industry, but some of the best technologists in the world to be able to create what is a game-changing solution for us in our RXO Connect. So very happy with where we sit and what technology is able to provide into our business, and look forward to continued growth. We can pick up talent off the street to add to that, we'll absolutely do it. I guess do you think with some of the pullbacks and the more digital natives out there, do you find this time is better than usual to pick up some of that talent? We haven't seen a huge number come over to us from the digital folks. And again, we'll talk to folks who are out there in the industry. And if it's something that we feel like is additive to our organization, we'll do it. But I'm very confident in the technology team that we've got. They've delivered amazing results over the last decade. And if I'm putting money behind somebody, I'm putting money behind them. Okay. Great. Good morning and thank you for taking my questions. So I guess I'd like to maybe dig into the volume growth a bit, just kind of circling back to that. So when you think about the components that's driving that 4% volume growth. Obviously, significant outperformance versus the rest of the market. But are you seeing any changes to mode mix there? Like for example, is that all full truckload driving that? Or is – are you seeing increased drayage volume, increased LTL volume? Just trying to square the lower revenue per load with strong net revenue margins and higher volumes. So just those things typically don't sort of all move in that same direction. Yes. We're looking at all modes of transportation to be able to continue to grow out. We've built the business off of truckload driving and freight. That's something that continues to grow for us in the fourth quarter. And LTL and other modes also grew as well. Okay. So it's a combination of not just full truckload there. So I just want to kind of clear that up. And then, I guess, Jamie, if you could maybe kind of talk a little bit about some of the expense buckets in 2023. I appreciate the interest guidance and the depreciation guidance. But as we sort of think about OpEx below net revenue, any sort of commentary either around inflationary cost pressures, or any sort of kind of commentary there to kind of help us square up the OpEx side, as we sort of think about 2023, that would be helpful. Yes. So if you look below the line there on OpEx, specifically, we've got a highly variable cost structure, first of all. So we're able to do with demand. We are – as we begin our journey being RXO as a separate company, stand-alone company, the first thing that we've done is take a look at optimizing our cost structure from end-to-end. We're doing a lot of process engineering views in the company, how we can make decisions quicker, how we can make easier decisions, which ultimately will translate into cost efficiencies and cost savings. In terms of directly guidance on our OpEx, we can't really provide that. But what we can say is the market from an inflationary standpoint, we're seeing good, able to negotiate with vendors well. We're seeing our overall cost structure – our overall cost structure stay in line with where we want it to be for the year. Back to the interest, one thing I do want to point out is it is coming in lower and what we provided as some modeling pools back at Investor Day. So we're down – I think we modeled about $37 million back in Investor Day. We came in at $32 million to $34 million range. And as you mentioned, depreciation is something we also see down year-over-year. Okay. Maybe just a real quick follow-up on that. If we think about like the SG&A line item. What portion of that would you say is variable would flow revenue? Yes. We haven't given that specifics before. I mean if you think about the cost of transportation is almost all variable. So if you take that, we've mentioned 87% of our total cost structure was variable. So if you go down to the SG&A line, by definition, it's going to be less variable than the 87%. I think depending on what the topline looks like; you could see that being in the 50% to 65% range at times. Yes. Hi. Good morning. Just curious, can you talk a little bit about contract negotiation timing? Like, where are you in the process? Is it just started? You're 30% through? And then following on that, I think you mentioned down 10% contract rate is kind of what you're looking at. I think that was for the full-year. So I'm just curious, have you hit that point yet? Or is that something you still think is yet to come as you discuss the contracts? Thanks. Yes. As far as where we're at in the bid cycle, the heaviest part of the bid cycle for us is starting at the midpoint in Q4 and going through Q1. So we're right and we're wrapping that up, coming out of it. When you look at the 10% comment on contract, that was looking at full year – it was looking at the full-year. And so for that, we're implementing those rates right now coming out of bid season. Okay. So that's sort of about the ballpark that you're seeing during this heavy period that you just talked about. Just to make sure I understand. All right. And then just a quick follow-up. The transaction and integration costs, the $40 million in the fourth quarter and I think you said $10 million to $15 million of restructuring in 2023. Like, what is – can you give some sense of what the components are of these costs? Thanks. Yes. So the things like rebranding, and I'm going to focus on what happened post-spin that impacted the $21 million we called out in our cash flow. Rebranding costs, where we want to move things from the logo of XPO to the new RXO logo. We had some cash costs of banking and financing fees that fell into that. We had some CapEx that we had to stand to start up a stand-alone business. You think about mainly in tech type areas. We had some other general restructuring. If you go prior to the spin, there's a lot of duplicate costs that we were running while we were pulling the spin together. As we look forward into 2023, as you would expect, those numbers come down quite substantially. We mentioned in the comments, $10 million to $15 million of restructuring or spin-related costs into 2023, I would think about $10 million plus or minus of that being cash expenditure versus just the P&L expenditure. And I think those will be predominantly in the first half of the year more so than the second. And you'll see that – but you will see those come down materially throughout the year. Thanks for taking my question. Just to follow-up with one more on the OpEx side. Are there any duplicate or excess cost from transition agreements, where you're really kind of running Dube systems and that sort of thing. Just any costs that come out naturally as those agreements age over the next year or two that we can think about on the cost side? Thanks. Yes. Thanks for the question. This is Jamie. As we transition through the spin, we had a number of transition service agreements. Most of those agreements had very short lives attached to them. In fact, we have ended a number of those agreements already. We actually had some agreements that we call reverse transition service agreements where we were providing services. I think if you look into 2023, a number of those have already been completed. We have a large amount that we'll be rolling off in the first quarter as we complete this first year of – this first quarter of being separate. As we look forward to the balance of 2023, that's not a material impact on our cost structure, really one way or the other. I think the good news about it is this business as a stand-alone was already very sort of self-contained. And so setting it up as a new publicly traded stand-alone company is going very well, and we're very pleased with both the cost side as well as the performance side. That's great news. And thank you for the color there. And maybe to cap it off here, you understand the desire not to give a full-year outlook given the uncertainty around here as far as EBITDA goes. But can you just – if we were to anchor to call it the Street's $235 million of annual EBITDA, can you walk us through the components of how you would get to free cash flow from there and what that could look like, if EBITDA were to come in roughly in that range? And maybe even higher level. I mean I understand your kind of giving your [indiscernible] as a public company here. But when we get to a more stable environment, any thoughts on how you want to guide, whether it will be annually, go forward a quarter, not really at all. We've just seen a lot of different approaches from different brokerage-related companies. I'd love to hear, how you'd like to come at it once the market stabilizes and you've got more experience as a public company. Thank you. Yes. So this is Jamie. I'll take the first part of that and let Jared take the second. If you think about free cash flow conversion, we use EBITDA as a reference point or a starting point, we will have an annual debt service. We've modeled that out in the range of $32 million to $34 million for the year. We will have CapEx. We've talked about that over the long-term, about 1% of our revenues. There will be years where that exceeds that. But on average, I think you can see about 1% over the long-term. You'll see a cash tax payment, obviously. But also, you'll see working capital. And what we've talked about is the way we think about working capital as we grow dollar revenue, about 8% of that dollar growth is a use of working capital. So it's an investment in growth. Conversely, if revenues were to decline, it's about 8% per dollar decline. Now if you go back to fourth quarter, we converted in excess of 60% of our EBITDA into free cash flow, which we were very pleased with. And as we look forward, you can use kind of the 50% to 60% conversion rate in a time of kind of stable revenue. At Investor Day, we talked about a 40-plus times of growth. And so we see those two holding true in the future. Hi, Bascome, it's Jared. With respect to your second question on guidance, we're not going to be providing formal guidance when we think about the company going forward. But we will certainly give you more color when appropriate like we did today. Thank you. We have reached the end of our question-and-answer session. I'll hand the floor back to Drew Wilkerson for closing remarks. Thank you, Michelle. I'm pleased with RXO's performance and our first quarterly report as a stand-alone company. We continue to gain share and grow brokerage volumes year-over-year and quarter-over-quarter. We also drove increased adoption of our technology with customers and carriers, and are effectively navigating through a very challenging macro environment. We have the right team, the technology and the playbook in place to outperform the market. The playbook, which at this point in the cycle is focused on growing volume, will put us in a position of strength, as the freight cycle turns. Our management team remains focused on continuing to deliver results for our shareowners, customers, carriers and employees. Thank you all for your time today. Have a great rest of the week, and I look forward to seeing you at the upcoming investor conferences. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

EarningCall_15

Welcome to Lupin Limited Q3 FY 2023 Earnings Conference Call. Please note that all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the opening remarks. Please note that this conference is being recorded. I now hand the conference over to the management. Thank you and over to you. Thank you. Good afternoon, friends. I'm very pleased to welcome you to our Q3 earnings call. I have with me are, Managing Director, Nilesh, as well as CFO, Ramesh. As you would have noted, we have continued to build on our momentum in Q3 both on revenues and in particular on margins. I'm very pleased that in Q3, our U.S. business performed well, India business growth improved and API business rebounded as well. On the margin front, we saw the benefit of NPLs in the U.S., seasonal product upside as well, and continued savings from our optimization measures. We are focused on sustaining this positive momentum, in particular as material new product launches start and our recent investment in a Salesforce expansion in India, starts yielding results. I will let Ramesh talk through the performance in deeper detail. I would like to share some of the business highlights. In the U.S. we continued to evolve our business with optimization of oral solids, driving growth of complex genetics, respiratory franchise in particular and executing on our new product launches. During the quarter, our inline business was almost flat with slight decline due to exit from low margin products, offset almost completely by seasonal products. New product launches in the year contributed well in the quarter with Suprep ramping up, performance generic successful launch and then authorized generic launch. Our respiratory franchise strengthened with Albuterol continuous strong performance, addition of Brovana and Xopenex brands, as well as generic performance launch. As we look at the quarters ahead, we expect new product launches like Spiriva, diazepam gel, Nascobal nasal Spray, and [indiscernible] all products where we have either exclusivity or first to market position will drive growth of our U.S. business in a profitable manner. On Spiriva, we continue to make progress and have received priority review from the FDA for a target action date in April without inspection or July with inspection. In the meantime, we are getting ready with launch preparedness. We continue to see Tutopium as a substantial opportunity for fiscal year '24 with a significant runway, given the competitive dynamics. Products like diazepam Gel and Nascobal we now hope to see approval soon given the recent successful Summerset audit. Our U.S. Generics business has come a long way in calendar year '22 still a long way to go. However with the new product launches coming in, continued optimization efforts, focused efforts in building a niche innovation as well as injectables pipeline. We are optimistic that we will grow our U.S. business in the next couple of years. Switching to India, the largest part of our business. While our growth in the quarter and first half has been below market, this is primarily due to loss of Sadness [ph] from our cardiovascular portfolio and genericization in the diabetes segment in the Gliptins. But for the diabetes portfolio, our growth in Q3 was inline with market, with therapeutic areas like cardiac, GI, respiratory all delivering double digit growth. Our gynecology and GI have actually been the fastest growth therapeutic areas for us. This quarter, we have added close to thousand reps created six new divisions to expand our reach and share of voice. We expect our investments to get us to above market growth in the quarters ahead. We are committed to growing our India business to double-digit growth in the quarters ahead. Other than India and the U.S., our API business recovered with the growth and cephalosporins and other countries like UK on the back of foster generic and Germany due to NaMuscla grew well as well quarter-over-quarter. On the margin front, we expect continued improvement in particular as we execute a new product launches and our recent investment in India and their salesforce in India start yielding results. Likewise, we continue to focus on cost optimization efforts. While we have been successful in optimizing our manpower cost, we have been very disciplined in getting out of low margin products that has not allowed us to optimize the idle cost. Nevertheless, we are confident with the efforts that we have underway we should be able to move the needle on this front of the quarters to come as well. On the compliance front, we have made progress and positive outcomes on sites like Ankleshwar, Nagpur injectable and Somerset. We've also made substantial progress on our remediation efforts in Tarapur and Mandideep. The recent approval of our Nagpur injectables facility will enable us to start building our organic injectables portfolio in full earnest. Overall, we are moving in the right direction. We expect the pace to get better as we execute on our material new product launches in the quarters ahead. With this, I will hand it over to Ramesh for a deeper analysis of our performance. Thank you, Vinita and good afternoon friends. Straight to the current quarter, INR4,244 crores as compared to INR4,091 crores in Q2 FY '23, a growth of 3.7%. On a year-on-year basis, the growth was 3.8% while the previous sales was INR4,087 crores. The U.S. business in the quarter, our U.S. business registered 11.2% growth in local currency terms on quarter-on-quarter basis, that a new product launches in the U.S. generics business and brands acquired from Sunovion. On a year-on-year basis, revenue declined by 12.3% in local terms with price erosion in top brands like Brovana, Albuterol and Famotidine. We launched four new products PERFOROMIST, NSAID, Rufinamide, and Pirfenidone TR tablets in Q3 FY '23 being the total NPS to eight for the year. NPS contributed $20 million in Q3 revenue. India region, India valid formulations business declined by 3.4% in Q3 versus Q2. Whilst on year-on-year basis sales grew by 2.6%. The overall market growth during Q3 was 10%, whilst Lupin grew by 7.5%. Loss of exclusivity and generalization in anti-diabetes portfolio has impacted growth rate of Lupin has paid the portfolio held by Lupin, in the anti-diabetes is close to 55% of the portfolio of the anti-diabetes portfolio. As you would know, a top 3As, are cardiovascular diabetes and respiratory. Apart from that gynecology and GI, you're also doing very well. And they're growing in the case of gynecology by 19.7% and GI by 16.1%. API business sales grew by 12.7%, quarter-on-quarter as core cephalosporins, API sales recovered during the quarter. Year-on-year basis sales growth was 9.8%. On the EMEA front, revenue growth of 11.1% year-on-year basis, while strong performance of Luforbec in UK and NaMuscla in Germany [indiscernible]. Sales for growth markets grew by 23.5% vis-a-vis Q3 FY '22 and declined by 5.9% vis-a-vis the previous quarter. Gross margins, Q3 FY '23 gross margins are 59.8% as compared to 58.1% in the previous quarter is mainly due to US margin improvement, better product mix and reduction in freight rates. As compared to Q3 FY '23 gross margins, the slight margin is due to reduction in writeups, freight, offsetting the impact price erosion in the U.S. markets, and of course inflation pressures on the cost front. On the employee benefit front, Q3 FY '23 was INR764 crores, vis-a-vis INR771 crores in the previous quarter. The margins declined on quarter-on-quarter basis because of [indiscernible] payments made in the last quarter, we had highlighted this in our last earnings call as well. On an ongoing basis, we expect employee costs to be in range of 18.5% to 19% of sales as we build a sales force in India. And Vinita just spoke about that. A lot of people have been asking me about manufacturing other expenses spend. I also rushed to say that there is indeed a onetime expenditure base increase by about INR40 crores which will potentially come down next quarter, but could also perhaps in some ways be offset by perhaps an R&D increase next quarter. EBITDA margins, operating EBITDA, external FX and other income is 12.2% in Q3. Our quarter-on-quarter growth by 160 basis points because of highest sales, gross margins and cost control. Normalized ATR is expected to be 35% as a few subsidiaries like LOI digital and healthcare continue to have losses. On the balance sheet front, there has been a lot of optimization that we have been working on and working capital operating days were lower by five working days. Yes, thank you very much. We will now begin the question-and-answer session. [Operator Instructions] So the first question is from Prakash. Hi. Good afternoon. Just wanted to check on the U.S. run rate. We had fairly good launches, where we have couple of one AG and decent launches. And we also acquired the two decent sized products. Just wanted to understand and the season was also good. I think, the flu season was good. The companies have reported market share gains. Would you -- were you satisfied with the U.S. performance or we missed some contracts or how do you think about it as a base business now? No. We were satisfied with the performance, Prakash. On the one hand, we should never be satisfied with the performance, but it's come a long way in the last couple of quarters, in the business, both the base business, the inline business as well as new product launches have contributed very nicely to the quarter. I'd say that, the impact of the flu season products that obviously as a flu season receipts, which has only started, one will see some decline on that front. But the team continues to work on this now, the $170 million dollars run rate with the current products, until we can get additional new product launches like Tiotropium and alike. Okay. I mean, so it's a full quarter benefits of these launches as well as the acquired assets is what I was trying to understand and you are saying that, yes, it had full quarter benefits. No. I won't say, it's full quarter benefits. Because, we had the brands only for a couple of weeks in the quarter. And also, performance launch was, yes, we had two months rather. The brand Lupenox and Brovana. And performance, we had some upside opportunity that we were able to capitalize on because of supply issuance of some of our competitors. So, I'd say we will see an increase from the brand products, but we probably see normalization on performance. Okay. Got it. Fair enough. And secondly, on Spiriva. So, what I heard was April, the target has moved a bit to April, which is with inspection in June without inspection. If you could just give more color, what does it mean? So that date is, like, what kind of color on the queries that has coming? And without inspection means that, if they don't come by June, it would deem to be approved or how should we think about that? So it's actually the other way around, Prakash. It's April without inspection and July with inspection. So if the FDA decides that they want to come and inspect, then it'll the tab date will be July. But if they decide that they don't want to inspect, which is very hard for us to predict the agency is going to inspect or not, then it's going to likely be April. And we are hopeful that, we can expedite it as much as possible, just given that are back and forth with the agency. Majority of the disciplines have been closed. CMC, the PD and disciplines have been closed. I believe that, quality is still pending, and that's why I say, it's either April or July. Okay. And lastly, on the cost side, I think Ramesh did mention that, there is INR40 crores one off. But even if I strip that off, that cost is fairly high even that. And I understand there is a thousand people have been added. So incrementally SG&A, traveling, marketing will increase from here. So first is why the jump apart from normal inflation is there anything else that is increased? Or is it maybe Forex as well? And how do we see this number moving going head? There is of course, a slight impact because of Forex, because the there is a rupee depreciation and only translate expenses outside the country, it has happened that way. But a large chunk of it is actually coming in because of the fact that you have had higher travels. And I also told you in Q2, there was a shift to in fact, payroll expenses, which has shifted back here, to the extent it has kind of normalized out here. There's been a higher component in terms of litigation spends in the light as well. So all of this is actually contributed. While your question actually comes in from the fact that what did we do on the optimization plan. I rushed to tell you that we've been doing a lot of work on that, to be honest, a lot of it actually happens at the gross margins line itself. And that is in terms of routes process external vendor development and the like, and apart from that. But this is also been in some ways eroded by high inflation out there. Apart from that, there were inefficiencies across various lines. And at the start of the year, we spoke about, in fact, trying to address the manpower situation at the factory level. We have been pretty successful there. And it's captured in some ways, the staff costs said. There are other lines where you have been extremely successful, but there are paths, which we couldn't do much, because the fact that volumes did drop, we had to take write-offs in terms of inventories that we had, and plus, of course, issues that we had on the impurities plant itself. So, whilst the initiatives are still on, there have been mixed results, but we'll certainly see a lot more of this bearing fruit in the quarters to come. Okay. So, our EBITDA margin guidance of exited of 16 to 18, with cost A, increasing and B, Spiriva moving out to next quarter changes, right? In a sense, yes. So if you're talking about specifically quarter four, it will be in the same line, the same range as the current quarter. But once we actually have the top-line moving, which will potentially happen once we have Spiriva coming in, and of course, you’ve got Darunavir and others, you can expect, in fact that obviously, impact the bottom-line as well. We will continue to work on the cost lines as well. But I think we really banking on the top-line to shift actually to see a real shift on the EBITDA front. Hi. Just to carry forward the question. I mean, you're banking on top-line to deliver the margins. But it's a handful of product. So, you have Spiriva, in case that gets further delayed? What's your outlook on margin in that case? And in that context, it is important to understand in some granular detail, what's the kind of a cost control initiatives that the company intends to take? Because banking on U.S. revenues, and that is a handful of products. There can be potential risks to that, because the margins are very low at this point. So I also recognize that, we also recognize that in lots of ways Saion. So, if the top line doesn't move, then potentially we still have to work on various initiatives on the cost plant. And there are several things that you still can. For example, there is an element of HEPTS [ph] still coming in because of the fact that if there are impurities, and we are not able to supply that it's actually impacting, in some ways, the bottom-line itself. There were write offs that we have taken during the course of this year. But those alliances that we still can work on. Apart from in fact, the footprint that we will reduce in case, there is, further volume drops. So we would, so it has to be, in some ways an [indiscernible]. We need to kind of weigh the pros and cons of potentially when will the top lines start moving, and then potentially work on other items as well. Specifically, when it comes to India region, yes, we are going to add more people, but we are also working on productivity. So whilst, there is going to be an increase in overall expenses, we also believe that there is going to be commensurate increase in the top line. So there will be, so at the very least, what I do expect is that if Spiriva and other products are going to get delayed, the expense lines will certainly will go down that path in terms of reducing. That could, of course, shift the EBITDA line in some way. Not to the extent that the top line can remove it, but they will certainly a perceptible increase because of the reduction on the expense plant itself. Yeah. So if we talk about, there has been an increase in cost of production because of that, and which is really impacting in some ways our gross margin line. But better sales mix. And, of course, in a reduction in terms of other air freight and others are actually broaden some benefit there and that's reflected in the gross margin increase this time around. Yes, Ramesh you would used to talk about, I think 500 crores of savings. I mean, there was a number which you talked about earlier, I mean, is that number still valid and how much have we already achieved? And how much is left? I mean, if you can give some color as to you know, how much more just from a cost perspective, one can expect? Yes, so the 600 crores were really could be broken down into six or seven buckets, so to speak. We achieved a lot of success in at least three or four of them, whilst two others, we are kind of stymied, because the fact that the volumes dropped, and there was like gaps in the light. So overall, I would say that it's mixed results. So at least about 50% to 60% has been achieved. But where we have not achieved also significantly alter the balance. So, still working on those, and it's not so it's it will never get achieved, it will get achieved. It's only a question of time. And that would actually kind of round up the full complement. Okay. Just one last question. Just a clarification on the new product contribution, $20 million, I think you mentioned, this includes the acquired brands. And also if you can indicate what's the exposure to the U.S. market from the Mandideep facility in terms of revenue? We exposure to from when to give us revenues is, any way it's some 10%. I'm not sure if it's up 5%. So coming back to cost, first few clarification. So you added 1000 people in your India sales team. So when did this addition happened because secretly we haven't seen much in the stock cost. And then you you're planning to add-on more people. So how many potentially could come in? And when do you expect these new people to start contributing meaningfully? So what we understand that it takes around 1.5 to 2 years, so are you expecting similar timeframe? So we are adding from November, and in this quarter, we will complete the addition. A large part of that is really in this quarter, that we're adding. We are creating six new divisions out of that. And part of this is just the fact that, we are under index in India as far as our sales force is concerned. So, we will see some impact this quarter. But as you know, we have also been growing below the industry average in the last few quarters, and that is changing. So I already see that minus teen [ph] licenses portfolio, we already had market growth rate. And even after adding these people, we will see further acceleration of our growth. My expectation is that from the second quarter, we will be growing overall at rate faster than the market. Yeah. So I think there was some small number which was added in in this past quarter. In Q4 is where you will see some impact of this staff cost addition. So, that also is staggered through the quarter. And then it gets baked into the numbers called Q1 onwards. Okay. Q1 onwards. Second, Ramesh, you mentioned fourth quarter, sorry, third quarter number obviously had one-off. And then you are saying, if we move to fourth quarter, that one-off might come down. But you are saying R&D will catch up because third quarter was a bit less. So should we assume broadly similar other operating expense cost to continue? It'll come down a little bit in terms of SG&A expense that we can control. But broadly around this. All it cost to have a level, but that's on a different line. So if I just look at the cost and that we wait for square by another key approvals to come in, when we should be seeing, I'll say, notable benefits coming from all the efforts which you have been doing on the cost front for last several years? So that's exactly what I was trying to explain. So -- timing for because of reasons beyond our control, which is really about in some ways, the volumes dropping and because the bright tops and alike. And those buckets, we would be a blessing. So these are not going to continue forever. These are systemic issues that we kind of faced, which we have addressed. Those will get corrected. So if you are talking about the total quantum of 600 gross benefit flowing, and it could have flowed into the P&L by the time we are through with this. And then we just more specifically, I think, Q2 onwards we would see improvement in performance. We are better than where we have some of this optimization that will kick in as well, that's what we see. And obviously, to your token will only whether it's through that picture. Okay. My last question is on India bit. So diabetic portfolio. Obviously, we have seen generalization. But with more salespeople coming on board, which segments you are focusing, which can clearly help you to outpace the market growth in coming few quarters? So big therapy areas are diabetes, cardiovascular and respiratory. And these are other three areas that would grow as well. So while it's a point of time, that diabetes market is also bouncing back. In addition, areas like GI, areas like women's health are growing strong double-digit as well. And these are areas that we would accelerate as well. Just I think to clarify. And diabetes, are we relying more on say improved penetration? Because maybe like there are some new launches lined out, but are you relying more on volume penetration to pick up pace? The market is inherently bad, unfortunately, it has the diabetes capital of the world. So, I think that market potential is always there. It's value wise, it is vitiated at this point of time, because of the generalization of multiple products in the diabetes portfolio for the market itself. It's the only segment that is really growing at best a single-digit kind of thing in the Indian market. And it's going to bounce back for the market, it's going to bounce back for us as well. So, my first question is on the kind of potential profitability that we can achieve. Over the next one to two-year period. So, practically having seen the pricing pressure in one of the key complex products, what we have been waiting for, let's say Albuterol and other respiratory products. So, now, our focus has been obviously on the complex index and we have been spending a lot, but we are also visualizing that or seeing that the kind of pricing pressure as well as competition with complex products are also witnessed. So considering that, are you confident enough to achieve what you have been trying to fetch from the complex portfolio going ahead? We've already started seeing the benefit of the complex products, just a couple of products, like Albuterol. How much they benefit from us, from a profitability standpoint. We can't wait for a portfolio to be rolled out completely. I mean, when Spiriva gets approved, the potential of Spiriva is substantial both on top-line as well as bottom-line. And we will execute on these opportunities. Meanwhile, until they get delayed, no one feels uncertain about them, but the fact is our team is working 100% to get these products approved and launched. And as we look at launching these products, that will really help us grow the top-line, as well as the margin profile and we feel confident of getting to that next couple of years to the 17%, 18% EBITDA level. Whether you are happy to achieve whatever the profitability that you have achieved in case of Albuterol. Because that is a concern that okay, that was a key product and we have been targeting certain level of market share there We achieved everything, but that has not influenced anything at all, to our overall profitability. Although there has been incremental competition incremental challenges to the business generally that has come up, but still. So given the scenario, whether we should see a kind of or weather the kind of profitability that we're trying to achieve, will that justify the kind of money that we have been spending on the complex portfolio? I will say that actually I'll be drawn offset a lot of challenges of the oral solid portfolio as erosion that we saw on the oil solid portfolio. And as we look out the next few years, we expecting that Albuterol will have some price pressure, price erosion, and that we are factoring in new products that we bring into the market that will help us bolster the top line and bottom line. My second question is on the let's say, Spiriva. See, obviously, it is delayed a bit. That is fine. But I think in the meanwhile have you understood anything about the potential competition in that product? Yeah, so we don't believe I mean as of yet, no one has really finished clinical trial, we believe that one company has started working on a trial, they're just starting a PD study. So from anyone who's starting a PD study right now, if I look at our timeline, they're going to be three years away at least to get a product to market. So till the time that we will be having a kind of exclusivity situation in Spiriva whether that will have some kind of advantage in terms of grabbing market share for other products, other respiratory product as well or there is no continuous benefit that we should see? Well, I wouldn't I mean, that would be an upside, if we can get it, I mean, we are strengthening our respiratory portfolio. So overall position on the respiratory and offering from a customer standpoint goes up, but that will really be an upside to see how we can bundle them if we can at all, when do as just a standalone a very lucrative opportunity. Just last one question about the numbers basically. So whether is any debt number that has been added during the quarter because the finance cost looks slightly elevated this quarter? That is one and to be also clear, what was the smooth contribution this quarter? This means the sequential of moving the U.S. sales what we have witnessed, how much was that driven by two? Firstly, on the debt front, yes, so we had a couple of acquisitions and as the bands that we bought in America, bought brands in Brazil, that's actually in our come on to the scene. And there's of course, the god binominal capital expenditure that we continue with should have come through in previous quarters also. So these are actually in some ways taken up the overall debt position. Though, there has been a reduction on the button capital front. This is, it's the M&A front which is really cost us for the take on some debt. Benji prices have been drooling at a particular another at a higher and because of that to the actual durability didn't have we didn't actually want to sell at a loss in America also because prices are what they are. We have been focusing on all the products that they're talking about. Yes. Thanks for taking my question. Nilesh, my first question is on the India business. I think you mentioned, we should get back to double-digit growth from second quarter onwards. So at that point, most of the sickness impact and also the diabetes impact will be behind us and we expect the MR start contributing to productivity. That assumption is right, right? So we should start seeing our performance versus industry from second quarter. Yes. And I actually did not even talk about the [indiscernible] impact that we are seeing, a little bit in the of Q3 and then it obviously ended in Q4 and then obviously a good portion of that we would expect to reverse in Q1. Understood. And if I were to look at the business in a little more two to three-year perspective, do you think we need any investments organic and inorganic to sort of bolster our position further in India? I think we are doubling down on India. Like, adding a thousand representatives. We are focusing on what that means in terms of employee expense in terms of selling promotion and alike. But we see this as an opportunity to grow in India. Obviously, in the COVID period, we headed back from adding people and alike. And again, what we are doing is no different from other industry leaders where clearly, there is a renewed focus on India, and it certainly is part of our plan as well. I think we are already committed to doing whatever is required from a people perspective, an expense perspective and R&D perspective to get to the business. I would love to fold in inorganic moves in this as well. We did some smaller stuff, including buying in licensed product on their own, including the -- portfolio, which is actually performing very well. But, I think acquisitions are going to be fluid between because, especially the somewhat bigger ones as you have seen, -- to multiples, right? You really kind of justify. So, we would seek value and that would make it difficult from an organic perspective. But we are looking at everything that comes and for our own part, digging out opportunities that we took place chase as well. Understood. Given that you are doubling down on India and most of the competition is increasing fee for SG&A. How do I put that in context with the fact that, we want to look at cost optimization further? That would indicate that, our costs are probably -- optimization whatever might come through might be more than offset by the fact that we need to continue to invest to grow in India, which does makes margin expansion without streamer nearly impossible. Is that the right conclusion? So maybe I get back to that issue. I think, first of all, there are some delayed effects. Yes, we are adding people. Yes, there will be certain costs that are associated with that, and we will not be the return. Obviously, the very day that we had those people. I think the cost optimization measures are largely driven from the optimization that we saw overall from a generic footprint perspective. So a lot of the stuff that we have done optimizing the R&D spend, optimizing the manpower footprint, 16% reduction in our workforce in our manufacturing plant. So optimizing the R&D workforce. Like, a lot of that has gone in the in the direction that the generic market is changing. We will obviously play an oral solid in the right as well. But clearly, the focus is to be a specialized generic player focusing on innovation, injectables and select oral solid. So I think that, to me those optimizations run in parallel, there are still obviously, there are five or six key growth drivers and big business areas isn't Lupin. Some of them will take investments at certain point of time, others will be adopted by us. But net-net, obviously, where we're all working to build a high growth organization, which grows at strong double-digits. And obviously, with a bit of far better than what we have right now. We are very cognizant of the fact that we're under index. So I think these investments are being made, in light of everything else that is happening. But obviously, with the view that in the next few quarters, we should be getting to much more solid numbers. Neha, just to add to that for the color. There's a base beyond, which is impossible to go on quite a few buckets, and perhaps in some buckets, it's not possible to kind of optimize further. But I also identified a few buckets where a great deal of optimization still possible. It is essentially in terms of the footprint reduction in some ways, potentially, you could also look at the idle time associated with that. And third bucket could potentially be on the reduction, on the inventory right up, so that we have seen so far. So those buckets will certainly contribute in some ways to further efficiencies, and that will certainly move the needle. And we are also speaking the same breath of in fact, a two to three-year horizon. And when you get to that point, we are talking about quite a few products coming through in our Spiriva certainly, in our opinion, should certainly come with a great deal of confidence, you're saying this in the first half of the current year itself. And then we are also lining up, in fact, for products for the future. We're working on in fact, the injectables portfolio, we're working on the entire respiratory range. And there's every conceivable product, which is worthwhile looking at, we're looking at out there. And we are pivoting a lot more towards a lot more complex ones. And so to the extent, there's a lot more stickiness associated with that realizations associated with that, which is perhaps not to seen in the OSD portfolio in at least in recent times. So I think, whilst there is further optimization possible on the cost front, there's a lot more possibilities for the top-line. And that has EBITDA ultimately going to be the difference between the two. And of course, the R&D expense and R&D expense to our mind by switch over to in fact, the more complex ones. As a percentage of sales, it will certainly keep going down only. So I differ with you and I would say that EBITDA margins in the next two to three years will certainly be much higher than what it is today. 12% is the absolute ideal from my perspective, and 18% to 20% over the next two to three years is from my perspective, certainty. Understood. And last question, if I may. Vinita, you mentioned about the Nagpur facility clearance helping unfolded injectable pipeline. Could you give us some color on the number of launches or the opportunity size that we're looking in injectables next year or the year after? Any color would be helpful. So, now that we've got the approval, I mean, we also accelerating our portfolio looking at some of the contract manufacturer partners that we can bring in-house where we haven't had the right cost and supply position. I think in the fiscal year '24, we potentially can bet four to five products into the market. We have couple of filings that are pending, glucagon [indiscernible] as well as other products that we are manufactured outside that we can bring in, in-house in Nagpur with the right cost structure. So in fortified products in the next fiscal year, we'll try to accelerate that and a larger number of the year after. Thank you for the opportunity. I see that we are continuously changing our strategy. So I see that wherever there is a momentum we go there, we started somewhere in technology, and now we are hiring 1000 people for India business, or later for Japan, we made acquisitions in USA, and things are not working, and that's why we are making too many changes. Is that the case, are relating too many changes with our strategy? Actually, we're not making any changes on a strategy, when we've been very focused on building our core business, which is one India, two our U.S. complex, generic business. Three, anywhere we can get operating leverage, like other developed markets, with our generic portfolio, the investment that we made in our pipeline and in a manufacturing facilities and four, the other emerging markets, which pretty much are self-sufficient in terms of their P&L as well as the cash flow requirements. So there's no real change -- I mean the only change in strategy that has happened over the last couple of years, I'd say, is a sharper focus on complex genetics, more specialist genetic portfolio, versus a broad generic portfolio. And the entry into Japan, 12 years ago and the except or very well crafted strategy, so to speak, there's nothing tactical about it at all. So I would not agree that, so our entry into in fact complex generics, injectables, biosimilars, inhalation space are also very well crafted. And to that extent, we've been very consistent in actually going down the path for the spins on those, there's been no change whatsoever. So can you give some guidance for the current financial year in the next financial year for top line as well as for EBITDA margins? EBITDA margin, if you talk about the current, the next quarter, potentially, it will be around the same lines as the current quarter. But I've also indicated that things will get progressively better because you're working on several things on the cost front. And on the top line front, we keep reiterating the fact that there will be products coming in. So things will only get better. You know, our ideal target would be to get to the end of the quarter of 20% that the competition is looking at when we get there in the fourth quarter of next year, or in FY '24, '25, it's general the overall direction is there, the target is that and there's no reason why we should not get there because all the initiatives are in place. And we are going down the path of our strategy without retracing any of those. Got it. I know there are too many misses that has happened, so even if we achieve something I'll be happy about it. All the best to you. Hi, good evening everyone. Vinita if I'm not wrong, FDA totally inspected the site for Spiriva, isn't it so why should they be need to do it again? No they have and I don't know if there's a need to do it again, Sameer, it all depends on the agency though. We don't know. So they always give you two dates. And its very standard language from the agency now on any product. So that's why we can't say for certain that is going to be a problem. Okay. Got it. And Vinita what transpired in November that date. In a sense, I thought that, there is a good chance that they might have approved then itself. No. So we got a priority review at in November, when we had reported. And at that point in time, we got -- we were expecting an approval by close to eligible launch date. It should be very close to April, actually. Okay. Got it. And second question Vinita. Are you seeing the competitive intensity in the U.S. for OSTs going up? Or is it much the same? For the three, four products that you mentioned that you saw some price erosion. But the new entrants, which were bidding lower or even without new entrants, you are seeing prices roll down? Actually, we have seen some rationalization on, and a little bit of retreat on the price erosion front, because there has been a lot of erosion. And companies have started to get out of products. Like, we have gotten out of a couple of products, which really worry our customers. So there have been also supply disruptions with a lot of challenges that companies have had in some years, due to the margin pressure. But otherwise, the GMP related issues. So we have seen degree of getting back to single-digit, high single-digit price erosion at this point. And we hope that, we will see that continue in this calendar year. So Vinita, if I may ask, how profitable is your U.S. business as it's stands today, if you can just talk about it? Because is that what is taking the minimum, taking the entire company average way below? And how sustainable is it to do business in this manner for a company, which probably is a lowest cost producer in that sense? So I'd say that, the U.S. business EBITDA is below the company EBITDA right now. But I can tell you that, when we look at the last full year. I mean, Q3 was probably the quarter where the U.S. business did the best from an EBITDA perspective. So given all the efforts on the cost optimization front, R&D optimization, stabilizing the base as well as executing on the new product launches, we have been able to get Q3 to a much better level than it was in Q2 and Q1. And we continue to build upon it. And two years ago, the U.S. generic business was above the company average EBITDA. And as we look at the next subject to Spiriva happening and some of the other product launches, which are certain. We think it is certain, and alike, we expect the U.S. EBITDA again from fiscal year '24 to be above the company's average level of EBITDA. You recognize me here as well as I do, it was a feast for quite some time. There's been better for firemen out there in the last two to three years. But it's not as though this party will never begin again, it will. Once you get the products in place, things should be much better. Ramesh, my worry is excluding Albuterol. Is it a bit in the right kind of a business? And it's not about Lupin, it's just about, is this sustainable business model in general for generics to be supplying at the pricing that it is given the consolidated buying in the U.S.? And you also know this, so that so entire business is kind of pivoting away from OSD into more complex ones. And the more commoditized products is where there's intensity, that is so much of competition, and one doesn't really make too much monies out there. And to the election term, companies should have focus on moving out of OSD. And that's exactly what we are trying to do also. Oaky. Grate. One final question from my side, if I may, it's also prep. Vinita two parts, one is how is the pricing been a typical exclusivity type pricing 40% erosion? And second post 180 days, how do you see the competition coming up? This has been a two-player market, authorized generic, the brand launched in authorized generic and us has been a very, very nice opportunity. From a margin perspective, price erosion, even in a two-player market is 60% or so. So, it's been that price erosion. However, the runway that we see is looking better beyond the 180 days, because we believe that the other players have supplier issues on the API that really is impacting the product approval and launch. Hi. Vinita just a couple of specific questions on products that are another you just mentioned. We are set for launch of 600 and 800 in 1Q, right? I believe so. I mean, the material opportunity, the larger opportunity we see is the explosive strength that we have in a majority of our revenues, that we see the upside as for the exclusive strength. So we responded to the agency on the queries that they had, just in the last couple of weeks. And we believe that we've been able to satisfy from our perspective. All of the questions that they have. So fingers crossed, that we get that approval in the next couple of months. Next couple of month. Okay, understood. And any further update on Dulera? I believe there also you had some queries to which you've responded. So, on Dulera, we have received a CRL from the agency and we need to do some additional work on the product that is ongoing. So, we'll have to respond to the CRL, which we haven't respond to the CRL, which we haven't responded as of yet. Good evening. And thank you, for taking my question. Just the first one of the data points on the India business. What's the current field force like, you talked about the 1000 people, but where were we at us in March and now so what's the absolute number? Got it. Thanks, Nilesh. So, when we track the progress, and you've guided to quarter to next year where you will start growing faster than the market? So, what are some of the monitorable maybe PCPM. If you could, you know, Dr. Coverage, if you could guide us to some of the things that we need to be watching out for? I think you should be watching for the total number where we report it, I think there's too much granularity I add. PCPM is actually pretty good. I overall, PCPM is INR8.6 lakhs per representative PCPM. So, it's actually a pretty good number overall, but, there's a spread. So, in an acute business, it's going to be lower, it's higher in more chronic high-end business. So, I wouldn't try to watch out for those things. The divisions that we are adding are in the big area. So that is, there's a metabolic division, there's another respiratory division. So, but I think all of it will reflect in the total numbers and the therapy wise numbers. Got it, Nilesh. Helpful. My second question is just on regulatory compliance, and just maybe you can Nilesh can answer it from an industry perspective as well. Right. So, when participants ask, what is the contribution from Mandideep, why is the question being asked? Is it because people worry that every OIA [ph] is now equal into an import alert? So just surprising. So, after so many years of having to work with the FDA, so how should we think about the dynamic and what are you hearing when you interact with inspectors, quality people? What are some of the feedback that you're picking up? I appreciate you asking this question. You know, from the industry perspective, I think there is an over heightened sensitivity to every 43[ph] that there is, but obviously if there are except some number of 43s or obviously other regulatory action that is often done, there's no question about that. And from an industry perspective, we've obviously had a few, examples where quality is somewhat pretty bad in other markets and the like, and unfortunately, I think that paints the industry in a bad light. We're coming out from, we had, I believe about 60 odd inspections in India, in 2022, versus the normal 200 plus. So, obviously, we are getting into a period where there will be more FDA inspections, and with the number of facilities that we have, as an industry, there will be, obviously, some portion of negative outcome that you come out as well. But, I would only, we had we had five observations and not for everybody given a hard time, we've got the approval thereafter. So, I think the nature of the observations is important, and not just the nature and not just a number. So I think it's important to get a little bit deeper into this, which is I think you guys do a great job of that. As far as we're concerned, I think we've had some wins and some misses Ankleshwar was a win Nagpur was a win, Somerset was a very nice win, even with a follow-on inspection. Mandideep clearly, we were not at the right level. We don't expect that to at the right level. We don't expect that to -- we are taking the right steps to put it to not grow up further than what it is. But it's not acceptable. Tarapur is not acceptable as well. And there is a clear remediation panel list. So, we do believe that we will get them to the right spot. We are not just going to leave them there just because the contribution may be below a certain level. Whatever we supply, every product that we supply has to be of the right quality. People don't have to look at where the products was made. So, we are committed to this. I think, the industry is committed to it in a broader sense as well. Certainly, the scrutiny on the industry is going to be there. And we have to be up to snuff. My only question was, the you said that the R&D expense as a percent of sales should come down as the revenue base up. So, could you give us a sense, I think we should be about 8% or so for this year. But how what is FY '24, '25 look like as a percent of sales, if you could give us some sense? Yeah. So, this year, it's going to be about 8%. But, on the subsequent years, it will certainly come down by a percentage or 2% for sure. Thank you very much. So as there are no further questions from the participants, I now hand the conference over the management for closing comments. Hopefully, we have been able to answer your questions. We hear all your concerns on the margin front. It was not too long ago, couple of quarters ago that, we were in a single-digit margin. And the fact that, we have been able to pull the business back up to double-digit in Q2 and then further improve it in Q3. We will continue to work on this front to ensure that we continue to grow our business in a profitable manner. We certainly don't feel we are even close to our potential as an organization, but we are moving in the right direction and it will ensure that, we can get to our true potential. It might take us couple of quarters longer, just given the delays in product approvals. But, we will get there. Thank you. Thank you very much. On behalf of Lupin Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines and exit the webinar.

EarningCall_16

Thank you very much for participating, despite your busy schedules today. From now we would like to start the briefing on NTT's Fiscal Year 2022 Third Quarter Financial Results. My name is Hanaki from the IR office. I will be the facilitator today. First of all I would like to introduce today's attending members. Representative Member of the Board, Senior Executive VP, Hiroi; Executive Officer Head of Finance and Accounting, Nakayama; Executive Officer, Head of Corporate Strategy and Planning Taniyama. Today's briefing audio is streamed live. We are planning to stream this on our website at a later date so we seek your understanding beforehand. As for today's materials please refer to presentation materials on our IR website. On the first page points to be noted are listed so we kindly ask you to go through them. Without further ado, Senior Executive Vice President, Hiroi will explain the outline and the financial results followed by taking questions from the floor. Mr. Hiroi, please go ahead. Thank you very much. This is Hiroi speaking. I would like to share with you the financial results for the nine months ended December 31, 2022. So please turn to Page 4 of your slide presentation material. This shows you the status of the consolidated results. Operating revenue increased year-on-year operating income decreased and profit increased year-on-year. So this is the same trend following from the second quarter. As for operating revenue and profit this reached new record high level as the third quarter results. Operating revenue increased by JPY 649.4 billion year-on-year up to JPY 9572.6 billion due to increase in revenue in the Global Solutions Business segment. Now of this increase, impact from foreign exchange currency was roughly JPY 220 billion. While increase in operating revenue boosted our operating income, they could not cover the increase in electricity cost, especially in the Regional Communications sector. The operating income declined. The decline was JPY 18.8 billion year-on-year and the number was JPY 1520.8 billion. Now towards meeting the annual target, we are already promoting various measures to reduce costs to cover the increase in electricity costs which is the main factor. So through these measures we intend to achieve the annual plan. Turning now to bottom line the profit. This went up JPY 2.2 billion year-on-year. As we have been explaining since the first quarter there was a decline in the non-recurring factors such as corporate tax burden. So therefore profit went up JPY 2.2 billion year-on-year and reached JPY 1032.5 billion. As for overseas operating income margin in line with the increase in profit we also had cost reduction related to structural transformation. So this increased 1.0 point and reached 6.4% overall. Let me now turn to contributing factors by segment. Let me start with the integrated ICT Business segment. Now there was negative impact from price reduction in consumer communication and the reduction in mobile communication service revenue continues. However, this will come from an increase in enterprise business and Smart Life business. We also had cost reduction efforts. So both operating revenue and operating income increased in the integrated ICT business segment. As for Regional Communication business segment, as I have already explained earlier, there is the impact from increase in electricity costs. And also with regard to fiber service, remote work an online class related demand as well has run its course. And also we had – we did not have the one-off positive factor or non-recurring factors such as Olympics and the Paralympic games last year. So therefore both operating revenue and operating income declined in this sector. At the risk of repeating myself in the case of Regional Communication business segment on top of – we see some very challenging impact from the electricity cost increase. However, toward the year-end and we will work to reduce cost. And also we see expanding revenue from system integration and growth business. So as we move toward the year-end, we hope to expand revenue from these segments. So we want to reach the annual guidance which is increasing both revenue and income. That is what we hope to achieve. Turning now to Global Solutions business segment. As far as the segment is concerned, we see increase -- we see increased revenue from strong demand for digital services. So in and out of Japan, we see increased revenue from digital services. Also, turning to NTT Limited, they have expanded their high-value services and also global business -- global operating companies have worked to realize social transformation through cost reduction. So both operating revenue and operating income increased in the segment year-on-year. As for the other segment, we have seen increase in electricity addition business at ENNET. And also, as we have been explaining, we see increase in revenue from electricity fees, reflecting the rise in commodity price. So we're able to pass on the cost to our customers and energy [ph] revenue in this segment is increasing. So, in this segment we see increase in both operating revenue and operating income. Let me now turn to some of the topics on hand. Please turn to page seven of your material. Let me start with the initiatives to resolve food and environmental issues. As far as our efforts in this area is concerned, we will form a planning company in furtherance of establishing a green food business with a company called Regional Fish Institute Limited. And we intend to do this in March. Well, what type of business will this be involved in? Please take a look at the chart and the diagram. There are two parts to this. So we have the land-based agriculture. So, we will be for the land-based agriculture system and also will be -- also harvesting algae on land as well. And Regional Fish Institute is a company with genome editing in relation to land-based agriculture system. They're able to accelerate the growth of the fish. They're able to increase the flesh meat of the fish. Now on our side, we have taken a relationship of genome editing of algae, the technology to accelerate the growth and the harvesting of algae. So we'll be able to cultivate and accelerate the cultivation of algae, which means that, the base absorbed CO2 can expand. They have the ability to fix it CO2 that they absorb. So by accelerating cultivation we'll be able to use algae as the feed for fish. And by using this land-based agriculture system, it means that, we'll be able to further expand the size of the land-based agriculture system. So that is a system which we hope to establish down the line. So as the first step towards this end, we will be establishing a greenfield business with Regional Fish Institute and we're going to set up a planning company. And we plan to establish a joint venture between the planning company and Regional Fish Institute in the first half of fiscal 2023. This will be the company that will actually be involved in this business on the ground. So that is how we would like to start the business. So through these initiatives, we have to resolve various social issues, reduction of governmental environment impact, [Indiscernible] fishing industry and so forth. And through this, we hope we will be able to respond to future risks that we see around the world. So, that is what we would like to contribute towards down the line. Next, on page eight, initiatives in the Space Business. For this initiative with us and Space Compass have established a company to promote the space business. And in order to -- for the early realization of a global rollout of this, we have concluded a partnership agreement with Skyloom Global Corporation. What this means originally is that, as you can see on this diagram, the so-called -- the LEO, the low earth orbit satellite. This is something that a satellite use for earth observation. And from here to the surface of earth, they will transmit data, but it's only during the limited time length and only limited data capacity. But for us, this GEO, the GEO stationary orbit satellite by using that, we will provide the optical data relay service. So through this GEO to the surface of earth, we will provide a high-speed transmission data service. And it will become possible with a large data capacity as well. So together with this Skyloom Global Corporation, we will work together with Skyloom. We will launch three geostationary orbit satellites. And to begin with at the end of fiscal year 2022, we will start this business and we will launch one GEO over Asia and gradually expand the business globally. And next on page 9. This is the status for remote working. Last July, we have introduced the work system with working remotely as a standard and it's about six months. I have pass since then and I would like to report the status. The employees eligible for the system, we started at 30,000 and currently it's 40,000. So we have expanded the eligible employees by 10,000. And by using this working system, how many employees are posted away from their family were reduced was about 400. In actual numbers, the employees posted away from their families was reduced by 900 and there were 500 employees who have newly started being post away from their family. So -- as a total overall, 400 employees were reduced for being posted away from their families. And the next page, this time we have conducted a survey for working remotely of our employees. And the results are shown on page 10. Having this system with working remotely as standard, we were able to improve the flexibility of working and the productivity is also improving. So we would like to expand the scope of the eligible employees and promote this initiative. And lastly on page 11, we are showing the progress of the medium-term management strategy initiatives and showing the third quarter of progress. So we would like you to go through them. That is all for my briefing. Thank you. Thank you very much. That was Mr. Shimada [ph], the Senior Executive Vice President. We would now like to go into the Q&A session. With regard to questions we're able to take questions from those of you who are taking part online and who have registered beforehand and for connected to the phone conference right now. [Operator Instructions] So we'd now like to take your questions. Thank you very much. Kikuchi is my name. Thank you for taking my question. There was a Q&A during the press conference and you talked about this earlier as well. But let me -- the impact of the -- impact from the rise in electricity prices. That's what I would like to confirm. This trend continues for the second quarter into the third quarter that you gave us, cost is increasing and you're not able to absorb the overall increase in costs. So at NTT East based on the supplementary data, if we take a look at supplementary data JPY6.9 billion increase in costs and JPY12.1 billion increase NTT West. So in the Regional Communications segment close to JPY20.4 billion increase is seen. So what is the impact from the electricity fees? I think you mentioned the number of JPY50 billion in the press conference. Can you talk about the impact of the rise in electricity price? And also can you give us a breakdown of increase in cost for those service related to increasing electricity price? Also you mentioned that this -- that could expand in the fourth quarter and the same trend could continue into the following year. Can you give us some numbers to indicate the potential increase in electricity cost? That's my first question. Yes, thank you for the question. With regard to the impact of rising electricity price. Overall -- as in the number of electricity fees [ph] is JPY45 billion overall. At DOCOMO and NTT West base -- they account for the bulk of this increase. It's very difficult to be specific as far as numbers are concerned, but I think the impact is roughly similar across these companies. I think that is the rough understanding that you should have in addition to the impact. Well, for the second quarter and the third quarter, the impact of electricity price has been significant in both the second quarter and third quarter. And I would imagine that the similar trend will probably continue into the fourth quarter as well. That is our outlook. But having said this though, there is the issue of the government assistance and support. In the fourth quarter this can the introduction of the government support and government assistance. So the impact -- there's going to be the impact of reducing the burden on our company. And I believe that this is -- it's a very complicated system. When I answer about the specifics of the systems scheme. But I believe the government assistance will probably have a positive impact to mitigating the impact from the rising electricity prices. Thank you. That is my response. Thank you for your response. Then I could go on to my second question. As we think about this next year will be the value for the media term management strategy. I'm sure that we cannot get these final numbers at this juncture. But I just want to hear your thinking on this matter. I think around -- in the previous year and at the beginning of this fiscal year compared with your prediction for -- at the beginning of this fiscal year and in the previous year the deposit is negative. Now of course the trend electricity price is a downside factor. Also in the case of different segments, urban solutions for example, their progress in profit growth is not very strong. So the impact of the electricity price and also increase in energy cost that has been a factor on urban solutions. But then on the other hand in the global business, I think the problem is primarily exceeding your expectation perhaps. So the -- so next fiscal year will be the final year for mid-year plan. So what is on the potential upsides and downsides at the back on the final year all you made your management strategy plan? That is my second question. Thank you. Thank you very much for the question. This is a very difficult question you have raised. I think you wanted to hear our outlook for the next fiscal year. It's very difficult to talk specifically about the coming next fiscal year. But maybe we can share with you what we see as the trend for this fiscal year. Well, first of all, when we take the consolidated portfolio DOCOMO is a very major part of the portfolio. So what about DOCOMO, what is the assessment because of mobile communications service revenue? Actually DOCOMO will explain in their meeting later on. But I think we see an improved trend for the improved ARPU this has been continuing from the second quarter and this trend continues. So in terms of the revenue structure, I think the improved ARPU will -- this continues into next year. I think this will help to stabilize the revenue structure for DOCOMO. On top of that in the case of enterprise business at DOCOMO, we have of course converged and integrated enterprise business for NTT communications in DOCOMO and that effects of the integration is now beginning to translate into concrete results. So that being the case I believe that we are on track with what we expected which means that the business structure at DOCOMO Group has really improved as a result of this integration. And we see very positive progress in this area. And turning to a global business NTT Limited and NTT DATA. Again here with regard to digital demand, digital transformation or DX is very strong. This applies to the domestic business for the NTT DATA as well. And so the strength demand with DX is translating into concrete orders and this is turning into revenue. Of course, there are of course ups and downs from different factors. But in terms of totality, we see this very positive trend. So as far as we're concerned, we believe that we've been able to see progress in the transformation of the business structure. And I believe we are on track as far as the progress we envision as far as midterm management strategy is concerned. Now on the other hand, in terms of the macro economy, there are uncertainties as for the macro economy is concerned. For example, the rise in electricity price is one reason -- one factor out of that. And also we see the rising trend in the interest rates -- in the interest rate hikes. Turning to the United States, the [indiscernible] is continuing to tighten their interest rate policy. And so they cautioned us to potential recession as a result of this policy. So we turn to the next fiscal year compared with what we had envisioned earlier as we regarded our center base. With regards to electricity price this has had impact on our domestic business for DOCOMO as well as for NTT East and West. For DOCOMO they just embarked down, as electricity business of their own so that has had a very negative impact on the business, which they just started. So there are positive sides, which we envisage, but also a negative effect. This was more than what we had expected. So turning to next fiscal year, I think, there's going to be a mixture of both optimism and pessimism. It's going to be a mixed bag if you will. So I hope you understand our position. Thank you. Mr. Kikuchi, thank you very much. We would like to take the next question from Nomura Securities, Mr. Masuno. Please go ahead. I have two questions. The first is regarding the segment breakout of the Global Solutions segment and three months year-on-year, it's a JPY 12.9 billion increase. But just looking at limited three months, it's JPY 7.1 billion increase in profit. So the remaining is about JPY 6 billion. And that is DATA and others. I think that is the breakdown of that number. Is that breakdown correct? And limited did the structure reform and the data center business has increased. So those were the drivers for the Global Solutions. And for the others, overall, JPY 5.4 billion increase in profit is what I think, but Urban Solutions is JPY 6.2 billion operating income decline has occurred. So other is JPY 11.6 billion increase in profit. Probably the wholesale market is selling electricity again has contributed is what I think. So that means that for NTT East and West the negative impact due to electricity cost probably half plus of that is recovered through a node business seems to be the situation. So I just wanted to confirm the actual results of these. Thank you. This is Taniyama from Corporate Strategy Planning. I would like to answer that question. First of all, for the Global segment for NTT Limited just the single third quarter has a profit JPY 12.8 billion for first quarter, second quarter. First quarter is 6.2, and the second quarter is JPY 100 million. So in the three quarters -- and the third quarter is JPY 12.8 billion, and so the total is the number shown here. So deducting that remains is the DATA's numbers. That is the degree of the increase of profit for three months. So compared these three months and the previous three months with the over Global Solution the JPY 12.9 billion but just looking at just limited is JPY 7.1 billion. So at DATA and others is JPY 5.8 billion. So limited is JPY 7.1 billion is good and the increase JPY 7.1 billion. Out of that the structural reform factor positive factor and data center business increase. Okay. Three -- just looking at the single third quarter, the structure reformed positive impact for Limited, it's JPY 5.3 billion -- well, it's JPY 5 billion. That's year-on-year. It's about JPY 5 billion. And structural reform is the opposite gone down by JPY 2 billion. So plus and minus of that is a JPY 7 billion profit was generated. So for the others the three months and single month year-on-year comparison Urban Solutions is JPY6.2 billion. That the three-month year-on-year has a JPY6.2 billion decline. So at a node it will be JPY11.6 billion increase. That is selling electricity. I just wanted to confirm if that is correct? Okay. If that is so the NTT East and West and DOCOMO's electricity price increase seems to be the focus point. But on a consolidated basis probably half of that increase is offset is the correct understanding, or is it more that's being offset? This is Nakayama speaking. Yes, as you have -- as mentioned at the third quarter electricity price increase overall group is JPY65 billion. And Masuno-san your question is that probably half of that and it is generating a positive profit right? Just a moment I don't have the numbers for only the three months, but on a cumulative basis the trend is as I explained and as you have commented. Okay. So full year in the group is minus JPY60 billion Third quarter nine months is JPY45 billion. So fourth quarter just simply calculating is about JPY15 billion. So and it -- if they have about JPY10 billion of profit I'm just thinking that you were able to offset quite a bit of it. Yes. But the profit of [indiscernible]. The secured business price and at the market what the price is going to be also it depends on that also. So whether the same trend is going to continue on into the fourth quarter, we cannot simply just say that that is the content. Okay. Understood. Thank you very much. Okay. I understand about that. The second question is the integrated ICT segment a very strong performance, especially, the mobile's ARPU, the mobile communications service revenue for three months compared to a year ago. It's only gone down by JPY2.4 billion. So I think it's very good. And as for consumer communications; the operating profit in three months compared to previous year is a JPY7.2 billion decline. I was wondering if the unexpected cost has increased in addition to the hike in electricity costs. What is the mobile revenue or the ARPU strongly performing? And the enterprise business is also performing well. So as explained before the enterprise business this is a synergy effect. How much is that generated? They are performing very strongly. So I just wanted to know the big background and the reason behind this? Yes. Regarding the ARPU from the second quarter has been explained, the trend has not changed meaning that the medium bucket, the large bucket usage has increased. And we call that an upsell, but that has increased and that positive effect is largely contributing is what we think. On the other hand the downside factors for example from the existing old plans transferring over to giga light in 2018, 2019 we had the price decline. And due to the impact we had a large number of subscribers moving over to a lower price plan. But the giga light customers are increasing. And this transferring over to a different plan the number of subscribers is declining. So the degree of the decline itself is becoming smaller. And also for the enterprise business, the mobile and fixed line services can be provided as a set and that is showing a very positive impact. We are able to respond to the customers' demand and needs and do sales activities that meet those needs. As for the synergy effect how much is the difference from before? Is that difficult to express in actual numbers of revenue is where I would like you to look at to grasp the actual situation. Thank you very much. So regarding the synergy the operating profit the enterprise business is increasing strongly. So there is a positive impact of the synergy as well. Is that correct? It has a good effect on the profit, yes, because the revenue is strongly performing and that is contributing to the push up in the profit side or the bottom line. Thank you. Thank you, Mr. Masuno. We'll go on to the next question from Mitsubishi UFJ Morgan Stanley. Mr. Tanaka, the floor is yours. Thank you very much. Yes. I would like to ask one question if I may. It relate to NTT Limited. Earlier; you mentioned that you carried out circa transformation and the effect is now being transferred into reduced cost. Now as far as this matter is concerned, first of all, I think you mentioned JPY38 billion in the annual target. But I think the effect benefit was actually JPY4.1 billion, right? So if we based just on the number that you mentioned earlier -- on a cumulative basis, I think JPY24 billion is already done for social transformation. And the effect is now – effect remaining is a big as far as expense is concerned, are you going to spend in line with the plan? In the first quarter, you didn't spend that much but then less spending in the second quarter, but it went down in third quarter. Is there will be expenses increase in the fourth quarter? I would like to ask how you intend to spend in relation to cost for social transformation? Thank you. Taniyama from Corporate Strategy Planning. With regards to structural transformation expenses, yes, we invested JPY38 billion for the full year and we spent already JPY23 billion until the third quarter. As, right now we intend to use -- we intend to go in line with the plan. We intend to use the expense in line with the plan. As for the specifics of the spending, well operating delivery overhead and optimization of human resources, we made progress after third quarter and we intend to continue this in the fourth quarter as well. And also on top of that, we will continue to introduce cloud service and migration in the security business will continue. So right now, yes, we intend to spend JPY38 billion at the end of the year as in line with the plan. The effect is going to be at JPY41 billion yearly basis, yes, it will be roughly JPY20 billion. That is the increase we envisage. Thank you very much for that. If I could ask if we look at social transformation expenses, you take automization of human resources. Was it more skewed towards the second quarter? Are you really going to be spending that much money at the end of the day? Well, again, we tend to go -- we intend to proceed in line with the plan. So we mentioned JPY38 billion. Right now we intend to spend that money as we planned. Of course, we have to monitor the circumstances and consider whether we're going to actually spend the full amount at the end of the day. So right now we cannot give you a clear response of this matter, but yes, we intend to spend -- right now we intend to spend JPY38 billion. Thank you for the respond. Do you think that -- for the next fiscal year, will the expenses coming down in the next fiscal year? Can you talk about the trend? Can talk about the trend starting for the next fiscal year as far as the spending is concerned? Well, next year the social transformation needs to be pursued to certain degree but then we will be embarking on a different phase. So, NTT DATA Inc. because we will now have discussions with project integration with NTT DATA Inc, so we'll probably be shifting to spending within the integration of NTT Data Inc. Mr. Tanaka, thank you very much. We'd like to take the next question. Goldman Sachs Securities, Mr. Tanaka, please go ahead. Thank you very much. I have two questions. The first is slightly related to Mr. Kikuchi's question. And I just wanted to confirm, the electricity cost hike, what the annual impact of the ¥60 billion has that not changed? And NTT East and West are strongly impacted by that. And the progress against the plan, they're struggling. So, the cost reduction plan in the full year, are they in line with the plan? Can I just confirm that first? First of all, the ¥60 billion impact of the hike in electricity cost that outlook we believe will be, as such. So we have not changed that. Looking at the actuals, we think that it is going to be in line with that outlook. And also regarding the NTT East and West cost reduction initiatives. They are facing quite a difficult situation, as the regional communications business. And within that situation, if you look at how the expenses and costs are being generated, it seems that NTT West has more of the difficult situation. There's an electricity cost hike as well as in terms of cost reduction, the expenses decline on the expense side they're not seeing that much of a track record. So in that sense, NTT East and West are both facing difficulties. But in terms of the degree of the difficulty West is facing more of a difficulty. Understood. And my second question is related to probably what was said right now, in terms of the company-wide cost reduction progress. Looking at the supplementary materials on page 2, the progress of the third quarter, for the two past quarters the cost reduction amount itself seems to not be progressing that much. So the ¥930 billion of the full year how much -- from where are you looking for the fourth quarter? Is the progress itself facing a difficulty as well? Can you please explain this? This is Taniyama from Corporate Strategy Planning. This ¥930 billion in annual basis, up to the third quarter is ¥880 billion. FY 2022 in a single year, we are planning to reduce ¥90 billion and the progress is ¥40 billion. As we have been explaining since before, the impact of the hiking electricity cost group-wide is ¥45 billion. So excluding that, -- so at ¥45 billion, so its ¥85 billion that is the progress. It's how we look at it. However, having said, that the hike of the electricity cost does exist. So NTT East West and DOCOMO in order to cover that hike they have several initiatives and several additional cost reduction initiatives being worked upon in NTT East and West in order to achieve that cost -- in order for them to achieve the profit target the cost reduction must be done. So they are implementing various initiatives to further reduce the cost. So towards achieving the target they will be -- put their full efforts into this. If that is so, up to the third quarter, the progress was not just strong. It seems that the strength has stopped from the second quarter. The impact of the electricity cost increase, due to that there was a slight of a delay. Is that understanding correct? Thank you, Mr. Tanaka. We'll take questions from other people. If there are any questions, we would like to take them now. From Daiwa Securities, Mr. Ando, you have the floor. Mr. Ando, please. I'd like to ask one question about the electricity situation. Earlier you mentioned that during the fourth quarter the electricity fees could actually be supported by the government assistance. You mentioned the possibility of government assistance relation to the electricity fee burden. If I may ask, do you think that this will be a factor in the next fiscal year as well? And do you believe -- and are you going to factor that in as you plan for the next fiscal year? Are you going to predict the performance of the outlook for NTT East and West based on the premise that the government assistance will be incorporated? I would appreciate if you also with regard to the position of the performance for NTT West -- East and West for fiscal year 2023? And how you see the government assistance at that juncture? Thank you. Yes. Thank you very much. With regard to the government assistance support. I think the idea is that, it will continue until September. That seems to be the makeup or the mechanism here. So -- in the first half, yes, we can probably rely on this assistance. So that is the assumption business which will be coming up with the plan for the next fiscal year. But having said that, this was then in the government budget. And also, this will depend on the -- how severe the impact is on the lives of the Japanese public. So this will be the variable here. With regard to the base electricity price for this fiscal year, yes, this been up significantly to fiscal 2022. And also, in fiscal 2023, I think, we have to be prepared for the situation that electricity prices could rise to a certain level as well. And that increase in prices is likely to be quite significant as a possibility. So in the first half, we are likely to rely on the systems with the government. We have to see how much the -- we will not be able to predict the concrete outcome -- concrete impact without the assistance of the government assistance. At this juncture, we cannot give you the very detailed prediction. I hope you understand. Yes. Thank you for your response. Let me turn to my second question then. I think you mentioned this during the Q&A session at the press conference. Mr. Shimada mentioned the data center remains very strong business. And it was mentioned in the next fiscal year data center business growth can be expected. That is my understanding of the Q&A at the press conference. So let me now turn to my question. With regard to technology sector, the data center, it still remains strong in the tech sector. The demand for data center remains still strong. It has not been affected too much. And despite the concerns in the stock market, I believe the strong performance in the data business continues. So where is this gap coming from, do you think? Is there a reason for this gap between the market expectation and the actual performance of your business? If you have any interpretation of the situation, I would appreciate it. Thank you, very much. Yes. Thank you for the question. As far this matter is concerned, it's very difficult to respond to your question. As you know, when we have discussions with various data center businesses. And this, of course -- this relates to the macroeconomic situation. But I believe the overall trend for digital transformation and DX still remains very firm and strong. And this is also applicable to the global market as well. So that is the backdrop. So players like GAFA and the so-called hyperscalers, they still have very strong demand. And also they're working to reduce costs on their own, in their own right. But with regard to data centers, the investment to our data center resources, they continue to expand. And it seems the demand for expanding their data center resources has not yet waned. That has not yet eroded. That is our interpretation of the demand among the hyperscalers. Right now the interest rate is on an upward trend. So that factor needs to be considered. And we have -- and their concerns about possible recession as a result of the hike in interest rate. But when we talk to different -- various businesses the need for digital transformation and data centers. They still remain very strong. Of course, if the interest rate were to hike -- were to increase interest level, likely the possibility of a recession. But the basic requirements for DX will not disappear. So the speed might be moderate somewhat, should the interest rate reach such a level. But once the interest rate stabilizes, again, the demand is not good to be translating into an upward trend. So then there might be some impact from recession, but it's not going to have a severe dent on the demand. It's -- many people, outside the banner [ph], say that they will defer the plan. That is the only effect. So that is my interpretation of the trend. Also, if I may add, as far as the data center is concerned, the fund and financial players are very active, because it was very profitable for them. So as far as financing is concerned, we are reliant on outside sources. And when the interest rate is rising, you have to increase the price, which means that the demand and the supply question -- the demand and discipline may not be in sync. Now, of course, we are monitoring the interest rate hike, but we are able to -- we're confident that we are able to realize the return, which exceed the increase in interest rate. Maybe that accounts for the difference in the views between the marketplace and the actual performance. Thank you, very much. Mr. Ando, thank you very much. We are getting close to the ending time. So, we would like to take the next question as the last question. BofA Securities, Mr. Kinoshita. Please go ahead. I have two simple questions. The first is this fiscal year, how it will end up. Regional communication seems to be facing slight difficulties and they want to achieve the target. But from the overall perspective, the others is performing strongly. And if it goes as it does in Global Solutions, maybe they may exceed what they have been planning. So the negative factor even though the regional communications goes under these two other businesses probably can absorb that negativity. Is that way of thinking correct? And also, ICT, looking at the overall ARPU trend, I think that there may be an upside. So this -- can you share your rough sense on these points? Okay. Then roughly, I would like to respond as well. It's not that we can stay back and relax. That's not the situation. As you have pointed out, the integrated ICT and the global business, we can have a certain degree of expectations for their performance, so that they can -- we will put our efforts in so that we can achieve the annual target and I'd like you to take it as the answer. So for the others, last year in the fourth quarter, they have had a decline in the operating revenue. And the same trend is going to happen this year as well, because on the annual basis, they have already achieved the profit level. For the first quarter, we don't expect them to have a large decline. Okay. Understood. Thank you. And also, regarding this fiscal year up to the third quarter, the profit before tax and how it goes down to the profit. The full year plan, it seems that the third -- fourth quarter, the profit whether the tax rate is going to go up maybe? So, there's -- in the first half, there was a reverse of the tax and there's a little unique factor. So naturally, it is going to be this way, or are there any special factors that are going to impact the final numbers in profit? Well, as you have mentioned Mr. Kinoshita, that situation does exist. And the corporate tax or the deferred tax asset in the quarter basis, it goes up and down. So, on a full year basis, the current annual outlook, I think is what you should look at.

EarningCall_17

Hello, everyone, and welcome to the Cloudflare Q4 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After today's remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Mr. Phil Winslow, VP of Strategic Finance. Please go ahead, sir. Thank you for joining us to discuss Cloudflare's financial results for the fourth quarter 2022. With me on the call, we have Matthew Prince, our Co-Founder and CEO; and Thomas Seifert, our CFO. Michelle Zatlyn, our Co-Founder, President and COO, is unable to join us on the call today as she is in Asia being with prospect customers. By now, everyone should have access to our earnings announcement. This announcement, as well as our supplemental financial information, may be found on our Investor Relations Web site. As a reminder, we'll be making forward-looking statements during today's discussion, including, but not limited to, our customers, vendors, partners, operations and future financial performance; our anticipated product launches and the timing and market potential of those products, and our anticipated future financial and operating performance. These statements and other comments are not guarantees of future performance, and are subject to risks and uncertainties, much of which are beyond our control. Our actual results may differ significantly from those projected or suggested in any of our forward-looking statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with SEC as well as in today's earnings press release. Unless otherwise noted, all numbers we talk about today, other than revenue, will be on an adjusted non-GAAP basis. You may find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our Investor Relations Web site. For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. We’d also like to inform you that we will be participating in Baird’s 2023 Silicon Slopes event on March 2, the Morgan Stanley Technology, Media and Telecom conference on March 8, and William Blair’s 7th Annual Tech Innovators conference on March 14. Now before wrapping up, I would also like to invite you to join us for our Investor Day on Thursday, May 4, which is being held in conjunction with our user conference Cloudflare Connect in New York City. A live webcast will also be accessible from our Investor Relations Web site. Thank you, Phil. It's great to have you on this side of the table. We had another strong quarter in spite of continued challenging macroeconomic conditions. We generated $274.7 million of revenue, up 42% year-over-year. We achieved a record operating profit of $16.8 million, representing an operating margin of over 6%. While we continue to invest to capture the huge market ahead of us, we believe that during economic slowdowns, like the one we're in the midst of, it's important to show discipline and optimize for efficiency. We have our hands on the levers of our business and are adjusting them based on the macroeconomic conditions. Our free cash flow in the quarter was $34 million, representing a free cash flow margin of 12% and allowing us to generate $29 million of free cash flow in the second half of 2022. While there will be some variability in our free cash flow quarterly, we expect to be free cash flow positive in 2023 and in the years after that. We achieved a gross margin over 77% above our long-term target range of 75% to 77%. Our dollar-based net retention ticked down to 122%, while our gross renewal rates remain as high as ever, like others in the industry, we're seeing customers take longer to sign new and expansion deals with us. Procurement departments are definitely in the mode of measure two or three times before cutting one. We still see a clear path to dollar-based net retention over 130% as we ramp seat-based products, like Zero Trust and storage-based products like R2, and we won't be satisfied until we get there. We added 134 large customers, those who pay us over $100,000 per year, and now have 2,042 large customers, including 33% of the Fortune 500. Revenue from large customers grew 56% year-over-year, and they now contribute 63% of our total revenue. We were fortunate that given our visibility into the overall Internet traffic and e-commerce trends, we started to see a slowdown in the economy all the way back in December of 2021. Based on that, around this time last year, we began slowing our pace of hiring to ensure we didn't get over our skis. That paid off and kept us from having to take more drastic actions like many of our peers. It's also given us the ability to sensibly invest in our team as amazing talent comes on the market. To give you some sense, in 2022, we have over 400,000 people apply for approximately 1,300 positions at Cloudflare. That demand to work at Cloudflare has allowed us to continue to hire incredible talent while remaining disciplined in overall compensation. We are committed to incremental equity compensation dilution well below many of our peers targeting less than 3% net burn rate annually. Tough economic times like these make you assess your strengths and weaknesses. Cloudflare has long had a product and engineering team that delivered an innovation engine that is the envy of the industry. Jen Taylor, who leads that team, briefed me recently on everything we have lined up for the year ahead, and the engine is definitely not slowing down. Our next innovation week is in March with security week, where we'll be launching a number of new products and feature enhancements, especially around our Zero Trust products. While our innovation engine is the best in the industry and has unlocked $125 billion total addressable market we have ahead of us, if we're honest with ourselves, our go-to-market organization hasn't yet been fully optimized. As our product become more complicated and we are selling to larger and larger customers, it's increasingly clear that we need to step up our game in marketing and sales. I introduced Marc Boroditsky who joined last quarter to lead our sales organization. Last week, he briefed me and Michelle on his first 100 days. My initial reaction, if I'm honest, was embarrassment over some of the basic things we should have been doing better. But my second reaction was excitement as there are so many opportunities for us to improve. In addition to Marc, Brent Remai joined us last quarter to lead our marketing team. Brent was previously CMO at FireEye and CMO of Core Services at AWS. His career perfectly prepared him for Cloudflare’s delivery of cloud security services. We've seen early results of Brent's team generating pipeline in Q4 and January Q1, coming in ahead of our targets. We’ve been leaders on the product and engineering side. Now we're focusing on becoming a leader in the go-to-market side as well. I hear the excitement from our existing sales and marketing teams at the rigor and discipline Marc and Brent are bringing to those teams. And what I'm watching carefully is another important pipeline, the pipeline of new sales talent. We're seeing incredible people from the leading sales team in the world apply to work at Cloudflare. We aim for nothing less than to build one of the leading sales organizations in the world. That's all exciting. And while I believe there's a substantial opportunity for us to improve our go-to-market engine, I'm also cognizant that these efforts can take time. That's why we're not relying on any improvement in sales or marketing efficiency or any rebound in the economy as we look at the year ahead and formulate our guidance. So focusing on the present, let me highlight some customer wins from the quarter. A Fortune 500 energy company signed a three-year $1.6 million deal that was a takeout of a first-generation Zero Trust networking competitor. We are placing both their Secure Web Gateway and Zero Trust network access products. Because the competitor's network is actually broken into multiple distinct clouds as compared with our unified network, their reliability and performance were underperforming the customers' expectations. We were able to replace the competitor's feature set and more. The customer ultimately purchased gateway, access, remote browser isolation and DNS filtering. The customer was attracted to our better pricing, performance and ease of use as well as the single pane of glass manageability of our platform. We worked with a large channel partner to win and service this customer and expect we'll be doing more with them going forward. A Fortune 500 financial services company expanded their relationship with Cloudflare, signing a three-year $1.1 million deal, a [indiscernible] Cloudflare customer since 2014 using our core application services. Like we're hearing from many of our customers, they wanted to consolidate vendors, reduce costs and have more flexibility and control over their traffic flows as well as implementing a Zero Trust architecture. They wanted to move away from legacy on-premise hardware to modern cloud-based services. The customer loves that we have a single pane of glass solution and that our technology is built from the ground up on a single platform rather than a Frankenstein solution bolted together through M&A. They purchased access, gateway, remote browser isolation, Magic WAN and Magic Firewall. They're a terrific customer. A Fortune 500 telecom signed a $400,000 one-year deal to bring a portion of Cloudflare’s Zero Trust services to their consumer base. They're bundling Cloudflare's DNS content filtering into their consumer security bundle. After evaluating competition, they found Cloudflare solutions to be the most secure and reliable in the market. This deal is not only valuable for the obvious reasons, but also because it will feed data back to our Zero Trust security products to further extend their lead over the competition. A leading generative AI company signed a one-year $1 million deal. The company had been a user of our free tier since 2017. And this deal originally started out as a relatively small gateway DNS opportunity to replace Cisco Umbrella. However, when their browser-based application debuted in late November, demand for the company's AI-generated content absolutely exploded with unprecedented rates of adoption. Their Azure Front Door had quickly proved insufficient at handling the massive load on their services from legitimate users as well as keeping fraudulent users from exhausting their resources. They started off with CVM, DDoS, bot management, gateway DNS and more. We are actively exploring various paths for expansion to support their incredible growth as well as emerging use cases of their AI models and applications with Cloudflare Worker, API Shield, imagery sizing and more. We saw success with other AI companies in the quarter as well. Given the resource constraints they all face as well as how attractive they are as a target to fraudulent users, Cloudflare security solutions are an obvious choice for all of them. But many of them came to us for other reasons as well. AI companies, in particular, need to find wherever it's most cost effective to run their models across multiple different cloud providers. They are, by their very nature, multi-cloud, but the data egress policies make it prohibitive to move large training sets between the clouds. Enter Cloudflare Worker. What we're finding with these AI companies is that R2 and other workers' products naturally become the glue at the center of a multi-cloud ecosystem. R2 has become the natural neutral place for these AI companies to store their training data in order to make sure it can be inexpensively and efficiently accessed from anywhere. It's obvious in retrospect. But it's a use case we didn't anticipate. Today, our largest R2 customer is another AI company using us for exactly the purpose of being a neutral place to store their training data. And, of course, being a neutral network super cloud that stitches together the traditional public cloud isn't a problem exclusive to AI. A European financial services company signed a five-year $1.8 million deal, replacing a dozen different security and network vendors with Cloudflare. This company settles hundreds of millions of securities transactions annually for the largest banks and governments in the world. As a result, security and regulatory compliance are paramount for them. They wanted to consolidate and simplify their numerous point solutions into a single pane of glass solution. After receiving regulatory approval, the customer signed on for multiple solutions across our core application services portfolio as well as both Zero Trust and network services in Cloudflare One, including access, DNS filtering and Magic Transit. In addition to consolidating their spend across multiple point solution vendors on to Cloudflare's broad platform, our data localization suite, in particular, won them over. Competing vendors simply do not have an equivalent solution. As companies increasingly face localization and data residency requirements becoming law in various geographies, our differentiated data localization suite is becoming more and more critical to customers. A public utility company in Africa signed a $2.8 million 75-month deal to help support a really cool industrial IoT rollout. They're using Cloudflare's intelligent network to monitor 3,300 sensors, tracking shipments of materials. This is another use case of Cloudflare's network we wouldn't have imagined on our own, but one we're uniquely positioned to deliver for the customer and now opens even more markets and opportunities. The state of North Carolina signed a three-year, $3 million deal. The state had originally come to us under our Athenian Project for free help with election security. They learned the power of Cloudflare using us to protect their elections infrastructure and signed the deal to expand Cloudflare’s protection across 50 state agencies. Finally, I'm happy to report that after our longer than expected wait at the proverbial DMV, we officially received Cloudflare’s FedRAMP certification. The certification covers nearly our full suite of products with a notable exception of Area 1 e-mail security product, which we acquired after we started the FedRAMP process, but we expect to add it to our certification at the FedRAMP renewal. Our first federal contract after our certification was a great start. We were awarded the $7.2 million, five-year deal to operate the .gov registry. We were awarded the contract because of our modern infrastructure, technical prowess, relentless innovation and proven ability to defend against the largest cyber attacks. Every e-mail sent to the White House, every agency's webpage and most of the other ways the U.S. government connects to the Internet now depend on Cloudflare and our network. We're proud to have won this business, but the public sector space is only 3% of our revenue today, so we believe it's only the beginning of what we'll be doing in the future. Thank you, Matthew, and thank you to everyone for joining us. I want to take a moment to welcome Phil Winslow, our new VP of Strategic Finance, Treasury and Investor Relations to the team. As an influential equity research analyst who has been following Cloudflare even before our IPO, Phil brings a wealth of knowledge, expertise and relationships to his role at Cloudflare, and we are excited to have him on board. Turning to the fourth quarter. Economic uncertainty resulted in businesses being more cautious with their spending, leading to longer decision making processes and ultimately longer sales cycles during the quarter, pressuring revenue growth across the technology industry, including Cloudflare. However, we remain focused on controlling what is in our control, which is to maintain our commitment to the efficient unit economics of the business and to prudently allocate capital with a focus on maximizing shareholder value. As a result, we delivered a record quarter in terms of operating profit, operating margin and free cash flow. I'm particularly proud of our free cash flow performance during the fourth quarter, and we are committed to continuing to scale free cash flow generation going forward. Turning to revenue. Total revenue for the fourth quarter increased 42% year-over-year to $274.7 million. From a geographic perspective, the U.S. represented 53% of revenue and increased 44% year-over-year. EMEA represented 27% of revenue and increased 42% year-over-year. APAC represented 13% of revenue and increased 40% year-over-year. Turning to our customer metrics in the fourth quarter. We had 162,086 paying customers, representing an addition of roughly 22,000 paying customers in 2022 and an increase of 16% year-over-year. We were pleased to see retention improve in the pay-as-you-go customer base in the fourth quarter returning to the levels we achieved in the late 2020 through early 2022. Turning to large customers. We ended the quarter with 2,042 large customers, representing an increase of 44% year-over-year and an addition of 134 large customers in the quarter. During the quarter, we also added a record number of net new customers paying us more than $500,000 a year. As Matthew mentioned earlier, we are also pleased to see large customer revenue contribution increase again sequentially to 63% of revenue, up from 57% in the fourth quarter last year. For fiscal 2022, large customers represented 61% of total revenue compared to 54% of total revenue in 2021 and 46% in 2020. For the full year, we are also breaking out large customers into cohorts of those who spend greater than $500,000 and $1 million. We ended the year with 222 customers that spent over $500,000 with us, an 83% increase year-over-year. We ended the year with 85 customers that spent over $1 million with us, a 52% increase year-over-year. Our dollar-based net retention rate was 122% during the fourth quarter, a decrease of 200 basis points sequentially and a decrease of 300 basis points year-over-year. We've not experienced elevated churn. Instead, similar to last quarter, the decline was primarily driven by less net expansion in customers spending less than $100,000 worth Cloudflare as well as pay-as-you-go customers. Conversely, our large customer net expansion was flat quarter-to-quarter and remains consistent with our average quarterly DNR for this customer segment since the end of 2019. We continue to expect DNR to trend upward over time to our long-term target of 130% plus. Also, we anticipate some variability from time to time particularly as customers are more cautious in their near-term spending, which, as I mentioned before, has impacted sales cycles. Moving to gross margin. Fourth quarter gross margin was 77.4% and 78.2% for fiscal 2022, both of which remain above our long-term target range of 75% to 77%. Network CapEx represented 10% of revenue in the fourth quarter. For full year 2022, network CapEx represented 11% of revenue as compared with our guidance at the beginning of the year at 12% to 14%, which demonstrates the flexibility, elasticity and scalability we have achieved in our network. For fiscal 2023, we expect network CapEx to be 11% to 13% of revenue. Turning to operating expenses. Also their economic challenges for every business currently, we again took proactive measures during the fourth quarter to improve operational efficiency and control discretionary spending. As a result of these actions, fourth quarter operating expenses as a percentage of revenue decreased 1% sequentially and 7% year-over-year to 71%. Our total number of employees increased 32% year-over-year bringing our total headcount to approximately 3,220 at the end of the quarter. We'll continue to pace hiring for the year based on current market conditions to deliver consistent results with a keen focus on allocating our talent to key strategic areas of the business to help us achieve our objective of $5 billion in annualized revenue in five years and to do so profitably, predictably and productively. Sales and marketing expenses were $113 million for the quarter. Sales and marketing as a percentage of revenue remained consistent sequentially and decreased to 41% from 44% in the same quarter last year. Research and development expenses were $49.4 million in the quarter. R&D as a percentage of revenue remained consistent sequentially and decreased to 18% from 19% in the same quarter last year. General and administrative expenses were $33.3 million for the quarter. G&A as a percentage of revenue decreased by 1% sequentially and decreased to 12% from 14% in the same quarter last year. Operating income was $16.8 million compared to an operating income of $2.3 million in the same period last year. Fourth quarter operating margin was 6.1%, an increase of 490 basis points year-over-year. These results underscore our responsiveness to market conditions and our ability to scale up or scale down our spending as needed to meet demand, highlighting the efficiency and elasticity of our business model which remain key elements of Cloudflare's success. Turning to net income and the balance sheet. Our net income in the quarter was $21.6 million or a dilutive net income per share of $0.06. Tax expense for the quarter was $2.3 million. We ended the fourth quarter with $1.6 billion in cash, cash equivalents and available-for-sale securities. Free cash flow was $33.7 million in the fourth quarter or 12% of revenue compared to $8.6 million or 4% of revenue in the same period last year. Operating cash flow was $78.1 million in the fourth quarter or 28% of revenue compared to $40.6 million or 21% of revenue in the same period last year. Remaining performance obligations, or RPO, came in at $907 million, representing an increase of 9% sequentially and 45% year-over-year. Current RPO was 74% of total RPO. Before moving to guidance for the first quarter and full year, I would like to begin with our expectations and the provisions we have factored into guidance. We performed rigorous scenario analysis across multiple vectors from pipeline and ACV growth to productivity in order to understand both our company-specific opportunities as well as the risks from the current economic uncertainty. In our guidance, we have not factored in any improvement in the macroeconomic environment or from our go-to-market initiatives. Specifically, despite a notable improvement in our pipeline exiting 2022 as compared to with the first half of the year, we have assumed the increase in sales cycle, which we observed in the second half of last year, continues in 2023 and have, therefore, incorporated close rates below recent historical lows. Furthermore, as Matthew discussed earlier, we believe sales and marketing can be broken down into a series of processes that can be organized, measured and continuously optimized. Marc and Brent are establishing a consistent structure, model and process that simplifies how we operate and how we interact with prospects, customers and partners. Because of the new leadership team we have already assembled has successfully executed these go-to-market playbooks before at other companies, we are confident in the ramp of implementing these models and tactics which we expect will ultimately improve revenue growth and productivity. However, we have not incorporated any improvement in sales productivity in our guidance for 2023, embedding in fact productivity levels below our recent historical lows. Now turning to guidance for the first quarter. We expect revenue in the range of $290 million to $291 million, representing an increase of 37% year-over-year. We expect operating income in the range of $11.5 million to $12.5 million, and we expect diluted net income per share of $0.03 to $0.04, assuming approximately 342 million common shares outstanding. We expect an effective tax rate of 36%. For the full year 2023, we expect revenue in the range of $1.330 billion to $1.342 billion representing an increase of 37% year-over-year at the midpoint. We expect operating income for the full year in the range of $54 million to $58 million, and we expect dilutive net income per share over this period in the range of $0.15 to $0.16, assuming approximately 344 million common shares outstanding. We expect an effective tax rate of 36%. Beginning in 2023, Cloudflare is subject to be the [indiscernible] minimum tax, which is the primary driver for the increased tax rate year-over-year. After having achieved positive free cash flow in the second half of last year, we anticipate being free cash flow positive for the full year 2023. While we expect free cash flow to trend upward on an ongoing basis, for modeling purposes we anticipate near-term variability in our cash flow generation with the first half of 2023 expected to be relatively breakeven. We remain confident in the elasticity and durability of our business model, and we'll continue to pursue the enormous opportunity ahead of us while raising the bar on our operational excellence. In closing, I'd like to thank our employees for their continued dedication to our mission, customers and partners. And with that, I'd like to open it up for questions. Operator, please poll for questions. Great. Thanks for taking my questions, guys, and congrats, Phil, on your new role. Looking forward to working with you on that side of the table. I guess one of the questions I'm getting is around the conservatism in your '23 revenue outlook. Obviously, Tom, you talked about some of the levers of conservatism. But I guess with 37% growth for both Q1 and the full year, obviously, your comps ease as the year progresses. But is there something that perhaps kicks in during Q2 or the second half of the year, maybe like the price increase you announced last year, or maybe a large customer renewal that would drive linearity this year? I think we stick to our rule of trying to be prudent and thoughtful how we think about the future, especially in a rather uncertain environment. I think that the important takeaway in the guidance that we put forward is that we did not assume any help from the macroeconomic environment. We did not plan that things would get better. And we have a lot of initiatives that will accelerate sales productivity and accelerate growth, things that we can control. But we've been rather conservative there too in terms of what we anticipated in the guidance we gave. So I think it was our goal in a world where there are a lot of variables that shift around to find some ground of stability from which where we can build on moving forward. But I think prudent is what we said during COVID and thoughtful is what we said during COVID, and I think we stick to that philosophy, keeping our hands on the steering wheel as Matthew would call it and work on what we can control. Great. And then maybe just a quick one, Matthew. Within your security portfolio, you noted some nice wins in your prepared remarks. I'm wondering, can you talk about maybe just some of the win rates specifically on your enterprise-grade customers within Zero Trust deals, I guess, specifically against some best-of-breed customers that you noted on the call? Yes. I think that we are really happy with our win rates. What I think our challenge is in the Zero Trust space is not winning customers that know about us, but making sure that customers that are in the market for Zero Trust services are aware that that's something we do. The frustration that I still have is when I’ll meet with a customer and oftentimes they'll literally say, you should build something that is in the Zero Trust space, competing with Zscaler or Palo Alto Networks. And so when we're in those deals, we find ourselves winning very often. I think we are especially successful with very technical rigorous companies that measure performance and care about making sure that they have the best possible end user and especially developer experience. But our challenge now, and what Brent and Marc are really focused on, is how in that space do we increase our awareness? And I think you're going to see a lot of us doing that. But when we're in the deal, we tend to have very, very strong win rates that rival what we see from our other products. Thanks, guys. So Matthew, I think it would be helpful for investors to understand. You had talked about the AI opportunity and the use cases, but help investors understand how the revenue opportunity with those types of customers actually ramped since you have that subscription model versus a consumption model. Yes. So the way that we've been -- the way that it has sort of been the natural way that we thought companies like AI companies would consume Cloudflare would be looking at our security products. And those are products that, as you said, are subscription-based and there's some opportunity there, but there really aren't yet that many AI companies. So that opportunity is fine. But I don't think it's anything that we would get really excited about. I think what we're seeing though is in that cluster of AI companies, they have a real use case for the cloud which is somewhat different than what we see from some other companies. It is, I would say, more forward leaning and that is that they are constantly looking for wherever the best model or wherever the cheapest GPUs are to process their data. And so they are looking around across multiple different cloud providers, whether that's Google or Microsoft or AWS and they're always saying, what can we take advantage of and get as much out of that as possible. And what the challenge for them is, is the AI training sets or these big lumps of data that they then have to sort of bring to wherever the model or bring to wherever that GPU is. And in that case, a lot of the workers products and, in particular, our R2 product, are a very natural way that they can put the data in one neutral location and then be able to access it all around in other locations as well. And what we're seeing is that that neutral position of R2 is actually not just appealing for people in the AI space, but for anyone that has shared data that they want to use not in just one cloud but across multiple different clouds. And so I think by having a way to embed data into the network and store data into the network, that is an opportunity for us to service anybody who is trying to be multi-cloud, which is frankly what every big enterprise today is doing. And in that case, R2 is very much a consumption-based product. And so as AI data sets get larger and larger, we expect that we will be able to grow R2 revenue along with that. And actually, our largest R2 customers, as I mentioned in the prepared remarks, is an AI company and they're growing at just extraordinary rates as they put more data into their models. I think that we are not looking for anything exotic here. I think, again, prudence is very much the sort of word of the quarter for us. And I think that we're not sort of counting on something that is the new hot thing doubling down on Cloudflare. And so while we're very proud of what we have done with companies in the AI space, and we're excited about the ramp in products like R2 and the overall workers ecosystem, we still think of that more as a long-term opportunity than a short-term quarterly or even 2023 opportunity. And so I think that we're not relying on sort of an AI miracle in order to make the numbers that we put up. Thanks for taking the questions. Just one is a little bit of a runoff from that one. Just around some of the new products that you launched, the one full in the back half of last year, R2 being one. Could you just give us some commentary around how that's picking up and launching those into maybe more challenging sales environment as it helped keep the DDR a little more stable than otherwise could have been? And then just financially, Thomas, if you can just talk a little bit about the decline in operating income sequentially into the first quarter, the seasonality there and what's happening? Thanks. Yes, Jim. So I'll start and then Thomas can take the second part. I think we're really happy with the ramps of these new products. Cloudflare, we've always thought of ourselves as stacking S curves one behind another. And so I always think of sort of our application services products as sort of our first act. We think of our Zero Trust products as our second act. And we think of our workers products as our third act. And so I think that they're maturing at rates that continue to make us very excited and happy and we're seeing more and more new use cases that are coming from that. I think some of the trade-offs around DNR have been interesting here. One of the things that we really talked about last quarter optimizing for was just on how we did cash collections and converting customers to paying upfront. And I think that one of the things that we made a trade-off on was at times saying we would optimize for getting more customers to be paying us upfront. And that might not allow us to expand those customers as much in this quarter. And I think that's the right thing for us to do. We want to optimize in these times, making sure that we can collect cash as quickly as possible, can be paid upfront as much as possible. That continues to be an ongoing effort for us. But I think that that was more of a drag on DNR. I think you'll start to see as those new products come online that those will be positive. But remember that DNR only starts to kick in for a customer that's been with us for an entire year. So for those products that are new, even if they are wildly successful, the expansion won't actually show up in our numbers until 12 months after the products were actually in the market. All of last year was a year where we did very active management of our expenses. And we reacted really early to the slowdown in the macro environment by slowing down our hiring, especially the velocity of hiring. And we'll stay committed to this course during the course of this year and align our spending to the development of the business. So there were a lot of companies out there during the season's earnings calls that talked about efficiencies. I always like to point out that efficiencies in the DNA of the company of Cloudflare, that is something that Matthew and Michelle already wrote in the founder letter for their prospects for the S1. So this is what you want to expect from us, not only for the first quarter, but for the remainder of this year as long as the environment is what it is. Thank you. Good afternoon, guys. Congrats, Phil, on the new role. Looking forward to working with you. Actually two product-related questions for Matthew. So actually starting with workers, so earlier today, Shopify came out with a press release discussing speeding up their storefront in 2023. [Indiscernible] like it is based on Cloudflare workers. I think back in the summer actually, they also had a blog where they confirmed the shutdown of their internal project Oxygen opting now to Cloudflare. So can you talk to us, Matthew, about Shopify relations, maybe just a flavor on workers and an additional win rate? Yes. So Shopify has been a terrific Cloudflare customer for a number of our different products, including workers. And I think, look, we've talked about in previous calls is that one of the most effective ways for us to sort of turbocharge the adoption of workers is to work with other great partners that have an existing developer ecosystem. And so we were proud that Shopify has really standardized around Cloudflare workers. We've worked with them to make sure that we are doing the right things for the overall community that we open source, for example, the run time of workers. And I think that as you see companies like that adopt workers for their developer platform that that's a real opportunity for us to, again, turbocharge what workers is and make sure that more and more developers are on top of it. And what's incredible is just watching how as again we get more reps with really talented and smart engineering teams like the team at Shopify, that's just making the workers platform better for everyone involved. And again, we're really proud to have them as a customer. Understood. And maybe back to the security side of things. Matthew, in your prepared remarks, you talked about that big security win displacement. But I'm just curious whether it also involved the e-mail security kind of the Area 1 related product? Yes. I want to be careful that I might misspeak, but I don't believe that Area 1 was included in that particular deal. So that's still an expansion opportunity with that customer. We do see that e-mail security is a terrific entry into getting people to move to our Zero Trust platform. The reason why is that Zero Trust one is the first challenges is enumerating how many people are within an organization, how many seats effectively does that organization make up. And if we can get somebody to use our e-mail security product, that inherently defines that in a very natural way. And so migrating somebody from sort of our application services portfolio to our e-mail security portfolio is one click. It's a simple DNS change. And they don't have to -- they can continue to use any of their existing e-mail vendors, and we effectively just proxy that traffic and are able to provide additional layers and enhancement of security as well. Once we've done that, it then makes it a very natural step to go from the e-mail security product to the rest of our Zero Trust suite. And so that is a standard play that we run. It's very successful. But in the case of this particular oil and gas company, it wasn't the reason that they adopted us for Zero Trust. But hopefully, we can go the other direction as well. Thanks for taking my questions. Congrats to Phil as well. Matthew, for you, I want to take a step back, notwithstanding the current economic situation, I would love to just talk about the barriers to entry for Cloudflare and your top priorities for the next three years in terms of growing the business? And Joel, by barriers to entry, do you mean for competitors competing against us or what exactly do you mean by that? Yes, exactly, Matthew. I think there's a little bit of -- in the investment community, there's a little bit of thought process that it's easy to do what you -- what Cloudflare does. And as you and I both know, that's not true. But I think it's important for you to explain that from the perspective of how difficult it is to provide the services that you do? Sure. So I think the thing that is at the core of Cloudflare is our network, the reason that our ticker is NET and not CLOFLARE [ph] is because of the fact that we are fundamentally a network. And that network has taken us over 12 years to build. And it is not something that you can just throw money at and buy your way into, it's not something that even some of the large hyper-scale public clouds have. And so we hear regularly from companies like Microsoft that they're like, wow, you guys have something very special in the network you've built, and it is very different than anything else that's out there. But somewhat counterintuitive a bit about our network is that as we expand into further corners of universe, whether that's opening an additional data center in St. Louis or going into Djibouti, any of those things actually help us lower our costs because it drives down the cost of delivering all of our services. And the other important bit is that unlike some of the competitors that are out there, whether those are competitors in the application services space that have grown through a series of M&A acquisitions or even in the Zero Trust space, someone like Zscaler actually runs multiple independent networks to provide their various services. And that means that customers that are using those different services not only is it more inefficient for them to service those customers, but those customers experience very performance setbacks when they're delivering their services. And that's something that a lot of the customers that are switching from Zscaler to us note time and time again. What's different about us is we have relentlessly said that we run one single network. And every single server across our entire network is capable of running and performing any of the functions that we may need it for. And so that means that as we grow our services, it allows us to deliver them incredibly quickly, incredibly efficiently and anywhere in the world, and that is paying off today by allowing us to continue to scale as efficiently as possible. And so I think that it was a unique period of time, 12.5 years ago when clouds got started that allowed us the conditions and opportunities to build the company. I think it would be very challenging today for somebody to replicate the network that we have, and that network continues to allow us to deliver more and more services, whether that's our traditional application services, the act one products; our Zero Trust services, the act two products or even the super cloud products that we have with brokers, which are our act three products, all of those rely on that network and the efficiency that it has. And I think that's where the fundamental barrier to entry to our products is. The other thing which is important is we just experienced significant network effects, and that comes in a number of different ways. One is just with every piece of data that we see, we're able to make our security products significantly better. So the fact that consumer ISP is rolling us out to all of their customers that use their security bundle, that's just feeding data back into our system, which makes us smarter and smarter across that. But it's more than that. The fact that we are today somewhere in front of 20% to 25% of the web means that for customers that use our Zero Trust products, if they are going to that 20%, 25% of the web that uses us, then they never have to leave Cloudflare’s network, and we can deliver a much more significant product. So as we are in front of more content and as we are in front of more eyeballs, that just makes the experience for both sides of that network better and better and that catalyzes the network effect, which, again, is very difficult for other competitors to catch up with. So we like our position. We like where we are for the next three years, and we continue to be committed to our goal of getting to $5 billion of run rate in five years from last quarter. Great. Thank you. Congrats on the great quarter and the really strong guidance for the year. I wanted to start with a question on that big Fed deal. I know you mentioned a lot of interesting deals. I want to dig into the $7.2 million five-year deal with the Fed. First, I guess, will that be recognized as revenue ratably over the next five years? And do they bake in any sort of expansions that might not yet be included in that $7 million? Because it seems like that's -- certainly a lot of your big competitors are very strong in that space as well. So I was just curious like how it will progress, how you want it and what might also be down the road in that deal? Maybe I’ll get started and there’s no expansion baked into the deal. That's the deal we signed and that's the deal we announced. And if there is expansion opportunity, it will add to that opportunity. Revenue will be recognized ratably. It's a little bit more tricky. It's not necessarily linear over the contract period. It's the amount of entities that are signing up and how fast they are on our network. But for modeling purposes, to assume a ratable distribution over the lifetime of the contract is probably a good start. Okay. Thank you, Thomas. And then it looks like your channel momentum has continued and I think the channel accounted for about 13% of revenue this quarter, which is the highest it's ever been. I guess where are you seeing that traction from? Is that more from the GSIs or the traditional resellers? I think that channel remains a big opportunity for us, but we're proud of the progress that we've made and it's a real priority for Marc as he’s there. I think that we're seeing both the traditional resellers as well as some of the GSIs that are increasingly adopting Cloudflare. And I think the big opportunity here is really with those act two and then to some extent, those act three products. And so we're seeing that in act two products, those are very much products that oftentimes we are winning in cooperation with a channel partner. And those initial wins help unlock future wins going forward. And then the second thing that we're seeing is that in our act three products, a lot of times, we're seeing as customers are coming to their partners to say, we're looking to consolidate vendors, we're looking to save money on some of our cloud spend that we're seeing more and more that Cloudflare is a solution that is in the toolkit for people who are trying to figure out how they can save money. So moving from an S3 to an R2 is a substantial savings. And we're seeing that even with some nontraditional partners. So someone like Palantir we announced a partnership with, they were driving a lot of their customers to their cloud solution. They saw how much money was wasted in some of the public clouds and so built a tool to help people understand what their cloud spend was. And they came to the conclusion that oftentimes, if customers could move more of their workloads to Cloudflare workers, that was a real money saving for them. And again, that's been -- it's early days but we think that that's definitely saving money, consolidating vendors. Those are all going to be trends throughout 2023, and we're very well positioned to be able to help partners as they work with their customers to take advantage of those trends. Thanks for the great print and welcome to have you on board, Phil. I was hoping you could talk a little bit about the word at the end of the year here about how many coders are currently working on your platform and give us an update on that? I think that is the major positive strategic advantage that you have going to an earlier question. Yes, I think that we announced at the end of last year that we were -- that we crossed through 1 million developers that were building on Cloudflare workers. I don't know what the latest numbers are on that, but the growth rates have continued to drive more and more developers to that. And again, partnerships with companies like Shopify that have their own developer ecosystem just further accelerate the number of people who are using Cloudflare workers. And we're doing more and more. I think one of the exciting things that we announced yesterday was a very small team on our side, wanted to see if they could get Mastodon which is sort of the open source Federated, Twitter client to run on Cloudflare. And that's a fairly sophisticated application. And they built not only a way for them to deploy that for any developer to be able to deploy that on Cloudflare workers, but then it scales just beautifully where if you wanted to build kind of the next generation Twitter that just scales and scales and scales, they have proven that that can be done on top of Cloudflare workers. And so I think we are starting to see more and more sophisticated applications like that get built on workers, and that's an exciting development for us. The second question I wanted to address was your strategy around pricing. I know back in November, you raised prices for the first time and it was at a decade, which is amazing in and of itself. But can you talk about the magnitude of the pricing lever as we look at the full year for '23 and whether that is broader than just the low end entry fees? Yes. I think that we were very hesitant and a little bit nervous about raising pricing. Cloudflare is fundamentally infrastructure for our clients, and we want to be reliable and predictable for them. And so we thought about this a lot. The primary goal of the price increase which was really only for our pay-as-you-go business, which is well less than 20% of Cloudflare revenue. But the primary goal was to shift that business from what was mostly a monthly payment business to one that was paid upfront and annually. So if you pay us upfront annually, you can keep the same price that we've had historically. And we were -- we obviously did all the work talking to users, figuring out what the tolerance was, but you have to sort of hold your breath and see what happens. And we've seen a handful of examples where I think with Slack, I think with Shopify, they’ve had price increases that have gone over well. And we've seen a handful of price increases from companies where there's really been pushback that they've received. And I'm really happy that our customers, if anything, I think we were very pleasantly surprised how many of our customers said, over the course of the last 12 years, Cloudflare has added so much additional value that they want to pay us more. And so we've seen a substantial number of convert already to the annual billing, which is great because it's helped us pull forward some cash, which is important. And then the second is that those people who -- we had price increases for, and it was about a 25% price increase, that actually -- so it went from $20 to $25, so not 25%. That's misspeaking. But that was well received and we have not seen elevated churn as a result of that. It went about as smoothly as we could possibly have hoped. Great. Thanks for squeezing me in and taking my question. Matthew, thanks for the color around the SLED business and congrats on hitting the FedRAMP certification. You've indicated that you thought 3% was I think low at only 3%. So just curious around that public sector business, kind of what you think the kind of the opportunities and maybe what held you back on that up to now? And if your sales and marketing, your new leaders there have kind of any plans to kind of help expand that part of the business. Thanks. We just lost Matthew. I’ll step in until he gets his line back. The Federal business, as you know, is a very local business. So getting all the certifications in place across the globe was one of the big targets. And we have made great progress both in Europe and now finally also here in the U.S. And as the certifications have been coming in and the products and the data centers get certified, we have been building up the teams in parallel, not only here in the U.S., but also outside of the U.S., especially in Europe, and we expect business to grow with it. And I would shy away from giving a concrete target or number for this year. But as you heard from Matthew, we think we have an overwhelming opportunity in front of us and now with the certifications in place and the team that gets hired, we are quite excited about this space. I wanted to -- I think Alex was cut off on his last question. I think you wanted to find out how much of the price increase was baked in, in our guidance. I think it's fair to assume, and you can draw that conclusion from Matthew's comments, for this year it's probably more a tailwind to cash flow than it is a tailwind to revenue. Most of the customers have opted in to convert to annual billing and lock in the historic prices for one more year. So less of a tailwind for revenue, but more a tailwind of free cash flow for this year, at least. And apologies. My cell phone provider doesn't use Cloudflare it turns out. So my call dropped. That's a first. But I'm sure Thomas’ answers were exactly right. Yes. Sorry about the technical snafu. I really just wanted to end by thanking all of our customers, partners and especially the Cloudflare team. We have proven that we can do more even in very difficult economic times. I'm proud of all the work that we're doing to keep the Internet safe, secure, reliable for all of our customers around the world. So thank you for helping us deliver the quarter, and it's going to be a great 2023. I appreciate everyone being on the team. And everyone that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.

EarningCall_18

Good morning, and welcome to the Cousins Properties Fourth Quarter 2022 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, and welcome to Cousins Properties fourth quarter earnings conference call. With me today are Colin Connolly, our President and Chief Executive Officer; Richard Hickson, our Executive Vice President of Operations; and Gregg Adzema, our Chief Financial Officer. The press release and supplemental package were distributed yesterday afternoon, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website, cousins.com. Please be aware that certain matters discussed today may constitute forward-looking statements within the meaning of federal securities laws, and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors, including the risk factors set forth in our annual report on Form 10-K and our other SEC filings. The company does not undertake any duty to update any forward-looking statements, whether as a result of new information, future events or otherwise. The full declaration regarding forward-looking statements is available in the supplemental package posted yesterday, and the detail special of potential risks is contained in our filings with the SEC. Thank you, Pam, and good morning, everyone. We had a strong fourth quarter at Cousins to close out a productive 2022. On the earnings front, the team delivered $0.66 per share in FFO and same property net operating income increased 2.5% on a cash basis. Importantly, we leased 632,000 square feet during the quarter with a 7.3% cash rent roll-up. Excluding Houston, where we signed a strategic 328,000 square foot renewal and expansion with Apache, the cash rent roll-up was 27.7%. For the full-year of 2022, we executed approximately 2 million square feet of leases with a 9.5% cash rent roll out. These are terrific results. Before providing an update on our strategy at Cousins, I will share a few observations on the macro environment: First, despite inflation, the Federal Reserve and other central banks around the world have rapidly raised interest rates to slow economic growth. Financial conditions have tightened. In response, companies are becoming more efficient. In some cases, this includes employing fewer people and reducing office space. Second, we are seeing an increase in office utilization. According to Castle, physical office occupancy averaged over 50% during the last week of January, the highest since the start of the pandemic. Austin, our second largest market led the survey at 68%. As the health crisis fades and financial pressures grow, CEOs are increasingly more focused on results and surveys. Rebuilding culture, collaboration and mentoring are now clearly priorities for innovative companies. Return to office mandates have accelerated, and this trend is likely to continue. Third, there is little to no leasing demand or capital available for older vintage, lower-quality office properties. As a result, the values of these properties will likely reprice to facilitate a repurposing or even a teardown. This process will take time to play out. In the meantime, these types of buildings will likely stagnate and have a reduced impact on the overall office market. Lastly, the pipeline for speculative new development projects is shrinking. So what are the implications for office real estate. In the short-term, leasing demand is likely to soften, expanding office footprint is challenging amid shrinking headcounts. However, silver linings are taking shape. The office market has begun the process to rebalance. Our customers are returning in greater force. Accelerated obsolescence is reducing the existing inventory. New development is minimal. And after companies right size and adapt to a more normalized world, they will grow again. Improving supply and demand fundamentals are not that far over the horizon for premier properties. The trend of growing companies distributing their workforces across attractive, affordable markets in the Sun Belt is still in the early innings. The flight to quality continues. Leasing demand is outsized for premium workplaces in amenitized locations. The [Indiscernible] is headed towards our Sun Belt trophy portfolio. Our conviction around our simple and compelling strategy to build the preeminent Sun belt REIT continues to grow. As I mentioned, market conditions will likely become more challenging in 2023. However, we built Cousins to thrive during all phases of the economic cycle. We are exceptionally well positioned today. Let me highlight why. First, we own the leading Sun belt trophy office portfolio in the best submarkets in Atlanta, Austin, Charlotte, Tampa, Phoenix, Nashville and Dallas. Likely surprising to some, our customers are growing. During 2022, our renewing customers expanded by 162,000 square feet in total. Importantly, our lease expirations through 2024 averaged just 5.1% per year of annual contractual rent among the lowest in the office sector. This positions us favorably to grow occupancy despite a softer market. Next, our $428 million development pipeline with the office component 63% pre-leased is appropriately sized and positioned for the current climate. We will benefit from meaningful incremental NOI during 2023 and 2024, while having only modest speculative risk. We approached 2022 with caution. While asset values were repricing, we intentionally and patiently prioritize our best-in-class balance sheet over new investments. Our net debt-to-EBITDA closed the year at 4.9 times. This compares to the Green Street sector average of 8.2 times. Importantly, we have no significant near-term loan maturities and approximately $950 million available on our $1 billion revolving credit facility. Simply put, we have significant liquidity and capacity to pursue compelling new investments in a dislocated market when many peers now lack capital to compete. In closing, we are mindful of the potential impacts of higher interest rates and a slowing economy. However, over the long-term, we are optimistic that premier workplaces will separate into its own asset class with improved sentiment. Cousins is an exceptionally strong position. We are in the right Sun belt markets; we own a trophy portfolio; we have a fortress balance sheet and our talented and creative team is a differentiator. Before turning the call over to Richard, I want to thank all of our employees at Cousins who provide excellent service to our customers. Their dedication, resilience and hard work continue to propel us forward. Thank you. Richard? Thanks, Colin, and good morning. Our operations team closed out 2022 with another solid quarter. I'm very proud of our team for finishing the year well in the midst of a complicated macro backdrop. We remain encouraged that the Sun Belt migration and flight to quality trends are intact. Additionally, we are pleased to see more influential companies in a number of industries calling for employees to spend more time together in the office. We expect this trend to continue. For the fourth quarter, our total office portfolio weighted average occupancy and end-of-period lease percentages were 87.1% and 91%, respectively. Those numbers include the addition of $100 million, and 92.3% leased and occupied new development in Phoenix into the operating portfolio. Our weighted average occupancy was down 0.2% in the quarter, driven primarily by a couple of explorations at San Jacinto Center in Austin and Tippy Gateway and Phoenix, both of which have been partially backfilled. Our lease percentage increased almost a full percent from last quarter, largely driven by the recently announced 328,000 square foot lease for Apache Corporation's new global headquarters at Brier Lake Plaza in Houston. As Colin said, when we announced this lease, this highlights the importance of Premier workplaces and foster employee collaboration and enhancing company culture. Apache's employees will experience an engaging, state-of-the-art workplace when they arrive at BriarLake, and we are excited to be a part of. In the fourth quarter, we executed 39 office leases totaling 632,000 square feet with a weighted average lease term of 11.6 years. This was our highest quarterly square footage volume of 2022. And excluding new development, it was also the highest since the third quarter of 2019. Our total signed activity for the full-year was just under 2 million square feet, a fantastic year of leasing for Cousins. The Apache weeks was clearly a big contributor to our fourth quarter leasing volume. However, it also muted overall leasing economics given it was in the relatively weaker non-core Houston market, namely our recent concessions, defined as the sum of free rent and tenant improvements were elevated and weighed on net effective rents. I'm pleased to say that even with our outsized leasing activity in Houston, second-generation net rents for all activity increased 7.3% on a cash basis and in the fourth quarter and 9.5% for the full-year. I also want to share some of the metrics behind our fourth quarter leasing activity, excluding Houston, in order to provide better insight into our core markets. Excluding Houston activity, we executed 36 leases in the fourth quarter, totaling 296,000 square feet with a weighted average lease term of 8.1 years. New and expansion leases represented 49% of total leasing activity. 83% of our activity net of Houston was in Austin and Atlanta and activity was balanced in terms of industries. Leasing concessions, excluding Houston, were $5.88 this quarter, 19.7% below our weighted average for the first nine months of the year. Further, net effective risk this quarter were a company record $30.61, when excluding Houston. Lastly, when excluding Houston's second-generation net rents increased 27.7% on a cash basis in the fourth quarter. From a broader market perspective, the flight to quality continues to bifurcate the market. According to JLL, assets built since 2015 saw 8.1 million square feet of positive net absorption last quarter and 33.8 million square feet in 2022. JLL Research also found that assets less than 10-years old captured 14.1% of gross leasing activity this past quarter, a 22.6% increase in share compared to the previous cycle. Even with the powerful flight to quality trend in our favor, we are seeing some slowing in our leasing pipeline as macroeconomic uncertainty persists and demand from large technology companies pauses. We expect that our total leasing activity is likely to moderate in 2023. In addition to the softening economy, we have modest lease expirations in 2023 at only 5.1% of our annual contractual rent. Thus, we have fewer renewal opportunities during the year. With a smaller sample size of leasing activity, there could also be more volatility in our leasing statistics quarter-to-quarter. This may especially be the case with net rent growth, which is highly geared to the mix of lease size and geography. For instance, we are in lease negotiations to renew our largest 2023 expiry customer in about 120,000 square feet. They are not a traditional office user and their in-place rent has escalated for a decade. As a result, we expect their net rents to roll down modestly on renewal. Given the size and despite being a fantastic potential lease renewal for Cousins, it could have an outsized impact on leasing metrics in one of the next couple of quarters. With this anticipated renewal of our largest 2023 expiration, minimal expirations otherwise and about 625,000 square feet of signed leases yet to commence in 2023, we see a reasonable path to maintaining occupancy and hopefully growing occupancy towards the end of the year. Moving to some market dynamics. The Atlanta Metro recorded 485,000 square feet of net absorption last quarter, bringing the 2022 total to over 1.1 million square feet, the most in seven years according to JLL. Class A rents in the market were up 5% year-over-year, continuing to be driven by highly amenitized, newer and recently redeveloped buildings. JLL also noted that Midtown posted annual rent growth greater than 10% for the year. We signed 92,000 square feet of leases across all of our submarkets in Atlanta this past quarter, rolling up cash net rents over 10% on average. In Austin, JLL pegged market leasing activity last quarter just below the pre-pandemic average at 1.1 million square feet, with positive net absorption for the fourth quarter and the full-year. We signed 153,000 square feet of leases in Austin last quarter, rolling up cash net rents over 40% on average. Our activity included a 43,000 square foot renewal and expansion of Adobe, a technology customer of the domain. JLL Research also cited that 80% of Austin’s leasing activity this quarter occurred in leases for less than 10,000 square feet, an indication that we see momentum could slow in Austin as larger requirements pause. Fortunately, our portfolio is 95% leased as in-place weighted average lease term of over six years and only 8.2% of our annual contractual rents in Austin expire through 2024, equally balanced between ‘23 and ’24, including only one exploration larger than 50,000 square feet that is in the third quarter of 2024. In the short-term, our portfolio is well insulated from softening fundamentals. Long-term, Austin remains one of the most desirable cities in the nation to live and work with strong demographic and job growth drivers. As the economy and the technology sector rebalances, we expect Austin to be poised for strong growth. In conclusion, our team had a strong finish to the year despite increasingly challenging macroeconomic headwinds. Looking ahead, we are optimistic that great companies will continue to seek high-quality, highly amenitized office space as they increasingly bring employees back into the office. Cousins is well positioned for the long term with a stable high-quality portfolio in the best Sunbelt markets. Before handing it off to Gregg, I want to thank our talented team at Cousins, whose hard work made 2022 a successful year. We look forward to a productive 2023 together. Gregg? Thanks, Richard. Good morning, everyone. I'll begin my remarks by providing a brief overview of our results, as well as some detail on our same-property performance in parking revenues. Then I'll move on to our capital markets activity and our development pipeline, followed by a quick discussion of our balance sheet before closing my remarks with information on our initial outlook for 2023. Overall, as Colin stated upfront, fourth quarter numbers were really solid. Leasing velocity remained brisk, second-generation leasing spreads were up, and same property, the year-over-year cash NOI was positive. It was also a very clean quarter. There were no unusual fees, gains or other items that materially impacted our results. That being said, interest expense was up significantly during the fourth quarter, driven by higher interest rates. Daily SOFR averaged 3.6% during the fourth quarter, compared to 2.1% during the third quarter and only 5 basis points in the fourth quarter of 2021. Focusing on same-property performance for a moment. Cash NOI during the fourth quarter increased 2.5% compared to last year. This continues a string of improvements during 2022, with the gains largely driven by our properties at Domain in Austin. Looking forward, we anticipate same-property NOI growth to be positive during 2023 on both a GAAP and a cash basis as our strong leasing over the past several quarters bears fruit. As Colin mentioned earlier, physical utilization has continued to increase, and our parking revenues have grown along with it. Parking revenues during the fourth quarter were the highest they have been since the first quarter of 2020. And for all of 2022, parking revenues were up 10% year-over-year. Turning to our capital markets activity. During the fourth quarter, we closed on a new $400 million term loan with our existing bank syndicate that matures in 2025 and includes four six-month extensions. We used a portion of these proceeds to pay off our maturing Promina Tower and legacy Union mortgages. During the quarter, we also refinanced the existing mortgages on our two terminus properties in Atlanta with the current lender, extending it from January of 2023 to January 2031. Looking forward, we only have about 1% of our total debt maturing in 2023. Specifically, we have a mortgage tied to a medical office building adjacent to a hospital that is essentially 100% leased. We own 50% of this Midtown Atlanta property through a joint venture with Emery University. We've initiated the refinancing process and anticipate a late spring closing. Turning to our development efforts. As Richard mentioned earlier, one asset, $100 million Phoenix was moved off our development schedule during the fourth quarter. Our current development pipeline is comprised of a 50% interest in Neuhoff in Nashville and 100% of Domain 9 in Austin. Our share of the remaining development costs is $172 million, $97 million of which will be funded by an in-place Neuhoff construction loan leaving just $75 million to be funded by our operating cash flow over the next two years as these projects are completed. Looking at our balance sheet, net debt to EBITDA is 4.9 times among the best of our office peers. Our liquidity position remains strong with only $56 million drawn on our $1 billion credit facility and our dividend remains well covered with an FAD payout ratio of only 70% in 2022. Our financial position is rock solid as we navigate these challenging economic times. I'll close by providing our initial 2023 earnings guidance. We currently anticipate full year '23 FFO between $2.52 a share and $2.64 per share with a midpoint of $2.58. No property acquisitions, property dispositions or development starts are included in this guidance. If any transactions do take place, we will update our earnings guidance accordingly. While there are no risks within our guidance around speculative property transactions, interest rates remain a risk for all rates. Whether through variable rate debt exposure or pending debt refinancings. As we have for many years, we used the sofer and treasury forward curves to forecast interest rates. To the extent these curves change, which they've been doing quite a bit lately, so of our interest expense. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Anthony Powell with Barclays. You may now go ahead. Hi, good morning. Question on Neuhoff in Nashville. And as you -- your completion at the end of the year, early next year, how are leasing kind of conversations going there? Any change in how you're approaching leasing, given kind of the changing office environment, that there would be so helpful. Hey, good morning, Anthony. It's Colin. The Neuhoff project, we remain incredibly excited about. The office component that project is predominantly an adaptive reuse project. And as that now is coming into shape and to form, we're starting to see increased activity in folks that can now kind of touch and feel and experience Neuhoff. So we do have some conversations going with several prospective customers that are encouraging. Our hope is to signed some leases this year. I do think if we sign those leases, just given the time to build out space and occupancy would be towards the back half of the year and likely not have a meaningful impact on our 2023 numbers. But certainly, we think can have a solid impact in our 2024 numbers. Okay, thanks. Maybe just what are you seeing on the transaction environment as things get more difficult in the office space? Are you seeing more deals from the market? I know nothing guidance, but maybe it's an update on volumes, cap rates, so helpful. Yes. The transaction market, I'd say, is still somewhat on hold in terms of actively marketed deals, but we are starting to see a pickup in -- and I characterize as off-market discussions as owners that don't have a strong capital structure ultimately need to fund either leasing costs or deal with an upcoming loan maturity or starting to reach out. And so you’re seeing conversations happen. I’d say there’s still a bit of a bid app spread between buyers and sellers. But as those capital needs become more in focus, I think you’ll start to see a pickup in transaction activity and start to find some price discovery as to where cap rates are. Thank you. Richard mentioned in his prepared remarks, the slow leasing environment and I guess, basically saying that you're hopeful that you grew occupancy this year. Can you just clarify, is that on a lease percentage basis or occupancy? Because there's a 400-basis point spread currently, you would think occupancy should be trending up this year because of that. Well, if you -- I mentioned that we have about 625,000 square feet for just 2023 signed leases that have not yet commenced, the weighted average, kind of, commencement they all know is in the 2Q time frame? Okay, so the remaining 400,000 or so, you're just hopeful to hold it? I'm just taking the difference between expiring and what hasn't commenced yet. Yes, that's right. I mean, how we're looking at the building blocks is that again, given we have expirations that are really historically low and the timing of those, which are more toward the back of the year, put that next to the commencements that we just talked about that we feel like we're going to be able to, through the year, maintain and then hopefully, demand willing, we think build occupancy towards the end of the year. And John, some of the delta between our percentage leased and percentage occupied, some of those leases are ones that won't commence until 2024. So some component of that, again, will be a tailwind for us as we move into 2024. We'll just get some component of that lift in 2023. And Colin, you mentioned obsolescence in your markets. Is there any way you can quantify the percentage of overall stock that's obsolete in your different markets? And what do you think is going to happen to some of these assets? That's a million-dollar question there, John. It is -- it varies by -- from market-to-market. I'd say, certainly, as you look at our Sun Belt markets, I'd say the average vintage of our properties is newer than what you would see in some of the gateway markets. So I think there's overall less obsolescence in our markets. But I'd still -- again, look at anything that was kind of built before the 1990s as you get into that 80s and 70s vintage product. And I think in some markets, it's anywhere from 10% to 20% of the inventory. What happens to, I think, it's going to need to reprice. As I mentioned, there's very little capital or leasing demand for that type of product. And so eventually, it will have to reprice to a value that will allow you to either invest capital to convert it to anything from a residential property to a data center to -- in some instances, if it's just not -- the bones, just aren't there, it’ll will have to reprice to a tear down with some sort of new product built on that. That process will take time. But I think importantly, in the interim, those properties are becoming less and less relevant to the overall office market. And I think effectively, we'll be removed from the inventory. And I think that will help the overall rebalancing of supply and demand for premium properties. My final question is for Gregg, just a following up on Neuhoff. Can you just remind us on your accounting treatment when you start expensing interest on that rather than capitalizing. Yes. We'll capitalize interest on any development project, including Neuhoff on the unoccupied space until the property has either been delivered for a year or becomes 90% occupied. Hi, good morning. You mentioned that cash leasing spreads were significantly higher, excluding the Houston leases, was there any particular market driving the elevated levels? And do you expect to continue signing leasing spreads at these levels? Hi, Camille, this is Richard. Yes, Austin has been and did in this quarter to drive the roll-ups. But Austin was over 10% -- or excuse me, Atlanta was over 10% as well. So -- but Austin really is a driver there. Again, as I mentioned in my remarks, we see some softening happening in Austin potentially in the near-term, so that could moderate. But really, at the end of the day, so we've always said there's volatility in how we report those metrics based on lease mix and geography. So it's tough to predict any quarter-to-quarter. Okay. That's helpful. And Gregg, I'd like to get your latest thoughts on how you're thinking about your floating rate debt strategy. I know you've spoken to in the past about being 20% as your target level, but with signs of the strengthening consumer and a robust job market. I think there's risk that the Fed continues to keep rates high, if not increase them. So do you still plan to keep this level as a target? Or what's your latest thoughts here? Sure. So you're right. Our long-term target for floating rate debt as a percentage of total debt is right around 20%. And that's where it is today, 21% as of year-end. We arrived at that level -- let me take a step back. That's consistent with, by the way, with the median curve, the office space as well. Some are at 0, but some are much higher. If you take a look at the 20-odd office companies out there, the average is right around 20%. So we're not high or low relative to our peers. That being said, we do have some benefit of having some floating rate debt on our books, not the least of which is that floating rate debt is oftentimes prepayable without a penalty. And when we're looking at our kind of sources and uses, we want to be able to be opportunistic. And so having the option of repaying some debt without penalty, we think, is a pretty powerful tool to have. And so that's what we have that, among other reasons, is why we have some floating rates has been on our books. So I don't think you're going to see it move materially from 20%. It hasn't in the past in the 12 years I've been here, it's always been right around 20%. I think it will remain there. It really is only comprised of 3 pieces of debt, it's our credit facility. It's the term loan that we just issued, and it's the new health construction on. That's it, but it solves for 20%. And it's something that we keep an eye on as well, and I don't see changing going forward necessarily. Great, thank you. So Richard gave great detail on how concessions looked high during the quarter because of the Apache lease in Houston, but the cost for the rest of the portfolio were actually very reasonable. It looks like maintenance CapEx was a little elevated, too. I don't know if that was also related to Houston. But my question is more broadly where net effective rents are and where they might be going in your markets and for your buildings. You consistently have very strong rent spreads. But do you think it's possible for office net effective rents to grow over the next, pick your time period given what we all see for physical occupancy and tech layoffs and all these apparent challenges for the industry. Good morning, Michael, it's Colin. I'd say our experience over the last couple of years is there's been quite a bit of inflation in pressure on things like TIs and so our overall concessions during that period have escalated, but we've been able to drive kind of face rents to offset that. And so we have been able to grow net effective rents I think we're at a point in time, obviously, where the economy is softening, potentially cycling down. And so as we look forward, I think it's still too early to tell. I'd say the leases that we're working on today, we've characterized net effective rents is kind of flattish, not growing them perhaps like we were last year, but not yet coming in. But typically, in economic cycles, you do see net effective rents soften. But again, I think as we look at the markets that we're in, and we do believe as this process unfolds that we're kind of transitioning out of for trophy premier properties out of this broader existential question around office into an economic cycle. And so what goes down, we think our markets like Atlanta and Austin will be the first markets to recover as they did after the pandemic, after the GFC and we would expect that to continue. So medium and longer term, we remain very optimistic that the quality of properties that we own and the locations that we own, we're going to drive net effective rents up into the right over the broader period of time. Great. And then Colin, you talked about cap rates and this bid-ask spread. So I guess it poses two questions, right, on the buy and on the sell. So first, on the sell, now that Houston is leased do you market that asset? Or do you wait for capital markets to kind of sort out? And then on the other side of it, you weren't acquisitive in 2022, but do you think this situation maybe offers an opportunity to buy something or I don't know, maybe your focus is still more on development. Yes. Well, the great thing about the strength of our balance sheet is -- we've got a lot of optionality, and we don't need to sell anything, because the balance sheet is so strong. So if an opportunity presents itself to sell something for more than we think it's worth, we'll certainly look at it. But I would say more broadly speaking, we're looking at dispositions as a potential source of capital if we elect to pursue new investments to keep the balance sheet relatively leverage neutral. But at the same time, I do think we're going to see opportunities this year. We were very patient last year thinking that prices would look better in 2023. And I think that's going to hopefully prove correct. And I think the closer I think, some owners get to having to either fund leasing costs to preserve their asset value or deal with loan maturities. I think you're going to see that for some transactions that might be in the latter half of the year. But when those arise, we'll be poised and ready to hopefully capitalize on some compelling opportunities. Hey, guys. It's Nick on for Dave. Maybe starting off with Colin in the same vein on investment sales and/or this portfolio positioning through your recycling efforts over the past couple of years, you've kind of downsized exposure and say, like our Charlotte older vintage assets. That's also kind of increased your exposure to some of the more tech-heavy metros, such as like Atlanta and Austin. I guess just kind of how are you viewing the portfolio on a geographic positioning today? And like what markets are you looking to gain more exposure over time? Yes. Good question. And I'd say the recycling over the last couple of years was less focused on kind of the geographic percentages and more focused on what we think is the most important trend, which is the flight to quality. And so we sold over $1 billion of older vintage higher CapEx type properties that I described have got growing obsolescence and reinvested that capital into terrific trophy properties like 725 Ponce and the railyard in Charlotte. But as we look up after completing that recycling, you're right, we're, I'd say, a little under representative in some markets that we like a lot, like Charlotte, like Dallas, and so we'll certainly be looking hard to find attractive opportunities to grow our exposure in those markets. But we continue to like Atlanta and Austin and others and despite a slowdown in tech activity, again, our portfolio is incredibly well positioned and derisked in those markets. And if the right opportunities arise, we'll certainly capitalize and continue to grow in any of our markets. Very helpful. And then maybe just a comment on your question on sublease space. I know like areas such as the domain, you have long-term walls in those areas. But just curious on any of your particular properties that might have some sublease space that's listed? Yes, the -- we've got some subleasing. There are some customers who've got some subleases in our portfolio -- across the portfolio, but not a significant number today. And really, as you look at it, the domain, that's what I think people oftentimes focus on. We've got some very large tech customers in D10, D11 and D12 and D9 will deliver next year. Expedia has got a little bit of space in the D11 property out there. Our perspective on that is with long-term leases with no kind of termination options on any of those in the near term, actually wouldn't be a bad thing from a diversification standpoint as some of those customers actually did multi-tenant those buildings for us. And so we'll continue to monitor if situations arise that are positive for us. We'll work with them. But as we stand today, there's not a material amount of sublease. Hey, good morning. Thanks for taking my question. I know that you guys have a pretty good size of land bank of $160 million. I'm just kind of curious what your thoughts are on certain projects of any of these sites. I know that guidance hasn't called for any development starts, but I'm just kind of curious what your thoughts are on utilizing some of these land. And if you're not playing out sort in the next couple of years, what do you need to see in order to kind of change your mindset with those? Thanks. Yes. I mean we own a terrific land bank, and we've always tried to size that land bank at between 2% and 3% of the overall balance sheet to really give us the role the raw materials, if you will, to start new development projects, and we've found in the past that if a customer comes to the market and you don't have a piece of land, it's hard to ultimately win the business. So we're about today about 2.5% or so. So we actually have a little bit of room, and we might see some land opportunities in this environment. But ultimately pulling the trigger on any of those projects, whether it's an office development or a residential development in a mixed-use setting, the return has got to be appropriate relative to the cost and the risk. My sense is in the near-term, we're going to see more attractive opportunities on the acquisition side. But again, you never know, and there are some customers out there that we're talking to today that could be potential build-to-suit opportunities. And so those will certainly be worthy of consideration. Great. Thank you. Just I think you guys mentioned the largest lease expiration in '23, about 120,000 square feet. Could you guys provide some additional color on that, which market it is? And then whether there will be any contractions or expansion associated with that space? Yes. This is Richard. It's in Atlanta. It's in November of this year. Their existing square feet about 135,000. So it's going to be a modest contraction, so call it a 90% of existing space renewal. Got it. Thanks for that Richard. And then just regarding your guidance for '23, what kind of retention rates are you guys assuming? This is Colin. We certainly do a customer-by-customer buildup to create our budget. But we're obviously in active discussions with a lot of different customers and on potential renewals. And so we've never publicly shared our retention rates and just don't want to do anything that could compromise some of the negotiations that we're in the midst of. It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Colin Connolly for any closing remarks. Thank you all for your time today and interest in Cousins Properties. If you've got any follow-up questions, please feel free to reach out to Gregg Adzema or Roni Imbeaux. Hope to see you all soon. Thank you.

EarningCall_19

Good morning, ladies and gentlemen, and welcome to Interfor Quarterly Analyst Call Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, January 10, 2023. With me on the call, you have Rick Pozzebon, our Executive Vice President and Chief Financial Officer; and Bart Bender, Senior Vice President of Sales and Marketing. Our agenda today will start off with myself providing a recap of our accomplishments in 2022 and our strategic positioning. I'll then pass a call to Rick, who will cover off our Q4 financial results, and then Rick will pass the call to Bart, who will cover off the markets. Starting with our accomplishments this past year, 2022 was a solid year for Interfor. We generated adjusted EBITDA of $1.1 billion with industry-leading margins. We completed two acquisitions that substantially increased our capacity, expanded our footprint into new operating regions, and diversified our product mix. We continued to optimize our existing portfolio, selling our last mill on the BC Coast, while investing over $300 million in capital improvements mainly in the U.S. South. In addition to our growth and reinvestment, we also returned almost $330 million to shareholders via share buybacks, reducing our share count by a further 15%. And last, but not least, the combination of all of these initiatives resulted in Interfor being able to generate industry-leading returns on capital, extending our multi-year track record on this all important metric. The key takeaway I want to leave with you is that our strategy is working as we intended. The steps we have taken as a company and the ongoing initiatives give us great confidence in the future value creation potential. To our strategy and positioning, our acquisitions in the last two years have expanded our footprint in existing key regions in the U.S. South, the U.S. Northwest, planted our flag in Ontario and Quebec, and most recently added New Brunswick as we closed out the acquisition of Chaleur Forest Products during the fourth quarter. At the same time, we've continued to trim and optimize the portfolio in regions where we see less potential. Underscoring our decision to sell the Acorn facility in British Columbia, as well as continuing to monetize options for the remaining BC coastal timber tenures. We are now the only publicly traded pure-play lumber producer of scale and the only lumber producer with operations in all major timber producing basket in North America. We have also recently grown and become the largest producer of studs and MSR lumber in the world, and we are actively working to leverage this position to improve margins and increase market share. Our growth has been well timed and the integration has been smooth, and we have now placed veteran Interfor executives to oversee operations by country, Andrew Horahan for Canada and Bruce Luxmoore for the U.S. Andrew and Bruce have deep expertise and will continue to advance our Interfor culture of operational excellence and capital discipline. Scale has also allowed us to realize significant synergies as we leverage our core lumber expertise across larger network. In addition to operating synergies, we also see opportunities in areas such as working capital. The previous owners had a much smaller scale and took a different approach than we can. We are running down the inventories, and we are keeping them lower, which will free up cash and ultimately improve returns on capital. We have also grown our SPF volumes by expanding into Eastern Canada, and this has enabled us to meet the demand left as some of our competitors have curtailed and continue to curtail SPF production in British Columbia. SPF is in limited supply, both in North America and globally, and our Eastern Canadian growth has positioned us well to benefit from these trends. Rick will cover off our financial details shortly. But from a balance sheet perspective, we continue to have significant financial flexibility to execute on our CapEx plans across the U.S. South and pursue other value creation opportunities. Underlining our entire strategy is our track record on returns. As I mentioned earlier, Interfor is now the clear leader among peers for returns on capital. We are responsible and strategic with our investments in our capital allocation decisions. In summary, we feel very confident about how we are positioned for the medium and long-term. Turning to the market. We have taken proactive steps to address the conditions over the last several months. We all know that volatility is given in our sector. And, of course, we're no strangers to the up and downs of the lumber market. One step we have taken is downtime, and we've been an industry leader in matching our supply to the market. During the last two quarters, we reduced our lumber production by a total of 300 million board feet, which represents about 25% of our quarterly capacity. Another step we have taken is our capital spending. We had recently guided towards 2023 CapEx at approximately $300 million. However, considering the market conditions, we are now planning to reduce our strategic CapEx plans by $60 million throughout 2023. I will note that we were able to quickly make mid-plan adjustments of this scale because we have an extremely capable internal CapEx team that oversees and implement our projects. If we invested based on turnkey projects and relied on external personnel, we'd have much less flexibility to pivot. Finally, we have also developed a comprehensive downturn playbook that has been refined over many years. This plan involves empowering all frontline managers from every business unit and work stream across the company and making them accountable to deliver on a wide variety of risk reduction, capital preservation and efficiency initiatives. These initiatives all have hard targets with a clear focus and discipline on all aspects of our business. We see these proactive steps as an opportunity to make our new company even stronger. With respect to the outlook, we remain positive on the medium to long-term outlook demand going forward. As demographic trends in years of under-building will continue to provide strong tailwinds, we believe that the underlying fundamentals remain favorable. On the supply side, we think that volume needs to continue to come out. And we expect that our competitors will follow our lead, both on a temporary basis and on a permanent basis, particularly in British Columbia. To sum things up before I turn it over to Rick and Bart, our guarding principles are always operational excellence and capital discipline. We believe that this is always a path to success and also very important in challenging markets. Over the last several years, we have built what is in many ways a new Interfor. Our Interfor team has used a recent downturn well, and we are stronger because of the efforts across our company. We are extremely enthusiastic about the months and years ahead and firmly believe that now is a great time to be invested in Interfor. With that, I'll turn it over to Rick, who will walk through some of the detailed financials. Over to you, Rick. Thank you, Ian and good morning. First off, I'll refer you to cautionary language regarding forward-looking information in our Q4 MD&A. As Ian mentioned, 2022 was another transformative year for Interfor in several respects. With respect to earnings, 2022 is the second best year in Interfor's history, with EBITDA of nearly $1.1 billion and earnings per share of nearly $11. Robust lumber markets in the first half of 2022 easily outweighed the impact of weakened demand in the second half of the year. This lower demand is mostly attributable to the negative housing affordability trend due to lack of supply from over a decade of under building combined with significantly higher mortgage rates as central banks took action to cool inflation. With respect to returns, 2022 saw Interfor continued to build on its track record of generating industry-leading returns with EBIT return on capital employed of nearly 30%. Successful capital allocation has underpinned this growing track record, including well executed capital projects, well-timed acquisitions at attractive valuations and significant returns of surplus capital to shareholders. Turning to Q4 financial results. Interfor generated an EBITDA loss of $69 million. This figure includes $59 million of expense from being required to write-down log and lumber inventories under accounting rules to reflect the depressed lumber prices at year-end. Also included is $8 million of non-recurring expense related to purchase accounting for the Chaleur acquisition. Excluding these two items, Q4 EBITDA would have been near a breakeven level. Our Q4 earnings result reflects significantly lower lumber prices across all products and species, combined with the lag in log costs adjusting down to reflect the lower lumber prices. The lumber price declines near quarter-end appear to have been exacerbated by inventory destocking from the distribution channel in an attempt to reduce risk. Despite the earnings result, we managed to generate positive cash flow from operations of about $10 million in the fourth quarter, benefiting from over $100 million of working capital being released, largely from lumber inventories and receivables. From a balance sheet perspective, we ended the fourth quarter in a comfortable position with a net debt to invested capital leverage ratio of 26%, which is well below our internal management threshold of 35%. To better reflect Interfor significantly increased scale, we bolstered our available liquidity in the quarter by securing additional fixed rate long-term debt financing and expanding our revolving credit facility. Available liquidity was $486 million at year-end, which is more than sufficient as we look forward. It's worth noting that the year-end balance sheet includes a current tax receivable of $104 million from over installments in 2022, which is expected to bolster our balance sheet leverage and available liquidity as it's recouped throughout 2023. Looking longer term, it's worth noting that Interfor softwood lumber duties on deposit totaled US$512 million at year-end, representing about $10 per share on an after tax basis. Regarding capital allocation going forward, Interfor's priorities and focus on a balanced approach remain unchanged in conjunction with maintaining conservative leverage on our balance sheet. We currently anticipate capital expenditures of $240 million for 2023, of which about $140 million relates to discretionary projects, largely focused in the U.S. South. While we've already reduced our planned 2023 expenditures for conservatism, given the current market, we maintain significant flexibility to reduce spend even further if appropriate. To wrap up, Interfor's transformative year of significant growth, combined with leading returns on capital has left us well-positioned for long-term success through all market conditions. Our focus going forward will continue to be on operational excellence and balanced capital allocation decisions that maximize returns on capital for our shareholders. Thank you, Rick. Good morning everyone. I'll provide an outlook on lumber markets through Q1 and into Q2, 2023. Lumber markets are navigating through sizable shifts in demand and supply, which in the short term have resulted in volatility in lumber prices. Majority of the lumber demand shifts have occurred in the new home construction and use segment as affordability, combination of house price and mortgage rates pushed some buyers out of the market resulting in a reduction of housing starts. The resilience of the repair and remodel and the use sector has been a highlight for us. Our shipments in this end-use sector are stable and consistent. The lumber supply side it has and is in the process of responding to adjusting to lumber demand through curtailments, both temporary and permanent. Interfor's position remains consistent and that we adjust our production rates to the market's demands. This market situation is short-term. We continue to be optimistic as the fundamentals on lumber demand growth remain largely unchanged. Employment rates remain high, demographics favor increased household formation rates, aging housing stocks encourage increased repair and remodel work, household balance sheets remain solid, led by equity in their homes. Under-built housing market suggesting demand should exceed household formation rates for the foreseeable future. On top of these, there are a couple of other areas that I'd like to highlight that bring further optimism. Builder confidence is on the rise with current sales, buyer traffic and the outlook for sales all improving in January over December, suggesting a bottom may have been reached. Mortgage rates are declining from a peak of over 7% to the high 5% range and are forecasted to continue to decline. Housing prices have declined and are declining and overall affordability is increasing. Existing home for sale inventories remained low, providing new homes for a sale a greater access to the overall housing market. Housing starts have not fallen to the degree to which some have expected. On the lumber inventory side, both manufacturers and distribution have remained disciplined. It's our perception that both are operating at historical lows for lumber inventory. We believe the last several months have seen downward inventory adjustments to the lower end of the consumption range, and we are signaling that as markets stabilized through Q1 2023 and into Q2 2023, tension on supply as the opportunity to increase. Lastly, we welcomed our Atlantic operations to our network of Interfor mills. We now have production from four Canadian provinces in eight U.S. states giving us North American wide coverage. Our ability to service our customers with high-quality interfere lumber has never been better. Thanks. Good morning, every -- good morning. Thanks everyone. A couple of questions. With respect to the leverage and your management around that and you touched on the 26% debt to cap being in your comfort range but arguably higher than some investors want to see it at this point in the cycle. Beyond the CapEx reduction, I just want to focus on a couple of other levers you might be able to pull. Working cap at this point, other than the tax receivable that's coming in, do you guys have further room to bring that down at this point from your perspective? Good morning, Sean. It's Rick speaking. Yeah. Absolutely, that's a lever we're looking to pull. As Ian mentioned in his remarks, we've got opportunities across our platform to reduce inventories further. And we've got some solid targets in place and we're working towards those in the first half of this year largely. So, both on logs and lumber inventories. So, at year-end, we probably had around $400 million of log and lumber inventories roughly and there's significant opportunity there to reduce that further on a permanent go-forward basis. Yeah. Sean, I'll just jump to add that -- Ian here. The legacy Interfor mills ran within our thresholds. But as we acquired our Ontario, Quebec and New Brunswick operations, it's clear to us that the previous ownership had a different look on inventories and the EACOM assets have been coming down and the New Brunswick assets are coming down. So, we're not all the way there yet. There's definitely room in Eastern Canada to bring those log inventories in particular down to the risk level and the threshold levels that exist in the other operations that we've owned for a long time. Thanks for that, Ian. The timber tenures on the coast, can you give us a little bit more detail on how you expect to manage that process. There was mention in the MD&A of working with First Nations communities. But from a broader perspective, the monetization of what you have there, can you give us any context on timeframe you expect to unwind those assets? Yeah. Sean, I mean, we have NDAs on most of this. So, it's going to be a little bit vague. But I guess the most important thing is that there's interest, significant interest in the tenures that we want to monetize. So that's very positive. We have monetized some already in 2022, as you know. We have over a dozen term sheets that have been executed and we're in purchase agreement details. But underpinning all of this is the BC government and obviously, approval there. And the team led by Andrew and others in the company have done a great job over the last year partnering with the BC government who are 100% supportive of the strategy that we're implementing. So, A, we've got very solid interest at attractive deal metrics for both parties. And we've got a very supportive BC government around this strategy. So, I would say we -- our confidence level is fairly high on some significant transactions this year and probably more to come over the next 24 months also. It's probably about as much, I think, as we could say just given that much of this is in process right now. Good morning, guys. Just a question on where are you at on your integration of all these new assets you've got, you just acquired Chaleur, but I'm also talking about the GP mills, the start-up as well as EACOM. Is that going to take the balance of 2023 and then you'll be ready to rock in 2024? How are you approaching that? Yeah. Sean, Ian, in here -- or sorry -- Paul, in here. Yeah. The GP mills, essentially, we're through that. They're we feel fully integrated, both operationally, financially in our sales systems, all green lights there. In fact, we're looking at some opportunities to make those mills even better. So, they're sort of being papered up now from a concept standpoint. The EACOM acquisition, I would say, largely we're not completely done, but we've got systems integration that we need to do. That's midyear to cut everything over that way. So, the back shop is I guess, six months away. And then on the operations side, we've made definite progress. But under Andrew's leadership and the team that we have in the East and the team that's being formed, I would say we're making progress every day. But as you know, for standards and operating expectations are fairly high, and it's going to take a little bit of time to get those where -- I think where the other ones are. And I often look at the East, Paul, is kind of when we think about the South or other regions that we've gone into from an operating standards and up time, it takes a bit longer. But we're confident we're making progress. The mills are getting better every day and great outturns are improving. We've made, I would say, significant improvements and pulling value out of the log that the previous ownership just for some reason wasn't achieving, but we're making really solid progress in those areas. And of course, pulling great outturn is the greatest lever you can do to make a change. I'm missing anything, guys? Hi, Paul. It’s Rick. I just jump in and add that with both EACOM and Chaleur we identified $30 million of synergies, and we're well on our way that we're more than halfway through realizing that. We'll expect to achieve the balance of that by the end of this year. Yeah. And then turning to Chaleur, Paul, that's gone extremely well. So, we took it over at the beginning of December. I would say internally, obviously, there's little things to do. But the majority of the work they're integrated, they're on our systems. The mills have not missed a beat and they're performing very well. And we're very pleased with that acquisition. Of course, it's a much smaller scale than EACOM. EACOM was an entire business sales, accounting, HR, what have you and Chaleur with the two mills and Woodlands profit center was a smaller scope. But I would say we obviously got a little bit of work to do. But largely, it was a plug and play, and I should say, contributing positively in this market. Good to hear. Just lastly on -- you guys mentioned the US$512 million you've got on your deposit. What are you guys doing to get that back? And then we heard President Biden to the Union address to buy America this week. How do you think that's going to affect your Canadian operations? Yeah. Paul, the -- I would say that the Canadian side is spending time discussing probably at a greater degree than we've seen in years. And so, I would say alignment across the Canadian operations and mills and order ships are much closer than they ever have been. And I think the key will be reaching to the U.S. side and seeing if we can achieve a similar -- I guess, similar feeling of trying to bring this forward and putting it on the agenda of federal government. So, there is more discussions than we've seen over the last months than we have in years. So, I think that's positive. I just don't have a read on the U.S. -- good read on the U.S. side at this point. Thank you and good morning. First question, maybe coming back to CapEx, I'm curious how much flexibility do you have within that $140 million, should the markets turn out to be weaker than what you guys are expecting? I know you talked about kind of having some flexibility, but order of magnitude, what kind of room you have. We have another tranche that as the year goes on, you kind of lose that flexibility just because equipment starts to get manufactured in facilities and delivered. So, month-by-month, that flexibility kind of diminishes as it goes. So that's the process, Ketan, but it's significant. And for us, to kind of share that at this point, the only hesitation is that -- if we kind of share that at what ends up happening is the equipment manufacturers and contractors would hear that. And then may get a little nervous with that. So, we don't think we're going to have to do that. The market is -- seems to have improved a bit. The outlook from what we can see looks much stronger than it was in December. So, we think the $240 million is going to stick. But I would say it's significant if required. However, we don't see that at this point. I guess that would be my answer. Got it. No, I think that's fair. And then, switching to low cost. Can you give us some -- just a quick update on kind of what you are seeing in the low cost trends in the different regions, BC Canada, North West and South? Yeah. Of course, as Bart said, in four provinces in eight states, we've got a bunch of unique log cost shifts here and there. But I would say, generally, in all regions, it's a downward trend in 2023 and some more significant than others. But we do see our forecasts all indicating that log costs will moderate through 2023 in all of the regions, in all four provinces and in most of our states. So, overall, for Interfor log costs, we see a trend downwards. Got it. And Ian, in BC, how much do you expect cost to come down as we move through Q1 and Q2? I think Rick's got the number, but I'm not sure if he's going to share the specific maybe the range or something like that. Yeah. It's roughly going to come down by about 25% from Q1 and going into Q2 here in terms of stumpage in the BC Interfor. Mentioned about further opportunity to reduce working capital. Can you give us sort of some sense of order of magnitude in terms of what we are talking about here in terms of opportunity? Hey, Ketan. It's Rick speaking. So, if we think about lumber inventories in particular, we're carrying about 19 days of production on hand. We think there's at least a few days there that we can take out permanently going forward. And we're working on plans to achieve that within the first half to three quarters of this year. So that will be quite meaningful from a dollar standpoint. And then on logs, we're looking -- at operating with, say 10% to 20% less log inventories overall. Yeah. Got it. Okay. That's helpful. And then perhaps can you give us a quick update on what you guys are seeing on the export side? I'll take that one, Ketan. I would say overall, the markets overseas are improving. The Q4 period was a lot of uncertainty over there, I would say, overall high inventories, some currency fluctuations that were unfavorable. Things like that. I mean, China, obviously, with their zero COVID policy made doing business difficult. Some of that stuff is cleared out. I think we're still dealing with some high inventories, particularly on the log side in China. So, I expect that to be a factor going forward. But our markets in Japan are improving. So, we're expecting that to show signs of more business as we get further into 2023. Got it. And then just last one from me. Do you expect any change in the price relationship of SPF and SYP? And this is not just sort of a 2023 question, but as we move through the next few years, do you expect any change at all? Yeah. It's -- I guess, the bottom line is yes. I mean, to a degree, they're very different markets. Some are -- SPF is a little more railcar driven in terms of sales and Southern Yellow Pine more trucks. So, there are some fluctuations that happened because of that in this type of a market. But I would say, in general, if you look at where the curtailments are taking place in the species that are being curtailed, you're going to see the overall, I suppose, volumes of SPF available to the market start to tighten. And so, we're thinking that we should see some tension. And quite frankly, have seen some tension so far this year on the SPF side versus Southern Yellow Pine. But when you get into these kinds of markets where demand kind of moves around and shifts around, it's a little hard to predict exactly where it's going to reside. But, in general, I think that SBF is under more pressure from a supply standpoint than Southern Yellow Pine. Yeah. I think about the capital investments in the industry generally being in the Southern Yellow Pine basket, that potentially is going to grow a little bit over the next little while. And then the massive sort of curtailments in British Columbia and more to come in the SPF volume, the tension on that is going to be pretty great. And we think given our platform and our strategic move into Ontario, Quebec, New Brunswick to capture that volume was very timely and will benefit us as these dynamics play out over time. Okay. Well, thank you everybody for your time and your interest in our company, and we'll talk to you next quarter. Have a great day. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

EarningCall_20

Good morning, ladies and gentlemen, and welcome to the 2022 Year-end and Fourth Quarter Results for Russel Metals. Today’s call will be hosted by Mr. Martin Juravsky, Executive Vice President and Chief Financial Officer; and Mr. John Reid, President and Chief Executive Officer of Russel Metals, Inc. Today’s presentation will be followed by a question-and-answer period. [Operator Instructions] Great. Thank you, Operator. Good morning, everyone. I will provide an overview of the Q4 2022 results and if you want to follow along, I will be using the PowerPoint slides to reference that are on our website and just go to the Investor Relations section. If you go to Page 3, you can read our cautionary statement on forward-looking information. So let me start with a little perspective on the quarter and 2022 as a whole. In 2022, we generated record revenues little over $5 billion and EBITDA of $579 million. Our EBITDA and net income were the second highest in the company's history and only a little bit behind the records that were set in 2021. We generated annual gross margin of 22% and a return on capital of 33%, both are tremendous results. The results for 2022 were strong overall, but if we look at the second half of 2022, in particular, I'm even more proud of how we performed as the market experienced volatility during that period. Our business is now more resilient as we have substantially reduced the volatility of our earnings profile. In addition, we continue to show the countercyclical nature of our cash flows. In Q4, not only did we deliver good operating results, but we also generated $146 million of cash and working capital. As a result, our balance sheet is extremely strong, and that gives us a great opportunity to take advantage of both internal and external investment opportunities. So let's begin by talking about market conditions which are on Page 5. Steel prices came down in Q4, but remained at healthy levels by historical comparisons, particularly for plate. In addition, we have seen price stabilization effects and price upticks over the past month or so. If we look back to around mid-December or so, the market was at somewhat of an inflection point at that point, as it felt like prices had hit a floor and as we’ve now rolled into January, there's now a more upbeat tone to the market, and we are cautiously optimistic based upon what we see today. The right charts on the page illustrate the recent movements in service center inventories for the industry. Inventory tonnage levels for Canada is on the top right chart and the U.S is on the bottom right chart. They both came down over the past few months, which is typical at this time of year. The result is that supply chain inventories are modest and are in check. As we look at takeaways from our customer base, demand has picked up quite nicely in early 2023 and we see it across most geographies and end markets. If we go to Page 6 for our financial results, from an income statement perspective, revenue of $1.1 billion in Q4 was down from Q3, but comparable to Q4 of 2021. Overall gross margins declined to 20% from 22%, but remained very healthy. EBITDA of almost $100 million for the quarter was very good for what is typically a seasonally weaker quarter. Interest expense came down by $2 million as the increase in interest rates is allowing us to generate some interest income from our growing cash balance. Overall, we generated earnings of $58 million and earnings per share $0.93 per share. Our Q4 results were impacted by a few non-operating items. In the case of TriMark, we picked up $10 million of earnings from that joint venture, which was about the same amount as the $8 million of cash flow that came into us as dividends in Q4. Stock-based comp had a $2 million negative impact versus nil in Q3, and we had a small, about $3 million increase in our inventory NRV reserves. One of the things that has changed in our portfolio over the past number of years is how we manage inventory in a period of falling prices. There were times in the past where we had significant NRV adjustments in some of our business units. The business units that had experienced those wild swings in the past are either no longer part of Russel or are under much tighter inventory control measures than in the past. Lastly, we had a $1 million expense for the annuitization of a significant portion of our DB pension plan. This transaction closed in early Q4 and involved the transfer of around $35 million of pension assets and liabilities off our books to that of the AA rated insurance company. In addition, it allows us to derisk and secure the current pension surplus of around $40 million for use across our other pension plans. From a cash flow perspective, in Q4, we generated as I said earlier, $146 million working capital. We have a countercyclical business that generates strong free cash flow in market downturns, and we did experience some of that in Q4 with a decrease in both inventory and AR. The decline in inventory was a combination of a decrease in both tonnage as well as average unit costs. I expect that going forward into Q1, we might see a small decline in tonnage and some further price drops in average cost as our on order inventory remains below the average cost for our on hand inventory since we use an average cost system. CapEx of $15 million for the quarter has picked up and we are continuing to advance a series of value-added equipment projects and facility modernizations. Going into 2023, our CapEx should pick up, and I suspect that it will average around $75 million or so over the next number of years. From a balance sheet perspective, we are now in a net cash position, which is made up of our term notes of $300 million that are more than offset by cash position of a little over $360 million. In total, if we look back over the past year, our net debt position has declined by about $230 million as a result of the strong free cash flow generation. Our liquidity of $743 million and our credit metrics are strong. In Q4, we are using our NCIB to acquire shares, and since the NCIB was put in place we've acquired a million shares at an average price just below $28, our current share count is now back to around 62.1 million shares. Our capital base continued to grow in the quarter with our book value per share up to around $25.10. This represents more than $5 or 27% increase in book value just over the past year. Lastly, we’ve declared a quarterly dividend of $0.38 per share, and that will be payable on March 15. If you go to Page 7, you can see our variance analysis between last quarter and this quarter. In looking at service centers, the seasonal decline in volumes impacted EBITDA by around $10 million. As mentioned earlier, we lost some operating days due to normal holiday schedules. The $25 million decline in margins was due to lower prices which have only partially been offset by lower cost of goods sold due to the lag effect. We expect cost of goods sold to come down further in Q1. Offsetting this is a $9 million favorable variance due to the direct drive system we have on variable comp, and that went the other direction in the quarter to create that favorable variance of $9 million. Energy declined by about $6 million in the quarter and steel distributors declined by about $2 million due to the moderation of steel prices that particularly impacted our U.S distributors business. There was a $9 million favorable variance in other, which included TriMark's lower earnings in Q4 versus Q3 and the mark-to-market on our stock-based compensation. Go to Page 8, we have some segmented P&L information. The service centers continued to do well amidst the market volatility. Revenues were down versus Q3, but still represented a good Q4 result. Average prices were down versus Q3, but still up versus the historical average. Gross margin in percentage terms is down to about 18%, but it's still strong in dollar per ton terms. I'll go into a little bit more detail on that in a minute on the next page. In Energy, we're continuing to see positive market sentiment. There was a seasonal factor with the Q4 revenues, but overall market conditions remain upbeat as we look into 2023. Gross margins came in at 28% and it remained at north of 25% since the monetization of the OCTG/Line Pipe business. Not to repeat the old cliché, we've used in the past, but we're doing more with less. Distributors revenues and operating results came down as they were impacted by the moderation of steel prices. If we go to Page 9, we want to here just show a deeper dive on some of the metrics within our Metal Service Center business. Last quarter, we started to disclose both current and historical tonnage and allows for some unit and dollar per ton comparisons. The top graph is the past 5 years for ton shipped, and as you can see, the typical Q4 dynamic is around a 5% to 10% pullback in volumes from Q3 levels because of that seasonal factor. In Q4 of 2022, the shipments decline was around 8%, which is within the normal range. And as we roll into Q1 of 2023, we expect to see a bounce back to more typical activity levels for Q1. On the bottom left graph, we have the revenue and cost of goods sold per ton. On revenue per ton, even though there was a pullback in the past couple of quarters, average price realizations remain around 50% higher than the long-term average. The bottom right graph shows gross margin and EBITDA per ton. Similar comment to revenues, net margins have come down from the peak levels, but are strong and well above historical levels. And as one basis of comparison even though gross margin percentage is 18% in this past quarter, which has been below the cycle average, the gross margin dollar per ton is around $464 per ton, which is much higher than the historical average that tended to be between $300 and $350 per ton. Some of this increase is related to market prices being higher on average, and some is due to the increase in our value added processing that is part of the portfolio and is continuing. On Page 10, we have illustrated our inventory turns. This chart shows the inventory turns by quarter for each segment with Energy in red, Service Centers in green, Steel Distributors in yellow. In addition, the black line is the average for the entire company. A few observations. Overall, our inventory turns remained strong just under 4. By sector, Service Centers improved a little bit from 4.1 to 4.2 in the quarter. Our Energy Field Stores came down from 4.4 to 3. But this is really a timing dynamic and that our inventories did pick up towards the end of the year to address the 2023 backlog of business for that business unit. For Steel Distributors in yellow, the inventory turns increased from 2.3 to 2.7 as our inventory position declined in the quarter. If you go to Page 11, you see the impact of some of that on the dollars for inventory. Total inventory came down by about $100 million from September 30, which we expected. This is mostly a reduction in Service Center and Steel Distributors. The Service Center saw 7% reduction in unit costs and a 4% reduction in tonnage. As they said earlier, the Service Center tonnage may inch down a little bit, but it's already in pretty good shape. At the same time, we should see additional declines in unit costs with a lag effect of the inventory on order being lower than that which is inventory on hand costs. We did see an increase in Energy Fields Store inventories, as I said earlier, is meant to serve the backlog of business for that segment. If we go to Page 12, you can see the overall impact on capital utilization and returns. Our capital deployment is down a bit with the repatriation of some working capital, but we remain around $1.5 billion. More importantly, our returns continue to be industry leading with a strong end of the year and a 33% return for 2022 as a whole. If we go to Page 13, I want to give you an update on our capital allocation priorities going forward. For investment opportunities, as we've talked about before we seek average returns over the cycle of greater than 15%. And we've delivered well above that over the multiple cycles. The ongoing opportunities are threefold. We are continuing to identify and pursue value added projects. In 2022, we move forward on a series of initiatives in both Canada and the U.S. And as we look back on the projects that have recently been completed, we are pleased with their operational and financial performance to date. Facility modernizations in several cities we have legacy locations that can be upgraded and consolidated into newer modern facilities. These projects will allow for volume growth, improve operating efficiencies, and improve health and safety conditions. In one -- in the most recent example, we just approved about a $10 million expansion project in our Joplin, Missouri operation. This branch was part of the 2021 Boyd acquisition, and it illustrates that we often uncover incremental opportunities to deploy capital and grow the operations that come by acquisitions. In terms of acquisitions, we remain committed to our financial and operating criteria. That being said, we expect to remain disciplined, yet active in seeking of growth opportunities that fit into our existing business units, and we are seeing a pretty reasonable deal flow of opportunities that we are taking a look at. In terms of returning capital to shareholders, we adopted a more balanced approach over the past couple of quarters. For dividends, we've maintained our $0.38 per share per quarter dividend which equates to $24 million in the past quarter. In addition, during the back half of 2022 since we put in place our NCIB, we have purchased a million shares in total for around $28 million. In closing, on behalf of John and other members of the management team, I'd like to express our appreciation to everyone within the Russell family. 2022 was a really great year for the company. Not only were we pleased with the financial results, but equally important were the series of initiatives that translate into record low health and safety incidents, strong community engagement and ongoing people development. Thanks to everyone across the company for those major accomplishments. Operator, that concludes my introductory remarks. You can now open the line for questions please. Hey, good morning, guys. Obviously another nice quarter, and a strong close to the year. Marty, I'm not sure if I missed your comment in terms of margin expectations for Q1 for metal Service Centers, just giving the firming steel prices in the last couple of months. And maybe just to build off of that to you, the spread between plate prices and HRC has remained wide I guess on a historical basis. So, John, maybe to get your views there on the price discrepancy in the near and medium term? Yes, why don't we start with John who could talk about the market, and then we -- I can flip it over and talk about the margin dynamic. Michael, good morning. And again, this observation of the spread has remained high. There has been some changes, I think several of the mills have talked about the changes to the dynamic. You have two things really weigh in, again, you have about five plate mills in North America, one of which is not operational right now out of Mexico. So that's limiting supply on the plate side. So the other is still the 232 being in plate, so that gives a premium there for that plate product. We're not seeing a lot of imports. So I think the mills are at a really sweet spot, if you will, on pricing. You take the 25% off, they just [indiscernible] is the ports not attractive at this time to come in at those numbers. So I think they're in a very healthy position. Supply is good. It's not a ton of extra material out there. At the same time, you can get there to some availability, so it's not out of control. So I think the mills have done a good job and been very disciplined on their pricing with plate as it in the historical comparison to the spread with coil. Coil there is a little bit more supply, so it's obviously more volatile. You've seen it shoot up higher, come down lower. But again, it seems to be operating in a good place. It's we've seen a rebound at the December and January. Two price increases have come through most of which have stuck, the markets receiving those fairly well. Scraps going up. So we think that pricing has stabilized and started to turn the corner in recent weeks. And then, Michael, in terms of margins, in Q4, within the Service Centers, the margins in dollars per ton averaged around $460. What we saw during the quarter was month over month it was coming down during the quarter, so October, November, December came down. So the exit margin from Q4 was lower than the Q4 average. And that was a function of both prices were coming down on average and cost of goods sold was coming down on average. What we've seen in early q1 is more of a stabilization in the early stages of Q1 from a margin perspective, but because the pace was -- goes -- was declining during Q4, the stabilization now was stabilizing at a slightly lower level than the Q4 average. Does that get to your question, Michael? Yes. It's totally helpful. I mean, I guess we can work the math from the Q3 and Q4 number and then aligned to Q1, just in terms of how you've outlined it. So it's really helpful. Maybe the second question, I guess, is bigger picture and I really appreciate the new disclosures around tonnage and what that gets us to for gross margin per ton. And if you look at the chart right here number, Slide 9, it's historically hovered the gross profit per ton at $300 and we've been well above that for several quarters now. So I'm just trying to get a sense for where we can land and what the new normal is because you're doing a lot with the business just in terms of value add investments, you're looking to add scale to M&A. You've talked about inventory controls, so what's the new normal look like? And maybe to push this a little bit further if you can care to quantify what a new normal could look like. I'd love to quantify, but I'm not sure that I know how to. But I think your observation is pretty fair, though, which is the old normal was 300 to 350. The new normal, we feel comfortable is higher. What normal looks like and when we hit normal mean the cycle always moves above normal below normal, and somehow we average to create what normal supposed to be. But that's a function of both the market pricing level still remains at a pretty healthy level compared to historicals in addition to our value added initiatives. So if the historical average was 300 to 350, we should be averaging more than that on a normal through the cycle basis. And as we continue to uptick on these investment initiatives, those are within our control, we'll continue to move up that margin curve. I was wondering if you could please comment on the puts and takes around energy products results in Q4. We saw lower volume sequentially, which is a bit unusual, but margins held up quite strong. So wondering if you could comment on that, please. Yes, there is a little bit of a seasonal dynamic there less than there has been in the past. One of the things is one of our business units within Energy Field Stores had a really, really strong middle part of the year. So even though sequentially look down, if we kind of look past some of the lumpier type of stuff that happened earlier in the year, and transactional business, day to day type business, that's still moving on the uptick. So we benefited some of that lumpier stuff earlier in the year. But if we look at the more day to day type stuff, that was moving up through Q4, and its moving up through 20 -- early stage of 2023. So that was kind of the dynamic in Q4 where you saw energy pull back a little bit. It was pulling back because it was being compared against Q2 and Q3 results where there was some of that lumpier stuff that showed up. Okay, that's helpful. Now I'm building on that, you had higher Energy Field Store inventory. At the end of the year, you said that's helped to -- that's to help address backlog is. Is this backlog higher than it was 12 months ago? Just trying to get a sense of are we seeing growth within the Energy Field Stores? And what's your outlook on next? And your visibility is somewhat limited, but on this next 6 months, what's -- what is it looking like? Yes, so Fred, on the energy inventory, we saw a couple of dynamics happening. One division specifically was really, really trying to play catch up. So their sales were running ahead of their inventory. So they finally caught up some of the port congestion was catching them. So finally caught up and got their inventory where it should be. So there was a little bit of a surge there. Another division ComCo specifically was -- has got some projects going into Q1, and Q2 where they had to go ahead and bring the inventory in to be prepared for the projects due to the lead times. So they saw surge in their inventory as well as project based, it will be a back to back order. Regarding what we see going forward for Q1 is very strong, in Energy both in Canada and the U.S., more of your medium to small type projects, and our day to day business in the field stores is very strong. Breakups hard to call for that second quarter of the year as to how long it will last, what the weather impacts will be. But we think we will have a strong breakup season based on the drilling that's out there right now, what we are being told from our customers, their backlogs are well into Q3 and early Q4 right now. So their desire is to work through breakup as much as possible weather permitting. Okay, thanks. Another one on Energy. You did benefit from nice equity pickups, and you received sizable dividends from the TriMark JV last year, but what is your view on it going forward? Is it something that you're very happy holding? Or is that something you would look at potentially selling or you're sharing to it? I think, again, their business is very much busy through the year as well as these drilling programs are busy. So we're happy with the performance. Again, long-term, it's something that we would probably look to exit either with doing something with our partner, it's there or look to exit that business is not part of our core portfolio. And it was a business we were looking to as we did exited completely in the U.S., we will probably look to exit that as well at some point in time. Hey. I guess I want to start with the demand outlook. So, you talked in your outlook about expecting a rebound in demand. And I think this is both for Service Centers and Energy Fields Stores. And I think the commentary was really specifically about kind of the near-term and improvement versus Q4. It sounds like part of that, I guess, is a seasonal uptick. I'm wondering if you can comment on if we sort of look beyond seasonality and any improvement as a result of that. What are you seeing in terms of underlying demand? And if we look at sort of across 2023 as a whole, any thoughts or views on what you think you can do in terms of volume growth in Service Centers for 2023 as a whole? Yes, thanks, Mike. So overall, one of the proxies that we use is mill capacity utilization, if you've looked at it for the last 3 or 4 weeks, we're seeing that steady uptick in that back in the 74% plus. It appears a little climb again next week, we watch mill inventories, those are coming down dramatically. So people are restocking the shelves that are out there alone with end users. What we're seeing from the end user demand side across the board is a very steady backlog that they're very bullish on the first half of this year. There are some impacts to inflation, higher interest rates that are impacting housing, which we don't participate a lot in housing, residential, more non-risk construction. So if the interest rates climb that could get into their backlogs, but they're 9 months out right now, most backlog. So there's a pretty big lead on those. Outside of that, if you're looking at agriculture, if you're looking across the border, any manufacturing of equipment, all those backlogs are really, really strong anything to do with energy, solar, wind, oil and gas are extremely busy right now. So they're pretty bullish on their backlogs. We think that wind in particular in the back half of this year is going to get extremely busy as new subsidies start to come out, tax incentives start to come out from the government. So pretty bullish on that. Also with the infrastructure projects coming on board, we think those are going to really, really have some strong impacts for us in Q2 and beyond. Just one -- and one supplement to that. One of the fastening dynamics is coming out of -- that’s come out of the global supply chain issues over the last couple of years is the concept of more on shoring has kind of evolved from a theory to a reality. And it's early stages, but we are seeing some of that activity where local North American based predominantly in the U.S., but a little bit in Canada as well. Activity has really been on shoring. And so I think that's a trend that we're going to start to see in 2023 take hold. And that is an ongoing trend that isn't going to go back to where it was for obvious reasons that we've seen over the last couple years with some of the supply chain issues. So I wouldn't be surprised that if we look at 2023 as a whole and compared to 2022, and take out some of the quirkiness of seasonality and all that, that we see some version of a low-single-digit type growth in volumes for the industry. And we are trying to outperform the industry in terms of market share. Okay. That's all very helpful. Thanks very much. And I know you've already had a few questions here on Energy Field Stores and your outlook there, and it sounds like it's fairly positive, which makes sense for a variety reasons. I guess. John, you commented on drillers having strong backlogs and potentially working as much as possible through breakup. I'm just wondering here we have seen energy prices moderate early here in 2023, particularly natural gas, I guess oil is off a bit as well. It's bouncing today on the Russia supply cuts, but could drillers pivot? Or is the backlog that that they have is that sort of hard backlog and committed? Or is there a risk here that if energy prices do particularly get natural gas if -- could they change the outlook relative to what you're describing. I think we're dealing with a much different dynamic than we were 3 or 4 years ago with the drillers and the energy companies due to the fact that their balance sheets are finally in such good shape. And there's a long period of time there where they were out running cash flow with these drilling programs. So when you would see a downturn, a reverse course in the either natural gas prices or oil prices, there would be those very quick pivots. I don't think those are as necessary now, because their balance sheet now if it's a dramatic downturn and prices cut in half, I'm sure there'll be some changes. But they're not as volatile as they used to be on pivoting all tied to that old price. And so, although oil prices have pulled back some natural gas prices have pulled back, so much drill running at really, really nice levels. And I think that make sense for these drillers to keep going forward. We're not hearing a lot of commentary that says they would have any reason to pull back at this point. So, it's more full steam ahead and how fast can we get this going. Okay, that's helpful. Thanks. And then just a question on the CapEx. I think Marty, you said about $75 million per year for the next few years. So, two questions on that. I guess, first off, are you able to give us a sense for how much of that amount is related to the facility modernizations? I guess, this year and in over the next few years. And then on the value added processing side, I mean, this is something you've been talking about for quite a while. And it sounds like you've made a fair bit of progress. It certainly sounds like there's more room to go. But just to use the baseball analogy, I guess, can you talk about what inning you think you're in as far as that value added processing expansion capabilities? Yes. So let's -- so going to your first question, first, Mike. So we're -- our maintenance spend is call it around $25 million per year plus or minus. So anything above that is related to either the value add, the mill modernizations, discretionary projects that have returned dynamics attached to it. So dealing with that I know first, your observation is right, though, which is it's picking up pace, there's more opportunities identified. And the funny thing is, if you can say what inning we are in? Yes, we're probably in the fourth inning, but we are in the fourth inning last year, and we're probably in the fourth inning the year before, because the game just keeps getting extended with newer and newer opportunity. So the scope of opportunities as every year goes by just seems to be presenting new situation as we go further down the path on certain ones, it just opens up new paths, or new opportunities that we didn't see before. As we've done acquisitions with those acquisitions, we did one in 2020 and we did one in 2021. With those acquisitions, we didn't really contemplate what specifically we could do for value added projects. But we're seeing those projects, and the one I just referenced in Missouri, part of that is to put in some value added equipment. So those are things that are just keep showing up as we're looking at more and more opportunities. So I know we probably said we are in the fourth inning of the 19 ballgame a couple of years ago, we're still in the fourth inning, because more and more opportunities are becoming available. Okay, that makes sense. Thanks for that. And then just a couple questions on steel distributors. I guess from -- I mean two parts. I guess from a demand or a revenue perspective or I mean more revenue is putting the demand, how do you see that business evolving over the course of 2023 versus 2022. And then from a margin perspective, I mean, that one I find is some of the more volatile margins across the business. And I'm just wondering what you see as sort of a run rate -- normalized run rate gross margin percentage in steel distributors. You're right, there is more volatility attached to that. And in some ways just to go back, Mike, there's two pieces to that business for us. There's the U.S piece, which tends to be more on the -- more volatile and more transactional, and there's the Canadian piece of the business that tends to be more back to back lower risk, lower margins, lower risk. And if we look at Q4, Q4 for steel distributors wasn't all that different bottom line results from Q3. And that's really because even though the steel market pulled off, that impacted more of our U.S business and our Canadian business was tends to be more of a steady eddy, steady as she goes type of business. So Q4 is actually not a bad reflection in terms of what it looks like on balance over cycle just because we did see the pull off on the U.S side, which does really, really well in up markets. And we didn't see that up market in Q4. But our Canadian business that's called worth, it was steady as she goes and did quite nicely in Q4. So Q4 is probably not a bad litmus test. Okay. That's great. Sorry and then just on the top line outlook for that business, I mean, it sounds like you're constructive on the other two in terms of demand. Does that apply to distributors as well? Yes, it does. And, again, to Marty's point, again, more back to back contractual type business in Canada, we're continuing to see that come through. So there'll be a more steady flow, we'll see the will ebb and flow more with the market price in the U.S and opportunistic, again, they're highly transactional. But again, I see that following along the same lines as a Service Centers as far as total market demand, keeping in mind Service Centers, self or others are big customers for them. With respect to the M&A environment, are you able to qualify for us where seller expectations are maybe relative to 6 and 12 months ago? Because I know that's been a challenging part of executing the M&A plan? Yes, it's a great question, Ian. And it's sometimes hard to gauge because we only see it through our lens. And it's not like there's a slew of activity that we have seen that's been transacted by other people. So we're seeing lots of deal flow, some of which is interesting to us, some of which is not interesting to us. But there hasn't been a lot of stuff that we've seen cross over the finish line and say, here's what value is. So it's more of an anecdotal comment than any hardwired data that I can point to. But anecdotally, yes, it seems like there's a better tone to expectations today than there would have been 6 or 9 months ago. Okay, that's helpful. And I'm going to take a shot in the dark here. Are you willing to maybe talk at all about how the discussion went with the Board around dividend increases? And your thoughts there, just given the strength of the balance sheet, future cash flow generation and the like? Sure, well, it really wasn't a hot topic to be perfectly candid. We think we've got a healthy dividend as it stands right now. So for us, we talk more holistically about capital deployment in a variety of areas. And our focus right now is we've as you’re right. Got an extremely strong balance sheet, and we see opportunities to deploy capital in a variety of ways. Your question about M&A is interesting. There's potentially opportunities that we're continuing to be optimistic about, but we'll see. And the projects that we have internally, so as of today, we're collectively comfortable with the healthy dividend that we have. Okay. And then last one around capital allocation, the NCIB was obviously pretty active through last year. It doesn't look like it's been used a lot through the early part of this year is that a function of Russel being in blackout or the perceived view of where the share price is today being healthier now? Okay. I just wanted to confirm that. That's helpful. That's all for me, guys. Thanks very much for the detail on the call. Great. Thanks, operator. Well appreciate everybody for joining the call and dialing in today. If you have any further questions, please feel free to reach out. Otherwise, we look forward to staying in touch during the quarter. Thanks everyone. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask you to please disconnect your lines.

EarningCall_21

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to The Chemours Company Fourth Quarter and Full Year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Hi. Good morning, everybody. And welcome to The Chemours Company's fourth quarter and full-year 2022 earnings conference call. I'm joined today by Mark Newman, President and Chief Executive Officer, and Sameer Ralhan, Senior Vice President and Chief Financial Officer. Before we start, I'd like to remind you that comments made on this call as well as in the supplemental information provided in our presentation and on our website contains forward-looking statements that involve risks and uncertainties, as described in Chemours' SEC filings. These forward-looking statements are not guarantees of future performance and are based on certain assumptions and expectations of future events that may not be realized. Actual results may differ, and Chemours undertakes no duty to update any forward-looking statements as a result of future developments or new information. During the course of this call, management will refer to certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance. A reconciliation of non-GAAP terms and adjustments are included in our release and at the end of our presentation. As a reminder, our prepared remarks, a full transcript and an audio recording, plus our earning deck, has been posted to our website alongside our earnings release. This morning's call will focus purely on Q&A. Thank you, Jonathan. And thank you all for joining us this morning. I'd like to start this morning by first thanking our Chemours employees, the entire 6,600 strong Team Chemours for another great year, a year of improved results in revenue and earnings and high free cash flow conversion, a year in which we set several records, especially as we think of our TSS and APM businesses. But as you saw in the results we posted last night, we had a difficult fourth quarter. And the results in the quarter were driven primarily by rising raw material costs also with higher energy and logistics costs, which were further compounded by weaker-than-expected demand, mainly in our TT segment, which also feeds into our unit rate costs in the quarter. Clearly, the strong US dollar and the winter storm at the very end didn't help, but clearly it was a weaker quarter. With that, we have stepped back and we looked at the year, we had a great year. And with that in mind, as we look at how we set the 2023 guide, I'd like to make a few comments. Our guide in my mind reflects our confidence in the work that's already underway in TT to improve margins from where we left off in Q4 throughout the year, to deliver margins that will be essentially in line with fiscal year 2022. We have a great foundation with TVS, and we're adding to that work that we're doing on input costs and plant efficiency. In TSS, the growth thesis is intact, with mid to high-single digit top line growth and comfort in getting back to greater than 30% margins for the full year based on mix and volumes, and especially as we bear in mind the step down in quotas starting in early 2024. In APM, the growth thesis in our advanced electronics and clean energy applications, which provide very high value in use is also intact. From a bottom line perspective, clearly, there will be some fade on less strategic businesses. Clearly, that will be impacted dependent on the strength of global macro. And also our sense that we are very much involved in driving growth and investing in growth in our APM business, which has an impact on the margins. Nevertheless, with all these ingredients, we're confident in delivering margins, again, consistent with last year in the low 20s. And then, finally, the team continues to work on a number of legacy issues, both on legal and environmental areas, as we continue to resolve legacy issues. And with that, we expect higher Corporate and Other spend in the year. So, overall, we're starting the year on a weaker note with a lot of global macro uncertainty, but the team is very focused on all of these points in delivering another good year for Chemours in 2023. First question was around TiO2. If you contemplate kind of your midpoint and the revenue guidance that you get, can I read into that that that's roughly or mostly, I guess, volume down and then maybe price off 1% or 2%, with a little bit of relief on the raw material side? Is that the right way to think about what the mid case feels like rolling through? Duffy, I think that is a very good characterization. The way we're thinking of the year is a modest volume recovery in the second half, but overall, that would translate to volumes being down. Clearly, TBS is working from a price perspective. And the team's hard at work on the input cost side and efficiency. So maybe I'll ask Sameer to comment further on some of the work we're doing on the cost side. Duffy, as you're going to look at the cost, definitely, we've started seeing some of the relief on that side. As we kind of move through the year, we should start seeing the benefit of that. But I would just caution a little bit, as we kind of move into Q1, we are carrying a little bit of inventory, as you know, from the Q4 into Q1. But as you kind of move through the year, the input cost relief should help us on the margin side. If you look back, you've had some good years in TiO2, kind of, let's say, three quarters of a billion dollars or better on EBITDA. What does it take for this business to get back to that level maybe over the next one to two to three years? Ed and his team are really energized around getting this business over time back to sort of a mid-20s EBITDA target margin. What it will take is full of plant utilization. Clearly, volumes are down overall as we look at 2023 today. We expect that will continue to improve as we go into 2024. And, clearly, the team is quite focused on the cost side of the equation, and candidly, where we might be able to also deploy capital in that regard. So, a lot of work ahead of us. But I think our view is, this is a business, this is the best TiO2 franchise, and we have a path to get here. Yeah, I guess I wanted to go back to a similar topic. So you address some of the improvement in TiO2. I guess on the TSS and APM side, I understand that the 2024 outlook definitely would get you back to that high-single digit growth. But in 2023, I know you faced tough comps in the first half, especially given the pricing that you realized last year, double-digit gains in both businesses. So we're also hearing some weakness on the electronics value chain as it pertains to APM. So could you just help us flush out how those two businesses kind of evolve through the year? And would you expect that those two businesses kind of grow in line with your targets in 2023 on an EBITDA basis? Or how should we think about that? We certainly expect, as I said, at the opening, continued growth in line with our long term forecast on TSS in 2023. Clearly, we're continuing to see growth in the deployment of our low global warming Opteon refrigerants as more and more stationary OEM players move to Opteon blend. So, really good growth there. We are expecting growth in auto OEMs this year, consistent with the ISA's [ph] outlook. And then, a big part of the TSS business is aftermarket, the replacement market in the stationery business and a growing pool of vehicles that require HFO technology. So, let me just say, we're seeing good demand signals here. Clearly, with the quota now in place, this is the second year, we don't expect the same kind of price delta, as we saw going into last year. But, certainly, market dynamics continued to be very favorable, with an effective quota regime. On APM, we remain sold out on a number of product lines. We're sold out on Teflon PFA. And yeah, while there's some weakness in the electronics market, new semicon fabs, especially where a US supply chain is favored, are moving forward. And then, on our hydrogen economy business, there's a huge backlog on electrolyzers, and PEM membranes required for those electrolyzers. So, Denise and her team, while we're seeing some fade in less strategic products, are really working at opening up capacity to meet customer demand in some of our higher value applications, which we're investing in also with some of the investments we announced last year. So, overall, I think we're quite confident in the growth thesis of both TSS and APM. Just as a quick follow up, a couple years ago, you had mentioned about $125 million annual headwind from illegal imports of refrigerants into Europe from China. Is that still the range of what you're seeing? Or is that also less imports into there? Would that also be a tailwind that you'd experience in TSS? I think we would see that the situation in Europe has improved. We continue to do a lot of work as an industry to monitor illegal imports. But my sense is, as we're moving more and more to Opteon blends in the European equipment base, that's becoming less of a factor on its own. Sameer, I don't know if you have any other thoughts? I think, Mark, you laid out pretty nicely. Arun, as you kind of look at the guide and the impact that you laid out, our guide, of course, anticipates that there's no further deterioration in any of the illegal import situation than you've seen in the past. But at the same time, we're really excited about the growth that's coming from the US side, right, with the AMAC and there's a much better regulatory regime, much better enforcement regime around kind of these products. So, we feel very good about that. And the team is really focused on really pricing the products based on value, value based strategy here. So, we feel really good about TSS business. On TSS, it had a kind of wild ride in 2022, with some huge numbers in the first three quarters. And then, fourth, look, you guys warned, hey, raw materials are going to pinch us at some point. Certainly seemed to nick you a good bit more than I think we were expecting it to. So I guess, can you help unpack that? And then, I guess, with your optimism for hitting 30% plus in 2023 in terms of the margins or kind of going back to your normal-ish levels, I guess, how should we think about the cadence of the recovery there and maybe even a little bit of color for 1Q would be helpful. John, let me start, and then I'll ask Sameer to give you some added color on sort of Q4 margins and some of the mechanics and calculus behind the numbers. Let me start by saying, we are fully – I would say, let me start by saying, Q4 in TSS was weaker than we expected. So while we were projecting lower margins in the quarter, we were disappointed with our own results in the quarter. Sameer will take you through how the math works. As it relates to 2023, Q4 and the unique attributes of Q4 should not be viewed as any way as overshadowing the year we expect ahead of us in 2023. And so, while we don't give a quarterly guide on any of our segments, we would expect our margin recovery to start early in the year. And as I said, we expect our full year margins to be north of 30%, consistent with our long term guide. So maybe I'll ask Sameer to give us some more color on Q4. As we're going to look at the Q4 margin, right, on the TSS side, it's really driven by three factors. First one is really what you would expect the typical seasonality in the business because, in the fourth quarter, our product mix tends to be more southern hemisphere based. So these are lower margin products for us. So from a seasonality perspective, the Q4 margin generally are going to be a little lower than the second and third quarter. But then the other two factors were really kind of specific to the timing at this point. First one is the raw material inflation that hit us as some of the products coming that we're exporting, kind of their prices increase. And the other one was a lower fixed cost absorption, which happened because of the planned turnarounds in the early part of the quarter, and then in December, the winter storm had a pretty meaningful impact on the business as well at corporate. So those two are driving the unit rates. And given that we are a LIFO company, we took a lot of that cost upfront in this quarter. And as we go into Q1 and into 2023, the margin should moderate back towards the guidance that we have given for the longer term margin of the business. On the APM business, for the first time, you're kind of breaking it out now into two new segments. I guess, can you help us to understand the margin profile roughly? Obviously, you didn't give it, so maybe you don't want explicit detail out there. But how should we think about maybe the difference in the margins between them, considering one is higher growth and seems like certainly higher value, but you're also investing a lot in it? And one maybe is a little bit – taking less investment, but also may be a little bit less value add? So I guess, can you help us to think about the margin differential there? I'd say our entire APM portfolio has very good or very high variable margin. But, clearly, value in use on something like a PEM membrane in an electrolyzer or a very high purity PFA for small node semicon applications, fabs carry a premium to the portfolio on average. I think the intent of breaking out our Performance Solutions versus our Advanced Materials was really to demonstrate the growth rate over time. Clearly, the numbers in the chart, using three years of financials, start with the COVID year. So, the growth rates are probably a little higher on our advanced materials than we would expect over time. But recall that we expect the growth in our Performance Solutions to really start to accelerate as we approach the middle of the decade. So we felt it was important for investors to reflect that double-digit growth rate, which is a multiple of GDP as we move forward, and clearly, we view that as a premium business, both in terms of a strategic value and [indiscernible] margin to the rest of the portfolio. Can you talk through just the working capital headwinds to cash flow, thinking primarily inventories? How will that balance out? Is that going to drive lower operating leverage in 1Q? And I guess what should we think for working capital, headwinds/tailwinds, for the year? Matt, why don't I take this one and Mark can comment afterwards. Essentially, as we kind of look at the working capital, really, it's predominantly in the TT business that you've seen in Q4, as we kind of move into 2023, into Q1 and beyond. Q1, as you know, seasonally, we typically consume working capital, right, because the seasonality portion of the TT business and the TSS business. So, we will consume working capital in Q1. But as we kind of move through the year, we should be able to release that working capital and that's reflected in the guide that we've given for the free cash flow greater than $350 million. I want to talk about PFS as there is a potential or proposed ban in Europe and wondering what that looks like for your thoughts on the Nafion expansion in France. And I guess conversely, 3M announced that it was closing some of its PFS or all of its PFAS operations. What are you thinking about – how are you thinking about that as an opportunity for your business and potential market share gains in the next years? Maybe I'll start with the 3M first. And clearly, the way we think about it, fluorine chemistries are essential. And we believe, based on our technology, can be made responsibly. And so, we continue to make significant investments in driving that growth, whether it's for semicon applications, especially as countries around the world look at shoring up their own semicon supply chain, or whether it's in hydrogen – renewable hydrogen where we're really focused, or, candidly, also, in the EV applications where our polymers are critical. So, if you want these technologies, our view today is fluoropolymers are the best solutions for those needs. Clearly, 3M made a decision based on what they thought was prudent for them and their shareholders. We think it's prudent to continue investing in making fluoropolymers responsibly for the next generation of the economy. As we think about the dossier in Europe, clearly, that's a multi-year process. And so, we will be very engaged, working with our customers, working with the same industries that I just talked to, to make it very clear to regulatory authorities that this is a chemistry that Europe should embrace, and they should embrace participants like ourselves, who can make this chemistry responsibly. We have always been an advocate of science-based regulations. And in fact, we have science-based targets in our scope 1, 2 and 3 missions. So, this is the beginning of a long journey as it relates to the dossier. But you can expect that we will be very involved and very vocal with our customers, and why we believe fluorine chemistry has a place in modern society. I want to see if I could try again on the cadence of earnings through the year. I've been getting a lot of questions from investors about – really for first quarter and what that [indiscernible] looks like. Is there any way you can frame kind of a range of what you're assuming there? Or maybe first half, second half? And then, relatedly, when you look at your range for the year, the low end, you talked about recessionary conditions. What really plays out in that scenario? I guess, how conservative is that relative to what you're seeing today? Clearly, the team's really focused coming off of Q4 to drive improved results, starting in Q1. So, let me just say, the team's fully energized around delivering a great year, and we need to make every quarter count. As I think about – as Sameer alluded to, there were some cost issues in Q4 that were unique to Q4. And clearly, we've started to see on some of the input costs, some rollover starting already. Clearly, we're seeing – if you're looking at nat gas prices in the US, which really impacts our TT operations, you're seeing a big improvement there. You're seeing a weaker US dollar, which is also helpful. So, I would say that there were some unique cost issues in Q4, which we would not expect to repeat in Q1. On the demand side, clearly TT is going to start off the year in a weaker place. But we expect some moderation based on the end of destocking in Europe, the improvement in Asia after the Lunar New Year, and then we're continuing to see the US hang in there as we move through the year. As we said earlier, our TSS franchise is very strong, and so we would expect to see a good start to the year starting in Q1. On APM, yes, we have the higher costs on some of the input costs flowing through, which really impacted Q4, but also we see in the year, the ramp up of growth by relieving capacity constraints in some of our higher value applications. So, listen, I think it will be a journey throughout the year. But, clearly, I want to make it clear that we're very focused on making every quarter count. Maybe I'll ask Sameer to give a little more color. Josh, as you're going to look at the three businesses, on the TT side, as you're going to look through the year, as we said in the prepared remarks and in the investor deck as well, we anticipate the destocking to be near end. And so, as we kind of think about the rest of the years, the demand recovery, the behavior model and what you see in the guide is really through the second half of 2023. It's a very slow ramp that we have, we anticipate at this point. On the TSS side, only one thing additive I would say to what Mark has already said is, given all the market and regulatory dynamics, we feel pretty good from the demand perspective. And we still believe, as we're going to look at the reopenings post COVID, there's still a backlog on the commercial side. So we anticipate that to provide the tailwinds as we kind of get into the spring season, especially in the first half of the year. And APM has lesser seasonality, but it'll be – the trend should be similar to this year. Maybe if you could just comment on the lower end of the guide, I guess what's baked in there in terms of recessionary expectations? And just I guess, a follow up to the prior one, could you size the cost benefit you expect to see sequentially? If you look at the low end side in the modest recession, what we have assumed is that US will have a more modest recession, and also the recovery in the Europe and Asia will be delayed until 2024. So, that's the way we're going to model from an economic scenario point of view. And of the three businesses, as you know, TiO2 is the most economically sensitive business. So, that's a big part of the guide range. I'm just taking a look at the guidance for 2023, and specifically on the TT side of things, you guys had adjusted EBITDA margins of 7% in Q4. And if I take a look at the commentary you're giving or baking into 2023 guidance, you're talking about 2023 adjusted EBITDA being similar to 2022. So call it around 18%. So, I'm just trying to understand how we bridge to that. Clearly, we would expect to see margin improvement in TT starting in Q1. As Sameer said, some of the higher cost inventory will still be flowing through the P&L. But already, we're seeing some improvement in input costs that will start to impact our business in Q1. The guide, as Sameer said, the bottom and the top end of the range are rarely tied to how strong or weak the second half recovery is with respect to TT volumes. So, I'd say for the full year, we are expecting volumes to be down year-over-year slightly. But the range of volume delta to 2022 will depend on the second half recovery. And clearly, as we get better utilization of our plants in the second half and lower input costs, we arrive back at a full year EBITDA margin in line with 2022. Hassan, just one more thing I would say on the margin side to what Mark just said is, the margin recovery will be through the year. So, you're not going to see getting 18% right away, but this will be margin recovery through the year as the things that have started easing up on the cost side, thanks for the great work with the team and also on the commercial side by Ed and team, those things should really start flowing and benefiting the P&L and the margin as we kind of go through the year. So it'll be a modest improvement for the year. As a follow-up, just sticking to the guidance, and now on the EPS side of things, I take a look at the EPS range for 2023 you guys have given and it assumes flat sort of shares outstanding, right? You guys obviously repurchased $144 million in shares in Q4, $495 million in 2022. So I'm just trying to understand how we should think about sort of the run rate for buybacks and as it relates to the guidance as well. Clearly, we keep the share count constant, as you noted, Hassan, in our guidance. But clearly, we have demonstrated historically our willingness to return cash to shareholders, while also deleveraging and funding the escrow, if you saw how we deployed capital. As you think about this year, with our free cash flow guide of greater than $350 million, the way I think about capital allocation this year is we're stepping up our investment in growth to fund really high return applications in both TSS and APM. Clearly, we think we're at a prudent leverage ratio today. But we will also keep in mind, and we have an approval from our board around stock repurchases. Clearly, as we think of the year also, I would just say we're keen to resolve legacy claims against the company. And so, we want to also factor that in mind as we think of the five key strategic priorities, which drive value for shareholders over time. So, listen, the point is well taken on the share count. We will continue to deploy capital against the four key priorities, the top four, but we'll also use capital allocation wisely to drive or augment the value from the those first four priorities as we move forward in time. In your TiO2 comments, you talk about the recovery through the year. You've spent a lot of time referencing Europe and Asia and China, which is easy to understand. Could you talk about sort of the end markets? And I think we all have a pretty good idea of what's going on in paint and coatings, but what about the balance of the book? What are you seeing in terms of how those customers are behaving? And what is your expectation for how their volume is going to flow through the year? Clearly, as we think of our TiO2 business globally, the majority of our product ends up in architectural coatings. And the US market continues to be robust. There is still, if you listen to some of the calls by coating customers, a backlog on the professional side. Europe is primarily a coatings market for us as well. And we had seen pretty significant destocking in the second half, especially in Q4. We're seeing signs that that's moderating. China is a high end coating market for us, also a laminate market. We're also big in laminates in Europe. Those markets are tied to end consumer demand in, whether it's furniture or flooring or kitchen cabinets. And so, again, in Europe, I think the expectation is, we'll start to see some return as the end consumer becomes less stressed as it relates to energy costs in in Europe. And then, finally, the last part of our businesses is in plastics. And that that tends to be more tied to global macro, I would say generally. But even there, I would say, if we look strong auto globally and other applications like that, we would expect a continued recovery throughout the year as well off of what we saw in the second half of last year. Just as a follow up, I just wasn't 100% clear on TSS in the fourth quarter on the volume side of the equation and whether that came in below your expectations and what caused it? I'd say, TSS, seasonally, Q4 is a weak quarter. Right? So, as you know, the season can either be relatively good or relatively weak. So I would say, in our volumes, we're somewhat lower than expectation. But I would say what transpired in Q4, which Sameer took us through in detail is more of some of the movements on the cost side. So, it's seasonally a weak quarter. We had some pretty major plant turnarounds, or TARs, as we call them, that were completed in Q4. So you always have the startup from a major TAR. You have a lot of cost being absorbed as you bring your plants up online. And then we had the winter storm at the end, which also resulted in either lower operating rates or higher costs related to how [indiscernible] the plants after the storm. So, I'd say Q4, from a TSS perspective, had elements of maybe slightly weaker demand. But I would say the cost factors were probably more significant in terms of the margin compression that we sell. Could you comment on the backlog for Nafion? And do you think the backlog accelerates in 2023 after the IRA? And how far out are you taking orders? As I understand it, there was a two year backlog on PEM electrolyzers before IRA. So, with IRA, the inbound requests for access to our capacity are significant. And Denise and her team are really working hard to unlock existing capacity. Clearly, we're involved in hydrogen in a very significant way. We have the announced joint venture with FUMATECH in Germany. We're a partner in the hydrogen hub application for West Virginia. And we also announced the partnership with the DoD on clean hydrogen at our facility here with University of Delaware here in Delaware. So, a lot going on in the hydrogen space. And Chemours continues to be extremely relevant in the work we're doing both on improving membranes, but also improving our volumes to meet the significant backlog in announced projects globally. You mentioned higher legal costs in 2023. Is that related to preparing for the first trial for PFAS or increased settlement negotiations or something else there? Yeah. I'd say we've been in settlement discussions regarding the water utility cases, and have now progressed those discussions through the court appointed mediator. So, in anticipation of the work we're doing there and other aspects, we're also very focused there. Clearly, we have a number of major remediation projects too online that we're bringing to completion. But we will ask Sameer to give some more granularity. I think, Mark, you touched it. John, the way I would think about the guide on the Corporate and Other side, which I'm assuming you're referring to, it's a combination of both, both the legacy environmental and some of the legal costs. So it's not just legal. There are no further questions at this time. Mr. Mark Newman, I turn the call back over to you for some final closing remarks. Thanks, Rob. And again, we're really excited as we look into the new year, where we're going with Chemours in our next chapter. We're really excited about the work we're doing to drive improve results in TT and prosecuting the growth in TSS and APM. And resolving some of the legacy issues that we've had since our inception. So, a lot of good work here being done. I look forward to seeing as many of you as possible this year and getting the word out on what Chemours is doing around sustainability-led growth going forward.

EarningCall_22

Welcome to the Corporate Office Properties Trust Fourth Quarter and Full-Year 2022 Results Conference Call. As a reminder, today's call is being recorded. At this time, I'll turn the call over to Venkat Kommineni, COPT's Vice President of Investor Relations. Ms. Kommineni, please go ahead. Thank you, [Carmen] [ph]. Good afternoon, and welcome to COPT's conference call to discuss fourth quarter and full-year results and guidance for the year. With me today are Steve Budorick, President and CEO; Todd Hartman, Executive Vice President and COO; and Anthony Mifsud, Executive Vice President and CFO. Reconciliations of GAAP and non-GAAP financial measures that management discusses are available on our website in the results press release and presentation and in our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed in our SEC filings. Actual events and results can differ materially from these forward-looking statements, and the company does not undertake a duty to update them. Steve? Good afternoon, and thank you for joining us. Upon [conclusion] [ph] of our strategic reallocation program in 2018, which deeply concentrated in our portfolio and defense IT locations, we entered into what we describe as a new era of growth. Since 2019, we've placed over 5 million square feet of nearly fully leased development projects in service, creating the foundation for long-term growth. During this period, we raised over $1 billion in capital, mainly from our data center shell portfolio and reinvested into other highly accretive low risk development projects. These activities coupled with a strong leasing in our operating portfolio and strategic debt refinancings delivered 4% compound annual growth FFO growth from 2018 through 2022. Today, nearly three years after the onset of the COVID-19 pandemic, we feel the strength of our strategy has been fully ratified. Delivering reliable growth through the pandemic era with visible growth for the next four years and progressing to a new era of internally funded development. Now, let's discuss our 2022 results. FFO per share as adjusted for comparability of $2.36 grew 3% over 2021's exceptional results and is $0.02 higher than the midpoint of our original guidance. We completed 801,000 square feet of vacancy leasing, which is the highest annual level in 12 years, and 30% higher than 2021. Demand was broad-based across our Defense/IT locations, with particular success in the Fort Meade BW Corridor and Huntsville. The National Business Park and Redstone Gateway are both 98% leased, which represents a 300 basis point and a 600 basis point year-over-year increase, respectively. Our core portfolio is now 95.3% leased, the highest level we've achieved since 2006. Defense tenants continue to commit to and renew at our locations executing their mission activities in office space. This leasing success stands in sharp contrast to the weakness in the broader office environment, which has been negatively impacted by the current economic conditions and played by space contractions stemming primarily from work for home. We achieved 476,000 square feet of development leasing. We had expected to sign a 225,000 square foot lease for a data center shell in summer, but the tenant's approval process dragged on, and the execution slipped a few weeks. We executed this lease in January, which represented the remainder of our 700,000 square foot target for 2022. So far in 2023, we're off to a great start on development leasing. As noted in our press release, we signed another 193,000 square foot build-to-suit with our cloud computing customer and a 46,000 square foot build-to-suit for a new headquarters building for a defense contractor in Huntsville. Including the delayed lease from 2022, development lease and executed year-to-date totals over 460,000 square feet. And with these leases, we now have 1.5 million square feet of active developments that are 89% leased. We placed into service 1.3 million square feet of development projects, which are 99% leased, over 900,000 square feet of which was delivered in the fourth quarter. Our 2022 deliveries included 1 build-to-suit with a defense contractor at the National Business Park, five projects at Redstone Gateway leased to defense contractors, including the new Northrop Grumman campus and two data center shells in Northern Virginia. In mid-December and in the second week of January, we closed on two new [90/10] [ph] joint ventures with Blackstone on five single-tenant data center shells, raising $250 million of proceeds. We are very pleased with the valuations of these transactions, and the $190 million of proceeds from the January tranche fully funds the external equity component of our expected 2023 development investment. We now expect to fund future equity required for investment in our development pipeline from cash flow from operations without the need for further dispositions. Importantly, we can accomplish this self-funding, while maintaining our strong balance sheet and conservative leverage metrics. Any future dispositions will be strategic sales with the goals of harvesting shareholder value and more deeply concentrating our portfolio in our Defense/IT locations. Turning to defense spending. The base defense budget for fiscal year 2023 was passed in December with a 7.5% year-over-year increase, which was 4.8% higher than the President's budget request. Recall, the fiscal year 2022 budget passed in March included a 5.8% increase and followed by this 2023 budget passed in December, which added to 7.5%. In total, this is a $100 billion increase in defense spending or 14.3% in the last 12 months. We expect demand from the 2023 budget will materialize starting in 2024 and drive leasing volume for both our operating and development portfolios. Moving on to guidance. We're establishing 2023 guidance for FFO per share as adjusted for comparability at a range of $2.34 to $2.42. At the midpoint, guidance implies 1% growth over 2022's results, which includes the dilutive impacts from the elevated interest rate environment and our capital recycling timing. Over the past three years, a period which encompasses the pandemic and a historic rise in interest rates. FFO per share as adjusted for comparability has compounded at 5.1% annually. Following 2023's modest growth, we continue to expect FFO per share as adjusted for comparability to grow at roughly 4% on a compounded basis between 2023 and 2026. Thank you, Steve. 2022 was a successful year for leasing, highlighted by our record vacancy and solid development achievements. We completed 801,000 square feet of vacancy leasing with a weighted average lease term of 7.3 years and contractual average annual rent escalations of 2.75%. This is the highest vacancy leasing achievement in 12 years, 30% higher than that of 2021, and 40% higher than our prior five-year average. In addition to the overall volume lease in 2022, our vacancy leasing strengthened our concentration in Defense/IT and was diversified among size requirement and location. Our 68 leases for the year represent a 25% increase over 2021. Our largest lease was 121,000 square feet with Lockheed Martin and Redstone Gateway, and we also executed 53 leases under 10,000 square feet. We expanded our relationship with the U.S. government with 126,000 square feet of new leases, including 68,000 square feet for the last two floors at 310 NBP, which is now fully leased. 50% of the leased square footage was to cyber tenants, further demonstrating the strength in that sector. Our core portfolio finished the year 95.3% leased. With limited inventory available, we are setting a target of 400,000 square feet of vacancy leasing in 2023. Demand remains strong with the current activity ratio of 78% and more than 70 active prospects, and we are confident we will reach our target. 2022 leasing activity also included 1.7 million square feet of renewals. We expected to execute 2 million square feet of renewals, but three large government leases totaling 316,000 square feet were delayed into the first quarter of 2023. We fully expect these leases will renew. Full-year retention was 72%, but that result includes a strategic relocation of a defense contractor for 58,000 square feet. Net of this relocation, the retention rate was 74%. Cash rents and renewals declined 2%. However, measuring the starting cash rent of the tenant's expiring lease to the starting cash rent of the new lease, the annual compound growth rate achieved in these maturing leases was 2.7%. Renewal leases signed in 2022 include 2.5% annual base rent increases on average, which translates into approximately 3.5% annual growth on net rent. For 2023, we expect cash rents to be flat with guidance ranging from down 1% to up 1%, and we expect tenant retention will be especially high at 75% to 85%. This retention expectation highlights the value of these locations to our tenants and of our strategy of concentrating assets approximate to Defense/IT locations. Our 2023 same-property pool started the year at 92% occupied, and we expect to end the year between 93% and 94%. The primary components of activity within the same property portfolio includes contractions in our regional office portfolio totaling 75,000 square feet, including a 50,000 square foot contraction by CareFirst at Canton Crossing, which will occur in the first half of 2023 and was part of the long-term renewal executed in November 2021. These contractions are more than offset by the commencement of leasing executed during 2022, including the 121,000 square foot lease with Lockheed Martin at 1200 Redstone Gateway and over 160,000 square feet commencing at the National Business Park, which includes the 126,000 square feet of new space with the U.S. government. With respect to development leasing, the midpoint of our 2023 target is 700,000 square feet. We have executed 464,000 square feet to date, including two data center shells and a 46,000 square foot build-to-suit in Redstone Gateway or a new headquarters building for Davidson Technologies, a rapidly growing defense contractor. During 2022, we placed 1.3 million square feet of development projects into service, which are 99% leased. We expect these deliveries, along with the nearly 850,000 square feet we expect to place into service during 2023, to contribute $12 million of cash NOI this year, of which 99% is contractual. The 2022 and 2023 deliveries, when combined with contributions from the remaining development pipeline currently under construction, will contribute annualized cash NOI totaling $66 million, 94% of which is contractual. Thank you, Todd. Fourth quarter FFO per share as adjusted for comparability of $0.60 was at the midpoint of guidance and the full-year result of $2.36 was $0.02 higher than the midpoint of our original guidance. The same-property portfolio ended the year at 92.4% leased, and same-property cash NOI declined 90 basis points. Within this result, cash NOI from the Defense/IT portfolio increased 1.3%, offset by a decline in the regional office portfolio, driven by the large move-out of Transamerica at 100 Light Street and the rent reset on the 15-year renewal of CareFirst at Canton Crossing. In January, we announced two new [90/10] [ph] joint ventures with affiliates of Blackstone on 5 data center shells raising $250 million of equity proceeds. The transactions closed in two tranches, one in mid-December for $60 million and another in early January for $190 million. The transactions were valued at a mid-5% cap rate on forward cash NOI and a GAAP cap rate just below 6.25%. Given the market environment, we found this to be very strong pricing. The achieved cap rate was about 150 basis points over the 10-year treasury, the tightest spread to treasuries of any of the venture deals we have executed. Given the strength of pricing achieved and uncertainty in the capital markets environment, we accelerated the $190 million transaction from the fourth quarter to the first quarter. Although this change in timing reduces 2023 FFO per share by $0.01, we felt it was prudent to take any capital and pricing risk off the table related to development funding. Separately, our partner placed secured debt on two previously formed joint ventures. The weighted average spread on these loans is almost 200 basis points higher than our line of credit, and our share of interest expense on these loans also reduces 2023 FFO by about $0.01 a share. We expect this financing will be short-term measure since the loans only have a two-year term. At year-end 2022, our floating rate debt exposure increased to 15% from 7.5% at the end of the third quarter as $200 million of hedges, which fixed LIBOR at 1.9%, expired on December 1. In mid-January, we entered into $200 million of new interest rate swaps, which fixed SOFR at 3.7% for three years, hedging a portion of our variable rate exposure. With this transaction, we expect our floating rate debt exposure will remain below 10% during 2023. With respect to guidance, we are establishing 2023 FFO per share at a range of $2.34 to $2.42, implying 1% growth over 2022's results. At the midpoint, this guidance takes into account positive contributions, which include $0.08 from same-property cash NOI growth of 3% and $0.10 from developments placed into service. These contributions are partially offset by $0.10 from higher interest expense based on the increased SOFR curve; a decline in capitalized interest resulting from the large volume of projects being placed into service, and the incremental interest from the venture financing, and a total of $0.06 from an increase in total G&A expenses from backfilling several open positions, market increases in wages and a reduction in capitalized labor; lower development fees, which accounts for $0.02 of this reduction as significant construction work on behalf of a tenant was completed in 2022; and accelerating the timing of the $190 million joint venture transaction. Our capital plan for 2023 is very straightforward. We expect to invest $250 million to $275 million to complete our existing 1.5 million square feet of active development projects and commenced new starts. Development investment will be funded with the proceeds from the completed venture, cash flow from operations and our revolving credit facility. Lastly, for the first quarter, the $0.57 midpoint of our guidance range is $0.03 lower than our fourth quarter 2022 results. The decrease results primarily from the impact of higher net seasonal operating expenses, which we typically experience in the first quarter. Thank you. Summarizing our key messages. We completed the highest level of vacancy leasing in 12 years during 2022. We're off to a terrific start to development leasing in 2023, having executed over 460,000 square feet thus far. Our 1.5 million square foot active developments are 89% leased, providing a strong foundation for continued FFO growth. We've raised the necessary capital to fully fund the equity component of our development needs in 2023. And going forward, we anticipate self-funding in our equity requirements for development investments. The outlook for defense spending remains strong as defense budget has increased roughly $100 billion over the last 12 months. We delivered our fourth consecutive year of FFO per share growth that has compounded at 4% per year since 2018. In 2023, we're projecting modest FFO per share growth, and we continue to expect compound annual FFO per share growth of roughly 4% from 2023 to 2026. Thank you. Hoping you could give us an update on what you're seeing in terms of construction cost trends and also if you could just touch on how we should be thinking about development yields near to midterm? Sure. In terms of construction cost trends, we actually have a very real-time example with the build-to-suit that we just talked about with Davidson [indiscernible] identical building to another building that we built on the site immediately adjacent to it. And those buildings have started almost exactly two years apart. The delta in cost is 16.4%, but our rent has increased commensurately to maintain our yield on those buildings. We're seeing, from a materials cost basis, the costs are obviously still elevated, but the increase has moderated a bit. Some of the materials, most notably steel, are actually decreasing. So, the good news is, we're able to continue to develop yields that matter historical numbers. That's helpful. Thank you. And then secondly, can you give us an update on the evolving challenges you're seeing related to power supply cuts in Northern Virginia? And any potential delays that might cause in construction of new data center properties? Well, there certainly is a shortage of power availability in Northern Virginia that delayed somewhat the execution of the leases that we just achieved. We expect to get one additional build-to-suit done sometime in the next 12 months to 14 months, and the new power supplies that are anticipated will start to materialize later in 2023, 2024, and then 2025. Thank you. One moment for our next question please. It comes from the line of Michael Griffin with Citi. Please go ahead. Great, thanks. Maybe we can just touch on leasing for a sec, mainly on retention. You're expecting a higher rate in 2023 relative to 2022. But I think, Todd, you mentioned in your prepared remarks, some of that was driven by a delay in renewals from 2022 push to 2023. I guess is that mainly driving the, sort of delta year-over-year or are you seeing a stickier nature from some of your tenants on that? No, I don't think it's driving a delta year-over-year. I believe it's a stickier nature of our tenants. Certainly, some of that renewal that moved into this year will contribute to the overall retention rate. But really, it's more a function of our tenant base and where we're located than it is – in any sort of variations from year-to-year in terms of when leases are signed. Got you. And then, Steve, you also mentioned about strategic sales. I was just wondering if we should read into that. Obviously, you don't need any equity funding to fund the development pipeline this year, but could we read into that as the potential exit of some of the regional office assets, just given maybe a softer bid or less demand for those relative to your core portfolio? Yes. The message was intended to advise shareholders that we will consider recycling capital in the future. We just simply don't need to, to fund our development and the obvious candidates when the opportunities are accretive at the regional office assets in our portfolio. Hi, good morning. Steve, you mentioned that the 7.5% year-over-year increase in the defense budget should fuel demand for space in the portfolio through 2024. Is there a way you can quantify or help us better understand the relationship between the increase in defense spending and what you've seen on how it translates to new leasing? Well, I don't have algebra to help you estimate the volumes, but we have deep experience over a long period of time. The larger increases manifest themselves in higher levels of leasing, and the delay between funding and demand being recognized in our portfolio is 12 months to 15 months. So, the comment was intended to suggest that our demand that we're going to experience in 2023 will be funded – will be fueled by the increases in the 2022 defense budget, and the recent 2023 passage will manifest itself in demand in 2024, intending to suggest we anticipate a strong demand environment for the next two years. No, we really haven't seen any change. We have advantaged land positions in most of our regions, and we tend to not have much demand from new development, or competition is inferior property or locations. And that advantaged position continues today. Thank you. And just a final question. You mentioned earnings growing at a compounded rate of 4% or higher throughout 2026. Do you see limited risk of this changing for the foreseeable future or what could change this outlook, either higher or lower? Well, the exact words I used was roughly 4%. And I can tell you that 12 months ago, 4% or higher was a very comfortable number for us to put in because we had significant cushion in that. Currently, our model suggests 4% or better, but as we start to apply scenario stress and even higher SOFR rates or a more material decline in demand in regional office, that could move a bit. But the key point is the developments, we've already achieved, and the future NOI that we can deliver will generate approximately 4% compound growth in a variety of stress scenarios. Thanks. One moment for our next question please. And it comes from the line of Anthony Paolone with JPMorgan. Please proceed. Thank you. I guess first question is on the data center shells that you just announced the new starts. Can you give us the yields on those? Because I think you said last quarter, you'd have a better indication as to how they've changed. Okay. Got it. And then I don't know, maybe it just struck me, but the time line to get those done out into 2025 seemed a bit more extended. Was there anything there driving that or just reading it wrong? Some of that has to do with expected power delivery. We tend to plan our development schedules to meet expectations of our customer, and they tend to overestimate the time that they want the assets and then ask us to compress. So, it wouldn't surprise me that at all if the delivery dates get moved up pretty significantly, but those delivery dates mirror the request of our customer. Okay. I understand. And then just last one. I think you mentioned there's one other data center shell build-to-suit in the offing for the next year. Just wondering if you can peel back a little bit more of how you're thinking about development leasing this year on what else might be on tap in the pipeline. Well, we put out what we believe is comfortable guidance. Scenarios include some lease-up of additional leasing from 8100 Redstone Gateway, which is 100,000 square-foot building we’ve commenced and is actively developing. New starts at Redstone Gateway from additional build-to-suit or pre-leases, potentially the data center shell I had referred to. In total, we have – with the significant harvesting from our development pipeline, we still have over 700,000 square feet of developments we consider, 50% likely to win or better in two years or less. Excellent. Sorry about that. I guess I was logged in twice. So, I want to take a, kind of bigger picture look for a second when we're thinking about risks. Obviously, there's a lot of debate around debt ceilings in Washington, and maybe I don't want to get into necessarily a discussion around how that could play out? But if we think back to when we've had other debt ceiling debates, in the past, this kind of drove sequestration, if I'm not mistaken, back in the early 2010s. And Steve, we've talked about in the past, and if my memory serves me, I think you've said that, kind of that type of limit on defense spending or pullback on it couldn't happen again in the same way this time. Is my memory correct on that? And kind of what's the risk that we could see some impact to work with more cuts or restrictions on defense spending, should the debt ceiling debate really get heated? Let me clarify the thoughts I've presented in the past. As I view, that kind of a budget-cutting measure would be unlikely, not impossible in the current environment merely because of the elevated technological capacity and aggressive threats of adversaries today as compared to the way we felt back in 2011. That would be illogical for Congress to enact across the board [sequestration] [ph]. Having said that, Congress will do what it will do, and that's just my opinion. One of the points we were trying to point out with the magnitude of the compound increases in defense spending is, the current budget is $100 billion higher than it was 12 months ago in fiscal year 2021. And it's our belief within the capacity that's been created with that increase, our business can succeed for quite some time. Recall the sequestration imposed mandatory cuts across the board and defense spending went down materially. Even if we are in a flat line at this year's level or last year's level, I think there's absolutely needs that will emerge and opportunities that we'll be able to fill. Within the defense budget, the line item that funds rental of lease spaces is called the O&M operations and maintenance budget, and this year's increase in net budget was actually closer to 9%. It increased 8.7%. So, certainly, there's going to be some cutting coming, and it's going to be awfully interesting, but I think we're pretty comfortable with the magnitudes that have accumulated that our demand will continue because of the priority missions that we serve. Really helpful. Appreciate all those thoughts, Steve. And then maybe pivoting over to your comments around the self-funding of development. But just do some quick back of the envelope, it seems like depending on where your yields fall for every $100 million that you deliver, you open up another maybe $40 million to $50 million worth of debt capacity still stay leverage neutral. And then you'd have to solve for that, call it, $50 million to $60 million of equity through your cash flow. The questions then are kind of, one, is that kind of back the envelope roughly correct? And then two, are there certain potential impacts to your retained cash flow that could upend that? For example, if leasing costs continue to escalate across the board, if there are additional cost within the regional office portfolio, where you have to put more capital into some of these buildings. Are there any kind of things on your radar that could upend that cash flow for you and cause you to have to look elsewhere for some of that developments funding? So Tom, when you look at the math, I think your math is roughly accurate. I think the one piece to add into that equation is the ongoing increase in EBITDA of the operating portfolio that helps, sort of that's the leverage metric that we're really managing to, is debt-to-EBITDA. So as we look at the benefit of the EBITDA that comes in from the development projects, which is the math that you articulated, plus the continued increase in EBITDA from the operating portfolio, it's really the balance of those two things that allow us to fund the equity component of the development project on a leverage-neutral basis. With respect to upending that math, surely, there's incremental capital that could be required for the items that you mentioned. But to give you some context, in order for debt-to-EBITDA to increase 1 tick, so 0.1x, that's about $35 million to $40 million in incremental debt, all other things being equal. So, it would need to be a significant increase in the capital requirements to lease up either parts of the portfolio or building capital that we're not anticipating that's not already built into our model. So, we think the plan as it exists right now has demonstrates that we can self-fund the development pipeline after this year, and it has a modest amount of cushion built into that given just how we put that math together. And then one last comment about risk from the regional office portfolio. We have been actively investing capital already in those assets to make them very current and reposition them where we have need for leasing to be leased. So that capital on any kind of repositioning risk, we've already spent it. The incremental capital they'll need is tenant improvements where we have vacancy, and that's built into our model. Got it. That's very, very helpful. And then, kind of last one for me, maybe sticking with that regional office thought and then comments. It looks like there was some recent activity on 100 Light Street. Todd, can you maybe update on the status of that in 2100 L Street as well? Sure. So in the quarter, we did sign a total of 47,000 square feet of leases in our regional office portfolio. 35 of that was at 250 West Pratt. It was a 12-year lease with a law firm, which saw a part of the Pandora sublease. So, two floors of that are now on a long-term lease. And at 100 Light, we signed a 12 – excuse me, 11-year lease for 12,000 square feet. So, we're happy to put some hay in the barn there. Obviously, we've said that, that was going to be a number of singles and doubles to get that building leased up and glad to see the activity. Looking ahead, we foresee about 140,000 square feet or so of the prospects that will be coming to market in the next 90 days in Baltimore. So, we hope to have some additional activity at the building soon. But [deal cycles] [ph], obviously, are very extended. The leasing that we accomplished this year, it was more than nine months from first contact to lease signature from those tenants. So as we've been saying, our deal cycles remain extended. As it relates to 2100 L, we're at about 150,000 square feet of prospects there. We are on the shortlist for over 100,000 square feet of prospects. But to give some context to that, one of those started out with 22 options and has narrowed the shortlist down to 5. So there again, I think our deal cycle time is going to be extended, but we are encouraged by where we sit with some of these prospects. But it's hard to forecast any sort of timing of conclusion on leasing there, but encouraged by where we are today. Thank you. [Operator Instructions] One moment for our next question. It comes from the line of Steve Sakwa with Evercore ISI. Please proceed. Yes, thanks. Tom went through a bunch of my questions. But I just want to circle back, I think, to one that maybe Tony asked about the development leasing, Steve. I mean with the delay in the one data center shell, I guess I would have thought that maybe your goals for 2023 would have been a little more elevated. So, I'm just trying to really gauge, kind of your level of, I guess, conservatism there, just given all the positive commentary that you, kind of laid out about the defense budget, demand, potentially another data center shell. That in and of itself would probably get you to the goal without doing any defense leasing. So, I guess what are we missing here? No, I think you correctly interpreted that our goal is relatively cautious. There could be opportunity to exceed that goal. But the one thing we have experienced, since costs have gone up, decision times take longer. We're projecting over an 11-month period. So, timing is an issue. I can tell you we're bullish on development. Beyond that 700,000 square feet that we characterize as 50% likely to win in two years or less, we've got another $1.7 million in opportunities that we're evaluating, but it's more of a timing risk concern for this year. Okay. And maybe going back to Tom's question on the – some of the, I guess, non-defense leasing. I know, Todd, we've toured the 100 Light Street many times, talked about prospects that have, kind of come and gone. I guess what are the risks that some of the newest prospects find space elsewhere? How much price sensitivity are they? Kind of where else are they looking in both Baltimore, and I guess, down in Washington? Well, let me take a swing in Washington before I let Todd finish. The one good dynamic you can see in Downtown D.C. is that the available inventory in the trophy class has come down, and there's not a lot of choices for larger tenants. And given there were a trophy building, I kind of feel like our opportunity set is tightening, I mean broadening rather than tightening. Todd, you can deal with Baltimore. Thanks, Steve. Well, it's hard to answer the – where everybody is going to look. We've got some prospects that are yet to come to the market. I would just say that the overall vacancy rate in Baltimore is over 20%, and I would anticipate all prospects to cast a wide net and take their time choosing a location. As Steve said earlier, we've invested in 100 Light. We're very happy with the way the building is showing. I expect us to be very competitive, but there's going to be a lot of options for the tenants. Hi Steve, good afternoon. When you look at your two core kind of parcels NBP and Huntsville, I think you're 98% leased. Your development pipeline is 89% leased. And you're pretty confident or at least cautiously optimistic about the growth of the business over the next couple of years. So, can you talk about kind of spec development and whether you would consider that? And two, I guess if you would or wouldn't, is that a function of maybe types of buildings that are needed? Are they just becoming more specialized? Do you think you would benefit from putting more space into these, kind of core locations? And I guess how do you kind of handicap that or think about that over the next couple of years given your overall tone today? Yes. So, at Huntsville, we are completing one building we built on spec, and we – our plan is to constantly be ready to add the next building [inventory]. So, we're advancing work to get [ready] [ph] to build the next building as we start to sign leases for this one. At the NBP, demand this year really was very strong. And drove us to a level, I think, a little quicker than we thought we were going to get there. So, we're actually working on start scenarios for three different buildings to be in a position to move quickly to capture demand. Two of those would be contractor, and we're starting to advance our readiness to do another government building if we see that demand materialize. We're cautious in this environment to put out capital where we don't have demand because we all know how expensive short-term or unfixed debt rates are. So, we will be very prudent, but we also want to be extremely well prepared to seize the opportunities when they come. In terms of the demand for those types of buildings, is that a demand that you see? You kind of mentioned the 600,000 and then the [1.7 million] [ph] behind it. Is that something a demand where you could see potentially more lease signings this year or does that still feel like it's probably a 2024-type event? Well, we expect solid progress at Redstone Gateway, and it would not surprise me at all if we got a commitment that allowed us to start a building at the NBP this year. Thank you for joining our call today. We are in our offices, so please coordinate through Venkat if you would like a follow-up call. Have a great day. Thank you for your participation today in the Corporate Office Properties Trust fourth quarter and full-year 2022 results conference call. This concludes the presentation. You may now disconnect. Good day.

EarningCall_23

Good day, ladies and gentlemen, and welcome to Phillips Edison & Company's Fourth Quarter and Full Year 2022 Earnings Conference Call. Please note that this call is being recorded. I would now like to turn the call over to Ms. Kimberly Green, Head of Investor Relations. Please go ahead, ma'am. Thank you, operator. I'm joined on this call by our Chairman and Chief Executive Officer, Jeff Edison; our President, Devin Murphy; and our Chief Financial Officer, John Caulfield. Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our Investor Relations website. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings, specifically in our most recent Form 10-K and 10-Q. In our discussion today, we will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, which have been posted to our website. Please note that we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials. The PECO team in 2022 delivered another year of strong growth with same-center NOI increasing by 4.5%. We continue to benefit from a number of positive macroeconomic trends that drive neighbor demand and support our growth, including hybrid work, migration to the Sunbelt and population shifts that favor suburban markets. These demand factors are further amplified because limited new supply is being delivered to the market. We accomplished a great deal in 2022 and have a lot to be proud of. At the macroeconomic level, the year presented many challenges with record inflation, rising interest rates and global conflict. However, the sustainability and consistency of our growth is a testament to our differentiated and focused strategy of exclusively owning grocery-anchored neighborhood shopping centers and the strength of our integrated and experienced operating platform. As we assess our business today, we're optimistic about the health of our neighbors and the strength and diversity of our neighbor mix. Our team in 2022 delivered record highs in occupancy of 97.4% and combined leasing spreads of 18.1%, our development activity provides attractive risk-adjusted returns on investment and sustainable and meaningful contributions to our same-center NOI growth. Our acquisitions are performing very well, and our pipeline continues to grow. We closed on an asset in January with more under contract and in negotiation. We observed the market power shifting to the buyer and with our platform, experience and capital, this should position us well to capture additional opportunities. Our centers are located in markets that are growing and have a strong competitive advantage with our grocery anchors. We have grown our cash flows and dividend distributions. We have a great balance sheet, low leverage and flexibility to be both patient and opportunistic. We could not have accomplished these results without the hard work of our PECO associates. I'd like to thank the PECO team for all of their efforts. As we look ahead to 2023, we remain focused on delivering long-term growth. Our gross-anchored neighborhood centers continue to benefit from structural and macroeconomic trends that create strong tailwinds and drive strong labor demand. These trends include population shifts from the urban to suburban markets, the increase in hybrid work the renewed importance of physical locations in last mile delivery, wage growth and low unemployment and low supply and lack of new construction. The resiliency of our neighbors, combined with the aforementioned tailwinds and position PECO well for all economic environments due to the following, our necessity-based neighbor mix, our rightsized format, our well-positioned locations in growing markets our record high occupancy and continued strong labor demand. Our strong credit neighbors and diversified mix, the lack of exposure to distressed retailers. Our balance sheet and our talented and cycle-tested team. When we consider our pricing power created from continued retailer demand at high occupancy, combined with these aforementioned tailwinds and the resilient necessity-based focus of our neighbors. We believe our growth strategy generates more alpha with less beta. While John will provide details of 2023 guidance later, I'd like to spend a few minutes walking you through the components of our long-term growth. We believe our portfolio can deliver organic same-store NOI growth of 3% to 4% on a long-term basis. The components of this growth include continued increases in occupancy, which will contribute 50 to 100 basis points. Rental growth, which will contribute 100 to 125 basis points through new and renewal leasing spreads and contractual rent increases, which will add 75 to 100 basis points and redevelopment and development activity, which will add 75 to 125 basis points. This gets us to our 3% to 4% long-term growth. Beyond the strong internal growth, we remain focused on accretively growing our shopping center portfolio. These investments are core to PECO's long-term external growth strategy, and we continue to be well positioned to capitalize on opportunities as they arise. We are conservatively guiding to $200 million to $300 million in net acquisition this year with the capability and the leverage capacity to acquire more if attractive opportunities materialize. We previously increased our targeted return for new acquisitions to an unlevered IRR of 9% or above. We plan to participate in the market when we can achieve this return objective while exercising the same diligence we've always exercised. We are finding those opportunities today. Therefore, with our combined internal and external growth drivers, we believe PECO can deliver mid-to high single-digit FFO per share growth on a long-term basis. I'd now like to provide a quick update on the proposed Kroger and Albertsons merger from PECO's perspective. We continue to believe that the merger is positive for PECO and for our centers and for the communities that we -- that our centers serve. We have 33 stores with an overlapping brand within 3 miles that could potentially be impacted. These stores have average store sales of $35 million or $620 per square foot. This compares to PECO's average of $6.42 per square foot. These are all productive grocery locations with strong sales and health ratios. These centers are also vital parts of their communities. We believe all 33 locations will remain productive grocery locations regardless of the ultimate outcome of the merger. This merger process will take time to unfold, but we remain positive on the impact it will have on the assets that we own. As Jeff mentioned, the PECO team is encouraged by the continued positive trends that we are seeing in our grocery-anchored portfolio and in the overall operating environment. We realized strong internal growth in 2022, which is reflected in our financial results. Lease portfolio occupancy increased by 30 basis points sequentially from the third quarter and by 110 basis points year-over-year, reaching an all-time high of 97.4%. We still see some occupancy upside in our portfolio. And when that driver of growth is no longer available, we believe that it will be replaced by incremental rent growth. We are seeing that transition today as our rent spreads have increased above historical levels. Throughout 2022, our neighbors demonstrated resiliency and successfully managed many challenges, including inflation, supply chain issues and labor shortages. Despite these challenges, our neighbors continue to invest in their stores, their technology platforms and the overall customer experience. Comparable new and renewal rent spreads for 2022 were strong at 32. 2% and 14.6%, respectively. Excluding anchors, renewal spreads were 17.7% in the fourth quarter. Our leasing pipeline remains strong and shows no signs of slowing. The most active neighbor categories include medical, quick-serve restaurants and health and beauty. We are seeing consistently strong neighbor demand across all geographic regions. We continue to have excellent success retaining our neighbors, while growing rent at attractive rates. Our fourth quarter retention rate was 92%, ahead of the historical average of 87% over the last five years. As Jeff mentioned, this factor is a large contributor to our rent growth over time. Our retention means no downtime and less tenant improvement costs. Our TI spend on renewals over the last five years averaged less than $2 per square foot. We also have been successful at driving higher contractual rent increases. On average, our new and renewal in-line leases executed in the fourth quarter had annual contractual rent bumps of 2.4%, another contributor to our long-term growth. In addition to our strong rental growth trends, we continue to focus on and expand our pipeline of ground-up outparcel development and repositioning projects. In 2022, we stabilized the highest number of these projects that the PECO team has ever delivered in a single year. These projects delivered over 300,000 square feet of space and add incremental NOI of approximately $5 million annually. These projects provide superior risk-adjusted returns and have a meaningful impact on our long-term NOI growth. In 2023, we will invest $50 million to $60 million in ground-up outparcel development and repositioning opportunities with average estimated underwritten cash-on-cash yields between 9% and 11%. We continue to see the many benefits of PECO's grocery anchor portfolio with our healthy mix of national, regional and local retailers. More than 70% of our rents come from neighbors offering necessity-based goods and services, and our top grocers continue to drive strong recurring foot traffic to our centers. We are currently seeing a resilient consumer despite the tougher macroeconomic backdrop. We believe our incentives are less impacted by an economic downturn because more than 70% of our rents come from necessity-based goods and services. Our trade areas offer favorable demographics with median household incomes of $77,000, which is approximately 9% higher than the U.S. media. The demographic strength of our trade areas is reinforced by the continued demand from retailers for space at our centers. In a recession, consumers will continue to frequent the grocery store, the barber, the local quick-serve restaurant and other necessity retailers. Our single non-grocery neighbor is T.J. Mac at 1.4% of ABR. And all other non-grocery neighbors are less than 1% of ABR. PECO had no exposure to luxury retailers, office or theaters and very limited exposure to distressed retailers. The top 10 neighbors currently on our watch list represent just 2% of our ABR. As a reminder, our combined exposure to Bed Bath & Beyond and Party City is minimal. These two retailers represent 10 and 20 basis points of ABR, respectively. 26% of our ABR is derived from local neighbors. 64% of our local neighbors rents come from retailers offering necessity-based goods and services. Our local neighbors are successful businesses run by hard-working entrepreneurs. The acute credit and are less susceptible to corporate bankruptcy caused by weaker performing locations. A local neighbor typically receives less capital at the beginning of their lease, accepts more Peco-friendly lease terms, high retention rates and achieved renewal spreads similar to national neighbors. Importantly, they differentiate the merchandise mix that our centers offer our customers. Our local neighbors are resilient and have been in our centers for 8.8 years on average. According to CoStar's recent global Predictions report, grocery stores and essential retail are among the most resilient retailers during recessions. During the pandemic, grocery stores and the foot traffic to these centers recovered at a faster rate than that of other retail locations. Since the pandemic, the vacancy spread between grocery-anchored and non-grocery-anchored centers has widened. Grocery-anchored centers are well positioned to maintain these lower vacancies, which we are experiencing in our portfolio. We expect these favorable trends to continue to benefit PECO's well-located, grocery-anchored neighborhood centers in 2023 and beyond. We have added slides to our investor presentation on these recent CoStar insights. In summary, the PECO team remains optimistic about the current strong operating environment and the continued positive momentum we are experiencing across leasing, redevelopment and development. In addition, our healthy neighbor mix and grocery-anchored strategy positions PECO well for continued steady growth. Thank you, Devin, and good morning, and good afternoon, everyone. I'll start by addressing fourth quarter results, provide an update on the balance sheet and then walk through some highlights of our initial 2023 guidance. Fourth quarter 2022 NAREIT FFO increased 43% to $71 million or $0.54 per diluted share. This result benefited from an increase in rental income and reduced general and administrative expenses. Fourth quarter core FFO increased 22% to $74 million or $0.56 per diluted share driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads as well as lower property operating costs and general and administrative expenses. Our fourth quarter 2022 same-center NOI increased to $91 million, up 2.8% from a year ago. This improvement was primarily driven by higher occupancy and an increase in average base rent per square foot, driven by our strong renewal and new leasing spreads, which was partially offset by lower collectibility reserve reversals in the current period when compared to 2021. During the quarter, we acquired two grocery-anchored shopping centers and 1 outparcel for $52 million, and we sold 1 shopping center in 1 outparcel for $25 million. Our net acquisitions for the year was $226.5 million. Subsequent to quarter end, we acquired one additional grocery-anchored shopping center for $27 million. From a balance sheet perspective, we ended the year with over $700 million of borrowing capacity available on our $800 million credit facility, and we have no significant debt maturity until the second quarter of 2024. Between the free cash flow generated by our portfolio and the significant capacity available on our revolver, we are confident in our ability to fund our growth plans, which is an important place to be given the current capital market environment. Our leverage ratio continues to be strong as a result of our strong earnings growth as well as our prudent balance sheet management with our net debt to adjusted EBITDAR of 5.3 times as of December 31, 2022, compared to 5.6 times at December 31, 2021. At year-end 2022, our debt had a weighted average interest rate of 3.6% and a weighted average maturity of 4.4 years. Approximately 85% of our debt was fixed rate. We continue to monitor the debt capital markets for the right opportunity to extend our maturity profile. Our variable rate debt allows us to maintain flexibility such that we can access the bond market or bank market without prepayment penalty and our low leverage reduces the impact of rate volatility to our earnings. We anticipate addressing our 2024 maturities along with long-term funding for our expected 2023 acquisition volume later this year. We believe patience is prudent as we continue to gauge the attractiveness of the market. Turning to guidance. Please be sure to review the incremental detail added to our press release, which we have also added to our supplemental. Starting with our same-center NOI growth, we are guiding to a range of 3% to 4% growth from our portfolio in 2023. This growth is aided by our leasing activity in 2022 with increased occupancy and favorable rent spreads in our development and redevelopment activity. Included in this range is the negative impact of normalizing our anticipated uncollectible reserves to historical levels of 60 to 80 basis points of revenue. Our initial core FFO per share guidance range is $2.28 to $2.34. Our internal growth is aided by an incremental lift from our 2022 and anticipated 2023 acquisitions, partially offset by incremental interest costs. As we look to 2023, we anticipate approximately $86 million of interest expense at the midpoint. Our acquisition pipeline is healthy, for 2023, we are guiding to acquire between $200 million and $300 million of assets net of disposition activity to further optimize our internal growth. We plan to continue to selectively recycle assets with proceeds being deployed into high-quality, higher-growth assets. As Jeff mentioned, we believe we are well positioned for long-term growth and we are delivering strong internal and external growth. Importantly, we have the flexibility to be patient and pursue accretive opportunities as they arise that will provide meaningful NOI contribution in 2023, 2024 and beyond. And maybe most importantly, as we consider the economic uncertainties, we continue to have one of the strongest balance sheets in the sector allowing us the ability to remain on offense and pivot quickly in response to changing market conditions. We believe our strategy has historically and will continue to prospectively generate excellent risk-adjusted returns. Our results in 2022 are no exception. Sure. Thanks for the question, Craig. So we still believe that we have room to grow our occupancy. Currently, we're at 99% plus on the anchor. So we're down to a few spaces there. So I think that part holds still, but at 93.8% on the in-line, we still believe we have about 150 basis points that we can grow that. And I would say that's probably over the next 12 to 18 months. Great. And then just on the adjustment for collectibility of 3.5 to 4.5 versus 2. When I look at your portfolio, I see very little exposure to bankruptcies and store closings, what's driving you to this higher number? Yes, Jeff, I'll take that one again. So really, what you see in '22 being less than that was the final amount of reversals from previous years coming through. As we look to it, we've said that this portfolio has delivered 60 to 80 basis points of uncollectibles each year. And so that's really the guidelines for that. I mean we believe it's going to be consistent from one year to the next, but that's -- on this portfolio, that's what our experience has been. This is Ravi Vaidya on the line for Haendel St. Juste. Hope you guys are doing well. Can you discuss your decision to buy an asset with relatively lower occupancy versus the rest of your portfolio? What sort of upside do you see there? And is this going to be more of a targeted strategy going forward with regard to external growth? Ravi, thanks for the call and appreciate you being on today. So we're -- One of the things we did over the last 30 days, really 60 or 90 days, look at our cost of capital. And as that's going up, we've actually adjusted our unlevered IRR from 8% of the IPO to 9% today. And one of the things that we're looking for are opportunities where we can have growth variety of different ways in the properties that we're buying. And where we see lease-up occupancy is one of those opportunities and select locations on select properties, but we're looking at ways that we can find properties with more growth potential than real stable flat, kind of returns over time. So yes, I think you could expect us to be more active in that market, but as you know, it's -- the market's got some pretty big bid ask spread today. And so we do anticipate that volume will be a little slower pick the first half of the year. Got it. Thank you. That's helpful. Just one more here. With regards to leasing, it's been a very -- leasing demand is very strong, and it's been very active, but how sustainable do you think the current leasing spreads are, especially with spreads over 30% like how healthy are the retailers are from an occupancy cost ratio standpoint to be able to sustain these continued higher the leasing spreads. Sure. Ravi, thanks for the question. Again, we're not seeing anything that causes us to believe that those spreads are not achievable, at least in the near to midterm. And I know that number at 30% when you see it seems shocking, but you have to realize that these retailers are entering into leases between five and six years and the CAGR we're getting is less than 3%. And the way we think about it is when we look at our overall ABR, our overall in-line ABR increased approximately 5% year-over-year. And when you think about how retail sales are growing, particularly in the categories that we have large exposure to, so food, health, et cetera, those retail sales have been growing at mid-single digits to low double digits. And so the fact that our average ABR is growing at mid-single digits makes us comfortable that we can continue to sustain these kinds of spreads. And at the end of the day, the ultimate tail of the tape is the fact that we don't see any slowdown in the demand coming from the retailers to lease space in our centers. In addition to that, we also -- and our retention rates are staying really strong. And so that would be an indicator that rents are moving. And they -- if anything, they're higher than they've been. So with what Devin said in that, we're -- we do feel that there is -- this is a long-term sustainable model to be able to increase rents in that 4% to 6% range that overall in terms of rental, the retailers will stay healthy and can absorb that kind of cost increase. Hi, good afternoon everyone. Just a quick one on interest rates. The swaps that are coming due September '23. Just kind of curious what the thoughts are on that and how that's built into your guidance? Sure. Thanks, Tayo. So as we look at it, we have positioned ourselves to be patient and with flexibility. So we do have a maturity of swapped in September. We also are looking at the debt maturities that we have in 2024. And as I mentioned in the prepared remarks, we anticipate addressing those '24 maturities later this year with incremental long-term funding, and we would anticipate that we would sell for it at that time. So we are looking at extending but at this time, we don't have -- we do have assumptions in there that we're refinancing the debt related to '24 as well as taking care of that at that time. And that could be in the bank market, it could be in the bone market. It's really going to be dependent upon our cost of capital and maintaining attractive cost of capital as we can. That's helpful. The second question, I mean, you started the season since inflation coming down. I mean, I think there's one a view out here that after a while, maybe like food prices, could actually go into a discretionary type scenario, which typically hasn't been -- typically is on a very good environment for grocers. Just think -- are you hearing some of that from your grocery neighbors at this point? And how do they kind of prepare for such a scenario be those kind of current in the next 9 to 12 months? Yes. So Tayo, thanks for the question. We are not hearing that from our grocers that they are still sort of ringing the bell on inflation, not on a deflationary environment. And they still are in having very positive operating results where they're actually a fact able to pass those costs on to their customers. So as long as that continues, that will be positive. Certainly, I think you're saying the deflationary environment is not positive. And we would agree. I mean, the grocers, they like -- they love that 2% to 3% inflation. It's certainly too high right now from their perspective, and they don't see from our conversations that coming down in the short term. Hi, good morning. Thanks for the time. Just hoping you could provide a little perspective on the acquisition market and pricing and where the bid-ask spreads are today. I'm just curious if you could give us the yields for the fourth and first quarter acquisitions and kind of what is baked through the assumptions for '23 guidance? Let me give you -- I'll give you some general. I don't think we're now putting out there those yet in terms of last year. But John, if we are, you can step in. But what -- what's happening in the market is what happens a lot of times when there's a change in the cost of capital. And that is -- it takes time for the buyers and sellers to reduce that spread. And so volume is down clearly in the second half of last year, and we're starting into this year. Overall volume is down. And so I would -- and we would anticipate that continuing until that sort of bid ask starts to narrow a bit. We are finding select opportunities that we are very excited about, and we think these were -- our positions where we've got a seller with that is motivated to sell and is moving to what we think is the newer market pricing quicker than maybe the overall market is. And so we are going to actively look for those opportunities and take advantage of them when they come. So, I would say it's -- our feeling has been that it's about 100 basis points in terms of that of initial yield, and it's probably at least 100 plus on the unlevered IRR. So that's a pretty big move. And it is going to take some time, I think, to fully realize that. And there's probably, potentially depending on what happens with rates, the ability for that to widen even more. So we will see, but we're continuing to look at everything that's coming on the market. And hopefully, we can find some good opportunities. We feel like we found a couple so far and we're going to continue to look at those and take advantage of that if we can find them. So Jeff, I'll jump in there. So for the full year, our weighted average cap rate was 6.1, but to the points that Jeff is making, there is variability in there because we focus on the IRR, there can be a delta in the going-in cap rate based on the amount of growth that we have. So if you were to look at our third quarter acquisitions compared to our fourth quarter acquisitions, the fourth quarter was closer to our total year weighted average cap rate, but I would -- the IRRs make up for the growth in that asset relative to the third quarter. And I think as we look to '23, if you're -- if '22 is at 6.1, I can see that we're assuming some -- we'll have a slightly higher cap rate on that assumption. So let's say, anywhere from 15 to 30 basis points, but it could be wider than that, again, dependent upon the amount of growth. And the key element for us is that 9% IRR and exceeding that. And then just a second follow-up question on retention versus pushing the spreads for the small shop tenants. I know the retention is very strong for anchors. But just curious on your willingness to maybe have a little short-term vacancy to drive rates at this point? It seems like you're pretty darn full. So just curious on how strategically you're thinking about that interplay between rate and retention. It's a great question. It's one that there's a lot more R2 than there is science because obviously, the numbers can tell you how much TI you're putting in and what the increase in rent is compared to the lower TI for retention. And that certainly goes into our analysis, but a lot of ours is also making sure we have the right merchant in the center that matches that store because if they can continue to generate and increase their sales, they can, over time, pay us a lot more rent. And so finding the right retailer for us is a critical part of that sort of decision process as we look at filling out our small store space with the right merchandising mix for each market that we go into. Jeff, the only thing I would add to that, Juan, is that I think our retention rate in the fourth quarter was indicative of our willingness to push rate and potentially be less focused on retention. You saw our retention rate in Q4 at 67%, which is lower than the full year average of 77.5% because the decision we made in that fourth quarter was we wanted to push rate and we wanted to optimize merchandise mix. So at the end of the day, we're not overly weighting retention, what we're waiting is our ability to push rates and get the right merchandise mix into the centers. And I think you see that with what our retention rate for in-line did in the fourth quarter. Thanks. John, first question, I just wanted to go back to the balance sheet. So the swap expires in September and guidance assumes throughout the balance of this year, '23, the cost on the $255 million increases by about 325 basis points for the balance of the year and perhaps in early '24. Is that right? And it looks like the '24 maturities are September and October, when would you expect to refinance those maturities. Sure. Todd, I would say that, yes, the only thing with your 325 basis point increases that if you're comparing where it is to where kind of spot SOFR is, but if you were to actually turn that out over a longer duration, that rate does come down, but I think as a going in, yes, you would see that in September. Look, we continue to assess and repay different opportunities whether it be in the bank of the bond market. You're correct, the maturity in '24, the $100 million is in May, and then the remaining 375 is basically September 30 of 2024. And we'd be looking to extend those maturities to refinance those maturities in the middle part of this year could be Q2, it could be any time really, but we are watching and once we actively push that out, I would say, no later than -- I'd prefer it to be earlier, but we have the ability to be patient in the line and the relationships to give us that flexibility and timely. But if I were to model, I would say, the middle to the end of this year would be the right way to think about it. Okay. And then is there any additional capital raising activity embedded in guidance for 2023? And how should we think about funding acquisition, net investment activity during the year? So our guidance -- yes. So our guidance does not have included any equity raise. I think that is something that as we evaluate our cost of capital, it is something that we are balancing both on the equity side and the debt side. And so when we look at our ability to fund our acquisition plans for the year, we feel very comfortable and confident that we can do that. And then in terms of the debt capacity, I think, again, we have great relationships with our lenders, but also we look at the unsecured market. We looked at the private placement market. We look to the bank market. We really are focused on cost of capital. And as we've discussed internally, it may need to be -- it could be a mix of anything. It could be a mix of all. So -- but specifically, we don't have that. But I also think that when you give the liquidity position in that, we're at 5.3 times on the debt to EBITDA and you look at the growth that we have planned, we feel very good that we can manage our funding activities and keep to the guidance range that we've stated. Todd, it's Devin. Just adding on to what John just said, given the amount of free cash flow after dividend that we generate, we can acquire $250 million a year in acquisitions without ever having to go back to the equity market. So given the fact that $250 million is the midpoint of our range for the year, we have not assumed any additional equity given the amount of free cash that the business generates. Okay. Yes, that's helpful then. All right. And then I just had one follow-up. I guess, going back to the bad debt expense commentary. I hear the comments about the forecast for '23, the assumption there and guidance being a more historical average of 60 to 80 basis points, but it did increase a little bit in the fourth quarter. The run rate there is above the full year '23 forecast. Can you just touch on that on collectible revenue in the fourth quarter? Sort of what impacted that what you saw in the portfolio. Yes. Thanks, Jeff. So I would say on that, the interesting part of this is it has been such a focal point post COVID because there's variability. And I would say that actually, fundamentally, there isn't anything unusual in the fourth quarter. It does tick a little higher. But I would also say that historically, our fourth quarter does typically take a little higher, but then we also have experience in the first quarter where it can actually be better than expected. So when we think about the 60 to 80, unfortunately, it's a challenge to do it on a quarter-by-quarter, and it ends up kind of smoothing out because right now, we're focused on reversals from one period to the next. But in the fourth quarter, I had reversals from Q2 and Q1 which is why, ultimately, we do look at on a smoothed-out basis, but I don't want to -- we do look at it on a granular neighbor-by-neighbor level and including the type of AR that they have and the like. And so it was higher, but actually, there was nothing fundamentally that actually drove us to do that other than a slight seasonality. Okay. So not seeing anything in the fourth quarter regarding the sort of tenant health maybe from some of your local neighbors or anything like that, that you can point to just a little seasonality in the fourth quarter, and you'd expect that to sort of just smooth out a little bit during the course of the year. I do. And in fact, in the first quarter, both at an AR level and even from a health level, the first quarter is actually better than we would have expected otherwise. So we are not seeing any signs that our neighbors are having difficulties. Thanks for taking my question, guys. It looks pretty good. Obviously, your portfolio has proven to be very resilient. Something, Jeff, you've been harping on about since you went public here. Encouraging to see that actually show through into the numbers as well. Curious about your small shop. You've got pretty strong leasing spreads, 17.7 for your average spreads for your small shop. Is it correct to assume that the majority of your sign that open pipeline of around 100 basis points is in that bucket in the small shop, which gives you the confidence in terms of your same-store NOI growth for '23. The answer is yes. That is how we're looking at our backlog today, and we feel comfortable in our guidance based upon that. But as you know, Floris, we've been talking about this for a long time. There continue to be really good pricing power for us in the -- on the leasing side. And a point that Devin made earlier, some of these numbers strike you as big numbers like 17% or 35%. But when you figure that's coming over a long period of time and over a piece of our portfolio, just basically getting them to market. It's not -- these are very sustainable numbers in our view. And so we're -- we do feel like that as long as we stay in this kind of environment where the demand is very -- is strong for our space that we should be able to see -- continue to see these kind of returns. I don't know, Dev, if you have any additions on that. Maybe one follow-up here on maybe the composition of your small shop, how that is changing or how that has changed over the last couple of years. I mean, we always -- I guess, the view on some of your local neighbors is the barber, the nail salon, et cetera. But are we seeing more coffee shops? Are we seeing -- how is the composition of your small shop change? And how do you expect it to change over the next couple of years? Yes. Floris, I mean, where we're seeing growth as a percentage of demand, it's primarily in a couple of categories. One of them is medical retail or what we call Medtail, and this is across a number of different verticals. So urgent care, primary care, physical therapy, et cetera. And the depth of demand and the depth of the tenant that are in that category is meaningful. And we've seen dramatic growth in the demand from those types of retailers. The other is what we characterize as health and wellness. And these are uses like a med spa, like a dry bar would be an example of a tenant in that regard, massage, stretch, which is a retailer means stretch lab and then fitness, club Pilates, Pure Bar, Orange Theory, et cetera. And then lastly, there continues to be very strong demand from quick service restaurant concepts. And those are names that you're very familiar with like Chick-fil-A, Shake Shack, Buffalo Wild Wings, but then emerging concepts like Dave's Hot Chicken first watch, et cetera. And the depth of demand coming from these various verticals is very strong, and that's where we're seeing the growth. Hi, good morning. Is it fair to say that the midpoint of your guidance assumes your portfolio really navigates this year without any sort of softness related to the macro headwinds that we are seeing? Because in a way, I find interesting that your assumptions, I think, based on what I have heard are really largely in line with an average year, even though this year may not be really average from a macroeconomic perspective. That is a great question. I mean, the reason we give a range is so that we can take where we are today and look at it and say, okay, well, this if things get worse, there's some downside in the range and there's -- and if they go great, then there's some upside in the range. And I think that if you look at the midpoint of our range, our assumption, and it's an informed assumption, Paulina, because we have a lot of what's going to happen this year is already in the leasing and the management and the cost and the contracts. So we have a pretty good vision of this year. So it does assume that we don't have a dramatic change from the way it is today. But it would be hard for us in the environment we are right now to see a -- to go to a really negative scenario. Now if you get to '24, that's a different story because there could be more in a '24 kind of time frame. But in a ‘23-time frame, we feel pretty good about these assumptions. I don't know if Dev or John, you guys have any other things to say here. Yes. I was just going to add to that, Paulina. I mean, Paulina, as we look at '23, I mean, the reason that we are giving the guidance we're giving and your perspective on it, as we look at '23, 98% of '23 is baked, if we assume historical renewal rates. So the factor that -- we are thinking about is renewal rates. And given what we're seeing and the continued strength of demand, we're very comfortable making the assumptions that we're making, given how -- what a high percentage of '23 is already in place. And that's the reason why we're confident that we can hit these metrics. And one additional piece that I would add that gives us confidence is that when you look at the diversification of our portfolio, both in terms of geography and we do not have exposure to those large big box retailers that are experiencing that disruption and so that gives us confidence because we have a granularity and just broad diversity of neighbor type and neighbor brand that gives us comfort so that it's more consistent. Thank you. Very good color. And then I have another question regarding your redevelopment activity impact. So you talked about the contribution in the long term. I think you said 75 to 100 and something of positive contribution. How should we think about the cadence of that contribution? Is it -- because I would assume really that could trend down over time after you saw the low handing fruit opportunities that you have in your portfolio? And because I would assume part of this is bringing your center's 20 standard and doing some pad developments, and there seems to be a limit to that. So if you could provide more color around how you're thinking about that contribution for next year, for this year, and over time, it would be great. Well, I'll take a crack at that and Dev can jump in. I mean the way I think about it, Paulina, is that these are opportunities that we create at the center basis. So there are places where we can continue to find these opportunities to buy adjacent land, to develop parking lots in partnership with some of the grocers to be able to create some more density in specific locations. And but these are small deals. And therefore, they happen in a very bite-sized basis. So they're -- if you look at the -- our plan of $50 million to $60 million a year of this product, Again, most of this -- I mean there's nothing that we're going to get done this year that's going to create revenue if it's not already in the book. So we are looking out on a longer-term basis on this, but I will tell you, we continue to push and find these opportunities. And I will give also credit to our acquisition program because in the acquisition program, we're oftentimes buying into opportunities where we can find additional value through specific ground-up development. So that's how we're looking at it. But we believe it's a very sustainable business, and we wish we could do more of it, but it takes a lot of time and it takes a lot -- it happens in small increments, which we love from a risk standpoint, but from a -- it'd be a lot easier if we were doing it on one or two big developments, which is not what we're doing. So Dev, did you have any additions to that? Yes. The only thing that I would add, Paulina, is what we are articulating is that 75 to 125 basis points of our same-store growth will come from this activity. And you're right, we are currently harvesting the low-hanging fruit in the portfolio. But I think the thing you need to consider is: one, this is a 280 asset portfolio and the projects that we've delivered in the last year represent a very small percentage of that portfolio, number one; and then number two, we are growing the portfolio over time. And we're finding, to the point Jeff just made these opportunities. And then we're aggressively looking to acquire contiguous land where we can successfully develop and redevelop. So we believe that this $50 million to $60 million number is the number that we're comfortable with in the medium term as we continue to look at our existing portfolio, and we continue to add opportunities to the portfolio. Just a couple quick ones. Just looking through the occupancy, and apologies if you hit on this already, but I see the economic occupancy is down 20 basis points quarter-over-quarter for the in-line. I'm just curious what sort of drove that? What happened there? I do. I was going to say, actually, I think, Devin has some commentary on that. And I think it was -- what we were talking about is intentional choices around merchandising and instances now where because the leasing demand is so strong that we actually choose to vacate the neighbor and put in a new neighbor. So Devin, did you have anything you wanted to add to that? Great. And then my second question is a little bit of a sort of a competition and a technology question sort of mixed in. So I was sort of looking at the foot traffic data that you put in the deck, which is really helpful. I mean, clearly, the centers are 2% to 10% above pre-COVID levels. That's really good. when you guys are thinking about sort of sourcing acquisitions and so forth, being a little bit into the secret sauce, do you use some of that foot traffic data, number one? And number two, does the competition whoever that may be, do they use it as well? I'm just trying to figure out what the secret sauce and the alpha to sourcing some of these deals. Yes. It's the realities are, it's all of the above. It is the data and -- as you know, we do use our own proprietary algorithm to actually evaluate every property that we look at, both on the acquisition and disposition side and foot traffic is a big part of it. There the -- for us, I think the special sauce is that we've identified 5,800 centers we want to own. And when they come on the market, we know that it is a center at the right price that we would be interested in. And we know that the trade area will not only support the grocer, but support the small stores that are around it. And so we have a very targeted -- I mean, although it's a very big market, it's very targeted. And we have a very specific niche in the market that we are attracted to and that we want to buy. So that -- I mean to us, that is the secret sauce is the ability to look at those centers and be able to find the ones that will be -- that we believe will be successful and then to bring them into the portfolio. So the only other thing I would add to that is when you've been doing the sort of continuous learning we have over the last 30 years on this business, we set up our machine to handle this kind of property where you have a large degree of small store space, you have a very strong, but a very defined 3-mile market. That's what I think is, at the end of the day, really, the special sauce is that we have a very specific market and we've built a team that knows how to maximize the value of the properties in those very specific markets. Thank you. Ladies and gentlemen, this does conclude our question-and-answer session. I would like to turn the call back over to the Phillips Edison team. Thank you, Bo. Before some closing comments from Jeff, I would like to quickly mention that Phillips Edison's team plans to attend the Wells Fargo Real Estate Securities Conference on February 22, the Wolfe Research Virtual Real Estate Conference on March 2 and Citi's Global Property CEO Conference, March 6th to the 8th. The PECO team looks forward to seeing you at an upcoming investor conference. Also in May, we will host our next PECO Grow webcast for financial advisers and retail investors. Thanks, Kim. Our results continue to highlight the strength of PECO's focused and differentiated strategy of exclusively owning and operating small format, well-located neighborhood centers anchored by the number 1 or number 2 grocer in the market. With high recurring foot traffic that drives neighbor demand and results in superior financial and operating performance. PECO has over 30 years of experience in the grocery anchored shopping center industry and an informed perspective of what drives quality and success at the property level. The way we think about quality, we call SOAR, which includes spreads, occupancy, advantages in the market and retention. SOAR provides important and sustainable measures of quality in PICO's grocer-anchored centers. We continue to benefit from a number of positive macroeconomic trends that drive neighbor demand and support our growth plans. Our experienced and cycle-tested team integrated operating platform and grocer-anchored strategy place PECO in a great position. Our fortress balance sheet and liquidity will allow us to take advantage of opportunities as they arise. We remain committed to delivering long-term growth and value for our shareholders. On behalf of the management team, I'd like to thank our shareholders, our associates and importantly, our neighbors for their continued support. Thank you for your time today. Everyone, has a great weekend. Thank you, Mr. Edison. Again, ladies and gentlemen, that will conclude the Phillips Edison Company's Fourth Quarter and Full Year Earnings Conference call. But again, I'd like to thank you all so much for joining us and wish you all a great day. Goodbye.

EarningCall_24

Good day and welcome to the Bon Natural Life Fiscal Year 2022 Limited Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. Thank you, operator. Thank you all for joining us for Bon's fiscal year 2022 fiscal results conference call. Bon has issued a press release announcing the fiscal year 2022 financial results earlier this morning. A copy the release and the financial reports can be found on sec.gov. Please note that this call is being recorded live and it will be available for replay. I ask that you please take a moment to review our forward-looking statements. During the call, we will be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that may cause results that are materially from our forward-looking statements. Please refer to our cautionary statement and risk factors stated in today's press release. Joining me today on the call are the Chairman and CEO of the Company, Mr. Richard Hu; CFO, Mr. Zhenchao Li; COO, Ms. Yingchun Xue; and CMO, Ms. Wenjuan Chen. I will now turn the call over to our Chairman and CEO, Mr. Hu, who will be speaking in Chinese and I will translate his opening remarks into English. Mr. Hu, please go ahead. Thank you everyone, for joining us today. I will begin today's call by providing an overview of our business performance during the fiscal year 2022. Li will then provide a detailed overview of our financial year 2022 financials highlighting the financial performance of each product category. Now turn to slides, I'd like to briefly introduce our company for those who are new to our story. Bon Natural Life is a bio-ingredient ingredients solution provider in the natural health and personal care industry we source raw materials from farms then process and break down the natural plants into natural chemicals that can be used commercially for their abovementioned applications. We have three product categories, fragrance compounds, health supplements and bioactive food ingredients. Fragrance compounds are used in fragrances that go into consumer fragrance, oral care, detergents and etcetera Health supplements are powdery drinks, prebiotics probiotics and etcetera. Bio-active food ingredients are used in food preservatives and health supplements as well. Our customer include well-known names in Asia including Tong Ren Tang, Liangmianzhen, Jing Brand and Angel Yeast. Our clients also includes some of the biggest names in U.S. and Europe, such as International Flavors & Fragrances, Mars, Symrise, Fridal and ACS International. Now turning to slide 7, I would like to briefly discuss our manufacturing facilities that’s coming in that plant. We currently have two facilities in Xi'an, China, both are located within 90 minutes’ drive from the company headquarter. Regarding our third production facility, Yumen Plant, the building structure of the first phase facility has been completed as scheduled. The first phase construction work is estimated to be completed in May this year. For the first phase the Yumen Plant will increase the production capability of the fragrance compounds and bio-active food ingredients to meet the existing market and customer demand. For the second phase of expansion, the production will be used for the company’s new proprietary products including natural pre audit and functional personal care products. The new construction is expected to increase our production capability of fragrance compound and by adding food ingredients by 200% representing a 130% annualized growth potential in revenue. In this light, I would like to introduce the development products of our proprietary product. Thanks to the tremendous and decade-long efforts of our R&D team, we are excited and proud to be able to add new and innovative health product to our nutraceutical line for our legacy compound business. We have received the initial purchase order for our first female personal care product, FeatherPure. It is an all-natural product with no antibiotics, fragrance or harmful chemical additives without harmful side effects. The product can regulate microbial balance of female reproductive system and will provide anti-bacterial and anti-inflammatory function. We expect FeatherPure to bring approximately $3 million in revenue in the next two years. Secondly, we would like to introduce our new broccoli based probiotic powdery drink as our first proprietary products of the cruciferous vegetable based health supplement series. It will provide an additional growth driver for us. According to the research, about 56% of the Chinese population are infected by H. pylori, a bacteria that can cause digestive disease. Our new probiotic powdery drink could potentially inhibit the proliferation of H. pylori bacteria and regulate the microbial balance of digestive system. In addition to the powdery drink, we are also expecting to develop other consumer products in our cruciferous vegetable based series. We plan to introduce immune system booster in soft gel capsules, digestive health booster in soft gel capsules, weight loss management products and sleep aid products for mid-age and elderly. We look forward to bringing our products to the market and we are optimistic about the opportunity and revenue potential of our proprietary consumer products. In slide 9, I will provide an overview of our growth strategies for the next six months to one year. First, we are expecting to put more effort in product line expansion. In the following year, the company will introduce two to three new raw material category to expand our sales in-house market and gain more competitive advantages. In addition to that, the company will continue to focus on the regulation technology of human microorganisms and develop new products which are beneficial for digestive and immune health. At present, we have tested and will launch some products, including products helping gastroenteritis, sleeping and memory issue, liver health and immune health. Next, in terms of capital markets and global operation, the company is expected to carry out two to three mergers and acquisitions in the following year. And these acquisitions will improve our capabilities in bio manufacturing technology and sales networking expansion. And the company will continue to look for opportunity to expand our business operations and local raw material market on a global level, especially in United States, Japan, Europe and Southeast Asia with a new COVID [Ph] situation. The company's strategy is to establish localized business to rapidly expand the raw material business market. Meanwhile, the company will also actively engage in Global Health Solutions, especially in the U.S. and China. Thank you Mr. Hu. I’m [Indiscernible] and I will review the 2022 earnings financials review and our CFO Mr. Li, will be available for the Q&A session if you have any questions regarding the financials. Before I reveal the numbers, let me remind you that all figures discussed are for this reporting period, the year ended September 30, 2022 unless I state otherwise. Additionally, any year-over-year comparison is to the September 30 of 2021. So let's go over our 2022 year end financials. I'll begin with an overview of our consolidated results on slide 11. In the fiscal year of 2022 Bon generated approximately $29.9 million in revenue at a 17.3% increase over last year. These increases were primarily driven by the increase in average selling price of all three product categories, as well as increase in sales volume of bioactive food ingredients. The selling price of fragrance compounds, powder drinks and bioactive food ingredients increased by 27.5% 7% [ph] and 17.4% as we raised our selling price in response to the rising raw material costs and market change as affected by the COVID-19 and the shortage of the principal raw material due to abnormal weather. Although the selling price was raised, the sales volume of bioactive food ingredients and health supplemental powder drinks increased by 27.3% and 1% for the fiscal year of 2022. The sales volume of bioactive food ingredients increased from 121,000 kilograms to about 154,000 kilograms due to strong customer demand and our sales efforts to promote sales of milk thistle extract, with benefit to protect liver and lower blood sugar. In addition, the sales volume of fragrance compounds decreased by 15.1% mainly due to the shortage of raw material, which suffered a normal wet weather in the second half of 2021, along with disruption of logistics caused by COVID-19. At the same time, gross profit for the fiscal year of 2022 was approximately $9.4 million, increased by 32.5% which is mainly driven by strong category growth from house supplemental powder drink and bioactive food ingredients. Both sales volume and average selling price are moving in the right direction, partially offset by the supply chain impact of the contribution from fragrance compound. Government subsidies received in the form of a grant and recognized as other operating income totaled about $1.3 million and $450,000 in the fiscal year of 2022 and 2021, respectively. This is an example of continuing support from government to high tech companies like Bon Natural Life. Net income in fiscal year of 2022 increased from $4.6 million to about $6.2 million, increased by 35.4%. Diluted earnings per share was $0.74 compared to the $0.68 for the same period in 2021. In this slide, I will dive deeper into the financial performance of each product category. Beginning with fragrance compounds, revenue generated from fragrance compounds increased by 7.6% from $12.7 million to about $13.7 million. As I mentioned previously, the revenue growth of fragrance compounds were primarily driven by the average order size and the average selling price of our product. Although there's a rise in the raw material costs due to supply chain and pandemic challenges, with our advanced technology and our ability to secure such supply, we are able to increase our average selling price and maintain our profitability in fragrance compounds. Next, our health supplements. Specifically Powder drink segment increased by 7.4% and $6.7 million to about $7.1 million. The increase from health supplements was mainly due to volume growth and higher average selling price. Revenue from bioactive ingredients increased 38.5% compared to the same period of 2021 from $6.1 million to about $9.1 million. As I mentioned before, the increase in revenues from bioactive ingredients was primarily due to volume growth and higher average selling price. Overall, the increase in total sales revenue from unit price increases in all three segments as well as volume increase in bioactive ingredients and house supplemental product drinks offset the negative impact of supply chain shortage in fragrance compound that we are pleased with the overall financial performance of our product categories. Now turning to the slide 13. I would like to discuss the regional breakdown of our sales and the dynamic that influenced our results. Despite the global supply chain challenges in 2022, revenue generated from domestic China was $28.8 million, achieving a 21.3% increase in sales, which represents approximately 96.1% of our total revenue for the fiscal year of 2022. Overseas sales was approximately $1.2 million representing about 3.9% of the total revenue. Due to COVID-19, global logistics have been disrupted. So we shifted our sales strategy by directing more marketing efforts to promote our products to large domestic enterprise customers rather than export sales to overseas customers. We believe that with the commissioning of Yumen Plant, we will be able to accelerate the revenue growth in both domestic and international sectors to meet the increasing demand from our customers. Next, in slide 14, I will go over to the key subsequent events after fiscal year of 2022. On September 2022 the company had announced the delay of the commencement of Yumen Plant to May 2023. On January 2023, the company closed the previous offering with gross proceeds of $2.2 mainly to fund it’s new Yumen plant and working capital for the new production facility. Thanks, everyone for joining us today. Before I wrap up today's presentation, I would like to first recognize our employees for their efforts and thank our loyal customers for their trust in us. We are confident that our R&D capability business model and strategy would enable us to gain more market share and maintain our growth momentum. With that, before we open to the call to your questions, I would like to note that for any questions directed to management in China we’ll translate both their questions and their answers. If you want to ask your questions in Chinese please also ask in English for the benefit of listeners. Please also note that we'll only be able to respond to questions about our financial and operating results. Hi, thanks for taking my questions. I think my first question is for the CFO, Richard. I saw your press release that the company has postponed the completion of the Yumen plant. I just want to know do you expect it to complete in May this year or there might be another delay. And also homeless production capability will the plants provide, is there any existing demand for such increase or do you have a according [Ph] plan to meet the increased production? Thanks. Your answer comes from the Chairman, CEO Mr. Richard Hu. So, the management does not foresee any further delay, especially after China is reopening after from the COVID-19 pandemic. So, they feel pretty confident that the company will be able to complete construction and also ramping up production around May this year. In terms of production capacity, phase one is basically for fragrance compounds. And phase two is for sale in bioactive ingredient food products. So, fiscal one as we mentioned will come alive around May which will bring additional capacity, approximately 30 metric tons of fragrance compounds products, which translates into about 200% in terms of production capacity increase. In terms of revenue, the company expect that will be increased by about 150%. In terms of bioactive for the ingredients products, which will come online in around May next year, the second phase so that will bring additional 300 metric tons production capacity to the company. All right, okay, thanks. I think my second question is also for Richard CEO. I noticed that your company has overseas expansion plan. But can you explain why does the earnings and sales ratio of the overseas decline in 2022 compared to the 2021. Will you adjust the plan the future or you're going to keep this plan? So the answer comes from Richard Hu -- become the Chairman CEO. In terms of the overseas sales decline significantly in fiscal year 2022 now there's two reasons. One is in March, April and May of 2022. There was a significant congestion at the port of Shanghai, which caused the company unable to deliver to the customer. So that's factor one. The second factor is due to the supply chain disruption globally. There's a huge shortage of raw materials commonly needed for fragrance compounds and also certain bioactive food ingredients materials. So those were primary reasons that companies overseas sales declined dramatically in fiscal year 2022. And looking forward the company does not foresee any of these factors will play a role. So the company believes they will continue, you will see there was a company will resume its -- as for business and the company does expect its overseas sales will pick up in fiscal year 2023 Okay, thanks. So one more question. My last question is for the CFO. I saw that the company's accounts receivable are over $6 million and increased by $1.3 million in 2022. Can you explain why the company has such a high level of [Indiscernible] and do we have any better provisions on that? Okay. So, here's the answer from Mr. Li, the Company's CFO. So, the terms the payment terms the company give the customer is universal, three months were 90 days. So throughout last year, the company has not experienced any during delinking [ph] payments. So all the payments are according to the payment schedule. As of now, in January this year, the company has pretty much collected all the balance that was reflected in the balance sheet as of September 30, 2022. So the company does not have any bad debt provision. [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Syni [ph] for any closing remarks. Thank you, operator. On behalf of all we want to thank you for your interest and participation in this call. If you'd like to speak with us further, please contact either Sophie or Maggie. Some contact information is listed at the end of the press release. Thank you. Operator, back to you.

EarningCall_25

Good morning. My name is Devin and I'll be your conference operator today. At this time, I'd like to welcome everyone to CareTrust REIT announces Fourth Quarter and Full Year 2022 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Thank you for your patience. I'll now turn the call over to Senior Vice President, Lauren Beale. You may begin the conference. Thank you and welcome to CareTrust REIT’s fourth quarter 2022 earnings call. Participants should be aware that this call is being recorded and listeners are advised that any forward-looking statements made on today’s call are based on management’s current expectations, assumptions and beliefs about CareTrust’s business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financings and other matters and may or may not reference other matters affecting the company’s business or the businesses of its tenants, including factors that are beyond their control, such as natural disasters, pandemics such as COVID-19 and governmental actions. The company’s statements today and its business generally are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied herein. Listeners should not place undue reliance on forward-looking statements and are encouraged to review CareTrust’s SEC filings for a more complete discussion of factors that could impact results as well as any financial or other statistical information required by SEC Regulation G. Except as required by law, CareTrust REIT and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. During the call, the company will reference non-GAAP metrics such as EBITDA, FFO and F-A-D or FAD and normalized EBITDA, FFO and FAD. When viewed together with GAAP results, the company believes these measures can provide a more complete understanding of its business, but cautions that they should not be relied upon to the exclusion of GAAP reports. Yesterday, CareTrust filed its Form 10-Q and accompanying press release and its quarterly financial supplement, each of which can be accessed on the Investor Relations section of CareTrust’s website at www.caretrustreit.com. A replay of this call will also be available on the website for a limited period. On the call this morning are Dave Sedgwick, President and Chief Executive Officer; Bill Wagner, Chief Financial Officer and James Callister, Chief Investment Officer. Thank you, Lauren and good morning, everyone. Many of themes from last quarter's call are still applicable today, starting with the macro dynamics at play, the Fed's response to inflation has had a significant impact on the credit market as intended, even with our sector leading leverage, the rapidly risen rates undeniably eat into earnings and slow what has also been a sector-leading FFO per share growth rate over the past five years. The good news is that even with the elevated cost of capital, we can still make accretive investments and intend to do so and positively, as we mentioned last quarter, the flip side of the tighter credit market continues to be a tipping of the scales in our direction for brokers and sellers who are looking for certainty to close. Our operators are also poised to find some relief to the staffing challenges if and when a recession begins to drive people back to work, where jobs are secure here in healthcare. Rent in the fourth quarter came in at 95.5% inclusive of about $750,000 of deposits applied. Today, I'm pleased to report that of the original 32 assets we identified as candidates to sell, reposition or restructure, we've made significant progress with only a handful of smaller assets remaining on the market. We provide a detailed update in our supplemental, but I will emphasize a few key points here. Ultimately, after running an exhaustive process, we sold 13 properties and decided to retain 14, leaving five facilities on the market. The 13 sold for $68.8 million, those properties paid essentially no rent in 2022. For the 14 properties retained, in 2022, we collected about $5.2 million of $8.6 million of contractual rent. For 2023, we estimate that eight of these 14 will produce cash rent of about $3.5 million. We hope to give more clarity on the timing of rent commencement for the remaining six next quarter. That leaves just five smaller seniors housing facilities from the original 32 that, as we sit here today, are still on the market. Two of those are under contract to sell, one is under LOI, leaving two being actively marketed. These five assets on the market, only one paid rent last year, for a total of $377,000. In terms of portfolio strength, you'll see a portfolio with the 10 ten tenants, who represent 89% of contractual rent, with property level EBITDAR lease coverage of 2.01 times, excluding HHS funds. We have confidence in the few operators in the top 10 that on the surface, appear vulnerable and believe it's just a matter of time until their results reflect the hard work they've been putting in to turn certain facilities. Last year, you may recall us repeatedly talking on this call about elevated risk associated with one Midwest skilled nursing operator outside of our top 10 who has had negative lease coverage for quite some time. They account for 2.8% of rent as of 12/31 annualized. In 2022, due to partial payments, we applied and exhausted their $1.2 million security deposit, and no rent payment has been made for January or February yet. A week ago, they informed us of a change in CEO and the need to work together on a plan that works for both of us. We've just started active discussions with them about the best path forward, and we expect to have a concrete plan to share with you next quarter. Like I highlighted before, without this operator, our EBITDAR lease coverage outside our top 10 goes from 1.08 times to 1.84 times, excluding HHS funds. Considering the toll that COVID has taken on our sector, the way the vast majority of our operators have managed through these past few years is gratifying on many levels, and we feel proud to affiliate with some of the best operators in the country, both large and small. The strength of our company enables us to turn more attention to external growth this year. So as we begin 2023, our strengths continue to be our balance sheet, our portfolio, and our experienced team. Thanks, Dave, and good morning, everyone. Looking to the market, we continue to see an uptick in seniors housing, skilled nursing and behavioral deals, coming across our desk. Many of the facilities being sold consist of distressed seniors housing assets with owners that are facing high interest variable rate loans and have to exit. Deal flow continues to increase on the skilled nursing side, with incoming transactions primarily consisting of a single to a few assets that are nonstrategic to the seller or at some stage of operational distress. We are also seeing a few smaller portfolios from operators looking to sell as they exit the business, and a few larger portfolios in states where Medicaid rates remain very low. Some REITs and private equity owners are also disposing of assets to help operators shed negative cash flowing assets or assets that are no longer geographically strategic. These trends may accelerate with the end of the public health emergency. We expect the upsurge in deal flow to continue, with sellers placing an emphasis on certainty of close and low execution risk. Price discovery continues, though we are seeing signs that motivated sellers are starting to adjust expectations in some cases. We will remain disciplined as we look for further adjustment to seller expectations, given the high interest rate environment, tightness in the debt markets and other factors. With our strong balance sheet and access to capital, we are poised to pursue actionable acquisition opportunities with a focus on those states with favorable Medicaid rates and access to labor, and where we have a strong bench of existing operators, or where we are actively pursuing new relationships with operators we have long admired. Our commitment to a side-by-side underwriting approach with our operators will be more important than ever as we face the challenges of underwriting labor, occupancy and other difficult assumptions in the current environment. Turning to the pipe, it currently sits in the $100 million to $125 million range. As we sit here today, the pipe is primarily made up of skilled nursing, but also includes some seniors housing assets. The deals include some of our standard one to two facility acquisition opportunities in addition to small or medium-sized portfolios that would allow us to not only enter new states, but also expand in states where we have a limited presence. Thanks, James. For the quarter, normalized FFO decreased 0.8% from the prior year quarter to $37 million. Normalized Fad decreased by 1.9% to $39 million. On a per share basis, normalized FFO decreased a $1 to $0.38 per share. Normalized Fad also decreased $1 to $0.40. Rental income for the quarter was $47.7 million, compared to $47 million in Q3. The increase of $657,000 is due largely to the following four items. One, we received approximately $1.3 million of cash related to a prior tenant that was recognized in the quarter. I expect a little more of this in Q1 of 2023, but it will not be material. Two, an increase in rents from CPI bumps of $182,000; three, a decrease in cash collections of $427,000 from tenants who are on a cash basis of accounting and four, a write-off of straight line rent receivable of $440,000 relating to a tenant we moved to cash basis of accounting during Q4. Interest income was up $860,000 due to the originations we closed in Q3. Interest expense was up $1.3 million from Q3 due to higher interest rates of $1.5 million, slightly offset by lower borrowings under our revolver. During the quarter, we took an additional impairment of $5.4 million, G&A expense was down $346,000 from Q3 due to lower compensation expense of $618,000, offset by other corporate related items of $272,000. Cash collections for the quarter came in at 95.5% of contractual rent and includes the application of $750,000 of security deposits. Without the application of the security deposits, cash collections was 94% of contractual cash rent. In January, we collected 94.5% of contractual rents due from our operators. A couple of notes regarding the balance sheet in Q4. We issued $2.4 million shares under our ATM for gross proceeds of $48.1 million, and we extended our revolver another four years. Our liquidity remains extremely strong with approximately $20 million in cash and $465 million available under our revolver. Leverage also continued to be strong with a net debt to normalized EBITDA ratio of 3.7 times, which is below our stated range of four to five times. The net debt to enterprise value is 28% as of quarter end and we achieved a fixed charge coverage ratio of 6.5 times. Great. So we hope our report has been helpful and thank you for your continued interest and support and happy to answer your questions at this time. Hey, good afternoon or good morning out there. I was just hoping we could talk maybe about the outlook for this year. And I know you've given us some building blocks of how things are expected to play out. I guess, why not give us the official guidance. It seems like we have kind of 95% of what we need. Obviously, there's still a few properties left to sell or retain it and figure those out and there's obviously that 3% or so operator that hasn't paid rent since November. And I do get the models not that complex, and we can certainly make our own assumptions, but just trying to understand what's preventing you from resuming your tradition of giving us annual guidance? Yes. So I think you've kind of pointed to the answer in your question. We feel like there's still enough uncertainty around the timing of when the rents are going to commence with these retained facilities and the outcome of this Midwest operator that we talked about to not issue guidance yet. But we're hopeful that in the next quarter, we should be able to do that because I think by next quarter, we will have a lot of clarity and things agreed to. And so then as soon as we're able to, which I think will be next quarter, we'll be able to issue guidance. I certainly will. That Midwest operator, the 2.8% operator that hasn't paid since November, are they still on accrual accounting since I don't think I saw a straight line write-off in the quarter. And if so, does that mean at this point you are still hopeful to recover what's not been paid? And maybe there is a chance, as the discussions progress, they will commit to the current rent under the new CEO, as you said and also I think they have some pretty strong financial backing. Yeah, they're on cash accounting. They're not accrual and the conversations with the group over there is very fresh. We literally got the news from them last week of the change in CEO, so it's hard to handicap how this year goes, although I'll tell you that they are expressing to us commitment to the portfolio and to the turnaround. This operator is primarily operating facilities in the state of Iowa, just to give you a little bit more color on them. And Iowa so far has really proven to be one of the least supportive states in the country for nursing home providers. Unlike other states, they've refused to pass on any of the FMAP federal funds. And I saw a report last week, or in recent days where about 39 Iowa nursing homes have been closed in the last couple of years. So that makes the environment pretty difficult. However, there is reason for hope because there's a Medicaid rate increase going into effect this July, but for some, it's just going to be too little too late. So we're going to be working with this operator to figure out a path forward that makes sense for both of us. But it's so early in those discussions that we just -- we can't really give you an indication of how it's going to play out yet. Just one more. It has been a while since you've used the ATM to raise equity, but you did so in the fourth quarter. And at those levels of low teens premium to NAV, kind of low seven implied cap rate, how do you think about raising equity proceeds with no publicly identified opportunities to deploy that capital? Could we expect that trend to continue to keep hanging down your facility to create more capacity and more optionality for future external growth? Yeah, I think, look, we saw a pipeline that we feel like is going to be able to -- that we feel like we'll be able to execute on in the coming months and so with visibility into that and the ability to pay down the line a little bit, it just made sense to pull that ATM trigger in the quarter. Hey, good morning, everybody. Just wanted to go back to that Midwest operator, Dave, I believe in sort of past discussions, you've talked about that roughly of that $5 million, $5.5 million contractual rent, there being maybe a couple of million dollar delta seemingly at risk relative to maybe where market rent would be based on facility level performance. And I'm just curious if that's still the right sort of range today, and then how are you thinking about a potential rent cut or even looking to sell these communities? Yes. I don't think our view on the value of these buildings has really changed over the last few quarters. Their performance has stayed essentially the same with negative EBITDAR. And so you're looking at a portfolio that would value probably on a per bed basis if taken to market. But in terms of what we'd be willing to do, it's just given where we are in the discussions, it's not something that we should be talking about publicly yet. That's fair. And then switching over then to the eight tenants that you retained, I guess, on one hand, you clearly flagged these within your original sort of portfolio optimization grouping. So presumably there was something about these assets that wasn't optimal, but they did pay all of their contractual rent in 2022. So can you just shed a little bit of light on the need for the rent cut and sort of how you landed on the magnitude of that cut to be sure that there's sufficient room going forward? Yeah, great question. And I appreciate the way you laid out the question, because you're right, there was something in these buildings that we saw early on, even though they were current with rent. If you'll remember, this time last year when we announced the plan for these 32, we said we were responding to a couple of operators that hit the wall and then that caused us to look at the rest of our portfolio and sort of try to anticipate who was going to be next and these operators or facilities made that list. They paid rent in the year, but that was largely subsidized with government stimulus and if not for that, we would not have received the full contractual rent in the year. And as we look forward to this year, then we say, okay, what is it going to take to keep these guys current, to keep them engaged and incentivized to run these buildings well? And I think that's the number that we arrived at. We very well may revisit bringing these assets to market when conditions improve for buyers and we've set a rent and come to an agreement that gives us the right to either sell or retain it at any time. Thanks for that. And then just last one with respect to kind of the rest of the retained facilities, I'm just wondering if you could give us -- is the rent commencement on the four specifically, is it a '23 event? Is it more likely a '24 event? Just even some range, even though I know you don't maybe know specifically today when that may occur. And then also curious if these now will be reflected on sort of a cash or GAAP basis going forward, so we can understand sort of the FFO impact once rent does commence. Yeah, so I would expect of the four retenanted that are showing are supplemental at $825,000 for year one contractual rent, that we would see some of that this year and again, I'm sorry that we can't be more clear on the timing of that. There's some licensing requirements that need to get checked, and sometimes those things take some time. But, yeah, I would expect that we'll get a chunk of that $825,000 this year. Then once all the redevelopment and retenanting transitions are complete, the properties will prevent use as it shows a full year one rent of 5.7%. Unfortunately, I can't give you today the timing of when that 5.7% really starts; but that will be followed by a step up in year two to 6.7%. And you'll have a better idea, I think, next quarter of the timing of when we'll get all of that rent commenced. Great. Thanks for taking the question. I guess first in the earnings release today, you guys went out of your way to sort of flag the official end of the PHE coming up in May, and you discussed how it could cause some additional displacement and lead to some property acquisition opportunities, which is obviously the positive side of the equation. I guess. On the risk side, I can't remember if you guys shared any color around this previously, but knowing it's a moving target, have you guys taken the time to determine internally what you think the average negative percent impact might be on EBITDAR for the average SNF provider? If we're just losing some of the benefits related to the PHE, do you think it's material or not material because you guys also talked about some states implementing some policies to support or make up for what's going to be lost in the PHE. I just want to get your thoughts around that as far as just the potential impact on either coverage ratios or just average EBITDAR in the back half of '23 into '24. Thanks. Thanks for that question. It's a good one. It's a bit of a crystal ball question that's hard to answer because there are so many levers at play and the answers it really depends on the state that you're in. In some states, I think it's going to be sort of a non-event, particularly for those operators who are already kind of operating at the historical skilled mix numbers. Those states have already put in Medicaid rate increases and so it really shouldn't be that big of a deal in some states. In others it might be. So it's hard to answer for the industry or on an average, some operators in some states will be negatively affected and I think others it won't be that big of a deal for them. Okay, but for your portfolio though, do you think it will move the needle on the coverage ratios or do you think it could be absorbed and just offset by other factors? When we think about just forward progression of your reported coverage ratios for the next six to eight quarters, I guess give or take. Yeah, I think on the whole net effect, it should have a negative effect on lease coverage just because there are going to be those who theoretically their skilled mix will probably come down a little bit. And if occupancy stays flat, then by definition, their margin is going to be eaten away a little bit. However, if occupancy continues to recover, which we're seeing signs that while slow, it's steady recovering, then that could offset it. So it's a little bit tough to handicap, frankly. Yes. Thanks. Dave, can we talk a little bit more about the 14 properties that you're planning on retaining that were in the portfolio optimization plan? How many different operators are those going to and are those going to be new operators operating those facilities versus the ones that were in there previously? So in the 14, we have a couple of operators that are coming in new, meaning transitioning from the prior operator. We have the two conversions to Behavioral Health. So those are going to landmark a new operator for us. And then among the eight properties that are retained that we classify as retained type, those are staying with the two operators there. And then how many of these are seniors housing versus skilled nursing? It sounds like two of them are behavioral, but what's the breakout? Okay. And then of the $3.5 million of rent that you expect from the [indiscernible], did that commence, or have they been paying that in the fourth quarter? And is that going to continue to be paid through January, or is there a different timing of that rent commencing or ramping up throughout the year? Okay, great. And then on the 2.8% tenant, when did those -- I guess how much of that security deposit was paid in the fourth quarter? Did that reflect their full contractual rent in the fourth quarter, or did they short pay their contractual ones in the fourth quarter even if you exhausted that security deposit? Yeah. So this operator, they made a partial payment in the fourth quarter. So their last payment to us was in November. And then you said, you applied and exhausted the $1.2 million security deposit. Did that reflect the full contractual rent payments in the entire fourth quarter? No. Sorry for the confusion on that. In the fourth quarter, we applied about $700,000 -- $750,000 of their security deposit to make up what was due. They still ended up a little bit short for the year, but security deposits for this operator was applied, if memory serves, in the first quarter, in the third quarter, and in the fourth quarter. And so what would happen is we would apply a security deposit in the first quarter, and then they would make up for that, they would replenish it, and then in the third quarter, same type of thing. They would make their payments, replenish part of it. And so it was sort of an ongoing late payment situation, which is why we started really talking about them in August last year, about being elevated risk. Okay. And then, I guess I know you kind of talked a little bit about this on the call, so I'm not sure if you can answer any more details, but what's the ultimate plan? I think we're just waiting to see if they can recover, and we're seeing if they can start repaying rent as soon as the results start to recover from that. Or is this a potential sale opportunity that you see in the marketplace? Hi. Just a follow up to Mike's line of questioning. So what was the total amount of rents booked from the 2.8% tenant in the fourth quarter, realizing that 750K was from the security deposits? Okay. And then just curious if you could talk a little bit more about the acquisition pipeline and where do you think cap rates have moved to or where they're heading to for your kind of $100 million plus pipeline find that you talked about in your prepared remarks. Yeah. Hey, Juan, it's James. I think that -- if we talk about it in terms of lease yield we're looking for, I think that's definitely crept up a little bit. I think we're testing, trying to put the money to work at ten or high nines for skilled nursing and maybe mid to low nines on seniors housing and working hard to find opportunities where that works. It's just really dependent state by state right now. When you look at which states have been favorable with respect to the Medicaid rate and which states have access to labor and which don't kind of drive what our basis is going to be and whether or not we can get that yield at a ten or high nine for the skilled nursing. And then just a question for Bill, any thoughts on the balance sheet on terming out some of the floating rate debt as we think about modeling out 2023? Yeah, I would expect as a percent of total debt, variable rate debt will increase over the course of the year as we utilize the revolver to match fund deals as well as, but also keeping in mind, we'll likely use the ATM to fund those investments. And then just last one, if you'd indulge me. Any update in terms of your conviction or maybe a lack thereof for kind of the three top ten tenants that have kind of meaningfully below one times coverage and covenant asset and tenant. Yeah, I talked about them in my remarks. We're confident that their hard work will pay off in a matter of time and we got good corporate credit behind them beyond the buildings that they have with us and so not much to share beyond that. I guess the one thing I would highlight is with Bayshire, their lease coverage all of last year was north of one times, and so because of the way we report, you're not seeing their real performance reflected in those numbers yet. So we'll see that continue to creep up and get out of the sub one times category soon. Thanks for taking the follow-up. You guys might have implicitly answered this on Juan's question about initial yields on future transactions, but I guess as you look at those future deals and think about sort of the recovery in operations in some of these various segments, how are you thinking about setting initial rent and any participation in upside as fundamentals recover? I think we've really offering upside and participation. I think that we work really close with the tenants we're looking to put in on some of these value add, if you will, transactions to work really closely side by side to try and come up with the best we can in terms of underwriting run rate for labor and what the occupancy can do. Those are difficult assumptions to make right now and I think the closer we work with the incoming operator to look at historic, where, if we have assets in the area, what they've been doing on their turnaround with respect to labor and occupancy and trying to mimic that with the deals we're looking at, I think we just try to get to the best assumptions we can with the tenant, who has the more local knowledge and localized expertise to come up with a stabilized rent structure. And if a ramp is needed, then we definitely are open to looking at that and look at other creative ways to help them get to the point where we feel like the facilities will be stabilized. There are no further questions at this time. With that said, concludes today's conference. Thank you for attending today's presentation. You may now disconnect.

EarningCall_26

Hello, and welcome to Fagron full-year results 2022 conference call. My name is [Prisciline], I'll be your coordinator for today's event. [Operator Instructions] My name is Karen Berg. I'm here together with our CEO, Rafael Padilla; and our CFO, Karin De Jong, who will discuss the numbers in more detail. And afterwards, we will have room for questions. Thanks, Karen. Good morning, and welcome all. Before Karin and I take your questions, we will go through the presentation where we will explain the highlights of 2022. We will elaborate on current macroeconomic developments and how they played during the year and deep dive into the regions where we operate. After this, Karin will guide us through 2022 financial performance and '23 guidance. We will conclude and open for Q&A. In 2022, we have operated in a fast changing and uncertain environment. Therefore, we are pleased to see top-line growth supported by organic growth in EMEA, North America, disciplined M&A, while we have seen ForEx in. In line with guidance, the second semester recurring EBITDA of 19.8%, excluding our Boston facility is ahead of the 19.3% in the first one, implying full year reported margin of 19.1%. Following our structured and disciplined M&A approach, we completed 5 very attractive acquisitions in 2022 showing continued focus on adding capabilities to the group. Our strong cash conversion of 70% supports balance sheet strength, shareholder value creation and M&A execution. ESG remains a key strategic pillar for us. And amongst other topics, our greenhouse gas intensity reduction was outstanding with a decline of 20% versus target of 15%. Lastly, we have proposed a dividend of EUR 0.25 per share for the year. Moving on to the next slide. We currently experienced a fast changing environment where agility and guaranteeing the highest quality standards are key. Looking at the external risk, inflation remains high. We manage by dynamic pricing pass-through and on the operations side by negotiating better procurement terms. Regarding the competitive landscape, we aim to maintain leadership in all our markets by strengthening our commercial approach, balancing competitive pricing and being unique with our brands. We offer the widest portfolio and aim to set the highest quality standards in the industry as regulatory environment evolves. Being the leading global compounder, we have strengthened our quality management organization by appointing a global head of quality, and we continued implementing our global quality systems across all our regions. Also, we commit to invest in state-of-the-art infrastructure as the one announced today for AnazaoHealth in order to remain well ahead of expectations. Moving to supply chain risk. With sourcing, again, given our global large scale, we have a broad supplier base, and we continue to further broaden our options. We have intensified our procurement and supply activities resulting in stronger purchasing power and better logistic terms. Finally, on our internal business drivers on operational excellence, while we always focus on it, it has now become necessary to be our key strength to support our activities across the globe to be more competitive and have better cost management. Regarding our disciplined M&A activities, 2022 has been strong, welcoming Pharma-Pack, HiperScan, Purifarma in Europe and both Letco and FSS Boston in the U.S. We continue to look actively for opportunities across all our markets. Now we move on to the regional update. Demands' growing trajectory continues as a result of strategic actions taken a centralized production, streamlined back office, brand rationalization in the Benelux and reinforcing registration and licensing capabilities. In a very relevant note, our compounding service activities in the Netherlands show further stabilization and growth. As stated in the previous call, our cGMP repackaging facility in Poland is fully operational, and we start seeing the benefits out of it. Also, our central brands manufacturing facility in the Czech Republic, concluded successfully a regulator cGMP audit during the last quarter. For this region, continuous pricing pass-through exercise is very important, and we are progressing well despite increased customer sensitivity to this. As we explained, we continued diversification in the EMEA region by performing outstanding in markets such as Italy, Denmark or [Iran]. Moving into LatAm. This has been the most impacted region based on external factors. In Brazil, where we have seen a 10% drop in scripts on the back of inflation leading to greater competition, which has intensified as there were some change in ownership of current players. Despite that, we maintain our market share. During Q4, our performance has been further affected by the football World Cup, resulting in 5 less working days and by the election. In order to maintain market leadership and drive operational efficiencies, we're executing on back and front office projects such as centralizing all our warehouse activities started in 2022 and being finalized at the second semester of 2022. We have also optimized our brands by merging 3 of them into 1 called Sovita to gain efficiency and improve innovation capabilities. Thanks to these initiatives, we have seen margin improvement during the second semester of '22. During Q4, our Brazilian cGMP repackaging facility was audited by ANVISA and concluded successfully. ANVISA is one of the toughest authorities in the world. In 2022, we also continued to further diversify into Mexico and Colombia. Into the first semester of '23, we expect to see a continuation of the market conditions we have seen in '22 and remain committed to strengthen our market-leading position in Brazil as it is the second biggest compounding market in the world and long-term fundamentals remain attractive. Moving into North America. The market opportunity is increasing as well as regulatory scrutiny creating opportunities for us. We decided to invest additional CapEx in the Tampa and Vegas facility in line with our strategy of having the best-in-class infrastructure and support the underlying growth at long run. For the region, we are benefiting of our global operational excellence programs, including supplier base to support our business operations and we have already seen early signs of easing syringe shortage. On our B&E division, regarding the Minneapolis warning letter, we had a greater impact than expected as we have taken a more conservative approach and deliberately delayed the sales from this facility to enable a seamless closure of the audit. We are also accelerating our original integration plan by increasing the transfer of sales to our Letco facility. In December, we started as well the merger of both Fagron and Letco commercial teams. These actions will ensure the strength of our position, and we expect to see an acceleration of sales growth during the second semester of '23. In line with our strategy of having the best-in-class facilities, we're assessing the investment requirements for a new cGMP repackaging facility in Alabama, which will provide capacity expansion. Moving into FSS. We have exceeded the $110 million run rate for both Wichita and Boston. Again, we see early signs of easing syringe shortage. And in January, we have hit the $100 million run rate mark in Wichita. We are committed to the target and expect a progressive step-up through '23 with the timing being dependent on supply chain and operational factors, particularly as we ensure quality remains of the highest standards. Regarding Boston, as you recall, strategically, the purchase of this high-quality asset is very important for us as we have presence in the Northeast, more capacity and redundancy. The integration is on track, having now 16 licenses, and we expect to be breakeven during the second semester. Going forward, we will focus on getting the main state licenses, onboarding new customers and aligning the process from our Wichita facility. And finally, we are very much pleased with the developments of our Health and Wellness division, Anazao, who is capitalizing the strong underlying demand for personalized treatments. To end this first part, moving on to the next slide. Pharmaceutical compounding is ESG at its core. Currently, medicine shortages represent a global health issue. And thanks to personalized care, we contribute to make accessible many different treatments to vulnerable patient groups. We experienced lack of important medication like antibiotic solutions based to treat children. As we speak, one of our most important brands, SyrSpend, is supporting hospital and compounding pharmacies to prepare them. On environmental, we have exceeded our carbon footprint reduction by achieving 20% decrease compared to target of 15%. And on 2022, we performed our biyearly global employee survey with an 84% sustainable engagement score. Now Karin will cover the 2022 financial highlights. Thank you, Rafael. Good morning, and thank you for joining this call. I would like to walk you through the 2022 financials in some more detail, while discussing the next couple of slides. The first slide lists our financial highlights for the year. Sales in 2022 increased by 19.2% to EUR 683.9 million, driven by organic growth in North America and EMEA, the contribution of acquisitions and tailwind of currency strengthening against the euro. Operating expenses increased by 25.8% due to inflationary pressure in combination with acquisition and FX impact. Overall, recurring EBITDA increased with 10.5% to EUR 130.7 million. An EBITDA margin decreased compared to last year due to the dilutive impact of the sizable acquisitions we did and the challenges we faced in the operational environment in 2022. Excluding the Boston facility, H2 2022 EBITDA margin is 19.8%, in line with expectation, an improvement compared to the 19.3% we reported over H1 2022. Earnings per share increased 14.3% to EUR 0.96 a share. Strong cash flow conversion in 2023 to demonstrate the strong cash-generating capabilities of our company. ree cash flow increased by 57.5% to EUR 91 million. Our strong cash generation also translated in a decreasing net debt to EBITDA in 2022 despite the 5 acquisitions we did this year, creating sufficient headroom for future acquisitions. The bridge on the next slide shows the sales development in 2022. EMEA increased 2.2% organically against constant exchange rate. North America at 10.5%, driven fully by the Compounding Services development, and LatAm showed a decline of 1.1% reflecting the challenging environment in 2022 in the Brazilian market. Acquisitions contributed for EUR 58.5 million to sales growth, mainly driven by the Letco acquisition in North America. Tailwind of FX strengthening against the euro, positively contributing to the euro sales growth. The P&L on the other side of the slide shows top-line growth and positive development on margin full year 2022, mainly driven by the performance in EMEA, offset by an increase in expenses due to inflation, FX and acquisitions. Gross margin as a percentage of revenue improved by 30 basis points, supported by operational efficiencies and improvements. Particularly in H2, we saw a strong improvement of 170 basis points compared to H1 2022 driven by operational benefits of our Poland manufacturing site and further price increases. The nonrecurring elements consist of [indiscernible] due to the acquisition of the Fresenius Kabi site in North America of a little over EUR 5 million and some releases of contingent liabilities, offset mainly by acquisition and legal costs. Overall, profitability increased by 12%, while net profit increased by 14.2%, resulting in earnings per share of EUR 0.96. Turning to the next slide. In the EMEA region, we see underlying organic growth supported by acquisitions, resulting in a total growth of 8.4% and H2 of 9.9%, showing the persisting upward trend of this region. The essential sales still show some impact of COVID-19 tests sold in the fourth quarter of 2021 for EUR 5 million, which could not fully be compensated in Q4 2022. This effect will also impact the Q1 2023 comparable numbers for EMEA. Compounding Services grew slightly over 10% and 5% organically against constant exchange rate. In the fourth quarter, we see the segments Compounding Services delivering a very solid 24% growth and an organic growth against constant exchange rate of 17.7%. The segment is benefiting from renewal of contracts and the acquisition of Curaphar. Profitability overall increased by almost 9% to 21.9% of FDA margin for the year. In H2, we see recovery due to operational benefits in combination with price increases in the region. Overall, with a solid year for EMEA, where we see Compounding growth stabilizing in H1 and starting to grow and profitability picking up as a result of operational benefits and savings. Turning to the next slide on Latin America. 2022 shows total growth of 15.1%, driven by FX. On the line, there's a small decrease in sales of 1.1%. In 2022, we see end-market softness having an impact on sales development in combination with price pressure due to competitive dynamics. Our deliberate focus on protecting our market share impacted margins, but we also streamlined the organization to reduce costs. We see a slight recovery in margin in the second semester to 18.1% from 17.4% in H1 2022. Overall margin for the year is 17.8%. On the long term, we believe that margins will recover further due to a strong innovation strategy and further cost reduction as a result of centralization of distribution centers and combining of brands. Next on North America. North America showed sales of EUR 245.1 million, an increase of 38% and an organic increase against constant exchange rates of 10.5%. B&E sales increased by 33.2%, driven by the acquisition of Letco and the strengthening of the U.S. dollar. Organically, B&E sales declined with 8.3% as a result of the deliberate slowdown in sales as a result of the FDA audit in Minneapolis. Part of that sales is transferred to the facility of Letco. We're acting for these transfer sales decline would be 6.8%. Despite supply chain challenges, the growth in the Compounding segment continued. Organic sales against constant exchange rates increased by almost 20%. The run rate combined for FSS Boston and Wichita exceeded USD 110 million. Profitability in H2 2022 was 15.5%. Corrected for the Boston acquisition, this was 17.8% compared to 18.1% in 2021. Profitability margin was impacted by the acquisition of FSS Boston and Letco, which had a dilutive impact in combination with the decrease in sales in B&E. We expect to see sales growth and the margin to improve towards H2 2022 as FSS Boston ramps up on the back of further licenses and completed the transfer of products to Letco. In addition, we will also benefit from the growth trajectory at Wichita. An important element of our business model is strong cash conversion. Operational cash flow in 2022 amounted to EUR 109.5 million, an increase of almost 40%. Working capital benefited mainly in the last month of 2022 from supply chain easing and improving operational output from the facility in Poland. The factoring amount increased by EUR 5.8 million to EUR 36.8 million by the end of 2022. CapEx was just below the guided range of 3% to 3.5% of sales, mainly due to timing of investments and order delays. For the next year, we expect, therefore, to be on the high end of the range. Strong cash generation resulted in an 84% EBITDA operating cash conversion and a free cash flow conversion of 69.5%, representing EUR 91 million. Moving to the next slide. This bridge represents the net debt development in 2022 moving from EUR 264.9 million at the end of 2021 to EUR 274.1 million at the end of 2022. In 2022, we see a further strengthening of the balance sheet as net debt to FDA ratio improved and is below 2.0x. This ratio includes, among other adjustments for the annualization of acquisitions and IFRS 16 adjustments. In 2022, main cash out is related to the acquisitions in North America and EMEA, of which Letco is the largest. For 2023, we will continue our disciplined M&A strategy taking into consideration our internal threshold net debt-to-EBITDA ratio of 2.8x. Continuing with the outlook for 2023, cash will be largely used to fund growth, which will remain our overarching priority over the next period. We do not expect working capital profile to change dramatically. Maintenance CapEx will remain between 3% and 3.5% of sales. On top of that, we're planning to invest in a new 503 facility in Tampa for around USD 80 million, mostly spent in 2023. This facility will be a part of AnazaoHealth. We are working on a plan for further expansion of our B&E businesses in North America and will inform you when these plans are finalized. Next, we want to maintain a consistent and disciplined approach towards acquisition growth. Net leverage ratio limits by our bank covenants at 3.5x EBITDA, while we have set our limit at around 2.8x. As you know, that compares with a ratio of 1.9x at the end of December 2022, which gives us sufficient headroom. Dividend policy remains unchanged. The proposal will be an increase compared to 2022, resulting in EUR 0.25 per share. Overall, our capital allocation framework will remain focused on funding growth opportunities. The next slide provides our expectations for 2023. Our sales expectation for 2023 is a mid- to high single-digit growth, with each region having their own dynamics. M&A activity will support upside in revenue in all regions. We expect revenue margin to show a progressive improvement during 2023 driven by operational efficiencies, global procurement benefits, rationalization of support functions in combination with continued passing on of price increases. Therefore, we expect a pickup in the second half of the year. Maintenance will be in line with -- maintenance CapEx will be in line with guidance and on top of this, we will invest in the expansion of our AnazaoHealth business in North America as discussed on the previous slides. Thanks, Karin. To sum up, Fagron is a niche defensive, high-cash generating company, who is consolidating a highly fermented market. We benefit from a resilient business with diversified geographical presence and the broadest product portfolio in the industry with favorable underlying trends such as demographics and personalization. As seen in our results, Fagron demonstrates strong cash-generating capabilities and disciplined M&A remains a key part of our growth strategy. Our operational excellence plans will drive several efficiencies across the company, mainly on global procurement synergies. To conclude, sustainability is a key strategic pillar as together, we create the future of personalized medicine. Now time for Q&A. Three questions, please. First of all, on Brazil, looking at the organic revenue decline. Could you roughly indicate how much is due to the market softness and how much is due to increased competition? And when do you expect this situation to improve? That's the first question. And secondly, on Boston, the Boston plant. You indicated you're going to reach breakeven in the second half. Is that over the second half? Or do you expect to reach breakeven, let's say, towards the end of this year? And what are you all doing to reach breakeven because you are still loss-making at the moment? So what is your, let's say, integration plan? Can you elaborate on that? And then finally, a financial question probably for Karin. The factoring position. What is currently the factoring position? Could you indicate that? Yes, Frank. Regarding Brazil, we have seen last year, and that's data that is available, right? So it's the scripts decreased 10%. And we have, therefore, seen that the competition intensity increase as everyone wants to sell and maintain their position, right? So as said, we want to maintain our leading position there. And therefore, we have, during the first semester, done some price concession, when you see the second semester improved profitability because regardless the fact that we maintain market-leading position have been extremely competitive. We have also focused a lot on innovative brands in order to maintain an increase, of course, the margin compared to the first semester and as well, we have started or continued important projects like the centralization of the warehouse that has helped us in order to achieve the results. On Boston... So when do you expect, let's say, the situation to improve in Brazil? Is there anything to say on this? Or will it stay like it is now? Right. During the first semester of '22, we expect that the conditions will remain as 2022, right? So the first semester of '23, and we expect to see during the second semester of this year a recovery in the region. Yes. Maybe coming back on the question regarding Boston. So Boston was acquired in the second semester of last year. Sales was approximately EUR 7.2 million over that period, and we reported a loss of EUR 1.7 million. We see that synergies from that acquisition lie in the combination of the facilities for Wichita and Boston. First step for Boston is obtaining licenses in the different states in the U.S. So we're currently at 16. So we acquired some licenses in the last period. We have to increase those licenses to sell in the big states in the U.S. So -- and that's an important driver of sales growth on the one hand and of course, profitability growth. So that's an uncertainty in the sense that timing on those licenses is difficult to predict. However, we see options to be at breakeven 12 to 18 months after the acquisition. So we expect to be breakeven in H2 2023 for that facility and continue to grow. So does that mean that you -- over the second half, you will be breakeven? Or will you hit at a certain point, let's say, at the end of this year, breakeven? Yes, we will hit -- yes, correct, Frank. So the last moment we hit breakeven in the second semester, correct. And then on the factoring position. At the end of the year, we were at EUR 36.8 million. So that's an increase of EUR 5.8 million. Three questions, if I may. We'll ask them one by one, if that's okay. First one is on the organic sales growth outlook for '23, which calls for mid- to high single-digit organic growth. Could you give some granularity on the regional level, how we should see this evolve in '23? So when you look at '23 and we go through the regions, we expect EMEA to continue the growing trajectory that we have seen in the last quarters. Moving into North America and in the Compounding side, we will see a progressive step-up and contributing to this organic growth. On the B&E side, we expect a greater sales growth in the second semester compared to the first semester. And then moving into LatAm, as we were discussing with the previous question, we will see an increase during the second semester as well. Okay. Understood. So the first half will still be sort of in line with the second half of '23 in terms of organic growth? Or do you already see a pickup versus the second half? Well, when -- specifically for LatAm, what we see is that during the first semester of '23, we will see a continuous progression on what we saw in 2022 and then increase in the second semester of '23. That's for LatAm. Okay. Understood. Then on Fagron Sterile Services. Could you provide some more specific guidance on the further ramp-up in Wichita in '23 and give perhaps a shot at a new year-end target? And then related to that, there are some new entrants in the sterile space in North America, such as injectables, especially [ Pigmerise ] which has bought the -- for medium assets. Do you see or do you expect an increase in competitive pressure as more players are looking into the space? Yes, that's a very good question, Stijn. And when you look at the overall market in the U.S. for Sterile Services, it's a current market of $1.5 billion, and the trends say that it will go up to $3 billion, moved for regulation, right? The underlying trends regulation that brings the outsourcing path. So regarding competition, we see new players coming as well. We also see some players going out of the space because quality, as we're saying, it's a very important factor there and ensuring the highest quality standards is again a very important factor in this industry. So regarding Wichita, we commit to target, of course, and we expect a progressive step-up in 2023. Timing depends on supply chain and operational factors and again, a set, Stijn, as we remain really focused on maintaining the high quality standards. Okay. If I may ask a follow-up on this one. In Q3, you mentioned that you would onboard new syringe suppliers. How is that progressing? Has that now been completed so that the syringe issue will not be sort of prevalent in the first half or is that still ongoing that process? Yes. Spot on, Stijn, because what we said, we see early signs of easing syringe shortage. We continue to monitor extremely closing with our global procurement teams. And if you recall, well, we have -- we were onboarding 2 new suppliers. We have currently 2 suppliers that we made business the last 5 years and these are the suppliers that are supporting us and that we now see these early signs of easing, right? So on the 2 new ones and specifically your question, one is -- one stepped out of -- because of quality demand from our side, right? So one is not there anymore. And the one that stayed, we expect to have onboard during the second quarter of this year. But again, the existing ones are the ones that are supporting us. And on time in full, the concept that we explained last call, right, so they were delivering on time, but not always in full the quantities that we're asking. We see now an improvement on that part. Okay. Understood. And the last one is a more specific question on the competitive dynamics in the Benelux. It seems that Netherlands is now on a more stable footing, but ACE Pharmaceuticals is expanding geographically with the first acquisition in Belgium, together with Sibelco and Sibelco has also launched its essential offering, I think, last year. And considering the high market share of Sibelco amongst Belgian pharmacies, which I think is at 40%. Do you see this evolution as a material one in one of your home markets? Could you also indicate what the significance is of Belgium within India in terms of sales? Right. So a very, very good question because Belgium is one of the biggest markets in the world in Compounding per capita, right? So 12 million compounds on a yearly base in Belgium. So it's important for us when you talk specifically on Sibelco. If you recall last year, we were saying that in the Benelux, specifically in the Netherlands, we had extend some important contracts and also we did in Belgium and Sibelco is one of it. So we have a good partnership with Sibelco. We do very good business with them. And as you said, they have a good coverage. So we are confident that this will stay, right? And then on the share of Belgium within EMEA? Yes. So it's limited. It's one of the 3 biggest markets, but not on profitability. So current first indication is that the impact will not be material. Okay. And your relationship with Sibelco is that as a supplier in Essentials? Or is there -- are there other aspects to it? We hope that Belgium is also most essential sales. Right. That's correct. We have -- as you know, the widest product portfolio in the industry. And of course, Sibelco, we work Sibelco with our full product portfolio. Congrats on the strong results from KBC Securities. Maybe 2 questions. One with regards following up on the Concur League question there. How will you evolve Boston versus Wichita? Right now, we see -- we understand, okay, you had EUR 110 million of which let's say, EUR 10 million in Boston. How do you see that changing over time? Will you be able to create some, let's say, of synergies on the longer term also with offsetting risks like what happened at the St. Paul facility? Can you give some more granularity as what will happen also with Anazao going forward because it seems like you're really going after this market? Yes. Thanks a lot, Jeroen. Regarding Boston, as we recall, it was the purchase of a high-quality strategic asset, right? So we had capacity. We have presence in the Northeast, and we have redundancy, right? So having said that, our focus lies on, first of all, obtaining new state licenses, mainly on important states like Florida, like Texas, like California, like New York, were important for us. And of course, this will bring, as a result, the onboarding of new customers. So this is the most important trajectory -- path trajectory for us in the upcoming months, right? So we are doing our work there. And next to this, and 1 remark that you gave, that's very interesting is the alignment of the operational processes with Wichita, right? So first of all, of course, the IT part because we need to introduce our system, right? And then the operational and production process being quality control, a very important one. We have the quality control lab in Wichita, where we have -- where we in-sourced at that time, and now we do almost all our quality checks, very important in the industry. So we will centralize this quality control lab and then all the compounding and operational process that come after that. So this is the pathway for Boston and asset, our folks now lies on bringing it to breakeven during the second semester of '23. And then on Anazao, yes, indeed, we go after this market because the 503A, the patient-specific market in the U.S. is growing. There is an effect on telemedicine and then also prevention and lifestyle. So you see patients, people looking for these kind of therapies and doctor really enduring to these ones, right? So we have seen a nice growth for AnazaoHealth in both the B division and also the A in Tampa, and that's the reason that we are investing in this new facility, also in line, of course, with our global strategy to have the high-class infrastructure, right, and also to bring capacity for the long term. Yes. So yes, that's a very good point that you are bringing because when we talk about Tampa, it's the compounding of patient-specific scripts, right, then we will move to B&E. And when we look at St. Paul, as we said, we are transferring the sales from that facility, mainly the API repackaging into the Letco one, right? And of course, Letco that had an FDA audit at the beginning of last year that we concluded successfully. Of course, we need to expand capacity. And as we speak now, we're assessing the financial plans to invest in a new cGMP repackaging facility in Alabama to give us extra capacity for the B&E market. So then you have both the new facility at Anazao for the 503A. And then, of course, when we assess and then we will announce accordingly, of course, when we finalize this exercise, for the B&E to capture that market as well. Yes, that's correct. It appears there is no further question at this time. I'd like to turn the conference back to the host for any additional or closing remarks. Yes. Well, thank you all for your questions. We look forward to speaking to you again when we present our Q1 results. And for the rest of the day, I wish you a great day. Thank you.

EarningCall_27

Good morning, and welcome to this presentation of Aker BP's Fourth Quarter and Full Year 2022. Our CFO, David Tonne, and I will hopefully provide some insight into our performance and provide updated guidance and outlook for the company. We will do this through the lens of the strategy that we presented back in July. Let me start by sharing some perspectives on the year 2022 for Aker BP. This was the year we completed the acquisition of Lundin Energy, the largest ever cross-border transaction done by a Norwegian company, which has roughly doubled the size of Aker BP. It took six months to complete the transaction and another three months to put in place a new organizational structure where we are all now integrated as one team. We are a stronger, more diversified and more confident company than ever. And our asset base and opportunity set are second to none in this industry. Another important event in 2022 was the maturation of a large set of new field development projects, up to the point of final investment decision and submitting the PDOs to the authorities in December, within the deadline for the temporary tax system. This was a great achievement and I am extremely proud of the Aker BP team and our alliance partners who have made this happen. This project will have a significant impact on the future of Aker BP. Thirdly, the operational and financial results for 2022 were strong. This was, obviously, impacted by high oil and gas prices. But to me the most important driver is the quality of our operations, where we are delivering improvements on both safety, efficiency, emissions and costs. Excellence in this area is the key to reach Aker BP's vision, which is to be the leading company in our sector. For our industry, there is one issue that has overshadowed everything else in 2022, and that is the European energy crisis. The geopolitical situation has created a huge shortfall of energy in the European market, and together with the rest of the Norwegian oil and gas industry, we have done what we can to help the situation. The most important initiative Aker BP took last year in this regard was to change the production strategy at Skarv, as we initiated a blowdown phase for parts of the field. This contributed to a gross increase of about 2 bcm of gas to European markets from Aker BP operated fields. Also on the oil side, we have increased our shipments to European buyers, replacing volumes from less favored sources. Here are Aker BP's strategic priorities, which we presented in July following the completion of the Lundin transaction. This outlines how we are going to reach our goals. We are going to operate safely and efficiently and we are on a journey to decarbonize our business. We have an important task ahead of us to execute on our large project portfolio, while at the same time we continue to build new growth options for the company. And finally, we will do this in a way that maximizes the value for our shareholders and the society. We will now discuss the performance and outlook for each of them in turn. I was once asked by a fund manager in New York why is safety important. It is a great question. The normal answer is that it is our license to operate, but there's more to it. High safety goes hand in hand with high efficiency. Hence, a strong safety record is also a good indicator of good operational performance. But most importantly, we are talking about human beings. So, I told this fund manager about the lesson I learned myself many years ago from my leaders in a completely different industry, and that is, never to ask people to do something you wouldn't do yourself. I still think this is a brilliant principle and I want Aker BP and our leaders to do the same. As this chart clearly illustrates, our injury frequency has been trending down nicely through 2022, which is, of course, very good. We did, however, have three serious incidents in Q4, two of which involve falling objects. Luckily, no one was injured. But we take these matters extremely seriously and we investigate each incident to learn and to prevent it from happening again. A key performance indicator for us is production efficiency, or PE for short. To reach 100% on this metric, all production-related systems, it being production wells, subsea systems, topside facilities or export pipelines, must be working 100% all the time and at full capacity. Any shutdowns, planned or unplanned, will pull the PE down. According to the last McKinsey benchmark for 2021, the average PE from the Norwegian Continental Shelf was 87% compared to 90% for Aker BP, including [indiscernible]. When we defined the strategic targets for the new Aker BP, we targeted a PE of 95%, and I'm very pleased to see that we achieved this level during the second half of 2022, because this does not come easy. It requires systematic focus on doing the right things right 24/7, and it requires that we establish and execute a timely maintenance program to ensure asset integrity. And when unexpected problems occur, which they unfortunately do from time to time, we need to be able to mobilize the right resources to fix it as quickly as we can. The high PE is the reason why we produced more than guidance in the second half. And the increase in production from Q3 to Q4 is mainly driven by the startup of the Johan Sverdrup Phase 2 in the middle of December, which I will come back to later. Another important metric of operational excellence and competitiveness is, of course, costs. Our long-term target for production cost remains unchanged at $7 per barrel. And for many years, this has in reality been more of a mission than an actual target, but now we are here, at least if we normalize for power cost for which we have a natural hedge through the gas price. Going forward, keeping production cost at this level is no easy task. We are fighting against post-inflationary forces and natural decline. And large part of the costs are fixed and determined by the way the production facilities are designed. The only way to counter these forces is to remain laser-focused on continuous improvement across the board and to ensure that we build new infrastructure, we optimize the design to minimize cost, not only through the development phase, but through the entire lifetime of the asset. In our strategy update in July, we sharpened our focus on decarbonization and we established a clear plan to achieve net zero emissions across our operations by 2030. The initiatives to get there can be grouped into three main categories. Firstly, we will avoid emissions wherever possible. This can be done through electrification or through portfolio optimization and asset retirement. Second, when avoidance is not realistic or prohibitively expensive, we aim to minimize emissions through more efficient use of energy on our fields and rigs. And thirdly, we intend to offset the residual emissions through reforestation or other carbon removal projects. We already have a significant exposure of this through the reforestation investments required from Lundin. When it comes to Scope 3, which are direct/indirect emissions through our value chain, but outside the company, we have so far focused on the upstream part and we manage this through our procurement processes. Carbon capture and storage, or CCS, is probably going to play a central role in the transition to a net zero world, and the Norwegian Continental Shelf holds an enormous capacity for storage of CO2. We, as Aker BP, are working with partners to evaluate the potential for CCS, both as a business opportunity and as a mean of reducing our net carbon footprint in the future. Now, this is the strategy. Let us turn to how we are performing. And as this chart shows, we are progressing well. In Q4, we posted the lowest emissions intensity ever for the company of 3.1 kilogram per barrel across our portfolio. Now, there are three main drivers for this improvement from Q3 to Q4. The largest effect came at Edvard Grieg, which started receiving power from shore towards the end of the quarter as a part of the Johan Sverdrup Phase 2 project. The full year effect of this alone represents more than 200,000 tons in reduced emissions. In addition, our focus on continuous energy efficiency improvements has delivered another 70,000 tons of annual reductions, significantly outperforming our own targets. And these effects are also gradually being realized. Now, Q4 was also a period with lower drilling activity than normal. So that means that there is a certain element of temporary reduction in these numbers. I am very pleased with the steady progress we are making in this area. And as the cost of emissions is increasing, this is no longer just a matter of doing things right for the environment, it also has a direct effect on the bottom line. Low emissions is becoming a competitive advantage. So, let us now look at how we compete in this space. Compared to the global average, Aker BP has been a low-emissions producer for many years, but it has been difficult to find good comparative data. We have now received these benchmark data from Rystad, which I believe speaks for themself, but I will say it anyway. Aker BP is among the very best, and we are of course very pleased to be in such a good position. It is great to be in front. But it is also important for us to stay in front because the expectations to our industry are only increasing from both regulators, investors and society at large, to solve the energy trilemma of affordable, reliable and sustainable energy. This is why we will not relax our effort when it comes to emissions and we have established a clear pathway to net zero. Now, this chart shows exactly how we will deliver on our strategy. And as you can see, we crossed an important milestone this year. As mentioned, Edvard Grieg and Ivar Aasen are now electrified, leaving over 80% of our portfolio now powered from shore and creating a significant reduction compared to the do-nothing baseline. Forward from here, the reductions will come from phasing out older [fuel fossil] (ph) assets over time in combination, with continued energy efficiency measures. From 2030, we intend to offset all our emissions with reforestation and other carbon renewable initiatives. And we are already well on the way, as a project we acquired from Lundin will cover approximately 50% of our estimated emissions from 2030 to 2040. By 2040, all our producing assets will be electrified and the residual hard-to-abate emissions will be low and will be neutralized through other carbon removable initiatives. Delivering high-return project is key for Aker BP. This is the foundation for our growth and value creation. And we have proven several times that we have got what it takes to deliver field development projects on time, on cost, and with the right quality. And last year was no exception. The Hod development achieved first oil in April, less than two years after FID. The Hod project is part of our continuous effort to increase value creation from the Valhall area where there's more to come. The new Hod platform is built on the same blueprint and by the same people and suppliers as Valhall Flank West, just a little bit better, faster and cheaper. We will build further on this success story in the upcoming projects. Production also started on Phase 2 of the giant oilfield Johan Sverdrup, and this is a really important milestone for the partnership and Aker BP, and lifts production capacity from 535,000 to at least 720,000 barrels per day. And we believe this can be increased to 755,000 barrels per day when we have done the proper testing of the system. This is a truly great achievement worth celebrating, and we are extremely pleased with the way Equinor has executed the project as operator. In addition to these very visible achievements, we also have four tieback projects running. Three of these are in the Alvheim area and one is near Ivar Aasen. The projects have a combined total reserve estimate of over 100 million barrels of oil with excellent economics and demonstrate how we utilize existing infrastructure to develop discoveries in the vicinity of our installations. The 16th of December was a really important day for Aker BP. On that day, we and our partners submitted a total of 10 PDOs and one PIO to the Norwegian authorities. In sum, these Aker BP-operated oil and gas projects represent one of the largest private industrial developments in Europe. Let's have a look. We are really looking forward to delivering these great projects together with all our partners. The scope of the development plans is the manifestation of our ambition to create the oil and gas company of the future, with low cost, low emissions, profitable growth, and attractive returns. In total, we expect these projects to deliver 730 million barrels of oil equivalent net to Aker BP. They will also contribute to extending the life of existing production and enable future growth opportunities. Along with several measures to increase efficiency and recovery, these development projects will enable Aker BP's daily production to grow from around 400,000 barrels last year to around 525,000 barrels in 2028. Aker BP will, over the next five to six years, invest $19 billion -- or around $19 billion [pre-tax] (ph) in these projects, and we calculate an average breakeven oil price of $35 to $40 per barrel. To further illustrate the attractiveness of these developments, we estimate an average payback time of one to two years at an oil price of $65 per barrel for the total project portfolio. Now, this all looks great on paper and in the spreadsheet, but we must also deliver these projects in real life. So, let's now dive into the question of how we are going to deliver. A cornerstone of our project execution strategy is our strategic alliances. This is a concept we have been working with for many years and gradually expanded to cover most of our supply chain. The alliance model provides us with a structured way to collaborate with our main suppliers over time, aiming to drive efficiency, eliminate waste and make sure we benefit from the learning effects that come from doing the same task over and over. The key features of the model are that we work as one team with common goals and shared incentives to do the best job possible. And it works. In fact, it works very well. Over the last six years, we have completed 16 projects under the alliance model, all with high quality and on time and on budget. Well, that is, production start at Hod was in fact one week delayed, to be honest. And for our drilling alliances, we have drilled over 100 wells, covering some 450 kilometers of wells with industry-leading efficiency. The alliance gives us the capacity and a reach that far exceed what would normally be possible for a company our size. And our experience so far gives me great comfort with the task we have ahead of us. As mentioned, the alliances are a cornerstone of our execution model and our alliance partners are deeply integrated in the way we work. On this slide is the key principles of project execution in Aker BP. Now the first pillar is partnership, which is no surprise. It's all about securing capacity and competence and make sure that we internalize the effects of continuous improvement and to ensure alignment of goals and incentives. The second pillar is what we call front-loading. The key to successful project execution is not only the construction as such, but the preparations you put in place before you cut the steel or spud a well. Is this what lies the foundation for quality in the execution phase and the quality of the final product. And quality is the most important parameter. When this is done right, cost estimates and time schedules are much more likely to be met. This is also the reason why we always involve our suppliers at an early stage in every project. We collaborate early with suppliers of critical input factors to facilitate efficient engineering and mitigate late changes, and we uncover interdependency between projects plans to optimize the overall execution. We also spent considerable time with our alliance partners in understanding the markets, securing capacity and developing sourcing strategies. The third pillar of our project execution principle is standardization, which we believe is a key to driving down cost, both in development phase and in operation. And let me give you a few concrete examples. One, we will be using the same type of compressors on both Lundin, Hugin A and Valhall PWP with the same requirement specification and synergies in project execution as well as in operation. Cranes is another example where we want to standardize as much as possible to enable our remote operations and to allow for efficient maintenance in the future. And finally, we are also standardizing Christmas trees -- subsea Christmas tree that is, across Yggdrasil and Skarv Satellite, facilitating efficient execution, providing operational flexibility and lower costs. As I have discussed, when establishing a robust execution strategy for a parallel project, the alliance model is crucial. On this illustration, you see a breakdown of the spending on the main fields, on the CapEx type and some granularity on contract types for the suppliers and compensation formats used to incentivize productivity. Let me make two important points. Firstly, most of the work is performed in the alliances. For drilling of wells, our alliance partners are Noble, Odfjell Drilling, and Halliburton. And one month ago, we signed a new five-year agreement for these alliances, securing all the capacity we need in the years ahead. These alliances have delivered continuous world-class performance and kept on drilling more cost-efficient and better wells. Our ambition going forward are not any less. For facilities, 85% of the planned contractor work will be performed by the fixed facilities alliance with Aker Solutions, ABB, and Siemens Energy, and the subsea alliance with Subsea 7 and Aker Solutions. All of these alliances have proven track record with excellent execution of previous budgets. Secondly, most of the capital is done through incentive-based models. For facilities and modifications, two-thirds of the contract volume has incentives for productivity and cost efficiency, while Aker BP and the licensed partners take on the risk of procurement and cost of components. For drilling, the commercial models are structured to incentivize high drilling performance with normal mechanism for risk management on both up and downside. Hence, an important principle is that our partners and suppliers should only take the risk related to what they can naturally control, which is their own productivity and quality, and shall also have strong incentives to help Aker BP manage and optimize the entire risk exposure. We truly believe we have established a good balance. To round off this part, I would like to point out that we have already signed contracts with yards in Norway for most of the construction activities. On this illustration, we show what and from where the different deliveries will come. And I'm very pleased we have secured this high-quality capacity at such an early stage. In total, above 60% of the total CapEx scope will be delivered from Norway, whereas the remainder will come from global sourcing of equipment and pre-fabrication, amongst other, from Brazil, UK, in Asia and the Middle East. So, we are well prepared, we are off to a good start. And through state-of-the-art partnerships and robust planning, I am very confident that we will successfully execute the program to lift our production to around 525,000 barrels per day in 2028. Even though we have just embarked on a major CapEx program to develop fields that will give us between 250,000 and 300,000 barrels per day in 2028, we are not resting on our laurels. E&P is a long-term business and we need to have a continuous focus on adding resources to backfill our resource base. There are basically three ways of building a resource base; exploration, increased recovery and acquisitions, and we are working along all these three lines. And let me start with exploration. We remain positive to the exploration potential on the NCS. And we plan to continue to be an active explorer in the years to come. We have a significant acreage position, which we are continuously renewing through licensing round and transaction. The short version of our exploration strategy is that we focus around 80% of our efforts on opportunities near existing infrastructure. These opportunities typically have a higher chance of success, it takes shorter time and less CapEx to bring them on production and have positive synergies with our existing assets on cost, as well as asset life. The remaining 20% of the activity is directed towards opportunities with higher risk and higher reward in new play types and new geographies. We expect to be drilling 10 to 15 exploration wells per year and the goal is to find 50 million barrels on average each year. Now let's have a look at our exploration results last year. 2022 was a good exploration year. We discovered more than 100 million barrels, twice the target. This placed us at the top of the list in terms of net volumes discovered on the NCS. One of the main features of the exploration program was a five-well campaign in the Skarv area. The campaign resulted in two discoveries, Storjo and Newt, which we believe are commercial and which will be most likely be included in the next group of tieback projects to Skarv. We will also test the upside potential at Storjo with a new exploration well in Q4 this year. The largest discovery was Lupa in the Barents Sea. This is a sizable gas discovery with preliminary estimates of close to 100 million barrels of oil equivalent. We would, of course, have preferred to find oil, which could have been produced through the Goliat FPSO. A gas discovery has less straightforward and will probably take longer to commercialize, as it will require new gas infrastructure in the Barents Sea. But on the positive side, such discoveries are exactly what we need to unlock such infrastructure. Today, we also present our exploration program for 2023 for the first time, built around the same strategy as before. The 2023 program consists of 17 wells, four of these are 2022 wells, which have been pushed into this year due to rig schedule. 15 of the 17 wells can be categorized as near-field opportunities, while on the Rondeslottet and Kaldafjell are in the high-risk high-reward category. Rondeslottet is actually a follow-up of a 20-year-old discovery called [Aleda] (ph) where the main risk is reservoir quality. The near-field opportunities are spread across different areas and play types and include several prospects in the Skarv and Yggdrasil area. We are also planning a well close to Wisting called Ferdinand. And as we announced in November, we chose to postpone the investment decision for a development of Wisting due to a combination of cost pressure, supply chain constraints, and less favorable tax conditions. Our discovery at Ferdinand in combination with further maturation of the development concept could pave the way for commercial Wisting development a few years down the road. The history on the NCS has shown that big fields tend to get bigger over time and we have several great examples of this in our own portfolio, with Alvheim, Skarv, and Edvard Grieg. And we will continue to chase the upsides in and around our existing fields. These upsides can again be split into three categories. The first category is 3P reserves which represent upside in existing fields. We are addressing this potential with infill drilling, pressure support, et cetera to increase recovery. The second category is 2C resources. These are discoveries that have not yet been through an investment decision, and when these are located within tieback distance of one of our existing production hubs, we include them in the overall plan for that hub. Now, finally, we have the exploration potential near existing infrastructure, also called ILX. When we make discoveries here, they become part of our 2C resources just mentioned. In sum, we actually do believe that these three categories have the potential that is roughly equal in size to our current 2P reserves. Now, a lot of these barrels have come through exploration, but Aker BP history is not only built through organic growth. M&A has, of course, played a central role in the creation of Aker BP, with the Lundin transaction as the latest example. We don't have any really exciting news to share here today, but in general, we are continually evaluating opportunities in this space. However, we will remain true to our principles. Our focus is on quality assets with upside potential and we prefer to have the operator role. And every deal we do must be financially accretive. The ultimate goal is the same as in everything else we do, to create value, which can be returned to shareholders, which brings us to the fifth strategic priority, which will be covered by our CFO, David Tonne. 2022 has indeed been a transformational year for Aker BP in many aspects, but also on the financial side. Here, we have summarized some of the key financial figures for Aker BP as we stand at the end of the fourth quarter. And having worked with the company since 2013, it is great to see what the organization has achieved together. However, the transformation and value creation journey does not stop here. Our goal is, of course, to ensure that we create, at least as much value over the next 10 years as we have done the last decade. Today, I will cover two main topics. I will walk you through the fourth quarter financial performance and then I will present the latest updates to our capital allocation plan for the coming years, including specific guidance for 2023. We start with the fourth quarter. With record high production and a small underlift, sales volume ended at 428,000 barrels of oil equivalents per day. Despite the higher volumes sold, total income was down quarter-on-quarter due to lower realized prices. With almost one lifting every second day in 2022, timing of lifting is no longer that important for realized prices. The achieved oil price for the quarter was $88.5 per barrel, very close to the average dated Brent at $89 per barrel. Most of our gas is sold on contracts linked to day-ahead prices with roughly two-thirds going to the EU and one-third going to the U.K. And our realized gas price was $150.4 per barrel of oil equivalent, in line with the observed market prices in the quarter. Combined, this gave an average hydrocarbon price of $96.5 per barrel of oil equivalents in the fourth quarter. And for the full year, realized hydrocarbon price ended at around $115 per barrel of oil equivalents. Now moving on to production costs. Costs for the oil and gas produced was relatively stable quarter-on-quarter at $288 million. Out of the $12 million increase, $5 million are related to increased tariff and transportation expenses due to higher production. In general, maintenance activities were higher quarter-on-quarter across the assets, but costs were compensated by lower electricity prices. The average production cost per barrel produced was $7.2 in the quarter, which means that the cost for the second half of 2022 ended in line with the guidance of roughly $7 per barrel of oil equivalents. Regarding capital spend, CapEx increased quarter-on-quarter, but still ended up at $200 million or roughly $200 million below the updated guidance of $1.2 billion for the second half of the year. The main drivers for the increase quarter-on-quarter was related to drilling of wells at Frosk, Ivar Aasen and Johan Sverdrup. The underspend versus guidance is a mix of a weaker-than-expected Norwegian kroner, strong cost performance on several of the projects, but also phasing of activities into 2023. Both exploration spend and abandonment in the fourth quarter were lower than planned as the four exploration wells; Angulata, P-Graben, Styggehoe and Gjegnalunden scheduled late in the fourth quarter, slipped into 2023. And the P&A work on Hod was deferred to the second quarter this year. Now with this behind us, let's move on to look at the P&L. Total income ended at $3.8 billion. Production cost of sold volumes were up due to the higher sales volume. Still the EBITDAX was strong at $3.5 billion, meaning a margin of over 90%. Exploration expenses, was $32 million. This is lower than normal as the Lupa discovery was capitalized and four wells were moved into 2023. Depreciation was $641 million, which corresponds to $16.1 per barrel. The accounting principle change related to abandonment provision as described in Note 1 to the financial statements imply a higher abandonment provision due to lower discount rates applied, which in turn impacts the asset side and increases the depreciation. In the quarter, we also recognized a non-cash impairment charge of $636 million, of which around $500 million was related to the postponement of Wisting, while the remainder was technical goodwill related to Edvard Grieg. The Edvard Grieg rig impairment is mainly caused by lower gas forward prices at the end of the quarter compared to when the asset values and technical goodwill was recognized at fair value as part of the purchase price allocation of the Lundin acquisition. Since technical goodwill is not depreciated but must be impaired over the lifetime of the asset, we are exposed to impairment going forward and we expect to impair technical goodwill from time to time. Net financial costs in the quarter were $37 million compared to $174 million in the third quarter. The change is mainly driven by the net effect of currency losses and gains on currency derivatives. Profit before tax then ended at $2.177 billion and tax expenses amounted to $2.064 billion. The effective tax rate for the quarter was 95% and mainly driven by the impairment of goodwill without deferred tax, which increased the tax rate with roughly 14 percentage points. Consequently, net profit ended at $112 million. As in the third quarter, we also had a change in other comprehensive income in the fourth quarter. The driver for this is that the legal entities acquired in the Lundin transaction include companies with other functional currency than dollar. This gave rise to a currency translation loss in the third quarter of $1.013 billion. In the fourth quarter, the loss was reversed by a gain of $1.308 billion. This essentially represents the net adjustment to the balance sheet, mainly as a result of the change in the dollar-NOK exchange rate for the second half of 2022. Now, all acquired companies have either been liquidated or merged with Aker BP, hence no further other comprehensive income will arise from these transactions. The main changes in the balance sheet from the third quarter are related to the currency translation just explained. Here, parts of the balance sheet that arise from the Lundin transaction have been subject to currency adjustment due to having Norwegian kroner as a functional currency. In particular, we see this on the increase in goodwill quarter-on-quarter. More interestingly is perhaps the key drivers for cash flow in the quarter. And although operating cash flow was very strong at $3.762 billion, the net cash flow was impacted by phasing of tax payments. First of all, since all companies on the NCS always pay two tax installments in the fourth quarter versus one in the third, but also by the extra tax payment we chose to do in October, compensating for the higher-than-estimated profits in the whole of 2022 compared to when the tax installments were originally set back in June. This means that taxes paid in the quarter was $2.955 billion, $785 million above the actual current tax for the quarter. Working capital development in the quarter was positively impacted by lower receivables and accrued income, which typically is the case when prices decline during the quarter. In addition, the recent adjustment to working capital for currency losses on NOK-denominated payables such as tax. The working capital movement in the fourth quarter is to a large extent a reversal of the movements seen in the third quarter. Investment activities excluding payments on lease debt, amounted to roughly $700 million. Dividends paid in the quarter was $332 million, and net change in cash was then minus $231 million. Before closing out the fourth quarter and 2022, let me summarize the second half performance versus guidance on the key metrics. I've mostly covered the details already, but to sum up, operational performance in the second half is likely the best in the history of the company and this is also reflected in the guidance metrics. Production ended above latest guidance of 410,000 to 420,000 barrels oil equivalents per day. Production cost per barrel ended close to $7, at $7.2, and total spend ended below guidance, driven by a combination of good cost control, strong delivery on ongoing projects, a weaker-than-expected Norwegian kroner and phasing of activity into 2023. Now, with that behind us, it's time to shift gears and focus on what lies ahead. Those of you who have followed Aker BP in the last years will recognize this framework. My key message to you is that both our strategy and capital allocation priorities stand firm. We believe a key attribute of the E&P company of the future is a robust balance sheet with financial flexibility and investment-grade credit rating. We will invest in high-return projects with low breakeven that not only arrest underlying decline, but provide profitable growth. We firmly believe this is how you create sustainable shareholder value as an E&P company. And lastly, the value we create will be distributed to our stakeholders. We start with a few comments on the financial position. We have used 2022 to build further robustness for the years to come. The Lundin acquisition supported this by providing low-cost production, adding significant cash flow and additional financial capacity. In the second quarter, we also deliberately chose to finance the $2.2 billion consideration of the acquisition from cash rather than issuing additional debt. As a result, we got credit rating upgrades from the three main rating agencies in 2022 and we ended the year with a leverage ratio of 0.2, $2.8 billion in cash, and an undrawn bank facility of $3.4 billion. Now looking ahead, as we have a diversified bond portfolio with no maturities before 2025, we have a lot of flexibility with no immediate need to refinance and can take our time to extend maturities over the coming years. Our strong financial capacity is the foundation for our ability to invest in high-return projects. And today, we have talked about the project portfolio that we sanctioned during 2022. This is a diversified portfolio of highly profitable projects that will grow our production of low-cost, low-carbon barrels over the next five years. The project portfolio has an average unlevered IRR, around 25% at $65 Brent. The average payback time from first oil is between one and two years, and the estimated average breakeven at final investment decision stood between $35 and $40 per barrel, using a 10% discount rate. We believe this to be a very attractive portfolio to invest in. At the same time, we recognize that the breakevens are higher than our target of $30 per barrel that we set when the temporary fiscal regime was put in place back in 2020. The key driver for the increase in breakevens is the adjustment to the temporary regime that the government approved in December. In addition, global cost inflation also impact our projects and we, of course, have reflected this in our forecast for the coming years when sanctioning the projects. And as communicated in November, these were also the same reasons why the Wisting partnership agreed to postpone the final investment decision to 2026. To me, this was an example of responsible capital allocation and capital discipline in practice. As we now ramp up the project execution phase on the projects that we actually have sanctioned, we also expect to increase capital investments. And on this slide, you see our latest long-term CapEx estimate. The estimates are aligned with the CapEx figures communicated as part of our press release when we sanctioned the PDO projects in December last year. The total investment illustrated here is around $23 billion to $24 billion, where roughly $20 billion of these are related to sanctioned projects covered under the temporary fiscal regime. Approximately $19 billion of these were sanctioned in December while the rest is related to PDO projects in the Alvheim area sanctioned earlier. The other $3 billion to $4 billion are estimates for CapEx related to producing assets, typically drilling of new wells and other non-sanctioned projects. Note that we have not included any CapEx related to the Wisting project after a potential FID in 2026, as the project is currently being reworked with the ambition of reducing cost significantly. This means that roughly 85% of the CapEx seen on the graph to the left are covered by the temporary tax rules and is eligible for 81.7% tax deduction in the year it is spent, while the remaining 5.2% are deductions covered in the next five years. In total, the tax deduction for investments under this regime is 86.9%, which can be compared to a tax on profit of 78%. The consequence of this is that looking at pre-tax CapEx alone for companies operating on the Norwegian Continental Shelf does not make any sense, as the actual free cash flow effect is so heavily impacted by which tax regime the investments fall under. The total CapEx after tax deductions related to the investment program is estimated to less than $4 billion over the next six years. And the phasing is illustrated in the graph in the middle. This means that the actual net free cash flow impact of the investment program is less than $1 billion each year. For comparison, Aker BP had a financial capacity of $6.2 billion, including $2.8 billion in cash on account at the end of 2022. The last element in our capital frame is how we plan to return the value created. The sources and uses graph on the left-hand side of this slide is familiar to many of you. We have now updated this with our latest plan data and moved one year forward, leaving behind us a very strong 2022. On the bar to the left, we show the estimated cash flow from operations after tax from 2023 to 2028 at various oil prices. Here you see the strong underlying cash flow generation from our low-cost asset base. This is then compared to the planned uses of this cash flow. The high pre-tax investment program has a significant less after-tax impact. Around $5.5 billion after-tax are spent on investments and financing over the next six years, which is covered by organic cash flow at an oil price around $35 per barrel, on average over the next six years. Any cash flow above this is capacity for dividends and debt repayments. This cash flow generation provides a capacity for a resilient dividend that grows in line with value creation. And a key principle for Aker BP is that dividends shall reflect the financial capacity through the cycle, considering the long-term financial outlook and the credit profile of the company. Our ambition is to grow the dividend by at least 5% per year over the coming investment cycle. For 2023, the Board of Directors has proposed to pay a cash dividend of $2.2 per share. This is up 10% from 2022. The dividend is to be paid in four quarterly installments, with the next payment already in February. In addition to the proposed dividend, the guidance on other key metrics for 2023 are as follows. Production for the second half of 2022 ended at 422,000 barrels per day and we expect to grow this to between 430,000 to 460,000 barrels per day for the full year 2023. Roughly 13% of the volume is expected to be gas, while the rest is liquids. The production is expected to ramp up in the first month of 2023, as Johan Sverdrup Phase 2 first came on stream in late fourth quarter. Production through the year is expected to be relatively stable, but with some planned summer maintenance downtime in the late second quarter and the third quarter. Production costs for the second half of 2022 ended at $7.2 per barrel. We continue to see pressure and high volatility in key drivers for this metric. This includes general inflation and fluctuating electricity prices, CO2 prices and FX rates. Given this uncertainty, we have, for 2023, estimated production cost somewhere between $7 and $8 per barrel of oil equivalent. This assumes a dollar/NOK foreign exchange rate of 9.5 which is slightly stronger than what we had in 2022. Given the increasing share of electrified fields, the electricity price is an increasingly important factor for the cost per barrel metric. However, as we are a producer of natural gas, we have an intrinsic hedge and are typically more than compensated for any increase in electricity cost with the increased cash flow from our gas sales. On CapEx, we expect to spend $3 billion to $3.5 billion in 2023. This is in line with the spend profiles of the PDO projects sanctioned in December and taking into account that some of the $200 million under-spend in 2022 is phased into 2023. As the projects are now moving into execution with final contracts being signed and payment schedules being matured, there's still quite some uncertainty regarding the in-year phasing and the between-the-year phasing of the spend. This is something that we will continue to detail over the next six to nine months and some changes should be expected. On exploration, we plan to spend between $400 million and $500 million pre-tax. This is in line with the targeted spend per year after high grading the exploration activity following the integration with Lundin. The 2023 program is expected between 15 and 20 wells. The number is higher than what we typically would target because of the four wells that were deferred from 2022 into 2023. As the current drilling schedule stand, we expect a similar activity in the first and the second quarter with a slowdown in the third quarter and then the highest level in the fourth quarter. On abandonment, total spend is planned between $100 million and $200 million pre-tax with almost all of the spend being linked to P&A activity on Valhall. And then lastly, on tax, as normal, we now have a fairly good overview of the total tax to be paid for the fiscal year 2022, with the last three tax installments to be paid in February, April and June, now being fixed. In addition, we have estimated the first three tax installments for the fiscal year 2023 to be paid in the second half of the year. The latter estimates are, of course, very sensitive to commodity prices but also other metrics that we have guided on today. For simplicity, we have in the scenarios shown here on the slide chosen to fix the gas price at $25 per MMBTU and the dollar-NOK exchange rate at 9.5. So, before leaving the word back to Karl for some concluding remarks and Q&A, let me just sum up the key messages from my presentation. 2022 has not only been another transformational year for Aker BP, but also a year with very strong operational performance. This is reflected both in our financial performance and the financial position at the end of the year, which has never been more robust. Now looking forward, with our large base of low-cost, low-carbon production and investments in high-return projects, our goal is to maximize long-term value creation for our shareholders and distribute this through a resilient and growing dividend. Safe and efficient operation is our priority number one. And I'm very pleased to see the progress on both safety, production efficiency and OpEx for 2022. On decarbonization, our net zero ambition by 2030 remains firm, and with the lowest emission intensity in the industry, we have a great starting point. We are going to execute a large portfolio of field development projects in the years to come. And we are focusing on strong partnerships, front loading and standardization to ensure a smooth execution and that we deliver the projects on time and on cost and with the right quality. 2022 was a good exploration year, and we continue along the same path in 2023. And finally, our financial priorities remain firm. And for 2023, we are increasing the dividends by 10%. We will now make a short break before we open the Q&A sessions. And if you want to ask questions, please connect with the Teams link provided below on the webpage. However, if you just want to listen in, please stay right where you are and we'll be back here in around two minutes. So, welcome back to Q&A. And for those of you who want to ask questions, which I assume is quite a few, you have logged into Teams, please raise your digital hand, and Kjetil Bakken will help me to take these questions and make sure that we conduct this Q&A in an orderly fashion. So, Kjetil what is the first question? Thanks for taking my questions. I have three questions. First on electrification. You've talked about decarbonization strategy and that is, of course, important with electrification. Could you talk a little bit about the economics for electrification? What will be CapEx? And what would be the specific cost savings for such projects? Second question on production guidance for 2023. What's the implied production for Sverdrup and Valhall included in your 430 mboepd to 460 mboepd guidance? And my last question is on cost inflation. Karl, at the third quarter presentation you said that you break down the cost inflation in 60 different categories. Just wonder what has the development been for cost inflation in those categories in the past quarter, or if there's been any material changes? Thanks. Thank you, Teodor. Excellent questions. When it comes to electrification, the assumption we're making when we're making these decisions is that the CO2 cost will continue to rise and we assume that the CO2 cost will meet the previously announced target of NOK2,000 per ton. And I can assure you that we actually only do NPV-positive investments in electrification to this date. Now that is of course -- the balances of course as you imply in your question, between the CapEx we're actually investing it, but there was also quite a lot of savings related to maintenance cost and other issues. So, the economy is a bit balanced. So, it doesn't necessarily have to be 100% direct CO2 cost or the cost savings from lower CO2 emissions. I think it would be fair to assume that there is maybe up to NOK500 to NOK1,000 in addition to the direct CO2 cost savings when we do these calculations. They vary, of course, greatly from project to project, but I can assure you we do NPV-positive investments in this case as well. Now the production guidance, we don't guide on fields on a standalone basis. And the guidance today provided include our best estimates for production, both from Johan Sverdrup and from Edvard Grieg. And they, of course, take into account both upsides and downsides in these two fields. Cost inflation. Okay, excellent. Well, let's go back to DG2. I think it's worthwhile saying that as we progress towards DG3, there has been a little bit of a trend change. So certain components that has a global market like steel and some more material components, actually seen a reduction in prognosed inflation in next couple of years, while others, more Norwegian-specific are pretty flat compared to the assessment we made back in the summer. So, I would say the overall trend is that the inflation pressure is somewhat reduced but not significantly. Thank you. Just a follow-up on the electrification. Would you dare to provide any payback times for electrification projects? I understand it's a wide range there, of course. No, we haven't provided that, but they will vary of course. But some of these projects, the most capital-intensive ones, you should assume payback in the same range as, I would say, normal oil and gas investments. If I may add to that, Teodor, so currently there are not planned any big CapEx electrification projects on our fields, right? So, we have that behind us with now Edvard Grieg being electrified and Ivar also being electrified as part of the Sverdrup Phase 2. Now, we are in the process where we're continuously investing in energy efficiency initiatives which are typically much less CapEx-intensive, right? I'm sorry, we lost John. We'll let him back in later. Let's move on to Mark Wilson from Jefferies. Go ahead, please. Hi, thank you. Good morning, gents. I'd like to ask about the CapEx out to 2028 and the $3 billion to $4 billion you spoke about on, it sounds like already producing assets. It sounds like that has potentially doubled since what you spoke about in July. So, could we speak about the -- what that actually relates to please? Could you confirm that $19 billion for the new projects is still the same? That's the first question. Second one is, we have some people slightly surprised on the mid-point of production guidance for '23 versus where you were in the second half of last year, given Johan Sverdrup Phase 2 is on stream. So, could you just give us the bridge to that guidance, and frankly, where you would be seeing declines as much as production going up? Thank you. So, just to recap, right, so we are talking about a total CapEx program now that we have guided on between $23 billion and $24 billion in total. Out of that, roughly $20 billion is related to the PDO projects, sanctioned either in December last year or previously. So, roughly $19 billion related to the project sanctioned in December. And then, there is additional CapEx, as you mentioned, which we have included in the plan, which is typically infill drilling related to the existing assets, and there's also new projects that are currently sitting in our contingent resource hopper. So, we have previously talked about potential new projects in the Alvheim area. We have talked about potential new projects which are non-operated. If you remember back, we had the [indiscernible] project as well, which is a partner-operated project. So, these are the additional $3 billion to $4 billion that we have currently in our plan. And then, with respect to production guidance, there are, of course, quite a lot of pluses and minuses when we make up the assessment here. And I don't think I'll kind of provide a various specific bridge between the assessment we have today and the assessment we had in the summer. But obviously, there are some changes. One of those specific changes is a slight reduction in -- or decline on Alvheim, which will be offset by the Frosk coming on stream. And then, there, of course, are uncertainty related to the final production volume coming out of Johan Sverdrup on Phase 2. So, I think those are the kind of key issues that make up the range. And, I guess, just want to add to that as well, right, so when we presented back in July our update, we had a different starting point for Phase 2. So, of course, with Phase 2 on Johan Sverdrup starting up in late December, we are still in ramp-up phase, which of course impacts then the discrete production number for 2023. Yes, I hope you can hear me now. Sorry, I don't know what happened. I logged out and in again. So, hopefully you can hear me now. If you can just confirm that you can hear me please, just to make sure. Yes, very, very good. Your production portfolio is oil-heavy, and both you and Lundin have historically seemed to prefer oil versus gas projects. Just wonder a little bit now about your 2023 exploration program. I love the table that you're providing with a detailed plan. But is it possible to give some indication of whether you're targeting oil and gas prospects in general in our exploration in '23, please? Yes. So, I think my feedback to the team is explore for hydrocarbons, because the biggest -- the most complex issue in exploration is actually to distinguish between these different phases. That being said, the 2022 program is largely focused on ILX. And since most of our hubs are in oil-heavy regions, you should assume that a significant part of the 2023 program is also oil-heavy. And the one deviation of course being the exploration wells close to Skarv in that gas portfolio. And then, the discussion is how will the oil and gas balance be going forward? I think if you look at the award we had in the recent upper around, I think our view is that the Norwegian Continental Shelf is still a prolific exploration region and we are probably not -- we're probably more agnostic, I would say, to oil versus gas now than we have been in the past. It's a little related both to gas price development, but also how we view gas price outlook. And then, it is also fundamentally how we think about exploration on the Norwegian Continental Shelf and remaining volumes. Makes sense. And may I ask, do you still see M&A potential on the Norwegian shelf going forward, both in the company M&A and also asset transactions? Are you likely to participate in asset transactions in '23? We're doing asset transaction pretty much all the time, minor portfolio adjustments. The question, do I still see M&A potential on the Norwegian continental shelf? Yes. The answer is yes. My final question. Could you update us on your hedging strategy, and whether there is any change in that, and maybe on your hedging positions for '23, please? That was my last question. Thank you. In terms of hedging policy, we have typically in the past used put options on oil. There is no change in the policy, but currently, we do not have any commodity hedges in place for 2023. The reason for that is the volatility in the market. It's linked to, of course, the increased size of Aker BP and sort of need to hedge downside risk, or need to not hedge downside risk. And then the last one also is related to the tax system and the change, right? So, when you don't carry forward tax losses anymore, the rationale for hedging using put options is not necessarily the same anymore. Thank you, John. And also thank you for showing your face on camera. And we would like to -- everyone to do that, if possible, please. Next question comes from Matt Smith of Bank of America. Go ahead, Matt. I think you need to unmute your microphone. Sorry, Matt. We can't hear. So, maybe you're on mute or something wrong with the connection. We might have to call you on to get some tips. Yes, good morning, thanks for the presentation. Anish Kapadia here from Palissy Advisors. A few questions, please. I wanted to start on Wisting first of all. So, it's a project that has been around for a long time. Only just over a year ago Lundin came in and bought an additional stake for over $300 million. And you mentioned kind of going back to rework the projects and getting costs down, but from my understanding that's already happened once in 2020 and 2021, then plus last year you had the additional tax advantages. So, I'm just really trying to understand how going forward, kind of, three, four years, you think that you could improve this project and why it would be better delaying it for that period of time? And then, my second question was looking at your existing production base now, it seems like you've got fairly steep decline on that existing production base out to 2027, 2028 that you show on the chart. Could you just break down a bit, kind of, the key components of the decline by the various field, and if you can what is Johan Sverdrup within that? And then just one final question on the cash flow estimates for this year. I see there was a note within the kind of the wider cash flow out for the next five years, you're assuming -- your base case is $85 for cash flow for 2023. Can you just outline what's that expectation in terms of cash flow in that $85 scenario? Thank you. Excellent. So let me start with Wisting. As you, of course, are aware, we postponed the investment decision towards the back end of last year, which was a result of, I would say, multiple changes. Cost increase, we had price developments, we had some constraints in the supply market. We had a bit of a reduction in the base reserves related to technical issues. And then finally, we had some changes in the tax system. Now going forward, I think the approach to Wisting is actually threefold. So, the operator is working on reducing the cost, basically changing the concept and optimizing that concept. They are working on the technical field development, including wells, to make sure that we get back to reserve levels we have at DG2, and then Aker BP will be operating exploration wells to increase volumes in the area. The first one to be drilled is the Ferdinand well in Q4. And in sum, at least from an ambition level, that should bring Wisting to an investable level in terms of breakeven. And then, of course, we'll have to come back to the actual results as they develop. In terms of decline, yes, there are of course natural declines in all of our existing fields, which we are to a certain degree offsetting as we go along. There was a question a bit earlier today about investments in -- other investments than the $19 million in new PDOs, which are largely tie-ins, new IRR wells, which will to a certain degree offset this mechanism back to 2027. We don't necessarily provide guidance on field-to-field breakdown on decline, but I think it's fair to say that there are some pluses and minuses. One specific thing as you look at the long-term project or long-term profile is that we have actually postponed the start-up of the Skarv SSP from '26 to '27, which might seem as a decline in terms of production, but it's actually just a postponement to the start-up. That is done for two reasons. The first one is, of course, to optimize the position under the current tax regime, but it's also due to modification scope necessary on the Skarv field. Yes, I can definitely do that. So, I guess you're referring to the sources and uses graph that we have on Page 44 in the presentation, right? And that's an illustration of the total cash flow capacity generation over the period. And you are referring to sort of the assumption of having $85 in 2023 as the base case assumption. So, one of the key reasons for doing that when we're doing this calculation is that we need to accommodate for the fact that taxes are phased when you pay that on the Norwegian Continental Shelf. So, you have a tax overhang with us from a very strong 2022 into 2023. So that needs to be accounted for when we are sort of making analysis of what the company would look like in a $40 scenario. This does not mean necessarily that $85 is our base case when we are doing our internal cash flow forecasting, and we are not guiding on cash flow at various oil prices in specific years. So, I'm afraid you have to do that calculation for yourself. He has not currently raised his hand. If he does, I'll give him priority. But the next one in line is Sasi Chilukuru from Morgan Stanley. So, Sasi, please go ahead. Hi, thanks for taking my questions. I just wanted to get your view on asset disposals. You are looking at investing in growth projects. Just wondering if there are any assets in the portfolio that you'd like to perhaps like to exit or even reduce your stake. Then the second question was related to FIDs. I am just wondering if you could highlight how many FIDs are planned for 2023 or perhaps in 2024. You've highlighted potential projects; Alvheim and [Yggdrasil] (ph). So just wondering how much -- how many of them will kind of come into this year. And, sorry if I've missed this, and if you've already highlighted this. I was just wondering what your assumptions for gas prices were in your sources and uses of cash flows like. You've highlighted $25 MMBTU in 2023. Just wanted to check what the assumptions were for 2024 onwards. And sorry, one last very small one. If you could isolate the proportion of electricity costs within your OpEx guidance of $7 to $8 per BOE? Thanks. Yes. So, let me start with asset disposal. I am, of course, not going to touch into any stuff that's ongoing in terms of portfolio optimization. But I think it's fair to assume that Aker BP will engage in portfolio optimization, both on the buy side and possibly also on the sell side. And we'll come back to that when and if it happens. When it comes to FID, if memory serves me right, I think we have four well decisions coming up in this year. But let me get back to you concretely on that, but it's in that range. Yes, I can do that. It's simple to answer the question. So, we use 13.8% in dollar MMBtu terms in ratio to oil price in [BOE] (ph) terms. So, we use that for each of the different scenarios in the sources and uses graph. And then, on electricity cost, it's between $1 and $1.5 per barrel. And, of course, electricity prices has been extremely volatile in tandem with the gas price, right, and that's also, of course, a driver then of the range on the production cost per barrel. So, this is the reason that the range on the OpEx per barrel is what it is, because after the electrification of [indiscernible] now 80% of our production is actually powered from shore. So, it's a surprisingly high sensitivity to electricity prices in the OpEx per barrel. If you look at the remaining part of the OpEx, that's actually been trending down quite nicely. So, the background OpEx is actually trending down pretty nicely from 2021 to 2023 and we also expect the same to happen in '23, but the big uncertainty of course is the electricity price. And I, of course, don't want to repeat myself too many times but I don't think we can talk about electricity prices without talking about revenues from gas sales, right, which is of course the natural hedge for that. So... Thanks, good morning, guys. Thank you very much indeed for your time this morning. Three questions from me, if I may. Firstly, going back to Mark's question on bridging the production guidance, you said -- you gave the initial guidance for 2023 or 475,000 per day post the Lundin transaction, which seems a long time ago now. But I'm interested, can you help me understand more where that -- give me any help about where that bridge is between where you are today at 445,000 midpoint and the 475,000 you gave a year ago? I know Sverdrup seems to be a big chunk of it. Is there anything particular other than that? My second question was on tax and the guidance you've given here, David, presumably includes the cash payments, includes the effect of prepaying that tax that you did in October. You've deducted that from the guidance you've given today. So, we shouldn't double-count that. And my last question was on Slide 22, the alliance model. Given all the sanctions of projects, all the Norwegian yards, and you said 60% of your CapEx is going into Norway, all the Norwegian yard is going to be absolutely flat out, and it's really interesting to see the massive cost overrun on the Balder X project, which actually is shown on Slide 23. The -- for energy, 50% cost overrun, $1.2 billion, $1.3 billion. But yet all of that cost for you is insulated because of the tax system. What matters to you much more is time. If the project is delayed that's a much bigger hit to NPV for you. How are you thinking about the -- therefore, the alignment because productivity and cost are linked [Technical Difficulty] the yard is going to have to bear some of that cost. How do you -- the cost to you is a lot lower than that is to the yard. So, this feels to be a mismatch there. I'm interested, Karl Johnny, if you could talk about that, please. Yes, absolutely. Three great questions, Chris. I think the easy way to talk about the change in production guidance is that back in, let's say, summer last year we had a certain assumption of start-up in Johan Sverdrup which of course, unfortunately, was a bit more aggressive than what happens in reality, which means that we should have been further progressed in the ramp-up and capacity testing. And then, of course, when this moves to the right, the average volume in 2023 also decreases compared to what it was back in the summer of 2022. So that's the major change. And then, there are quite a few other pluses and minuses, but they are in the range of 1.5% to 2%, right? And so, inside that would cause statistic significance and hard to predict. So that's how I would think about it if I were you, Chris. And then that doesn't mean that we don't believe in Johan Sverdrup. We just believe -- means that we were a bit too aggressive back in the summer, and we are still following the same ramp-up plan but now pushed a bit to the right. Yes, and I can do it very quickly, Chris. So yes, you are correct in assuming that the additional one-off payment that we did in October is now sort of baked into the estimates for the first half of 2023. So, we don't expect any sort of additional payments. So, this is our best estimate on the tax payments in the first and the second quarter this year. And then, moving back to the alliance model and your discussion on time versus cost and probably flowing quality as well in that debate. So first, let me start with this discussion around the Worley project at Rosenberg, which [indiscernible] can comment on themselves, but that is a brownfield project. They are not directly correlatable to what we're doing in greenfield. So, I think that's probably point number one, right? And then, I think the key issue to actually deliver on time is to make sure that we have the right resources, that the plants are well known and well worked out, that there is a link between the site need for equipment and packages and the construction sequence on these yards. And this is where the alliance model actually excel, because it means that the actual construction and I'd say the major package vendors have actually been a part of developing the concept and the solutions and therefore, have bought into the plan and are familiar with the plan. That means that as we are now progressing into detailed engineering and ultimately into construction, there are no surprises to these yards in terms of what they are supposed to deliver and when they are supposed to deliver it. So, I think we are in a lot better position than we would have been using normal EPC contract mechanisms. And then, of course, you're absolutely right, the two key issues we are focusing on in the moment is quality, because quality -- if you deliver on quality usually means that you deliver on time, and on cost as well. And then, of course, we're preoccupied also with making sure that the plants we have are linked to the real reality on these sites. And I can assure you that there is quite a lot of work ongoing at the moment. And there are no red flags as far as I can see at this point in time. So good morning, everyone. Thank you for the presentation this morning. I will have two questions if I may. So, one is on CapEx first. CapEx-induced tax deductions have been revised down a few times in recent years. And as you explained, it's the last chance to the temporary tax system that had a significant impact on your projected breakeven levels. With this in mind, can you please help us understand how much of CapEx under your budget falls under the temporary tax system this year and next? Would you tend to say overall the CapEx budget is slightly back-end loaded in terms of how much falls under that temporary tax systems throughout the 2023-2028 period? And also still on CapEx, are you able to provide some high-level breakdown for this year, if possible, please, and what is the USD-NOK assumption throughout the period that you are using with your projections? Then the second sort of group of questions will be related to production. Last time you provided some detailed color on production profiles for each operated was I think back with the 2021 CMU, if I'm not mistaken. At the same time, the overall production outlook has been revised down a few times since then for various reasons. So, again, with this in mind, can you please update us on Valhall, which still remains a significant contributor? I understand that we ended some 15 KBD short of the 2022 level, that was sort of projected according to that last provided illustrative profile. The same profile points to a big, north of 65 KBD this year for Valhall net to Aker BP. How close do you expect to be to that peak this year? Is that still expected basically if you think about Valhall overall is up? Is that still expected to reach its peak contribution this year based on your current plan? That would be great if you could provide any color on these two questions. I can definitely do that, Yoann. So, we have communicated that roughly 85% of the CapEx under our profile is linked to the temporary tax regime or falls under the temporary tax regime. We'll not split that on a year-by-year basis. And as I said in my presentation as well, we are still working on in-year phasing and also between-the-year phasing. So, we don't have a specific number on that. But I think as you see on our CapEx ramp-up profile, you can of course see that we are increasing CapEx in '25, '26 in particular, and that would then be related and specific to Yggdrasil and PWP-Fenris. And then, we're leaving behind those CapEx, for example, related to Johan Sverdrup Phase 2 and so on. So, I think there is probably an increase in the CapEx that falls under the temporary regime in that period. Exactly. And then when it comes to foreign exchange assumptions, we have an FX assumption of 9.5 in 2023 and then we've used a flat rate of 8.5 in the period forward. Yes. And then in terms of production and production breakdown. So, I think I talked about the bridge between, let's say, the Q2 discussion on production and the current outlook for 2023. And then your specific question on Valhall, I agree with your numbers, but Valhall, at least in Q4 has actually been a pretty decent contributor. We're now seeing quite a few of the wells that had been falling over on Valhall being put back on stream in the current intervention campaign. So, if Valhall continues to perform the way they have done now, the last few months, I think they certainly have a P50 of 65 and maybe a possibility of being a bit higher in 2023. The key component on the Valhall production is not necessarily the facilities as such, but it's the chalk influx in these wells, which are pretty hard to predict from, let's say, quarter to quarter. So that's the key differential on Valhall. It's the chalk influx in the singular wells. All right. Then we have currently three questions in queue. So, number one is James Thompson from J.P. Morgan. Please go ahead, James. Good morning, everybody. Thanks for taking the questions. I'll try and keep it quick. Karl, could you maybe just give us a little bit more color on the Phase 2 ramp-up on Sverdrup? I mean I know it's a few days delayed, but it will be interesting to understand well performance, et cetera. I mean it looks like it's beaming up quite quickly. So would be good to just understand how that's gone versus your expectations. Secondly, David, could you give us some views about, I guess, the company view on leverage from here? I mean, obviously, 0.2 times net debt-EBITDAX is very, very strong. Clearly going into a bit of a CapEx cycle. It would be good to understand where you are comfortable as we kind of work our way through this CapEx program from here? And finally, just maybe David for you as well, a bit of a detailed question. You talked about the currency translation differences kind of acquired with Lundin. Is that now gone away? Is that what I should take from your comments, or we should expect that volatility into 2023? Thanks. Yes. So, let's start with Johan Sverdrup. I think it's fair to say that in Aker BP, we had a bit more aggressive assessment of startup date than the operator had communicated. The ramp-up has been going quite well, actually, there has been some minor hiccups as is, I would say, normal when you start up facilities of this size. But the ramp-up is pretty much on plan, with the exception that it's in our plans a bit delayed compared to what we communicated back in Q2. I think to give some more color there, I think the operator is actually doing quite a stellar job on the commissioning and startup of Phase 2 as they actually did on Phase 1. So, I don't have any -- I don't really have any worries about the ramp-up of Phase 2 as such. It's all coming along pretty nicely. Yes. So, in terms of leverage ratio, as you mentioned, James, yes, we have delevered the balance sheet quite significantly over a period when the oil prices have been very constructive. Our financial framework is linked to our investment grade credit rating and then believe that that is key in order to ensure that we have financial capacity and also flexibility in the years ahead, given the investment program that we have. And we typically talk internally about a threshold of not exceeding a leverage ratio of 1.5 net debt to EBITDAX over a period of time. So, of course, we are quite significantly below that, but that doesn't mean that we plan to sort of lever up the balance sheet in the shorter term. But given the volatility of commodity prices, we think that it's good to build robustness when the prices are as constructive as they have been in the last year, year and a half. In terms of the foreign exchange question with regards to the Lundin transaction, yes, as I said in my presentation, we have now either liquidated or consolidated into Aker BP the entities which have the NOK as functional currency. So, we don't expect any sort of other comprehensive income linked to the Lundin transaction in future quarters. Okay, brilliant. And maybe just one final modeling point, just in terms of OpEx. Are you going to be able to hold that seven to eight range ahead of the start-up of Yggdrasil, or should we expect it to kind of creep higher until that point? Thanks. That's a good question. I certainly hope that we will be able to stay on this level, it would depend largely on -- well, the variable cost will depend on electricity cost to a certain extent, but there are also discussions on transport tariffs and booking fees and other production-related costs. And then, of course, as these assets mature, we also see a certain increase in maintenance costs, but hopefully, that will be offset by our improvement program along the same lines as well. So, I certainly hope that we will end up in the same range. Modeling-wise, we are actually predicting that we will be pretty flat in terms of OpEx per BOE internally. Yes. Then actually it looks like the final question of today comes from James Hosie from Barclays. So, James, please go ahead. Yes. Thank you. I guess, just want to ask about capital allocation priorities through 2028. Slide 44 indicates you got really $10 billion allocated between debt reduction and dividends at current oil prices. Should we just assume the vast majority of that goes to dividends or do we need to produce it to realize your possible ambitions with further acquisitions or other groups? Yes. So, it's a good question, all right. I don't necessarily think that it's an easy answer to that, because of course it depends on many aspects, including, of course, commodity price environment and so on. But I think, in general, we believe that the cash flow generation is very, very robust and that we have capacity to increase dividends in line with sort of the minimum of 5% per year. And then, it might be that we choose to refinance the debt maturities that we have in '25 and '26 with new additional debt, and it might be that we actually choose to repay some of that, but that's still ongoing discussions. And then, I think the last part of your question is linked to could part of our financial capacity be used for M&A, in the end, right, our M&A transactions is all about creating value. So, we have a robust balance sheet with a lot of financial flexibility and that's also one of the reasons why we're building that flexibility. So, if the right opportunities arise, we, of course, will use that flexibility to create additional value. But the transactions in themselves, of course, needs to be value accretive and built further robustness and further capacity for cash flow generation. Well, as you probably know, James, there is no specific point in our capital allocation policy that talks about building up a war chest for future M&As. So, I think that's a good sign of how we're thinking about M&As. Then I think I'll thank you all for participating in this Q4 for Aker BP for 2022. It's been a fantastic year for us, and we're looking forward to 2023, and look forward to seeing you again in Q1 2023. Thank you so much, and have a great day.

EarningCall_28

Greetings, and welcome to RBC Bearings Third Quarter Fiscal Year 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. Good morning, and thank you, for joining us for RBC Bearings fiscal 2023 third quarter earnings conference call. With me on the call today are Dr. Michael J. Hartnett, Chairman, President, and Chief Executive Officer; Daniel A. Bergeron, Director, Vice President and Chief Operating Officer; and Robert Sullivan, Vice President and Chief Financial Officer. Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition. These factors are also described in greater detail in the press release and on the Company's website. In addition, reconciliation between GAAP and non-GAAP financial information is included as part of the release and is available on the Company's website. Okay. Thank you, Josh, and good morning, everyone, and welcome to the RBC's third quarter conference call. So net sales for our third quarter for fiscal 2023 were $351.6 million versus $267 million for the same period last year, 31.7% increase. For the third quarter of 2023, sales of our industrial products represented 70% of net sales with aerospace products at 30%. Gross margin for the quarter was $146 million or 41.5% of net sales. This compares to $93.3 million or 35% for the same period last year. Adjusted operating income was $71.6 million, 20.4% of net sales compared to last year of $46.3 million and 17.3%, respectively. Adjusted EPS diluted came in at $1.64 a share. Adjusted EBITDA was $103.3 million, 29.4% of net sales compared to $71.4 million, 26.7% of net sales for the same period last year. During the period, we paid down debt by another $60 million on the term loan and free cash flow was $54.4 million. Turning now to some of our – to our sectors. On the industrial business, [indiscernible] and are seeing continued strength from the OEM sector with RBC Classic industrial up by 14.1%, driven by a semiconductor machinery, energy and mining. Both RBC and Dodge showed a 12-plus percent growth in the industrial distribution revenues. Overall, industrials were up 11.8% with sector growth mitigated somewhat by Europe and some select OEM weakness. On the aerospace and defense side, overall we saw an expansion of 13.2% with aero OEM up 26-plus percent. Demand drivers here are the obvious candidates, large plane builders and their supply chain coming to life as the production of Boeing's 737 and 787 ships rebound. We are at the beginning of this recovery now and pandemic inventories showing less of an impact and production rate increases are well publicized. We expect to see increased demand creating double-digit growth from the plane builders for many quarters to come and we continue to add resources and planning to support increased build rates, build rate-driven demand as well as expanded work statements. In total, RBC saw an organic growth in revenue of 12.7% during the period. There has been some questions about backlog and much of our commercial aircraft business is done, where the backlog isn't represented by the contract and the orders are published on a portal and we ship to those orders. So probably 60% of our business there doesn't ever get into our backlog. Regarding the fourth quarter, we are expecting sales to be $375 million to $385 million. This is becoming an increasingly difficult projection to make now post Dodge acquisition, which means half our sales are stock items where daily shipments are subject to daily orders as opposed to being defined by long-term contracts where quarterly revenues can be well planned. So that kind of puts us into the business of economic forecasting and we do the best we can. Thank you, Mike. SG&A for the third quarter of fiscal 2023 was $56.8 million compared to $41.7 million for the same period last year. As a percentage of net sales, SG&A was 16.1% for the third quarter of fiscal 2023 compared to 15.6% for the same period last year. Looking forward, SG&A as a percentage of sales is expected to be between 15.25% to 15.75% of sales in the fourth quarter. Other operating expenses for the third quarter totaled $18.9 million compared to $35.8 million for the same period last year. For the third quarter of fiscal 2023, expenses included $17.4 million of amortization of intangible assets, $1.2 million of costs associated with the Dodge acquisition, and $0.3 million of other expense. For the third quarter of fiscal 2022, other operating expenses consisted of primarily of $23.5 million of costs associated with the Dodge acquisition, $12.1 million of amortization of intangible assets, and $0.2 million of other items. Operating income was $70.4 million for the third quarter of fiscal 2023 compared to operating income of $15.9 million for the same period last year. Excluding approximately $1.2 million of acquisition costs, adjusted operating income was $71.6 million or 20.4% of sales for the third quarter of fiscal 2023. Excluding approximately $30.4 million of acquisition costs, adjusted operating income for the third quarter of fiscal 2022 was $46.3 million or 17.3% of sales. Interest expense for the third quarter of fiscal 2023 was $20.9 million compared to $11.9 million for the same period last year. We anticipate total interest expense of between $21 million and $22 million for the fourth quarter of fiscal 2023 at an effective tax rate between 23% and 23.5%, excluding discrete your unusual items. For the third quarter of fiscal 2023, the company reported net income of $36.3 million compared to $0.5 million for the same period last year. On an adjusted basis, net income was $53.3 million for the third quarter of fiscal 2023 compared to $40.6 million for the same period last year. Net income available to common stockholders for the third quarter of fiscal 2023 was $30.6 million compared to a net loss of $5.2 million for the same period last year. On an adjusted basis, net income available to common stockholders for the third quarter of fiscal 2023 was $47.7 million compared to $34.8 million for the same period last year. Diluted earnings per share was $1.05 per share for the third quarter of fiscal 2023 compared to a loss of $0.18 per share for the same period last year. On an adjusted basis, diluted earnings per share for the third quarter of fiscal 2023 was $1.64 per share compared to adjusted diluted earnings per share of $1.20 per share for the same period last year. Turning to cash flow. The company generated $60.9 million in cash from operating activities in the third quarter of fiscal 2023 compared to $40 million for the same period last year. Capital expenditures were $6.5 million in the third quarter compared to $14.9 million for the same period last year. We paid down $60 million on the term loan during the period, leaving total debt of $1.46 billion as of December 31, and cash on hand was $82 million. Cumulatively, since November, 2021, we have paid $350 million on the term loan, including a $20 million payment in January of this year. Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Pete Skibitski with Alembic Global. Please proceed with your question. Hey. Mike, maybe you could put your economist hat on for a moment, but you probably see a lot of the macro guys out there are concerned that we could tip into a mild recession later this year. Just wondering if you're seeing anything in your industrial end markets that might indicate that – I know you touched on Europe, but wondering if you're seeing anything else there? Well, Pete, on our industrial end markets, we're seeing – yes, let me – right now we see a very strong picture from oil and gas and a lot of demand beyond our capacity – substantially beyond our capacity from the oil and gas sector. I suspect that's going to continue given what's going on with the world events. And I personally favor fossil fuels and – so this is one of my favorite market sectors. Getting down, just – we're also seeing strength for mining. Actually the mining is challenging the same manufacturing capacity as oil and gas, so it's – we need to do a little bit of an expansion there. Industrial distribution very steady, some inventory adjustments are going on, but they're small, small impact overall not worth talking about it. Construction of warehouses are down and you've all read the Amazon news and we were a significant provider of hardware for those warehouses. And so that demand, which runs between $15 million and $25 million a year was completely out of our revenues in the third quarter. And we don't expect them to be back in the fourth quarter. So that's the major shift for us. We're seeing a little bit of weakness in semiconductor manufacturing, but that manufacturing capacity that we were opening up is, is being used to productively for industrial distribution where we were a little bit short on product to support that sector. So I think overall, we're just not seeing it. On the defense side, in some sectors it's unbelievably strong, you haven't seen the shipments yet, but we've got a sleepy supply chain that we're trying to wake up there and shake things out and make them happen, and the aircraft build rates, you know what's happening there with Boeing and Airbus and the 737, 787 programs. So that's going to be a double-digit growth sector for us for at least the next eight quarters. Okay. Got it. That's very helpful. Let me ask my last one on commercial aerospace, Mike, just – it seems like there still is a lot of inventory sitting at Boeing with regard to the Max and the 787, and they've kind of indicated to us kind of their timeframe for getting rid of that inventory, for delivering that inventory. So are you guys still delivering kind of below their stated rate? Like for instance, on the Max, I think they're 31 a month now, but some of that is out of inventory, so I'm just wondering if you guys are still delivering on the Max if ship set worth more in line with 20 a month or so? No, no. For us it's – and we study this pretty closely to make sure that we've got the right planning in place and steel is really hard to get now. So I mean, you have to be out 12 months on your planning with steel, so you really have to be sharp on these numbers or you're going to create a problem for your customer. So it looks like every time we measure it, we're right in step with their production rate. Thanks. Mike, you kind of mentioned like, it seems like backlog is no longer the leading indicator when we think about revenue growth. So when you kind of think about forecasting your business, what do you guys have to do differently and how much conviction do you have that you're going to see growth like even with the risk of the mild recession? Let's take the first question. What do we have to do differently? We actually don't have to do anything differently. The thing that we've evolved to Kristine, is just to understand, for example, when we do a contract with Boeing or Airbus, exactly what mix we have under contract. So we assign a contract with them, it's three years or five years or whatever it is, and we have a certain mix that's – and market share, maybe a 100%, maybe 80%, something like that by contract for those ships. And so because we're working against the portal and not against the backlog, it's really important for us to understand their production rates and their consumption rates of our product so that we can plan our plants to have more product in place as they relieve the product that we have to build their ships. And so that's basically – we've evolved to that over the last five years and I would say five years ago, we were really terrible at this and now we're really, really good at it. And we take that information and we actually [indiscernible] a lot of the subcontractors that use our hardware, our bearings integrated into a subcontractor produced system and then ship that to Boeing or Airbus. And they're planning, they haven't got to this level, let's just put it that way. And so we actually have to call our subcontractors and tell them when to put orders, not in all cases, but in many cases when to put in orders in order to catch up and be in position and not to get quite sure because if they are quite sure they're going to blame the bearing guy that they can't ship that, that piece of hardware they produced because they couldn't get bearings. So we don't want them to do that. And so we do actually look at their content and do the – and help them with their planning. And so that's kind of how we evolved to operate. And so what was the second part of your question? In terms of confidence, in terms of forecasting, I guess like, the underlying question to that second part is, with the – changing your business, being more book-to-ship, how sensitive is that to the economic environment and would you still see that grow if we're in a mild recession? And how confident do you feel not having a backlog to kind of support that view? Yes. It depends on sector, and we're very confident on aircraft not – with how to deal with the backlog situation. That's just standard operating procedure now. In terms of where we stand relative to an industrial – mild industrial recession, I don't see a mild industrial recession showing up in the oil and gas area anytime soon. If you look at Dodge, I mean, they're really important markets are grain and aggregate and mining and those are markets that they service principally through industrial distribution. And you look at grain, wheat, corn and rice and soybeans, you look at what's happening in the world, the demand there, I don't see that back in line, that's food. And the world – the U.S. feeds the world and now it has to feed it more with the problems in Ukraine and Russia. And so I think their grain sector is going to be good. When we look at the construction sector, the aggregate sector, and we talk to our sales people, all the cement plants are at a 100% capacity and before the infrastructure built really gets released for commercialization. And so that looks to me like that sector has a net under it. And the other important part of that business is food and beverage. And food and beverage is, it's just a staple. I mean as long as these machines are operating and producing cans and bottles and boxes and transmitting that material that we're a strong part of that business. So I think that Dodge business is very low beta in terms when you look at over the past years, it's so much of what they do is a staple of life. Their revenues were impressively stable over many years. And then when it comes to the… Yes. When it comes to the aircraft business, I think, what's going on there that kind of speaks for itself. And then our marine business is, they're building, we have 10 Virginia ships in our backlog and we're only showing one-year of Virginia ships, but we have 10 of them. It’s a lot. And we're bidding another 10 or 12, and we're also bidding Colombia. So we have a serious problem in our marine business with regard to our capacity and our footprint. And so we're trying to deal with that right now in terms of staffing and hardware and supply chain and we've got a lot to do in that sector in order to accommodate the objectives of the Navy. Yes. I mean, it seems like a good problem to have if you've got strong demand. If I could sneak one more in Mike, I mean, on gross margin, I mean, we looked at the quarter, it's 40.8% for the nine months trailing the quarter, and for the actual quarter itself it's 41.5%. I mean, how much of this was, like the synergies that you guys had outlined with the acquisition of Dodge. Can you give us an idea of where you are in that, that synergy extraction and where gross margins could go from here? I mean, your historical target was like what 1 percentage point in gross margin each year? You reinvest 50 basis points, so you have 50 in terms of the net. Is that how we should think about this or should there be more upsides from the synergies? I mean, this is a pretty big jump versus where you were last year. Yes. Kristine, hi, it’s Dan. So just to give you a range, Dodge for the last nine – for the nine months ended December 2021 had an average gross margin around 35%, 36%. And for the nine months ended this December, it's around 42.8%. So it's about a 7% to 8% jump in gross margin. So that's not all synergy, but say a big – half of that or more is synergy based on $700 million run rate of sales. You talked in $40 million to $50 million of improvement in gross margin over a 12-month period since we've owned Dodge. So I would say on our low hanging fruit, it's going well on our synergy. On the integration of our sales team, it's going well. There's a lot of activity and I think that's reflected in our industrial growth rates compared to the competition who have already reported this quarter, where there are numbers are significantly under ours for growth rate. We are working on our manufacturing processes and our manufacturing footprint and on being a better sourcer of intercompany activity between Dodge to RBC and RBC to Dodge. And those two are kind of the long point of tens. So we should see the benefit from that activity in fiscal year 2025 and 2026. So I would say we are definitely ahead of schedule and things that we thought were going to be easy to get done aren't that easy, and things that we thought would be very difficult to get done turned out to be a little easier than we thought at first. So I think we're in pretty good shape. Yes. Kristine, I can add to that a little bit too. And you know we acquired Dodge in November of 2021, and we were at a run rate, an actual rate of sending the previous owner of Dodge $18 million a year to support computer systems and other activities that couldn't be transferred day one. We've had a team of – dozens of internal people and consultants working on putting Dodge on the RBC computer network. And so as of November 1 this year, that was mission accomplished and so that $18 million goes away. So that was a big project that had to be done in a fail safe matter to complete this acquisition. I think this, the second, another area that we're working on is in manufacturing integration. Some of the Dodge plants were very full in terms of floor space, in utilization and we needed to open up the Dodge floor space in some of those plants to capitalize new products or new manufacturing capacity for existing products that where there was market demand, but we're unable to satisfy that market demand because of capacity constraints. So we're in the process of moving some of that, some of their processes to Mexico and to open up the floor space so that they can in source some of their materials that from outside suppliers and increase the throughput capacity for those products. So where Dodge is constrained, it seems that our RBC had a pretty cost effective solution for that. So this year we'll be opening up some of the floor space and some of the Dodge plants by using our Mexican resources. And I think the final thing we did is in November, we ran a manufacturing seminar for a 125 to 150 people in Tennessee for manufacturing management and manufacturing engineers that were selected from our 40 plants with the purpose of presenting and exchanging best practices. And whenever we've done this for the RBC classic business, it's produced amazing results in productivity and each plant seems to be competitive with the other plant with regard to, is absorbing new technology or new techniques in improving their operation. So we expect to see a nice benefit from that seminar. Thanks. Mike, you sound pretty optimistic about end markets on both sides of the business, but orders were down 19% sequentially. Can you talk about what parts of the business that came from and has that deceleration extended into 4Q? Yes. Steve, the biggest impact on the backlog was our marine business. So for marine in September, our backlog was $118 million and in December, it dropped $91 million, so that's $26 million, $27 million drop. And the reason is because we only reflect in backlog what's shippable in the marine product line in the next 12 months. But the gross backlog, marine's total backlog that shippable past 12 months is $179.9 million compared to September of $170 million. So it's actually up $10 million. So it kind of – when we put it in a total backlog, $25 million has a pretty big impact on the overall backlog. It's just mainly due to the timing of shipments on our submarine business and how we account for that. And then Dodge was down about 10. Again, September Dodge was about a $100 million in backlog and they were down to $85 million. So their supply chain was free enough and their capacity and their catching up to their past dues that they had in backlog. So those are the big two contributors. No. Steve, it's not decelerating, it's accelerating. We're adding to our legal staff because we have so much contract, so many contracts that have to be inked, negotiated and so there was – we booked a $100 million worth of new contracts between December and January. I suspect those even haven't even hit the backlog yet. Nice. And Dan, your comment on the $50 million in synergy in the past year or so, if I'm remembering right, the original target was $70 million to $100 million over five years. So now that you've had this for a while, has this changed the upside target? I guess in terms of either time or dollars, how are you thinking about what's possible? I think we're still target in that range and as Mike said, and what I said a little earlier on some of the [indiscernible], the manufacturing integration that we're doing, it just takes a little longer. You have to pull machines out of one plant, set them up in another plant, teach that plan how to make the product, put it through testing, could be six to seven months, make sure it's acceptable to the marketplace and then be able to supply it to the marketplace. And I think every year we'll just continue to see the activity between the Dodge sales team and the RBC Classic sales team continue to increase where RBC Classic focuses more on OEM type activity and Dodge focuses more on distribution activity. Got it. And if I can just get one more in. It seems like most companies are working on some sort of digital strategy. Do you guys have any initiatives underway at RBC designed to maximize sales efforts or optimize manufacturing from a data collection standpoint? Yes. Sure. We do it on both sides. On the front-end, Dodge uses the front-end of their warehouse consortium that they're part of, and it's called PTplace, and that's where independent distributors and customers can come through and electronically place orders and get them delivered in 12 to 24 hours. RBC always had eShop or front-end, where our independent distributors also can come online and guaranteed shipping in 12 to 24 months to keep them going. And we've been making more advances on the manufacturing side, on digital, data collection, data mining to better run the plants. So if you walk through one of the plants now and took a tour, you'd see a lot of visual screens, a lot of activity at each manufacturer cell reflecting information from the machines from the operator and where they are compared to the standard that they're running. So I think that part of it has actually become more and more important to our business as we move forward. It all has an impact. Exactly right. By reducing touch labor, increase in your efficiencies, and obviously for customers being able to go online, place an order and be able to get their delivery in 12 to 24 months, weeks and days, hours. Yes. Steve, especially when you have – in some of our plants, we have a lot of robotic operations, and so you don't have any people in that sector for every minute of the operating day. And so you need a screen like this to tell you if there's a problem, if the machine is idle, if it's on set up, and so that the manager can dispatch technicians or other talent to remedy the problem. Hey. Good morning, guys. Thanks for the question. I wanted to go back to the strong gross margin in the quarter. Can you just give us any color on what you're seeing the pricing environment, price cost what your expectations are for price costs going forward, and then just whether you expect to retain price increases if inflation starts to come down? Thanks. Yes. And the contracts that we typically negotiate have an inflation index or some metrics tied to some standard bureau of economic standard that allows us to change pricing if there's a change in material cost or if there's a change in labor cost or something else happens, change in volume. So to some extent that's why we have a backlog in our contract – legal side of our contract management because these contracts now are more difficult and timely to manage. Okay. I guess maybe just historically in a deflationary environment, have you given back pricing or have you historically held price increases? Okay. And then maybe just pivoting for a minute, just you guys have talked about adding capacity and adding resources and things like that. Can you just level set us kind of where you're are, where you're adding some of these additions and just like how we should think about your – this ramp, I guess, I don't know if it's through next year or just sort of how we should be able to think about your ability to produce higher volumes going forward? Thanks. Yes. Well, first of all, for the third quarter, our SG&A was a little higher than normal simply because there's – production in sales are usually down because of the number of production days, but SG&A is like constant fixed cost through a quarter. So that – we expect that to normalize into the mid-15s by the end of the fourth quarter. We pretty much stay there. It's a matter of getting on top of your cost base and as we increase our sales and production in a given quarter, we may revisit what we're spending on SG&A and let the company earn more SG&A credit. But we're not going – we're just not going to dump in the SG&A and hope that it gets absorbed, they have to earn it. So everybody understands that. And that's the way it works. Hey. Good morning, guys. Thanks for taking the questions here. Mike, just on this gross margin and what we saw on the quarter, and obviously, piecing together what you just said, everything accrues, so it sounds like on a go forward basis, I mean, I don't want to get out in front of our [indiscernible] here, but it sounds like you've got a new floor here on gross margins, or should we be thinking about anything that might push these margins down, anything from a mix standpoint that we should be looking at? Okay, that's good to know. All right, perfect. Just on aerospace, I understand what you said, and earlier this week, we heard spirit kind of spill the beans. I guess they're going to 38 on the Max, then 42 in October. Presumably you're kind of at those rates or prep in and kind of aligned? Perfect. Just on – I know we've been trying to get at this. You mentioned, Dodge not a lot of backlog, I guess, and I think you talked about the daily orders. I mean, are you noticing anything from those daily ordering trends of late, I mean, I guess we're all trying to figure out here, the global macro backdrop, but what are the daily orders kind of telling you as you're looking real time trying to gauge the health of the industrial markets aside from – I know you talked about the strength in oil and gas? And that was a pleasant surprise. So, again, I have to – I'm forced to do the job that Chairman Powell does for a living and try to figure out what the next two months are going to be like. But that's – January was very positive. We're still constrained at Dodge on very key high margin products that just can't get our leg over the wall on it. And I think we're going to be there for another year. Okay. Last quick one for me. I think you mentioned – so Europe and maybe some specific OEM weakness that you saw anything notable with certain OEMs or just kind of isolated? So it sounds like Dodge orders accelerated in January. I'm curious, I was just trying to back into it, but what was Dodge revenue for the quarter and what was it up or down organically? Okay, great. That's helpful. And so, I'm just curious, and I know that it is putting your [indiscernible] a little bit, but a lot of the industrial companies that we cover, some of them are kind of flashing yellow on their businesses, downturning or seeing some destock from their distributors. I recognize that two thirds of your industrial sales now go through distribution. So I'd be curious to hear, what you're seeing on the distribution side. I know that you called out a little bit of destock and then how are you thinking about that as we progress through calendar year 2023? Well, I think the fourth quarter calendar quarter for the distributors is normally an unusual quarter. And we normally see seasonality in that quarter because the distributors are trying to meet some working capital target that they had in order to achieve their bonuses for the year. So they really clamp down on their hardware purchases. And typically the business can't really run effectively there. So you usually see a pretty good snapback in the fourth quarter, and I think that was the January effect and it probably is going to continue through February. Got it. Okay. That's helpful. If I could maybe sneak one more in. Your defense business, you called out, I saw in the Q some of the decline there was due to revenue recognition. Like is there any dollar amount, maybe you can kind of quantify, how much of the down revenues were a timing impact? Yes. We don't have that number in front of us, but I know – on the defense side, I know that some of the operations – in order for us to ship a lot of our product, it has to be bought off by a government inspector. And sometimes our product isn't ready until the third week, sometimes the fourth week of the month. And it's hard to get a government inspector into your plant when it was the third week of the month and the month is December. So we definitely had some of that going now. Hi, good morning. I was hoping you could give us a little color on your expectations for revenue growth in the fourth quarter. I think your guide implies somewhere between lower, obviously than it was in the third quarter, and I was just wondering what that's attributable to where you're seeing. Is the slowdown on the items you mentioned earlier or somewhere else? It's pretty much the fact that we're not going to see any revenues out of that sector where they were building warehouses as fast as they could build warehouses. As a matter of fact, last July, those same people were visiting us, asking us what it would take to triple our capacity. And so that's kind of a boomer bus area and it's busted right now and that's sort of $15 million to $25 million a year annualized and it doesn't have particularly good margins, so frankly we don't really miss it. Okay. And then you hit on – you said there's some past dues that were the Dodge work through. How many past dues are still… There are no further questions in the queue. I'd like to hand the call back to Dr. Hartnett for closing remarks. Okay, well I appreciate all the interest in the call today and look forward to speaking to you again. I guess that'll be in May. So thanks for your participation and good day. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

EarningCall_29

Good morning, everyone. I'm delighted to welcome you in person for the very first time to present our 2022 results. So we'll start with a detailed presentation from Christophe Babule, our CFO. Then you'll have short presentation by each division presidents, so Alexis Perakis-Valat for Consumer Product Division; Omar Hajeri for the Professional Product Division; Myriam Cohen-Welgryn for Active Cosmetics; and Cyril Chapuy for L'Oréal Luxe. So without further ado, I will hand over to Christophe and, of course, you have a presentation from myself and a Q&A at the end of this presentation. Christophe, you're on. L'Oréal showed another excellent performance in 2022, in spite of the fact that we had to face an unprecedented number of challenges. If I had to summarize the past year in three key figures, I will highlight the double-digit like-for-like growth of plus 10.9%, the operating profit margin of 19.5% up 40 basis points, and 27.6% surge in EPS to €11.26 per share. Consolidated sales increased by a substantial 18.5% to above €38 billion. Foreign exchange had a very positive impact of 7.2% as the euro remained weak throughout the year. More detail on our invoicing currencies and their evolution against the euro can be found in the appendix of the presentation posted on our website, loreal-finance.com. The change in scope of consolidation was a positive 0.4%. It was mainly due to the acquisition of Youth to the People in December 2021 and of Skinbetter Science last October. On a like-for-like basis, growth came to plus 10.9% over the full year. Excluding 2021, which was an exceptional year in many respects, 2022 showed the best growth in more than 20 years. On a reported basis, it was the best in almost 30 years. Looking now at the performance of the last quarter alone, you can see on the left that sales increased by 13.5% to €10.3 billion, passing the €10 billion mark for a quarter for the first time. Like-for-like growth came to plus 8.1%. On the right of the chart, the comparable quarterly growth since 2019. Over three years, annual growth was plus 23.4% on a comparable basis. And growth sequentially accelerated quarter after quarter to plus 26% in the last quarter. Let's look at sales by division. Like-for-like, they all grew strongly. The Professional Products Division ended the year on a high note and posted a 10.1% increase. L'Oréal Luxe continued at a strong pace at plus 10.2% despite the turbulence in the Chinese market. Active Cosmetics posted another year of stellar growth at plus 21.9%. The division has almost doubled in size since 2019. And the most remarkable however was the acceleration of the Consumer Products division, which achieved its best growth in 20 years at plus 8.3%. Our business is well distributed by region. Europe and North Asia accounts for around 30% of sales. With North America at over 26% of our business, three zones are now exceeding €10 billion in sales. The emerging markets combining SAPMENA - SSA and Latin America now account for 14% of total sales and are becoming a true growth engine for the group. Business was very dynamic in all regions, both versus 2021 which was a year of sharp recovery and even more versus 2019 as shown on the slide. On the left, in Europe, we recorded 11.6% like for like growth at double digits for the second year in a row, led by the Spain, Portugal hub at mid-teens while the German-Austria hub, the U.K. and Italy rose high single digit, a strong performance in these large countries where we sold significant share. In North America, momentum remained very strong at 10.4% like-for-like as the American consumer showed strength throughout the year. In North Asia, growth came to 6.6% over the full year as business was softer in the second half due to the challenging market conditions in China with the resurgence of COVID. In a declining market, sales in mainland China rose 5.5%, boosted by double-digit growth in e-commerce and a strong performance on Singles' Day. Emerging markets up by 20.5% punch well above their weight contributing a quarter of the Group's overall growth. India, the Malaysia-Singapore hub, the Gulf countries and Vietnam drove a swift 22% like-for-like increase in SAPMENA - SSA, while growth of 18.6% in Latin America was quite broad based, led by Mexico. To be noted on the right, the remarkable three-year growth in North Asia and emerging markets. Let's now look at sales by category. Skincare, our number one category grew by 10.1%. The category accounted for 40% of our total sales. Makeup continued its rebound at plus 9.2%, but was penalized by health restrictions implemented in China. It represented 20% of our total sales. Hair care was very dynamic at plus 12%, both in the professional and consumer divisions. Fragrances recorded an impressive 22.8% increase and accounted for 12% of our turnover and hair color grew by 4.6%. In a nutshell, the keyword of 2022 is balance, a balanced contribution to growth by division and by region and the balance can also be applied to the components of the growth, one third came from volumes, one third from price increases and one third from mix improvement. Let's move on to the profit and loss account. Gross profit increased by 16.1% to €27.6 billion. The gross margin stood at the high 72.4%, 150 basis points below the level of 2021. As every year, let me give you some additional color on the development of the gross margin. Currency impact including conversion and transaction were negative by a significant 85 basis points. Thus, on a comparable basis, the gross margin decreased by a much more limited in 65 basis points. The value effect combining price increases and mix improvement offset about two third of the substantial input cost inflation. Research and innovation expenses advanced 10.7% to €1.1 billion. We have continued to invest significantly to support the growth of our brands. Advertising and promotion expenses increased by 14% or by €1.5 billion in absolute value to over €12 billion, amounting to 31.5% of sales. Selling and administrative expenses continued their relative decline, down 40 basis points to 18.4% of sales. This demonstrated the strict management discipline in the context of strong growth and improved efficiency of our organizations, thanks to the creation of hubs in various geographical areas. Operating profit surged 21% to almost €7.5 billion. The operating margin stood at a record 19.5% at 40 basis points over 2021. Last year, the Group expense the cost of configuring and customizing software user in software as a service model. These costs, previously recognized as fixed assets, had a negative impact of 20 basis points on the operating margin in 2022. On a comparable accounting basis, the operating profit margin will therefore have increased by a noticeable 60 basis points. By division, the profitability of the Professional Product division was unchanged at 21.3% that of Consumer Product divisions to that 19.8%. L'Oréal Luxe increased 10 basis points to 20.9% and Active Cosmetics came out at 25.4% at 20 basis points. Non-allocated expenses consisting mainly of corporate and fundamental research costs were 40 basis points lower in relative terms at 2.4% of sales. Note that the operating margin of each division was negatively impacted by 40 basis points in 2022 as a result of structural accounting adjustment, minus 20 basis points related to the reallocation of certain central cost to each division, which is reversed in the non-allocated costs at Group level. And minus 20 basis points in each division and at a Group level due to the change in accounting of software related expenses I mentioned earlier. Therefore, before taking into account this reallocation and accounting adjustment, the operating margin will have been up 40 basis points for the Professional Product division, unchanged for the Consumer Product division at 50 basis points for L'Oréal Luxe and at 60 basis points for the Active Cosmetics division. Since 2019, L'Oréal has gone from strength to strength. A few key figures to highlight how well we have navigated the last three years. Consolidated sales advanced 28% to over €38 billion. Comparable growth was 23% over three years. Operating profit increased 34% from €5.5 billion to €7.5 billion. The operating margin advanced 90 basis points to a record €19.5, notwithstanding the fact that we substantially invested behind our brands to secure our growth and prepare for tomorrow. In relative terms, our A&P spend was up 70 basis points. And in absolute terms, it increased the third to over €12 billion. From operating profit to net profit excluding non-recurring items. The net financial charge came at €73 million. For the full year of 2023, the net financial charge of €130 million can be anticipated, all other things being equal. Sanofi dividends amounted to €468 million. In addition to the annual €393 million, Sanofi paid a dividend in kind in the form of newly listed euro API shares for an amount of €74.5 million. Income tax was €1.8 billion, representing a tax rate of 22.8% below the 23.7% rate the year before. For 2023, we can anticipate at this stage the tax rate of slightly below 24%, all other things being equal. Net profit excluding non-recurring items exceeded €6 billion. Diluted earnings per share of €11.26 showed a substantial 27.6% increase. And the impact on EPS of the distribution of euro API dividend amounted to €0.13 of a euro per share. To help you in estimating your EPS for 2023, I will recommend that you base your calculation on the diluted number of shares equivalent to that of 2022. Non-recurring items were broadly unchanged at €347 million. The other income and expenses of €241 million mainly include restructuring charges of €172 million of which €114 million related to the ongoing disposal of Logocos and €37 million for various reorganizations in Europe and SAPMENA. Last €39 million for declare of brand impairment. Donations to charities and exceptional cost related to the Ukraine conflict for €43 million. Gross cash flow advanced 9.8% to over €7 billion. Working capital increased significantly due to some precautionary stock billing at raw materials and supplies, the price of which had risen sharply and finished goods to mitigate supply chain disruptions. Capital expenditure of €1.3 billion represented 3.5% of sales. For 2023, an investment in the order of 4% of sales may be expected. Net operating cash flow amounted to €4.9 billion. Lastly, after payment of €2.6 billion of dividends, of €740 million for acquisition, of €500 million for share buybacks and of redemption of the lease debt, the residual cash flow was positive at €518 million. The balance sheet remains robust with shareholders' equity of €27.2 billion or 58% of the total balance sheet. And the financial situation remains healthy. At the end of December, net debt amounted to €3 billion and to €1.4 billion excluding the financial lease debt. The gearing ratio stood at 11% and the financial leverage of net debt over EBITDA was down to 0.3%. The Group's 2022 outstanding performance as well as the quality of the balance sheet led the Board of Directors to propose to the AGM a further 25% increase in the dividend to €6 per share. This new increase in the dividends leads to a payout ratio of 53.3%. This is another illustration of L'Oréal 's consistent dynamic and balanced dividend policy. With regards to L'Oréal for the future, 2022 was a year of further progress. You can see on this slide some of our achievements in the effort to fight against climate change, manage water sustainably, respect biodiversity, and preserve natural resources. For example, regarding climate, the Group is committed to achieving carbon neutrality for all of its sites by 2025. At the end of 2022, 110 sites, including 22 factories had already achieved carbon neutrality, that is 65% of our sites. In 2022, L'Oréal was once again rewarded for its social and environmental performance and recognized among the best companies in the world by nonprofit organizations, rating agencies or international bodies, all leading in their respective fields. Thank you, Christophe, for this great results and we'll now hear from the division, starting with Consumer Products division in Alexis Perakis-Valat. So good morning, everyone. 2022 was a dynamic year for the mass beauty market, which grew at plus 6%. And it was a great year for our division which touched the €14 billion mark and grew at plus 8.3%, our best result in 20 years. This acceleration was very balanced coming from value at a solid plus 5.7%, but without sacrificing volumes which grew at plus 2.6%. These dynamic shows the power of our brands and our data science of pricing capabilities. We're not only growing, but accelerating our market share gains, widening our lead over the market year-after-year. We achieved all these while protecting our profit despite the exceptional cost of goods increases. All our major brands are growing and gaining market share. L'Oréal Paris reinforced its place as the world leading beauty brand at plus 7% while Garnier accelerated by plus 8%, powered by green science and innovations. The boom of Maybelline at plus 16% and NYX Professional Makeup at plus 21% fueled a spectacular bounce back of makeup. The category is on fire for us at plus 15%. Hair care was another highlight, growing double-digits twice as fast as the market, thanks to our focus on premium. And in fact, beyond makeup and hair care, the division gained share on all of its major categories. Our growth was also balanced across regions. We performed well in Europe and the U.S., both growing above 8%. And at the same time, 40% of our growth came from the emerging markets of South Asia, Latin America, the Middle East, and Sub-Saharan Africa, led especially by high potential countries like Mexico, India, and Brazil. So building on a successful '22, we are determined to keep accelerating, thanks to four strategic growth drivers. First, our focus on the upper half of the middle class. This group represents 2 billion people worldwide. And thanks to search, makeup tutorials, and TikTok skin influencers, they are becoming more beauty savvy every day. And as they learn, they seek out more efficient and desirable products at a premium. Our division is perfectly positioned with brands that are particularly strong among these more affluent and demanding mass consumers. Emerging markets are key for these targets representing 38% of this upper middle class group. Take India, for example, which is rapidly growing into a beauty epicenter. In India, 50% of the mass beauty spending is done by consumers that fall in the top two socioeconomic classifications. But in our division, 70% of our business comes from this upper half of the Indian middle class, which will fuel the market growth for years to come. Second, we specialize in beauty categories with high potential to premiumize and inspire new consumer habits. Skincare, premium haircare, makeup and hair color are markets in which people seek innovation and desirability, not just utility. That makes these categories ripe for new products and segments. Look at skincare serums, a high efficacy product with a masstige price positioning. In the U.S., the number of households buying at least one serum has increased by over 80% since 2019. The third driver is obviously our highly desirable brands that are creating game-changing innovations. L'Oréal Paris is a luxury brand that happens to be sold at mass. It is a unique blend of femininity, feminism, and superior science. After the successful launch of Elvive Hyaluron Plump in 2022, Elvive was introducing Bond Repair, a highly effective salon solution brought to mass for the first time. Garnier is the champion of green beauty from its innovations to its social causes. In '22, its new vitamin C serums took the skincare market by storm. And this year, the brand will reinvent at home hair color with the launch of Garnier Good. Maybelline, the world's number one makeup brand is on an innovation winning streak. First, Sky high mascara, then Vinyl Ink lipstick, and this year they launched mascara, a groundbreaking fiber technology for stunning, last lengthening effect. NYX Professional Makeup is accelerating its presence as the brand of entertainment. In '22, the brand created lines inspired by Cirque Du Soleil and Avatar 2 with more blockbuster collaborations coming in '23. Fourth and last, we are pioneers of Beauty Tech and data, which actually unlocks value in many ways. Thanks to tech, we are bringing service to the self-service world of mass. Our tools, like the Skin Genius diagnosis by L'Oréal Paris is like putting a beauty adviser in the bucket of millions of consumers. We're also leveraging our data capabilities to target the right consumers with the most compelling messages. Our brands are already winning on this front, with Maybelline topping the digital genius ranking by Gartner. And finally, we're exploring new digital territories like NYX Professional makeup recent launch of GORJS, a web3 community of 3D artist and beauty makers whose mission is to create the future of digital beauty. So as you can see, we are entering the Year of the Rabbit with confidence, speed, and agility as we opened a new era of strong, profitable, and balanced growth. Thank you. In 2022, our division saw yet another year of exceptional performance. We passed the €4 billion turnover mark. With two billionaire brands, L'Oréal Professional and also Kerastase, which passed the symbolic €1 billion landmark for the first time. On a full year basis, we grew by 10.1%, twice the speed of the market estimated at plus 5%. Compared to 2019, the division has grown by 29%. We outperformed the market in all zones, in our historical key zones, in North America we're up 7% led by powerful SalonCentric distribution network, and strong growth in e-commerce and specialty retail. In Europe, we're up 7% with impressive growth in our major markets and a strong rebound in salons. Our growth markets also recorded substantial growth plus 32% in China, which has become our number two country worldwide. We still have strong untapped potential in many cities and plus 50% in India, now a fifth biggest country worldwide where an exciting e-commerce journey is only beginning. We outperformed the market in our two key categories, hair care and hair color, fueled by innovations and supported by the breadth of our powerful brand portfolio covering all hair needs at all price points. In hair care, we grew by 16.5%. The division keeps accelerating on the haircare market which is premiumizing. Following the COVID period, we see a strong appetite of consumers investing more in the premium haircare category and sophisticating the haircare routines. Premium haircare is becoming a luxury category. Kerastase is growing by 16% for the ongoing success of its two blockbusters Genesis and [indiscernible]. Following our Metal detox disruptive innovation, L'Oréal Professional recorded double-digit growth at plus 27%. In hair color, we grew by 5.3%. Growth is driven by our blockbuster Shades EQ by Redken, enhanced by powerful innovations like our Shades EQ Bonder Inside. Our performance since 2019 is a result of our winning strategy, built on two major transformations in our business model. First a reinvented relationship with consumers. Today, our division is truly omnichannel. To recruit new consumers at scale, we continue, of course, to capitalize on our strong channel footprint. We remain dedicated to our 400,000 selling partners, leveraging the fantastic power of stylist advocacy and professional expertise and we go further by accelerating in e-commerce and we are progressively extending our distribution in specialty retailers. Together, e-commerce and specialty retailer represent 30% of our total turnover. Our omnichannel strategy is supported by investments in media, CRM and advocacy financed by a strong valorisation versus tight control of our SG&A. A second key transformation is reinvented relationship with our studies. We continuously adapt to an ever evolving market, characterized by the rise of independent stylists. To reach them all, we are building the most powerful data driven digital ecosystem. There are 7 million hair studies in the world every week. The division is interacting with 2.5 million of them and the number keeps growing. Digital now drives our relationship with salons and stylist. For e-commerce, thanks to our B2B e-commerce platform, L'Oréal Partnership. For education, thanks to our online academy L'Oréal Access. And for services, thanks to our recent launch in the U.S. of the first ever marketplace dedicated to beauty professionals. Capitalizing on all these transformations, the Division is uniquely positioned to reach consumers and studies at scale and recruit new clients. In 2023, I'm confident. I am confident that we will keep our growth momentum. Thanks to our cutting edge innovation agenda and a strong potential of conquest in our growth markets. Innovation in hair care, with the launch of Symbiose by Kerastase are unique and serve to be huge anti-dandruff market. Innovation in hair color with the relaunch of iNOA by L'Oréal Professional and iNOA iD, the ultimate in salon luxury color experience. Innovation in Beauty Tech with the rollout of our disruptive SteamPad 4, the first all in one professional steam styler. Innovation in sustainability with deployment of our L'Oréal Water Saver, our breakthrough showerhead saving up to 69% water. And acceleration in our growth markets. We will further strengthen our footprint by recruiting new consumers and conquering new salons in China and in India. In 2022, L'Oréal Luxe outperformed the luxury beauty market for the 12th consecutive year. The market ended at solid plus 8% and we closed with a very strong plus 18.6% in published and plus 10.2% in like-for-like. Our net sales reached €14.6 billion. Our worldwide market share increased by 60 basis points in just one year. And if you consider the long-term perspective, it has increased by over 200 basis points versus pre-COVID. In skincare, the first category is luxury. We again made significant strides at plus 7% versus the market at plus 2%. This is thanks to the success of all ultra-premium skincare namely Helena Rubinstein and Lancome Absolue, a strong start for our recent acquisitions Takami and Youth to the People, and last but not least, a powerful award winning innovation in the age defying segment. In fragrance, the fastest growing luxury category, we strengthened our worldwide leadership big time at plus 23% on a market at plus 17%. These despite some disruptions in our supply chain. Our worldwide blockbusters were consolidated, like for instance Libre by Yves Saint Laurent, number three in Europe just three years after hitting the market. Our launches of the last few years also kept gaining traction and we had very impressive scores with the new product by product, the best feminine launch of 2022. Finally, our collection business in Asia, maintain impressive momentum, namely Maison Margiela, recording a phenomenal growth at plus 19%. In makeup, our third category, the main drivers were San Laurent and the reinvented [indiscernible] both recording double-digit growth. In 2022, L'Oréal Luxe balance its geographic footprint more than ever. In North Asia, the biggest luxury beauty region, we had a strong year ending at plus 8% on a market at minus 2%. The performance was particularly strong in China local markets with highest ever market share, over 30% in China local markets. In 2022, L'Oréal Luxe China grew 11-point above its markets and was the only major player to grow in a difficult context affected by several lockdowns. L'Oréal Luxe is the leader by a long distance in China and I'd like to pay special tributes to our teams there. We also continued gaining market share in travel retail in the Asian region, despite keeping a very tight control policy on our brands. In North America, L'Oréal Luxe grew by 7%, slightly below market as we concentrated on revamping our business. The second half showed some very encouraging signs of acceleration of our sellout. In Europe, where we are the historical clear leader, L'Oréal Luxe again delivered a solid year, +16% and is evolving at double-digit growth in Germany, Spain, Italy, U.K. In the promising emerging markets, we became the luxury market leader. Importantly, 2022 was another year of profit improvement for L'Oréal Luxe. At 22.9%, our profit level far exceeds all direct competitors. Let's now look ahead to 2023 and beyond. I am extremely confident in our capacity to deliver consistent strong growth. First, because I'm convinced the market will continue to show strong dynamism. Desire for luxury amongst the global upper middle class is extremely robust. Our market registered a 6% CAGR over the last decade and it will remain at least at the same pace. And because I'm convinced L'Oréal Luxe is perfectly equipped to keep outperforming the market. There are seven very important points I'd like to highlight. The first one, L'Oréal Luxe has the most diversified and balanced brand portfolio of the industry. We now have five powerful billionaire brands where we will consistently be investing in. Helena Rubinstein is joining this very selective billionaire club in 2023. We have exceptional growth relays brands like Takami, Youth to the People, Prada, Valentino, Carita, which are just beginning their globalization journeys. We saw 23 brands, all price points in the luxury ladder are covered perfectly. The quality of our portfolio allows us to answer to all beauty aspiration, all communities, from couture lovers to science lovers, from boomers to Gen Z, from classical to highly creative customers. Point two, L'Oréal Luxe has a dominant position in the Chinese ecosystem, which will bounce back big time after Q2. Six of our brands are in the top 20 of its gigantic market. Three, we are solid leaders in Europe and in conquest mode in the U.S. with the restructured footprint and P&L. Moving to four, we're now leaders and growing by over 20% every year in emerging markets, where many new luxury customers will be located. Five, our channel strategy gives us a very balanced business be on brick and click, each with highly specialized teams and performance management tools. We can manage any shift in luxury consumption from one channel to the other. Six, the innovation we've developed for 2023 and beyond are exceptional. Their added value is clearly understood by customers allowing us to keep valorizing our prices significantly every year. Last key point, L'Oréal Luxe is dominantly stepping up its luxury knowhow, becoming the industry very best in class. With exceptional services, the Maison, Carita cases this perfectly with ultimate experiences rooted in emotion, arts and culture. Take the incredible Couturissime exhibition by Mugler, spectacular success. And with high tech innovation, always pushing the boundaries of personalization. Look at Avatar by Lancome, which won multiple awards at the last three years allowing women with disabilities to enjoy the pleasure of makeup. All in all, I'm very confident that the unique brands and the passionate teams at L'Oréal Luxe will continue driving strong highly profitable growth and gain shares in the coming year. Thank you. 2022 was another outstanding year for our division, growing by 21.9%. Our division almost doubled in size in the past three years. We now reached a sizable €5.1 billion business, which is even more profitable at 25.4%. We consolidated our leadership growing 2.4 times faster than the market. Our business model is successful. It is powered by medical, amplified by digital and driven by outstanding teams. I want to thank them for their ongoing commitment. So what explains a remarkable growth? Four key success factors. First, the power of complementary brands. They address all consumer needs, those related to skin pathologies and those to aesthetics. As you can see, all our brands recall the best from performance in 2022. I chose to zoom La Roche-Posay and CeraVe as they contributed to more than 80% of our growth. Indeed, La Roche-Posay reinforced its position as the number one dermocosmetic brand. In 2022, it grew by more than 23% and climbed the ranks to become the number sixth biggest global skincare brand across all channels. It's life changing products and UVMune 400 were key to this success. As for CeraVe, it grew by 38% and became the number two dermocosmetic brand worldwide. International business now represents nearly half of the brand's growth. In the U.S., the cradle of the brand, CeraVe, became number two in total skincare across all channels. I also want to highlight that we acquired the U.S. Professional brand Skinbetter Science to reinforce our aesthetic anchorage. Second success factor, our medical leadership. Today, we reached 250,000 doctors globally, 13% more than last year. Three of our brands are now in the top five most recommended. And more and more doctors are consulting and advocating online. Digital allows to amplify our medical strategy. This is our third success factor. We can now reach many more consumers than before. We are number one in medical advocacy, meaning we recorded 48% of share of views of the brand videos posted by doctors. E-commerce grew by 20% and is key to make our products more accessible. Finally, our last growth factor, our international expansion. All zones grew strongly. U.S. and China recorded an exceptional performance growing three and six times faster than the markets. Emerging countries rose sharply at nearly 26%. Europe is accelerating. Now looking into 2023, you may wonder if our growth will continue? I believe it will. One - for two reasons, one being that the dermocosmetic share will continue to grow within beauty. Dermocosmetics gained three points of market share in the last four years reaching 8% in 2022. For perspective, in five best in class market, dermocosmetics already reached a 15% share of beauty. This trend is driven by two elements. First, the booming consumer quest for health. Skin issues affect 2.1 billion people and are unfortunately on a constant rise. Separately, there is a boom of consumers visiting aesthetic professionals. In the coming years, these consumers should represent a pool of over 600 million. And second element, the scale up of teleconsultation and diagnosis services are increasing accessibility to skin health. Finally, I'm convinced, our division will keep growing its share of the dermocosmetics market. We have a strong innovation plan and our brands can still expand their geographic footprint. To sum up, we will - growth will continue as we will grow the pie and a slice of the pie. Today to stand more clearly for who we are, a division with dermatological brands under pathological anesthetic fronts, I am thrilled to announce that L'Oréal Active Cosmetics becomes L'Oréal Dermatological Beauty, a division that strives to change people's life and increase access to skin health to everyone everywhere. LDB also means Let's Dream Big. Thank you. So, good morning again. Over the next few minutes, I'd like to outline some of the key 2022 highlights, then explain why we are confident for 2023 and finally share with you L'Oréal 's vision for the future. Let's start with 2022. As you already heard this morning, 2022 with a year of remarkable performance, our sale of €38.3 billion represented another year of double-digit growth, close to 11% or €3.5 billion of pure organic growth. As Christophe already showed it, we increased our growth quarter-after-quarter versus 2019, the only year without any lockdowns or reopening comparative buyers. Once again, we significantly outperformed the market at a 1.8 multiplier and thus strongly solidified our position as the world champion of beauty. Before going into further details about 2022, I would really like to thank our 87,000 strong teams around the world for this great collective performance, this performance truly belongs to them. 2022 was another grand slam year. We outperformed across all geographic zones, divisions, and categories for the second year in a row. We can talk about perfect balance, all say that all the L'Oréal engine are - all the L'Oréal cylinders are firing L'Oréal 's engine. Let's take a quick look at the geographic cylinders. I'm pleased to say that in 2022, Europe was despite the context, our number one growth contributor, up 11.6% like-for-like, leading to a 20% market share in core countries. 2022 was the confirmation of the turnaround for North America exceeding €10 billion in annual sales for the first time ever with like-for-like growth of 10.4%. It was notably the year of the comeback of CPD in the U.S. with gross ahead of its local mass markets accelerating in Q4. North Asia, grew plus 6.6% like-for-like with Japan and South Korea both up double digits. Of course, I want to highlight the extraordinary performance of our teams in Mainland China in a very difficult sanitary context. Their resilience together with the agility of our operations, who managed to keep product availability close to 100% and, of course, the power of our brands allow L'Oréal to grow 11 points above the markets. Finally, our emerging markets SAPMENA-SSA and Latin America are accelerating as promised slightly above 20% in aggregate growth. There middle classes are young, digitalizing and growing a perfect combination for future growth in beauty. From a distribution channel standpoint, 2022 saw the return of our brick and mortar, which is up 11.7% versus last year. We are reinventing the retail experience with further O+O integration. In parallel, our e-commerce continues to grow faster than the market at plus 8.9% and therefore stays above 28% of our total sales. On division, you've heard their presidents, but let me point out my personal highlights. In a dynamic beauty market, which continues to premiumize, each has come out stronger. L'Oréal Luxe, our number one division and growth engine continues to outperform the luxury market both in sales and profitability, continues to up its luxury game and to play in all the keys of its super brand piano, accelerating in skincare and strengthening its leadership in fragrance and in China. CPD, our largest division in units has confirmed its turnaround, notably in the USA. Thanks to premiumization, acceleration makeup and hair and has delivered a real breakthrough in emerging markets. The division managed to hold its profitability, despite massive input cost increases and is now poised for margin improvements. The Professional Products has become truly omnichannel, serving stylist and consumers alike and leveraging the global appetite for premium professional hair care. And active cosmetics, now L'Oréal dermatological beauty is working hand-in-hand with the largest global network of dermatologists above 100,000 across the world to provide the safest and most efficacious products. It has doubled the size in three years and thrives on the two strongest ascending beauty currents, skin health, and aesthetics. Now, with Skinbetter Science as a new jewel to its ground, LDB can indeed dream big. Let's now look at our performance by category. Our largest category skincare, which now represents over 40% of our sales, remained our number one growth contributor at plus 10% in a market growing low single digits. Skincare is a cross-generational need from Gen Z to seniors, driven by science and performance. Makeup continued its rebound, driven by the return to social life by innovation and creative flair, as demonstrated by NYX Professional Makeup, one of the key contributors to our global overperformance at plus 9%. Then two categories came as post COVID good surprises, fragrance and hair care. On fragrances, at plus 23% on a market growing double-digit, it's not just about going back to social life. From the USA to China, we also see fragrance as an affordable luxury aspiration and a self-pampering feel good gesture. So I think it is bound to last. Finally, hair care where we grew at plus 12%, well above the market has become the new skincare. We see longer hair, more diverse types of hair and great hair is increasingly a sign of health and use. People invest in it with a strong appetite for professional products and premium mass products. So the market is premiumizing and selective retail has made a growth category. So you'll see whether it's from a zone, channel, division or category perspective, the L'Oréal engine is indeed firing on all cylinders. The fuel for this fire is once again a great vintage of innovation. We spent over €1 billion in R&I and it is worth it. In 2022, we have launched several groundbreaking innovations. The one you see on the screens, have been mentioned by the division presidents and we have filed 561 patents that are laying the groundwork for future successes. Innovation are an important asset in our capacity to valorize most being launched at an accretive gross margin. But, of course, financial performance is only one side of the equation. Consistent with our dual performance model, L'Oréal has continued to deliver a strong environmental and social performance. Christophe has mentioned our numerous awards and external recognitions, but allow me to showcase some of our concrete achievements in 2022. First, on the environments. Close to two-thirds of our sites are carbon-neutral, including the sites of North Asia, Brazil, and our first site in India joining this year. 97% of our products - of our new products and renovations our eco design. We are developing and advocating refills like with the new product refillable fragrance. Over three quarters of our PET plastic packaging comes from recycled plastic. And 82% of all our haircare bottles are now in PCR. On societal contribution, our program L'Oréal for Youth launched in 2021 has reached its cruising speed. We are now creating 25,000 job opportunities for people under 30 years old every year. In 2022 alone, our solidarity sourcing programs have supported over 21,000 people coming from struggling communities in gaining access to employment. Through our funds, we have invested €22 million last year alone to restore the great ecosystem, €30 million to support over 1.2 million vulnerable women throughout the world. Our brands have also played their part working in partnership with organization around the world to support a wide range of causes on health, mental wellness, women empowerment and, of course, the environment. We have achieved a lot to date, but we are conscious, there is still more than we can do. And we will do to continue sharing values with the world and its people. I am with all 87,000 L'Oréalians committed to this. To conclude on 2022, I would like to reflect on the past three years in which the world has faced unprecedented challenges. But as they say, when the going gets tough, the tough get going. And we have emerged from this time stronger than ever. We saw that the L'Oréal engine is firing on all cylinders and these translate into an increase in our overperformance versus the market compared to the pre-COVID period as this graph shows it. Since 2019, we have delivered an average growth of more than 5 points above market growth, significantly increase the - increasing the gap with both the markets and our competitors. However, growth is not the whole story. We have emerged from the pandemic more profitable than before, improving our profitability by 90 basis points, whilst at the same time increasing the fuel behind our brands. A&P's share of sales is up 70 basis points from 2019, which represents over €3 billion in additional A&Ps over the 2019-2022 period. And SG&As have come down a 190 basis points. This is the L'Oréal virtuous circle. We have also transformed our organization. First off, our new geographical organization, much of it put in place during the pandemic, has been a complete game changer. Not only has it brought better coherence to each zone, in terms of consumer profile and market maturity, it has helped to create the optimum conditions to maximize growth. This has been at the heart of the Group's strong outperformance in North Asia and the real acceleration in SAPMENA - SSA. To drive more efficacy and productivity, we have re-grouped several markets into clusters. This has allowed us to control SG&A and fuel our virtuals P&L model. Secondly, our brand portfolio has been reinforced. The Group has built a portfolio of 36 global brands, 11 of which are members of the exclusive billionaire brand club, which bought three new members this year and a couple more knocking at the door. So I'd like to say a big welcome to Kerastase, CeraVe and welcome back to L'Oréal Professional to the club. More importantly, our portfolio is a winner. We have the number one beauty brand in the world. We have the most prescribed brands by either skin professionals or hair experts. We have several of the most coveted luxury brands and we have brands at all price points and for all tribes and generations, including those loved by Gen-Z. This portfolio has been strengthened by acquisition as we identified white spaces. Since 2019, we onboarded Takami, Youth to the People, the Prada license, Mugler, Yuesai, and recently Skinbetter Science. And then we aim at supercharging this acquisition as it was the case with CeraVe, which we took to billionaire status in barely five years growing in 10-fold over the period. Throughout the crisis, we have continuously also invested in maintaining our digital leadership. In 2022, L'Oréal has the number one position in terms of paid media share of voice and in beauty and the number one share of influence. L'Oréal is the number one group in Gartner's 2022 Digital IQ ranking for the personal care category in the U.S. with seven of our brands in the top genius ones, including the number one and the number two. Yet, we are never complacent, ever seizing what is starting, being first movers on TikTok, for example, or exploring the metaverse with NYX Professional Makeup and its first of a kind digital creators community. Finally, we have deepened and increased our team's engagement into the L'Oréal - unique L'Oréal culture, continuously adapting to the new ways of working, emerging over the last three words. In a world of quite quitting and great resignation, we continue to see high levels of engagement amongst our employees reaching 79% and a significant rise in job applications for 1.3 million, an increase of 7% versus '21. Our teams are passionate and engaged. We had a strong company culture and values, leading us to enter the top five's most attractive employers ranking from universal. So, in all aspects of our activities, it is clear that we are emerging to the post COVID world in a much stronger position and are ready to take on the future. Now I'd like to look forward to the year ahead. Whilst remaining prudent in this world of poly crisis, I am confident in L'Oréal 's ability to build on our strength and deliver another year of growth in sales and profits. At a macro level and even if currency should be less favorable in 2023, we see some patches of blue sky amongst the dark clouds. There are a few early signs of reduced inflation on some raw materials, recession is seen as less likely in many parts of the world and China is reopening with a clear focus on economic growth. If we look at our markets, we know that beauty is an essential human need and even in times of recession, there is a continued consumer demand for beauty products. The beauty market has always been resilient to economic uncertainty with an average growth of over 4% over the past 23 years and this has proven true once again in 2022 growing a robust plus 6%. We believe it will keep growing at this rate of 4% to 5% on average in the coming years. In the current inflationary context, we saw limited volume decrease and even though there are nuances by geography and category, our latest consumer panels show that valorisation more than compensates any drop in volume. Indeed, the beauty market maintain solid growth in Q4 mostly everywhere in the world with the exception of China. And as for China, well, you've all seen the sharp market contraction in December, which will still weigh on our growth at the start of the year. However, we believe in the rebound of the Chinese beauty market after Q1 and we are prepared for it. I know that some of you worry about the risk of downtrading, especially in developed market as inflation ways on consumers' wallets. Needless to say, we monitor this very closely, but feel reassured. The market has remained dynamic throughout the year as mentioned previously. We are not seeing significant levels of down-trading in 2022 and internal studies have shown that the L'Oréal consumer is skewed towards upper middle classes who are less vulnerable to inflationary pressures. And to continue to fuel that consumer appetite, we have a strong pipeline of cutting edge innovation for '23, designed to drive consumer towards new and often more premium offerings. We will continue to work on improving our gross margin in '23. We would benefit from 2022 price increases, mostly taken in the second half. They have yet to show their full year impact as well as from new ones at the beginning of '23. So all in all, with the experiences gained during the pandemic, coupled with our balanced footprint and unique operating model, we are perfectly equipped to drive growth despite the uncertain environments. To finish, I would like to talk about the future. It is increasingly clear that these past few words of crisis and constant change will mark the dawn of a new era. It will be an increasingly multi polar era, more fragmented that in previous one, an AI and tech led era with the highest expectations in terms of sustainability, purpose and cultural diversity. In this increasingly complex and fragmented world, having solid roots and structural agility will be essential to a company's success and we have that. Transformation is part of our DNA. Like a Unicornus Rex, we are a truly unique creature that combines the strength and scale of a 114-year-old leader, the dinosaur, together with the unmatched speed, agility, and innovation capabilities of a unicorn, always ready to seize what starting. That's why L'Oréal is uniquely positioned to win in this new era. Firstly, L'Oréal is multipolar by design, a multipolar geographical footprint, which will allow us to grow in and beyond China in emerging markets and seize opportunities in North America and Europe. A multipolar supply chain with 38 owned factories globally to derisk our service levels, a multipolar divisional model to go beyond luxury and leverage fast growing dermatological beauty of premiumizing consumer products division and truly omnichannel Professional Products division. A multipolar RNI model with 20 research centers close to the world's consumers. And finally, a multipolar distribution strategy with an O+O boosted brick-and-mortar going beyond traditional e-commerce to explore the possibilities of D2C and B2B platforms. Next, in an AI and data powered world, we will extend our digital leadership to own as the possibilities that Beauty Tech has to offer and explore new horizons like the metaverse. We have over 2,000 dedicated experts working in Beauty Tech and IT, together with 800 data analysts. Our entire RNI organization is being augmented with powerful AI and data including strategic partnership with the experts such as Verily, an Alphabet subsidiary, where we will combine our large - very large scale consumer data with our own to better understand skin and our aging. Data and AI will allow us to develop next level diagnosis services for personalized recommendation to drive loyalty and satisfaction. Beauty Tech will also help us to create a range of augmented beauty solution such as HAPTA, specially developed for those with limited hand and arm mobility, which was showcased at this year's CES. Finally, the world of beauty has expanded into the metaverse. To address this need, we have developed the first dedicated incubator in partnership with STATION F and Meta and the first multi-brand Avatar partnership with Ready Player Me. Third, in this new purpose driven era, companies that do not take action on environmental or societal issues, will simply be left behind. Our longstanding track records of commitments and clear actions in sustainability will give us a head start. We've already discussed the progress we've made in reducing CO2 emissions and plastic and we'll continue to work towards achieving our 2030 goals. We have embarked on our green science transformation, which will reinvent the way we develop and manufacture our products. Currently, 61% of our ingredients are bio-based like hyaluronic acid in vitamin C produced through biotechnology. And this is just the beginning. We will continue to invest in developing new bio-sourced ingredients, including partnerships or investing in start-ups which has global bio energies or macrophytes. In addition to harnessing the power of nature, we will also harness the power of beauty tech to develop new to the world sustainable solutions, like L'Oréal Water Saver and once again invest in start-up that can scale to have a real impact like net zero in carbon capture. And, of course, we can't do this alone. So we'll continue to help consumers make more informed choices towards sustainability with initiatives such as the industry led eco beauty score. Fourth, in this increasingly fragmented world, we will evolve from universalization to singularization from offering beauty for all to beauty for each. And we are uniquely equipped to face these shifts. Beauty for each with our unrivaled portfolio of brands with different cultural backgrounds. Beauty for each with regionally developed innovation with global potential like the Garnier vitamin C serum, born in Thailand, developed in India, and a winner in emerging markets and beyond. Beauty for each with a multipolar RNI organization designed to cater to the infinite diversity of hair and skin types around the world. Beauty for each with personalized products, service and experiences powered by AI, data, and Beauty Tech. Finally, we will succeed in this new era. Thanks to our L'Oréal culture, which will only deepen. These culture full of passion, creativity and commitment, which have been living and breathing for 37 years is truly unique. It is the secret sauce to our success for the years ahead. To conclude, I would like to leave you this morning with three key takeaways. Firstly, in '22, in a world of poly crisis, we have delivered our best and most balanced growth since 1999, outperforming the market in all divisions, geographic zones and categories and we have reached historical levels of profitability. Second, while we know that 2023 may continue to be another bumpy year, we strongly believe that the beauty market will grow yet further and L'Oréal is ready and confident to deliver another growth of solid growth in both sales and profits. And as we look beyond 2023 and towards a new era, our multipolar modal, coupled with our proven capacity to harness the power of data and AI and drive sustainable change will place L'Oréal in a unique position to strengthen our leadership and deliver strong value for our shareholders. Yes. So since the meeting is recorded, I kindly ask you to state your name and company as clear as possible before you're asking your question in English. And I also kindly ask our journalists guests to raise their questions during the latter part of the Q&A session. Thank you. Celine? Thank you. Celine Pannuti, JPMorgan. Well, two questions to start with. Number one, on the growth of the market, so you seem to think that 4% to 5% is what the growth of the market would be for this year, which maybe sounds a bit low. If I think about China reopening, which you seem to be quite bullish about and as well for the pricing. So if you could a bit elaborate on that and maybe as well tell us a bit about your average fund? It was quite interesting to see how strong it was at the end of last year, in fact whole of last year. My second question is on China. Just to clarify, do you expect a bounce back after Q1 or after Q2 because those two were mentioned in your presentation. If you could elaborate a bit about how you see the bounce back coming true by divisions in that channel? And maybe could you also tell us how big is [indiscernible]? And you didn't talk about travel retail, so maybe sharing your views on that and how that will benefit the reopening? Thank you. Okay. So that's a lot of questions. I'll start with China because that's your probably one of the questions that's on everybody's mind. It's true that in China for most companies December and the beginning of January was very low consumption because people were sick and staying home, but the early signs we are getting from February, the first weeks of February are pretty positive - very positive in terms of traffic and as well in terms of purchases. So to answer your question, I think that the Chinese market will rebound from Q2, not from the second half, but it probably will be progressive as consumers need to regain trust. I think it will bounce back on all divisions, but clearly the divisions that have stronger brick-and-mortar footprint, like L'Oréal Luxe, will probably benefit even more from this reopening, but I think every division will benefit from it. Hainan is a nice part of the of the Chinese market. And, of course, today travel retail, air traffic has rebounced back a lot in 2022, but is still more than 30% below that of 2019. So I guess it will be another year of acceleration in 2023. And as far as the way we manage by the way because this is the implicit question, we have a very good cooperation between our travel retail teams and our local market teams in China to make sure that the local market and the value for L'Oréal is perfectly protected. As far as the market growth is concerned, we've looked at decades of market growth. The market was always between 4% and 5%. It's true it has bounced back stronger last year and this year was 6%. So frankly, we don't know. It's too early to say. Maybe it's going to be 4%, maybe 5% and maybe a bit more. We hope it's going to be a bit more and what's important for us is to continue to overperform that market, which of course as you heard, everybody is very determined to do. And it was the - you had a question on Europe. Yes, Europe was really a good surprise for us. And I really want to pay tribute to Vianney Derville, who is in the room, who is managing Europe with great talent. The market has been very resilient including at the end of the year. The last quarter on the European market was at - omnichannel was at plus 12. It seems that consumers continue to want to enjoy beauty, to indulge, to wear fragrances, to take care of their hair. And we have no evidence at the beginning of the year that things are changing course, but it's too - really too soon to tell. So we also have - I know that the European teams are ambitious. It's Jeremy Fialko from HSBC. Thank you very much for the presentation. Good to be back in person in Clichy. So couple of questions from me, maybe throwing up one on China. Clearly we're going to get more Chinese traveling outside the country this year, so, Japan, Korea and perhaps further afield. What do you think the impact of that might be on the kind of the Chinese market and your kind of business when you get that big increase in sort of external tourism? And the second question is on kind of compare and contrast between China and India. So if you think of China, say, 10 or 15 years back, how similar do you think India is at the equivalent stage development in its capacity to become a market of the scale that China is? Thanks. Okay. Well, first of all on India and in China, I think there are two very different markets. I don't think India will never - will ever look like China, but it's still a very promising market for us. We have high ambitions. Statistics say that by 2030, India will represent 20% of the world's population and 30% of the qualified workforce. So it will definitely be a driver of growth for us. Middle classes are rising in a major way. I was in India two months ago and I was really impressed by the growth, the development, and the accelerated sophistication of this market. It's still not as developed as we would like in terms of distribution, but it's really accelerating and our shares are growing. We have only two divisions over there. We already have an 8% market share. It's actually over 10% if you take e-commerce, which is our main growth driver. So from a €500 million business today, I think we can take it to a €1 billion in the next foreseeable future. So very excited about India, but I don't think it will be like China. Today, we are growing a lot through our CPD business. Maybe Alexis, you want to say a word about your CPD business in India because I think you have great results. Yes. No, absolutely. So as Nicolas was saying, I think what's interesting is to look at this upper part of the Indian middle class, which is today, let's say 200 million to 300 million people, but which is set to double in the next five to 10 years. So that's very exciting. And it's true that already we had a great year in India. We grew two times faster than the market. What was also interesting and what we pay a lot of attention to is to have a balanced growth in these countries between volume and value because it's important for us to both preimmunize and recruit. And maybe the last point, as Nicolas was saying, I've been going to India almost every year in the last 10 years and I've seen changes in the last two years like never before in terms of - in terms of sophistication of the market, in terms of change of the distribution, thanks to e-commerce. And all that powered by a super digital ecosystem. So we're very, very bullish about India. And to go back to your first question about Chinese travelers, I don't think - for us, it's - the driver of our growth in China is not so much whether they travel or they travel here or there. We don't highlight some other luxury industries of huge price gaps that justify bigger consumption abroad. Of course, our French team is going to be very happy if Chinese consumers come and buy some locum in Paris. But overall, our drivers are more of the rise of the middle classes, the penetration of our brands in China. Today we have approximately 100 million customers that buy our brands in China and we have to double that. We have potential in Tier 3 and 4 cities where our penetration is half of the one we have in Tier 1 and 2. So this is more my focus on the Chinese growth markets rather than knowing whether they're going to go to Thailand or to Paris. Morning. Tom Sykes from Deutsche Bank. Just firstly, you mentioned the FX impact on margin and then you alluded to some FX impact on the business and maybe a bit of a headwind. But could you maybe talk about in periods when the dollar is particularly strong, has that helped you to sell-in and be more competitive and is that at all a headwind to full year '23 given FX movements at all? And then would you be able to just clarify some Q4 movements, which to work out what happened by the category. I think in fragrance, you said at the nine month level, you were about 35% year to date at least at the half year where you have 35% and obviously quite a bit below that you mentioned for the full year and you mentioned capacity constraints from glass and just what impact that may have had on the Q4 growth, please? And perhaps then just on skincare, was there a rebound at all in North Asian skincare compared to Q3? And if so, when skincare has remained the same growth, does that not imply that skincare elsewhere may have been a little weaker in Q4, perhaps the U.S. at all please? So coming first on the FX effects, I think what is most noticeable, of course, is the impact on the net sales. As you've seen, it has been true massive impact of more than 7% growth. Obviously, we'll see now what will happen in 2023. Now coming on the P&L, I have to say that as I was mentioning before, there is an impact of course in the cost of goods. That's probably the area in the P&L that is the most visible. In the rest of the P&L, it's much less. It's due to the weight of our factories and the divisions. Meaning that, of course, if the euro reinforced this year, of course, it will have a positive impact on the gross margin. But then on the whole P&L and also on the profits, I think that this impact is 10 basis points version. So regarding provinces, the market was, as I mentioned, in my presentation extremely dynamic throughout the year because the market ended at plus 18. To look at it by halves, by semester, first half was plus 25, so that was plus 50. So there was a slight decrease, but still an extremely dynamic market on fragrances on 15 and second half. There were some supply constraints from the whole industry, as you mentioned, mainly glass ones. I think they are behind us now. And for most of the industry, 2023 is going to be a healthier supply wise. At least for us, it's going to be much healthier. And I'm very confident in the work that the teams have done on gas supply. What you need to understand is that it's the fundamentals of the fragrance markets which explain the growth. The daily usage of fragrance, which is something extremely strategic for us to look at has increased between 2017 and 2021 by 10 points in the U.S., in China has gone from 40 to 52, so Chinese - half of the Chinese luxury consumers use fragrance every day, which is pretty new. And so overall, this market is bound to grow, thanks to the development of the usage and especially amongst the young generations. The young generation in America, the young generation in China are really crazy about fragrances right now. They love it, not only for its social benefits, but also for some wellness benefits, but their associates to the fragrance. So I'm very confident that this market will keep driving us. And as you know, we are the number one worldwide by foreign fragrances. So I'm confident it will be a strong business for L'Oréal and L'Oréal Luxe especially. And on skincare, I'm not sure I can answer your question because anyway we do not have yet the whole sell out performance of the end of the year. But most likely, I don't think there has been a slowdown somewhere to offset the North Asia rebound because December was very low in China. So the odds are that skincare has remained strong everywhere. I think it's been very strong in the U.S. I look at the CPD performance, it's been very, very strong on skincare. So skincare is one of these categories that has - that is bound to grow because, as I said, it addresses everybody from Gen Zs and that's new because they weren't using so much skincare, they're investing into the UV protection. And so the penetration and the usage of skincare is going to grow on younger generations. And, of course, as you know, as people age, it is the one category that they continue to use. So skincare is doing good premiumizing and I have seen no slowdown anywhere at the end of the year. If you allow me before handing over to you, we have two questions on the phone, which have been alerted on, so we will take them and then we will go back to the room. Hi, good morning. My first question is on those four high-growth emerging market that you mentioned at quarter three. I think it was Mexico, Brazil, India, and Indonesia. At quarter three, they were all growing around 30%. Could you just comment on what they're growing right now and I think they've slowed down. Is there anything to read in the quarter for slowdown of some of those countries? And second of all, I'm not sure if I missed the number, but could you give us the quarter four growth in mainland China and Hainan please? Thank you. Just on the SAPMENA - SSA and our emerging market in general, Q4 has accelerated significantly versus 2019, but the drop you see on Q4 is just the fact of comparatives. Last year in Q4, was the reopening - massive reopening of India after a very strong lockdown. So there's just a base effect, but if you look at our actual sell-out numbers, the market remains as dynamic as it was, a bit like L'Oréal overall. You have a Q4 that compared to 2019 continues on its acceleration path. So there is no slowdown and nothing to read more than a tough comparative. Christophe, you have some information on Q4 on China? To be precise, the growth in China in the last quarter was plus 3.8%, so higher than the growth in Q3. Good morning, all. And couple of questions for me, please. The first one is on the consumer division. I think in your presentation, Alexis, you mentioned your ambition to accelerate the divisions growth. So does it mean you are targeting a like-for-like sales growth in excess of 8% in 2023? And I guess related to that, you showed how your growth last year was particularly strong in countries like Mexico, India, and Brazil. My question on this would be, what about the margin impact from this strong growth? So, any color you could provide on the gross and operating margin impact from this strong push in EM would be interesting. And then my second question is on the Yves Saint Laurent license. So you signed an agreement with Kering back in 2008. I think if I remember well, the wording at the time was very long-term agreements. So, it's now been 15 years whilst there has been a fantastic growth driver for you, but wondering if we are getting closer to the end of this long-term agreement and maybe if you've had already some conversations with the owner of YSL and if you've got any early indications on whether they would like to take the brand back in house or not? Thank you. Yes, of course. So thanks for your questions. On the '23 acceleration of the division, first, you know we're genetically engineered to outperform the market and accelerate. So that's what we do every day. What I can tell you is that we start the year with momentum because what I see is that, if I look at both the market and our sell out performance in the Q4, I see an acceleration and I see also an outperformance of the market of the division versus the market that accelerated into Q4. So we're starting - I would say that we're starting to 2023 with a good momentum. So that's what I can say. And, of course, we're going to do everything to outperform the market and to widen the gap between us and the market in every single country on every single category. Then on your question on the profit impact of emerging markets, maybe - let me maybe give you one - maybe one fact, which is interesting because what is interesting also in those markets, what we follow very precisely is gross profit. Because once you have - once your growth generates money through gross profit, then you can strategically decide where you allocate this money between media or rack. So I think the gross profit measure is something that we look at. And if you take a country like India, the gross profit that we have in India is pretty comparable with the gross profit that we have in the U.S. or Europe. So we really think that we can grow emerging markets in a profitable way for the future. Okay. So on the - just on the Kering license between - going back to the room, first of all, we take the decision of Kering to enter beauty as a very strong sign that beauty is definitely a category to invest in because it's not an easy category, but we see that we have new players. And as it relates to the license, I would say that it's a very, very, very, very long-term license and that's about all I can say, but there is absolutely no risk that this license is taken back from L'Oréal. Yes, so first of all my compliment for the results - maybe a microphone, please. So that - I can hear you, but I just want to make sure that people that are connected can. Hello, [indiscernible]. So first of all, my compliments on the results. So I have two questions. So the first one concerning your B2C strategy, so B2C is not so big out of total, but you have some brands that directly aligned, there are some other brands with some - their own stores. So what is your B2C strategy? And that was - you put this strategy inside the overall approach to distribution? So this is the first question. So, second question concerning more specific about U.S. market. So which trend serves internal distribution? So we're seeing strong increase market share, increase specialty, retailers like Ulta Beauty and Sephora, you will see in the brands selling also on Amazon. So what is your strategy for U.S. distribution and what trend we can expect in the midland term? Thank you. Okay. So on D2C, which is mainly - not only because we can add to - our status to it, but it's mainly a L'Oréal Luxe play. So I will happily hand over to Cyril. Yes, obviously D2C is a high priority for L'Oréal Luxe. Why because it's where the consumer experience is the best in the luxury business. So we keep investing relentlessly, consistently in our D2C capabilities, both offline and online. And D2C online is also extremely critical for us. And we link the two permanently obviously is that our CRM and loyalty programs. So the division has 23 brands. So I would not say D2C is a priority for all brands. Some of our brands are more targeting specialty as you mentioned as a priority channel. But I would say most of the top of the pyramid of the L'Oréal Luxe brands are investing heavily in D2C capabilities and want to win on this channel, which we think is going to be - is going to remain a key element of connection when you're in the luxury business. Yes, clearly we want to - D2C is really part of our luxury brands or premium brand strategy. It's obviously a bit more difficult to make it a very profitable business on mass market, but on premium brands, it's really part of the strategy, both in terms of consumer connection and data. As far as the U.S. is concerned, I would say that, first of all, the U.S. market remains very dynamic and that's a great news. Last year was - second half was plus 7 growth. The beginning of the year is positive too. And we do not see any signs of recession in the U.S. And then retailers, as always, there are some winners and losers. But overall, what - I guess what you felt from the presentation of the brands and the division is that the world is omnichannel and we are more and more omnichannel. I mean, you've seen the Professional Products division that has its Kerastase brand in Sephora, it's Redken and Matrix brands on Amazon. You've seen active cosmetics obviously being quite omnichannel. So our approach is to be where consumers want to shop as long as the qualitative criteria that are defined by each brands are respected. Even if we take L'Oréal Luxe today, a brand like Urban Decay is on Amazon because there is a good match between the Amazon consumer and way of expressing the brands and Urban Decay, so we are constantly assessing options. We have no taboo, but we are here to serve consumers and protect the equity of our brands in the long term. We had a - over there - the lady over there because you were almost asking your question earlier, so back to you. Thank you. Emma Letheren from RBC. So I want to ask about your A&P spend, which fell as a percentage of sales this year for the first time in several years. How are you thinking about that going forward? Do you still see further scope for efficiencies or can we go back to that trend of increasing that year-on-year as inflation headwinds recede? Secondly, sounds like you've got some great innovations in the Consumer Product division. I was just wondering how you view the risk of cannibalization of sales when you're using similar innovations such as the vitamin C serums in your Consumer Product division as well as in L'Oréal Luxe. And lastly, I wondered if you could split out the volume, price and mix growth you had in Q4? Yes, I've seen - I've read the memos from your company, I was very concerned about our area, our A&P spend, which keeps on progressing. So I know you look at basis points, but as I expressed in 2019, we added €3 billion on fuel on our brands, which is a pretty significant amount of money at a time when obviously and hopefully and we have also that question, we are improving in our accuracy, capacity to target to measure. We are investing, as I said, in AI to measure both the short-term and mid-term efficacy of our media spending. So we are absolutely and totally and utterly determined to continue to fuel and support our brands, both the ones that are already billionaire and all the ones in the making, that's why we continue to increase our media spend. But we do it more and more, with more and more efficacy, so my view is that A&Ps are continue - are going to continue to grow. Whether they're going to do it in basis points or no, we'll see. The intention is to continue to grow and that's a clear objective because our brands are number one priority. Your second question was on cannibalization, that's an old topic for L'Oréal. It's always been our business model. We have - we spent over €1 billion in RNI. Our team has come up with great innovations. We usually launch them first in the most premium part of the business because usually a new product, a new molecule and innovation is more expensive in the beginning. And then when we can reach economies of scale or slightly more affordable versions of the same technology, we trickle it down. We call it cascading at L'Oréal to the mass market division or to other divisions and it has always worked. As you may have noticed, the L'Oréal Luxe has become the number one division of the Group despite this cascading strategy. So I'm not worried about it. Although more as premium divisions are constantly at that time upgrading their products, bringing new molecules, improving the ones that are already on the market, so that's a very virtuous model for us. And I think that's one of the uniqueness of L'Oréal is that we can precisely invest in groundbreaking innovations because we know that at some point, we'll be able to leverage and scale them. And as far as the volume value mix on Q4, you want to say that or not, Christophe. I don't want to give too much details, but I think it's worth mentioning that the volume was told, it was still up, nearly 1% and all the rest was value. So that's part of the strength of this year. You know that we've been able to increase both in volume and value and we keep fighting for it and results next year, of course. Thank you. It's Karel Zoete with Kepler Cheuvreux. I have a question on derma because you spoke about unmet consumer needs. And in some markets where the dermocosmetics is 15% of the market and others between 5% and 10%. So what basically explains this gap and what are you doing to get to increase penetration and develop the market? Then one on cash flow, inventories €1 billion higher than normal. You mentioned high safety stocks also for raw materials. Can we expect this to unwind in 2023? And if you maybe locked in raw materials at high prices? And the last one is more on ESG, a lot of progress, but when it comes to the ambitions to reduce water in your own operations, there is still a big gap towards the 2023 ambition. What are the big blocks to progress a lot in seven, eight years? Yes. So indeed there are different ways of building the derma market in the world. The countries that benefit from strong pharmacy networks and that have a medical ecosystem where doctors - where patients go first to dermatologists, have developed a dermal market that is very valorized than premium, that is Europe, LatAm. And other market, the Anglo-Saxon market that are based on patients going to CGPs and buying the product in drugs have developed market. There is less valued and less developed. And what we are doing to develop the growth? Yes, we are entering premium brands in the mass market to premiumize the market. So, for instance, as we grow CeraVe quickly in the U.S., the brand grew by 29% in the U.S. and became very big brand locally, we still are able to premiumize the market of the U.S. by growing La Roche-Posay which has become the second fastest growing brand in the U.S. And at the same time in countries that are developed on a premium dermal market, we can still carry on growing market that is very developed by affordability and this is - this explains the beautiful growth that we're seeing in, for instance, the European market which has picked up a very, very significant business. Yes, cash flow. So indeed, we have been facing transferable amount in our working capital. And this is mainly of roughly €1billion. And this is mainly due to our inventory policies. You know, we have been trying like many people to try to mitigate all the disruptions caused by logistics issues and also the COVID. So we decided to increase our safety stocks mainly in the U.S. So we have been increasing our coverage by I think something like eight days for raw materials and the same for some finished goods. And I think it's quite wide in this period and what I feel a little bit also if you read the Chinese market start to produce strongly from Q2. So we will see. If the market normalize. Of course, we will be able to decrease the level of our inventories. If we still see many disruptions, I prefer to have a higher level of inventories and be able to serve our customers. And, of course, this year the value of the stock itself was increased significantly by the increase in input. So as this starts stabilizing, we should not see this type of increase or at least of this magnitude this year. Okay. And your third question was ESG. Yes. On the water - on water loop, yes, we have a commitment to increase the percentage and to bring all our factories progressively to the water loop. So, this year, there was no investment plan. And actually, we had a little bit of a setback is that our Mexico factory, which was water loop, had to cope with a very strong increase in demand in our products and therefore could not be a 100% water loop on its production, which is going to be corrected in 2024. And we have another three factories that are - which investment were planned to happen in '23, so both Mexico and three more will be a water loop again in this coming year. So it's just - we had a, there was no more plan this year and we had a little bit of a setback in Mexico and four are coming into the loop in '23. So it's about - as you rightfully say, all these ESG commitments, it's getting harder. All the teams are mobilized. We also work as you heard in influencing our consumers' behaviors with the ECO score that we've shared with all the rest of the industry in our consortium. We are advertising on the way to recycle and refill and we are, as you know, promoting this L'Oréal Water Saver Showerhead in all the hair salons of the world and hopefully tomorrow in the homes of consumers. So it's really a 360-degree commitment from everybody in the company and sometimes things do not progress as fast as you want. But on the other hand, when you got three quarters of your - a bit more than two-thirds of your - of your site's industrial side that are already carbon-neutral. It shows also good progress in that respect. Thank you for the question. Chris Pitcher from Redburn. Two questions, please. Firstly on the U.S. In 2019, you had slowing growth, but had plans in place to improve the business to see an acceleration. Obviously, we have the huge distortion of the pandemic. We're you able to do everything you'd hope to do than during the pandemic or is there more still to do in the U.S. in terms of strategic development? Obviously, you advanced your channel and your category exposure. And then secondly on China and Hainan, there a big expansion in retail space in Hainan. Is there a risk that you see some cannibalization from the Mainland? And you incrementally expanding your space in places like Haikou and so hopefully in the future development? Thank you. Okay. So on the U.S., I think we could do all the transformations that needed to be done during the pandemic where there is the reduction of the distribution footprint of L'Oréal Luxe, whether it's the refocus on some categories and reorganization at the commercial level of L'Oréal USA. And, of course, the acceleration that was right before the pandemic, but the organization of our Active Cosmetics - sorry, L'Oréal dermatological beauty organization in the U.S. with the combination of CeraVe and La Roche Posay as it relates to our medical visitors, all this was done. And frankly most of it is paying off. Where we still expect more return still is in luxury because it's - we've, I would say, cleaned our distribution, but we still have to accelerate more in the USA, which we've done on the last quarter. So it's promising. Thanks to fragrance, skincare, and probably we need a bit - a bit more [indiscernible] in Luxe makeup, but I guess it's coming - I guess, it's coming in '23. And your second question was the famous Hainan. I have to say I wish I could - I can go pretty soon to this new incredible store, which by the way is totally LEED certified. So it's a huge store, but very eco-conscious. All our brands are there. What we've seen in the past is that travel retail in general, whether it's in Hainan, in Hong Kong before, in Macau or even in Paris is never a cannibalization. It serves several purposes. First of all, it's a fantastic exposure of our brands. We are talking about the A&P and by the way to create brand desire, these stores are the biggest airports in the world are just incredible showcases for our brands. I haven't seen it physically, but I've seen the film of the Locum boutique, the Prada counter, I mean - the Valentino beauty counter. It's a way for Chinese travelers from often that are by the way from a larger number of cities, then the Tier 1 and Tier 2 where we usually very strong to discover the brands to touch them feel them. And that's a fantastic asset and a very important in our strategy. And then, of course, you've got people that do repurchase there and you have people that - the famous Daigou's. And then it comes to our way to manage the equation between Mainland China and these travel retail stores. And what we can see is that our Mainland China share is continuously growing, which tends to indicate that we must have struck the right balance between travel retail and domestic market. Thanks very much. It's Ian Simpson of Barclays. And couple of questions from me if I could. Firstly, could we dig a little bit into Helena Rubinstein. It's sort of being a bit under the radar in the last few years, but clearly a phenomenal success, meaningfully more premium than anything else you've got in skincare. I'd be fascinated to hear where you think price points can get to structurally over the medium term? And if I could go up to some of the, I guess, ultra-high end skincare brands, some of your competitors have in this space, that's your ambition. And then secondly, I know we've talked about in a bit, but I wondered if we could dig into some of those big emerging markets ex-China, India, Brazil, Mexico, what's driven the turnaround here in recent years? It feels like they are performing better than they have for a while. Is it greater investment, change in strategy, management changes or sort of combination of those? Thank you so much. Okay. So Cyril you will take question on Helena Rubinstein and we will share with Alexis question on the emerging markets which are mostly CPD play, even though not only. So Helena Rubinstein. So Helena Rubinstein is a brand which has a long history in skincare. It has always been an extremely impressive skincare DNA, but it's true that the brand was rather tiny a few years ago. And we decided to develop it in an accelerated way because we saw the premium skin care market was growing three times faster than the average luxury skin care market. So we needed a stronger from this market and we thought the Helena Rubinstein had the perfect DNA to do so. So since then, the brand is almost at €1 billion. It ended the year at €950 million, if I want to be precise. So it's going to be a €1 billion brand in 2023. And it's positioned at, what we call, super premium skin care. And so the prices of Helena Rubinstein product are between $200 and $300. Then we have another offer, which we launched just this year to go higher, which is Carita - Maison Carita. Maison Carita is not super premium care, it's ultra-premium skincare with prices which are above the 300 bar. Maison Carita has also a long history and tradition of luxury beauty earned because as you know it was Maison de Beauté beauty heart in Paris, already in the 50s. So it's - it has a long history, amazing formulas. And we think we're going to keep growing in this very valorize part of the skincare market. It's today - for your information, today almost 25% of the skincare - luxury skin care market worldwide is what we call really the prestige skincare above the $200. Thank you, Cyril. On emerging markets, I'll give a very short soundbite and hand over to Alexis, but it's really innovation and e-commerce penetration, which are the two main drivers and probably Alexis can elaborate a bit more. And then I'll take the last questions because I'm being reminded that we have time constraints. Yes, I think, emerging markets first to start with strategic intent. So we have strategically decided with Nicolas to really focus on it. That's the first point. Then the second thing is coming back to innovation is there - one of the differences between beauty and food is that in beauty, there is a certain transfer strategy of needs across the emerging markets unlike food because it's mostly hot and humid climates. It's mostly dark hair. It's mostly skin unevenness problems, et-cetera. So that's why we've taken in terms of creation and innovation more transversal approach on creating new groundbreaking products for emerging markets, that's the example that Nicolas showed on vitamin C serum. And we've also slightly make our organizations evolved because of that. I have next to me GM in charge of emerging markets, so that represents all these emerging markets together, represent a big cloud. It's the same thing in the labs. It's the same thing in industry. So that's really has helped us really bump up the innovation. And on the kind of activation side, the reorganization that Nicolas showed you clearly helped a lot in terms of execution. Okay. So we'll finish with a question from Rogerio and we will have to call it today. We will find some coffee break, extra questions, but we have to - I'm reminded that we have to stop. Thank you very much. Rogerio Fujimori from Stifel. And my follow-up question is actually for Christophe. It should be probably quick ones. I think you've mentioned your expectations about gross margin expansion in '23 by pricing, weatherization, and moderation in input cost inflation. So if you could elaborate a little bit on in terms of kind of magnitude of moderation and H1, H2 dynamics. And then on the SG&A ex A&P, when you think about selling, general, and administrative, what type of cost inflation you're thinking, whether the natural cost inflation and whatever needs you have in terms of reinvesting digital customer service, et cetera? Thank you. Okay. So that's a $1 million question because, of course, regarding the gross margin, it will depend a lot on what will happen on raw material. We had nevertheless some good news for the time being, but again, I prefer to be extremely prudent because of the situation for a potential rebound in China that could drive again capacities that are coming from this country. Nevertheless, our ambition, of course, is to go back to what was the strong level of gross margin, even it's 72.4%, I consider it's very strong one, but we are willing of course to catch up on this. As you know, that's very strategic for us because gross margin will give the company the means to keep investing in our brands. And with all gestures that have been already put regarding price increases, et cetera, that are already there, I'm pretty confident that this will improve this year. But I prefer to be extremely prudent because at this stage, the currency is evolving very fast, it's very difficult to give a precise number. And on SG&A, it's very hard to answer because the situation is very different from one country to another in terms of salary inflation. And we are - what is true is that we are continuously recruiting talents, particularly in the tech and data arena, which I explained in my presentation. So we will continue to recruit and invest, but, of course, keep tight control of our SG&A as we've shown. And by the way, all the clusterization of our activity in several countries is bringing a lot of efficacy and allow us to generate fuel on the ground and that's been proven - one of the success cases of Europe. Ladies and gentlemen, we have to call it today. So we'll - I guess we'll hear you - aside from the coffee break, we'll hear you at the Q1 call, but I thank you for your attention and your questions. Thank you.

EarningCall_30

Hi. My name is Merton Kaplan. I'm Head of Investor Relations at Saab. I would like to welcome you all for listening in to our Fourth Quarter Earnings Presentation. With me here today in the studio, I have our CEO, Micael Johansson; and Saab CFO, Christian Luiga. So we will, as usual, start with the presentation and continue with a Q&A, and you'll be able to ask questions on the website directly to me. So continue with that. And with that introduction, I'll hand the microphone to you, Micael. Thank you, Merton, and good morning, and welcome, everyone. Thank you for joining our call today for the fourth quarter of 2022 and also for the full year report. And I will jump right into the numbers, I think, and I'll start with a few comments on the full year of last year 2022, a few highlights. And I think we had a very good year when it comes to the market positions that we took and we had an order intake of more than SEK63 billion, which is a huge growth in order intake. Still, I would say that maybe in the last quarter, we start seeing some effects, specifically on the tragic war in Ukraine. Most of the contracts were still discussions we've initiated with customers quite a long time ago. We delivered on our outlook when it comes to sales growth, and we have an organic growth of slightly above 5%, 7.3% reported. And we also continued to grow our EBIT, which is really important to us, 13%, which is slightly above the range that we did our outlook on, and we continue to generate cash, which is extremely important to us as well, of course. And looking at the fourth quarter, more specifically, we had an extremely good quarter, of course, when it comes to order intake. I think it's a record high order intake, almost SEK30 billion. And also the growth was good, 14% organically, 16% reported. And we had growth of EBIT in all business areas, except in aeronautics, which is also a good growth situation in most of the organizations, and we generated a margin of 9.5%, which is a lot about volumes, of course, but also that we continue to improve our efficiency. Good cash flow generation in the quarter, SEK1.7 billion. And the machine, the organization is running at high intensity, of course, and this reflects the quarter very well, I think. And as you've seen, the Board has proposed a dividend increase with 8% to SEK5.30, which will be taken now to the AGM in April. I think it's worth looking at and reflecting upon the huge backlog we have now. It's a record high. We increased that backlog with 21% during the year. So we are at SEK128 billion, and as I said, we start seeing an impact directly on orders connected to Ukraine. And I think many countries now in Europe have seen their stocks being depleted, and they need to be replenished and they will go above maybe what they had before because of the necessity of having resilient societies and thresholds, if things go really wrong. So I think we will see that continuing in terms of a good market situation. And I really hope the war in Ukraine will end, of course, with tragic, but I still think that the country, specifically Europe will continue to grow the defense spending for many years to come. And most of the order intake has been in the large and the medium order side, still, we didn't have sort of a huge sort of order in 2022. So it's still an extremely strong order intake situation looking at medium and large orders, but not sort of a substantially large order involved at all. We had the mix between international markets in Sweden, roughly 50-50, I would say. And we now see a more short-term high sort of delivery pace of that backlog that we see and Christian will come back to that in his presentation. Important contracts during the quarter was, of course, the two SIGINT ships that we have contracted for Poland, which is all of our situation awareness, of course, that was SEK6.7 billion. We got a couple of contracts on the Gripen support contract, but also an upgrade contract of the Charlotte Delta version of the Gripen, which is extremely well since Sweden will continue to fly that aircraft well into the 30s. And also that will generate more potential business for other countries that fly the Gripen. The NLAW contracts from the U.K. and Sweden is an important contract, which we now really start up the production at high volumes again when it comes to the support weapon, which has been extremely successful in the tragic war. And that will now continue to be a sort of a volume product for us going forward. And we also had an important contract from a neighboring country, Finland, when it comes to the missile side of things. So it's a good mix of contracts during the quarter, of course, and also during the full year. A few highlights from quarter four. I think I've already alluded to that, that we have a very intensive market activity out there with many countries needing to replenish their stocks. But also, of course, discussions on more sophisticated equipment and systems going forward. And we need to be diligently working that market going forward. And I mean, NATO is also now gathering again to discuss what is actually the floor of spending to be a strong alliance. And now it's 2%, but I wouldn't be surprised if it's actually more than that when we have passed the next summit. We have a very important milestone now which we passed related to the Gripen program. We have miles, the type certificate approved from the Swedish authorities and the Brazilian authorities, so now both air forces can take this new version of the Gripen in full operational aspects. And I was in Brazil in December, taking part in the inauguration of the aircraft in their operational use at the wing in Annapolis. We've started also the production of the Gripen E version in Brazil. We also have delivered a very important Torpedo to Sweden, which is all about an adapted torpedo for the covets, of course, and also for the submarines in our type of environment in the Baltic Sea, very strong capability. And then again, this is all about increasing capacity. And of course, we have fantastic employees in the company that we need to retain and the momentum is really good, but we also need to employ new people. So we increased our full-time equivalents with more than 1,000 people in 2022 in Sweden and internationally. And we will continue to do that during 2023, and we'll probably be above another 1,000 people in 2023. So we are growing, but we also are investing in infrastructure to be able to manufacture things and be more efficient in manufacturing, automization is important to us. We also have done a divestment of the maritime traffic management part of Saab, which is sort of back to being focusing on our core business and that divestment, I hope we will not close in the first half year of 2023. A couple of comments on each business area. As I said, the type certificate for the Gripen E is, of course, extremely important for aeronautics. There is intensity in the market. We are involved in a few campaigns, both in South America and in Europe when it comes to the Gripen aircraft. We still have a difficult position when it comes to the civil aviation part of aeronautics, but also that the T-7 ramp-up is still affecting the profitability in a negative way. This is a timing issue, of course, over time since we are going to manufacture many, many aircrafts of T-7 going forward. So we have to sort of mitigate as far as we can this negative effect and then that will sort of fade out over time. Dynamics have had an extremely strong year and lots of interest from customers, specifically related to the sport weapons and missile activities, but also training and simulation. One must remember that when activities are intense within the defense forces, they need to train. So our combat training centers are also being extremely important for our customers. Now this year have been exceptionally favorable when it comes to both sort of the mix of contracts and the support weapon side of Dynamics. It will be favorable going forward in terms of high levels of growth, and I think also good profitability, but this has actually been an exceptional year when it comes to the sport weapon. And we do invest now to expand all the time our capability in terms of deliveries in Dynamics. Surveillance also had a strong interest in the marketplace for their portfolio when it comes to sensors, of course, but also command and control systems and electronic warfare. And they improved continuously in all business units. And the EBIT margin is going in the right direction, and we are performing better and better on certain low performance [indiscernible] and have been a turnaround in a couple of units. I'm really pleased with that. There's still more to do, but we are going absolutely in the right direction. On Saab Kockums side, we have a much better position as a whole in that business area since we have a good mix now, Swedish and international contracts and the surface side is complementing the submarine side in a good way. And we have an aftermarket sales that is impacting things in a good direction. So the profitability is growing in the right direction all the time. And quarter four was a good year when it comes to profitability, as I say, and a good order intake as well. So Saab Kockums is delivering in the right direction, and it's on a good journey of growth and becoming more profitable, as we've talked about before. When it comes to sustainability, which is an extremely important area to us, we have, during this quarter, now being approved by science-based targets initiative related to our science-based targets, which is older scopes. And we're going to reduce our emissions with 42% until 2030, and become neutral 2050. And we're going to also have the reductions in Scope 3, which is connected to our supply chain, of course, but also to the customer side of things, things that we can affect on the customer side. For the fourth consecutive year, we have been rated as A minus on the climate disclosure reporting side. We are taking initiatives all we can do to make sure that we have good provisions of energy to the company in the right way and right energy sources. We have a savings campaign, which has already received a reduction or achieved the reduction in the first two months of 11%, and we're going to phase out our fossil fuel-driven vehicles from mid this year now. So we'll only be supporting having electrical vehicles being ordered in the company from June onwards. So many good initiatives in this area as well. But the foundation of everything is that what we do is the purpose, of course, is to protect societies, and that is a really important foundation for everything we do on top of that when it comes to sustainability. So looking ahead, we have now looked at the backlog and we think now that we can give an outlook to where we will grow around 15% at 23%. And we continue to have the view that our profitability must grow more than that. So we continue to become more and more profitable, but all the time with the trade-off of having the strength to invest in R&D for the future. So we will be a strong company also in five and 10 years to come. And we will continue to generate a positive cash flow. That is so important to us. So we have a strong outlook for 2023, as you can see. So in summary, looking at things going forward, of course, extremely high intensity in the market. We must continue to capture market opportunities, both in Europe and the U.S. and also in Asia. And we, of course, need to get inside the NATO acquisition processes, and there are cases now that been worked on, but also taking part in all the forums and so forth. And we are in NYT even if it's sad that it's dragging on to become a full member, so we participate in the forums already. Lots of initiatives to increase capacity and expansion but also, again, on a standard line that retaining our skillful employees is as important as actually employing more people and then it's sort of infrastructure investments, of course, also that is involved in that. We have respect for the macroeconomic situation, of course, and supply chain issues, and we can have a sort of stop sort of focusing on things to mitigate all these things, which I think we've done in a very good way, and we are prepared. Of course, when it comes to supply chain, it's all about having a little bit more working capital, making sure we understand the full fledge of the depth of the supply chains, having redundant suppliers and some in-sourcing activities, of course. And then contracting when it comes to being hedged for cost increases and currency exposure is also incredibly important. I also need to say we have a backlog now of SEK128 billion. It's a lot about deliveries here and now, but this company needs to be capable of using its best brains to look at future capabilities as well. So we do put efforts on that. So the trade-off is important between growth, growth and profitability, but still the strength to create fantastic things going forward. And as you've seen, I've also taken a step to strengthen again the Group management team. I need a strong person looking at government affairs, both for the Swedish perspective, but the European perspective. We have much more presence needed in Brussels and other and also connected to NATO, we need to increase our focus on stakeholder management and understanding how we work the possibilities in that context. And then I've decided then that we need to go into the next phase with aeronautics. So I have a new BA Head of Aeronautics, which is Lars Tossman, who used to be the business area head of Saab Kockums. And in consequence, we have a new business area head to Saab Head:Kockums, which will be Mats Wicksell. So Jonas Hjelm will stay in corporate management, but take the role of the government affairs position. So this is good sort of adjustments of Group management to become even stronger going forward. So that is the quick summary of quarter four and the full year and also a little bit of what's going to happen in the future. With that, I will hand over to Christian, who will dig in a little bit more into the numbers. Thank you, Micael, and good morning to everyone. Happy to have you on the call today. Just to recap and summarize again. I think it's worth to mention that we said and we set out this year with an outlook and we said that, that outlook will be achieved through a weaker first half and then a stronger second half, and that's exactly what we see. And on top of that, we have delivered a fantastic order intake and that has then built a great foundation for the growth going forward. And that order book that came from the SEK63 billion in order intake, 1.5 times sales this year and SEK30 billion coming through in quarter 4. As you see on this picture, it has increased and pushed up year one, year two and year three in our order to sales backlog. Next year or this year, actually, the coming year is up 19%. And that supports the 15% growth uplift that we believe in for next year. The orders have come in a bit more towards Sweden than we have in the past. And meanwhile, the small orders have been quite flat, medium-sized and large have been increasing substantially. And I think this is, as I said, something that is important to look at and see how this shift from sometimes before when we had large orders coming in but should be delivered in the long-term time frame, they are now coming much faster through our backlog sales cycle. If we look a bit on the full year numbers for 2022, we are also closing the year, as Micael said, not only a quarter and just summarize and see how did this year work out. We have a sales growth of 5%, and that has delivered scale and the improvement is driven primarily in Dynamics with Surveillance and Kockums. The EBIT improvement of 13.4% is driven by scale effects and efficiency. Efficiency comes through a small increase in gross margin and through the scale effects that we have on top of the OpEx development. Depreciation has increased faster than sales. We talked about it last year because then we had a big step-up in depreciation between 2020 and 2021. We still have a quite big step up faster than sales, and that has also had a negative impact. So if you would have followed sales pattern, it would have been 0.2% more in EBIT margin. So how is the depreciation and amortization going next year? Well, it will be more in line or below the sales growth we have set out in our outlook. Another thing that is important to see, we did achieve our outlook, even though the corporate costs increased a bit more than expected. There's different factors that have driven the corporate cost this year. Those that we didn't sort of plan for is that the share price went up as it did and therefore, our share program cost more for paying off for all employees that are participating in the share program. The other part is the minority losses that we have in some of our portfolios that also came out higher than expected. But what has also come through is more recruitment cost and more IT and IT security costs, which is important, of course, in this new situation to take on. These will be moved out, of course, into the BAs and part of the BA's profitability over time. But as we did react quickly on this, on Group level, they are corporate costs for now. Finally, if you dig into the financial net and the bridge between EBIT and net income, you will see, and we talked about it in quarter three that we have an unrealized loss on our portfolio for the year and the portfolio of placement that we have on our excess cash, the SEK12.9 billion that we have in cash. We have placed that in bonds. And as the interest have increased during the year, we have had unrealized losses on those. As long as we don't sell these bonds, we will not have a realized loss. So we will actually revert that back and get a positive from that. In quarter four, we had a positive financial net. That is partly because now we start to see that positive coming back, and it was partly because of financial impact from currency revaluations on some hedges we have. So those impacted positively in the quarter. we still had a SEK200 million impact on those unrealized effect on the full year on net income. And despite that, we increased our net income with close to 13% and the EPS close to 14%. Looking a bit on the sales growth. We can see on this picture that pretty much all our units, except for Kockums, did grow double digit. And Kockums actually had a 7% nice growth for the year. So this is more a quarter effect than anything that we should be worried about. As Micael said, we have a strong backlog also in Kockums. Actually, all these four business areas have a backlog that is close to 3 times sales when we end the year. Aeronautics is driven by high activity in the Gripen programs that start to ramp up. And the sales growth in Dynamics and in Surveillance are in all business units in this quarter, which is very, of course, fun and encouraging that all business units are driving growth. Combitech, I will come back to when I present that separately. You know that I come back to this. This is for me to make sure that we continuously improve our EBITDA in the same time as we continue to grow our sales on a rolling basis. And now we are in the end of the quarter, so it becomes full year numbers. But before we have the depreciation and before we have the amortizations, what is the achievement we do on our profitability? And since 2020 when we had a dip from the COVID situation, as you all may remember, we are now returning back up, and we continue to steadily improve that EBITDA margin year-by-year. And as Micael said, it's extremely important for us to continue to drive profitability. And that said, we have that sort of locked in, we know how to do that. Growth is going to be fundamental, and we need to be innovative in the future. So we will come back to that mix and how we work with that over time. But in principle, we work with a volume scale effect, and we work with efficiency, those two boxes. In addition to that, we also work, of course, with our portfolio management where MTM was part of that in this last quarter. The margins per business area, Aeronautics did have a somewhat weak quarter and it is Aviation Services where we had strong quarter four last year. That gives a comparison effect in this quarter. So without that, it would have been an increase in the rest of the business. That said, as Micael said, the civil aviation side is still impacting negatively. And there, we will have to look at how we take contracts in the future, and we have taken a decision during the fall to make sure that we will be much more diligent on what kind of contracts we take with the big customers there to make sure we are profitable. Strong margins in Dynamics is a result of high volumes in quarter four, but also in quarter four and in 2022, we want to point out, it has been an exceptionally favorable mix from the type of contracts that have come through. So that will be something to look at going forward. Strength in EBITDA in Surveillance. We had three business units that were below our expectations on what they should achieve previously. They are now moving slowly up very, very good pace and very steady pace in their movement, which is encouraging, and that is driving Surveillance profitability growth, and that should continue also into next year. And as we have said, Kockums good performance. Here, we have also a favorable customer mix, but that will also continue for the future. It is a mix of more foreign contracts and aftermarket sales that drives margin upwards. It's still a low-margin business, but it is actually improving and coming up to decent levels. Quickly on Combitech. Combitech is something we came to you and said in the spring that we were not too satisfied. Actually, year-end, we said it came out on a weaker note and we had to work with how to improve the profitability in Combitech. I'm happy now to see that the quarter four results of this year shows signals of that we have started to see results from this work. We are improving utilization. We are hiring more people, and we have good tractions, not least from the defense and civil security market. And that is a good foundation for future improvement. It also shows in the result of quarter four being an improvement year-on-year compared to last year. We also closed our Danish business that was not profitable in quarter four, and we have taken the cost in this result for that closure, and we continue to recruit people as we have a strong demand. Cash flow. We indicated that cash flow would be positive but below last year. And last year, we had SEK3.3 billion in operational cash flow. And this year, we had SEK2.6 billion. So we were SEK0.7 billion below. With that, we have also built up inventory quite substantially in Dynamics and a bit in Surveillance. And as you understand, with the short lead times, we need to have both in Dynamics and partly in Surveillance, that is important for security supply, but also to be able to deliver on new demand coming in. And that has been a quite easy decision to take to secure that we actually can be resilient in our growth journey. We do have investments that are on the same level on property equipment and tooling, and they may increase a bit going forward. But on the other hand, we also had lower investments in R&D, but that was primarily Gripen and T-7. And these are program maturing now, and therefore, it's natural that they are starting to phase out. We end the year and have had actually during the year a strong balance sheet. We have a net liquidity position, which makes the net debt-to-EBITDA equation quite uninteresting to talk about actually. But we have a strong position. We have SEK12.9 billion in short-term investments that we sit on, and we are prepared to take on both a growth journey, have the flexibility in the growth journey to do M&As and to work with partnerships going forward, which will be important to have that strength now in this next phase. I'm not going to reiterate what Micael said on this. I just wanted to then point out that we don't guide specifically on a range this year on operating income, but what we say it is going to be higher than the organic sales growth. And we will see if and how we can come back during the year with more specific details. But right now, this is what we would like to communicate, and we feel comfortable that this should be achievable. And before I leave back to you, Merton, I just want to say that we have a Capital Markets Day on Tuesday. For those of you that haven't decided to go there yet. I really urge you to contact the IR or the communication department to make sure you get there. It's going to be a super day with my colleagues in group management, our CEO and some other people. And I hope we can give you more details, both on the position we have and the future we see for Saab and our market. Thank you very much, Christian, and thank you also, Micael, for walking through the business in this quarter for us. So now we continue our live stream, and we will have a Q&A session. So is our moderator around? We will now begin the question-and-answer session. [Operator Instructions] The first question from the phone comes from Erik Golrang from SEB. Please go ahead. Thank you. Thank you for the presentation. I appreciate your comment there on sort of maybe coming back to the EBIT guidance a bit later in the year. But just so we don't get too carried away here. Could you say something about, I mean, is it fair to assume that Dynamics will be the fastest-growing business this year? And is it also fair to assume that based on your commentary about a very favorable mix that it's going to be a struggle for Dynamics to further expand their margin. Is that a potential sort of factor holding back EBIT growth a bit? Because otherwise, given what you said about corporate items, some of the other divisions, you can easily get to an EBIT growth level 2 times what you guide for in terms of sales growth. So what should we think about here to not get too carried away? Well, I can start and Christian can add. I mean, I don't want to guide on business area level, of course, in more specific terms. But you're right in assuming that we were trying to say that this year was exceptional when it comes to the mix and how that turned out into high margin level for Dynamics. And I actually don't think that level is sustainable really, but it's going to be high level going forward. And then of course, we do see potentially in Surveillance continuing to improve their margins going forward. And also Combitech is on the right journey, and that is also true for Saab Kockums. And of course, there is more to do on Aeronautics side to also continue profitability. But of course, you shouldn't be too carried away, of course. But I think the most important part to say here that Dynamics will continue to do well, but this was an exceptional year. I think we have to understand that. And on the growth side, I think we see favorable growth in all business areas. But of course, things that are faster moving, both Surveillance and Dynamics will probably have a better potential for growth in the year, but we see all areas actually growing quite good next year. Okay. Thank you. And two follow-ups. Still, I mean, the above 15%, I would assume that we're not thinking about 16% or 17%. Is that the right way to think about it? And then the second question is the 15% organic growth. In terms of risk for bottlenecks and supply chain constraints, et cetera, cost overruns, what's your thinking there? How do you prepare the business for this level of growth? Maybe, Micael, if I take the first one and you take about the second one first, I mean, as we talked about this balance, we have worked with the balance in 2022 as well on making sure we have a profitability growth and we -- and we have said that before. We don't want to just make a dot profitability growth. We need to make something that is visible, sustainable. And that, of course, is some kind of great. But we don't want to go into exact details at this point. It's a very special year. But we will have a goal to make a profitability growth, and then we need to grow as hell and then we need to make sure we innovate for the future. So that is very simple put on without guiding anything on it. And I think on sort of the risk level on supply chain issues and so forth, I think we're doing well. I do have respect for the fact that the weakest link in the chain can have an effect and all that. But I do see, and I feel confident about the growth perspective, looking at the backlog that will generate turnover next year. And what we have now built up in inventory and working capital, we can generate a growth level of that magnitude. But we still continue to work extremely diligent on making sure that we prepare ourselves through understanding the depth of the supply chains, also our suppliers supply suppliers, so to say, but also creating redundancy when it makes sense and also some in-sourcing and building, unfortunately, but I think it's wise now more inventory and working capital to make sure we can sort of deliver on our commitments. So I do feel confident in what we've said about our outlook going forward. Despite that, we need to work diligently on all what you said. Hi. Good morning, everybody. I had a few actually. The first one would be going back to your EBIT guidance. I understand that you don't want to give us more than what you've provided, but would you be able to give us any color on what is sort of the variable or the variables that have made you not provide a specific number range? Is there any more color you can give us on that? The second one would be on Dynamics. So I know you've said that so far this year, the mix effect was extremely favorable. Can you give us any more color on exactly what this means or what happened specifically? And the third one would be on civil on aeronautics, how to think about the civil aviation business for 2023 as it recovers? And maybe one last, on cash, given your currently very good cash position, how you think about that for 2023? Thank you. So maybe I start to say EBIT guidance, no. Sorry, you will not get more details on that to be a little bit brutal, but I think I had enough answer to Erik on that. I can't say that much more. On Dynamics, of course, Dynamics has a great portfolio and a big portfolio and a broad portfolio. And certain things have higher margin and certain things have lower margin. And of course, if the stars are right and all the high-margin stuff and the high-margin contracts get delivered in a certain period and maybe others come later, then that mix is very favorable for the company. And we have also said during the year as we get larger contracts, we will probably have a bit more pressure on margin, but we will have much more stability. And over time, we will have much more security in our profitability and cash flow. And that's something we probably will see in part of our business going forward. And sometimes -- I need to add on that. I mean, sometimes when you get to a certain position, you need to work with obsolescence issues and manage sort of the growth of the manufacturing side and change a few parts and re-certify. And all of that, so far, we just pushed on. We're investing in new capacity. We also need to adjust for the future, of course, but it will be good levels and high levels. But this year was sort of, okay, the stores were actually in the right positions on exactly what contracts we got. But you're going to see good levels going forward also, there won't be a big surprise. We are saying that this was exceptional on Dynamics. On the civil aviation side, we're not a big player in the civil aviation side. So we need to work on how we complement our portfolio on the civil side, how we also potentially renegotiate a capital contract to mitigate what we're seeing in our Aerostructures side. And those discussions we have with Airbus and Boeing, of course, and it's a timing thing also. So we get off sort of the legacy things that affects our profitability now when it comes to currency hedging and exposure and things like that. So it's both sort of a size issue, but then it's also about sort of what contracts we have legacy-wise and how we mitigate that going forward. So it's a timing effect, but it will drag on for a little bit further going forward. T-7, I mean, we say that, that affects also negatively right now. That is definitely a timing effect because, I mean, we are in the startup phase of production, and we're going to do many aft user launches in West Lafayette. So that will be a good business to us going forward. We don't foresee any material improvements on the civil aviation or aeronautics side next year. It's too early for that. And I think we have mentioned before, we need to wait until 2025 to get into some kind of turnaround in that. And on the cash position, of course, it is a strong position. And as a shareholder, you wonder what we're going to do with all the money. And I promise you, we are very careful with money in this company and the return we need to achieve on them. But at this time, we will probably elaborate more on that on the Capital Markets Day, but we see more interest in building up our operational countries and their M&A could be a possible route. But in this industry, it's important not only to be making good sound decisions from a financial point of view and strategic point of view, you also need to make sure from a security point of view, all stars are aligned in that as well. And secondly, we are going into a new pace and situation where we just want to make sure we have flexibility also on not having to wonder about what the capital markets is going to change over time. Even though we all predict it's going to be better, we want to be on the safe side, making sure we can deliver on our journey. Thank you, Virginia, for your questions. We have a lot of questions from the chat as well, but I'll get back to you moderator. So please let's have two more analysts questions. Thank you. First question is on NLAW capacity build out. When will that take place and how much are you expected to build out that capacity? And then if you can get some color on Aeronautics of stability, excluding the civil and the T-7 impact that we have seen and will see for some time. Are you happy with the kind of underlying profitability or so? And then if you can say something about guidance for CapEx for the year, that would be helpful. Thank you. Well, the capacity on NLAW is, of course, we more or less start up the production again, as you know, to a higher level because there will be more to come. So we can handle the requests that we see coming and the ones that we got already last year now from U.K. and Sweden. But it's mainly going to be in the manufacturing side of Northern Ireland, but we provide the kits, of course, to make that final assembly and test. So we have invested now in building up that capacity to the extent that it will be sufficient for quite some time now. I'm confident of that. I can't sort of say exactly how many weapons per year and all that. But I mean, just in the context of looking on how we double our capacity from one year to the other in the Swedish sites, and then we invest again and we including the Northern Ireland a little bit in the U.S. and Sweden, we double again. So 2025, we will have a double capacity again. And then it will be possible to generate 400,000 units from our sites delivering ammunitions and weapons per year. So it's a huge sort of ramp-up. Cool. And then on the Aeronautics, excluding T-7 and the civil, if you are happy with that or if you can say something more that you see even better? There's more to do on that side even if you exclude sort of the things that are affecting us negatively. Of course, we have a ramp-up now in production. that will give us a better profitability. And then we have an incremental software upgrade organization for this aircraft for many years to come, and that is becoming more and more efficient. So I see opportunities for efficiency improvements without guiding on exactly how much definitely going forward. And then we will increase CapEx. I won't go in exactly how much, but it's going to be a bit more CapEx actually next year. But we also have built inventory of SEK2.5 billion in 2022, which is unexceptionally high. So I think they will compensate partly each other. We are actually dealing with that CapEx right now in timing because some will end up in 2023 and some in 2024, but over these three years, based on now the contracts coming in primarily in Surveillance and in Dynamics and in that primarily in Dynamics, we are looking at, as we've talked about, building the infrastructure. Just to give a view, I will share one number is that in Dynamics, we will invest between SEK700 million and SEK900 million over three years period. So it's not SEK1 billion in dynamics in one year. So -- but exactly how this will play out, of course, in essence, we would like them to play out as fast as possible to ramp up, but that's not always something we can control. Hi. Good morning. Thank you. Just a question on corporate costs. Obviously, they've been notably higher than last year, though this has been largely offset by margin improvement in your fleet segment. Just wondering which are the key elements of those corporate costs do you see reducing next year? Thank you. Well, on shareholder program. I'm not sure I would like them to go down, but to be a little bit funny here. But honestly, the minority cost and the minority interest portfolio, if that would increase as much next year or not even go down, I would be very disappointed. IT and other corporate cost is built into sort of the plans for the other organizations, and they should also be reduced on corporate, meanwhile, we increased the profitability in the other units. So that's more a timing effect of how we move them out. And so, therefore, both on IT and recruitment costs and the minority portfolio, it should be not higher or below in the next year. Thank you, Sam. We have received a lot of questions from our viewers online. So I'm going to actually break out here and dive myself to you, Micael, because I'll give you two business related questions, and I'll have one question to you, Christian, which I think is interesting. So one is, one of our viewers wants to know a bit more about our plans in India? And how does the tender on fighters go there? And how is Saab positioning itself in the Indian markets? Well, in many ways, I would say. I mean we have taken the decision to set up shop in India for our support weapons capability, which I think is necessary looking at how much they view the importance of having indigenous capability. So that we're continuing. We haven't decided exactly where, but in the vicinity, I think, of Delhi. So that is continuing and that will be up and running in 2024. We also are looking for the decision from the politicians to say that we have an acceptance of necessity, which will be the milestones to start the acquisition process of multi-role aircraft acquisition. So that we're waiting for that, and then we are, of course, preparing to be able to give a good proposal to them. So that are sort of the major ones. Then we are onboard helicopters for EW equipment and have other initiatives as well. So India is an important market to us. But I assume the fighter acquisition process is of a big interest, and that is true for us as well. Thank you for that one. Maybe I'll flick into you, Christian, just to have a question from Charles here also from Citi. And he wants to understand the cash profile, especially the outflows during this year and the investment levels that you mentioned earlier in the presentation for 2023 versus 2022? How is that going to work out in terms of working capital investments? Well, as I said, I mean, this year, we have had a positive cash flow of SEK2.6 billion. We have a bit lower investments this year, but they are primarily related to R&D and the Gripen and T-7 program, which are maturing. Meanwhile, we have had good payments from our customers. So it's been quite flat. That means our customers have paid us this year as well, and we have a very special type of customers, and they typically pay us. So that's not a shock in a sense, but then we have built inventory of SEK2.5 billion, which is much faster than our sales, and that is coming back to and 70% of that actually is in Dynamics, and the rest is primarily Surveillance, which is the short lead times and making sure we are resilient. Of course, depending on how we come back on growth in the future, but right now, it looks like that we're not going to have to do the same trick on inventory at the same level every year. We may want to keep the same kind of level of resilience, but not grow it as fast we've done this year. We deliberately stepped in, in the beginning of this year and did build inventory on the things we knew would come through the pipeline. So I think it will be an easening on the working capital going forward. But I think also there will be some pressure on the investments actually in the same areas we talk about Dynamics and Surveillance primarily in this midterm period. But if we see you at the CMD, I will elaborate more on this. Thank you, Christian. That clarifies. Micael, I'm going to go back to you. And I know that we have a very strong portfolio in the underwater segment, and I know that we have these products that are amazing. How would you describe that our way to capture market in the underwater segment? Well, there are many products in the underwater segments. I mean, first of all, we have our submarine business. And that is, of course, we have a lot to do in Saab Kockums now to deliver the upgrade of the third version of the Gotland-class submarine. And then we have the two A26 submarines to deliver going forward. So there's a lot of activity on that side. And then, of course, we have a campaign in primarily the Netherlands to try and win that business. So there are a few things campaign-wise boiling, to say, at least on the submarine side and lots of internal activity. Then there's new capability requirements, which I call seabed warfare, protecting infrastructure and mitigating sort of mine neutralization systems and things like that, both surveillance and neutralization systems and where we have a great commercial portfolio in terms of underwater vehicles, autonomous ones, which we are adding military capability to, to address customer requirements going forward in European countries, U.K., Sweden and elsewhere. So I see an interesting future in terms of capability development on that side. Thank you. We have a couple of more minutes left, so I just want to do a shout out if anybody have more questions, please dial in. Moderator, would you like to update us for anyone else who wants to ask questions on the line? Thank you. So you have a couple of more minutes, if you want to get back to the line. Otherwise, I have one more question from a person here that wants to understand a bit about our work or the status on the two GlobalEyes to UAE and how that is progressing? Progressing really well and delivery is same for next year, not 2023, but 2024, but they are now going into soon a flight test campaign. So that is progressing really well. I just like to thank you for being part of this call. And I must say, I really look forward to seeing you all hopefully at the Capital Market Day Tuesday, February 14, and we can have more in-depth discussions then. I look forward to that. Thank you. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

EarningCall_31

Good day and thank you for standing by. Welcome to the Flowers Foods Fourth Quarter and Fiscal Year 2022 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, J. T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead. Thank you, Tanya and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks and view the slide presentation that were all posted yesterday evening on our Investor Relations website. After today’s Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company’s performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods’ business are fully detailed in our SEC filings. We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Ryals McMullian, President and CEO; and Steve Kinsey, our CFO. Ryals, I will turn it over to you. Thanks, J. T. Good morning, everybody. Thanks for joining the fourth quarter call. I am really proud of our accomplishments in 2022 and would once again like to thank our Flowers team for their hard work in making that performance possible. Despite the challenging macroeconomic environment, we generated record sales, we advanced our innovation pipeline and we made important progress with our digital and supply chain initiatives. And we expect to build on that progress this year in 2023. We will be making additional investments in digital and supply chain as well as marketing support for the DKB bar launch. Although these investments, alongside continued inflationary pressures, will impact our near-term results, I am confident by enhancing our already strong foundation we are positioning the company for future long-term success. Ryals, could you give us a little more color on this kind of stepped up marketing behind the snack bars? I guess it had been growing and been in test market has been doing well, but we didn’t really have a kind of a quantification of how big it is or how big is it expected to be this year? And maybe you could talk about what and when is being invested behind the brand kind of what kind of impact that’s having on gross margin or on earnings specifically versus just kind of overall brand spend or marketing step up? Thanks. Sure. So Bill, as you know, we are beginning the nationwide rollout as we speak. So it will ramp up as production builds up and as we gain shelf space and retailers throughout the year. So, it will be a build throughout the year. And most of the support behind that is going to be marketing support, digital spend, display execution, all those kinds of things you really need to activate a new product. DKB is a known quantity, but obviously, this is a new space for DKB. And so we are being very intentional about the investments we put behind the introduction of the new snack line, so mostly marketing support. And again, it will be a build throughout the year. As far as magnitude goes, we are not going to disclose that separately. But as we gain traction during the year, we can start to give you guys additional color on how the products are performing overall in the marketplace. Got it. But I guess looking at the initial guidance, which is below kind of where we were and granted you hadn’t given guidance before, I mean, is this kind of a $0.05 headwind to earnings? Is it a $0.10 headwind to earnings? Just trying to understand how much of that versus other market dynamics going into the guidance. And then just second looking at kind of the private label trends you talked about in your prepared remarks, I mean, is there an expectation now that pricing is kind of normalized for private label at the one mass customer that it’s stable as we move through this year that it actually improves? You mean, in terms of branded share improves, what’s kind of your outlook for share as we move over these next couple of quarters? Yes. So the pricing dynamics have started – the retail pricing dynamics, I should say, for private label and mass have started to come up some, which is a good development. I think it’s too early to call the play as to what the overall private label performance will be in ‘23. Towards the end of last year, as we saw private label kind of build the second half of the year gaining share, it did sort of plateau at the end of the year. And sort of through our first period that we just completed this year, that same dynamic is at play. So, it’s kind of to be determined and of course, that’s kind of factored into our guidance range. That’s one of our watch-outs for the year as how those – how is the consumer overall and how does that translate into private label performance. The divergence between mass and grocery does continue though. In the first period, private label was up pretty significantly in line with what it had been the last couple of periods of last year, but it was actually down from a unit share standpoint in the grocery segment. So that’s – if that continues, that’s obviously an encouraging trend in and of itself. Great. Thanks so much. I have a bunch of questions, but kind of – I’ll try to keep it short. Ryals, maybe also Steve, just I am curious in terms of the top line guidance, the essentially 8% to 9% year-over-year is a lot of that coming from – it sounds like some incremental pricing in foodservice and private label? And I am kind of just asking because obviously, there has already been some pricing taken right on the branded side, which I would think would decelerate through the year and volumes overall for the business were still down a little bit. So just seems a little high to me, but maybe there is also some tailwind coming from the bar rollout. So, just any additional color on that would be awesome? Yes. So yes, definitely a little bit of tailwind expected from the bar launch, but more impactful. Remember, Rob, we have got roughly 5 months of wraparound pricing from last year. So that maybe something you are missing there. Plus we have gone back with additional pricing on top of that this year. So a lot of the top line guidance range is additional price as we continue to experience higher costs. Okay, got it. And then in terms of the gross margin, it sounds like Q1 is a tough comp. You do have some pricing. It sounds like maybe there could be some easing costs as you get through the year just in terms of the hedging strategy kind of how would you paraphrase the year in terms of the gross margin side? Is it like probably flattish? Maybe it’s down a little bit? Maybe it’s a little second half better than first half? Again, any other color would be great? I mean, when you look at the full year, Rob, I think you’re going to look – you’re going to see probably pretty much flattish. As we said, we’re expecting some significant inflation to continue through 2023. And even with the additional pricing that Ryals just discussed, from an overall margin perspective, I would say, pretty flattish and pretty even throughout the year, with some pressure coming in Q1, obviously, because if you go back and look, Q1 was a very strong start in the last year. Okay. Perfect. That’s good enough. And then lastly for me is just, Ryals, in the prepared remarks, there are a lot of discussion commentary on the spending side kind of for future benefits and then also some commentary around kind of what those benefits could mean longer term. I think the line was meaningful margin expansion potential. Obviously, you’re spending to make the business stronger. And hopefully, with that strength and some mix benefits, longer term, there would be margin expansion potential. So I’m – I just think – I’m just curious like if we’re thinking about timing that some of that spending will continue through ‘23 and then assuming ‘24 and then maybe start to decelerate ‘25, ‘26 but still some there, if we just kind of hold, let’s say, commodities cost center, everything else being equal, right, which is tough to do, but just conceptually, how do you think of kind of that flow through on the benefit? Is it – again, this is more broad-based? Is it more like, yes, we need to really – we’re spending more, right, in ‘23, and then we will still be spending in ’24? But as we get through these benefits, and we would expect to see, right, that margin expansion maybe playout in year 3 or 4 or what have you? So that’s all. Thanks. Well, first of all, I would certainly hope that this is not the new normal as far as commodities go. So hopefully, there is some, yes, with this coming as we get through this year and into next year. But no, good question, Rob. And I think you’ve largely got it. Obviously, investment has to come before benefit, right? And I think we’ve laid out that due to inflation and the consumer and other things, it’s going to be a pretty challenging year for us and others in the food space. But we remain steadfast about continuing to invest in this business for the future. And so we’re not slowing down. We see no reason to slow down. So we will continue to roll out the bars. We will put marketing support behind that. We’re investing in supply chain this year. We’ve talked a lot about the efficiency improvements that we need in the bakeries. We think that these investments are going to unlock that as well. And then, obviously, you have the digital ERP spending. And I think that’s where you’ll see kind of a peak spending this year, with that beginning to moderate in the years to come. And then, of course, you have the expected benefits that we will be rolling in as well. So investments going down and benefits coming up, all of which we think will contribute to substantial margin improvement. I wanted to ask some questions around demand elasticity. I know in the prepared remarks, you guys called out a significant portion of the volume decline was due to SKU rat. Can you just give us an idea for maybe what the branded volumes would have looked like ex the cake SKU rat? I assume in the other – the whole volume decline is probably all eliminated SKUs, but on the branded side about like half SKU rat, half demand elasticity? I don’t – we don’t have that to disclose for you today, that breakout. I mean, what I can tell you is you’re right that the lion’s share of the volume declines are in cake and foodservice, and a lot of that is strategic and intentional. So we pulled back on a lot of underperforming SKUs. In cake, we pulled back on a lot of underperforming business in foodservice. And we will continue to attempt to optimize that business, if you will. So when you think about volume declines – and certainly, yes, there has been some softness on the branded side. As we’ve seen this mix shift to private label, I don’t think that’s a surprise to anybody. But as you think about the overall business, it’s most – it’s heavily weighted towards cake and foodservice. Okay. And then on the pricing for 2023, is that kind of evenly spread across the portfolio? Or is that more targeted on foodservice and private label? Because my thought is as the value gap at mass is narrowing, if you guys put pricing, does that kind of reopen that gap back up? Or is it still going to kind of trend to a narrower gap? Yes, I think the gap should – they should stay pretty stable throughout the year. I mean, overall, there is going to be more sort of total dollar in private label and foodservice overall, but the pricing is across the entire business, but probably a little bit more heavily weighted towards private label and foodservice. But I would expect the gaps to – assuming – this is us talking, depending on the retailers can always do something different, but I would expect the gaps to maintain where they are. Okay. And then maybe one more question on that, from a consumer perspective, do you think once – if they have traded down, whether it’s from a high premium to just a normal branded or from normal branded to private label, do you think that there needs to be promo in the channel to get them to make the switch back up the value chain? Or as the gaps narrow, do you think they’ll just kind of naturally go back to buying the more premium SKUs? Yes. I mean, certainly, my hope is that it’s the latter. That’s just something we will have to wait and see what happens here. So far, the competitive environment has been – has continued to be stable, haven’t seen any meaningful uptick. And I would certainly hope that any consumers that might have left a Nature’s Own or DKB to trade down, that something else will come back. But that’s also remember the reason that we’re continuing with our marketing spend. We’re not slashing that for the year because it’s going to be a difficult year. We’re continuing to invest in our brands. And when the time comes and some of this pressure is relieved on the consumer, I think that they recognize the differentiated aspects of our top brands. And I mean I think that alone, in addition to the marketing support, will all drive them back to us. [Operator Instructions] And I’m going to remove Mitchell from the platform. [Operator Instructions] Our next question will come from Connor Rattigan, Consumer Edge. Your line is open. Yes. So it sounds like you guys have a really exciting innovation pipeline coming from Dave bars and snack bites to Nature’s Own breakfast pastries. And so clearly, the snack occasion [ph] is totally incremental to the existing portfolio. But I guess on the breakfast pastry, in your research, do you guys see this as a substitute to your current breakfast products like bagels or English muffins or is this really bringing on a new customer or a new occasion? Yes, we actually think it will be incremental, Connor, which is a pretty exciting prospect. Now remember, those breakfast pastries are still just in test. But the thesis is bringing something additionally differentiated. And what’s interesting about these breakfast pastries is that we would intend actually to market those in the bread isle. So, I see it as an incremental item to a bagel or an English muffin, something like that, that distinguishes those from the DKB bars, which of course, are warehouse distributed, and they are in the kind of the traditional bar out. Okay. That’s great. That’s really interesting. And then also, too, just a little bit on the basis of the future initiative, if possible, could you guys maybe share some of the data points you are collecting or maybe some of the insights that you have gleaned thus far? And maybe any cost savings initiatives as the budget to pursue? Yes. I mean a big one for us is scrap or waste reduction. And so having greater data insights into how the bakeries are running allows us to be smarter about how we run the lines and reduce that waste. Waste is a big cost for us. So, it’s not immaterial at all. The other thing it helps us do is it helps us with preventive maintenance, understanding when breakdowns may occur so that we can plan for downtime instead of having unplanned downtime, which is costly. And then there is a whole notion of micro stops on the line. You have your normal downtime for cleaning or whatever or if you have a mechanical problem, but it’s the tiny stops, the 10-second, 15-second, 20-second, 30-second, 1-minute stops that build up day-by-day, week-by-week, month-by-month throughout the year that become a big expense as well. So, all of this data that we are able to gather is going to help us alongside of leadership capabilities and process improvements, things like that help us gain those efficiencies in the bakeries that we have needed for some time now. Okay. Have you – so what should we assume? Is that small, but what percentage of the sales guidance comes from Papa Pita? Yes. We can’t break that out specifically, Mitch. I mean it’s not tremendous. Remember, they were a co-manufacturer for us. So, the overall top line sales impact is not that huge. Okay. But it is included in there, right? So, whatever incremental you expect to get out of that would be included? Okay. And then of the sales guidance, what’s the breakdown of volume and mix – pricing and mix in the year? Okay. And maybe now – what would be the SKU rat this year? Is it the same 3%-ish of sales? Is that included in there? We should see the effect of SKU rat decline as we get throughout the year. Now again, that will – we will continue to do SKU rat, but the volume losses that you have been seeing over the last year or so, that should start to moderate as we move through the year. Okay. When I look in terms of – you are going to try to take some pricing in foodservice and private label, but I am looking at Slide 8 of your fourth quarter presentation. You have some of your store brands in the priority and some of your store brands tactical. What percentage of your store brands are in each of those categories? And where are you going to be taking the price? Okay. And is that – and what percentage is your store brand, the breakout between priority and tactical? Is it 50-50? Is it mostly priority? Can you describe that? Okay. And then another question, just sort of on interest expense, you expect it to go up this year, but most of your debts fix. And when I look at your cash flow, just based on the preliminary guidance, you are going to have free cash flow, so I wouldn’t anticipate debt to rise. Am I wrong? I mean, you will have the financing of the Papa Pita acquisition. So, you will see it rise for a moment in time until we are able to de-lever and pay back down. And also from an investment perspective, we are still investing in ERP this year. So, although last year was the highest cash flow year, it’s still pretty significant in 2023 as well. Okay. And then finally, so as you look at your guidance range, let’s say your EBITDA guidance range, EPS, if you were down – if you are down at the bottom, what’s that saying about – what would cause that to be down at the very low end? Is there to be more private label pressure, commodity cost spikes? What gets you to the low end? Yes. It’s not really going to be on the commodity side just because of our hedging program. So, we pretty much know what our costs are going to be for the year, Mitch. But I think you are spot on, it’s mostly going to be the overall health of the consumer, how does this private label uptick trend play out throughout the year? What happens with the competitive environment, to an earlier question. Does it start getting – do we start seeing much higher promotions as perhaps we move into the back of the year and some of those inflations of size to people start trying to win consumers back with promotions. And then finally, it’s our ability to execute on our savings programs. I mean you saw in the prepared remarks, and we have additional savings of $20 million to $30 million in the plan for this year, and it’s up to us to execute on that. So, those are the biggest swing factors that we could see during the year that could move you higher or lower on the guidance spectrum. And then I would also note that, once again, in addition to those items, pressuring EPS this year are the investments that we are making behind the bars, behind our supply chain capabilities, additional investment in digital, yes, that’s pretty much a $0.09 headwind on the digital ERP side alone this year, plus you have the additional D&A from the Papa Pita acquisition and the ERP Plus program that are pressuring EPS as opposed to EBITDA. That’s helpful. Have you made any – or included in your guidance would be continued growth margin improvement, I guess in the cake business, or is that not in your – do you anticipate that in your guidance, I should ask. Yes. I mean every year, we are making improvements with the cake business. I mean last year, despite some of the syndicated data that you all see that doesn’t pick up, nearly all of our cake business. The profitability in our cake business improved substantially last year. Okay. And that should continue. I mean I remember, I thought earlier in the year it was still struggling a little bit. So, is there incremental growth there? Remember that a lot of times, Mitch, when we are talking about the cake business, some of the struggles that we focus on are the struggles at the Navy Yard specifically. And the Navy Yard is not all of the cake business, right. So, significant improvements have been made at the Navy Yard. But alongside that, we have done really well with our SKU rat program, getting rid of all the unprofitable – well, not all of them, but a lot of the unprofitable SKUs, taking pricing to improve profitability, innovation, etcetera, has done a lot to improve the profitability overall of the cake business. Okay. Thank you, Tanya and thanks everybody for your interest in Flowers Foods, and we certainly look forward to speaking with you again next quarter. Everybody, take care.

EarningCall_32

Good day, and welcome to the Mohawk Industries Inc. Fourth Quarter 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Brunk. Please go ahead. Thank you, Jason. Good morning, everyone, and welcome to Mohawk Industries' Quarterly Investor Call. Joining me on today's call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's fourth quarter and full year performance and provide guidance for the first quarter of 2023. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website. Thank you, Jim. For the full year of 2022, Mohawk's net sales were $11.7 billion, up approximately 4.8% as reported or 8.8% on a constant basis. And our adjusted EPS for the year was $12.85. The flooring industry entered 2022 with momentum from strong housing markets supported by record home sales, low interest rates and rising household formations. High home equity levels, shifts to larger homes and the desire to customize living spaces during the pandemic were driving remodeling investments. As the year progressed, the U.S. housing market declined under pressure from rising interest rates and inflation. In Europe, energy and overall inflation escalated and consumers reduced discretionary spending to pay for essentials. In the first half of the year, the company implemented pricing actions and production that offset the inflation we incurred. With reduced home sales and remodeling in the second half of the year, our Flooring volumes decreased. Our pricing did not cover material and energy inflation. Throughout the year, commercial and new construction and remodeling activity outperformed residential. Even with the housing industry slowing during the second half of the year, we concluded 2022 with a strong balance sheet, low net debt leverage of 1.3 times EBITDA and available liquidity of approximately $1.8 billion to manage the current environment and optimize our long-term results. We acquired five bolt-on businesses during the year that extend the scope of our product offering and our distribution. These include sheet vinyl, mezzanine flooring and wood veneer plant in Europe, a nonwoven flooring manufacturer and a flooring accessories company in the U.S. When we complete the integration of these acquisitions, we will expand their sales opportunities, enhance their operations and improve their efficiencies. We've just acquired Elizabeth in Brazil and are awaiting regulatory approval to close Vitromex in Mexico, Both of which will almost double our local market positions in ceramic, expand our customer base and product offering and improve our manufacturing capabilities. The teams are preparing to integrate the businesses, which will create significant sales and operational synergies. Turning to the fourth quarter results. Mohawk net sales were $2.7 billion, down 4% as reported or approximately 1.3% on a constant basis, and our adjusted EPS was $1.32. Our revenues were driven by price increases and strength in commercial channel. Our sales across all our businesses were slower than we expected in the quarter as Residential sales contracted with rising interest rates, declining home sales and lower consumer confidence. As a consequence, our customers lowered their inventory levels and consumers reduced their spending for renovation. Unlike other products, Flooring does not require immediate replacement. So purchases can be deferred more than other durable goods. Commercial sales continued stronger than residential in the quarter, benefiting from ongoing remodeling and new construction projects. In the quarter, our Global Ceramic segment outperformed the others due to a higher level of commercial and new construction sales. Our Flooring Rest of the World segment softened as higher inflation and energy costs reduced demand in Europe. Our Flooring North America segment sales declined with lower residential activity and a reduction in customer inventory levels. The combination of weakening sales, plant shutdowns and the consumption of higher cost inventory decreased the segment's performance for the quarter. In response, we reduced production rates and lowered our inventory, which increased unabsorbed overhead expenses. We curtailed spending across the enterprise, though inflation offset many of our initiatives. In both Flooring North America as well as Flooring Rest of the World, we're taking restructuring actions in specific areas to align our operations with the present market conditions. During the quarter, energy and material costs around the world began to decline which should positively affect our future results. While we're managing the present economic cycle, we're operating with a long-term perspective and expanding capacities in areas where we have the greatest growth potential when markets rebound. These include LVT, laminate, quartz countertops, porcelain slabs and insulation. We have reduced our planned capital spending until we see greater certainty in our markets around the world. We recently announced an agreement to resolve the securities class action lawsuit filed in January 2020. Though we believe the case is without merit, further litigation would be burdensome and expensive. We reached a settlement of $60 million, a significant portion of which will be covered by insurance and is subject to court approval. We also settled a dispute with the Belgian Tax Authority regarding royalty income. Though we believe our position is correct, we settled the $187 million assessment for EUR3 million. Thank you, Jeff. Sales for the quarter were just under $2.7 billion. That's a 4% decrease as reported or 1.3% on a constant basis. Favorable price/mix in the quarter was offset by reduced volume and unfavorable FX. The decrease was primarily driven by weakness In the U.S. as residential markets slowed more than expected in the quarter. Gross margin, as reported, was 20.9% and excluding one-time items, was 22.4% versus 26.8% in the prior year. The year-over-year decrease was primarily driven by higher inflation of $263 million, offset by stronger price/mix of $269 million and productivity of $16 million. The fourth quarter margin was further negatively impacted by a weaker volume of $95 million, temporary plant shutdowns of $69 million and FX headwinds of $12 million. SG&A as reported was 18.6% of sales. And excluding one-time items was 17.9%, inline with the prior year. On dollar basis, the favorable impact of FX of $12 million and volume of $3 million was partially offset by price/mix of $6 million and inflation of $3 million. Operating margin as reported was 2.3% for the quarter. Restructuring and one-time charges, $58 million, including initiatives in Flooring North America and Flooring Rest of the World and our disclosed litigation settlements. The restructuring charges combined the initiatives announced in Q2 and a new project in Flooring Rest of the World to better align our LVT assets with market conditions. Operating margin, excluding charges, was 4.5%, and the year-over-year decline in operating income was primarily driven by higher inflation of $266 million, offset by price/mix of $263 million, productivity of $15 million, lower start-up and other items of $8 million, although these were not enough to counter the weaker volume of $92 million and increasing temporary plant shutdowns of $69 million. Interest expense for the quarter was $15 million, and other income -- other expense was a $10 million expense due to unfavorable impact of transactional FX. In the fourth quarter, our non-GAAP tax rate was 12.6% versus 18.9% in the prior year. We are forecasting the full year 2023 tax rate to be between 21% and 22% with some quarterly variations. Earnings per share, as reported, was $0.52 and excluding charges, was $1.32. Turning to the segments. Global Ceramics had sales of $988 million, that's a 4% increase as reported and 5% on a constant basis. Actions to drive favorable price and mix across the segment and improved year-over-year volume in the U.S. offset weakening unit volumes in other geographies. Operating income, excluding charges, was $70 million, which is a 16.7% increase versus prior year and operating margin at 7.1% improved 70 basis points due to improved price/mix of $111 million, productivity gains of $17 million and favorable FX and other items of $8 million, offsetting the increase in inflation of $85 million, lower volume of $28 million and related increased temporary plant shutdowns of $14 million. Flooring North America had sales of $946 million. That's a 6.8% decrease versus prior year as weaker volumes was only partially offset by favorable price/mix. The volume decrease was primarily a result of declines in residential channels and customers lowering inventory levels with consumers deferring discretionary spending. On an adjusted basis, Flooring North America's operating margin was approximately breakeven. The year-over-year decline in profitability was driven by weakening volume of $32 million, Temporary plant shutdowns of $33 million, and the impact of higher cost inventory and other inflation flowing through the P&L of $109 million, only being partially offset by price/mix of $71 million and productivity of $8 million. We expect many of these issues to carryover to Q1 then in Q2 with seasonally stronger sales, lower costs and increased production levels, we should see a solid improvement in profitability. And finally, Flooring Rest of the World had sales of $717 million. That's a 9.9% decrease as reported and 2% on a constant basis. Installation products continued with strong growth in the quarter, but it was not enough to compensate for declines seen in the flooring categories, primarily laminate and LVT as inflation resulted in consumers reducing discretionary spending and in turn, customers lowering inventory levels. Operating margin, excluding charges, was 7.7% for the quarter. Operating income declined versus prior year. It was a result of the decrease in volumes of $32 million, temporary plant shutdowns of $22 million, which contributed to lower productivity of $10 million and increases in inflation of $79 million, only partially offset by price/mix actions of $81 million for the quarter. With the business concentrated in residential channels, we expect a number of these issues to impact Q1, which results improving as we move through the year as lower energy and material costs should drive higher consumer spending. Corporate and eliminations was $6 million in Q4 and $37 million for the full year. Moving to the balance sheet. The company generated free cash flow of $91 million in the fourth quarter and over $165 million in the second half of 2022. Receivables for the quarter ended at $1.9 billion with the DSO at 60 days versus 56 days in the prior year, due in part to customer and channel mix. Inventories ended at just under $2.8 billion or a 17% increase versus prior year, but declined 4% versus the third quarter. The year-over-year growth in inventory was primarily due to a spike in inflation. And sequentially, the decrease is primarily due to lowering of production levels to better align with demand. Inventory days ended at 138 days for the current year versus 131 in the third quarter. Property, plant and equipment ended at just shy of $4.7 billion and capital for the quarter was $151 million versus D&A of $159 million. For the full year, CapEx ended at $581 million and D&A of $595 million. Our current view for 2023 is a forecast of $560 million for CapEx and D&A of $592 million, but we will adjust with the changing environment. And finally, the company maintains a strong overall balance sheet with gross debt of $2.8 billion and leverage at 1.3 times adjusted EBITDA. This strength gives us the flexibility to manage through the challenging environment. Thank you, Jim. The Global Ceramic segment increased sales and earnings with a higher mix of new residential construction and commercial sales than our overall business. Residential ceramic sales in all geographies are slowing and operating margins are contracting due to lower volumes and manufacturing shutdowns. The cost of energy and transportation are declining, which will benefit our margins as these costs flow through our inventory. In the U.S., Ceramic sales and volume both increased as we benefited from our premium product offering, price increases and growing countertop business. Our collections with larger sizes and unique finishes, combined with specialized structures and shapes are enhancing our sales and mix. We're increasing our sales efforts in growing categories, including health care, hospitality and fitness as well as multifamily and build-for-rent homes. Cost inflation increased as higher energy and transportation expenses from prior periods were incurred. We are optimizing material supply chains and reengineering formulations to improve our costs. We reduced our inventories during the quarter by lowering production and enhancing our import strategies. We are reducing discretionary spending and limiting capital investments. To support additional growth in our quartz countertop sales, we are adding manufacturing capacity by the end of this year. Our countertop mix continues to improve as we expand our premium collections featuring our advanced painting technology. Our Ceramic business in Europe remains under pressure with slowing demand, customer inventory reductions and inflation. Our cost in the quarter were impacted by peak energy prices in the third quarter and reductions in plant volumes from temporary shutdowns. We are receiving energy subsidies in Italy, but we remain disadvantaged to some competitors who have long-term energy contracts. Natural gas prices have declined substantially, though disruptions could impact future costs. As Ceramic sales slow, the market is becoming more competitive. We are introducing new technologies to enhance surface textures, expand design capabilities and improve our costs. We are completing the expansion of our large porcelain slabs to support continued growth and enhance our styling. We have successfully reformulated our body composition to use alternative materials. Sales in both Mexico and Brazil decelerated in the quarter as inflation and increasing interest rates reduced residential demand. We anticipate continued near-term weakness and have reduced production levels in both countries. To cover inflation, we are managing mix and pricing. Natural gas prices in the regions are declining in line with the worldwide market and will lower cost as it flows through inventory. We have completed the acquisition of Elizabeth in Brazil and are awaiting regulatory approval to close Vitromex in Mexico. These acquisitions will position us as top producer in two of the world's largest ceramic markets. We anticipate significant synergies in all aspects of the businesses, which will enhance our sales and margins. We should be well positioned to leverage our combined strengths when the markets emerge from this downturn. During the fourth quarter, our Flooring Rest of World segment was impacted by high inflation in energy prices and consumers reduced investments in Home Improvement. This caused a decline in Residential sales, which comprise a majority of the segment's business. As consumer spending slowed, our customers further reduced their inventory levels, which lowered market demand even more. In response, we implemented temporary plant shutdowns and reduced our inventory levels, compressing our margins. Natural gas prices in Europe peaked at an unprecedented level in the third quarter, raising our material and production costs. Our pricing and mix did not fully cover inflation, which remains a headwind. We remain focused on optimizing volume with selective promotions as well as controlling costs until the business improves. To enhance our competitive position, we are increasing our supply chain from outside the European Union. We have initiated additional restructuring actions to align with current conditions. Since the beginning of 2023, gas prices have declined substantially and material costs should follow. Assuming this trend holds, Europe should see lower overall inflation with higher wages, consumer spending should increase. During the quarter, all of our European Flooring categories experienced significant volume declines with many residential remodeling projects being postponed as inflation eroded consumer discretionary spending. Our product/mix was impacted as homeowners purchased lower-priced flooring to maintain their budgets. We are launching new product collections and expanding promotional activities to improve our sales. Higher cost inventory will compress our margins until it flows through our costs. Our sheet vinyl sales outperformed our other flooring categories as consumers chose lower-priced alternatives. We are improving the small polish sheet vinyl plant we acquired in the third quarter by increasing its output, reducing its cost and expanding its distribution. We are expanding our rigid LVT offering as it takes some share from flexible. We are increasing our existing operations and improving our formulation to lower our costs. We're adding new rigid production that make smaller runs with additional patented features. We will phase out of the residential-flexible LVT products and will close the supporting production. The cost of this new restructuring initiative is approximately $45 million with a cash cost of approximately $7.5 million, resulting in annualized cost savings of $15 million and significantly increased sales. Our Insulation business is growing as conserving energy has become a higher priority and building requirements have increased. We selectively increased pricing to cover higher material costs, and we lowered production in the fourth quarter to reduce inventory levels. We are growing our sales and distribution in the U.K. as we start up our new insulation plan. Our Panels business has faced the same pressures as our other categories with softening demand and rising material prices. During the quarter, our customers continued to reduce their inventory levels, further impacting our sales. Anticipating higher winter wood and energy costs, we maintained our inventory levels going into the first quarter. Our investments in green energy have benefited our performance by reducing our reliance on higher cost gas and electricity. The integration of our recent mezzanine acquisition in Germany is progressing as planned. We are defining best practices and utilizing our own manufacturing to replace source boards. Our business in Australia and New Zealand are slowing with the local economies as inflation and mortgage rates are impacting foreign sales. We are taking actions to align our cost and inventory levels with the expected volume decline. We have announced additional price increases and are initiating selective promotions to maximize our sales. We are updating our product offering and enhancing our merchandising to capture greater market share. As in other categories, commercial sales are stronger than residential and we are increasing our participation in specified projects. For the quarter, Flooring North America sales decreased faster than anticipated, primarily due to declines in residential channels, rug and customer inventory reductions. With inflation and interest rates at high levels, many consumers defer discretionary spending or traded down to lower cost products. Earnings in the segment were compressed due to lower sales, consumption of higher-cost materials, reduced inventory levels and temporary plant shutdowns. Our hard surface products outperformed soft and the commercial sector remains stronger than residential with hospitality showing the most growth. In response to slower market conditions, we are completing our restructuring actions, deferring capital projects and reducing discretionary spending. During 2022, we reduced our costs through process enhancements and rationalization of less efficient facilities while absorbing historically high inflation. We continue to adjust our strategies to manage the near-term market conditions, reductions in energy and materials should become a tailwind in the second quarter. Our commercial business remains solid as remodeling and new construction projects continue. We maintained strong margins in the quarter with pricing and mix offsetting inflation. Our flexible LVT products are a preferred alternative that provides versatile styling with easy installation. The combination of our carpet tile and LVT collections enables the customization of commercial spaces with unique designs. Our integration of a small flooring accessories acquisition is proceeding well. The company produces rubber baseboards and stair treads used in commercial installations and broadens our current flooring accessory business. In the fourth quarter, sales of residential soft services declined more than other categories, sales weakened as retailers reduced inventory with declining consumer sentiment and home sales. The multifamily channel was the strongest performer, and we are realigning resources focused more on this sector. As demand dropped in the quarter, we increased temporary shutdowns, which resulted in higher, unabsorbed costs. We have significantly lowered inventories in the fourth quarter and are reducing costs by eliminating less efficient manufacturing, enhancing productivity and adjusting production to demand. Participation in our recent flooring roadshows was at a record level with leading retailers expressing optimism about the year ahead. Our rug sales were lower as national retailers continue to adjust inventories with reduced consumer spending. We are restructuring our rug operations to lower cost and align production with demand. The integration of our nonwoven rug and carpet acquisition is progressing well and provides new opportunities with our existing customers. Our resilient sales grew in the quarter as we leveraged our WetProtect and antimicrobial technologies to differentiate our collections. We offset inflation through pricing and mix, though increased plant shutdowns resulted in higher unabsorbed costs and lower margins. We are introducing new collections to expand our offering while eliminating less productive SKUs. Our sheet vinyl sales were higher as consumers pursued budget friendly flooring options and the multifamily channel strengthened. The first phase of our new West Coast LVT plant is operating at expected levels. We are preparing new technologies that will improve our cost and add differentiated features. We will install additional production lines and train personnel throughout this year. Our Premium Laminate sales were impacted by slowing retail traffic and customer inventory adjustment. Our laminate is gaining acceptance as an alternative waterproof product in all channels. During the quarter, we offset inflation through pricing and mix, though our margins were impacted by lower absorption from temporary shutdowns as we reduced our inventory. We are beginning to see reductions in material inflation, which should help us recover our costs. Our new manufacturing line, which began last year, is operating at planned levels and will deliver our next generation of laminate features. With its industry-leading design and performance, our laminate business is in an excellent position to capitalize on the growing waterproof flooring category. Thank you, Chris. The flooring industry is slowing due to higher interest rates, sustained inflation and low consumer confidence. The visibility of the depth and duration of this cycle is limited and conditions differ across the world. Mohawk has a strong record of managing these downturns by proactively executing the necessary actions. We're adjusting our business for the current conditions by reducing production level, inventory, cost structures and capital expenditures. We're implementing restructuring actions in both Flooring North America and Flooring Rest of the World to streamline operations, reduce SG&A and rationalize higher-cost assets. In the first quarter, we anticipate more pressure on pricing and mix due to the low industry volumes. Our inventory costs remain elevated in most products due to the higher material and energy that we incurred in earlier periods. Additionally, we will not raise production as normal in the first quarter to prepare for future demand, increasing our unabsorbed costs. Our cost of energy have fallen and should benefit our global margins as our inventory turn. Our second quarter results should have sequentially stronger improvement with seasonally higher sales, increased production and lower material costs. Significantly lower cost of energy in Europe should enhance consumer spending, discretionary purchases and flooring demand. We're refocusing our sales teams on the channels that are performing the best in the current environment. We're introducing new innovative collections and merchandising as well as targeted promotions to improve sales. Given these factors, we anticipate our first quarter EPS to be between $1.24 and $1.34, excluding restructuring and other charges. Around the world, the long-term demand for housing will require significant investments in new construction and remodeling. Mohawk is uniquely positioned with a comprehensive array of innovative products, industry-leading distribution and strength in all sales channels. We're implementing structural changes to navigate the industry's challenges while optimizing our future results. We anticipate coming out of this downturn in a stronger position as we benefit from our bolt-on acquisitions, enhanced market positions in Brazil and Mexico and strategic expansion of our high-growth product categories. Our balance sheet is well positioned to manage the current cycle and to drive future growth and profitability. Jeff, a quick question. In terms of your price/cost despite demand is actually weaker last year, you managed price/cost actually really well, but you did highlight you're seeing a little more competition on pricing. But raws are falling as well and kind of flowed through a little more in 2Q. So how should we think about that price/cost equation looking in the current backdrop in 2023 and how that progresses through the year? Any pockets where we're seeing a little more pricing competition in particular you want to flag? So the energy and material costs are moving. The low amount of volume we're seeing across the world, we're seeing additional promotions and pieces. So far, it's been controlled pieces across most of the marketplaces, and so we think that's going to continue. In our first quarter, we said we expect more pressure on pricing and mix at the lowest part of the year. And then we think that we're going to see some balancing of the cost and pricing better in the second quarter as the costs flow through inventory. We'll have to see how the rest of the year goes. We're going to have to continue to manage it and change as required. And Phil, from a year-over-year perspective, we would expect that you still have the higher cost inventory layers that are going to come off in the first quarter. And with that renewed pressure on price and mix, I would expect the gap between price/mix and inflation to be greater in the first quarter than the fourth quarter, and that was included in our guidance. Got you. So it feels like your margins are going to bottom out in 1Q and get progressively better throughout the year. That's really good color. And then help us think through productivity. You talked about you're rolling out some restructuring efforts in North America and the Rest of World. But demand is a little weaker and you're seeing more start-up costs with new capacity coming on. So give us a little color how to think about productivity for this year? And then how is the acceptance of some of these new capacity that's coming on? I think you're bringing on laminate, you got some LVT coming on as well. How's the product acceptance so far? The productivity piece is driven by multiple pieces as we slowdown -- some of it we isolate -- some of the costs we isolate into temporary shutdowns, but we don't catch them all. So the productivity ends up a catch-all for all of those things that change as they go through. We think due to the volume -- the volume differences between last year and this year, the productivity is going to be less in almost all the businesses. If you remember last year, we were coming out of COVID in the first half, we were building inventories and running most of the businesses at very high levels. This year, we're going to be running at much lower levels and that's what's going to show up in the productivity decrease as we go through. I think your other question was around the new investments. The new investments are all in areas that are growing and that we've had capacity limitations, and we think they're preparing this for a growth cycle as we go to the -- as we come out of this cycle at the other end, we're putting in -- the pieces are -- so we're adding laminate, which has been a growing category in the pieces as we go through. And it's expanding because it is becoming more accepted as a waterproof option, which is a technology we've brought in as an alternative to LVT and it's actually more resistant to scratches and more durable. We're increasing our quartz countertop business, which our lines has been running full. We've been supplementing with imported products to support greater sales, and that should be starting up at the end of this year. The investments in LVT In the western part of the country should support broader U.S. -- broader local-based production of it and should give us advantages by having both East Coast and West Coast production. And then we can supplement or not, source products we're doing with the same equipment. We are out of production in our ceramic slab businesses, which is based in Europe. it's a growing category that's taking the high-end marketplace as another alternative. And so we're increasing it. And finally, we've just started up a new insulation plant in Europe. in the U.K. It puts us in a new region that we haven't been in, and it's starting up now and expanding its production. So we've chosen the parts of the business that have the growth -- largest growth potential. And we think as we go into '24, it's going to pay us a lot of benefit. Just a point of clarification on that productivity comment, Jeff. you said it's a catch-all, less productivity versus last year, but on a year-over-year basis, is that still a good guy or you would expect it to be a negative headwind on a year-over-year basis? On a year-over-year basis, when we get outside the first quarter, it should become more of a positive. Again, what you have is when you're running the facilities, even if it's not a complete shutdown, if you're running slower, you do have inefficiencies both in labor and material that are going to come through the productivity line. My first question is, can you help us think about that sequential lift that you expect for the second quarter relative to what we normally see in sort of historical years? Should it be bigger than what we've otherwise seen, given some of the factors that you outlined? And then how do we think about the cadence through the year? Is it reasonable to think that first quarter should be the low point? So going into the first quarter, residential sales are slowing and customers are minimizing the inventory. So we're expecting them to keep their inventories low at this point. We are using high-cost inventory levels in the first quarter. Production volumes are lower than last year when the business benefited from a rebound we just talked about. There's more pressure on pricing and mix due to the industry volume and competition trying to utilize facilities as we are. We see inflation impacting our labor costs around the world as we start raising the labor rates, and we're actually putting some more investments in new products to reposition some of the pieces to optimize our volume this year. With this, we're anticipating improving conditions as we go into the second quarter with lower costs. To remind you, normally, margins expand as we go into the second quarter. We think that will expand a little more this year because of seasonally stronger volume and mix. In both our Flooring Rest of the World and North American segments, we're expecting the margins to improve as the cost and pricing better align from this inventory flow-through. We believe that European demand will also improve. In Europe, their wages are increasing at a higher rate than they are in the United States. And then over the winter, their energy costs were so high that it really impacted their discretionary spending. So we see that changing as the new gas prices flow through the economy. With all that, we see the input being a tailwind. Production levels should increase from where they are in the second -- first quarter to the second quarter. We see restructuring should start benefiting us more as we go through. And then -- so I guess last as we go through -- and we go into the fall of the year, the fall comparison should be weaker and we think that the category could improve with inflation declining, wages being higher and potentially housing starts improving from the bottom. Okay. That's very helpful color, Jeff. And then my second question is how do you think about the longer-term trajectory for your Flooring North America margins? You obviously made up a lot of ground in the last couple of years relative to where we were before the pandemic. How much of that do you think you can hold on to as things normalize? And how should we be thinking about what that new rate of profitability could look like? First, where we are today, you have those peak costs that we didn't -- we weren't able to cover. So the cost peaked in the third quarter. It's still flowing through our inventory. The pricing never got aligned with it as the inventories were falling off. So that impacted the margins. As we go through, the cost and prices should more align helping the margins. And then overtime, we expect them to continue increasing. But in this environment, there's pressure on everything. So we'll have to get through this year, and they should improve significantly as we go into next year. Just to remind you, this cycle is a little bit different. It's not typical like other cycles. The employment remains strong with wages increasing. Housing remains in short supply and low mortgages will kind of limit people moving as much, aging homes, higher home values should support future remodeling and strengthen the rebound or the pent-up demand. Commercial projects continue to be initiated, that's holding at this point. And inflation is slowing and interest rates may actually be near peak. Okay. So is it reasonable to assume then that you can sustainably operate at a higher level than you were at, say, in 2019 or so, but maybe still holding a bit below the peaks that we've seen earlier -- in the earlier years? I don't have the numbers in my head to compare them like you're asking. I think that in this year, what you have is all the lack of visibility, and we don't exactly know what the volumes are going to be and the competition is going to be. So we'll have to adjust as we go forward. Thank you. A couple of things. First of all, you talked about the pressure on price/mix, which still look to be, I think, ahead of cost as was here in 4Q. But I'm curious, Jeff, in prior cycles, is it -- this changes for -- it sounds like it's -- there's some pressure for a quarter or two and then it improves. How should we think about how price /mix behaves through sort of this phase of the cycle, not just 1Q, but throughout kind of 2023? Price /mix, first of all, you have a channel change as you go through. As you go through the cycles, the highest -margin businesses we have, with the retail replacement business, remodeling businesses and those slowdown first. So those margins slow down, and that impacts the mix as we go through. So that's having one part of it. The margins have been affected by these lower throughput through the plant as our cost increase and then we have to make conscious decisions over what we do with the infrastructure and how far you cut it back in order to make sure that you're able to operate as the business improves on the other side of the pieces. So we're managing those and keep changing the strategy based on what the volume levels do. The other thing, I guess, going on this year is you have -- recently, all the channel inventories were taken down. We think they should be bottomed out about now. We think the energy and inflation in Europe is going to be a big change in it as it flows through the economy over there. We see residential remodeling and home sales improving as we go through the year. And with that, we expect the mix to improve as the other categories improve. Okay. So the favorable price /mix, which was $270 million or thereabouts in the quarter, that number from what you're saying, that doesn't have to necessarily step down meaningfully in 2023. That number can still -- I guess the question is, is there a trade down? Is there this change? Does that number deflate or contract meaningfully from the level that it's at now? Or is that not how it works? You are going to -- Eric, and we're seeing it right now, you're going to see some trade down. Again, it depends if you're looking sequentially versus year -over-year. But in the first quarter year -over-year, you do have some still favorable price /mix from all the pricing that was initiated in Q2, Q3 and Q4 of last year. And then you are going to get to a point where you start overlapping the initiatives from 2022. The point is, and especially in the first quarter with the lower volumes and until that starts to pick up, you're going to continue to see pricing pressure in the marketplace. Okay. And then the second question just relates to the competitive environment. I think you talked about some restructuring of your Europe LVT business. Is transport costs, and specifically, I'm thinking ocean costs of bringing containers of LVT to the U.S. has changed. I'm curious how you're seeing the U.S. competitive dynamic supply situation. I guess, narrowly in LVT, different now or ask differently, how the global supply of LVT is influencing the market and your expectations for 2023? Yes. I'll comment on that. So specifically related to imports, the import prices have been declining, but also our production cost in the U.S. has been declining. As you look at the competitive situation, we have a broad offering for both Residential and Commercial. We participate in all price points of rigid and flexible LVT. Imports are declining and the U.S. material and energy costs are also falling. Our local costs are higher than imports, but we get a premium for better service versus supply chains that can be three months or longer. We're improving our production and adding features like WetProtect that protects subfloors and antimicrobial to differentiate. And then lastly, our West Coast plant will -- cost will continue to fall as that plant comes up. I'll just ask a multipart question and keep mine to one. But following up on some of the prior questions, clearly, nat gas was a large headwind for Ceramics throughout 2022. It's clearly nosedived here recently, both in the U.S. and Europe. I know you all have that high -cost inventory you need to work through. You all were hedged partially in Europe in the fourth quarter. But any chance nat gas, ceramics -- any chance you can help us think through some of the potential cost tailwinds as we move through the year and we get through some of these items? And do you primarily give these cost tailwinds back through pricing, trying to stimulate demand? Or are there any offsets that you all think you might be able to maintain pricing and kind of recapture that price cost? Well, let's talk about the cost first. So as the -- as we get in the back half of the year, our costs should be more in line with our competitors. We should be pretty much equal. Yes. European and then there will be -- we do think there's going to be volume pressure in the market. But as those energy costs continue to come down and wages go up, we think demand could be higher in Europe going forward. So it just depends on how that works out. And then around the world, the energy prices are continuing to come down everywhere, and it will impact the cost. We're going to have to see what happens with the competitive environment, given the slowing conditions around the world. Good morning. Thanks for taking my questions. Sorry to beat the dead horse here on the price /cost stuff, but I'll ask one more. On the pricing side, I guess, correct me if I'm wrong, but some of the pricing last year, we were under the assumption, it was almost kind of like surcharge pricing that layered in pretty quickly in relation to some of the energy cost increases on both product and maybe on some of the logistics also. So I guess the question is, to what extent is it more kind of quantitative or mathematic in terms of how much pricing comes off as some of those costs come down and maybe those surcharges roll off? You're correct that we did in different markets on different products have some of it is temporary surcharges. It was both on product and on freight, and most of those surcharges have now gone away, and they don't exist anymore at this point. And the majority of the increases though were put through by price increases in the marketplace, and we're having to -- we'll just have to manage those relative to the competition to stay competitive with the world changes. Okay. That's helpful. And my second question, just in relation to the channel inventories and then your own production, where is your sense of where channel inventories are, obviously, just cover a rough range of products and geographies, so either kind of high level or by region, do you think you -- are you back at normal levels? Are you below normal levels? I was just trying to gauge the risk of further destock here in part? As a general statement, we think there was a significant amount taken out in the fourth quarter and the third quarter. And we believe in most markets, they should be close to the bottom. There's some where the costs and prices and supply was a little tighter and longer. So there may be some in a few regional markets. But for the most case, we are assuming they're close to the bottom at this point, but we'll know after this quarter. Yes. Thanks very much for all the info. I'm going to sort of follow up on that last question there regarding inventory. With respect to the plant shutdowns and your planned inventory reduction, I understand that market forces are driving some of this. But it also seems like there's a bit of an opportunistic aspect, perhaps, where you're shifting the timing of your annual production into periods with lower commodity cost. So in other words, what I'm curious about is, if commodity costs were not declining as they are, would you still take the same amount of shutdowns? Or are you planning to take a little bit more than you would otherwise do because of the trajectory of commodity costs? And then finally, can we get some guidance about where your inventories and dollars could go over the next couple of quarters? So in the fourth quarter, we made conscious decisions to decrease the inventories in some of the businesses, given our forward view of the commodity prices. And so we took them down even knowing that our customers were also taking them down, which also hurt our margins in the quarter. And some of the businesses in Europe, we made a choice not to take them down. At the time we were looking at it, and we didn't know whether there was going to be a spike in the energy costs and we actually left some of the inventories higher in anticipation of higher costs in the first quarter, which we are going to reverse out in the first quarter now that didn't -- it didn't happen like we thought. So we actually -- if we knew what would happen, we probably would have taken those down sooner as if. So we are making those decisions on a constant basis based on our future view of the dynamics of the business. I forgot the other part of your question. So the other part, Stephen, in terms of our view of kind of our inventory plan for 2023, presently, we would expect the year to be kind of at year-end to be slightly below where we ended in 2022. Obviously, it really depends upon the demand conditions as we go through second quarter and the second half of the year and the pace of inflation. Okay. So that's a year -end comment. In terms of the trajectory here over the next couple of quarters, though, can you give us an idea of what we might expect, Jim? I mean the goal is to try to keep the inventory levels and production very close to demand. So that was the principle -- one of the principles behind not building the inventory as we normally do in Q1. Second question relates to mix; not price per se, but mix. You've mentioned that you've seen trade down across your categories, reflecting pressure that the average consumer is feeling with their rising household expenses. And so basically, the consumer's P&L, if you will, is driving negative mix. But on the other hand, certainly in the U.S., but in many other markets, I think you've seen homeowners balance sheet strengthen dramatically due to much higher home equity levels. And so my question is, do you expect this to show up eventually in favorable mix as folks tap into that home equity? And are you positioning your product assortments in any way to be able to capitalize on an eventual move to higher -end products or a richer mix, which is different from what you're seeing like right now? Yes, to your question, it's really a question of timing. At this point, we see we're towards the front end of it. I mean it started with the housing slowing down in the third quarter. So we're seeing at the front end so we would be doing all that later in the year. We're also -- Stephen, I know in LVT and Ceramic like in Ceramic, we've got new collections with larger sizes and specialized shapes, all that are helping the mix. And we're also doing some of that in LVT as well. So we are doing things to take advantage of a higher mix. Thank you. Question, you talked about this a little bit earlier, but just some more clarification. This sequential rise into the second quarter, is that going to be felt in all three segments? And which one would you say would feel at the most? The two ones that will feel at the most, as we said before, will be Flooring North America and Flooring Rest of the World as their costs better aligned with the pieces as you go through and then the Ceramic business has held up better because of the different mix it has. So it won't have the same change in the other as the other two. So we think those two will be much more than the other ones for those reasons. And one other question, just within that, will it be returning to normal production that's the biggest risk? Or is it other -- what would be the biggest kind of one, two factors that would cause a sequential? Well, I'd say it's a combination, really. And so you have seasonally higher demand, so that's going to help me on the volume. My production increases. So then my plants just by the nature of it are going to run better. So I don't have that unabsorbed expenses shutdowns. And then the last one would be the cost kind of align. So inflation is not as impactful is the hope as you go through Q2. Hi, guys. This is Andrew [indiscernible] on for Mike. I guess I just wanted to head on in terms of multiyear acquisition strategy. Where are you seeing any opportunity in terms of products or geographies? Let's see. We just -- we're in the midst of concluding two ceramic acquisitions. We talked about in Brazil and Mexico. We think those are really good ones for us because we have positions in both marketplaces, and it will put us in either the first or second position in each marketplace. They are huge ceramic markets and the combination of the two businesses will enable us to have a complete offering from top to bottom in both marketplaces and the companies tend to be in different -- focus on different areas of the business. In both markets, we tend to be a little higher in the product offerings. And so they fill in the lower parts of the market for us to help us get the biggest opportunities out of them. So we see both of them really helping us once we get the two businesses put together. Other than that, usually, in this environment, you don't do a lot of acquisitions when people's margins are low. Unless they're in real trouble, they tend not to want to sell given both their margins and the market multiple. So I wouldn't assume that we're going to do much until you get to the other side where you're coming out and the multiples go up and the margin starts expanding. Hey, guys. Thank you for putting me in here. The first question is on cash flow conversion this year, given similar CapEx levels and entering the year at sort of higher working capital levels. How are you guys thinking about free cash flow conversion? So a couple of things to note there. In the second half of the year, we generated a little over $165 million coming into 2022, obviously, we're behind on inventory, so we had to kind of build up inventory. So for 2023, our visibility is limited. We do expect cash flow to improve, but it's worthy to note that we're investing in growth categories and acquisitions to try to improve the long -term results. Got you. Okay. And then the second question is, it sounds like the Commercial business has held up really well. Are you seeing any signs of slowing in that business? You start with the ABI Index, which I'm sure we're all watching, it's been under 50 for several months. So it looks like there's less projects going to be -- most of those projects tend to have at least a time before we get to them, a minimum of a year and some up to three years. So it takes a while for the projects that come through to know what's going on. Some categories in Commercial are performing better than others, like hotels didn't invest during the whole time. There's still investments in hotels going on to update them and keep them and it's performing the best. So -- and it all depends on the economy. But again, it's got a long tail to it. Hi, there. It's Rafe at BofA. Thanks for taking my question. I just wanted to follow up on a comment you made earlier in terms of the Europe natural gas input. I think you said that you saw costs would be more in line with competitors by year -end. I thought while raw material costs were going up, your competitors were hedged, so they had lower input costs. I would have thought as the kind of gas prices come down, and they're hedged, you would actually have sort of a benefit there, lower gas prices. Is there a window where your input costs will be lower because they're hedged and they don't get the benefit from the falling raw material cost? First is that the comment was around our European Ceramic business, not all our businesses. And so in European Ceramic, the cost of gas prior to this was about 15% of the manufacturing cost. It peaked somewhere over 40%. And what we've said was going into this thing that we have not hedged gas prices historically. It has given us an advantage by not doing it. But as you went through these things as gas prices went up by 8 times to 10 times over there, we're competing against people that had hedged it at much lower prices. The comments were around this year as the gas prices have dropped substantially that we believe by the fall flowing through inventory, we should be on a competitive level with those companies that had hedged before this whole thing started. I think where they are hedged will be more like what the market will be, is the way to look at that. We think their average hedging price will be similar because we're assuming that they hedged more during -- if you have a hedging policy that we're assuming that their average hedge prices will be similar to where our purchase prices will be. Okay. That's really helpful. And then just in terms of the planned CapEx, can you just break out how much of it is maintenance versus growth? Then within that growth component, like how much is Flooring categories versus some of the other growing lines like countertops? Thank you. Well, the growth investments, I would say, are between $200 million and $250 million, depending on timing. Most of that would be in the Flooring area. Maintenance CapEx approximately is $250 million. And then the balance is on cost reductions, product innovation and acquisitions. Hey, everybody. Just a question on first quarter EPS given that's roughly in line -- expected to be in line with 4Q, should we expect from the segment level the performance to be similar as well? You said your EPS guidance is really the same in 1Q versus what you put up in 4Q. So just from a segment fundamentals and performance, should that look similar as well? So I would say Flooring North America, given the market conditions and such remains slow and they -- we do anticipate more pressure on pricing and mix with the higher cost inventory still being used. Production levels will still be low and labor inflation will increase. But given this, I still expect margins in Q1 should be slightly better and then strengthened in Q2 when the costs align and volume seasonally increases. Got it. Thanks. And then just on the LVT piece, shutting down or exiting the business out of Europe, do you see -- do you foresee a similar move in North America at some point? And also just on the European exit in flexible, are you able to repurpose that capacity for the rigid manufacturing? Yes. Let's -- just to isolate that one question, so in Europe, we're replacing our residential flexible with rigid. We'll continue to produce flexible for the commercial market, and then in the U.S., you won't have that because we have a much larger commercial presence where we use our flexible LVT. Got it. And is the issue there more that carpet is losing share versus other Flooring categories? And do you think that -- if so, is that just a function of the mix shift towards Commercial? Or are there other factors still at play there? I think it's a few different pieces. One is you're comparing to the fourth quarter, the prior year where we had really significant pent -up demand that the inventories were low, all the plants were running as much as we could get labor and material to run and you're comparing that now to an environment and our customers' inventories were low, and they were actually trying to build their inventories, which continued into the first half of the year. So you're comparing that to an environment where the opposite is occurring. Our customers are lowering inventories, the environment is slower. And so that's exacerbating the decrease, but it is still losing share to hard surface as it has been. Hey. Good afternoon. It's actually Brian Biros on for Kathryn. Thank you for taking my questions. It seems like after Q1, maybe starting in Q2 or even midyear, things are expected to ramp up from the current low levels going on now. What indicators do you guys look at to understand when and how much to ramp up production? There's obviously just seasonality lift. But beyond that, is it strictly just orders coming in? Or are there other metrics you look at to kind of get a sense of how do we get ahead of this retail customer, the new resi activity that picks up to be ready for the ramp -up and not just reacting to it? We act differently based on the capacity utilization. So in a slow marketplace, you have excess capacity and you can react to it so you don't have to anticipate it more. Earlier in the call, we talked about in some period -- we usually build inventory in the first quarter to cover the peaks in the rest of the year, which would be a typical year. So this year, we're not acting the same way because of the capacity availability that we have. Okay. That's helpful. And second question, I guess, is given the restructuring plans you guys have, adjustments of product, operating lines, plants, is there a way to think about kind of the new Mohawk capacity going forward here, a lot of moving pieces, especially since you're also adding some products as well. But is there just a way to understand what the company is able to serve going forward now versus what it was previously? Maybe something like we took out 5% of capacity or across our footprint. Just any color on that kind of dynamic would be helpful. I think that the -- on the capacity side, what we've done is we've reduced some of the carpet less -efficient plants. We're aligning the rug business with lower volumes in it. And we said we were taking out the -- some capacity and flexible in Europe. So those are the decreases in the business. The increases are in the main growth categories, which we've been telling you about, and I can repeat them again or I think you have them already. Good afternoon, everyone. Thanks for taking the questions. Another one on the Q1 earnings guide, just to make sure we got all this right. It sounds like you're speaking to some additional kind of headwinds that might be worse sequentially. Price/cost, I heard you mentioned, obviously, reducing production and all that. You're guiding to earnings flat sequentially, roughly, and historically, Q1 is below that of Q4. So I'm just curious what else we're missing there? What might be a little bit better than you typically see seasonally? Thank you. I don't think that we're anticipating Q1 being significantly better. We are trying to tighter manage our inventories given that our future view is weaker and that we don't want to build inventory. We think that the commodity prices and energy prices will stay low. So we're not trying to build the inventories in the first quarter. Matt, sequentially, when you think about it, so the two benefits that you have sequentially is the lower cost Q4 to Q1 and then less shutdowns Q4 to Q1. And so those are being offset partially with -- as we talked about, the price/mix, which is kind of all kind of leading you back to relatively flat quarter-to-quarter performance. Okay. That makes a lot of sense. That's very helpful there. And then secondly, back on the pricing environment in European Ceramic. And just any thoughts kind of if you kind of educate us historically, how does the market kind of typically react there to reductions in input costs and you mentioned the competitive environment. Just I know it's prognostication, but any thoughts from you guys on how you think the competitive environment will evolve, given the reduction in costs there? Thank you. I'll give you sort of an overview. Our business is under pressure there with slow demand, customer inventory reductions and inflation. Our results in the quarter were impacted by energy prices from the third quarter and temporary shutdowns. The market is still being supported with energy subsidies. And we still are, at least in the first part of the year, disadvantaged because of the hedging. I think as that -- as you go through the year, what we would hope to happen is that energy costs come down, that the consumer will be able to have a better situation with wages going up and energy costs going down. But I still think it will be a competitive situation in Italy for the short term. Some of you don't keep up with Europe, there were people that their energy costs were more than their mortgages. I mean, it's a huge drag on the economy. Good morning, everyone. Jeff, just a question on the Commercial business here. How are you thinking about your competitive position in North American commercial flooring? And do you see sustainably better flooring fundamentals in this category and therefore, you invest more aggressively to gain share? Or do you attribute the relative strength you're seeing in Commercial to just timing and the typical lag of the categories to start showing behind changes in Residential and therefore, you kind of go forward with what you have. Just curious on how you're thinking longer term about capital allocation in the Commercial Flooring. We've been supporting the Commercial business with both products and capacity to satisfy the demand that we think we have, and we haven't been restricting it. Typically, in these cycles, though, as we talked about Commercial is the last thing to fall off, this is really an unusual cycle because you -- typically all categories are in lower shape. In this thing, you have the hospitality that's doing really well at the moment where other categories are doing really poorly, the airline business is doing really well. We provide airline carpets. I mean, this is a really unusual environment that we haven't seen in prior cycles. We're going to have to see how the whole thing works out, but we continue to invest in the Commercial business. We have strong relationships. We have a broad product offering, and we'll continue to do so. Okay. If I could just ask a follow -up, really, just trying to calibrate here. Within your first quarter guidance, what do you assume for U.S. Residential for industry unit growth? It depends if you're looking year -over-year or sequentially. So sequentially, we would expect the volume to improve generically across the business from a sales volume perspective, but certainly, year -over-year, it's going to be under pressure. Yes. Year-over-year going to be significantly below because remember, this time last year, we were still in a very hot market. Right. Yes, I think you discussed that previously on the call. I'm just trying to get some sense of what maybe quantitatively you're looking for, so we can calibrate against the guidance. This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Lorberbaum for any closing remarks. Thank you very much for joining us. We are in a strong position to manage through this period. It's going to be slower for the near term, and we're continuing to invest to optimize the long -term results, and we think we're in a very good position to improve our business as we come out. Thank you very much.

EarningCall_33

Hello everyone. I am Chikashi Takeda, the CFO. I would like to give you the review of our consolidated financial results for the third quarter of fiscal 2023, as well as the full year forecast for fiscal 2023. Please note that today's briefing will focus on continuing operations. Please refer to the appendix section for detailed information about the discontinued operation. Now, a review of our financial results. Page two; highlights. These are the highlights of our financial results for the third quarter. During the third quarter, we continue to see the impact of supply, shortages of semiconductors and other components, together with rising materials cost. But the situation is gradually improving and we have taken measures to minimize risks as much as possible. Revenue increased 17% on a consolidated basis. We achieved double-digit growth for both ESD and TSD, setting record highs for both the third quarter and the first nine months in the medical business. Operating profit and operating margin also set record highs for both the third quarter and the first nine months. As for full year forecast, we have revised our foreign exchange assumption from the previous forecast. Based on the results up to the third quarter, we have slightly lowered revenue on constant currency, but have left adjusted operating profit unchanged. We are still on the track to achieve adjusted operating profit margin over 20%, the target set in the corporate strategy. We expect revenue of JPY871 billion up 16% year-on-year and the operating profit to achieve record highs both in amount and ratio. Profit as the sum of continuing and discontinued operations, expect to reach a record high of JPY376 billion due to a gain on transfer of scientific solutions business evident with EPS of JPY297 up 229% year-on-year. Let me go over the details of financial results and the business review. Page four, overview of consolidated financial results, consolidated revenue totalled JPY641.5 billion in the first nine months, up 17%. Revenue in medical represented record highs for the third quarter and the first nine months, with double digit growth for both ESD and TSD. Gross profit was JPY433.7 billion, with gross margin improving 0.7 points. Despite the impact of rising materials costs and others, gross margin improved due may lead to a change in regional sales mix driven by increased sales in China in Q3 and Yen depreciation effects. SG&A expenses were JPY306.1 billion union with SG&A ratio deteriorating by 0.3 points. In particular, expenses associated with face activities and strengthening of the operational infrastructure such as QARA increased. In other income and expenses, a gain of JPY14.9 billion was posted, mainly coming from a gain of JPY16.4 billion on the sale of land in Tokyo in Q1 and the record recording of JPY1.3 billion from the adjusted acquisition consideration due to a change in the fair value of conditional payment that was part of the acquisition consideration for Meditate in Q3. Operating profit was JPY142.6 billion, up JPY40.4 billion or 39% year-on-year. Operating margin improved 3.5 points to 22.2%. Please note that adjusted operating margin, excluding other income and expenses, which is a milestone in our corporate strategy, was 20%. Profit from continuing operations was JPY105.6 billion with EPS of JPY83 up 29% year-on-year, while total profit including both continuing and discontinued operations was JPY108.4 billion with EPS of JPY85 up 25% year-on-year. We have been operating this fiscal year under conditions of multiple growth inhibitors and rising costs while making investments in growth areas and strengthening operational infrastructure. The environment remains uncertain, but we will continue to strive to achieve revenue and profit growth and reach the must-hit target of over 20% adjusted operating margin set three years ago. Moving on to the full year forecast, please turn to Page six. We have revised the FX assumptions from the previous forecasts. Based on results up to the third quarter, we have a slightly lowered revenue excluding FX, but adjusted operating profit remains unchanged. The forecast assumptions for annual average FX are JPY135 to the dollar and JPY140 to the Euro. For more details, please refer to Page 24 in appendix for FX sensitivity. Revenue is expected to achieve JPY871 billion up 16% year-on-year. Operating profit is expected to achieve JPY198 billion up 35% year-on-year with an adjusted operating margin of 21.1%, record highs for both amount and ratio. Although multiple risk factors continue to stay in front of us and the outlook remains uncertain, we will proceed with all efforts with the goal of achieving the must-hit target of above 20% of adjusted operating margin set in the corporate strategy. Profit is expected to reach record high of JPY376 billion, reflecting a gain on transfer of Scientific Solutions Business. EPS is expected to be JPY297, up 229% year-on-year. Profit of continuing operations expected to be JPY149 billion with EPS of JPY118 up 37% year-on-year. Regarding dividend for fiscal 2023, we plan to pay dividend of JPY16 unchanged from the announcement in May. Next page shows forecast by segment. We expect both ESD and TSD to continue double-digit growth year-on-year. As a result, the combined revenue of the two divisions in the medical field is expected to reach record high. We previously announced that EV61 would be launched in the US within the fiscal 2023. However, we have been revised the schedule to ensure that all regulatory requirements are completed prior to the launch of the product. We are now aiming for a launch in the middle of fiscal 2024. We do not expect this postponement to have a material impact on our business performance. In ESD, the impact of supply constraints, including semiconductors, is improving. We expect continued sales expansion of EV61 one in Japan, Europe and APAC. In China, we expect growth supported by pent-up demand due to delays in tenders and business negotiations caused by the Shanghai lockdown in the first quarter as well as government support such as low interest loan programs for medical equipment. In TSD, we expect continued growth centered on the three focused areas, while in Japan and China, number of procedures is declining due to rapid surge of COVID. In Europe and North America, where the number of procedures are recovering, sales of mainstay products are expected to be strong. We will continue to work on achieving adjusted OPM above 20%, despite the unstable and uncertain environment by controlling SG&A expenses through companywide efforts such as hiring constraints, review of various projects, limited nonessential overseas trips and review of R&D priorities. Discontinued operations expected to record gain on transfer, resulting in significant increase in profit. This is going to be my last slide. I would like to explain about the warning letters that we received from the FDA and our efforts to strengthen quality assurance and regulatory affairs. Olympus received warning letters regarding an inspection of the Aizuwakamatsu facility based in Fukushima, Japan and in July and inspection of the [indiscernible] factory based in Tokyo, Japan in September. The content of the warning letters cites quality system issues related to process and records for design and manufacturing, as well as late submission of MDR. We are closely communicating with the FDA through both written and live interactions in order to ensure they are met in a timely manner. We have been promoting efforts to strengthen quality assurance and regualtory affairs, including the globalization of equality and regulation. We have implemented a global Complaint Improvement Program that is a new process and technology platform to ensure compliance. We established an independent worldwide quality and regulatory organization structure including hiring many leaders with knowledge and experience of a QARA at meditech companies under the Chief Quality Officer reporting directly to the CEO. We have been implementing global quality system and the governance model for all Olympus sites and businesses and remediating design and manufacturing processes and records. The total amount of investment for these initiatives is currently under review. We will inform our forecast when a reasonable estimate can be made. The latest costs include JPY1.4 billion in expenses for the current fiscal year. In order to become a leading global medic company, we will further strengthen our quality assurance and regulatory affairs and globally establish quality and compliance to ensure patient safety. Thank you very much for convention. Before we move to taking your questions, we would like to focus on one question that we received in advance regarding the results up to Q3 and the projection for Q4. [indiscernible] that question. Yes, I think I've covered majority of that in my presentation and although I skipped the oral presentation, the longer version that is available from the company website, which includes the scripts. Do answer your question. As for the guidance, compared to the guidance for revenue, largely in line with the guidance, but when comes to specifics TSD revenue, is a bit short. That has been the trend so far and so that is the reason why we made a very small revision to the full year forecast. And profit is doing better than the guidance to a certain extent and regarding the SG&A expenses, compared to the projection three months ago, we are spending more. As is included in the slides, the sales activities are becoming more active is one reason and for enhancing the operational infrastructure, we are hiring people and also QARA and some other functions. To address the specific challenges facing the company, we are making the investments and expanding, which explains an increase in SG&A over the projection. That has been the case up to the end of the nine month period. Regarding Q4, the adjusted operating profit number hasn't been changed, meaning that during the last three months, we are to catch up, especially regarding the SG&A expenses by implementing further measures, we are to catch up and make up for the difference. That's my high level response. And Nacho is close to the field. So I think he can add some more comments. Well, I would like to add some comments on the revenue development in Q3 and along the first three quarters of the year. I think at this point of the year, we are completing a solid revenue growth year, having in mind all the different situations that we have experienced in this year, including the lockdown in China in the first quarter, the COVID surge in China and in Japan in the third quarter, and some continuous supply chain tensions that have provoked some delays. I think, we've seen -- having all that in mind, still we have been able to solidly grow our ESD business, especially with a remarkable after-effect change impact 10% growth in our gastrointestinal business in ESD, and including as well a recovery of the business in China. In ESD for GI that even with a very severe lockdown in the Q1, we are able -- we have been able to show growth in the year-to-date in the China region for ESD. In TSD the situation has been a little bit more complex because the tensions in the supply chain and the lockdowns has provoked a situation where well in TSD business is mostly run rate, obviously when we are not able to fulfil immediately the orders from customers, those orders are lost because the procedures cannot wait. But even though, I think that we are at this 2% growth in the TSD business, and our analysis shows that without the situation in China and TSD and without the tensions in the supply chain, we would have been able to be on north of 4.5% growth in the TSD business, which give us a lot of confidence in terms of when the normality in terms of supply chain, which is where we are now and the China situation is normalized, we can return to the role that is expected in the TSD business. So altogether I think is a healthy situation. EV61 is progressing very well in those regions of the world has been launched and we are expecting this to be the case in the United States as soon as it is launched. And in TSD, with the exception of the situation in China and the supply chain, we believe that both the Urology and the ET business which are the mainstays of the business are progressing very well based on the plan. So these are my comments regarding SD and TSD. Thank you very much. We would like to open the floor for questions now. Since I can only ask one question, I want to ask about the warning letter from FDA. One is for [indiscernible] design validation, efficiency and also lack of response for earlier findings and design record deficiency and MDR. And the other letter is about basically URF for medical device as a whole delay in MDR. So I would like to understand the current status of response for each because if you go back, there was an MDA delay for duodenum endoscopy, and I understand that you had to pay a penalty for that in the past. And at first glance, it looks like there has been no improvement since then. For isolympus [ph], I understand that it's something that you could deal with documentation. But for the [indiscernible] endoscopy, this was exposed metal, which could cause penetration and despite that fact, why was MDR delayed? I think it had to be reported within 30 days. But how much was the actual delay? I would like to know and how do you intend to respond to this situation? That's my question. Thank you. Mr. Cotoni [ph]. CTO, Pierre Boisier is joining us today. So he would like to take this question. Pierre, the floor is yours. Okay. Before I start, I would like to go through and introduce myself. So my name is Pierre Boisier. I am the Global Chief Quality Officer for Olympus. Olympus is committed to becoming a leading global medtech company. Since March of 2021, when I joined the company, we've been focused on support of a global QARA globalization effort which supports the pillars of all of our quality and compliance improvement efforts. This initiative began with my hiring as the Global Chief Quality Officer. In addition, Olympus has hired many new senior executives to lead the quality and regulatory global organization. The new leadership possesses decades of industry experience from top tier companies, including leading companies going through change initiatives. We are moving from a regionally based managed quality organization to an empowered, centrally managed global organization with oversight of all Olympus facilities. Improving quality culture and mindset, strengthening and consolidation of quality systems across Olympus, establishing new governance structures and standardizing practices at all Olympus operating sites, most importantly, provide assurance that the compliance issues identified by the FDA are being addressed. Following the FDA inspection and the issuance of the US FDA warning letters, Olympus has accelerated efforts to invest in our globalization initiatives. This is an important and essential investment for Olympus to become a leading global medtech company and achieve sustainable growth. Over the next few years, we will be making significant investments in this area to further strengthen our global assurance and regulatory affair function as well as to establish quality and compliance to ensure patient safety worldwide. Lastly, we are closely communicating with the FDA to ensure actions are timely through written and live interactions, and in order to ensure FDA expectations are met in a timely manner. So with that said, I think there was two parts to the question. The second question was, how late were the MDR reports? The reports are due to the FDA within a 30-day working period. If I remember correctly, the complaints that were cited were between 45 days and 60 days old when they were reported. It is also important to remember that when the FDA came in and audited our files, they were going back over a three-year time. During this time, we had gone through COVID, and for about a year we were trying to figure out the best way to work and so things were not always going as required. So that's not an excuse, it's just the reality of as we were going through the COVID lockdown, companies had to find new ways of working. Did I answer your question or was there additional? So I think you were talking about at least addressing the MDR for the URF scope, I guess, whatever failures that occurred there. You said it's 45 days to 60 days. So obviously it's not that far away from 30 days and it's COVID related. What about the ISO documentation? I think is that something that's going to be resolved really quickly and while we're on the subject of regulations, if you could comment on any impact on Olympus from the India, that is changing the medical regulation. I think it made it very difficult to sell products, and I think a lot of companies have talked about cost increases from that and on top of that, of course, there's the Italian clawback law that was, I think, went into effect somewhere in last year. Some companies have put a lot of write downs on that based on this Italian mall. If there's any impact on it, those are my follow ups. Thank you. Okay, go back. Just to be clear, I am not trying to say it was all COVID as far as late MDRs go, just to be transparent, part of our problems for MDRs are operational as we are working through regionally controlled quality systems, our systems don't always link up to be able to hit the 30-day window. I think that when the FDA went into our facility and found the 15 late MDRs, some of that was probably caused by COVID. But I don't want to say that everything was always caused by COVID. I would have to say that our systems are, as we work on globalization, and we create one system, one quality system to have everything come together that will fix all the problems, but we're not going to get there until mid-next year at the earliest, through the end of next year. So, hopefully I've clarified that the MDRs. As far as Aizu [ph] goes, the issues that were identified in Aizu were tied specifically to process validation and to design verification. There were no safety issues found. There were no product issues found. It is not, I believe, like past inspections where they actually found a product issue that had to be resolved. So far our analysis and we are still going through a lot of analysis or identifying, which processes need to be validated. But as we look at each of the processes, we're also analyzing the product to ensure that there are no safety issues. So we've been working very closely with the FDA on that. As far as India am not aware of that. Nacho, is that something you're aware of? Thank you, Pierre. I think I can take the last two questions about India and Italy. In the case of India, there is -- actually in India there are continuous changes in both the regulation, but also the reimbursement. So it's a changing environment. Our work in India is quite stable and our market share in our main platform, GI is quite solid there. The market is still not as relevant as the population in India would say. But our market share numbers are good and the products that we have for regular register there are working very well on this plan. So there is very limited impact in our business plan on the changes for the Indian changes in the regulation. As per Italy, yes, I can confirm that we have all the reserves in our books related to the global clause that was imposed. So I think in both cases, the situation is in good shape. I hope I answered your question. This is Takeda speaking. So as Nacho mentioned, the amount is not that material to our company. And also I would like from finance perspective that new regulation in EU and in India activities are already taking place and finance does understand that in other words, we are making investment from our side as well. I hope that answers your question. One question. So as I explained EVIS X1 launch in US is going to be pushed back further. You said to meet all the regulatory requirements, what do you mean by that? And this was sort of a last minute decision to postpone. What is the backdrop of that? No, first question is about what the old requirement means to make US launch in the United States exponents. I just was asking if either of you can answer to the questions. I can take a first shot and Pierre wants to come and additionally, he can do it. The current situation and the current thought on the approval in the X1 is that we are working with the FDA to submit all the necessary documentation and we expect that the approval, the FDA regulatory approval, the 510-k approval for the platform, we are expected, and obviously this never can be confirmed 100%, but we are expected to have it around DDW. This is our current thought. After that, we will be able to initiate the promotion, the promotional activity in the United States, but we still would require a few months in order to prepare all design validation and product validation which is required in ISO. So with all together we believe that around the middle of fiscal year '24 we will be able to make a complete launch of the product in the market but the promotion activity, the time we kind of speak with customers about EVIS X1 we are hoping and expecting that we'll be right after we did that. I don't know if Pierre, you want to add something or I hope I did an accurate representation. I think you did really good Nacho. When we go through and get a 510-K, lot of times we have to work with the regulatory agencies, in this case, the FDA and understand what they're approving. So if there's a change in labeling or there's change in anything on the product to make sure that we have the processes validated and gone through all the factories, make sure everything is ready for mass production. So it will take a little bit after the approval of the 510-K. Thank you. I am aware of the screening process by FDA, but so what specifically were the issues that prohibited the launch as originally scheduled, and why is it that you are finding that out right now? And a follow up question, if this is going to be in the middle of FY '24, I understand that in the US, many of the business is on the lease basis. So I'm afraid the EVIS X1 profit contribution for FY '24 is going to be limited that is as far as the US is concerned. So can you talk about that? Thank you. Regarding your first points, I think Nacho partly referred to that, but let me repeat. The follow up question, okay. I think you have answered some of the questions already, but… Yeah, I think I can comment on the business in both of the EVIS X1 as you and the he question you referred very well. The nature of the US business is mostly related to leasing, which means that essentially every time we launch a new platform is a smooth transition because those lease contracts are still in place until they have to be renewed and this is what we normally do, the technology update. Meaning that in any given year, when we launch a new platform, it has a smooth ramp-up of the penetration of the EVIS X1 platform. So I think that the current situation in the launching of the product of the platform, it's not going to impact our business results or our business expectations for fiscal year '24, and in any case, we were expecting a smooth move between the core and the existing platform. We know it's going to take always few years to penetrate the existing 190 platform that there is a market and so it's not like a spike in the first month as of the launch, it never happened because precisely of the lease characteristic of the business. So I think the current situation is not going to impact our business plan for fiscal year '24. I think that's the most important message. As to why it's further delayed, I think probably Pierre is better to comment than me. I think that from one side, obviously we need to fulfil the application of 10-K. From the other side, we need to make sure that the proper validation and design validations that happen in the factories are accordingly with what the FDA is expecting as well from us and this is what would take a little bit more of time even after the effect in 10-K approval will be awarded. That's a quarter situation. So as we were going through putting the product on the market, trying to get approval, there was negotiations with the FDA on how certain things should be tested. And if I remember correctly, with the FDA on the EVIS X1, we came through and we debated on how to test certain modules. We finally came to an agreement and we're working full force now on our agreements that what we've had. But we've gone back and forth with negotiating the best way to prove the devices and so, we finally gotten to that point with the FDA where we have full understanding of what they're looking for and we're going to be able to meet it. But my belief is that the slowdown in between was us trying to figure out exactly how do we best provide this and the FDA has been working very closely with us on this. So that would be a response to your follow up question. Was that helpful? Yes. Thank you. Thank you very much. I have a question about China. In the beginning of this fiscal year, China EST sales plan, you present a certain number and in the first half, you basically maintain the full year guidance and lockdown impact was present in the first half. But still you expected that there would be large enough pent-up demand and that is why you maintained the full year forecast for China and in the third quarter, I think you actually see pent-up demand translating into strong sales. But there was something unexpected as well. Low interest loan program by Chinese government, this wasn’t expected in the first half. This is a new factor. So for the full year sales revenue in China, do you think there's going to be a big enough impact from this loan program that would affect and change the focus that you gave us in May? I will try to answer first and then Nacho, you can give us some additional comments later. About three months ago, this new policy was introduced, and it would have a positive impact on our business. That's what we said three months ago. And, in fact, in the third quarter, we haven’t received a big number reported. But taking the low interest program actually generated some benefit up until December and also in the fourth quarter. Well, the application is closing end of December, and the actual usage will continue until March. So the fund that is obtained through this loan program will be used. So that is a potential positive factor that we're looking at. However, when it comes to the Q4 outlook or the full year forecast, we do not believe that it would have a material impact. That is our view. For EST, anyway, the initial forecast is still maintained, and demand is expected to increase during the second half and that is what is happening, in fact and we believe that momentum will continue into the fourth quarter. That is our story, Nacho? Something more than just to compliment. The situation in China during this year has been a little bit complex from the very beginning. So the first two months of the year were completely lost due to the COVID, the COVID lockdown. Then the business recovered. Then the government announced these low interest loans and that this was a boost for the orders. But then at the same time in Q3, we have again COVID spikes in China that provoked again some complicated situation from the supply chain in China. So I think it has been a complicated year with minuses and pluses, and I think all together, we have been managing the situation pretty well. And despite almost two months of north sales in China, we're going to end the year with a growth and about 4% or 5% growth in our ESD business based on the solidness of our GI business, which I think given the circumstances and given all the situations, it's actually a pretty good result. And this has been impacted by the loans, of course, the low interest loans as well, but again, this is the tailwind. There has been some headwinds in other areas. TSD situation is a little bit more complicated because again, its procedure based business and many, many procedures were canceled in China that has not been able to recover at the end. I think that as -- I think the situation in China is always fluid and flexible and I think that we're expecting to continue our plans in Q4 and even officially the low interest program has been canceled at the end of the year. But I know that many of the orders that were placing the system before still will be delivering Q4. So we still expect to have a good Q4. In China in the absence of any other external factor like COVID or any other thing that can impact and get in the supply chain. Thank you very much. Thank you. Follow up question. Now question about TSD. So endoscopy procedure count, surgery count, I understand the volume went down in the third quarter and what about January and February? Do you have the latest information? Up until December, as I have explained and as was explained, number of procedures had been struggling. It was not recovering very fast up until December and since January, the number of procedures is expected to increase. Well, that was our expectation, but I think I have to ask Nacho to respond to your question because he was talking about the actual numbers on the ground. Nacho? Yeah, I don't have the specific numbers of the proceeded recovery in the Q4 versus the Q3. What I can say is that January is always -- February is always the month where we have the New Year in China happen. So there is traditional a significant slowdown of the operation in that time. So when from one side, we think that there is no reason that procedures will not resume as normal in this quarter. It's also impacted by the New Year celebration in China, which has slowed down the activity of the hospitals as well. So I would say we expect a normal Q4, including the New Year and that means that on the TSD side, we should expect a normal year in terms of procedure development and so on. Another question on China. By China policy, has there been any change to buy China policy? I know that those Chinese manufacturers are not a competitor for Olympus, but going forward, I think the Chinese government is going to be very flexible in its policies. So in terms of your production capacity and global supply chain, are you planning to start the local production in China? Thank you for that question. I would like to comment on the measures that we can take. Of course, China is an important market for us today, and it will continue to be important for us going forward. We like to contribute to the health of the Chinese people through our products and services, and there are many opportunities as well. That view remains unchanged, of course. By China policy, how are we to address that? There are many possibilities. Right now, all I can say now is that we are considering various possible measures that we can take. So that will be my response to your second question. Your first question again, I would like to refer that to Nacho again. Please. Yes. Thank you again. And as usual, I see a strong interest in China and luckily our present continue being solid there. I would echo Takeuchi comments that we are exploring any necessary activity that will allow us to keep our Korean level of competitiveness in China. But having said that, is also true that our technology differentiation mostly on the GA platform is still very significant. And there is no specifically on the on the ESD side on GI, there is no local competitor that in China that we see that despite any buy China policy is actually getting our market share. So I think that we are maintaining our market share despite any policy from the government and our orientation in China and honestly speaking, I think that with buy China policy or without buy China policy, our strategy is always the same, right? So we have to provide the best possible product, with the best possible service, with the best possible education, with the best possible servicing in the market. And this is what has been our growth engine in China in many years. And we plan to continue that. We are considering all options. And if at some point we would feel that China manufacturing would be necessary to be added to the strategy, it would be clearly considered. But I think at this point, we are in a good competitive situation in China and Takeda mentioned, we will continue doing all the scenarios and all the considerations to keep that competitive position there. Thank you. I'm looking at page five of the earnings material about ESD, China. Third quarter grew 57%, excluding FX, it still grew by 38%. I understand that there were inventory issues and COVID issues as well, but what was the actual growth, apple-to-apple growth? In other words, this looks really dramatic growth. Is this due to one-off factors and if although one-off factors were excluded, what would be the actual growth? Thank you for your question. It is well, I don't have any specific numbers on hand about the baseline, but last year, in the third quarter, this is year-over-year, so I'm comparing it against the previous third quarter. Second quarter of the previous year, actually, there was a bit of a shift from third quarter to second quarter. So the second quarter number was higher and the third quarter number was lower than expected. And we are basically comparing it against that baseline and that's where the 38% came from. So how much do we add back to the last year to create the appropriate baseline? I'm sorry, I don't have the specific numbers in front of me, but that is what happened and if I was to add something, the question is about Q4. We do not expect 38% growth, for example. Oh, that's very clear. Thank you. A follow-up question. I don't know if I should ask this to you, but whether it's ESD I know that you're seeing a lot of recovery because of many different factors. But if you look at other medical device companies, their performance is suffering due to COVID-19 by China and Tender [ph]. But you are making recoveries. Is this specific to your products? Is it the product specificity or is it related to inventory? Maybe the inventory dropped too much last year and this is a rebound. How do you assess the situation? Yes, I will try to answer your question. I am not really in a position to be able to say anything about other companies. We don't have sufficient information to do so. But as far as Olympus is concerned, there is a clear trend that ESD is strong and TSD is not recovering as much as ESD. So that is the situation; ESD product power, strength. And not only the strength of products, but also strength of services and training. The whole platform through long history has been established in China. And I would say that that may be the difference between us and the other companies that you have been hearing the stories from. Nacho, add something to this question. Yeah, I think that in China, but in general right. So the reality of the TSD business, as has been explained many times, is procedure based and so we are more exposed. So as many of our competitors in the same space, we're very exposed about changes in the procedure set right and this year, we had a lot of disruptions in China. China? But also disruptions in Japan and in other places that impact the number of procedures. That are being performed and that obviously impacts our revenue until those procedures have recovered, plus, on top of that, we had some delays in the supply chain that provoked that. We couldn't fulfil that demand. In any case, I think that what we have to understand as well is that where is our competitive situation in TSD. And I think we are making advances that will return in positive growth later. For example, in our stone management business, we have been placing tons of instruments and selling tons of capital instruments, gaining market share in the space that obviously, once those procedures are fully recovered are going to bring a lot of devices business for those business. So I think that when we look at our TSD business in this year, we know what has been the headwinds factors that has impacted the limited growth, but we know as well that in several areas we are gaining market share. Our position is very solid and we are gaining market share in. We are making good strides and increasing our footprint geographically and even in the United States, growing or above what the market is. So I think that there is a lot of indications that tell us and give us confidence that the TSD business is going to continue growing at a higher pace in the future, despite that, maybe this year again, for the headwinds that has been explained, we couldn't grow at that level. But our expectations continue being very strong for the TSD business and we believe that those products categories will do very well. So I know it's a broad answer, but just try to characterize a little bit what TSD business about. One question related to economic situation after COVID, especially in the US for the last two years, I think we have seen rather good recovery, but going forward the question is what's going to happen? The recovery that we have seen may be followed by a decline. Well, in your case, you have new product launches, so it might be different. But overall, looking at calendar year '23 or your fiscal '24, what is your projection in terms of the economic situation? Thank you. I'm wondering from what perspective I should answer your question. The economic situation, health care overall is less affected by the economic situation. I think that is a common understanding. Having said that, we do live in the economic world, so in many aspects we have to pay attention and be careful, of course budgets at hospitals and of course related to the interest rate. EVIS X1 discussion, we talked about the lease arrangements and lease would be affected by the interest rate. So that's one thing that we have to pay attention to and also the cost aspect. In the inflationary trend should it continue, cost will go up. So how do you address that, is big question. So looking at the macroscopic economic situation, as I stated earlier, healthcare tended to be less affected. So maybe our sensitivity has been less compared to other industries, but when we look at the recent trends and when we project into the future, I think we have to take into consideration the factors, which we have not taken into consideration in the past.

EarningCall_34

Thank you for standing by. This is the conference operator. Welcome to the IGM Financial Fourth Quarter 2022 Analyst Call and Webcast. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Kyle Martens, Treasurer and Head of Investor Relations. Please go ahead. Thank you and good morning everyone and welcome to IGM Financial’s 2022 fourth quarter earnings call. Joining me on the call today is James O’Sullivan, President and CEO of IGM Financial; Damon Murchison, President and CEO of IG Wealth Management; Luke Gould, President and CEO of Mackenzie Investments; and Keith Potter, Executive Vice President and CFO of IGM Financial. Before we get started, I’d like to draw your attention to our cautions concerning forward-looking statements on slide three of the presentation. Slide four summarizes non-IFRS financial measures and other financial measures used in this material. On slide five, we provide a list of documents that are available to the public on our website related to the fourth quarter results for IGM Financial. Okay, thank you, Kyle and good morning, everyone. I'd like to start the call by reviewing a few highlights from 2022 on slide seven. Earnings per share were $3.63, our second best annual adjusted EPS on record, second only to the record-breaking year in 2021. We ended the year with AUM&A of $249.9 billion, down 10% from December 31st of the prior year. The decline was caused by broad based global equity and fixed income market volatility during 2022. In this context, IGM's overall net flows remained positive, adding $1.2 billion in client assets over the course of the year. IG Wealth Management's continued momentum in the high net worth market segment was partially offset by Mackenzie's flows, which are in line with the overall challenging industry environment. While not included in our reported net flow numbers, Northleaf had a strong year with new commitments of $3.8 billion in 2022. IG Wealth Management announced an investment in and strategic partnership with Nesto bringing an industry leading digital experience to IG clients and advisors. In addition, we closed the ChinaAMC transaction in January 2023 and has increased our ownership to a meaningful 27.8% in a leading Chinese asset manager, providing IGM's investors attractive exposure to a long-term secular growth opportunity. We are proud of our results, results that we would not have been able to achieve, but for our employees, consultants, and advisors, each of them persevered through uncertainty in a volatile economic backdrop, demonstrating resilience and positioning IGM for further growth in the year ahead. Before turning to the results from the quarter, I'll take us to slide eight, where I'll share a bit about our outlook and priorities for 2023. To start, we are planning on an improved operating environment through the second half of the year, while continuing to position our businesses for further organic earnings growth as we navigate ongoing market volatility. Part of our planning includes the continuation of our prudent approach to expense management, while maintaining investments to support our strong competitive positioning. Keith will speak more to our specific expense guidance later in the call. Our business has remained strong and uniquely well positioned. IG Wealth Management will continue to build on its momentum in the mass affluent and high net worth space. Mackenzie will continue to focus on executing well on its objective to be Canada's preferred global asset management solutions provider and business partner. Our capital allocation priorities are aligned to positioning our businesses for continued long-term success. We look to deploy capital through both organic business investment and through M&A to support and extend our wealth platforms and our global asset management capabilities. We remain committed to sustaining our current strong dividend. And finally, we will consider and evaluate share buyback opportunities within the overall context of our capital allocation strategy. On slide nine, we show IGM highlights for the fourth quarter earnings per share of $0.94. That's the second best adjusted Q4 on record, a strong outcome I think in the current environment. We ended Q4 with a AUM&A of $249.4 billion, an increase of 4.7% quarter-over-quarter. IGM's overall net redemptions were $440 million in the fourth quarter, with positive net flows at IG being offset by net outflows at Mackenzie. IGM continues to receive recognition as a leader. I'd like to take a moment to highlight two recent developments. IGM was recognized as one of Corporate Knights' Global 100 Most Sustainable Corporations. This is our fourth consecutive year being a part of the top 100. And IGM was also recognized as a Top 100 Employer in Canada. Turning to slide 10, the fourth quarter saw a market rebound and global equity markets, while Canadian fixed income returns were muted. Equity markets continued to gain ground during January and the Canadian fixed income market delivered attractive total return. Still, we remain somewhat cautious given the continued macro uncertainty. We continue to believe that market volatility will remain an important factor throughout the year. Turning to slide 11 on the industry operating environment. Market volatility over the past 12 months has continued to weigh on industry flows with net redemptions across equity, balanced, and fixed income asset classes during the fourth quarter, totaling $28.1 billion. Slide 12 through 15 provide further details on our quarterly and annual performance. I'll highlight a few key points while Damon Luke, and Keith will dive into greater detail in their prepared remarks. Slide 13 highlights earnings across our businesses, which reflected the declines in AUM and a AUA year-over-year for IG, IPC, and Mackenzie. Turning to slide 14, Northleaf on the other hand has delivered a 24% growth in AUM over this period. And ChinaAMC's AUM grew by approximately 2%, which compares favorably to the roughly 20% decline, experienced in Chinese equity markets over the course of 2022. Slide 15 presents IGM's consolidated net flows for the fourth quarter and full year across IG Wealth, IPC, Mackenzie, as well as Northleaf's fundraising results. Great, thank you, James and good morning, everyone. Turning to slide 17 and IG Wealth Management's fourth quarter highlight. We ended the quarter with AUA of $110.8 billion, an increase of 5.5% during the quarter, driven by client returns of 5.4%. Gross inflows of $3 billion were the second best fourth quarter in our history, second only to the record high of Q4 2021. We achieved our ninth consecutive quarter of positive net flows at IG Wealth with $429 million during Q4 2022. IG's gross outflows as a percentage of average AUA over the last 12 months remained well below the industry and ended the quarter up slightly at 9.1%, while the industry redemption rate increased to 16.6%. Positive net flows continued into January with net inflows of $30 million. While equity markets continue gaining ground in January, we know the speed at which our client contributions are deployed into long-term investment solutions will be impacted by the volatility they experienced over 2022 and the continued uncertainty in the near-term. Our advisors continue to work with our clients take an unhurried approach in s exceeding their financial plans and in most cases, dollar cost averaging into these volatile markets. We continue to see strong new client acquisition in the high net worth and mass affluent client segments, with inflows from newly acquired clients over $500,000 to lean $431 million in Q4, and $1.8 billion for full year 2022. Turning to slide 18, you can see the Q4 2022 growth in net flows remained solid relative to the past 10 years, especially considering last year's volatile capital markets. IG wealth achieved a second highest annual gross and net flows in over 20 years at $12.9 billion and $2.7 billion, respectively. On the chart on the right, we continue to see short-term solutions like cash and GICs play a larger role due to the current market environment. Turning to slide 19, I'll reiterate that during Q2 2022, we achieved the second best growth inflows in our history at $3 billion and our net inflows remained solid. We continue to gain share of wallet from our existing clients, while acquiring new clients and recruiting experienced financial planners to IG. Given the current market environment, it's natural and prudent for advisors to build short-term position and dollar cost average into the markets over time. As James mentioned, we are planning for a stronger operating environment in the second half of 2023. With this in mind, we fully expect there to come a quarter where AUM growth exceeds AUA growth noticeably, as short-term money is redeployed as a function of our clients executing their financial plan. We firmly believe we are winning market share through new client acquisition and greater share of wallet with our trailing 12-month net flows rate of 2.4% to end the quarter. On slide 20, we highlight how IG Wealth clients tend to remain committed to their financial plans throughout periods of market volatility. IG Wealth's last 12-month gross outflows rate of 9.1% remains low. The overall industry redemption rate for long-term funds, on the other hand, has experienced a sharp increase during the fourth quarter, reaching 16.6% as at the end of December 31st. Turning the slide 21, this demonstrates a very strong year in new client acquisition, in particular clients over $500,000. We had $1.8 billion in gross inflows from newly acquired clients with over $500,000, which represents a 3% increase year-over-year and a 210% increase over the past five years. Something to note, gross inflows from newly acquired clients with over $1 million represented 25% of newly acquired clients during 2022, that's up from 22% a year ago and 12% five years ago. This is a testament to our client value proposition and our ability to execute our high net worth strategy, especially in during volatile markets that we continue to experience. Turning to slide 22, this represents the productivity of our advisors. Both our newer advisors and more experienced advisors practices are continuing to deliver strong productivity numbers as measured here by growth inflows per advisor. We have undertaken several initiatives in the past five years to drive productivity gains and expect continued momentum in future quarters. Lastly, I'll turn to slide 23. I'd like to take a moment to discuss the changes we made within our mortgage business at IG. We launched new and exciting partnership to drive a simplified and modernize mortgage experience for both our advisors and our clients. This will be done under the IG Wealth brand powered by white label solution. We view mortgages as an important component of our clients' financial plans and this renewed focus on our mortgage operations will allow us to better address this important client need. We view this as a compelling opportunity to grow our mortgage business in a profitable way, while continuing to digitalize our business and improve our overall advisor and client experience. Hey, thanks, Damon. Good morning everyone. So, turn to page 25, a few comments of the quarter. First our AUM increased by 3.4%, driven by financial market improvements during the quarter. Equally important I remarked that we published January a few days ago and these financial market improvements continued with assets up another 4% and we're starting to see a bit more investor confidence as we start the year. In point two, you concern net redemptions, which were aligned with industry net sales rates and the industry environment was reviewed by James earlier. In point three, we're very pleased to see the share of our assets in 4 and 5-star funds increased to 57% from 50% at September. This is the highest we've been on this metric over the last two years and places us near the top of the industry on this metric as we enter 2023. And point four, we have the final prospectus filed and approved for our new Corporate Knights' Global 100 Most Sustainable Companies ETF and Mutual Fund. I'll review this in a few slides and we're launching this product in early April. And lastly, as described by James, we closed the purchase of our additional 13.9% stake in ChinaAMC at the start of January and we're very pleased to close that important transaction. Turning to slide 26, you can see the trended history of Mackenzie's net flows. As with last quarter and highlighted once again earlier in this call, we continue to see migration as safety and to the sidelines in the industry with meaningful flows to deposits and savings accounts. With our boutique approach, we have a number of relevant product themes that were emphasized in the market. And as the significant liquidity on the sidelines gets reallocated, we're optimistic that we're going to return to very positive net flows. As you've seen, initial industry results for January, I'd highlight the year-over-year declines in gross sales have improved and redemption rates have now stabilized. Our leading position in Canadian retail and access to distribution through strategic relationships provides a strong foundation for us to maintain share in volatile markets, while positioning us to deliver continued growth over time. Turning to page 27, I'd highlight that our retail gross sales decline at the top left was in line with industry peers and in the bottom left, you can see our net sales rate is similarly in line with the industry. As mentioned in the bottom right, you can see our share of assets and 4 and 5-star funds improved during the quarter. Andes mentioned, we do ride near the top of the industry on this measure at this time. Turning to page 28, we have our retail mutual fund AUM, investment performance and net sales by boutique. With our boutique approach, we seek to have a broad roster of relevant products with compelling performance and features across different market environments. While our sales are reflective of current industry trends and market volatility, you can see based on the asset-weighted percentiles and Morningstar ratings, we have strength across multiple boutiques. As we enter 2023, a number of our larger boutiques have very compelling performance. I'd note in the middle, Greenchip remains our best-selling product, and we continue to see strong interest here and a lot of sales potential during 2023. Turning to page 29, we profiled our upcoming launch of the Corporate Knights' Global 100 Most Sustainable Companies in the World Index ETF and Mutual Fund. We are so pleased to partner with Corporate Knights on this endeavor. The index reflects the top 100 Most Sustainable Companies under Corporate Knights' methodology out of all of the 8,000 publicly traded companies with annual revenues in excess of $1 billion a year. We believe this is a core global equity holding. And as you can see, as part of the methodology, the top 100 is diversified by industry, with industry weightings proportionate to their weights in the MSCI All Cap World Index. It's also very well-diversified geographically. The industry has an 18-year track record and as you can see on the right, it behaves very similar to the benchmark and has a very strong track record of risk adjusted outperformance. Corporate Knights' methodology incorporates a variety of social responsibility and financial criteria and we've highlighted the investment thesis that we believe is simple and intuitive. Responsibly run businesses are consistent with long-term shareholder value creation, and we're very excited about the launch in April. Turning to page 30, I'd highlight on the left that the Chinese mutual fund industry declined very slightly in the quarter in AUM with net outflows primarily within fixed income funds. You can see the strength in net flows over all the prior quarters. And I'd note that this net outflow in fixed income is isolated related to interest rate increases at the long end of the curve and some movement out of these products at Bank Wealth platforms. Growth has been very robust throughout the last three years, and we expect this to continue as China continues to emphasize growth in the retirement system. On the right, I'd highlight that ChinaAMC's position remains very strong as the second largest fund manager in terms of long-term mutual funds. Their market share increased during the year from 4.4% to 4.6% within a very robust market. I'd also highlight that including money market funds, ChinaAMC improved its market position from fifth place to third place during the year and its share increased from 3.9% to 4.2% on this measure. Turning to page 31, you can see ChinaAMC's growth in AUM over time. Total assets were up 4% in the year and mutual fund assets were up 10% in the year, driven by strong net flows and market share gains. And on page 32, you can see the continued growth at Northleaf with AUM growth of 23.6% in the year, driven by strong fundraising. In the chart on the right, you can see that we had fundraising of $1.3 billion in the quarter and this was diversified across private credit, infrastructure and private equity offerings. I'd also highlight Northleaf has averaged about $1 billion in fundraising during each of the last eight quarters since we began our partnership with them and acquired a stake in them, and we are so pleased with their ongoing success. Great. Thank you, Luke and good morning everyone. On slide 34, you can see our AUM&A. This chart on the left shows ending assets were up 4.7% during the quarter due to positive market returns, which is the first positive quarter in 2022. It's also a good start to the year with client returns of 4.3% in January. However, as James mentioned, we do believe market volatility could persist in the near-term, and we will manage our business with that in mind. Turning to slide 35, shows quarterly EBIT in millions of dollars on the left and as a percentage of AUM&A on the right. I have a few comments on the left chart on adjusted EBIT. First, we had a strong contribution from share of associate earnings and net investment income relative to last quarter and Q4 2021. Second, net wealth and asset management fee revenues are down slightly in Q4 relative to Q3, and that's primarily from lower other financial planning revenue. And finally, we had a sequential increase in expenses between Q3 and Q4 and that was largely timing related, including technology and other project-related expenses. On the right, you can see the adjusted EBIT margin is down slightly versus last quarter and that's from the two items I just referred to. Turning to slide 36, we can see our consolidated earnings at IGM under 0.1%. We had another quarter of higher net investment income and other of $15.6 million, which is driven mostly by interest income earned on cash and secondly, from favorable seed capital marks at Mackenzie. Looking forward, I'd note we have now closed the ChinaAMC transaction and we'll have a lower cash balance, and that would have accounted for approximately $6 million in investment income in the quarter. Second, we had an increase in proportionate share of associated earnings and that was driven by Northleaf and Great-West Lifeco. And on point three, operations and support and business development expenses combined, increased 0.4% year-over-year and 2.3% on an annual basis, which is within our previous guidance of no more than 3%. We are issuing our full year 2023 expense guidance of 3% growth, and I'll speak to this further in a few moments. And lastly, our dividend payout rate on a last 12-month basis is 73% of cash earnings. Turning to slide 37, you can see a summary of IG Wealth's AUA and the key revenue and expense rates. On the top right, our advisory fee revenue rate was flat quarter-over-quarter. And as I've discussed on past calls, we continue to expect downward pressure of about 0.5 basis points per quarter in this rate from a mix shift as we acquire high net worth clients, but it's also important to note that the rate will be influenced by the mix of client cash and deposits and the spread on that cash. For the first quarter, the mix shift from advisory fees earned on high net worth solutions was offset by higher spread on client deposits. In Q1, I'd expect an increase in cash spreads to offset any downward pressure from high net worth client acquisition. Product and program fee rates were stable quarter-over-quarter and we would expect this line to stay relatively flat going forward as it has in the past several quarters. And on asset-based compensation rate, it's up 0.4 basis points in the quarter as we continue to see DSC units mature. And as a reminder, as DSC units do mature, the asset-based compensation rate on those units doubled. We did discontinue to sell these products in 2016. So, the impact of this will come to an end in Q4 of this year, at which time all DSC units will have matured. On slide 38, you can see IG's overall earnings of $104.6 million is down 26% relative to Q4 2021, primarily due to lower AUM&A and the impact that had on revenue as well as $6 million in lower contribution from IG's mortgage business. That was primarily due to unfavorable accounting marks in the management of our securitization structures. And as Damon commented, we have a great opportunity to enhance our mortgage solutions for our clients in 2023 and would expect to see this having a meaningful benefit for growth over the next three to five years as we implement the platform and build our mortgages under administration. And finally, we continue to remain focused on managing expense growth, the combination of business development and operations and support for Q4 2022 was up 0.7% year-over-year. Moving to slide 39, you can see Mackenzie's AUM by client and product type as well as net revenue rates. It was a fairly uneventful quarter on the right, focusing on the blue line. You can see net management fee rate for third-party clients, excluding Canada Life at 82.3 basis points and this was fairly stable and in line with what we had communicated last quarter. And I'd just remind, as we look forward to Q1, we have two fewer days upon which we charged revenues. However, our asset-based compensation paid to distributors and advisors is based upon one quarter of a year and the combination of those two things will have a negative impact on our revenue rate in Q1. And just for some context, during Q1 2022, this had an approximate 0.3 basis point impact on the overall rate. Turning to slide 40, where we show Asset Management segment profitability. Just two short comments. First, net investment income increased year-over-year, driven by favorable returns on seed capital and operations and support business development expense combined were flat year-over-year and up 3.1% for the full year 2022. On slide 41, has ChinaAMC results on the left. Total AUM in RMB172 trillion, which was up 4% from last year and flat quarter-over-quarter. With respect to earnings on the right, Q4 2022 earnings were down relative to Q4 2021, and this was primarily due to lower performance fees that are typically earned in Q4, and this is in the context of very strong markets in 2021 and negative returns in 2022. Looking forward, we are very pleased with our increased ownership in ChinaAMC and expect strong AUM and earnings growth as markets normalize. On slide 42, I have a few comments. Firstly, just on IPC, just a reminder that the decline in earnings was driven by pricing changes in Q2 of 2022. And second, on Northleaf earnings are up $6 million relative to 2021, part is certainly due to AUM and revenue growth over the year, but there are also a couple of lumpy items benefiting the quarter, including timing of fees earned on new commitments and a lower effective tax rate from capital distributions within Northleaf entities. We continue to expect earnings closer to about $3.5 million per quarter. Finally, you can see at the bottom of the page where we have included the pro forma fair value of Lifeco and ChinaAMC, which closed on January 12th. On slide 43, you can see our typical disclosure on some of the parts at January 31st, closing price of $41.53, the implied P/E multiple for IG Wealth Management and Mackenzie based upon expected 2023 earnings is 8.5 times. I'd also highlight the second column from the right unallocated capital, where you can see we have excess capital of $196 million as a result of the ChinaAMC transaction that closed on January 12th. And on slide 44, we provide expense guidance for 2023, a 3% growth. We believe this level of growth enables our business to continue to be positioned for long-term success, and the guidance does account for normalization of in-person and travel entertainment expenses, normalization of Mackenzie wholesaler compensation with a view of improving net sales environment 2023, continued support of competitive compensation for our employees in an inflationary environment, and we do expect lower pension expense in 2023. I will point out that the increase in Mackenzie is slightly higher than the overall guidance, and that's really driven by higher variable compensation for wholesalers as we expect the sales environment to improve. Hi, good morning. My first question was just on IG Wealth. The consultant count has been declining, albeit very, very, very slightly over the past few years, so let's call it flattish. But in that, obviously, the percentage of experienced consultants has increased significantly. Just wondering what's the strategy here? Because now you're roughly about 85% of the consultants have at least four years' of experience. Is it to keep the consultant size around this level and just further mature it in terms of the proportion that have at least four years' experience? Or now that you've kind of made the changes you're seeing the fruits of that labor that plan to increase the consultant count? And is that a matter of hiring more in existing offices? Or is it opening up new offices and footprint? Hey, Jeff, it's Damon. So, in terms of our advisor count, it's less about the actual number of advisors, and more about the quality of advisors. As you know, we've transformed from an organization that that is just focused on 100% career changers, to an organization that is really focused on bringing experienced financial planners that are out there in the industry to IG advisors that want to compete for clients in their community, that value financial planning, and all that IG has to offer. Now, we still continue to bring in career changers. But we do see that more and more, our strategy is going to be around experienced advisors, just as a whole in the industry, I think the growing trend will be less advisors more experienced bigger teams. So when you look at our organization, I think you want to take a look at not just four years plus and one to four. But you also want to take a look at the associates by making sure that our teams are larger, and have associates and have teams that that can build capacity, and capabilities. It's going to allow us to further penetrate the massive fluid and high net worth market. Okay, that's helpful. And just my other question, James, just wondering if there's been any change on the kind of M&A funds in terms of, level of activity that you're seeing, and also to is just on pricing, if there still is any sort of meaningful disconnects in terms of asking prices, which are which are willing to pay? Yes. Thanks, Jeff. We remain -- we remain active, we remain in the traffic we have -- clearly, we have not consummated anything to this point. Although, as I said, in my remarks, we're very proud of our investment in Nesto and in the commercial partnership with Nesto, as well as the work that led to the closing of China AMC. In terms of pricing, what I say is, I continue to observe others might see it differently. But I continue to observe a large gap between public company multiples and private market multiples, where deals are being a transacted. Although, overall, I'd say there's probably fewer deals being transacted in this market environment. And I think what that means for us, Jeff is that if we're going to do a transaction, and we're going to pay a big multiple the property is going to have to be both important strategically. And it's going to have to have growth rates attached to it that reflect the multiple that we're paying relative to our own multiple. So we remain active, we remain busy, and we're looking forward to 2023. Good morning. Luke just on the county side, 2022 kind of talks about Q4 and the year being in line with the industry for the mutual fund flow fund? And we look at the past two calendar years Mackenzie was punting a lot of fossil and then maybe can you talk about like what issues, outside of the industry that that like could have affected your net flow trend in 2022? Yeah. So I guess, two factors I point to, when the significant dislocation in the industry in 2022. And in particular, the way different product categories were impacted. We had a lot of strength, particularly in the brokers channel and fixed income. And when you look through the product level at level answers, it really is getting to those themes. And so one thing I'd say is with us being so diversified and a boutique, and looking at our performance in relation to peers, that's what you should expect from us. We've been tracking with the market. We're not as volatile as others. And there was a lot of dislocation and a lot of places. And so we are maintaining share and that we're not happy with that. We want to grow market share. That's why we're here. But when you look through the numbers, that's what you'll see is different product areas were affected in different ways. And in fixed income as a category in particular, that's when we had strength and given the declines in fixed income markets. And the net outflows in those categories that's one thing that impacted us and was offset by strength-wide other places. The other thing I would highlight is, is the percentage of our assets in a four to five star places. We actually were a bit lower throughout most of the year than we had been in those prior two years periods. And I am pleased as we close the European in December, we're back to the highest level in terms of the percent of assets and four and five star funds than we had been for the last two years. And so that's another feature of our -- of our condition in 2022 and again, we love having a diversity and loving having all these boutiques, but we're striving for investment excellence everywhere. And yeah, we're pleased to be right back close to 60%. For us in Four and Five Star Funds, which is our target. So when we think about 2023, and I think the commentary was higher expenses just based on, you know, wholesalers selling more, where do you anticipate that coming from? Is there any particular like kind of hotspots or strategic partnerships, like Primerica that you can kind of point to that, that kind of supports that? Yeah. The biggest ones is when you look at us, and I've been -- I've been exuberated on these calls, we've got a lot of compelling performance and features in a diversity of places that are relevant today. Sustainable, and we showcase the CK100 but and also Greenchip are doing very well. Dividend income, we've got strength across boutiques, and we're out there emphasizing it and it's in demand, Canadian equities. We've got strength across boutiques and it's in demand. And then of course, our income offerings and privates are also areas that we're at we're emphasizing we think are very relevant and we have real, real strength. Right. And then last one question is a house keeping question on green, Great‑West Life equity contribution it seems like it's on their reported earnings and onward for earnings, just looking at their Q4 results yesterday. Is that correct? Good morning. This question, I guess both for IG Wealth and for Mackenzie, but, you know, you've got a lot of cash, building up a IG Wealth level, and then Mackenzie, your forecasts even better sales in the second half of the year. So, what's the base assumption here that sort of gets sales moving into your higher funds, or into your investment funds at IG and sort of improving sales Mackenzie, is this interest rates increases likely behind us and markets are less volatile or what's sort of the basic assumption behind those forecasts? Hey, Graham it's Damon. So from an IG perspective, we do have a significant amount of cash and, and I clearly see that is a significant positive for our firm, it's important that everyone knows if this was four years ago, this was not possible. It was our move into from client name and nominee. And in the transformation that we went through that's allowing us to be extremely competitive from the cash standpoint, allow our advisors put our hands around our clients. At our firm, we're a firm made up of financial planners, and financial planners, we don't time the market. We know it's best to be invested. So what financial planners tend to do is to dollar average cost into the market. Starting in February, I think you're going to see that cash deployed, but doing so over a six months to 12-month period, I think it's for us, the back half of the year looks extremely positive. As I said in my comments, we believe that we're going to see a period where AUM growth exceeds AOA growth. And we saw it last year at this time. with IG when we had a significant amount of cash and AUM exceeded AOA was just a great environment to invest. Right now, obviously, there's a lot of uncertainty in the market. So we've seen this -- we've seen this before. This is nothing new. And it plays out generally the same way every time. And you know, I echoed Damon’s comments, we've seen them. The main mantra, I'd say for 2022 is Canadian stocks, their financial plans, and we're rewarded for doing so that's the overall theme when you look at the invested assets. People did not panic in April -- in April and May and June of last year. They stayed committed to their plans and they've recovered significantly from them. But the investor confidence we saw it in Q4 with client returns of close to 5%, year-to-date in 2023 we've got another 5% on top of that. And we are starting to see investor confidence strengthen again and there is just a glut of liquidity on the sidelines. So when it comes back, it could be quite the wave, just like we did see in 2021 following a buildup in 2020. Okay, great. Luke, I think what you just -- the investment performance or the percentage of your funds that have moved into the four or five star bucket, any mandates specifically driving that change? Or anything you would call out? Yes, actually, there are a few -- some of our flagships. So we did see a strategic income increase in rating. And we have seen that's an improvement in Bluewater as well, which are some for larger funds. Okay, perfect. And my last question, just could you remind us, what is the payout ratio on your cash earnings that you would sort of be targeting in terms of the threshold where you start to consider a dividend increase? We've -- it’s Keith here. Yes, we've guided to 60% is when we start to take a look at a dividend increase. And we're tracking at 73% right now. Yes. Thanks very much, and good morning. Just now that you've gone to doubled up your share of ChinaAMC. I was wondering if there's anything different in terms of your approach with respect to that. If I look at the boutique slide, would look like ChinaAMC is probably like less than 1% or 2% of your retail AUM at Mackenzie. But to what extent can you do anything different now that you've doubled up your share of ChinaAMC. And what are your plans to sort of capitalize more of that investment other than just getting your share of their earnings into your P&L? Yes, right on time, we're going to continue to stay the course on collaborating with ChinaAMC in both markets. We believe Canadians and North Americans should have more exposure to China in their portfolios, that's only going to become more relevant over time. And we're going to continue to be the leader in bringing those solutions to it to Canada and beyond. And then of course, cultivating relationships in Asia is another advantage for us. And so we did announce some very good flows last year in terms of us advising to ChinaAMC Hong Kong. And we have a lot of doors open for us in Asia that we wouldn't otherwise have absent this investment. So we're really staying the course. This is a secular investment for us. And that collaboration between the companies is so important to us. We're also pleased now, obviously, in the last number of months and weeks to see China opening again, and there's a lot of excitement with both the companies around being face-to-face, as opposed to virtual. And so that's this is actually a very exciting moment for us. Okay. And then the second question is with respect to the 3% OpEx guide for 2023. Like in the face of inflation here, obviously, there's got to be quite a bit of wage inflation, that's apparent across all kinds of financial services industries, not to mention US as well. So, how do you kind of marry that with a guiding to a 3% an OpEx growth? And so just kind of looking for your comments there? Is it some other discretionary spends that get cut back? Just trying to see if how you can balance it with respect to kind of what you pay employees and how you can still all-in come guide to a 3% SG&A growth? Sure. Thanks for the question, Tom. It's James. I’ll start. So, of course, in 2022, we came out of the gate saying, look for 5% growth. And there's no question there were significant, obviously, inflationary pressures in 2022. And we started to as our outlook grew more cautious, we said, well, what do we control? And certainly one of the things we do control is our expenses to a significant degree. So, we lowered our guidance on expenses, and ultimately, as you've observed come in not at 5% on the full year, but just under 2.5%. So, as we think about 2023, as you point out, we're saying not more than 3%. And I would say, the principal tactic to kind of generate and maintain that discipline is around headcount, Tom. It's really around headcount, just discipline. Around who were how hiring, why we're hiring, whether the role is critical sort of or not. And at the same time, I'm very proud of the fact that we have been able to for our lower tiers of employees, we've been able to respond with wage increases that we're proud of. So for lower bands of employees, as the wage increase was in the 5% range, the total budget was kind of 4%. So as you went up, as you got higher in the organization, the lesser was the merit or the COLA increase. The other thing we did this year is we made sure that everyone in the organization on salary was earning a salary of at least $40,000. So if you're going to do that, you've got to watch headcount. And I would say the principal tactic has been watching headcount, the second major tactic has been being disciplined on project spend. And in that regard, Tom, we spent, $65-ish million a year on what we call project spend. And that's a number that, if you're not disciplined can kind of creep up and we're committed to maintaining spend at that level. But we meet frequently to make sure that we're on budget, and then we're not approving projects that are going to take it meaningfully north of there. So I point the headcount. I'd point to project spend, and I'd say, it's balancing all of that against an imperative to treat the lower band employees well in this environment. We believe we've done that squared that circle as well as we can. And I just add to that the -- we've also invested in technology in places process automation, and other investments in technology that has taken costs out of our business that gives us the opportunity to invest in other places to grow the business. And a great example this year is the mortgage business and the partnership we're building with Nesto. That's an area that we're going to invest. And we're doing that through savings from other initiatives in the past. Yes, thanks. I wanted to dig into the mortgage banking upside. I mean, this is a business that generated I think $26 million last year, $45 million roughly in the years prior to that. What kind of upside you think you can drive to that revenue line? And is there a plan to shift, I guess, the strategic outlook for that business from maybe holdings, mortgages, selling mortgages? Like are you looking to change how you generate those revenues at all in that platform? Hey, Jaeme, it's Damon. I'll jump in and then I'm sure Keith will have some words to say. But in terms of the mortgage business, we're very excited about the opportunity here. Really, what we're trying to do is we're trying to elevate the experience of both our advisors and our clients by being modernized, make sure it's digital, by leveraging really a best-in-class tech stack with Nesto, to be able to offer mortgages at a very competitive rates for our clients. Right now, we're punching below our rate. And if you look back, and not-too-distant future, I believe at one point, we're earning $70 million in this business, we believe that we can get there back again, and be very, very competitive. It's not like we need more clients, we have the clients. We just want to make sure that we have the experience to be able to deliver what they expect from us. From our standpoint, we've transformed our business, our platforms, our investment products, the natural sequence of things is to be looking at mortgage and banking, and then to look at insurance. So, we believe that we have drivers for future earnings to accelerate future earnings across a number of different factors for this firm. I was going to add to that, Jaeme, we're probably normalized $35 million per year in the mortgage business. If you do look back 2012 to 2016, we're growing our mortgage under administration by a $1 billion plus a year, and we grew from $7 billion to close to $11 billion, or over 11 billion. So we think we can easily do that again, now that we have a great competitive offering for our clients and gets back to that number Damon just mentioned, or you can, $35 million and double the business, we're at $70 million and call it five years. Understood. And then just respect to the, I guess, the net flow outlook seems a little bit more tepid here with Mackenzie and if I look at like January performance in wealth same story. What do you think it is like are just -- are investors just sitting on too much cash at this point? That's kind of what's kind of flows you're seeing, especially in this RSP season, it just seems a little bit maybe lighter than maybe otherwise you would expect? You hit the nail on the head. It's investor confidence, we are seeing an improved as we're entering 2023, but that is it. And as mentioned, there will be a lag. We did see financial markets up 5% in Q4, we have seen another 5% in the first five weeks of 2023. And that's what's going to take to actually drive investor confidence. And there is a lot of money on the sidelines right now. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Martens for any closing remarks. Thank you, Ariel. And thank you everyone for joining us on the call this morning. And I hope everyone has a good weekend. Ariel, with that, so we'll close out today's call.

EarningCall_35

Welcome, and thank you for attending today's AIR Communities Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Alexis, and will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Lisa Cohn, President and General Counsel of AIR Communities. You may proceed. Thank you, Alexis, and good day. My name is Lisa Cohn and as Alexis said, I am the President and General Counsel of AIR Communities. During this conference call, forward-looking statements we make are based on management's judgment, among other things, current market conditions, macroeconomic trend, socioeconomic drivers, including projections related to 2023 performance expectations. These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings. Actual results may differ materially from what may be discussed today. We will also discuss certain non-GAAP financial measures such as funds from operations. These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of our full earnings release published on AIR's website. Prepared remarks today come from Terry Considine, our CEO; Keith Kimmel, President of Property Operations; John McGrath, Co-CIO and Chairman of our Investment Committee; and Paul Beldin, our Chief Financial Officer. Other members of management are also present. All of us will be available during the question-and-answer session, which will follow our prepared remarks. AIR was designed to be the most efficient way to invest in public ownership of multi-family properties. The past year provides this confirmation. At 74%, AIR operating margins are the highest among our peers. At 67%, AIR has by far the highest rate of conversion of revenue into free cash flow. The highest among our peers and 10% higher than peer average. And for your information is posted on our web page and you might be interested to review the calculation. One foundation is the prowess of Keith and his ops team. Like other apartment owners, rent growth last year was good. AIR same-store revenue was up more than 10%. But unlike all other owners that I know AIR's COE, Controllable Operating Expenses actually declined by 10 basis points in the most inflationary economy of the past 40 years. How does Keith do it? A second foundation is the portfolio management of John McGrath. Roughly 3 times is active in the past two years as the average apartment REIT. John and his team sold 21% of our starting assets and purchased about $2 billion of acquisition assets. The acquisition Class of 2021 increases the overall same-store NOI growth rate by about 100 basis points. The Class of 2022 about the same size, it's outside the same-store portfolio, and has net operating income growing at faster than 20%, approximately 2.5 times the growth rate of the same-store properties. A good example of the consistency of AIR ops can be seen in the fourth quarter in January and now February leasing activity, and without the seasonal slowdown others faced. A good example how AIR paired trades improved portfolio quality and revenue growth can be seen in John's fourth quarter trade of 50-year-old Garden apartments in the outer suburbs of Boston, for an almost new mid-rise in dynamic Miami Beach. It also shows how we like to invest on Highland, where zoning or neighborhoods or mother nature make a location attractive to high-quality residents and is protected in some part from competitive new supply. Good ops and dynamic portfolio management, combined with Paul's balance sheet with little floating rate debt and Lisa's disciplined oversight of off-site activities in costs, makes for growth and the greatest efficiency of any public apartment REIT in converting revenue to free cash flow. Looking to 2023, this year, we plan for more of the same. Keith and his team will select the best residents and then work hard to satisfy and retain them. John - Josh and John Stein will look for acquisitions whose returns magnified by the AIR Edge are accretive to AIR's cost of capital. Paul will keep score and our balance sheet safe with low leverage long maturities, limited interest rate exposure and abundant liquidity. And Lisa will develop our precious human capital, manage risk, upgrade corporate systems, most important Gardner priced culture. They're conflicting views about what to expect from the economy this year. I note that the stock market and the bond market are pointing in different directions. AIR is prepared for both. If inflation continues higher and longer, AIR customers can afford higher rents, and Keith has proven decent control costs. If the Fed raises interest rates, their bottom line is little affected because Paul has only 4% of borrowings and floating rate debt. If the economy turns down, AIR is resilient with residents with high credit scores, incomes averaging $225,000 in the latest quarter and a greater than 60% propensity to renew. If the transaction markets prove difficult, John and Josh have demonstrated their ability to source capital from property sales and to invest in properties with big upsides when added to the AIR platform. I note that Paul's guidance assumes no increase in market rents and yet results in same-store net operating income up almost 9%, and FFO up 10% over last year's run rate FFO. It's not guidance and only my opinion, but I expect inflation to linger and net rents in our portfolio may grow faster than we expect. I'm optimistic about AIR's future. Efficiency and effectiveness provide comparative advantage in operations and acquisitions. We are a veteran team committed to continuous improvement and to each other. Our intentional culture makes AIR a great place to work. I take pride in its regular recognitions and National Top Workplace Award is the most recent. I look forward to the opportunities of this year and appreciate my teammates for their exceptional work last year. I thank Tom Keltner, Chairman of the AIR Board, and my fellow Directors for their engagement and good counsel, I'm grateful to shareholders. We work hard to be good stewards of your precious capital. I'm pleased to report we wrapped up a good 2022 with a solid fourth quarter. On today's call, I will cover: AIR's operations, which have had a more positive trajectory over the past four months than multi-family in general; AIR's acquisitions, a second portfolio that drives elevated growth as we apply the AIR Edge; and AIR's revenue outlook, which is highest amongst our peer group and based solely on facts and evidence today. Now to the details. First, the core business continues to do well. Revenue was up 9.9% from last year and the sequential growth of 1.8% made it the fastest-growing fourth quarter in our history. We saw rate growth in double-digits, with signed blended lease rates up 10.2% during the quarter. Occupancy increased each month from 96.7% in October to 97.4% in December. January further improved with occupancy of 97.5% and rate strengthening sequentially. Second, AIR Edge is a unique predictable advantage. While AIR Edge is comprised of a multitude of innovations, I boil it down to a single concept, consistency. It is consistency of resident selection, ensuring we have the highest income requirements, credit standards and resident quality. It is consistency of customer service. Our teams deliver day in and day out, relishing the opportunity to provide a world-class experience. Our residents scored us over 4.25 on satisfaction surveys in the fourth quarter, leading to our trailing 12 month turnover of only 38.9%. It is consistency of execution and innovation delivered by a talented and seasoned on-site team, bolstered by a platform of technology, process and centralized support. As a result, fourth quarter expenses were down 10 basis points year-over-year and controllable operating expenses were down 30 basis points. And it is consistency that is the key to AIR's operating margin. We established a new high watermark, achieving 76.1% in the quarter. Third, AIR has a proven track record of above-trend growth and acquired properties, what we call the AIR Edge portfolio, which will generate long-term outperformance. The great work of John and his team has positioned us in superior submarkets with higher rents, higher quality customers and higher upside for growth. For our AIR Edge Class of 2021, both revenue and NOI have grown about 50% faster than our same-store communities in the fourth quarter. We project these communities to grow at twice the same-store pace in 2023 as the AIR Edge continues to lead to both additional revenue and expense decreases. The contribution of the AIR Edge at these communities is worth about an additional 100 basis points to the same-store growth rate. Our acquisition Class of 2022 is on a similar trajectory. These communities are ahead of our underwriting and are expected to grow significantly faster than our stable portfolio of communities. Fourth, 2023 has the makings of another good year. Our revenue growth of 8% is a direct result of three facts and evidence today. AIR has 5% earned in from leasing activity in 2022. Our 5% loss to lease today will contribute 2% growth in '23, and our program of upgrading apartment homes will drive another 1%. Those three factors, none of which rely on market rate growth, will result in an 8% increase in AIR's revenue. Occupancy is anticipated to be 96.9%, flat from last year, with January occupancy of 97.5%, continued strength in February and robust demand, which is 10% ahead of 2022. Bad debt is expected to improve. Excluding the noise of repayments and delays, the run rate of bad debt is around 50 basis points. Residents are increasingly paying rent on time. And in the cases that they don't, our options for collections are returning to pre-COVID norms. At the beginning of 2022, we had 1,000 residents more than two months delinquent, and today, that is down to 250. Of those residents, a vast majority are now in the collections process. The final input to '23 revenue is market rate growth. And while we don't have a crystal ball, here's what I do know. Rates have strengthened this year as we have increased asking rents by $40 or 1.5% thus far in '23. In total, we are projecting 8% revenue growth based on 8% rate growth that we can directly see today, flat occupancy and no additional market rate growth. Now look at it another way. We can view 2023 revenue growth through second lens. In most markets, our outlook is in the mid-single-digit revenue growth. We add to that the benefit of our market allocation, AIR's portfolio is over 20% allocated to South Florida, where earning alone is in the double-digits, and we anticipate growth in the high teens. Finally, we had the benefit of John's refresh of our portfolio. Our 2021 AIR Edge portfolio now entering our same-store population is expected to see revenue growth in the mid-teens. In the way we look at it, AIR a clear path to strong revenue growth in 2023. My thanks to all the AIR team members for a fantastic year. Their consistent attention to our residents and communities has set us up for a great shared success in 2023 and beyond. We are focused on repositioning the AIR portfolio for disciplined portfolio management and accretive capital allocation. Since the separation from Aimco, $4.1 billion of transactions or approximately 41% turnover of GAV, about 3 times the turnover of our peers has transformed our portfolio in terms of value, growth, risk and quality. We have recycled capital into higher quality properties and higher gross markets, materially reduce exposure to markets with greater regulatory and political risk and an uncertain rule of law. Continue to improve our capital allocation, including diversification by market and price point and improve the quality of our portfolio as measured by expected rent growth, average rents, age and physical condition. And we increased the allocation of GAV to our high-growth AIR Edge portfolio from 0 to over 17% today. As shown in the supplemental schedules of the earnings release, during 2022, we furthered our goal of continuously improving portfolio quality by selling 18 of our lower-rated properties, which were located in slower growing markets with high regulatory exposure, had average rents 20% below our portfolio average and whose average effective age was about two-thirds older than that of the portfolio. We also allocated $840 million of capital in 2022 and another $298 million in January 2023 to neighborhoods that exhibit high growth due to durable demand factors and have constraints on competitive supply. These accretive acquisitions were match funded and are earning an attractive spread over the unlevered equity cost of capital. Turning to 2023. Market uncertainty and volatility have changed the calculus. However, therein lies the opportunity. During the recent boom times, cheap money and over-speculation attracted investments from every corner. As the market downturn set in, investor sentiment sourced, competitors were forced to pull back and buyer pools became shallow. An elevated cost of capital made it harder for buyers to make deals pencil, sidelined levered investors and forced others to take a cautious view of the future. As a result, transaction volumes are well off peak levels, driving uncertainty of pricing and a widening of bid-ask spreads as many sellers hesitate at the change pricing and choose to wait for greater clarity or better days. To be sure, uncertainty makes it tough. But our experience, economic downturns present a tremendous opportunity for profitable growth. AIR is well positioned to invest through a downturn and capitalize on the opportunities being presented and these exciting, albeit uncertain times. We have comparative advantage in transactions market due to our ability to generate enhanced returns through non-market advantages such as Paul's balance sheet, which is safe, secure and flexible, with ample liquidity and access to all sources of capital. The ability to use non-market currencies, such as OP units, to provide significant tax advantages and greater after-tax cash proceeds Incidentally, we use OP units in 50% of our acquisitions, which Paul neutralizes by repurchase of AIR shares. And most importantly, the AIR Edge, simply put, properties are worth more in Keith's hands. As I've stated on past calls, errors in the spread business, and we will continue to execute a capital allocation strategy that utilizes our paired trade philosophy. Paired trades improve both portfolio quality and rental growth rates and allow us to be relatively agnostic to market volatility while also establishing the cost and availability of our equity capital. Consistent with our strategy in November, we locked in an attractive cost of capital by closing the sale of six 50-year-old Garden apartment properties in outer suburbs of Boston. The proceeds from the sale were used to fund the $298 million acquisition of Southgate Towers in January. Southgate, which has got rehabbed in 2016, is located a few blocks away from our Flamingo assets in the South Beach neighborhood of Miami Beach. The acquisition improves the quality of our portfolio by recycling capital into a high-quality asset located in a high-growth, supply-constrained and regulatory-friendly submarket. Like our cost of '21 and '22 acquisitions, which are performing well ahead of underwriting, the investment in Southgate is expected to be accretive and earnest spread over the cost of capital of 200 basis points or more. Looking ahead, we are confident in our ability to continue to source and execute similar trades whose returns magnified by the AIR Edge will be highly accretive to our cost of capital. However, given market uncertainty, we have no fixed goal for additional acquisitions in 2023. While Keith is rightfully optimistic, when buying, I take a more cautious view. Growth for the sake of growth is not a strategy I advocate. We will look to continue investing in neighborhoods and addresses that are attractive to high-quality residents and have some protection from competitive new supply. Despite having a cautious disposition, I remain bullish on our 2023 growth prospects. AIR's future investments, irrespective of the economic climate in which they are made, are expected to be highly accretive and an attractive spread over the equity cost of capital within the company's leverage policies and be built upon the company's solid operational foundation. Today, I will discuss AIR strong and flexible balance sheet, full year 2022 results, our expectations for 2023 and conclude with a brief comment on our dividend. AIR's balance sheet is well positioned for a period of economic uncertainty, including today's unsettled interest rate environment. First, leverage is low. Leverage EBITDA is 6.05:1, and variance to our target range of 5 times to 6 times of some $26 million as a result of the timing of share repurchases, which I'll discuss further in a moment. In 2023, we anticipate the leverage to EBITDA levels will vary from quarter-to-quarter, but our year-end target range remains unchanged. Second, liquidity is ample, with well over $800 million now available under our revolving credit facility. Third, we have limited repricing risk and limited exposure to floating interest rates. Subsequent to year end and on a leverage-neutral basis, we borrowed $320 million for 10 years at a fixed rate of 4.9%. Proceeds were used to refinance our sold debt maturity before May 2025 and to reduce borrowings by $230 million on our revolving credit facility. This transaction reduced floating rate debt to $150 million or 4% of total leverage and increased our weighted average maturities by nine months. The quality of the balance sheet is not just my opinion Moody's issued a Baa2 issuer credit rating, supplementing our BBB flat rating from S&P. With two investment-grade ratings, we have access to the full suite of debt capital markets. We have access to the public and private bond markets, the bank debt market and non-recourse property-level debt. Now turning to full year 2022 results. Full year FFO was $2.41 per share, inclusive of a $0.22 contribution from a now repaid Aimco note. Last spring, we decided to allow prepayment on the note to delever and extend debt maturities, all while lowering our engagement with Aimco to advance the separation begun the year before. When we announced the prepayment, we provided guidance for run rate FFO that is FFO exclusive of the contribution from the Aimco note expected to be $2.19 per share. Full year 2022 run rate results delivered that 2019 run rate. In same-store operations, we outperformed our expectations, with full year same-store NOI growth up 14%, 200 basis points ahead of our beginning of year expectations. Revenue was up 10.2%, and operating expenses were up only 40 basis points. Furthermore, controllable operating expenses were down 10 bps, a remarkable achievement in a year when the CPI increased 6.5%. Outside same-store, a 21 acquisitions did even better, with fourth quarter growth rate in NOI almost 50% higher than in the same-store pool. We used our strong balance sheet and abundant liquidity to take advantage of the stock market doldrums to repurchase a total of 8 million shares, 5% of our shares outstanding at the start of the year at an average price of $39.49 and an expected IRR of approximately 10%. These repurchases are inclusive of 654,000 shares repurchased in November and December to neutralize the OP units issued in connection with the January acquisition of Southgate. As we look forward to 2023, we expect FFO per share at the midpoint will be $2.41, up 10% from 2022's run rate FFO of $2.19 million. We expect this growth to be the result of a $0.24 addition from 8.8% NOI growth in the same-store pool, inclusive of an approximate 100 basis point benefit due to the inclusion of the faster-growing Class of 2021 properties, partially offset by a $0.02 subtraction due primarily to the combination of NOI loss due to property sales and higher interest expense from a combination of earning of higher interest rates from 2022 financing activities and higher average outstanding balances, partially offset by benefits from incremental contribution from our 2022 acquisitions, the January acquisition of Southgate and a net $0.02 benefit from share repurchases. Finally, a few quick comments on our dividend. This refreshed tax basis continues to result in a taxpayer-friendly dividend. In 2022, AIR's dividend of $1.80 per share with 86% taxable at capital gains rates and 14% at ordinary income rates. For those investors who are tax-sensitive, each dollar of the AIR dividend was worth 39% more after tax than was the peer average. In 2023, we anticipate our dividend will continue to be the most tax efficient of the multi-family peer group. With that, we will now open up the call for questions. Please limit your questions to two per time in the queue. Alexis, I'll turn it over to you for the first question. Good morning to you guys. So first, I guess, congratulations on another strong quarter. My first question is on the blended rents here, which are holding up much better than your peers, especially on the new lease rate side. So I was hoping if you could provide some color on the trend of the blended rate throughout the quarter and into early this year? And I'm curious if your expectations over the next few months into the spring, what sort of path would you expect the blended rates to follow? Thanks. Haendel, it's Keith. Thanks for the question. Well, you can see in our walk as we've been looking at our blended rates that they've been in around the 10% plus range. As we look into January, we're in the 9s, essentially, is what we're coming in at. And when we look forward, we can see our signed leases that are looking forward or maintaining a very similar type of trajectory. Now of course, it's early days in just January and a week into February. So there's a lot still in front of us. But what I would tell you is, is we have an expectation that we'll continue to see something similar like that over the next, call it, 30 days or 45 days. But the important part is that, in January, we saw an acceleration. And so seasonally, we're starting to see a pickup. We had raised our rates by about $40 or 1.5%. And we'll see how that plays out. But of course, we'll get together in another 90 days, and we'll be able to give you a better update. Got it. I appreciate that, Keith. And what am I missing on the new lease rate side, your new lease rates are much stronger than your peers. Maybe some color on that would be appreciated. Of course, Haendel. Look, I'd point to three different things. Our resident quality, our team members and our portfolio. And just - if you start with our - starts with our residents, and we are really highly focused on high-quality resins with high incomes, high credit scores. Our average FICO score is 725. These are individuals that have the ability to sustain and be able to pay increases. And they're just a different customer who wants to stay longer with us. That's backed up by team members where our community managers and service managers have - they've worked for us for eight plus years on average. So these are individuals who give exceptional customer satisfaction, knowing that all these things work together where residents will stay with us longer, team members work for us longer. And then, of course, not to be missed is the portfolio. And I talked about this in my prepared remarks. But when I think about the work John and his team are doing, we have multiple things that are really contributing to this. One, let's talk about Miami. Our position in South Florida, 20% where we're getting really high rents, of course, that helps bolster. But not to be missed is the Class of 2021 that's coming into play. And where we could apply the AIR Edge and where we can actually see upside when we take over a building, we can raise rents more than others. And between the combination of those things, I believe that's really what you're seeing that's coming through in those numbers. That's helpful. That's helpful. I appreciate that. One more, if I could, just on the expense side, maybe some color on the building blocks for the pressure you're seeing. And then, I guess, just looking ahead, are you expecting to return to a more normal kind of low single-digit level beyond this year? I mean, obviously, that's been a hallmark of the platform last several years. So I'm just wondering this year is more of an anomaly? Or if there's something structural that perhaps could prevent you from going back to those lower levels? Thanks. Thanks, Haendel. This is Paul. And I appreciate the question. I mean you're very right to point out that our guidance for expense growth next year is very abnormal and atypical for us, our portfolio. There are really two factors that are driving the increase in our expense expectations. The first is an real estate taxes. And so before talking about '23, I just want to focus on the past for a second real estate taxes. Not only we did we have negative growth in real estate tax expense in 2022, but if you look at our compounded growth rate for the past three years, it has only increased on average by 1.7%. And so what we are seeing in 2023 is a catch-up in valuations in many markets and the impact of two large tax appeals that occurred in 2022 that we don't have as part of our guidance in 2023. And when we combine those two factors, you get an expectation of a real estate tax growth next year in the 7% to 8% range, which, if you look at our long-term trends, should moderate in future years, especially when you consider that 40% of our portfolio roughly is located in California and protected by Prop 13. So the second factor in increasing expenses is on the insurance side of the equation. As I'm sure you've learned from talking with other multi-family companies and just through your industry context, you know that the property market right now is very difficult. It's hard and premiums are increasing. So we think we have a potential for a sizable increase in insurance costs in that line of business. And that's really what's driving our expectations for this year. Thank you for your question. The next question comes from the line of John Kim with BMO Capital Markets. You may proceed. Thank you. I wanted to follow-up on the lease growth question because it is a bit of an outlier in the sector. I was wondering if you could break down what markets are driving that high lease growth rate? Is it just Miami? Or are there other markets that are giving you above your peers at 9%? And also how much capital enhancements or revenue had some CapEx, how much of that split additive to these growth rates? Hi, John, I'll start with it, and then maybe I'll turn it to Paul. But when we go through the lease to lease rates, we see it strong across the board, quite frankly. Miami would be - the highest would be in the mid-20s. But we have lots of other places that are coming in 8s to 10s, I think D.C., our Los Angeles portfolio that's also in the 10 to 13 range. So we have a variety of places that we're getting high rents and those new leases, not just any one particular spot. John, and to address the capital enhancement spending, in 2022, we invested about $90 million in capital enhancements. The vast majority of that was in K&B programs across the portfolio. And so as we underwrite those projects, we anticipate not only a high yield on the initial investment but we underwrite an expected internal rate of return or an investment of 10% on our money in the way that the majority of that is manifested is through higher revenue growth. And so you are seeing a benefit of that investment in our - in the lease rates. Okay. Now that you've closed Southgate, and you have, I guess, a better idea of where rents are coming in at least in the beginning of the year. Can you disclose what the year-end cap rate is on the asset? 5%. So when you say 200 basis points above the cost of capital, is that just over a five year period? Or what can you specify on that? That's over the IRRs. So our deals will be accretive on - from the beginning, if you will, of our fair trade. And over the IRR period - 10 year IRR period, we expect to have a spread of 200 basis points or more over that cost of capital. Great. And then one final question for me is just you made a lot of discussions today or discussion points about getting into lower regulatory environment. So I was wondering if you were going to continue to pursue that path of reducing your exposure to California and some other highly regulated markets and allocating more towards the Sunbelt? I'll start and then maybe Terry would be to jump in. As part of our capital allocation, we are very focused on looking at concentration and concentration risk. And one of those areas is, of course, regulatory and political environments. So we will continue to balance our portfolio, both on where we see high growth, but also where we can reduce risk within the portfolio. John, I don't have a lot to add to that. I note that there's even discussions of national intervention in housing policies. So it's just a fact of business in America today. We look at expected outcomes in different markets, and we look at the risk factor of regulatory excesses as part of that. Thanks. I appreciate the comments on kind of the AIR Edge and the benefits from the incoming same-store assets as well as, I guess, the acquisitions of 2022. When you look at those deals that you done over the past two years, were any of those pre-stabilization? Or is all the outperformance just from putting it on to your platform? Hi Nick, this is John McGrath. The AIR Edge is what's created the opportunity. We buy stabilized product. We put it onto our platform. The greatest advantage that I have as a deal guy, plain as simply as Keith and his team. I can drop the product on to the platform, and they take it from there and the magic has worked. Nick, what I would add to that is that, that also continues. So it's not a one-time event. But we believe will happen over those 10 years is that in the first time, you'll have this rate of increase as the customer selection process takes a couple of turns of the rent roll, the capital investment based planning and then investment and then rolls of the rent roll, so that when we take a stabilized asset and add to its value, that will be so much in the first year, but there will also be another increment in the second and another increment in the third and so forth, so that the first five years are likely to be elevated and then some reversion to trend. Yes. Absolutely. I think a lot of the questions have just been really focused on January results and kind of the - maybe the diversion to trends that you guys are putting up versus peers and recognize it's a competitive acquisition market. A lot of peers are very good in operations as well. So just trying to understand where that difference is coming from. But maybe the second question just on kind of capital allocation going forward. You've been doing some buybacks. What is the appetite going forward, just given where the stock trades relative to at least consensus NAV? Well, we have zero appetite to issue shares, if that's your question. What we've done in paired trades is, if we've sold real estate - And reinvested where we have higher growth rates, when we look at the - where the stock trades, we see that as an opportunity. And it's been about a 20% element of our investment policy over the last year or so. Well, as I said, we bought back 5% of our capital in the last year. And if pricing continues, we'll continue to buy more. And when we look at the - this is part of a balanced program. We see that the real estate returns are that - equal to or greater than those of share buybacks. Thank you for taking my question, and congratulations on a very strong quarter. I'd like to go back to market trend growth a little bit. Look, I understand that guidance assumes no increase in market trends. But then, Terry, you did say that your view of inflation is that it will continue to linger. So in light of that, are we to then basically take away that guidance is conservative or the other end of that could be that things might fall off the cliff as the year progresses and therefore, market rent growth is not there, 0, because we all understand that you've obviously started with such a strong generally. So why not give a view of market rent growth in the slides? Chandni, it's because we're giving guidance for the year. And at a time when the Chairman of the Fed is trying to figure out what to think about the future, I think it would be foolhardy for me or AIR as a team to give specifics about what's going to happen going forward. So there is a conservative bias in what we do. It's based on what we know today. That's likely to change. In our remarks, we talked about what would happen if it changed in a positive way. And what would happen if it changed in a negative way. And we know that on this call are people that are far more expert about the macro economy than a group of apartment operators. And so you can overlay your macro objectives and see what they would choose. After my own unworthy opinion that I think it's going to be harder to get inflation under control. And if that's the case, the likely outcomes are going to be higher rent growth, but also higher interest rates. Now we're not too exposed on an operating basis to higher interest rates, thanks to Paul. But going back to Nick's question, that may show up in net asset values and property pricing. So those are all dynamic factors that could unfold in the year ahead. But for the moment, we think a very reliable basis to say that we don't - we think you can probably rely on it not being worse than it is today and that there's some upside in those numbers. Sounds fair. Absolutely. So my follow-up, I'd like to touch on the supply in some of your Sunbelt markets. Now we all know that there's been a lot of capital, at least there was a lot of capital that was chasing some of these markets that are obviously, like you said, lease rates in Miami are still very strong. So curious as to how you see supply risk in some of the markets where you have been recycling capital into? Hi Chandni, this is Paul. I'll start and Keith, if you have anything to add, please jump in. Your question was framed in a manner of our supply risk in some of our new acquisition markets, and that has predominantly been in South Florida and then in the Washington, D.C. area. So just starting with South Florida, there is a lot of construction when you look at Miami Dade in that area in aggregate in total. But if you drill down and look at supply in close proximity to our properties, particularly the properties in Miami Beach, there's very, very little competitive new supply in those particular areas. And so while there might be some ancillary effects from new buildings delivered in other parts of town, we don't expect that to meaningfully impact our business in 2023. Similarly, in Washington, D.C. our assets and our locations at our price points, we don't have a concern. More broadly, where we do see supply though is that many of the submarkets that we've talked about on past calls, we see the Cedar City, Philadelphia area continue to have high deliveries as a percentage of existing stock. There's about 1,600 units that are being delivered within a mile of our Cedar City properties in 2023. And then the only other location of appreciable supply is here in the Denver area, where we see competitive new supply being delivered in the area of our 21 Fitzsimons and properties, but we have a very critical advantage in that and that our properties are the only multi-family properties that are actually on campus. So when you're choosing a place to live, our location is far superior. Thanks. Hello, everybody. So I want to go back to this January, 9.4%, blended number. And you said that the 2021 acquisitions added 100 basis points to your same-store growth profile, I think you said that. Is it a similar level of additive impact when it comes to this new renewal and blended math? Or is it substantially more impactful for some reason? Because the multi-family REITs tend to move in a pack in terms of operations and the numbers there, but this is just quite, quite different. I'm just wondering if that's driving as the differentiator if you're - if there's maybe a difference in the calculation methodology? Is there anything you could say that kind of explains this a little bit more than just saying you have the best residents and best properties? Rich, it's Keith. When we look at the numbers that came in, in January, they are impacted very little, frankly, by the 2021 number that came - or the 2021 population as far as it goes as the new lease rates or the blended rates. While they're impactful, they weren't the thing that drove it. What we really saw was strength in places like Miami, Los Angeles, D.C. And frankly, San Diego would be another one that I would point out, in which we were able to continue to press rates and we had residents who are just continuing to stay with us and put us in that position. Now of course, 2021 will earn in even further as we - or the Class of 2021 will earn it further as we get into the balance of this year, and we think it will - just as you pointed out, that 1% will be for the full year, but not in particular around January's results. Okay. The other outlier for you guys is bad debt running at 50 basis points. That's also eventually better. Can you give some color behind that, why you're doing so much better on that number? And maybe a related comment on how San Francisco is moving along these days in your eyes? Thanks. Hi, Rich, good to hear from me. This is Paul. On the bad debt question, what we have seen as we looked at our bad debt experience through the quarter is that our bad debt expense has trended down. But I think a very important distinction to make is what is the net bad debt expense and what is the gross bad debt. And the difference between the two relates to government assistance payments or collections from former residents. And so what we have seen that our gross bad debt has trended down quarter-by-quarter from about 240 basis points in the first quarter down to roughly 150 basis points in the fourth. And then if you look into that detail a little bit further, our fourth quarter, 150 basis points of bad debt, is made up of 100 bps of bad debt related to residents that Keith mentioned that are more than two months delinquent. And our confidence in lower bad debt experience next year is driven by the fact that whereas we had 1,000 of these residents in the beginning of the year, we only have 250 today. And most of those are in eviction process, and we're optimistic that we'll be able to re-lease those units to rent paying customers in the relatively near future. And so that's really what is driving our opportunity and our expectations going forward for next year. Hi Rich, I would just add to that Paul is too modest to say so, but our accounting has been quite conservative, and we basically reserved uncollected bad rent. So the noise about collections is almost always going to be a good guide to us in terms of reported bad debt. But the metric we focus on is what Paul mentioned, which is run rate and bad debt, is happening today. And as the economy has healed and the restraints on normal collection have ended, we're getting back to sort of an AIR standard of 50 bps or lower. So what we've seen in the Bay Area is that we've seen some strengthening as it comes to demand with leasing apartments. So one of the things that had been for - as you might recall, over the past 18 months or so, there was this outgoing of folks that would go work remote and different things. And what we've seen on the ground is, is people coming back. And so it's not clear to me if that's a reflection of some of these tech layoffs that are occurring that essentially, people are coming back saying, I want to get back to the hubs and the home basis of these companies. The point I would give you is our occupancy in the Bay Area is in the high 97s, and we had struggled previously being at 95 as an example. So we are seeing a shift that's there. Now the rents haven't fully recovered. The Bay Area was one of the slowest and most impacted. And so there's still more work to be done, but we're feeling good about where the Bay Area is as we start the year. Thanks for the time. Please bear with me one more question on new lease changes. Paul, can you just give us a sense without revenue CapEx, how much lower new lease changes in rates and months would have been versus the roughly 10% reported? John, that's a question that we're going to have to dive into and get back to you on because when we talk about the contribution from revenue-enhancing CapEx, that revenue enhancing is a little bit of a misnomer, because it's not all revenue enhancing, but it's also expense reducing. And so there is a mix issue there, and I don't want to give you a number off the top of my head that isn't precise. So let us follow-up with you on that. Okay. No problem. Then just a few quick market level questions. Keith, your Miami portfolio, obviously, the composition of the assets has changed and rents are up massively in the market. Can you just give us a sense for rent-to-income ratios in your current Miami portfolio, how that compares to the total portfolio? So the renting - let me see if I have that right at my fingertips here. It's - well, so I've got Matt Homes who's just giving me the detail right here. We've been running at 20% rent-to-income ratio in Miami, which is actually quite similar. And the reason that is, is because we don't actually have a different requirement from city to city. So regardless of the product type, what we do is whether the rents are $8,000 a month or $4,000 a month, we have a very high standard of having the incomes being substantially high enough to cover and to grow into it. So it's about 20% in Miami. Okay. Last one for me. The 1% sequential decline in revenues in Washington, D.C. Keith, can you provide a little more color about what's going on in terms of demand trends in the D.C. Metro? Sure. So really, what we had there was some transitions of some AR accounting that we had that happened in the third quarter and fourth quarter, the transition between the two. So it was really a matter of that happening between those two months. The broader points on D.C. is that DC is one of our strongest markets, and it's at 98% occupied. And really, as we look forward, it would be one of our strong. So it's really just some noise between those two months. If you look at the total overall number, it's in great shape. While we wait for questions, I just want to thank everyone for their interest in AIR. Please call if you have any questions any of the management team. The conference season is assumed to be upon us. We look forward to being together. And - or if you're in Colorado, we welcome you to visit us in our offices. But thank you very much. There are no additional questions at this time. I will now turn the line back to the management team for any possible additional remarks. Absolutely. That concludes the AIR Communities fourth quarter and full year 2022 earnings conference call. Thank you for your participation. You may now disconnect your lines.

EarningCall_36

Hello, everyone, and welcome to NEXON's earnings conference call. Thank you for joining us today. With me are Owen Mahoney, President and CEO of NEXON; and Shiro Uemura, CFO. Today's call will contain forward-looking statements, including statements about our results of operations and financial condition such as revenues attributable to our key titles, growth prospects, including with respect to the online games industry, our ability to compete effectively, adapt to new technologies and address new technical challenges, our use of intellectual property and other statements that are not historical facts. These statements represent our predictions, projections and expectations about future events, which we believe are reasonable or based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information on some of these risks and uncertainties can be found in our earnings-related IR documents. We assume no obligation to update or alter any forward-looking statements. Please note, net income refers to net income attributable to owners of the parent as stated in NEXON's consolidated financial results. Furthermore, this conference call is intended to provide investors and analysts with financial and operational information about NEXON, not to solicit or recommend any sale or purchase of stock or other securities of NEXON. A recording of this conference call will be available on our Investor Relations website, www.ir.nexon.co.jp/en/ following this call. Unauthorized recording of this conference call is not permitted. Thank you, Kawai-san, and welcome everyone. I'd like to start today's call by setting context. Like most companies in our business, at NEXON, we regularly do comprehensive reviews of other companies that we might want to buy. Recently we've been challenged to find potential targets that have not expressed serious concerns about the future. Private and public game companies have each been telling us a very similar story, largely around four themes. First, the global economy is in bad shape and that is impacting consumer spending. Second, competition, especially from highly-funded AAA games, has been even more fierce than usual. Third, the end of COVID and return to work has eliminated the surge in players and play time we saw during the pandemic. Fourth, for many companies in the mobile space, the IDFA changes from Apple have destroyed their unit economics and their hope to generate any material profit. This all sounds pretty bleak. And certainly, the gloom we've been hearing in games is even worse in the broader consumer media and tech space where even the most respected companies are slashing ad spending and laying off tech workers by the tens of thousands. In sharp contrast to that gloomy operating environment, NEXON's performance has never been better and is getting even stronger. NEXON achieved its best ever revenue year in 2022. We just completed an outstanding Q4 where we grew our top-line 36% on a constant currency basis. That brought us to 19% growth for the year on a constant currency basis. And that great performance extends to Q1 of 2023. As Uemura-san will detail for you, our guidance calls for revenue growth of 19% to 28% growth on a constant currency basis. Performance of all of our largest live games has been excellent. Now we're launching a number of major new Virtual Worlds in 2023. In a moment, we will give you details of our performance by franchise and by region. Before doing so, we think it's worth pausing to underline a key point to help investors. That is, NEXON's business, the business of deeply immersive Virtual Worlds, is so different from other game companies as to constitute a wholly different entertainment industry category altogether. Virtual Worlds is different in almost every way; different in how we operate our business on a day-to-day basis, the kind of people we hire, what metrics we use to gauge our success, what technology investments we make, how we communicate our business performance internally and to outsiders, and perhaps most importantly, the mindset of our management and operating teams. The sharp contrast of our performance to other companies that we are usually grouped together with, presents an opportunity to reconsider and reframe what investors think they know about Virtual Worlds companies like NEXON. In this call, Uemura-san and I will endeavor to explain what we mean by this difference, so you can better analyze our performance and our future. I'll start by summarizing the highlights of the quarter and the year. Q4 2022 marked the highest Q4 revenue in NEXON's history and 2022 marked the highest annual revenue in NEXON's 28-year history. Fourth quarter revenue grew 49% year-over-year to JPY81.1 billion and included a year-over-year increase in operating profit of more than 200%. For the full year 2022, NEXON delivered a 29% increase in year-over-year revenue to JPY353.7 billion and a 13% year-over-year increase in operating profit. In the full course of 2022, NEXON delivered strong results in key franchises. FIFA ONLINE 4 delivered record high annual revenue. We're extremely pleased with the result, especially since we think the core product, the performance of our live game team and our live ops tech stack backing the game are working so well together. World Cup clearly provided a boost for 2022, although we should note we'll have a tough comp in 2023 for this product as there will be no World Cup. Meantime, following a drop we experienced back in 2021, MapleStory in Korea continued its growth trajectory that began in Q2 of 2022. Both revenue and MAUs increased year-over-year. Also in Korea, the mobile version of D&F, which we introduced in March 2022, has continued to perform well. In Q4, the game also won Game of the Year from the Korean Association of Game Industry known as K-Games. The live operations team celebrated this achievement by lowering monetization in the game. Why would they do this? Because they understand that in a well-run Virtual World, building long-term engagement year-over-year -- engagement over years and decades is more important than near-term monetization. In China, after significant preparation work by the live development team, the PC version of Dungeon&Fighter showed very strong performance. And overall, our business in China grew by 55% year-over-year. Importantly, the game saw a meaningful increase in active users in Q4. The Lunar New Year update released this January is proving to be very popular, and our China business is tracking toward double-digit year-over-year growth in Q1. It's too early to project how this trend will continue across the full year, but we are pleased with the recent results we're seeing in China. I will pause here to note that the rebound in both MapleStory in Korea and Dungeon&Fighter in China reflect our experience over and over again. Live Virtual Worlds fluctuate up and down in the near-term, but when managed well, can show steady growth over years and decades. Second, and as important, NEXON has a portfolio of such robust Virtual Worlds. So when one goes down, the others very often make-up for the difference. This inherent stability to our portfolio enables us to make thoughtful investments in the community of each game over time. Next, I want to provide an update on new Virtual Worlds in development for release in 2023. In mid-January, KartRider: Drift debuted with an open play test on PC and mobile platforms. The test which we dubbed, Preseason, was conducted with only a limited marketing support and was designed to evaluate stability, network code, new features and gameplay with a large number of consumers in Asia, Europe and the Americas. KartRider: Drift is fully cross-platform, meaning players can compete across PC, console or mobile. It is also global, so that players in the U.S. can play against others in Korea or Japan. The game is scheduled to begin official service from March 9 on PC, iOS, Android, Xbox and PlayStation. KartRider: Drift is an example of how we are approaching Virtual Worlds by focusing on building a robust community over time. While KartRider is virtually unknown in Japan and the West, in Korea, it's been played by over half the population. The consensus of the community around the world is that KartRider: Drift is a lot of fun, but even more, it redefines the genre of kart racing. Of course, it starts by being free, and it's also available with full cross-play on 5 different platforms, not just one. But because it's online, players love to express their personality through the deep customization features we've put into the product. So the Virtual World of KartRider is about players' own individuality, not limited to someone else's IP. This sentiment of individuality and self-expression is a powerful aspect of successful Virtual Worlds, and one that we will build out much more deeply in the quarters and years ahead. Speaking of deep customization and self-expression, I'll now turn to THE FINALS, from Embark in Sweden. We plan to follow-up from the successful closed Alpha last quarter to a much larger closed beta this quarter as planned. We are very excited with the technology underpinning the game, and most importantly, with the gameplay that technology and other innovations enable. Despite these innovations, development has continued to move rapidly. The upcoming beta will enable us to test these features at a scale of hundreds of thousands globally. Meantime, development for the second game from Embark, ARC Raiders, has been proceeding apace. We are conducting an internal UXR test in March, followed shortly by a closed Alpha with a limited number of outsiders, just as we did with THE FINALS. Our external play tests of both KartRider: Drift and THE FINALS are conducted with limited marketing support. At the early stages, our focus is on player engagement and fun, so that we can build a robust community over time. That community of engaged players enables us to build a strong, stable revenue base that we hope to extend and grow over future quarters and years. As a Virtual Worlds company, we've learned from experience how important those early stages are for the long-term success. So we discourage investors from making assumptions about early stage revenues until these games are launched and established in the market. In addition to these, several other Virtual Worlds are in later stages of development, including WARS OF PRASIA, VEILED EXPERTS, The First Descendant, Warhaven and MABINOGI MOBILE. To summarize, NEXON delivered record-breaking revenues in Q4 and full year 2022. Performance of our portfolio of live Virtual Worlds has never been stronger and our pipeline of upcoming Virtual Worlds has never been more robust. We think our strong performance reflects both the extraordinary effort by NEXON teams around the world, but also the power of the innovative business model of Virtual Worlds that NEXON has pioneered. We believe the next 12 to 18 months will be very exciting. Thank you, Owen. Now, I'll review our Q4 and FY 2022 full year results. For additional details, please see the Q4 2022 Investor Presentation available on our IR website. We achieved record-breaking fourth quarter revenue of JPY81.1 billion, up 49% year-over-year on an as-reported basis and up 36% year-over-year on a constant currency basis. Our performance continued to be driven by the growth of multiple major titles as well as contributions from new titles, HIT2 and Dungeon&Fighter Mobile. Overall, our top-line performance was within the range of our outlook. Dungeon&Fighter in China and FIFA ONLINE 4 exceeded our expectations, while revenues from our mobile business in Korea were lower than planned. By region, revenues from China, North America and Europe exceeded our outlook, while revenues from the Rest of World came in at the high end of our expectations. Revenues from Japan were within the expected range and revenues from Korea were at the low end of our outlook. Looking at the total company performance by platforms, PC revenues exceeded our outlook, while mobile revenues were lower than expected. Operating income was up 269% year-over-year and within our outlook at JPY11 billion. Net loss was JPY7.9 billion, which was below our outlook. This was mainly due to an FX loss of JPY25 billion related to the appreciation of the Korean won and Japanese yen against the U.S. dollar and its corresponding impact on U.S. dollar-denominated cash deposits. Let's move on to results by region. Revenues from our Korea business were at the low end of our outlook. On a year-over-year basis, revenues increased by 62% on an as-reported basis and by 50% on a constant currency basis, coming in at JPY51 billion, representing record-breaking fourth quarter revenues in Korea. FIFA ONLINE 4's PC and mobile combined revenues exceeded our outlook, driven by successful World Cup-related events and sales promotions. MAUs, paying users and ARPPU all increased year-over-year. As a result, its revenues grew significantly and marked record-breaking fourth quarter revenues. MapleStory's MAU and revenue increased year-over-year driven by the well-received Winter update. Dungeon&Fighter's revenue grew by 65% year-over-year, which exceeded our expectations and achieved record-breaking fourth quarter revenue driven by well-received update. For Sudden Attack, revenue decreased year-over-year due to the challenging comps with last Q4 when it grew 124% year-over-year. All in, PC revenues in Korea increased by 61% year-over-year. As for the mobile business, revenues from HIT2 and Dungeon&Fighter Mobile were lower than expected. HIT2's revenue was below our outlook as the impact from the update introduced during the quarter was lower than expected. We are preparing multiple major updates that we anticipate will help maintain high user engagement in 2023. For Dungeon&Fighter Mobile, the user community was excited about the news that the game was selected as the Best Game of the Year at the Korean Game Awards in November. Given this positive event, we decided to focus on keeping the good momentum and canceled the planned item sales, and instead, offered large scale rewards to players. As a result, while the revenue was below our outlook, the number of active users increased quarter-over-quarter. On a year-over-year basis, mobile revenues in Korea increased by 63%. Contributions from HIT2 and Dungeon&Fighter Mobile as well as growth of FIFA ONLINE 4 M and FIFA MOBILE, were partially offset by revenue decreases in Blue Archive, V4, The Kingdom of the Winds: Yeon and KartRider Rush+. On a quarter-over-quarter basis, mobile revenues decreased by 15%, primarily due to a decrease in Dungeon&Fighter Mobile's revenue and a seasonal decrease in FIFA ONLINE 4 M's revenue. Revenues from our China business exceeded our outlook driven by Dungeon&Fighter's strong performance. On a year-over-year basis, revenues increased by 55% on an as-reported basis and by 37% on a constant currency basis. For Dungeon&Fighter, revenue exceeded our expectations. Last quarter, we adjusted the game to be more user-friendly and saw a recovery in active users after the introduction of the National Day update at the end of September. Amidst this positive trend, we strengthened our communications with players and conducted various events during the quarter, which resulted in further improvement of user engagement and increase in active users. On a quarter-over-quarter basis, MAUs and paying users increased as a result of these initiatives, while ARPPU decreased due to seasonality. On a year-over-year basis, MAUs, paying users and ARPPU all increased. Revenues from Japan increased by 14% year-over-year driven by the growth of Blue Archive and a contribution from TalesWeaver: SecondRun despite revenue decreases from FIFA MOBILE, TRAHA and V4. Revenues from North America and Europe decreased by 6% year-over-year due to revenue decreases from Choices and Blue Archive despite the growth in MapleStory. Revenues from the Rest of World increased by 25% year-over-year driven by the growth in MapleStory M and contributions from new games. Next I'll review our FY 2022 full year results. We achieved record-breaking revenue in FY 2022 driven by the growth in existing games backed by the strength of our live operations and the launch of new games. Group revenues for the full year 2022 were JPY353.7 billion, up 29% on an as-reported basis and up 19% on a constant currency basis. FIFA ONLINE 4 significantly grew driven by successful marketing as well as well-received events and sales promotions. It marked record-breaking full year revenue for the fourth year in a row. Dungeon&Fighter and MapleStory, which experienced decreases in active users and revenues in 2021, showed signs of recovery in 2022 and increased revenues year-over-year as we strengthened our relationships with players and increased the volume of content and events. As a result, overall PC revenues grew by 24% year-over-year. As for the mobile business, revenues grew by 41% driven by significant contributions from Korea Dungeon&Fighter Mobile and HIT2, which launched in March and August 2022 respectively. Operating income was JPY103.7 billion, up 13% year-over-year on an as-reported basis and up 2% year-over-year on a constant currency basis as the increase in revenues was larger than the increase in costs. HR costs increased year-over-year, primarily due to recruitment of staff for development of new games as well as bonuses for outstanding financial performances from our games. Marketing expenses also increased, primarily due to promotions for new game launches. While operating income was up year-over-year, net income was JPY100.3 billion, down 13% on an as-reported basis and down 21% on a constant currency basis. The year-over-year decrease in net income is primarily due to a comparison with last year when tax expense was at the low level due to recording of additional deferred tax assets on overseas subsidiaries. Also, we recorded valuation losses for investment funds, bitcoins and affiliates due to changes in the market environment. Moving on to our FY 2023 first quarter outlook. In Q1 2023, we expect our three major titles, Dungeon&Fighter, FIFA ONLINE 4 and MapleStory to continue to grow year-over-year. We also expect good contributions from HIT2 and KartRider: Drift, which we started pre-season in January. Consequently, we expect record-breaking quarterly revenues in Q1 2023 in the range of JPY116.7 billion to JPY125.6 billion, representing 28% to 38% increase year-over-year on an as-reported basis and a 19% to 28% increase year-over-year on a constant currency basis. We expect our Q1 operating income to be in the range of JPY45.3 billion to JPY52.5 billion, representing 18% to 36% increase year-over-year on an as-reported basis and 11% to 28% increase year-over-year on a constant currency basis. I'll discuss the details on this shortly. We expect net income to be in the range of JPY34.4 billion to JPY39.8 billion, representing a 15% to 1% decrease year-over-year on an as-reported basis and a 19% to 6% decrease year-over-year on a constant currency basis. The year-over-year decrease in net income is due to a JPY12.7 billion FX gain that we recorded a year ago. As you know, our guidance does not factor FX gains or losses. In Korea, we expect growth from our major existing franchises as well as solid contributions from HIT2 and KartRider: Drift, which we started pre-season in January. Consequently, we are looking for revenue in Korea to be in the range of JPY62.7 billion to JPY67.2 billion, representing a 31% to 40% increase year-over-year on an as-reported basis and a 20% to 29% increase year-over-year on a constant currency basis. As for the PC business, we expect our three major titles, FIFA ONLINE 4, Dungeon&Fighter and MapleStory to maintain their strong momentum from Q4 2022 and to grow year-over-year. We also expect an initial contribution from KartRider: Drift, as its pre-season started on January 12 with the grand launch on March 9. Regarding the mobile business, we expect Q1 revenues to increase year-over-year. We expect contributions from HIT2 and KartRider: Drift. In addition, we expect year-over-year growth in FIFA MOBILE. We expect these to be partially offset by year-over-year revenue decreases in older mobile titles. Turning to China. We expect revenues from our China business to be in the range of JPY39.3 billion to JPY42.4 billion, representing a 32% to 43% increase year-over-year on an as-reported basis and 25% to 35% increase year-over-year on a constant currency basis, driven by the anticipated increase in Dungeon&Fighter's revenue. For Dungeon&Fighter, in Q4 2022, we saw a turnaround in the number of active users, which increased year-over-year. Under this positive trend, we introduced the Lunar New Year update on January 12. We expect revenues to grow year-over-year driven by the excellent start of the Lunar New Year update accompanied by strong sales of the avatar package. Throughout 2023, we will continue to focus on promoting communication with players to stably operate the game. In Japan, we expect revenues in the range of JPY2.7 billion to JPY3.0 billion, representing a 3% decrease to 8% increase year-over-year on an as-reported basis and an 8% decrease to 3% increase year-over-year on a constant currency basis. We anticipate contributions from new games and growth in Blue Archive to be offset by decreases in older mobile titles. In North America and Europe, we expect revenues to be in the range of JPY4.8 billion to JPY5.2 billion, representing a 2% to 11% increase year-over-year on an as-reported basis and an 8% decrease to flat year-over-year on a constant currency basis. We anticipate contributions from new games, including KartRider: Drift to be offset by decreases from MapleStory M and Choices. We expect revenues in the Rest of World in the range of JPY7.2 billion to JPY7.8 billion, representing a 22% to 32% increase year-over-year on an as-reported basis and a 12% to 21% increase year-over-year on a constant currency basis. While we anticipate contributions from new games, including KartRider: Drift, we expect these to be partially offset by a decrease from MapleStory. In Q1 2023, we expect operating income to be in the range of JPY45.3 billion to JPY52.5 billion, representing a year-over-year increase of 18% to 36% on an as-reported basis and a 11% to 28% increase year-over-year on a constant currency basis. An increase in revenue is expected, which will contribute to an improvement in year-over-year operating income. However, compared to Q1 last year, we expect increases in costs due to business growth. First, we expect increased royalty costs due to revenue increases in FIFA franchises and a contribution from KartRider: Drift. Also, we expect increased PG fees due to revenue increases in mobile titles. Since KartRider: Drift is developed by the joint venture, royalties to them will be recognized following the launch. Second, we expect increased HR costs related to additional headcount for the development and operation of our major games as well as an annual salary hike. Third, we expect increased marketing expenses primarily associated with promotions for new games such as KartRider: Drift. Lastly, we expect increased other costs under COGS and SG&A in relation to outsourcing costs associated with new game development and cloud service costs due to mobile business growth. Operating income is expected to increase year-over-year as we anticipate the increases in costs due to business growth to be more than offset by revenue increase. Overall, in Q4 2022, we saw increases in user engagement and active users in our three major titles driven by our strength in live game operations. This positive trend continued into Q1 2023, and therefore, we expect revenues from these titles to increase year-over-year. In addition, the development of new games is progressing well. KartRider: Drift started its pre-season on January 12 and is scheduled for grand launch on March 9. We plan to reflect player feedback during the pre-season as well as even after the grand launch and to focus on maximizing player experiences through communication. For Embark Studios' first title, THE FINALS, we plan to conduct a beta test in Q1. In addition, we are preparing for the launch of multiple new Virtual Worlds. We believe that NEXON could grow our business in the long-term by layering these titles on top of our strong revenue base. On the other hand, lastly, I would like to make some comments on our short-term outlook. First, last year, while revenue in the first quarter grew just 3% year-on-year, it grew roughly 30% to 50% from Q2 to Q4 respectively, which means we will face high hurdles for the rest of the year. Secondly, we focus on long-term growth over short-term financial performance and we sometimes scale back our short-term monetization strategy to sustain long-term strength in our titles. Finally, unlike traditional games, we gradually grow our Virtual Worlds following their launch as we nurture the user community and enhance player engagement. We think it's important to consider these three points when considering our business from the second quarter onwards. Last, I would like to provide an update on the shareholder return. Based on our 2022 shareholder return plan, we plan to pay year end dividends of JPY5 per share to shareholders recorded on our shareholder registry as of December 31, 2022. We will continue to pay the semi-annual dividends of JPY5 per share in 2023. As of the end of January, we have completed approximately JPY24.7 billion of our 3 year JPY100 billion share repurchase policy that we announced on August 9, 2022. We expect to have completed JPY50 billion in share repurchases by April 2023. As for the remaining JPY50 billion, we plan to complete the rest of the repurchase authorization after May 2023 and by August 2025 at the latest, by considering several factors, including investment opportunities, financial conditions as well as the market environment. Thanks, Uemura-san. To summarize our thoughts, in the face of a very difficult global economy, NEXON has never been stronger or its future brighter. We grew 49% year-over-year in Q4 and we expect to grow 28% to 38% year-over-year in Q1. NEXON teams around the world are clearly firing on all cylinders. But as happy as we are by our results, we think there's an additional factor at work that is vital for investors to understand. The business of NEXON is commonly misclassified as games, as if making casual games or single-player RPGs is similar to making and marketing online Virtual Worlds. It's not. We operate a different category of the entertainment business altogether. This legacy misclassification is a trap for analysts. But since so many market participants use legacy mental models, there is a significant opportunity for the analysts who uses an updated set of tools. So what do we mean by the category of Virtual Worlds? First, we obsess about the time spent in a game over what a user pays us in an individual month. Second, we focus on assembling a community of dedicated players over near-term monetization. We'd rather miss our quarterly revenue forecast for the game than hurt the economy -- excuse me, hurt the community. We have made this decision many times in the past and it has served our shareholders extremely well. Third, over a period of years, a successful Virtual World will have ups and downs over the short-term, but we will see through those near-term fluctuations to achieve our objective of growing a community of players who are highly engaged. Fourth, player lifetime in a Virtual World is indefinite, spanning years, and in some cases, decades. In our world, a whale is not someone who spends a lot of money in the near-term, it is someone who is highly engaged and has a large and active network of friends in their chosen Virtual World. Finally, a concentrated portfolio of well-run Virtual Worlds may double revenues in the period of a few years without launching a single new game. Very few people understand this. Now why do we take this approach? We see ourselves as investors, not as traders. As investors, we look for compounding growth over the long-term. Our objective is to make NEXON a strong, resilient business. So what does this mean for you the analyst or investor? Our view is that it's best to start over and recognize we're talking about an entirely different industry, one that has similarities to the game business, but is in fact operating from a different set of principles. One example of where to start over is the game lifecycle fallacy, where a game starts, grows and then dies in a relatively predictable pattern. That pattern does not apply to a well-run Virtual World. A second useless analytical fallacy is the focus on timing of product launches to predict revenue. Again, this matters a lot in the games business, but is of very limited use in Virtual Worlds. So what should you do instead? Here's how we think of NEXON in the coming couple of years. Our base of live Virtual Worlds has proven again and again to be very solid. Within any quarter, some will be up and some will be down year-over-year, but we believe our portfolio is anti-fragile and serves as a stable base of revenue and profit in the coming years. On top of that base, we then have 8 major projects in the pipeline over the next 18 months. If one hits, we're looking at another year of strong double-digit growth. If two hit, we're a whole different company. We don't know the exact timing of most of these launches, but that doesn't affect your investment decision much because the impact of whatever month they launch will be dwarfed by the performance in following quarters and years. Net, we see our business as an asymmetric opportunity with limited risk to the downside and much opportunity to the upside. We have in fact designed it that way. We expect you to come to your own conclusion on how to forecast the NEXON business, but it's important for you to see the business through our eyes so you can make more informed decisions. Thank you, Owen. Next, we would like to open up the lines to live Q&A. Q&A session will be conducted with Japanese-English or English-Japanese consecutive interpretation. Please be noted that interpretation will come between your questions and our answers. Please hold for interpretation before you hear our answers. Our answers will also be followed by interpretation. So please hold until the interpretation finishes before moving on to the next question. For those of you who have more than one question, we will take your questions one-by-one. I have several questions. So I would like to pose you the first question, which is on China situation. I would like you to add more color to the situation in China, especially around China Dungeon&Fighter. You mentioned that you are seeing an increase in the number of active users, which means that you have once again built a solid revenue base of China Dungeon&Fighter. And having said that, in your materials, you stated that you are emphasizing the stability of the community and operate accordingly. So when you look at the situation in China in 2023, especially around Dungeon&Fighter, do you think that FY '23 will be the year for investments or do you think you will be able to gain revenue from Dungeon&Fighter more than ever before or do you think year 2023 will be both, i.e., investment and generating revenue? So can you give me the full picture of what will happen in FY 2023? I will answer about the details of China Dungeon&Fighter. As I have mentioned in my previous briefing, we believe that we have bottomed out in Q1 of 2022. And then afterwards, we were able to see the steady improvement of this title throughout the last fiscal year. And under the new leadership, in particular, we emphasize communications with the players and increase the frequency in which we have dialogues with the users. And as a matter of fact, Korean developers actually directly got in touch with Chinese users, so we were able to understand what are the needs and wants of the users in China. And we had implemented those feedbacks into the improvement we made in the games. And I will give you some particulars of what kind of improvements we made. Firstly, for example, we included mechanism, which will enable the players to grow more easily than before. And secondly, we made the game more action oriented. And with those two endeavors as examples, drove our steady improvement of this title in 2022. And that improvement became very conspicuous in Q4 of 2022. And fortunately, we are seeing the continuation of such momentum in Q1 of 2023. Now, talking about the outlook for FY 2023; I mentioned that we were able to see the gradual growth of this game in Q1 of 2022 and therefore, when you try to compare the result of FY '22 Q1 vis-a-vis that of FY '23 Q1, the hurdle is not that high. And so we will continue growing this fiscal year, but please do not apply the growth rate that we are seeing in Q1 for the rest of the quarters of FY 2023. We gradually made improvements in Q1 of '22, and that momentum further increased throughout Q2 to Q4 Therefore, the comp between the sequential quarters will be very high. And as Owen mentioned in his remarks, we as a company emphasizes longevity. Therefore, we do not just look at the short-term revenue or growth. And so going forward, as far as China Dungeon&Fighter is concerned, we are going to work on the steady operation of this title. My next question is once again on China. I know that you were able to get the regulatory approval of MapleStory M. And this title is very popular in Korea, whereas I do not think that is necessarily the case in China. Having said that, I have three questions. Firstly, on will be the launch timing? And secondly, how much marketing investment you plan to make? Thirdly, what is the expectations of the management towards this game in China? It is indeed true that we were able to get the approval of MapleStory M in China. But as far as the launch timing or what kind of marketing investment we will be making, we do not have any definitive information that we can share with you today. Talking about the expectations towards this game in China, needless to say, we do not think that China users will be in the same magnitude as that of the ones we have in Korea. But having said that, we still do have some amount of plans surrounding Maplestory in China as well. As you know, we already have MapleStory PC version in China. And China itself is such a big market. So the management does believe that we can expect to some extent the success of MapleStory M in China as well. But again, once we know the details of the launch and other matters that you have mentioned, we will disclose that as soon as those details are finalized. I have two questions. One is on FIFA and the other is on KartRider: Drift. For FIFA Online 4, we've seen very strong trends starting beginning of actually 2022. And looking at some of the PC Cafe stats, it looks like that strength is still continuing this year. Yes, I understand that the World Cup probably played a factor in it, but it does kind of seem that this improvement in revenue seems a lot more structural. And hence, I kind of wanted to get some sense as to why looking back, the company feels that this game has done so well recently. And whether it's part of the overall trends for FIFA Online in other countries or whether it's something a bit more specific to Korea? That's my first question. My second question is on KartRider: Drift and looking at -- I know it's still pre-season. It seems like in terms of the game dynamic, no pay-to-win, no random [indiscernible] kind of system. And please correct me if I'm wrong, but it seems like it's obviously making it easier to cater to some of the western gamers who have not tried this. Can I get maybe some thinking of how -- what kind of I guess, end state, you're kind of aiming for this game. I know you're -- it's fully cross-play and obviously, you're expanding to other geographies. But obviously, it sounds like it's going to be a lower monetization-based game. So I kind of wanted to hear some philosophy of where the company is trying to take this over the longer term. So thank you very much for your question. Allow me to answer your first question on FIFA Online 4. And as you mentioned, it is very true that we are finding a very good performance at this moment. And that is why for the past quarters, we have always been able to mark record high. And certainly, we do believe the World Cup did have a good effect to that. And of course, we had been preparing ourselves to make sure we'd be able to materialize the momentum. But then what is really crucial is something that we already mentioned in operating Dungeon&Fighter. In other words, we believe it is crucial that we always have communication with the users so that we'd be able to invigorate the community. And at the same time, we need to make sure we have good seasonal updates that matches the needs of the users. And I think that is very crucial in operating PC online games. So again, it's really about daily operations and to make sure we have the good content update on appropriate manner. And theoretically, that is what is supposed to give you a long-term growth. And on top of that, we now have the tailwind of the World Cup, and that is why we're seeing this very good performance. And on top of that, we did really well on the marketing promotion. So all of these multiple factors is what created this very good performance of FIFA and we're still seeing the good momentum continue to today. But with that said, we cannot deny that 2022 was a particular year where we were able to enjoy the contribution from the World Cup itself. And so in 2023, we do not want to be that bullish. We would not be surprised if we started to see the numbers start to turn off from what we have been seeing. So that's something that I'll be able to comment. And also when it comes to operations in other countries that's not something that I would be able to comment because that's not something that we'd be doing. Seyon, this is Owen. I just want to add to what Uemura San said, and then also answer your second question about KartRider: Drift. I think another way to sort of frame what he said is what I referenced in my prepared remarks, which is there's probably three factors in addition to World Cup providing a tailwind, I think there's three factors at work that are providing satisfying long-term performance here. Obviously, the product -- the core product itself is very, very good, and it's very unique in the market. That really matters. And really that in combination with how the team is operating the game is a very big deal. That's number one. Second, the tech stack that we've developed over time has helped us a lot. And then third, I'd say, sort of our approach, our overall management and operating team approach to taking a long-term view on how to build the community over time, which seems obvious, but it is in fact, hard to do in practice. That's -- those things have all compounded over time that is provide a longer-term support for the experience for the users and therefore the performance of the game. But just to make a point that leads into the KartRider question, I think one of the key things is it starts by being a great game. I mean the core game and our partnership with EA, it's very satisfying to work with a partner like them who are making a great game. So that would be the point number one. That would be the most fundamental point of all is the great game experience. So that leads to a question on KartRider and I think your -- the core of your question is how do you see that developing over time, if I understand that correctly. To answer your question, I want to go back to what the fundamentals are of KartRider: Drift. Let's remember what the kind of key pillars of the game are. Number one, it's free. Number two, its cross-platform, that means PC, mobile, meaning iOS and Android and console, meaning PlayStation and Xbox. So it's cross-platform. It's online from the ground up. So it's got very sophisticated things like matchmaking and community building for online. And then fourth is about customization. And customization doesn't really matter so much if it's an offline game, meaning if you're playing with -- by yourself or with one or two other players, but it matters immensely in a Virtual World. If you think about a Virtual World is like a virtual city. And if you never go out of your house, it kind of doesn't matter what you wear every day. But if you go into a city and you're surrounded by other people, it matters a lot what you wear and people really self-express through what they were. Well, the same thing happens in the Virtual World. So with that as background, I'll stop there and allow for translation and then get to the point of your question. So, during the pre-season, just getting back to the core of the game, during the pre-season I've been playing a lot of the game and more importantly, talking to a lot of players through Twitch and other forums, pretty much daily. And each of them tells me -- talks about the game and talks about one or more aspects of the four pillars that I just told you. I ask them if they like it. Are they having fun? And they'll say, yeah, it's great because the online of it is so terrific -- or yeah, I really like customizing my card or certain aspects of my character or yeah, it's great that it's free. And I'm really looking forward to the console version being out. I'm really loving playing it on whatever platform. And it's great that we're all playing together. They mentioned one or more of these aspects. And fundamentally, what they're saying is that it's a really great game. They really enjoy participating and playing in this Virtual World. So at that point, what our key job is, is to build a community over time. That's what it's all about. And it starts by being a fun experience and then what -- which is very, very important. But what it really does is it's redefining the whole category of Kart or racing games. And it sort of takes the concept of a Kart or a racing game and brings it into the world of Virtual World with these several key features. And we think that, that's something that is a great basis to build a large Virtual World over time, very much along the lines of what we did over time with FIFA and what we did over time with the first generation of KartRider and what we've done so many times before. So we think it's got all the core ingredients to build over time; a strong, robust Virtual World. I hope that answers your question. Thank you very much for your presentation. And I want to refer back to what Owen has mentioned a few minutes ago about Virtual World. And I have one follow-up question around that. I fully agree that your business is based on making constant improvement and to build a long-term community. And I remember you mentioning using the analogy vis-a-vis the theme park. And I fully agree with you that Virtual World is akin to theme park. But when you look at the real tangible physical entertainment world, you have to understand that we only have one body. And if people tend to go more towards the Virtual World, the tendency of people is such that we be feed back to the entertainment that is being provided in the real world. And I think that, that has been this issue that digital entertainment industry has been facing so far -- and you've talked about the probability of coming out with 10 million virtual cities. And once those 10 million virtual cities are being built, one by one, the later you come into the game and the hurdle, I believe, will get higher because as I mentioned before, we only have one body. So there will be a limitation in the number of virtual cities or virtual communities that you as an individual can belong to. And I think it all boils down to the balance that you have mentioned. So I want to know how you plan to embrace the players in your Virtual World? And how do you plan to strike the good balance? So can you give me some tangible ideas about what kind of strategy you plan to pursue in growing your Virtual World? Sure. Thanks for your question. It's certainly a very, very interesting question, and we could probably spend several hours talking about that question alone. But if I understand the core of your question, I think what you're saying is we only have limited time in a day, and people tend to revert to their physical life in their entertainment life. Look, what I -- I don't think that, that has proven to be the challenge for the industry. The challenge for the industry is as an industry if you look -- and I say this as a consumer, as a game consumer, if a Virtual World is really entertaining and if someone -- if I've got lots of interesting things to do in that Virtual World, I will definitely play that game. And if the game is -- if that Virtual World is undifferentiated, it looks like everything else, it becomes uninteresting over time; I won't. And so much of what we do or what the industry does is create things that are very similar. And yet, what we find over and over again is when there's innovation, when there's new types of experiences when we bring a high-quality product to market, people immediately start gravitating in very, very large numbers. And through the history of the last 20 years, we've seen this over and over again across not just Virtual Worlds, but games. And so it's really -- and I could name Virtual World from NEXON, I could name games and Virtual Worlds from other companies over and over again where that has been the case. And then people get blown away. People get so surprised by how many people end up playing and how many hours they end up playing. So to us, it really comes down to a question of quality. And if we deliver a great online experience to customers, they will definitely play. Their playtime will be indefinite. They will keep coming back to that Virtual World for years and, in some cases, decades. And the management team -- we're all gamers and our personal experience has certainly borne this out. The experience of our kids has borne this out. We've seen this among our friends, and we think the industry has borne this out over and over again. So if that is gets to the crux of your question, I hope I'm understanding your question correctly. But what I would summarize is it's about meaningful differentiation and meaningful quality. And if we deliver those things well, we find that that online games especially Virtual Worlds are incredibly compelling form of entertainment. Well done on a great quarter and guidance. On the costs, I wanted to ask about, in particular, HR costs in 2023, your guidance for 1Q is up JPY6.3 billion year-on-year. Can you talk a little bit about the rest of the year and how you think the costs will grow? And will it be moderate -- more moderate growth versus last year's growth? That's my only question. So thank you for your question. So your question was around our cost, especially HR cost. Now I do believe the circumstance that we are experiencing this year versus last is a bit different because last year, it was the time when we wanted to make sure that we'd be able to strengthen the pipeline that we had in line. And so for that, we wanted to make sure we have good increase in the talent that'd be able to look after it. And so this was an investment to make sure we'd be able to have the right number of people to look after these pipeline. But then this year, we are better -- we are in like getting better prepared for the launch of these titles now. And so when it comes to like the increase on the HR side, it will not be on the magnitude that we did last year. It's not going to be as much. But then, of course, with that said, we will keep on adding appropriate number of people if we find it necessary. And also another part of the cost, which you didn't ask, but it's about marketing, we do believe we will be spending more for marketing this year because, again, any title, any large title that we have high expectation, we do believe we need to spend marketing appropriately to make sure we'd be able to secure future growth. And so that is why for marketing, we are going to expect a cost increase. But overall, when it comes to our overall cost, we do believe that in 2023, we will be able to secure the same level of margin that we secured back in 2022. But with that, we do believe we will be spending costs accordingly. This is Owen. Just to add on to what Uemura San. So maybe helpful for everybody to sort of remember how our P&L works. Remember, we have, as I mentioned before, for existing live Virtual World, we have a very strong base of revenues, very stable. We also have a very stable cost base for those live Virtual World. That doesn't change much. But then remember, we have several major new products, new live -- or new Virtual Worlds that we're launching, which are really about, of course, development spend and about live operations in preparation for those launches. And currently, until those launch, we generate no revenues against those costs. But we've got real major ones on the way. But as those Virtual Worlds launch, we generate revenues and those revenues flow through our P&L and end up after those costs that we've been incurring, they end up as operating profit. So it's sort of a special time right now because we have several major new Virtual Worlds in production getting ready for launch. So it's important to remember that when you think about the long-term cost and how we're investing against investing towards our future business. This concludes the question-and-answer session. Mr. Kawai, at this time, I'd like to turn the conference back over to you for any additional or closing remarks. Thank you very much. And with that, we would like to end this conference call and allow us to take this opportunity to thank everyone for your participation. And if you have any further questions, please contact the IR team. You can contact us by e-mail, investors@nexon.co.jp. So thank you very much.

EarningCall_37

Greetings, and welcome to the Regency Centers Corporation Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christy McElroy, Senior Vice President, Capital Markets. Thank you, Christy, you may begin. Good morning, and welcome to Regency Centers' fourth quarter 2022 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Alan Roth, Executive Vice President, National Property Operations and East Region President; Nick Wibbenmeyer, Executive Vice President, West Region President; and Chris Leavitt, SVP and Treasurer. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by the forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and 10-Q filings. In our discussion today, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance. Our caution on forward-looking statements also applies to these presentation materials. Thank you, Christy, and good morning, everyone. Thank you for joining us. 2022 is a really good year for Regency, and we ended it on a high note with solid fourth quarter results on all fronts. Our strong performance is a testament to the quality of our shopping centers, the health and resiliency of our tenants and the hard work of our team. We enter 2023 with great momentum in our leasing pipelines fueled by strong tenant demand as we continue to have success growing rents across our portfolio. This persistent strength in the operating environment also continues to support the economics of our development and redevelopment projects. We look forward to further growing that pipeline over the next several years. At the same time, it is important to acknowledge that the challenging macroeconomic backdrop is bringing with it more tenant bankruptcies and early store closures, which have been relatively light for the last couple of years. But importantly, our exposure to at-risk tenants is limited. This is not by accident. It is a product of many years of intentionally cultivating our portfolio of neighborhood centers and strong suburban trade areas. And where we do have exposure, we see upside opportunities in getting spaces back and taking advantage of the strong leasing environment. Additionally, with inflation moderating, along with some stabilization in the capital markets, we believe we have more clarity on the impacts to our business from the economic environment than we did three months ago. These factors underscore our conviction in our 2023 outlook. Shifting to the private transaction markets, we are starting to see increased activity. Transaction volumes remain thin, but with financing markets stabilizing and treasuries reversing course, competitive bidding situations are returning for high-quality grocery-anchored centers. We believe this validates our portfolio and our investment strategy as shopping centers with a focus on necessity, convenience and value are more resistant to impacts from economic cycles. A couple of final thoughts before I turn it over to Alan. In addition to the stability and steadiness of grocery-anchored shopping centers, the open-air sector generally has really benefited from structural tailwinds coming out of the pandemic, lifting all boats with the rising tide. While we do expect those tailwinds to continue, we believe that 2023 can really shine a spotlight on Regency's attributes, allowing us to separate from the pack. These attributes include the quality and locations of our real estate, our tenant credit, our balance sheet strength and liquidity and the hard work and dedication of our amazing team. In our business, you win on the meaningful margin by making solid operating and investment decisions every day that generate steady and sustainable growth. It's how we create value for our shareholders and this is reflected in Regency's long track record of outperformance in cash flow and dividend growth. Thank you, Lisa, and good morning, everyone. The retail operating environment remains healthy, and we ended the year with another strong quarter. I'm really proud of our 2022 results. We had an exceptional year in leasing, helping to drive strong occupancy gains with our leased rate up 80 basis points and our commenced rate up 110 basis points over levels one year ago. Notably, our year-end 2022 same-property lease rate is back to our 2019 level of 95.1%. But make no mistake, we still have room to run and we aim to ultimately get back closer to peak levels of 96% or higher. The primary driver was our record year for shop space leasing ending the year up 200 basis points with our shop lease rate now 70 basis points above 2019. I am especially proud of the shop occupancy recovery considering the many challenges we faced during the pandemic. Our tenant retention rate remains above historical averages, bad debt as a percent of revenues is back to pre-COVID levels. And importantly, our GAAP and net effective rent spreads were in the mid-teens for the year due to our team's accomplishments of achieving initial cash rent spreads north of 7%, embedding contractual rent steps in the majority of our leases and maintaining our track record of judicious leasing capital spend. All of these positive trends and the progress we've made contributed to another strong year of same-property NOI growth of 6.3%, excluding COVID-related reserve collections and term fees. At year-end, our signed but not occupied pipeline of 230 basis points represents more than $34 million of annual base rent, giving us positive momentum into 2023. Importantly, as leases commence, we continue to replenish this pipeline with newly executed leases. We have seen strong tenant demand continuing in the New Year, and our LOI and lease negotiation pipelines remain full. Our most active categories include restaurants, health and wellness, veterinary, grocers and off-price. We are hearing from top national retailers that their appetite to expand outpaces the quality inventory available today which bodes well for Regency's high-quality portfolio. As we all know from recent headlines, tenant bankruptcies and early store closures will be more impactful as we think about move-outs in 2023. Among retailers that have recently filed for bankruptcy, Party City comprises only 20 basis points of ABR over 6 stores, and we have only one Regal Cinema, which is less than 10 basis points of ABR. In the context of Bed Bath & Beyond's recently announced store closures, at year-end, we had 11 stores comprising 60 basis points of ABR. We had one of those expire naturally in January, and of the closures announced last week, we had five locations on the list. Within our 2023 guidance range, we've embedded assumptions for credit loss associated with these bankruptcy filings and store closure announcements which Mike will discuss in more detail. But all of that said, we believe our overall exposure to at-risk tenants is relatively limited. Our current tenant base is healthier than ever as a result of being intentional in the centers that we own and thoughtful in our merchandising process. And whatever the outcome of the at-risk tenants, we feel really good about the quality of our real estate. Tenant bankruptcies are a normal part of our business. And to the extent we get stores back from underperforming retailers, we have opportunities to mark-to-market rents and upgrade the merchandising mix at our centers. To that end, our teams are already negotiating with replacement tenants at higher rents for all of the known closures. Thank you, Alan. Good morning, everyone. Last year, we successfully executed on our development and redevelopment strategy. Even with pressures from rising construction costs, we continue to achieve solid returns on our investments that will provide earnings accretion in years to come. To that end, we completed more than $120 million of projects with over $100 million of those completions in the fourth quarter. These include East San Marco, our public-anchored ground-up development here in Jacksonville. The property is 100% leased and outperformed original expectations on all metrics, including timing, cost and rents. Carytown Exchange in Richmond, Virginia is another public-anchored ground-up development. We split this project into two phases during the pandemic and recently completed construction on the second phase. We've had great leasing success at Carytown with tenants such as Torchy's Tacos, Jenny's Ice Cream, Burton's Grill and Starbucks. Preston Oaks is the redevelopment of an HEB-anchored center in Dallas. We were able to significantly upgrade the center in the merchandising mix by adding vibrant new shop tenants, including Mendocino Farms, Heyday and Everybody, and the property is now 100% leased. Out at Serramonte Center, we completed the first two phases of our redevelopment project during the fourth quarter. These phases included the interior mall renovation as well as the addition of Chick-fil-A and Starbucks outparcels. Future phases of this project, including the addition of two exterior buildings and the redevelopment of the former JC Penney space are expected to start in the second half of 2023. In addition to our completions, we've also made great progress on our in-process development and redevelopments, which totaled $300 million at year-end. Highlights include our Whole Foods-anchored Town & Country redevelopment in Los Angeles. We discussed this project in detail a quarter ago, but construction has commenced in the fourth quarter and demolition of the former Kmart building is nearly complete. Additionally, at our Glenwood Green development in Old Bridge, New Jersey, construction is on schedule with Target's anticipated opening later this year, and we expect Shoprite to open in early 2024. The team continues to do an excellent job of managing costs and keeping our projects on time and on budget. In total, we believe our accretive development and redevelopment program remains on track to deliver $15 million of incremental NOI in 2023 and 2024. Beyond our in-process projects, I'm really encouraged by the progress we're making growing our shadow pipelines. We're focused on building our pipelines through sourcing new ground-up development projects, new redevelopment projects through value-add acquisitions, as well as continuing to unlock redevelopment opportunities in our existing portfolio. We also continue to engage meaningfully with developers that are facing financing challenges, which could create additional joint venture opportunities. In totality, we have the key ingredients necessary to grow our program, including robust tenant demand, long-standing retailer relationships, experienced development teams in top markets around the country. Importunately, we have the ability to self-fund this growth with free cash flow. We believe the combination of these capabilities are unequaled, and we look forward to sharing additional details as we advance these opportunities. Thank you, Nick, and good morning, everyone. I'll take you through some highlights from our Q4 and full year results, then walk through our 2023 guidance and assumptions before ending with some color on our balance sheet position. Our strong performance last year was underpinned by growth in NOI and more specifically from base rent growth. Excluding the collection of 2020 and 2021 reserves, which I'll refer to today as COVID collections, we delivered same-property NOI growth of 5.8% in the fourth quarter and 6.3% for the full year. Again, most importantly, we saw a 3.6% contribution from base rent growth in 2022, accelerating to 4.8% in the fourth quarter. This growth in base rent over the last year has been driven by contractual rent steps, mark-to-market on re-leasing, increases in occupancy and commencement of rent from redevelopment projects. As Alan mentioned, our leased occupancy rate is now back to pre-pandemic levels, but our eyes are set even higher. COVID collections were about $2 million in the fourth quarter and totaled $20 million for the year. That's down from $46 million in 2021. During the fourth quarter, we converted another 2% of our tenants back to an accrual basis of accounting from cash, and as a result, recognized nearly $5 million of non-cash income from the reversal of straight-line rent reserves. We ended the year with 7% of our tenants remaining on a cash basis of accounting. For uncollectible lease income, in 2022, we were close to our historical average of 50 basis points on current year billings by nearly all metrics but for some limited exposure to higher profile potential bankruptcies, our in-place tenancy is about as strong as it's ever been. Looking ahead to 2023 and after excluding COVID collections, we are guiding to core operating earnings per share growth of close to 4% year-over-year at the midpoint. We'd like to point you to Slides 5 through 8 in our earnings presentation, which I'm certain you'll find extraordinarily helpful as you work through our outlook. We expect same property NOI growth, excluding COVID collections of 2% to 3%, which is the largest positive driver of earnings into 2023. The primary contributor continues to be base rent growth, driven by embedded rent steps, rent growth from new leasing and shop space commencement as well as the delivery of completed redevelopment projects. Importantly, our same-property NOI guidance range also assumes credit loss impact of roughly 75 to 100 basis points from anticipated tenant bankruptcies and early store closures, including from those tenants that Alan discussed. This credit loss impact includes an assumption that current year uncollectible lease income will be modestly above our pre-pandemic average of 50 basis points as well as the potential for occupancy to end the year flat to lower -- should bankruptcy-driven move-outs occur. Again, this range excludes any impact from COVID collections, which I'll discuss in a minute. As you think about reconciling NAREIT FFO of $4.10 last year to a guided midpoint of $4.07 in 2023. Remember that this metric continues to be significantly impacted by COVID era accounting adjustments, including the collection of rents previously reserved as well as the impact on non-cash revenues from converting tenants from cash to accrual. Our operating fundamentals continue to strengthen, as they have in 2022 and as they are expected to continue this year. And these pandemic-related items can mask our true growth in cash earnings. It's important to take this a step further this morning as these two items meaningfully impact year-over-year comparability. First, we are anticipating lower COVID collections of $3 million in 2023 compared to $20 million last year. And second, we are also anticipating lower non-cash revenues of $36 million at the midpoint in 2023 compared to $47 million in 2022. Please note that we increased our full year non-cash revenue guidance from $30 million a quarter ago to account for new information, including an assumption that we will continue converting tenants to accrual accounting in 2023, as well as the likelihood that we will recognize accelerated below-market rent amortization triggered by the potential for bankruptcy-related store closures. This is why we focus on core operating earnings, which strips out the noncash adjustments and also why we provide same-property NOI excluding COVID collections. With this added transparency, you can better see the underlying positive growth. Again, I encourage you to use the materials in our earnings presentation, as I'm certain you'll find it very helpful in evaluating these impacts. The good news is that we are fast approaching the point where these COVID-related impacts will no longer create meaningful noise in our reported results. To finish and to pivot from guidance, we feel great about how we are positioned from a balance sheet perspective with one of the strongest in the REIT sector at a time when it matters most. Our leverage is at the lower end of our targeted range of 5 times to 5.5 times debt-to-EBITDA. And we expect to generate free cash flow north of $140 million this year, self-funding our development and redevelopment commitments. While the financing markets have moved in our favor over the last 3 months, we have no need to access the capital markets this year. Our revolving credit line was undrawn at year-end, and we have no unsecured debt maturities until mid-2024. Our liquidity position and maturity profile provide us the ability to remain patient and act when we need and walk to. Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Michael Goldsmith with UBS. Please proceed with your question. Good morning. Thanks for taking for my questions. You have this nice chart in your presentation where you outlined the factors that drive your long-term organic same-property NOI growth algorithm of 2.5% to 3% to your 2023 guidance of same property NOI growth without termination fees or collections of reserves 2% to 3% is generally consistent with that. So maybe you can reconcile your long-term algorithm with what you're expecting this year. Where are the moving pieces? And just does that mean that 2023 is setting up as a Regency average year? Thanks. Good question, Michael. Thank you for that. Let me color that up, and I think you'll find that the algorithm still is intact. We are anticipating north of 3% growth this year and the also important base rent line item. And that's largely being driven by the tremendous activity that the leasing team delivered, and we highlighted on the call, 200 basis points of percent lease coming out of the small shop arena total, 110 basis points of commenced occupancy increases really driving good solid base rent growth. Rent steps are playing a contribution there. Rent spreads from 2022 into 2023 redevelopment contribution. So all of those elements as you highlighted in our algorithm are there. That being said, there are some items that are dragging us down in 2023, one of which is our credit loss reserve. So a touch higher on a sequential basis, 2023 over 2022. I spoke to that in the prepared remarks, we are accounting for and providing for the potential for bankruptcies, which would be in excess of what we experienced last year. And then there is a slight drag coming from the net recoveries line item as well. You may have noticed that, that spiked in the fourth quarter. It's been a little bit elevated for the year, and some of that won't recur going into next year. So on balance, I feel like the algorithm is still in place. Regency has set up extraordinarily well to deliver upon that growth profile. And we still have room to run from a leasing perspective and seeing that north of 3% base rent growth in '23 is a real positive identifier. And my follow-up is on the (inaudible) pipeline. Are you able to quantify how much is in there? And is that going to be realized by the end of 2023? Or is that a 2024 type of event? Let me start and if Alan wants to provide any color, he'll jump in. It's roughly $35 million of ABR. You can call that 4% of our in-place rents. So that's -- I'm speaking to the 230 basis points of SNO from a timing perspective, Michael, about 75%, 80% of that should be online by the third quarter of this year. And nearly all of it, in fact, by year-end, I think we're in the 90% area for year-end. Thanks. Good morning. So when you look at the inventory space that is left to lease across your portfolio, how would you describe the quality or leasability compared to what is currently occupied? Meaning there's always typically space in every center that's always harder to lease. So just trying to -- I'm just trying to calibrate our expectations going forward. Ki Bin, it's Alan. I would look to our pipeline to answer that question and tell you that it's still full with a tremendous amount of activity that's following on the heels of a really strong 2022 year. So -- by and large, as we said, at 95.1% leased, we're setting our eyes higher, and we believe we can and will get back to 96%-plus and the quality space that remains will certainly allow us to do that coupled with the great merchandising activity that remains in our pipeline. And as you've reached 95% and on your way to 96%, like you mentioned, what do you think that means for lease spreads going forward? I know it's not always linear, meaning the more you're occupied, the higher spreads you get, but just trying to understand that dynamic a little better. Yeah. I think we're shooting for high single digits is kind of how we look at that, Ki Bin. Feel again, really confident in doing that. But as you know, there's a lot of levers that also go into that cash rent spread and that includes embedded rent steps as well as our approach to how we spend our capital. And so collectively, again, I think we feel confident with the trajectory and the path that we're going down. Good morning. I realize it hasn't been that long since the Bed Bath store closure announcement, but I'm hoping you might have a few points of clarification. One is on -- you discussed higher rents, just curious how much higher? And then how many break backfills are you looking at versus demising and what type of downtime should we expect on those? Yeah, Greg. No fun to be talking about bankruptcies again. But we have 10 stores that do remain that represent 50 basis points of ABR. We have five stores that were on the closure list. And again, we feel really good not only about those five stores, but the totality of whatever may come of the Bed Bath portfolio. From a mark-to-market perspective, we think we're in the 15% to 20% range. And I think when you think about bankruptcies that have happened in the past such as Sports Authority, Toys "R" Us, Stein Mart, those were 40,000 to 45,000 square foot stores, and the Bed Bath stores are generally in the 30,000 square foot range. And so that really provides a much wider pool of interested users that, for the most part, will not require downsizes or splits, which again, I think will play a part in your capital question. We are negotiating deals for all of our known closures. And in some instances, we're even running what I'll call an RFP in the interest of appropriately managing demand and relationships. But time will tell. They obviously just recently announced that equity raise. So we're staying close to it, and we're staying active and aggressive on all of our spaces. Okay. And one follow-up on you mentioned the developers facing financing challenges and those who might end up doing deals with. I'm just curious kind of how big of an investment are you looking at on some of those assets? And how close are you to getting any of those deals done? Great question. This is Nick. As you can imagine, it's a wide range of investment. As you guys have seen the capital markets, especially for construction debt for local developers is effectively frozen. And so we are very well situated, as I mentioned in our prepared remarks, with our retailer relationships, combined with our impressive team around the country and clearly our available capital. And so -- we are, I would say, moving from coffee conversations that started 90 days ago into real dialogue and real negotiations and analysis of these opportunities. And so I do feel like it's the early stages, but the early stages are very important to growing a meaningful pipeline. And some of these projects that you could appreciate when you look at our historical development program of scale. So excited about it. Good morning, guys. Thanks for taking the question. Maybe, I guess, I've got two for you. Number one, maybe if we can get a little bit more detail on the $0.21 nonrevenue mark-to-market. And presumably, some of that is related to some of your troubled retailers. If you can give us a little bit more color on that and also in particular, what sort of mark-to-market opportunities would you have if you get some of the space back, and I'm particularly thinking about properties such as Buckhead Station, South Beach, University Garden, some of your properties that have some of this Bed Bath exposure. Sure, Floris. I think you're asking about the accelerated below-market rent associated with the potential to get back anchor spaces. So we do -- we have incorporated a touch of that income into our expectations. It is a fluid situation, as you know. And those -- what we have incorporated into our guidance is, call it, roughly $3 million or so of anticipated accelerated amortization. Those would be tied to what we believe to be the potential for the Bed Bath & Beyond scenario to play itself out in which we may get back those spaces. To Alan's point, I mean it's really a direct reflection of Alan's point that it's about a 15% mark-to-market opportunity on those units, which that below-market rent would indicate exists. And again, those original amounts were put up at the time of acquisition of the shopping centers and time will tell on the true economics where we end up. Great. And then maybe a follow-up, a little bit more. Obviously, your not all spaces created equally, your small shop rents are double your anchor rents typically. I note that your small shop occupancy, leased occupancy went up 60 basis points. Can you talk about your physical occupancy a little bit? And also maybe talk about where you see -- I know you've mentioned that total occupancy in the portfolio gets to 96%. Where can small shop occupancy go? Where was the peak in the past? Before Alan answers this question, I feel like I have to jump in and say I appreciate that you recognize that all space is not equal. And I would say it's not just from small shop and anchor all retail is not created equally, and high-quality space actually is very different and command, but much different rents than those of lesser quality. So I appreciate you making that recognition, Floris. I'll let Alan answer your question more specifically. Yeah. Really well said, Lisa. I think the only thing left to answer there, Floris, is where is the peak occupancy? And that's at 93% historically. And so we are at 92% on a shop occupancy perspective right now and again, as I said, we feel really good about kind of where our pipeline is and what remains in our ability to not only get there, but hopefully, we can exceed that. Hi, thanks for taking my question. I was wondering if you could walk through the assumptions behind base rent growth seeing that as the primary driver of 23% same-store NOI guidance. What exactly are you assuming for contractual rent in-place rents and then the commencement of rent from redevelopment? Or if you could just talk about your strategy on how you're balancing the Street? Sure. I'll walk through the components and Lisa or Alan may provide some color from a strategy perspective. North of 3% base rent growth, you got it right, and we're excited about that opportunity in 2023. It's really coming from a combination of several things, as I talked about earlier with Michael's question with respect to our NOI growth algorithm. So rent steps, that's the bread and butter of our growth profile. It's been a -- the positive contribution has been in the 140 basis point range for a long time, and we're trying with every lease to move that needle as we continue to embed higher and higher contractual rent increases. Rent spreads continue to be a positive contribution. You saw a 7%-plus outcome in 2022. That will translate to growth in '23. That will be in that call it, 75 basis point area. It depends on timing from that perspective on rent commencement from a delivery perspective. What we're really excited about is now that we're starting to contribute from a redevelopment perspective. We've talked about this $15 million of NOI that's coming online from our redevelopment and development pipeline. A lot of that is from the redevelopment pipeline. It will come through our same-property NOI growth line item. We strategically try to deliver 25 to 75 basis points of impact to NOI growth. I will say with this pipeline that we are delivering at this point in time, we should be at the upper end of that range. And then I made some comments in the remarks around our outlook for occupancy. We've made tremendous strides in moving that commenced rate in 2022. We will continue to deliver our SNO pipeline, hopefully, maybe even a little sooner in 2023. But now we're getting into the impact of the credit loss and the BK reserve. So that could be a bit of a dampening impact depending on how the bankruptcies play out over the course of '23. Those would be the contributing factors to face rent growth. Great. Thank you. Another follow-up, I was wondering what is included in your assumptions for the $65 million of dispositions baked within guidance at a 7% cap rate? Is this just based on what you're seeing in the market? Or is that kind of an estimated -- just an allocation for now? Thanks. It's specifically identified projects. They are actually a collection of assets coming from one of our larger JV portfolio. So that's -- we've long been a -- we've long believed in kind of culling the bottom of our portfolio, whether it's wholly owned assets or JV properties. It's one of the reasons why our exposure to risk is so minimal. It's just Regency's active commitment to calling on a limited basis, lower-quality, nonstrategic, lower-growth assets. So this -- the $65 million is just that specifically identified projects. Note the timing expectations there are an assumption that could move around. But it's just a placeholder for now on those identified projects. And I'll just add. I appreciate Mike's comments about that. We really do believe that a year like 2023, may really shine a spotlight on that in terms of making sure that we are proactively managing the quality of our portfolio. And we believe that, that really does fortify sustainable NOI growth over the long term. So while that disposition guidance did come with a 7% cap rate that as Mike said, that's a placeholder. We looked at last year's transactions and just added a little bit of perhaps market movement to that. But more to come, and we'll have more clarity as we move through the year with regards to that market. But again, it's an important part of our strategy and one that we remain committed to, and I believe has enabled us to deliver same property NOI growth at the higher end of the industry. Good morning. Just want to follow up on the transition of tenants back to accrual accounting from cash. I'm just kind of curious, as we sit here today. I mean, could you just give a little bit of color on what types of tenants you guys move back in the fourth quarter? And of the 7%, maybe what's the probability of moving more and where you think that 7% to move to by the end of the year or what's a more normalized level? Sure. Hey, Craig. So we're at 7% at year-end, as I mentioned in the remarks, and that's down significantly. I think the high watermark at the peak of -- in 2020 was 27% of our ABR. The answer to your question of who is that and what is that it's largely just a reflection of who was originally. And that is small shop tenants, more local credit, personal services. It actually has a bit of a West Coast bias to it now because those are the tenants who are -- who kind of came out of the impacts from it later. And there being very specific requirements that we've set up internally to qualify for conversion. So current on all rent no same deferred billings, and have been current for a period of time around nine months or so is what we anticipate. So they're meeting pretty strict hurdles. And I mentioned on the call, we're extraordinarily satisfied with the quality and health of our tenancy at this point in time. To your point on 2023, we have included about $2.5 million of conversion forecast into our expectations. That is worth about 2% of ABR. So another 2% brings us down to the 5% area. That is probably in the ZIP code of where we -- I think we settle out from a cash basis tenancy perspective. A touch higher than if you were to look over our shoulders years ago, and it's a touch higher than that. But I think 5% given the new standard with respect to the accounting for that impact is about in the ZIP code of where we'll be. That's helpful. And then separately, maybe Lisa going back to your commentary of better visibility today than three months ago. Could you just give a little bit of color on what aspects of the business you feel like you have more visibility on today, whether it's leasing, you talk about the transaction market a bit, tenant credit? And also, I'm just kind of curious, if you were forced to give guidance three months ago versus today, what -- directionally kind of where we sit today versus three months ago? Answering it first, it's all of the above. It's actually everything that you pointed to. It's another three months of building the leasing pipeline. It's another three months of seeing how our tenants are performing with sales continuing to rise and at our restaurants and our grocery stores. It's three months of prior -- three months ago, we were seeing literally no activity in the transaction markets, and those are starting to fall, and we're seeing high-quality properties come to the market. And as I mentioned in my prepared remarks, competitive bidding situations for the types of properties that we want to own. So it's really all of the above that is just giving us that confidence. I'm looking at Christy and Mike, to make sure that I can answer this question. If I was forced to give guidance thee months ago, I would say it would be similar to what we just did. I just have a lot more confidence and conviction today than I did 3 months ago because of all the reasons that I just stated. Hi, thank you. Maybe a question for Mike. I was just hoping you could maybe delve a little bit into the expense recoveries that you noted were elevated in the fourth quarter and for the year and how that changes or morphed a bit into '23? Sure. Yeah, and you can see the impact in the supplemental, and I appreciate you asking the question and pointing that out. It's about a 160 basis point positive impact in the quarter alone. It is diluted down for the full year to 30 bps. So there's some seasonality actually in that line item in the fourth quarter. We do -- the billings from a recovery perspective in that quarter tend to be on the higher end of the recovery ratio side. You can think of expenses like snow removal, like real estate taxes that just have a bit of a higher collection rate. Another component, it's really a lot of little things, Juan, and I'm going to go through some of them. But one of the larger drivers is also a bit unique. Going back to the Equity One merger and Prop 13 impacts, it took remarkably long for the municipality to get through the supplemental tax billings. And those billings ultimately were expensed as incurred, but then collected later and now you're bringing in some cash basis tenancy impacts here as well. So thankfully, and gratefully, we've collected all of it in 2022. Some of that being accelerated into the fourth quarter so that's causing a bit of the bump as well. So it's really a combination of those 2 things driving that outsized impact in the fourth quarter. I feel really good about our collection rate. We're in that 85%-plus area from a recovery rate perspective. I would anticipate that holding steady into 2023 as you think about your model. Great. And then just maybe a sensitive question, but on Amazon, what do you guys think from them across Whole Foods and their other brick-and-mortar concepts with regards to demand for space, appetite for new stores the lack thereof and how you're using your space? And is there any signs of weakness there with regards to foot traffic versus other grocery concepts? Juan, I appreciate the question. So look, they're still performing really strong in our portfolio. We have a great relationship, given the abundance of Whole Foods stores that we have in the portfolio. They're expanding, as maybe Nick can touch on a bit in terms of his discussions on new stores and how they're looking at that with our conversations. But foot traffic is certainly coming back with them, and they remain a great retailer that we really love merchandizing around in terms of the totality of our assets. Yeah. Juan, I would just add, as Alan alluded to, there's just -- there's a lot of demand from a lot of our grocers right now to continue to expand around the country. And so that's a lot of what's driving our excitement about future development opportunities is key grocers such as Whole Foods do want to expand. They're performing really well, and we're excited about continuing to grow our portfolio with them and others. Good morning. I guess a question on the bad debt assumptions for the year. How much of the 75 to 100 basis points is tied to known situations like Bed Bath & Beyond? And how much more cushion is there in that number? Sure. Anthony, it's Mike. Let's talk through maybe scenarios is how I like to think about it from a midpoint, low end and high end. And also, when we think about credit loss reserve, I think it's important to remind everyone, that's a combination of uncollectible lease income or bad debt expense, together with the impact on base rent that could come from a rejection of a lease in the bankruptcy. So it's a combination of base rent in assets as well as the expense line item. From a scenario standpoint, let's start with the midpoint and go from there. We are anticipating what I would call more of a classic reorganization scenario at the midpoint of our range. So in the middle of that 75 to 100 basis points. And by the way, that 75 to 100 is really encapsulating the top to bottom. So a classic reorganization, Alan gave us some intel and some clarity on what stores have been identified for closure at least. That does not mean that they've been identified for rejection. Nothing's happened at this point. But that scenario would be in the midpoint. You can also be certain to know that a full liquidation scenario of this name would be captured by the low end of our guidance. So we are very comfortable that even with a relatively -- soon to follow filing if that were to happen and a relatively quickly paced liquidation process, we are pretty comfortable here that the low end of our range would capture that scenario. And then the -- and then I'd say, I'd actually extend that midpoint scenario into the upper end. So what may be an unlikely scenario that a lot of good happens and Bed Bath is if there are no closures at all and that they continue as a going concern, frankly, that would be a little bit of an upside to our guided range. Now also recall it's credit loss, so there's bad debt expense. I mentioned in the call, we are a little bit of an increase with respect to 2023 outlook versus 2022 actual performance. So just a little bit more cushion in the plan from a classic bad debt expense perspective. And we'll see how the year progresses. I feel really good, again, about our tenancy, feeling really good about the quality of our merchandising but we all are aware of what potential headwinds there may be out there. And maybe one more on acquisitions. I think, Lisa, you mentioned that you're seeing more bidding processes play out. How do you view your potential to be acquired this year of assets given what you see in cap rates, transaction volume, your own cost of capital? I'll just point to our balance sheet and the fact that we're generating $145 million of free cash flow. We do have development spend. But even we are able to access the debt markets and to the extent that we leverage that cash flow, even staying leverage neutral within our strategic net debt-to-EBITDA targets, that gives us investment potential north of $200 million. So we are positioned to be active. It has to be the right opportunity. And you all probably get tired of hearing me say this, right? If it checks the three boxes, we will be active. If it's accretive to earnings, accretive to our future growth rate and accretive to our quality, we're poised to act. Hi. In your slides, you talked about five redevelopments that could start over the next, I think, it's like 12 or 12 to 18 months. Just wondering, how should returns on those look compared to what's already in process today? Thank you for the question, Mike. The simple answer is very similar to what we've seen historically. And so our target returns on redevelopments have not changed materially. And so when you look at our ones that we've recently completed and are ones that are in process, we're targeting similar returns for our future redevelopments. Got it. Okay. And then, Mike, I know there are a lot of moving parts with the ins and outs of occupancy. But what does guidance assume for the year and commenced occupancy level? I like to think about it in two layers, Mike. And it all kind of -- it's -- I'll summarize as to what I said in the call that it's flat to slightly negative if the bankruptcies were to appear. But when I think about our lease -- our base leasing plan. And again -- and if I think about the SNO pipeline and the fact that we're going to deliver that pipeline, that's a rising level of percent commenced, and that is what's driving that billable base rent line item. However, when you layer in the possibility of bankruptcies, that could lead us in my midpoint scenario to a flat to maybe slightly negative outlook for percent leased. So there's a lot of good news in that occupancy outlook but there's also the potential for some vacancy to come back our way. Not afraid of it to Alan's comments really excited and actively working on re-leasing that space today. But that would be the best outlook on occupancy. Hi, good morning, everyone. Lisa, thanks for your comments around how you're thinking about acquisitions. You guys also made some comments about the redevelopment pipeline. I'm just curious, just kind of given freshness cost of capital today. How do you guys kind of think about prioritizing or accelerating one versus the other acquisitions, development, redevelopment and as well as share repurchases? That prioritization has not changed. The best use of our capital has been and will continue to be the developments and redevelopments. We get the best returns. We have a really successful track record of delivering our underwriting and the underwritten returns that we disclosed to you, which are clearly a premium over competitive bidding acquisition market. At the same time, we do have the capital to invest, as I just stated. And if we are able to check those boxes of accretive to earnings, accretive to quality and accretive to our future growth rate, then we will invest in high-quality shopping centers as well. We've been successful with that. We had quite an active -- really the past two years, we've been successful in closing on shopping centers that check all three of those boxes, some off-market and one or two that were actually competitive bidding as well. And share repurchases, we've had the opportunity to take advantage of what we believe to be a significant dislocation in the market a few times in the history of Regency, and we will continue to use that arrow in our quiver when the opportunity presents itself. Good morning, and -- so transactions are spars and having a retool on pricing, it's more difficult than it was before, but there are still hundreds of millions of dollars of exchanging hands. So what in your assessment of how pricing for your product has changed since, let's say, the peak last year? I'm going to Paulina, going to -- I'll let Nick handle this as he's -- again, we haven't been active, as you've seen from the results as I said, the market is falling, transaction activity is still pretty thin. But Nick's team is the one along with Barry Argos are really kind of farming those opportunities. So I'll let Nick address that. Appreciate it. Thank you for the question, Paulina. I don't have a lot to add. As Lisa said, there just aren't specific data points we can point to yet. However, we do expect here in the next 60 to 90 days as some of these transactions that have come to market and we are seeing real competition for them. There's solid demand for our type of asset, high-quality grocery-anchored assets around the country can continue to be in demand from investors. And so -- we do expect to have some specific data points here in the next, call it, 60 to 90 days as some of these deals close. But we're expecting those to be -- to highlight the quality of our assets. And can you characterize point to a specific segment of investors that are back at the table that have regained confidence? Because we also hear a lot of institutional investors that are selling product and need to sell product today. So how can you characterize the demand at the margin that you are seeing coming back? Again, great question. And again, as these deals close, we'll be able to point to specifically who the buyers were, but what we're seeing and hearing as these -- as our team continues to underwrite and talk about specific transactions is it's really broad-based. And so it's institutional investors around the country. And so as much as we're seeing broad-based in the sellers, we're seeing broad-based and the buyers. And so I can't point to a single institution that's the buyer or the seller right now. It's broad-based in both respects. And if I can, last one, hopefully short. Where do you think that the CMBS market is for grocery anchored centers today? Paul, it's Mike. Hard for us to tell. We're not really a CMBS user. So I'm not as -- as close to or familiar with that market day to day. I will -- for our product, grocery-anchored neighborhood shopping centers that are very resilient, have great quality rent rolls with underwritable tenant credit. I would imagine that, that market would be available to us. I don't know that I would appreciate the pricing of that product. But it's -- as with most of the credit markets, especially today, it's limited. And borrowers have little less access to debt capital today, but borrowers like Regency with great reputations in the credit market with scale, with quality will have and great relationships. We'll have more access than most. Hi. Just one quick one. With treasuries reversing course and inflation is starting to abate a little bit, is this showing up in terms of more traffic or transactions at your centers? Linda, we're basically flat to 2019. And so we feel really good about the traffic that's there right now. Again, necessity-based retail, and they're performing really well. Our restaurants are performing exceptionally well, as are others. So I think we're back to a pretty steady state right now from a traffic perspective. Hey. Just two quick ones from me. Just going back to the 96% potential leasing targets. Just curious what we need to see for that to happen. Is that just the current run rate are you seeing? Limit sort of move outs? Just trying to figure out the building blocks, the breadcrumbs to get to that 96% and how achievable that is? Well, we know it's achievable as we look over our shoulder in our past, and we feel even better about the quality of the assets we own today than when the last time we achieved that level. So that's how we know it's achievable and where our targets are. You outlined the breadcrumbs. The third element I would give is time. We've talked on previous calls about our ability to lease space at pretty meaningful rates. And we delivered on that in 2022. We added 100 basis points of commenced occupancy. I mentioned the 200 bps of percent lease coming from the small shops. So time, continued effort by the leasing team, bankruptcies of a material sense will put kind of holes in the bucket that we then need to work our way through. And again, that will only be a matter of time, not if we can lease that space but really win. It's not -- Ron, we're not anticipating that achieving that level, and I'll just say, in 2023, there's going to be more time than 12 months ahead of us to achieve that. But we'll get there in due time. And I would just add, and setting the bar high, as I expect that our team would deliver that, if not for those bankruptcies, as Alan talked about, our leasing pipeline is really strong. We have a lot of momentum. And my expectation, if we didn't have the hole in the bucket from those store closures and bankruptcies that we know are coming, we have visibility to it. We'd be able to increase occupancy in 2023. Great. And then if I could just sneak in a quick one because I haven't heard it. Just any updated thoughts on this, the Kroger Albertsons, how you guys are thinking about the deal and as it relates to Regency? Yeah. I mean not much has changed. I know that there was a report this morning where they -- I think they publicly stated that they were looking to sell 250 to 300 stores but that's actually not any different. It's just more narrow than what they had said when they first announced the transaction. So we're just going to -- we are in a wait and see what happens. We've got great relationships with both of them. They're not allowed to give us any nonpublic material information, though, so we know what you know. But what we do know is we feel really good about the quality of our real estate and our grocery stores that have Kroger and Albertsons, they're both leading grocers and we believe the combination of the two would be good. We think that, that would provide them more scale, more ability to invest in both their physical bricks-and-mortar as well as in technology. And if for some reason, it gets blocked, we still feel really good about our real estate, and we have 2 of the leading grocers anchoring our centers. Thank you. There are no further questions at this time. I'd like to turn the floor back over to Lisa Palmer for any closing comments. Just want to thank you all for being with us this morning, and I also want to once again thank the Regency team for a really good 2022. And we look forward to further conversations and great results this year. Thank you all.

EarningCall_38

Hello and welcome to the Euronext Fourth Quarter and Full-Year 2022 Results. My name is Caroline, and I'll be your coordinator for today's event. [Operator Instructions] However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions] I will now hand over to your host, Stephane Boujnah, Euronext's CEO and Chairman of the Managing Board joined by Giorgio Modica, Euronext's CFO to begin today's conference. Thank you. Good morning, everybody and thank you for joining us this morning for the Euronext fourth quarter and full-year 2022 results conference call and webcast. I am Stephane Boujnah, CEO and Chairman of the Managing Board of Euronext. And I will start with the highlights of the full year and the fourth quarter. Giorgio Modica, the Euronext CFO will then further develop the main business and the financial highlights of the fourth quarter. As an introduction, I would like to highlight three points. First, Euronext is stronger than ever. Euronext is now present in the full value chain and Euronext confirmed its leadership position in listing and in trading in Europe. In addition our revenue demonstrated strong resilience, thanks to our diversified business model. Second, we beat our 2022 cost guidance, thanks to cost discipline in an inflationary environment. Third, we are well-advanced in the integration of the Borsa Italiana Group and by the end of 2023, we will reach EUR70 million of cumulative run rate synergies. We are now in a position to upgrade our 2024 synergy target by EUR15 million to EUR115 million of annual run rate synergies. Let me give you some more detail on each of those points. First, as I said Euronext is today the leading listing venue in Europe for equity, and for that globally. And we are also the largest venue for equity trading in Europe representing 2 times the volume traded on the London Stock Exchange and Deutsche Borse. We are now a top-ranking Post Trade infrastructure operator through Euronext Clearing and Euronext Securities. This is all the result of our diversification strategy. And this major transformation is reflected in our 2022 performance where 58% of our underlying revenue is now non-volume related. 2022 was also a strong year in terms of financial performance. In 2022 Euronext reached record underlying revenues, an income above EUR1.4 billion. This is up plus 13%, compared to 2021. We generated plus EUR120.2 million additional revenue in 2022, compared to ‘21, which was a very strong reference shows as you may remember. This strong 2022 performance was driven by the strong performance of non-volume related businesses and enhanced revenue capture. And in trading, we recorded a very strong year for power and for ForEx trading. The softer volume environment for cash equity trading in the second half of 2022 was clearly offset by significant and efficient management of yield and a real uptick in market share from October 2022. Our Post Trade franchise significantly benefited from the consolidation of Euronext Clearing and Euronext Securities Milan, which were acquired as part of the Borsa Italiana Group acquisition in April ‘21. The diversified business of the Euronext Securities allowed us to capture value as settlement activity stabilized in H2 2022. I would -- like especially to highlight the performance of our listing business, which grew by plus 15.1% and reported solid listing activities with 83 new listings in 2022. In particular, we welcomed 20 international companies, which in my view is the recognition that Euronext, Euronext market in Europe are now the venue of choice for listing in Europe. Furthermore our Advanced Data Services business increased by plus 15.5%, reflecting growth across the real-time and non-real-time data business, as well as index growth. Lastly, following the successful migration of our Core Data Centre to Bergamo in June 2022, we significantly scaled up our Technology Solutions business reaching over EUR100 million in revenue now. That's why, as mentioned earlier, the share of non-volume related revenue represented 58% of our top line in 2022 and accounted for 141% of operating costs excluding D&A. And that brings me to our ongoing focus on cost discipline on slide five with a bigger picture on financials. Thanks to strong cost discipline and several positive one-off impacts of the year, we overachieved or revised cost guidance of EUR612 million, down from an initial cost guidance, as you may remember it, up EUR622 million, because we reported EUR606.1 million of underlying expenses excluding D&A. And this was achieved despite inflationary pressures, despite pressure on supply chains that everyone experiences. Consequently, our 2022 adjusted EBITDA grew double-digit to EUR861.6 million. This translated into an adjusted EBITDA margin at 58.7%. Overall, this performance resulted in a plus 5.7% increase of adjusted net income to EUR555.3 million. Adjusted EPS was down minus 4.8% to EUR5.21 per share. And this reflects the higher number of outstanding shares of our 2022, compared to 2021. On a reported basis, net income is up plus 6% to EUR437.8 million. Consequently a dividend of EUR2.22 per share will be proposed at our upcoming Annual General Meeting in May. These dividend represent a payout ratio of 50% of reported net income adjusted for the EUR49 million pretax or EUR35 million post tax one-off loss related to the partial disposal of the Euronext Clearing portfolio announced in Q2 2022. And this dividend is EUR0.29 more than the ‘21 dividend per share. It is an increase of plus 13%. Moving now to the Q4 performance on slide six. Euronext reported a solid fourth quarter for 2022. The quarter was marked by strong performance of Advanced Data Services, strong performance of listing activities offset by lower revenues from business correlated with cash equity volumes. Underlying revenues were down minus 6.2%, compared to Q4 2021 at EUR347 million, reflecting the resilience of our diversified revenue streams in a low volatility environment. Despite softer cash equity derivatives and MTS cash trading activity, the strength of our non-volume related businesses enabled us to report only a slight decline in total revenue. First non-volume-related revenue posted a strong performance overall. Notably, as I said earlier in listing and advanced data services in technology. Second, our trading businesses that are not related to equity markets strongly performed. We notably recorded strong growth year-on-year in power trading and a solid quarter in ForEx trading. Last, we efficiently manage our revenue capture and regained market share from October 2022 in cash trading operations. This translated into non-volume related revenue accounting for 60% of the total Q4 revenue, and covering 130% of underlying operating expenses excluding D&A. So Q4 2022 underlying operational expenses excluding D&A increased slightly to EUR159.2 million up plus 1.6%, compared to Q4 2021. And this reflect for cost disciplined approach to cost control and higher capitalized project costs offsetting inflationary pressures. Overall we reported an EBITDA, an adjusted EBITDA of EUR187.9 million and an adjusted EBITDA margin of 54.1%. This led to an adjusted EPS at EUR1.11 per share and an adjusted net income of EUR118.2 million. On a reported basis the EPS for this fourth quarter reached EUR0.93. Clearly ‘22 was a year of transformation for Euronext and we made good progress in our integration process and synergy delivery. The migration of our Core Data Centre from Basildon in the U.K. to Bergamo in Italy was the first key milestone of our growth or Impact strategic plan. This migration combined with continued cost discipline enabled us to deliver EUR34.1 million cumulated run rate annual synergies at the end of 2022 in relation to the acquisition of the Borsa Italiana Group. Looking forward, we expect to achieve around EUR70 million of our targeted synergies by the end of ‘23 alone with the delivery of several key projects. First, next month we will significantly change the dimension of our unique European liquidity pool, because the migration of Italian cash market to Euronext state-of-the-art proprietary trading platform Optiq will benefit local and global trading members and will allow an alignment of fees. Second, the other Italian markets will migrate to the Optiq European liquidity pool starting in Q4 2023. And looking further cost synergies with the termination of the Millennium LSEG technology contract. Third, Euronext Clearing would become the CCP of choice for equity clearing by the end of this year, generating revenue synergies. And the following year by Q3 2024 Euronext Clearing will also clear Euronext listed derivatives. Those good progress on integration mean that we are able to upgrade our synergy target. We expect total run rate synergies in relation to the acquisition of the Borsa Italiana Group to reach EUR115 million by the end of ’24. This is EUR15 million more than the amount targeted until now. And this is almost 2 times the initial amount announced at the moment of the Borsa Italiana Group acquisition. You may remember that in April ‘21 we committed to deliver EUR60 million of synergies in relation to the acquisition of the Borsa Italiana Group. Today we are confident that we will deliver almost a double EUR115 million of synergies in relation to the acquisition of the Borsa Italiana Group. So that demonstrates once again the strong track record of the Euronext teams in delivering operating performance and operating leverage. On the next slide, I'd like to take a moment to tell you in more detail about one of our key strategic objectives related to clearing. It's a key strategic project. Last month we confirmed the planned European expansion of Euronext Clearing to all Euronext listed derivatives for Q3 2024. As a result Euronext served LCH SA, a notice of termination for the existing derivative clearing agreement on 16 January 2023. As we already announced, the related termination fee of approximately EUR36 million to be paid to LCH SA is part of the EUR150 million envelope of implementation cost related to the growth for Impact 2024 strategic plan. Therefore, this amount will be provisioned in our income statement as a non-underlying expense in Q1 2023 and will be payable in 2024. When we embarked on our ambitions Post Trade Strategy our aim was clear. To offer our clients the benefit of scale and harmonization’s across European markets, while still maintaining a robust local footprint in Euronext market. For all clients this will bring margin efficiencies with the implementation of a new value-add risk model and a single default fund. It will also bring efficiencies across all asset classes with transparency on data, particularly on settlement leveraging Euronext Securities target to securities settlement platform. So the expansion of Euronext Clearing is really critical as it will allow us to manage the entire trading value chain of our markets by the end of ’24, and it will generate significant revenue and cost synergies. Moving to slide nine, we continued to deploy capital efficiently in 2022 through a number of initiatives allowing us to better control our technology and develop new services. First, in March Euronext Securities acquired the General Meetings, Designated Representative and Shareholder's Registers activities of Spafid. This strategic partnership has contributed to the high growth, but had its services offered through Euronex Securities franchise. Secondly, we have internalized the technology powering MTS and Euronext Securities in Milan as part of our plan to integrate our full value chain and our technology. In addition, following the completion of the strategic review undertaken as part of the integration of the Borsa Italiana Group and our decision to divert from non-core asset, Euronext has disposed the U.S. subsidiary of MTS, MTS Markets International Inc. Importantly during this time, we have pursued very actively our deleveraging path, reaching 2.6 times net debt to EBITDA at the end of December 2022. And this compares to 3.2 times net debt to EBITDA at the closing of the acquisition of the Borsa Italiana Group. Together with our strong cash generation capability, this brings us to around EUR1.5 billion of available capital at the end of December 2022. And our progress has been recognized by S&P that upgraded their outlook to positive in 2022. And as you have seen it yesterday evening, we have been upgraded to BBB plus. So we are very well advanced on our integration. We are confident in our ability to deliver upgraded synergies, because, once again this demonstrates the post-merger integration track record of Euronext teams. And this confidence combined with our favorable liquidity position enables us to continue exploring external growth. We would be looking for assets able to contribute to higher organic revenue growth to provide scalability and to improve exposure to non-volume related businesses. Obviously always in line with our rigorous capital allocation policy. Finally, I'd like to take a moment to highlight the great progress we have made with our Fit for 1.5 degree ESG commitment. We [Technical Difficulty] achievements of this SBTi target have already been implemented such as the migration of the Euronext Core Data Centre in Bergamo, which is powered 100% by renewable energy sources. We are also pleased to announce that Euronext has been included in the Euronext Equileap Eurozone 100 and the Euronext Equileap Gender Equality France 40, two indices showcasing European companies that demonstrate a strong role in improving gender equality. And we have continued to push for a broader transition in our markets. We have launched the CAC SBTi index, an index for grouping companies within the SBF 120 that have set emission reduction target approved as being in line with the Paris Agreement 1.5 degree before. Thank you very much Stephane and good morning, everyone. Let's have now a look at the performance of Euronext in the fourth quarter of 2022. I'm now on slide 12. In the fourth quarter of 2022 Euronext demonstrated solid results reflecting the strong performance of advanced data services and listing combined with an efficient management of market share and revenue capture in a challenging trading environment for especially cash trading volumes. As a result, and as already mentioned by Stephane, Euronext underlying revenue income was only down 6.2%, compared to the fourth quarter of 2021 despite the relevant reduction of volumes, notably reflecting the strength of our diversified business mix. Briefly, listing revenue grew 3.1% resulting from a resilient equity and debt listing activity despite the tougher environment. We capture the majority of listing in Europe, remarkable this quarter were the high shares of company from outside of the Euronext market among our listing, accounting for around 40% of equity listing and demonstrating the international appeal of Euronext. Trading revenue was down 12.1% resulting from lower cash equity and MTS cash volume, partially offset by a record quarter for power trading and a good performance of FX trading. Post Trade revenue including -- excluding NTI was down 2.5% as a result of weaker equity clearing activity and a stabilized settlement activity. Advanced data Service revenue increased 7.3%. This was good performance across the offering both on real-time and non-real-time data, as well as on indices. Technology Solutions grew 1.8% driven by the good performance of colocation activity after the migration to the Bergamo Data Centre in June this year. In the fourth quarter of 2022 non-volume related revenue accounted, as Stephane said, for 60% of total Group revenue versus 58% the same quarter last year, reflecting high Advanced Data Services and Corporate Service revenue and revenues from services in general. Lastly, those non-volume related revenues cover 130% of our underlying operating expenses excluding D&A compared to 136% last year. Now I would like to move to the next slide, slide 13, for listing. Listing revenue was EUR53.5 million this quarter with an increase of 3.1% compared to the same quarter last year. This growth is driven by a higher annual fees, the strong performance of corporate service and the positive impact of primary and secondary listing revenue recognition over time. We have discussed already the impact on IFRS on listing revenues. In detail during the fourth quarter of 2022 Euronext maintained its leading position in Europe for primary equity listing counting 24 new listing of which, as I said, approximately 40% were international companies. In the fourth quarter of 2022 EUR310 million were raised on Euronext primary markets compared to a very strong Q4 2021 with EUR6.6 billion raised on our markets. As far as secondary issue are concerned EUR10.1 billion was raised in the fourth quarter of 2022, well above the same quarter last year. Euronext also reinforced its position as the leading venue for bond listing worldwide this quarter with over 53,000 bond listed across all Euronext market at the end of the year. And this despite a slowdown of the global bond listing activity due to the macroeconomic environment. This translated into EUR226.9 billion in debt raised on Euronext market during this quarter. Overall, this brings us to a total of EUR237.3 billion raised in equity and debt of Euronext market this quarter. Lastly, Corporate Service continued its growth trajectory across businesses despite slightly lower webcast activity in a post-pandemic environment. Let's have a look at our trading business on slide 14. I'm starting with cash trading. In the fourth quarter of 2022, we observed lower cash trading volumes, which were partially offset by efficient revenue capture and market share management, in particular we saw an uptick in market share from October 2022 not at detriment of revenue capture. Cash trading revenue was EUR65.1 million this quarter, a decrease of 17.9%, compared to the same quarter last year as a result of average daily volumes of EUR10.1 billion, a volume decrease of 17.2% and 3% fewer trading days this quarter. Average revenue capture over the quarter was at 0.50 basis point versus 0.49 basis point in the fourth quarter of 2021, reflecting the dilutive impact of Borsa Italiana market and larger average order size in line with pre-pandemic levels. As a reminder, we charge per value and per order explaining the dilutive impact of larger order size on our revenue capture. As I said, we reported an uptick in market share from October 2022 and Euronext market share on cash trading averaged 65.3% in the fourth quarter of 2022. In the past we were often asked about the sustainability of those metrics. This is why I would like to confirm to you that in 2023, we expect to maintain on our market, the market share greater or equal to 63% and our revenue capture to be around 0.52 basis point following the integration of Borsa Italiana cash markets to Optiq, considering current market condition and order size. Euronext has once again confirmed its position as the largest, the deepest, and the most stable liquidity pool in Europe offering the highest quality of executions with market participants. We are excited that our cash trading business will significantly change dimension with a migration of Italian cash market to Euronext state-of-the-art proprietary trading platform Optiq in the first quarter of 2023. Now, I would like to move to Derivatives trading. Derivatives trading revenues decreased 5.4% to EUR13.4 million this quarter as a result of softer volume environment, partially offset by a positive impact of volume mix on revenue capture and fee changes. Average daily volumes on financial derivatives in the fourth quarter of 2022 were down 12.7% from the same quarter last year, suffering from a strong comparison basis with high volatility in the fourth quarter of 2021. Commodities average daily volumes were down 17.2% in the fourth quarter of 2022, compared to the fourth quarter of 2021, reflecting a normalized trading environment. Over the quarter, the average revenue capture increased for derivatives to EUR0.34 per lot, up 12.5% from the fourth quarter of 2021, thanks to volume mix impact and fee changes. Lastly on Fixed Income trading. Fixed Income trading reported revenue at EUR22.1 million this quarter, compared to EUR24.2 million in the fourth quarter of 2021. This reflects an economic environment in Europe favoring money market and therefore repo volumes. MTS reported an overall robust performance in market dominated by increasing interest rate, with continued strong traction for repo trading offset by lower cash trading volumes. In the fourth quarter of 2022 MTS cash reported EUR12.8 million of revenue with ADV down 32.7% to EUR15.4 billion and MTS Repo reported EUR5.6 million of revenue with term-adjusted ADV up 36% to EUR397 billion. Continuing on trading on slide 15. The fourth quarter of 2022 saw a solid performance of Euronext FX in terms of both revenues and average daily volume, benefiting from the continued positive momentum with a high volatility and good traction of our matching engine in Singapore. Euronext reported average spot FX trading daily volumes of $20.1 billion in the fourth quarter of 2022, up 4% compared to the fourth quarter of 2021. Spot FX trading revenue increased 9.5%, compared to the fourth quarter of 2021 at EUR6.7 million. Power trading reported EUR8.9 million in revenue in the fourth quarter of 2022, a growth of 4.7% year-on-year driven by dynamic volumes increased foot print in Nord Pool in Central Europe, U.K., Ireland and a continued robust performance in the Nordics. In the fourth quarter of 2022 average daily volume day ahead power traded was 2.98 terawatt hours, up 7.9% with respect to the same quarter last year, and average daily intraday power traded was at 0.13-terawatt hour. This is an increase of 9% year-on-year. I would like to highlight the intraday trading volumes in Central and Western Europe reached record level this quarter. Moving to slide 16. Revenues from our Post Trade activities excluding net treasury income decreased 2.5% to EUR88.6 million. Clearing revenue was down 3.9% this quarter to EUR29 million as a result of dynamic bond clearing activity, partially offsetting weaker cash and derivative clearing activity. As announced with the Q2 2022 results, Euronext Clearing engaged in a partial disposal of its investment portfolio. We dispose the portfolio maturing after the 1st of May 2023 and kept the rest until maturity. The runoff for this portfolio is currently ongoing and almost completed. As a consequence, our net treasury income is not yet at cruising speed and this quarter amounted to EUR4.3 million. In this respect, I would like to confirm our target for NTI 2023. In the first quarter of 2023, we expect to reach 10 basis point margin similarly from the margin we have reached in the fourth quarter of 2022. And from the second quarter this year and onwards we will reach our cruising speeds at 20 basis points. I wanted to make a brief comment as well on the upgrade of S&P. What I wanted to highlight is that the upgrade of rating is not only linked to an improvement of leverage, but as well a reduction of clearing risk and our rank anchor rating moved from BBB to BBB plus as S&P has removed the notch downgrade for clearing and settlement risk. This gives us a significantly more upside as far as rating is concerned. Continuing on settlement and other Post Trade revenue including the activity of Euronext Security, the revenues were EUR59.6 million this quarter, down 1.9% year-on-year. This reflect the resilient top line of Euronext Securities, thanks to its diversified geographical footprint in a stabilized environment. For settlement, over the fourth quarter of 2022, the value of assets under custody at Euronext Securities increased to EUR6.3 billion. I'm now moving to the next slide, slide 17, Advanced Data Services reached record revenues of EUR54.5 million this quarter, up 7.3% year-on-year, driven by strong traction of our core data businesses and good momentum of Advanced Data solution franchise including quant research and indices. Investor service revenues were up EUR2.6 million this quarter, up 13.2% reflecting continued commercial expansion of the business. Lastly, Technology Solutions revenue was up 1.8% compared to the same quarter last year to EUR26.9 million, reflecting the good performance of colocation activity following the migration of Euronext Core Data Centre, and this more than offset the lower revenues from hosting services. Moving to the next slide, I'm now on slide 19. I wanted to give some highlights on our 2023 cost guidance. In 2023 Euronext expects its underlying expenses excluding D&A to be around EUR630 million, compared to the annualized second half 2022 underlying expenses excluding D&A of around EUR620 million. The slight increase solidly relates to growth initiative to develop our non-volume related fund business. In other words, we expect that the cost base of Euronext to remain stable as cost savings and synergies will entirely compensate inflation and business development costs. I would like also to add that on the revenue side, we have performed a deep review of our pricing strategy across products to reflect inflation. And we will have the effect of this activity in 2023. I would like as well to do a few comments on integration costs. Stephane has already partially covered that. Following the termination of our derivative clearing agreement, we will post the provision this quarter of around EUR36 million covering termination and migration costs. For the sake of clarity, this does not change our target of integration cost, which is set at EUR150 million. In addition, I would like to confirm our previous guideline in terms of integration cost per quarter that for 2023 will range in between EUR10 million and EUR15 million depending on the quarter. Moving now to the next slide. This brings us to the EBITDA bridge. Euronext adjusted EBITDA for the quarter was down 12% to EUR187.9 million, mainly from lower volume environment partially as we discussed offset by non-volume related revenue growth and maintain cost discipline in an inflationary environment. Indeed despite the pressures of inflation and despite the deployment of our strategic plan cost remain contained this quarter, as Stephane mentioned earlier, we beat our revised 2022 cost target of EUR612 million, initially set at the beginning of the year at EUR622 million. Adjusted EBITDA margin decreased as a consequence by 3.5 points, compared to the fourth quarter of 2021 to 54.1%. Moving to slide 21 for the bridge on net income. Adjusted net income this quarter was down 18.2% to EUR118.2 million, resulting from lower EBITDA, partially offset by the following elements. First lower D&A as in the first quarter of 2021 we had some write-offs as the one of the brand name of VP Securities, with as well lower net financing expenses mainly linked to the positive impact of higher interest rates, there are many moving parts in this number, but in summary, the positive impact of the interest rate on our interest income reported in the fourth quarter of 2022 is higher than the benefit from the interest rate swap we had in the fourth quarter of 2021 and it was terminated in 2022. And then I would like to highlight as well higher results from equity investment, representing the contribution of LCH SA and the dividend received from Euroclear. As a reminder, in last year Euroclear paid its dividend in Q1 and Q3. I would like to highlight that the non-underlying cost in this bridge are mainly represented by D&A and more specifically related to the PPA amortization of our acquisition. Lastly, tax for the fourth quarter of 2022 was EUR38.5 million. This translated into an effective tax rate of 27.3% for the quarter. Reported net income was EUR99.3 million, and adjusted EPS basic was down 18% this quarter, EUR1.11 per share, compared to an adjusted EPS basic as well of EUR1.35 per share in the fourth quarter of 2021. This reflects higher number of outstanding share of the quarter compared to last year. Moving to slide 22 for the cash flow generation and leverage. The net operating cash flow post tax amounted for a negative EUR147.1 million, compared to a positive EUR145.6 million in the fourth quarter of 2021. This negative flow was impacted by a change in working capital related to Nord Pool CCP activities for EUR276 million. As we will see in the next slide, the balancing item of this negative cash flow is a reduction of the cash in transit for EUR297 million. Excluding the impact of on working capital from Nord Pool and Euronext Clearing, CCP activities net operating cash flow post tax accounted for 55.3% of EBITDA. Our net debt to EBITDA as reminded by Stephane was at 2.6 times in the fourth quarter of 2022, compared to 4.3 times in the third quarter of 2022, that was positively impacted by higher cash in transit as we just discussed included in the cash and cash equivalents. Excluding the EUR49 million non-underlying one-off loss on NTI, the net debt to last 12 months reported EBITDA was at 2.4 times in the fourth quarter of 2022. Moving on to the slide 23 for the evolution of our liquidity position over the quarter. As described on previous slide, you can see the impact of the short movement in working capital related to Nord Pool CCP activities in the net operating cash flow. As an illustration, our liquidity position remains strong, above EUR1.5 billion, including the undrawn revolving credit facility for EUR600 million, and excluding the cash currently in transit. As Stephane highlighted, while the integration of Borsa Italiana is on track, we can look for external growth opportunities, thanks to this strong liquidity position and improvement in our rating profile. Thank you, Giorgio. As you have seen 2022 was a real pivotal year, we took advantage of our diversified business model, our business model which is much more diversified than many people think. We strengthened our core business with continuous leadership not only on listing and on trading, but also a very strong development in other businesses. We maintained our trademark cost discipline in an inflationary environment, which has affected everyone. And we have put the key projects of the Borsa Italiana Group integration on a very good track, hence our commitments in terms of synergy delivery for the years to come. So 2023, ‘22 has demonstrated that Euronext has the recipe for success, for cash flow generation even in tough environments. Also 2022 paved the way for future growth in Euronext now 2023 will be a real transformational year. First, our cash trading market share is expected to remain greater or equal to 63% and our revenue capture for the cash equity trading business to remain above what we call to 0.52 bps in 2023 after the Borsa Italiana markets migration to Optiq. Second our continued cost discipline and achieved synergies will enable us to offset inflation. The slight increase in cost only results from costs related to non-volume related revenue growth initiatives and savings and synergies entirely compensate inflation and business development cost. So the superior track record of Euronext in post-merger integration will translate -- will continue to translate in a strong cost discipline. Third, as a result, we have great, our 2024 run rate synergy target to reach almost twice the level of the first announced synergies back to the time of the Borsa Italiana Group acquisition announcement to what will be EUR115 million of run rate synergies by the end of ‘24. ‘23 will be pivotal, as I said, with the delivery of the key strategic projects that have been highlighted by Giorgio and I early on. And the continued cost optimization that will lead to EUR70 million of cumulated run rate synergies at the end of '23. And fourth, combined with our fast deleveraging, since the acquisition of the Borsa Italiana Group and as demonstrated by the BBB plus upgrade by S&P announced yesterday evening, we are now in the right position to look for possible external growth in the respect obviously of our strong investment criteria of return on capital employed above WACC after three or five years -- three years to five years. So thanks for your attention. We are now ready to take your questions together with Giorgio Modica, Anthony Attia, the Global Head of Primary Markets and Post Trade, and Simon, Head of Cash and Derivatives trading. Thank you. [Operator Instructions] We will take the first question from line, Kyle Voigt from KBW. The line is open now. Please go ahead. Hi, good morning. Maybe a couple of questions from me. First question is just on pricing, some of your peers globally have spoken about taking larger pricing adjustment in 2023 given the inflationary backdrop, and I believe you mentioned that in your prepared remarks that you also took some inflationary adjustments. Just wondering how you viewed pricing in 2023 versus prior years. And in which lines we should really expect the most material pricing adjustments to come through? And then also just a question on the synergy realization slide in the deck and the timeline there. Obviously, some of the key dates are for the fourth quarter of 2023, so quite late in the year. So when we think about your 2023 underlying cost guidance, I'm just trying to get a sense of what level of actual realized cost synergies are embedded within that as that may help us think about the expense trajectory into 2024. And given those timing of synergies, is it possible that underlying costs may actually be down in 2024 versus 2023? Thank you. Thank you. So, Giorgio will answer your two questions, the first on pricing and the second one on the phasing of synergy delivery. So thank you very much for your questions. So with respect to pricing, I guess that the best way to describe what we were going to do is that mostly price are going to be increased in the non-trading activities. And the increase that we will have are around, I would say, mid-single-digit than some slightly more, some slightly less. But this gives you a sense of how much our non-volume related business will grow in terms of pricing. And if you consider that 60% of our business is non-volume related, this gives you a bit of an idea of what would be the price increase impact on our top line next year, excluding any other variables. So it's around mid-single-digit time 60%. Then on the line, this price increase we laid, I mean, I believe I indirectly answered saying that it's not really going to be the trading lines, but the other line. So this is for the first question. When it comes to the synergies, the way I can answer your question is the following. Let's start from the synergies that we have delivered run rate this quarter. So at the end of December 2022, we have reached EUR34 million of run rate synergies. What this means is that part of the synergies will hit the P&L in 2023. And this is going as well to contribute to making sure as I described that the key cost of the organization will remain flat from a P&L perspective. Then coming to the delivery of synergies next year, a few elements, there is going to be an important moment with the migration of Optiq in the first quarter, and this will have -- impact our P&L right after the migration. But then, you are correct, there are other cost and savings that are going to be delivered in the fourth quarter this year with the impact on the P&L of next year. So then, my last comment is that, this year we will deliver a combination of revenues and cost synergies. And as far as the revenue synergies, again, I already mentioned the Optiq integration, but we will have as well the launch of our clearing activities on equities. Thank you. We will take the next question from line, Mike Werner from UBS. The line is open now. Please go ahead. Thank you very much for the presentation and the explanations, all very, very helpful. Two questions from me please. In terms of the market share in cash equity trading, and we know you've adjusted your pricing schedule, I think it was in November, we saw an uptick in market shares into the year end. The data that I collect, which certainly is not perfect implies that market shares have trended lower in January and ultimately in the first couple of days of February. So I was wondering if you can confirm if that's what you're seeing. And then B, just wondering, is this -- is that price adjustment in November, kind of, your final take, is this something where we could see further adjustments ultimately to protect the market share as we look at over the next couple of months? And then on the second question, just thinking about deleveraging, and I think the debt to EBITDA was 2.6 times at the end of this year, very similar level at the end of 2021. I know there was a bunch of restructuring costs throughout the year. But as we look out to 2023 kind of given your guidance on restructuring costs, how should we think about the pace of deleveraging throughout ‘23, assuming no M&A or no other factors involved? Thank you. So, Simon Gallagher will answer your first question on market share and yield and prices. And Giorgio Modica will answer your question on deleveraging pace and phasing. Thank you, Stephane. So to answer the first question on market share, so you're right, we implemented a first batch of measures on pricing and liquidity programs in November last year, which was successful, which resulted in a three-point uplift in market share over the quarter. And certainly since the start of the year, what we're seeing is that volumes are soft, there is a lack of real economy liquidity in the market, which has had a slightly downward influence on market share because regulated markets tend to have a higher proportion of real economy flow than the alternative trading venues. And so, that's what we see as the primary explanation for the first quarter. To answer your second question, the answer is resolutely, no. This is obviously not the end of the pricing measures we are taking, and the changes in liquidity we are making. There will be further adjustments to the flagship liquidity schemes in March, alongside as Stephane and Giorgio mentioned the pricing adjustments to the Italian market post migrations. These price changes and liquidity schemes will not be yield dilutive. They will be pushing our liquidity providers a bit more and adjusting the intricacies of the LP schemes. So this is not the end of the story. Obviously, this is a very dynamic and ongoing process. Yes, when it comes to the deleveraging profile, I can confirm a few elements. Now, I believe you are the target for dividends, so it's EUR236 million. And then the other element is that we confirm two-thirds cash flow conversion post tax from EBITDA. So with these two elements, I believe that now we have, I mean, we have guided with respect to the non-underlying costs are related to the termination of the agreement. Those are the key elements of the equation. So again to summarize, around 66% cash flow conversion post tax, and EUR236 million of dividends to be expected in 2023. Thank you. We will take the next question from line, Haley Tam from Credit Suisse. The line is open now. Please go ahead. Good morning. Thank you very much for taking my questions. Could I ask a couple about the revenue capture please in the equity market. So first of all, the Q4 revenue yield of 0.5 basis points was a step down from 0.53 in Q3? And if I've heard you correctly, you're saying that the supplemental liquidity provider scheme adjustments you've made are not yield dilutive. So I wonder if you could help us walk through that step down from 0.53 to 0.5, please just to understand the dynamics there? And then the second question, just to understand your assumptions for 2023, market share more than 63% to revenue capture 0.52 basis points. Are both of those numbers for after the Borsa Italiana migration or are they numbers that I should assume for the average through the year? And I do know that 63% is less than the 65% market share you had in Q4. So I just wondered if you could comment on that? Thank you. Okay, so Simon Gallagher will answer your two questions on the revenue capture and on the phasing of the market share evolutions. Thank you, Stephane. So I'll break down very precisely the variance in yield from 0.53 to 0.5. In the numbers are included a small number of non-equity items, so it's the Warrants and Certificates and ETFs notably. So if we break down the 0.03, 0.01 of that was due to non-equity items this variance in volumes in non-equity businesses, which are ETFs and the Warrants and Certificates. So that leaves 0.02 basis points imputable to cash equity yield. Two-thirds of this 0.02 was due to changes in the order sizes. And so, how does this impact the 0.02? When markets tend to be a bit less, there's less volatility in the markets, order sizes as we've seen recently, order sizes tend to go up a little bit, which means there is less arbitrage opportunities from the electronic liquidity providers, which means order sizes go up in the market. And this interacts with certain features of our fee grid where we have fixed euro fees per executed order. And so this is two-thirds of that 0.02 is imputable to order sizes. One-third of the 0.02 can be imputable to other features of the fee grid, including partially to the SLP changes we made in the supplemental liquidity scheme. So if you break down -- if you break it down that way, the changes we make to the SLP scheme are largely immaterial in terms of impacts on yield. And there will be further yield accretive changes to the SLP scheme from the second quarter onwards. With respect to the second question, the market share number, I think can be seen as an average over the year as a base. And the yield, the revenue traction number is a -- and the market share is obviously a floor we see and is the minimum we are targeting. And the yield extraction number is post -- is the run rate post the Italy migration. Thank you. We will take the next question from line Bruce Hamilton from Morgan Stanley. The line is open now. Please go ahead. Hi, good morning, and thanks very much for the presentation and Q&A. I guess firstly just going back to the synergies, obviously encouraging that you've increased those. But could you break out the EUR115 million between revenues and costs? And just going back to the earlier question, given the consensus assumes, I think a reduction in absolute costs in 2024, is that kind of consistent with the way you're thinking about the cost synergies? And then secondly on M&A and balance sheet flexibility. In terms of your sort of EUR1.5 billion of capacity, I can see on slide 23 you've laid out, how you get there. But what's the sort of net debt EBITDA that you would be comfortable going up to temporarily to do a deal? And then just an update on what the -- what you'd view your current WACC as, as well would be helpful. Thank you. So let's start with the first one. I would like to highlight that the increase from EUR100 million to EUR115 million is mainly related to a better visibility on the opportunities on clearing. So this is the first element, then when it comes to the breakdown between cost and revenue, I will try to do my best, but there is a complexity is that, as we said from the beginning, the EUR115 million is an improvement of EBITDA, that includes sometimes project involving more revenue and more cost. So the best breakdown I can provide you with is the following. Let's start from the original target, the EUR60 million. The EUR60 million were broken down as follows, EUR45 million of cost savings and EUR15 million of revenue uplift. Now this EUR15 million revenue uplift, the significant portion of the EUR15 million is linked to the migration of Optiq. Part of which were going and the most relevant part were going to execute in 45 days. And this is clearly pure revenue synergies. Then the other buckets are around EUR10 million EBITDA coming from the migration to the center. And this is already embedded in our number, but involves more revenues, but as well more cost. And then the remainder that was originally accessed to be EUR30 million and now it's increased to EUR45 million is the clearing opportunity. And you will -- and then there are many moving parts because we'll clearly have more revenues, but as well we will need to upgrade and as we are doing the platform of Euronext Clearing. But on the other side, we will not have any more the costs that today we are paying to LCH SA, which are currently captured in our P&L. So this is the breakdown. Unfortunately, I cannot further break down the different project in between cost and revenues. So this is -- this I believe covers your first question. When it comes to the underlying cost of capital, I believe that Euronext is in line what we see as an average of analyst, and again, as I always stress, those are a point in time, so what I can say is that, I don't see a major deviation from what you analysts are taking as an average as our own cost of capital. And when it comes to the max leverage, what I would say is the following. And again, this is very tricky question, because it depends very much on the target you acquire that give -- would give us additional leverage. But as we commented in the past, we believe that in terms of pure debt capacity, we would have a capacity in the range between EUR1.5 billion and EUR2 billion. This is roughly speaking the standalone capabilities we would have to finance and impute that acquisition. And again, I would like to highlight that as you very well know rating and leverage consideration are very much target specific. Thank you. We will take the next question from line Enrico Bolzoni from JP Morgan. The line is open now. Please go ahead. Hi, thank you. Good morning. Sorry to go back once again to market share, just a clarification. I would like to understand the market share you are guiding is something that in case you should not be on track to achieve; you would implement some changes in pricing or something else to make sure that you hit it or it's rather you simply saying that in light of your proposition your pricing in your relationship with customer you will naturally achieve? So this is my first question. And then a more general one, possibly related to that. Can you just give any comment in terms of what you're seeing in terms of volume migrating to dark pools, because it seems like these are increasing. And also interestingly the average order size are going down, while historically they have been higher in dark pools. So I was just curious to hear from you on this subject. And then finally, I mean, a number of your peers in Europe and also outside of Europe are increasingly doing partnership with technology providers. So I was just curious to hear your thoughts here. Is this something that you consider as well or you have more -- you think you have internal capabilities to develop all the technology infrastructure that you need to support your growth? Thank you. So I will answer your third question on the relationship with the providers of data services and data storage. And Simon Gallagher will answer your question about the market share dynamics and the dark pool development. We have made the deliberate decision to internalize within Euronext and to locate within Europe the businesses that are the most critical ones to our strategy and the operations that are the most sensitive ones to our operational leverage and operational performance. That has led to migrate our Core Data Centre that used to be in Basildon to new -- brand new data center, 100% powered by green energy in Bergamo near Milan. We do believe that core data processing, core software, core systems, core data storage, core applications must be located within the European Union and must be managed by Europeans. We do use for historical data storage one of those technology provider that has facilities located in the Republic of Ireland. We do not intend to have critical applications, critical software, critical matching engine related platforms located outside the European Union, nor being managed outside the Group. So this is a deliberate choice we have done, which is consistent with our strategy. Others have done different choices in a different environment with different sharing of value with partners, with different profile of future dependency on third party providers. We have not taken the choice, we have taken the choice to internalize that and that was not done at the compromise of anything in terms of financial performance as you have seen it over the past few years. Thank you, Stephane. So to answer the first question on the two numbers of 63% and 0.52. So this is obviously an equilibrium between these two numbers. And the aim of this equilibrium is to maximize euro revenue extraction from the franchise. We believe that these two numbers represent the optimal trade-off for this year, obviously there is some room, wiggle room around these numbers. But the primary aim here is to maintain our role and our ability to price full value within the franchise across the various pricing segments. I just want to make one point. So beyond the explicit fees of 0.52, what is behind a lot of this is the management of implicit costs for investors, which is the quality of execution on our market. And this has to do with the mark out, the liquidity of our markets, which is by all published papers vastly superior to the alternative market. So this explicit yield number is only a part of the story. And I'd even say sort of a minority part of the story. The bigger picture behind here is the design of our liquidity schemes and the partnerships we form with our partners in the electronic trading community. The second point about dark pools, there's been some small increase in these pools. I'd say two things, dark pools, if you look at the numbers remained very small features still of the European execution landscape. These are low-single-digit -- sorry, below 10% in terms of volumes and is constrained by regulation, right. So we have the 8% cap and the 4% cap on reference price trading venues. And the second thing, if you look at the revenue models of these pools, they actually charge less than that we do in the lead markets. Third point with respect to dark pools we are observing with great interest the movements in the regulatory landscape, and we will be very active in this space. And depending what's happened -- what happens there, there will be potential business opportunities for Euronext as well in the stock trading space. So I think that's what we can say there. Thank you. We will take the next question from line Ian White from Autonomous Research. The line is open now. Please go ahead. Hi, thanks for taking my questions. Just a few follow-ups from my side please. Can you just clarify a little bit, your appetite for M&A at this stage, from the discussion so far, I'm sort of taking away that you'd be happy to consider a transformational deal at this stage, even while the Borsa Italiana integration is still ongoing. Is that a fair reflection of your appetite for M&A please? Second question, just any revised thoughts at all around the medium-term financial guidance that you've given for out to FY ‘24. And finally, just maybe a clarification please on the outlook for NII. I think you talked about getting to cruising speed 20 bps yield, but how have collateral balances trended there over the last sort of few months and what's the outlook there please? Thank you. So I will answer your first question on the M&A framework and Giorgio will answer the two other questions on financial guidance. The M&A objectives or the M&A framework remains the same. We want to continue the growth of the Euronext project in two directions. The first one is to remain open to single country or several country exchanges in Europe, who consider being part of a scalable project and who might be interested in joining the largest single liquidity pool in Europe and the largest single order book and the most powerful technology platform. So anything that would make Euronext more relevant for some European market infrastructure is clearly something that we will consider. The other avenue is always to pursue the diversification of our of our top line. The diversification of our revenue mix, because this call is very interesting. There are many questions on market share and yield of the business that represents 20% of our top line today. It's important, I appreciate that. But you may have noticed that over the past few years, we have done a significant effort to diversify in Post Trade, to diversify in other asset classes like energy, like ForEx, like in other services like corporate services in technology et cetera. So we -- the objective Post Trade by any M&A move will be diversification of our top line. And the other objective would be to accelerate growth to capture businesses that have a growth profile that can accelerate the growth profile of the combined entity. So we explore and we analyze all sort of situations. And clearly the fact that our deleveraging has increased, and that the rating has been improved yesterday evening to BBB plus. The fact that the synergies in Italy are in the very good track, hence the upgrade targeted -- that really target that we have shared with you, it gives us more confidence that we need to explore these opportunities again. But nothing very new or fundamental, just an improvement of the surrounding consensus around the same strategy. We'd always, always the same very rigorous framework that we want to deploy the capital of our shareholders in acquisitions that generate a return on capital employed above the WACC of the company between year three and five after synergies. So that's the M&A framework. Absolutely. Let me start with the net treasury income. I will give you a few more details so that you can have a better view. So the first element, I wanted to highlight is that, with respect to when we discussed the last time around the average collateral has actually increased, what we have seen are level at around the EUR22 billion. And in the fourth quarter of last year, these EUR4.3 million that we have posted as NTI represent around zero point -- around 7 basis points. So slightly below the 10 we guided. And this is the result of the fact that interest rates increase more than anticipated. And as you know, during the fourth quarter we still had an important point of fixed income portfolio in run off, but then in terms of euro million this is very, very marginal. If we now move to the first quarter this year, what we will have in terms of P&L is going to be a revenue capture, which is going to be closer to the 10 bps I guided. And we might have in euro million a result, which is in between EUR5 million and EUR6 million. Then after that we will see, collateral should remain in the EUR20 billion type of a range, slightly more, slightly less. And the cruising speed in terms of NTI should be 20 basis points. Then this is as granular as I can be, if you have follow up question, happy to take them. When it comes to the target of 2024, the only one I can put, we will not change the target is that within our current target of EBITDA growth, given the environment we see room for having slightly more revenues for an environment where we will have slightly more cost. So this is more or less the trend, so 5% to 6% EBITDA CAGR remains unchanged, maybe depending on how the next two years will evolve, we might be in a situation where revenue growth is going to be higher and cost marginally higher. Thank you. We will take the next question from line Johannes Thormann from HSBC. The line is open now. Please go ahead. Good morning, everybody. And some follow-up questions please. First of all on the clearing business again. First of all, why have you delay in the margin improvement from 10 bps to 20 bps? I'm still lacking to understand, and will it be really fixed end of this quarter, or will we probably get next call the message again, we have another quarter running in 10 bps. What is driving this because investors here this is probably, anyway so it's just the worst time of the market? And secondly, on your clearing initiative in general, especially for the cash clearing, what incentives are you giving to the customers to move your business to Euronext Clearing away from LCH, because as I understand in cash clearing the customer has major part of the choice? And last but not least on the cash trading market share, historically you were about 70%, now you seem to be satisfied with 63%, which is also the revenue opportunity for the clearing business. So you're reducing your own revenue opportunity. What is driving your assumption to be satisfied with 63%? Thank you. Okay. So Giorgio will answer your -- the first part of your questions. And Anthony Attia, who is the Head of Post Trade operations will answer your questions on the incentives, the pricing of our operation -- clearing operations and our market share in equity, cash equity clearing. So, I would like to clarify one element, you seem to highlight the level of surprise, but in July 2022, we expressed a very clear guideline saying that, we would have had 20 basis point in the third quarter, then 10 basis point in the fourth and in the first quarter and then back again 20 basis point. And the result, so -- and we guided for around EUR20 billion level of collateral, which means implicitly that we guided for EUR10 million in the third quarter and EUR5 million in the fourth quarter. The actual result were EUR11 million in the third quarter and EUR4 million in the fourth quarter, which is, I would say, exactly identical to what we have guided in July 2022. So what is happening? And why did we get zero point -- sorry 7 basis point and not 10 basis point, simply that, when you have a small portion of your portfolio, which is fixed income, it means that the rate on the asset side will not change, whereas on the liability side where 100% of our ability are benchmarked to ECB rates, then you pay more. And this has a slightly dilutive impact on the level of NTI. Finally, on your question, is really true that we are going to have 20 basis point in the second quarter? And then, my answer is, yes. As a simple fact that in -- as I said, from the 1st of May 2023, we'll no longer hold any fixed income portfolio and for all of our assets and all our liabilities are going to be at variable rate. And therefore, we will make the spread between the interest we collect and interest we give back to clients. I hope this clarifies. Good morning. This is Anthony Attia. Thank you for your question. Let me detail for you the value proposition of our clearing internalization initiatives. They are five main points that I want to share with you. So first of all, we will offer the clearing services for cash equity for all our Euronext market excluding Oslo, but including Italy. So in the same default fund, on the same risk framework and the value-add risk model, we will be able to clear all our cash equity trade. This generate efficiencies on margin and default contribution to the client compared to the current fragmented situation. Second, we will be operating from a state-of-the-art clearing platform that we are currently developing with one connection for all the market. And the use of the extremely efficient set of technologies. Third part, we are working on offering competing clearing fees. There’s no need to get into the rest of the [Technical Difficulty] on from a clearing fee point of view. But it's the combination of these different factors that create this attractive value proposition. And last, thanks to our Post Trade investment on Euronext Securities, our CSDs, in particular in Milan, we will be able to offer extremely competitive settlement fees. And so the engagement we have with the clearing members presently show that we are in a very, very good position to succeed in the migration at the end of 2023. Thank you. Thank you. We will take the last question from line Greg Simpson from BNP Paribas. The line is open now. Please go ahead. Hi, good morning. Thank you for squeezing me in at the end. Maybe a follow-up on clearing, can you just talk about what the current market share of that LCH SA has in your cash markets? What are your expectations for when your next clearing goes live in Q4. And then you have fewer CCP in the background. So just interested in any thoughts on competition? And then a second question would be on, on the mid-single-digit price increases in the non-volume areas, can you share if there's any user feedback on this? Do customers generally just accept the price increases as they're essential or is there any signs that you just might try to say optimize the subscriptions, our market data for example. Thank you. So on clearing, so we do not comment market share element of LCH SA or the Euroclear Europe, you can direct your questions to them. Nevertheless the setup that will be out at the end of the year is complete for CCP setup, which means that by default the trade done on Euronext Optiq platform will be routed towards Euronext Clearing and if the buyer and the seller select another CCP then the trade will be relative to these other CCP. So far this preferred CCP model creates an incentive for the year, for the CCP of choice to clear the bulk of the trade, because it provide efficiencies the way I commented before. Then when it comes to your question with respect to price increase, it's actually a complicated question, but let me try to answer. So in general terms, clients are not necessarily happy of price increases. However, it is important to highlight that the general environment is -- in this general environment price increase are very common, everyone is increasing prices and therefore as well clients are accustomed to increase their own prices to their clients and receive a request for price increasing inflationary environment. So this is the first element. And we have not received any sign where our price increase were considered to be excessive. And clearly, we have deeply assessed that, making sure that price increase were commensurate to the quality of the service we provide. So this is the first element. Then you seem to refer more specifically to market data. And on that specific angle, what I can tell you is that, if you look, for example, at our -- if you look for example at our results in the fourth quarter, you see that the 7%, a part of that 7% is related to an increase of users. It's related to an increase of streams, which is quite surprisingly in an industry where usually there is attrition in terms of clients and number of terminals. And this reflect the new way of a mix way of working, flat -- part from home and part in the office where sharing screen and terminal becomes more complicated. So to make a long story short, we did pass the price increase that was generally well accepted by clients. So thank you everyone. As two words of conclusion now, I want to highlight really in my -- what is my view is that -- are the key takeaways of where we are today. We deliver diversification, our revenues are more diversified than they have ever been, and we will continue to deliver diversification. We deliver cost discipline in environment, which is quite complicated with inflationary pressure and we will continue to deliver cost discipline. We deliver post-merger integration for real with major projects already delivered in relation to the acquisition of Borsa Italiana, and new ones will be delivered including within a few weeks’ time with the Optiq migration in Italy. And we will therefore there continue to deliver revenue synergies and other post-merger integration projects. We have delivered deleveraging and we will continue to deliver deleveraging as demonstrated by the BBB plus upgrade announced yesterday by S&P. So we are extremely confident that this strong diversified cost discipline operating leverage focused company with great assets to expand the top line through the extraction of revenue synergies will continue to be extremely positioned to capture opportunities in ‘23.

EarningCall_39

Good morning. My name is Matthew, and I'll be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your question and comments after the presentation. At this time, I'd like to introduce today's speakers. Joining us today are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Executive Vice President of Finance, Chief Financial Officer and Treasurer. Thank you. We appreciate you joining us. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details of our fourth quarter and full year 2022 financial results. Paul will then recap the year and discuss our initiatives and outlook for 2023. I will return to provide our financial guidance. We will then end the call with a question-and-answer session. Now before we begin, I would like to remind you that Mr. Sarvadi or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. Now let's discuss our fourth quarter results in which we achieved $1.21 in adjusted EPS and $79 million of adjusted EBITDA, significantly above both our expectations in Q4 of 2021, a quarter which was negatively impacted by higher COVID costs. Paid worksite employee growth of 14.3% in Q4, which is slightly below the low end of our forecasted range as we experienced a greater than expected slowdown in hiring by our client base. As for the other two growth drivers, worksite employees paid from new client sales and client retention came in near our Q4 forecasted levels. In a few minutes, Paul and I will comment further on the outcome of our recent fall sales campaign and heavy client renewal period, leading to our 2023 outlook. Fourth quarter gross profit increased 41% on the 14% growth in paid worksite employees and a 24% improvement in gross profit per worksite employee. This improvement was largely driven by lower benefit costs as COVID-related costs continue to decline without a notable increase in health care utilization from previously deferred care. Other areas of gross profit, including pricing and contributions from our payroll tax and workers' compensation areas, also improved over Q4 of 2021. Operating expenses increased 22% over Q4 of the prior year, which was slightly above our forecast and included continued investment in our service personnel given our high worksite employee growth, a planned increase in Business Performance Advisors, higher sales commissions tied to programs surrounding our Q4 sales volume and pricing, increased costs related to recruiting, travel and training, and costs related to our ongoing implementation of salesforce. Net interest income improved over the prior year on higher interest rates and our Q4 effective income tax rate remained at 25%. Now let me recap our full year 2022 results. We achieved a 38% increase in adjusted EBITDA to $352 million and a 42% increase in adjusted EPS to $5.59, significantly above both our initial budgets and our recent guidance. These higher than expected earnings were driven by the significant growth in the paid worksite employees, execution of our long-term pricing strategy, and effective management of our direct cost programs, while making the key investments tied to our long-term growth plans. Our full year worksite employee growth of 18% over 2021 included an increase in worksite employees paid from new sales driven by an improvement in the sales efficiency of our Business Performance Advisors. Client retention also improved from 82% in the prior year to 85% in 2022. And the third driver to our growth included robust hiring by our clients during the first half of the year, prior to the recent slowdown that I mentioned earlier. Gross profit per worksite employee per month or key pricing and direct cost metrics improved from $273 in 2021 to $286 in 2022. These results [Technical Difficulty] by increased utilization from previously deferred care. Effective safety and claims management, combined with the recent hybrid work environment, resulted in lower workers' compensation costs. Operating expenses increased 18% over 2021, consistent with our worksite employee growth as we made key investments in our long-term growth plan. In addition to an increase in our service capacity, given the recent high levels of worksite employee growth, we made targeted adjustments to compensation levels of our corporate staff, given the current labor market dynamics and the inflationary environment. Our 2022 compensation costs also included higher sales commissions and incentive compensation tied to our outperformance. We continue to invest in our technology, including the ongoing implementation of salesforce. And lastly, we experienced an increase in travel and event costs on higher prices and higher volume when compared to the unusually low levels during the pandemic in 2021. Now we continue to produce strong cash flow and ended the year with a solid balance sheet, while investing in the business and providing strong return to our shareholders. We invested $30 million in capital expenditures in 2022 and returned $150 million to stockholders through our dividend and share repurchase programs. We repurchased a total of 770,000 shares at a cost of $73 million. We also paid out $77 million in cash dividends, which includes a 16% increase in our regular dividend rate in May of '22. We ended the year with $224 million of adjusted cash, up from $163 million at the end of 2021 and continued to have $280 million available under our credit facility. Thank you, Doug, and thank you all for joining our call. Today, I'd like to start with comments on our excellent fourth quarter results and the dynamic we've seen in the marketplace as we entered the new year. Second, I'll discuss our record setting full year 2022 results in the context of our internal five-year plan and the key initiatives that are continuing our momentum. I'll follow this discussion with the key drivers of our outlook for continued success in 2023 and how this keeps us on track with our long-term goals. Our fourth quarter results capped off an excellent year in both growth and profitability. In addition, we executed a strong selling and retention campaign to continue growth into 2023 despite a slowdown in client hiring. New booked workforce optimization sales came in at 96% of our aggressive fall campaign forecast. The highlight was continued success in our mid-market book sales, up substantially over the prior year and exceeding the budget. Another highlight was continued sales success in our traditional employment Workforce Acceleration book sales, which came in well over budget and well ahead of the same period last year. Q4 is also our heavy renewal period, with over 40% of our client base renewing around the year end. These renewals flow into the starting point for paid worksite employees in January and this starting point is foundational for our unit growth expectations for the coming year in our recurring revenue business model. Our Q4 renewal results were strong and our expected attrition flowing into January and February is expected to be slightly better than the average of the last several years. Now this level was not as good as last year, but still solid results from a historical perspective. Another highlight of this heavy renewal period was continuing our strong pricing of our direct cost allocations and markup on our services. We were successful in achieving the targets, which we had set, to account for the higher inflation rates we are all seeing in the marketplace. So these key revenue drivers that we control, new sales, retention and pricing were very solid in the fourth quarter and rolling into the new year. Now one driver we have less control over is the net change in employment within our client base and this factor slowed more significantly than expected in Q4. To put this in perspective, this client growth factor was stronger than typical years in 2021 and the first half of 2022, as the post-pandemic economic rebound occurred. The third quarter of last year slowed to a more normal rate and we forecasted for this slowdown in Q4 accordingly. Now keep in mind, we enroll every new hire and process every termination. So our net client growth numbers are actual real-time net hiring results, not an estimate. In the fourth quarter, net hiring in the base was only a slight increase, which was considerably below the third quarter. This contrasted with the relatively positive hiring outlook reported in the client survey we conducted late in the third quarter. Now this dynamic has continued through January. We have conducted an additional client survey to assess the sentiment of our client base to help plan this year. Historically, we compare actual data from client hiring and compensation, and we check for alignment with the outlook of business leaders. Most of the time, these are in sync, but not always as in Q4. Now the good news is, our client sentiment was even more positive in the survey we conducted over the last couple of weeks as clients look ahead. More than half of the clients responding to the survey expect to increase staffing levels and more than 70% of those surveyed expect 2023 to be somewhat or significantly better than 2022. The top three HR concerns among survey respondents were building a strong culture, attracting talent and managing healthcare costs. Now these issues align with the key strengths of our service offering and reflect positively on the strong demand for our services. Now in a few minutes, I'll explain how we've integrated the recent slowdown in hiring and the positive survey results into our outlook, but first, the full year record setting results reported today were an outstanding first year of our internal five year plan. Our full year results were record setting in both growth, in the number of worksite employees and profitability in adjusted EBITDA. This demonstrated our balanced approach and highlights the strength of our business model. Now in addition to the significant financial outperformance of our plan, several key accomplishments in 2022 are driving our confidence going forward. Our five year plan is driven by 10 key success factors and significant progress is happening across the board. One of these success factors is improvement in sales efficiency, which we believe could add significant operating leverage to our financial model in the future. This year, we increased sales efficiency by 9% and incorporated changes designed to further this improvement. We aligned commission incentives at all levels in the organization in order to focus on achieving quarterly goals and moving BPAs up to performance tiers. This was successful in 2022, and we've made further revisions to optimize these incentives moving into 2023. These incentives also incorporated changes to drive another key success factor in our five year plan, ramping up our Workforce Acceleration sales. Our 40% increase in these sales in 2022 validate we are on track with this initiative. Workforce Acceleration has the potential to further improve our sales efficiency, lower BPA turnover, and enhance our customer for life strategy for long-term client retention. And we're still early in the ramp-up of this service and the contribution is relatively small. However, this business also adds to gross profit without related risks included in the co-employment workforce optimization model. Our successful sales effort in '22 was also supported by a 13% increase in marketing assisted sales, which was a new high watermark for marketing influence sales for a year. These results were related to another of our key success factors, which is extending our brand awareness and affinity and capitalizing on the increased demand for our services we've seen coming out of the pandemic. Another highlight of the year was our internal hiring success in the face of a continuing tight labor market. This effort directly supports our highest priority success factor, which is continuing to attract and retain people with the heart and dedication of our current staff. This effort helped us catch up on hiring across the company to meet our growth related service demand and bring on our targeted number of BPAs to drive future growth. This has allowed us to begin the year with over 700 BPAs, a 9% increase over last year, which is in line with our long-term plan. The last key success factor to mention today is pricing and direct cost management, considering we've been in a higher inflation environment. Our discipline and consistency in this area has paid off considerably and we believe we're well positioned going forward. So before I pass the call back to Doug, I'd like to provide some color around the approach we're taking in our plan for 2023 and how this fits in as year two of our five year plan. We're coming off a strong year with momentum in the primary growth drivers we control, sales and client retention. However, the recent slowdown in client hiring has modestly lowered the starting point of paid worksite employees, and that needs to be factored into this year's plan. Our recent survey of our client base implies solid hiring ahead in 2023, yet there's a level of economic uncertainty in the air that we believe justifies a level of prudence in forecasting this factor. Now this has produced a wider range for our unit growth rate projection than we typically begin with each year. Interestingly, this wider range for growth is somewhat offset by a narrower range for gross profit that we've had over the last few years due to our strong pricing performance and expected normalization of direct costs. We're also continuing investments to achieve the objectives of our five year plan with the goal of exceeding the strong five year run we experienced from 2015 to 2019. Our compound annual growth rate in paid worksite employees over that period was 12.5% and adjusted EBITDA was over 24%. Also, one of the charts in the earnings presentation we released today shows the compound annual growth rate over the most recent five years in paid worksite employees and adjusted EBITDA of 10% and 15%, respectively. This is a significant improvement, since it includes a negative growth year in 2020 due to the pandemic related shutdowns. So when we add our 2023 expected performance to our recent record setting year, we're still well ahead of our internal five year plan in growth and profitability, and we believe we're making the right investments to continue to achieve the goals of our plan. I believe this is very important for our shareholders to understand, because if we perform according to this plan, the return to shareholders could be similar or possibly even better than our previous five year run. Our total return to shareholders over that period was a remarkable 434%. Quarterly dividends increased an average of 27% each year, and the share price increased more than five-fold. Now we are focused company wide on the 10 key success factors we believe will capitalize on the strong demand for our services in the marketplace, achieve the goals of our internal five year plan, and produce compound annual growth rates that drive exceptional return to shareholders. Thanks, Paul. As I'm sure you're aware by now, our worksite employee growth in 2022 was very strong and was significantly above our typical long-term targets. We are now entering a year with some economic uncertainty and a recent slowdown in the level of hiring by our clients. Therefore, we are beginning the year forecasting 2023's worksite employee growth in a wider range than normal, with the midpoint in the high-single digits rather than our typical target of double-digit growth. Our outperformance in 2022 was even stronger at the earnings line. While this will create challenges with the comparisons, our 2023 earnings outlook remains strong, particularly given the current macro environment. Now let me provide some details behind our 2023 guidance. Beginning with the results of our recent sales campaign and heavy client renewal period, and the possibility of less hiring by our clients, we are forecasting 10% to 11% worksite employee growth for Q1 of 2023. Subsequent to Q1, our growth is projected to be driven by an anticipated increase in the number of Business Performance Advisors and their sales efficiency. We expect client retention to remain strong, although at a slightly lower level than last year. And when combined with the possibility of less hiring by our clients over the balance of the year, we have forecasted a range of 7.5% to 10.5% growth for the full year. As for gross profit, we expect a strong performance last year to continue in 2023, although we are taking what we believe is a conservative approach to budgeting compared to our 2022 performance. We currently expect our direct cost programs to return to a more normalized environment in 2023 with less uncertainty in the benefits in payroll tax areas. In addition, we expect a benefit from growth based administrative cost reductions in our UnitedHealthcare contract in 2023. So we are more comfortable with a tighter range of expectations in this area than the past couple of years. Now as far as our operating costs, we remain focused on the long-term initiatives in our internal five year plan. Our 2023 operating costs include the impact of successfully hiring sales, service and support personnel in the second half of last year. We plan to continue to grow the number of BPAs, and we believe our restructured sales commission program will drive further improvements in sales efficiency over the long term. We also intend to continue investment in our marketing and technology to meet our planned objectives. As for our interest income and expense, our 2023 budget assumes the current interest rates and a run rate consistent with Q4 of 2022. Recent rate increases have had a positive impact on our adjusted EBITDA, given the interest income we earn on our cash and investments, including the funds in our workers compensation program. This is a component of our business model that has been depressed over a considerable period during the extended low rate interest rate environment. We are estimating a tax rate of 25% for Q1 and 26.5% for the full year 2023. So let's now talk about the full year earnings expectations, which have a couple of comparison issues. We are forecasting 2023 adjusted EBITDA in a range of $353 million to $409 million, ranging from relatively flat to a 16% increase over 2022. We are forecasting full year adjusted EPS in the range of $5.24 to $6.30, ranging from a decrease of 6% to an increase of 13% compared to 2022. Now the disparity between the forecasted adjusted EBITDA and adjusted EPS year-over-year growth rates is primarily driven by increased interest, depreciation and amortization expense, which are excluded from adjusted EBITDA. As for Q1, we are forecasting adjusted EBITDA in a range of $143 million to $153 million, an increase of 21% to 29% over the prior year's quarter. We are forecasting adjusted EPS in the range of $2.40 to $2.60. The Q1 forecasted year-over-year earnings growth rates are higher than the full year 2023 rates due to quarterly comparisons to the prior year. Earnings in Q1 of the prior year were negatively impacted by higher benefit costs associated with COVID. These COVID-related costs declined over the balance of 2022, particularly in the latter half of the year. Secondly, interest income started out low in Q1 of 2022 and increased over the course of last year. As a result, comparisons are more favorable in the first half of the year and more challenging in the second half. Certainly, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Andrew Nicholas from William Blair. Your line is live. Hi, guys. Good morning. This is Daniel Maxwell on for Andrew. Just to get started, wondering what is assumed in guidance in terms of gross profit per worksite employee per month and then any puts and takes relative to the $286 million number you did in the full year 2022? Yeah. I think as you're aware, we don't give that as a key metric in our guidance. We reported the $286 million last year. Obviously, that's a high mark for us, really contemplated the pricing strategy, long-term pricing strategy that we put in place from the outset of the pandemic through where we are today, and we've slightly exceeded those targets through that particular time period. And as you expect, there were fluctuations in benefit costs during the pandemic, post-pandemic, but we're exiting -- we exited 2022 in very good shape relative to our pricing in our benefit cost trend. We also obviously experienced some benefit from the remote work environment in our workers' comp and we managed the payroll taxes accordingly. So all that said, $286 million, if you look at our history is a high watermark for gross profit per employee. We're not going to go into a year. We go through our regular typical process of budgeting gross profit going into a year with the intent of managing to the upside in each of the direct cost program areas. So, you wouldn't expect us to go into 2023 budgeting at that same level. Now on the -- what we did mention in my prepared remarks was, we do expect to realize administrative cost savings in our UnitedHealthcare plan relative to the significant growth that we've experienced and that we're continuing to forecast. So that would be some upside in that particular area versus in previous years. So it gives you a little bit of a flavor there. So hopefully, that will help you some. Yeah. That's helpful. And then as a follow-up, is there anything unique to call out from a healthcare activity or claims perspective? And in 2023, are you assuming any pent-up demand flushing through or is 2023 kind of looking like a more normal year? No, I think we're looking at '23 as more of a normal year as it relates to benefit and benefit utilization. Obviously, we went through 2022 with declining COVID cost, but we didn't see a notable increase in utilization from care that was previously deferred when the pandemic was at its height. All that has -- seems to have settled down through the latter half of 2022. So we do think barring any significant new variants that we're entering 2023 in a more normalized environment, both from a benefit perspective but also from the unemployment tax area where that was also -- had a little bit of volatility in it relative to the pandemic and its impact on unemployment and on state unemployment tax rates. Great. Thanks. And then maybe if I can just squeeze one more in on pricing. Are you seeing any noticeable change in the aggressiveness of competitors when it comes to price? And if so, is that something that's had any impact on new business generation or competitive win rates to this point? No. We really haven't seen any of that. Our pricing strategy is really specific, and relative to every client's specific information throughout their organization and then how we're trending things for going forward and building in increases is based on all the underlying trends that we're seeing plus, like I mentioned, one of our key success factors in our five year plan was to also build in a reasonable level to deal with inflation that's going on in the marketplace. Obviously, wage inflation is significant and 60% of our operating costs are in personnel cost as a service company. So we've been really -- our team has done a really great job at meeting those targets, and so we're in good shape on that front, and it really hasn't affected us on the competitive landscape. Thanks. I was wondering if you could give us some color on trends in the Workforce Acceleration area, sort of any kind of color about growth, et cetera? And where do you want to go in terms of the transition and the ability to shift customers from Optimization to Acceleration and back and forth? And how long might it take to get to sort of an end state where that's a relatively smooth and sort of automated process? That's a very good question, Tobey. And we're really all over that front. I mentioned that last year, we had a 40% increase in our Workforce Acceleration growth. We also, over this year, made some of these incentive changes, commission changes in our organization that really have aligned everybody in the organization. With this other key success factor that we believe, which is really growing this Workforce Acceleration business, because of the benefits that I listed in my prepared remarks. So we see that where this is going for us, now that we've synced things up. I wanted to be really careful about that because we wanted to make sure that we weren't pulling away any from our Workforce Optimization sales through how we went about this. And we have done a beautiful job of that. But now we're ready to really see that all synced up, see that continue to grow faster and we believe that there'll be a significant effort now. We've already had customers go both directions from WX to WO from WO to WX. We had more this past year than we did the year before that. But what our effort will be going forward is to now make sure our customer base knows about these options earlier, so we don't have to have this discussion after a customer's thought about making a move or maybe like toward our year end transition. The numbers that we have in attrition every year, we want to see if we can address that. So we're going to go after that more aggressively this year on how we do that. And your question about how long you think it will take, I think it'll get a lot better this year, but it will take a couple of years before we really see that really happen. So that's -- hopefully, that helps you. It does. Thank you. You talked about BPAs and some pretty good high-single digit growth. Could you refresh us and put that into context relative to the last couple of years, where you're able to hit pretty good rates of WSEE growth with more flattish BPAs by optimizing marketing and some other things? Maybe just give us some color on the go-forward strategy and the interplay between BPA growth and WSEE target growth? Absolutely. In our big picture plan, in our five year plan, what is a key differentiator from previous years is that we believe that this sales efficiency improvement allows us to grow our units, our worksite employee growth at a rate faster than our growth in BPAs. Historically, over the 37 years I've been at this, most of the time, it was when we grew the BPAs at 12%, within 18 months, you'd be growing worksite employees at 12%. That's kind of the way things work. But we believe we're really at a different -- the biggest difference in this five year plan is we're very confident about sales efficiency improvement. We're confident about the demand in the marketplace. We're doing things in a way that are optimizing. You also have the big change in being able to do discovery calls on Zoom calls instead of the whole -- how people use their time. There's so many things that can contribute towards sales efficiency. So in our five year plan, we talked about, hey, we believe now we can actually look at a program where we're growing the BPAs in the high-single digits and growing the worksite employees in double-digits between that 10% to 15% range. So that's the objective, and that's what we're targeting. And the beauty of that is how that adds to our operating leverage. We've had excellent operating leverage in our business on the service side, because we haven't had to grow the service organization as fast as the unit growth. We also have, obviously, our other areas of the business, G&A, other areas that don't have to grow as fast as the number of clients, et cetera. But we've always had to grow the Business Performance Advisors and invest ahead of the growth. And this is going to change the calculation and allow more to drop to the bottom line, provided we're successful at this. Perfect. My last question is, could you remind us what normative historical fee and healthcare benefit expense growth is and juxtapose that with what you're seeing or are able to achieve for this year? Well, I think if you look, one of the slides we put out there on the benefit cost trend, you looked at it over a five year period and look at a CAGR of less than 3.5% on our benefit cost per employee. So that's sort of the cost side of the picture over the past three years, which included the pandemic. If you remember, going into the pandemic, we made the decision to price -- to stick with our long-term pricing strategy and not swing it back and forth from year-to-year, but with the intent of matching price and cost. If we fell behind a little in one year, I think maybe in 2021, we added a percentage or two on the pricing side to accommodate that. But at the end, we're exiting -- we feel very comfortable with the exit that we are properly matching price and costs going forward. Good morning, Paul and Doug. Great results here for the full year. I'm wondering, can you talk a little bit about -- just the benefit cost increase that you ended up seeing this quarter? And in terms of enrollments, when we listen to ADP or Paychex, they basically ended up saying that fewer of their clients were signing up for the full benefit package on a go-forward basis. Are you seeing anything similar to that just in terms of the number of eligible WSEE taking on health benefits on a go-forward basis? No, Mark. We really haven't seen any of that. And I'll tell you the reason I would suggest that, that wouldn't be happening in our case, is our target customer base, of course, we call the best, small and medium-sized businesses in the country, and they're a lot of times fast growing and a lot of times, just they're really after an environment that really, are they people-centric and how they think about their business. And so benefits is really important there and they're -- they want to make sure what we're able to do it. So we've always had kind of in the industry, the highest percentage participation and highest kind of percentage rates of what customers are contributing toward the cost. So we don't really see that. Now we do have sometimes mix changes that affect the overall numbers that you see because sometimes mid-market customers or customers that have more part-timers, of course, those people aren't eligible for the coverage. So we have some moving around on that number to some degree, but it's not reflecting any change in what people are signing up for. Great. And that the benefit cost expectation for this year and what it was actually in the fourth quarter in terms of year-over-year increase? So for this year -- every year when we look ahead, we trend every component of the cost, and we compare, obviously, to our pricing. Good news, we feel super strong about how effective we were on the pricing front. When we look at trends going forward, you have years that offset certain parts of the trend. In the marketplace, you're seeing 7% to 8% of trend in cost and then we have things that offset, and that's why you look at our history, as Doug just mentioned 3.5%. This year, we would expect more like 4% to 5% because you've got demographic changes, things of that nature that play in. This particularly, we don't have -- we did introduce a couple of new benefit plans that will lower cost when people choose those new options, but we didn't make any planned design changes that would offset the cost of this particular year. And we knew that, of course, last year, and that's why our pricing was done in a way to make sure that, that all matched up. So that's kind of what we're looking at for this year. I hope that helps you. It does. And then you mentioned, I didn't catch the retention for the full year. So I'm wondering what that is. And then also, in terms of the slower hiring among the client base, to what extent did you see variances? Were there any clients that were actually reducing headcount or are there any regional differences or industry vertical differences that are discernible? Thank you for the question. So our retention last year was exceptional. It actually went up from 82% in the prior year in 2021 to 85% last year. And of course, that's benefited by a really strong year-end transition last year where we had kind of record low attrition. This year was a little bit higher than that, but even better than our average over the last few years. So we expect a good year on the retention front for this year. But the issue about net hiring in the client base, it's interesting, we obviously have dug in very deeply on this and then did our survey to try to understand what's happening out there with our customer base specifically. And I will say that in the fourth quarter, the slight increase in net hiring really was an issue kind of across the board. It wasn't like we could pinpoint one area, one group. Previous in the year, we did have customers by industry category, the mortgage business, some other companies that were hitting more obstacles and lowering staff. But in the fourth quarter, it was more kind of across the board. Some of that is a seasonality effect. You don't have as much hiring typically in the holiday season. But as we look forward, we see the optimism there. And as far as customers expecting staff reductions, it's interesting because 54% are expected to add employees and then only 4% expected staff reduction. So that's the sentiment and their plan. We're in a situation, we thought it was prudent for us to weigh what happened last quarter with that optimism and with the potential for a tougher economic environment. And so we're just being prudent to start the year, and we think that's the right thing to do. Thanks. Good morning, fellas. Paul, I wanted to get a sense of the renewals. January is a big month for renewals, but also there's some into February. Can you characterize renewals on the traditional Workforce Optimization versus Workforce Acceleration? And then also on the mid-market and wanted to dig in a little deeper in terms of where you're seeing the biggest growth potential in the business, is it mid-market? Is it Workforce Acceleration or the traditional offering? Yeah. That's a great question. We always talk internally about a three pronged growth effort. So it is our core Workforce Optimization, sales and retention, our mid-market efforts and then also our Workforce Acceleration. And we, man, we had all three gen in beautifully last year. We have optimized, like I mentioned, about the commission to make all that work together. We've really tweaked it to where we believe, we really have a great focus on the quarterly production with quarterly bonuses, people earned for hitting their objectives on both sides, whether it's -- on all three of those actually, whether it's mid-market, core or Workforce Acceleration. So we're really excited about where that's going, and we think we're in great shape on that front. Great. And then other question was in terms of lead flow, maybe segment how you're -- how strategically you're doing things differently now versus several years ago? I know digital marketing has been a key component in conversion of those leads. Maybe give us some color on the sales and marketing initiatives? Yeah. What we've done, the marketing efforts really been effective because we continue to localize what we're doing. So different markets you're able to reach our target customer base with different approaches. And that takes a lot of work to go market by market and figure it out and work with our local folks. But when you have a good overarching marketing program, including the digital and everything from radio or TV to billboards, different markets have different ways that it works best to hit our target market. So having localized campaigns has really helped a lot, having them multiple times within a year, timing it right to boost activity. And then coupling that with our two other things that have really made a huge difference, and that is our partnering programs that we have with different folks who refer people to us and that's been very effective. And what we call our loyalty events. Even through the COVID period, we did them online and all kinds of people got very creative this past year, everybody wanted to see each other again and get back in person. So we did a lot of that. That's been very effective. So we have -- the marketing effort hit its all-time high in how it supported the organization, and we intend to continue to do that. Thank you. That concludes our Q&A session. I will now hand the conference back to Paul Sarvadi for closing remarks. Please go ahead. Once again, we want to thank everybody for participating with us today. We're excited about having a record year last year and very excited about this year too, and our five year plan and the return to shareholders we intend to produce. So thank you for participating, and we look forward to discussing these things with you more. Thank you. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

EarningCall_40

Good afternoon and welcome to the Fourth Quarter 2022 Connection Earnings Conference Call. My name is Cherie, and I’ll be the coordinator for today. [Operator Instructions] As a reminder, this conference call is the property of Connection and may not be recorded or rebroadcast without specific permission from the company. On the call today are Tim McGrath, President and Chief Executive Officer and Tom Baker, Senior Vice President and Chief Financial Officer. I will now turn the call over to the company. Thanks, operator and good afternoon everyone. I will now read our cautionary note regarding forward-looking statements. Any statements or references made during the conference call that are not statements of historical fact may be deemed to be forward-looking statements. Various remarks that management may make about the company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision 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 the company’s annual report on Form 10-K for the year ended December 31, 2021 which is on file with the Securities and Exchange Commission as well as in other documents that the company files with the Commission from time-to-time. In addition, any forward-looking statements represent management’s view as of today and should not be relied upon as representing views as of any subsequent date. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so other than as required by law, even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management’s views as of any date subsequent to today. During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measure discussed and its most directly comparable GAAP measure is available in today’s earnings release and on the company’s website at www.connection.com. Please note that unless otherwise stated, all references to fourth quarter 2022 comparisons are being made against the fourth quarter of 2021. Today’s call is being webcast and will be available on Connection’s website. The earnings release will be available on the SEC website at www.sec.gov and in the Investor Relations section of our website at www.connection.com. Thank you, Samantha. Good afternoon, everyone and thank you for joining us today for Connection’s Q4 2022 conference call. I’ll begin this afternoon with an overview of our fourth quarter results, highlights of our performance and share our thoughts on business in 2023. Tom will then walk us through in more detail in our Q4 financials. We are seeing increased demand for advanced technology solutions, including data center modernization, cloud, software optimization and security solutions. This shift away from endpoint devices means our customers have to be aligned with a partner they can trust to deliver on more complex integrated solutions and services. Our strategic initiatives were developed to support the evolution in customer priorities around advanced technologies and integrated solutions. We’ve continued to make investments in tools, resources and training in order to further expand and align our offerings with the needs of our customers as we enable their digital transformation. We believe our business strategy remains well aligned to the shifting dynamics of how customers deploy, utilize and consume technology. We continue to connect our customers with technology that enhances growth, elevates productivity and empowers their innovation. We help our customers expertly navigate through a complex set of choices within the technology landscape with dynamic and constantly evolving technology choices around core infrastructure, on-prem and off-prem cloud, security and software. We help calm the confusion of IT for our customers. Now let’s discuss our Q4 performance. We have had great success since the pandemic began, helping our customers to navigate through hybrid work and hybrid learning solutions. During Q4, the endpoint device categories experienced nearly a 15% decline in revenue as customers have shifted their priorities and become more cautious with their overall IT spending in this uncertain economic environment. As a result, net sales declined by 8.5% to $732.5 million compared to Q4 2021. Gross profit declined 2.1% to $124.3 million. However, gross margins were up 110 basis points to 17% in Q4 compared to Q4 2021. This increase in gross margin is a reflection of the shift in product mix, including more solutions recognized on a net basis. Operating income in Q4 was $23.9 million, a decrease of 23.6% or 3.3% of net sales compared to $31.3 million or 3.9% of net sales in the prior year quarter. Net income in Q4 was $18.8 million, a decrease of 15.9% compared to $22.4 million in the prior year quarter. In Q4 2022, our diluted earnings per share was $0.71, a decrease of 16.2% from $0.85 in Q4 2021. During the quarter, we saw a continued improvement in the supply chain, although pockets of constraints still exist with a few suppliers. For the full year, we delivered record results, including an 8% increase in net sales to $3.1 billion, 13.3% growth in gross profit to $526.2 million and diluted earnings per share of $3.37, which represents a 27.2% increase compared to 2021 full year results. We will now look a little deeper into our performance. In our Business Solutions segment, our Q4 net sales were $280.7 million, a decrease of 7.5% compared to a record and tough compare of $303.5 million a year ago. In spite of this decrease in net sales, our gross profit in the Business Solutions segment was $60 million, an increase of 3.6% from a year ago. Gross margin increased 229 basis points to 21.4% in the quarter. This increase was driven by strong demand for higher-margin data center products, including software, networking and servers during the fourth quarter of 2022. This is in line with our expectation of the shifting technology mix and customer spend. In our Public Sector Solutions business, Q4 net sales were $117.3 million, a decrease of 9.4% compared to $129.4 million a year ago. Sales to the federal government increased 46% year-over-year compared to the prior year, while sales to state and local government and educational institutions were $79.6 million, a decrease of 23.2% compared to the prior year. Gross profit for the Public Sector segment was $17 million, a decrease of 8.8% compared to Q4 ‘21. Gross margin increased by 10 basis points to 14.5% in the quarter. In our Enterprise Solutions segment, Q4 net sales were $334.5 million, a decrease of 8.9% compared to $367.3 million a year ago. Gross profit for the Enterprise segment was $47.3 million, a decrease of 6.2% compared to the prior year quarter. Gross margin increased by 41 basis points to 14.1% primarily driven by an increase in sales of servers and services during the fourth quarter of 2022. Our vertical market focus continues to deliver customer value. In our finance vertical market, revenue grew 13% year-over-year as customers modernize their environment with a focus on security and software. In addition, gross profit increased 22% year-over-year. Retail revenue grew 11% year-over-year as customers relied on technology to enable automation and improve the retail experience. I will now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement. Tom? Thanks, Tim. SG&A increased 175 basis points to 13.7% of net sales in the quarter compared to 12% in the prior year quarter primarily driven by lower revenues. On a dollar basis, SG&A increased by $4.7 million compared to the prior year quarter as a result of an increase in the cost of labor and ongoing investment in resources to strengthen our sales, technical sales and services organization. Looking forward, we intend to continue to invest in technical resources while focusing on improving our efficiency in light of what we perceive to be continued economic headwinds in 2023. In the first quarter of 2023, we launched an initiative intended to reduce our current cost structure by $8 million to $10 million annually. Implementations cost reduction initiatives started this month and will be fully implemented by Q4. Q4 operating income was $23.9 million, down 23.6% this quarter from $31.3 million a year ago. Our Q4 effective tax rate was 23.7%, down from 28.5% in the same period a year ago due to a reduction of state income tax expense. Net income for the quarter was $18.8 million, a decrease of 15.9% from $22.4 million a year ago. Diluted earnings per share was $0.71, a decrease of 16.2% from the prior year period. Our trailing 12-month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $139.3 million compared to $113 million a year ago, an increase of 23%. In terms of returning cash to shareholders, we announced an increase in our stock repurchase program of $25 million in Q4, in addition to a $0.34 per share special annual dividend paid in December. Additionally, we are pleased to announce that our Board of Directors have declared a quarterly dividend of $0.08 per share payable to shareholders of record on February 21, 2023, and payable on March 10, 2023. Our goal is to maximize shareholder value while maintaining financial flexibility. We continue to assess M&A opportunities and other capital allocations such as dividends and stock buybacks. We have approximately $37 million in previously authorized share repurchases. Cash flow generated from operations for the year ended 2022 was $34.9 million compared to $57.8 million for the same period a year ago. The decrease in cash flow from operations reflects an increase in accounts receivable as our DSO increased to 70 days from 65 days at the end of 2021. This increase in DSO was primarily a function of netted products recorded in accounts receivable on a gross basis, while the revenue was recorded on a net basis. Our accounts payable balance declined $49.1 million for the year ended 2022, while accrued expenses and other liabilities declined $14.7 million due to the timing of product received and associated payments. Our net cash used in investing activities of $9.1 million in 2022 was primarily the result of equipment purchases and IT initiatives that we believe will drive future efficiencies. The company used $11.2 million of cash for financing activities during the year ended 2022, of which $8.9 million was returned to shareholders in the form of dividends. We ended Q4 with $122.9 million of cash and cash equivalents. Thanks, Tom. I want to take a few moments to update you on our strategic plans. As stated earlier, we’re seeing increased demand in advanced technologies, and we’re focused on keeping our customers secure, productive and competitive with technology. Now in our 41st year, we remain committed to our trhee main pillars of growth: cloud and data center transformation, workplace transformation and supply chain optimization. To help us accomplish these initiatives, we’ve made enhancements to our business plans and have hired several world-class leaders in sales, technical sales and services. As our customers continue to transform their businesses, they look toward connection to integrate and deliver on more complex and innovative solutions. Looking at the first half of 2023, we believe that demand for endpoint devices will continue to be challenged as they were in Q4. Additionally, our customers continue to tell us that they are more deliberate in spending and are being more restrictive on budget in the face of economic uncertainty. We do expect our customers will continue to shift their priorities towards hybrid data center, cybersecurity and cloud transformation, which should partially offset weakness in the endpoint market. In addition, we expect our customers to extend the life of their technology assets more than they normally would. This means that services and advanced technology should be a growth driver for Connection as clients will look to help offset their continued need for technical resources and solutions. As we navigate through 2023, we will remain very focused on improving our operational efficiency, managing our costs and scaling our expenses appropriately. Consistent with analysts’ predictions for the second half of 2023, we believe that the overall IT market should recover as the macroeconomic environment improves. Great companies can take market share in any economic environment, and we expect to end the year with growth that is 2% above the IT industry growth rate. I’d like to take a moment to thank our valued employees for their continued effort and extraordinary dedication during this rapidly changing environment. This is Stefan actually. This is Stefan in for Anthony Lebiedzinski. I apologize. My first question is given the slower economy, are you seeing any meaningful customer cancellations or postponements for certain IT projects? So thanks. So, clearly, the economy, the economic backdrop does have an effect on many of our customers. We are seeing it probably the most in our enterprise space right now. But overall, we continue to add customers overall. So, our acquisition engine is working very well. And our current customers, some that have taken a pause, it’s largely as I mentioned on the call in the device arena. And when you think about that, if you think about Q4 ‘21 versus Q4 ‘22, there is an extraordinary difference in the overall device ecosystem for us. It was over 75 million. And so that really is the story for the quarter. We have got tremendous loyal long-term customers. They are going to continue to buy from us. Many of them have taken a pause in device – devices specifically. But that said, we are really excited about where headed – where we are headed as a company. We have really made a transition to focus more on those advanced technologies, have put a number of plans in place around training initiatives, leadership focus and especially the tools to drive all that. So, we are pretty optimistic about where we are headed and don’t think that our customers are doing anything other than as you indicated, trying to get through this uncertain economic time. We are here to help them through that and overall, pretty bullish. Tom? Yes. I think to-date, we haven’t seen any meaningful cancellations of POs or orders that have been placed. There have been a few projects that have pushed a bit. But I wouldn’t say those are significant at this time. Alright. Thank you. My second question is also given the current macro environment, are you seeing or are you expecting any meaningful pricing pressure? And if yes, you have got across the board or only in some of your vertical markets? So, I don’t think – clearly, there have been pricing increases from our suppliers over the pandemic and over the probably the last 18 months, but nothing meaningful. Any price increases that we have had, we have been able to successfully move along. And we are not seeing any extraordinary pressure the other way from our customer base, frankly, because I think they see the technology and the integrated solutions that we deliver as being mission-critical and impactful to their business. So, we have not had that pressure. Thank you so much. And my follow-up, how should we think about like the PC cycle playing out this year? And if you could talk about that in terms of your expectations for your three main segments, that would be great, please. So, clearly, what we saw with the PC cycle, as you know from following our industry, is that, from the pandemic through late Q3 of ‘22 and certainly into Q4 – let me correct that. During the pandemic, of course, PC was essential, and purchases were accelerated. In fact, we saw great acceleration in the device market overall. And as a result of that, I think many of our customers did indeed accelerate purchases of endpoint device and all the related ecosystem and products that go along with that. We did see a slowing of that, it started late in Q3 and certainly continued into Q4. And we now expect that, that slowness in device will be around at least for the first half of 2023. There are meaningful drivers of growth coming, I think after that. And we think that 3-year upgrade cycle will return to normal and really start to pick up in the second half of the year. Does that answer your question? Yes. I would say during the quarter, our backlog is down a little bit. But as we mentioned in our prepared remarks, there are still pockets in the supply chain where supply is constrained. So, backlog still is a little bit elevated, and it has been easing through the quarter. And one moment for our next question, that will come from the line of Jake Norrison with Raymond James. Your line is open. Hey guys. This is Jake on for Adam. I was just hoping you guys could provide me with more color on sort of the demand trends you are seeing in SMB compared to enterprise. Obviously, discussed customers getting a little more cautious in scrutinizing IT budgets more, but are you seeing that sort of index more towards SMB or enterprise? Can you just dive into that a little further, please? Thanks Jake. So, really, we have been seeing it across the board, and there are some pockets of opportunity, and I will outline those. But clearly, our large enterprise customers, many of them are going through reductions and certainly budget reductions. And as a result, the enterprise has probably been hit the hardest. We do believe that is temporary. They hit the hardest when it comes to device, but they are investing in the advanced technology side of their business. And so there is a great opportunity there. As you said, the SMB business is forecasted to be down in device as we go through 2023. But again, our SMB customers have been pretty resilient and do look to us to provide a lot of those IT solutions. And so enterprise and SMB have been down about the same. And that is also true for the K-12 and with the SLED business. However, there are some drivers on the horizon there as the ECF funding has been continued through the end of 2023. We do expect that will be a driver of demand. And then finally, with our Federal business, we are seeing really strong growth right now. That is large project dependent. But we have a good view of those large projects. We think they will last throughout 2023. So, we are optimistic there. So, I would say we are kind of down in all three subsidiaries. We see some pockets of growth in Fed. We see a return to growth coming with K-12 a little later in the year as ECF works its way through. And with the enterprise and SMB, we think the first half will be infrastructure and advanced technology. In the second half, we will see that device start to kick in again. And speakers, I am showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Tim McGrath for any closing remarks. Thank you, Cherie. I would like to thank all of our customers, vendor partners and shareholders for their continued support and once again, our dedicated coworkers for their efforts and extraordinary dedication through these times. I would also like to thank all of those – excuse me, thank all of you who are listening to the call this afternoon. Your time and interest in Connection are appreciated. Have a great night.

EarningCall_41

We would like to begin the presentation of the Fiscal Year 2022 Third Quarter Financial Results. Thank you very much for the participation. Today, we have with us COO, Ashwani Gupta and CFO, Stephen Ma. Thank you very much again for your participation. First COO, Mr. Gupta will give the Q3 results and full year outlook. Mr. Gupta? Thank you. Good afternoon, everyone. Thank you for joining Nissan’s third quarter results for the period ending December 31, 2022. I will take you through our latest results. As mentioned, our performance should be seen against the backdrop of the headwinds impacting the wider auto industry. Although Nissan is not immune to the global shortage of semiconductors, we introduced countermeasures to secure chip supplies. This enabled us to increase production volumes in the first 9 months of the fiscal year with accelerating output in the third quarter. Despite these measures, our unit sales were negatively impacted by three main issues: firstly, the ongoing disruption in China caused by COVID; second, shortages of semiconductors in U.S for compact segment models; and third, the vehicle exports hampered by constraints of global logistics. Despite these challenges, we prioritized production of models, where there were no supply constraints to regulate production and in some cases, producing cars to replenish dealer inventory back to healthy level. This helped lift our production volumes. Global production rose by 9% year-on-year to 909,000 units in 3 months to December 31. This represented an accelerating trend on the 2.4% increase in production volume to 2.5 to 6 million units achieved in the first 9 months of the fiscal year. Although we were able to ramp up our production, year-on-year unit sales declined 6.9% to 842,000 units in the third quarter. Our third quarter retail sales varied noticeably around the world. In Japan, our home market sales rose 11.4% to 104,000 units as we successfully increased production to meet domestic and export demand. Japan unit sales reflected demand for models such as the Note and Aura as well as the Sakura and X-Trail. For all these models, we are working hard to ensure deliveries as soon as possible to customers. In China, retail sales were down 6.9% to 292,000 in the third quarter as the COVID lockdown continued to impact customer traffic. In North America, sales were down by 2.1% to 256,000. This was primarily due to semiconductor constraints in the production of compact cars, including Sentra, Versa and Kicks. Turning to Europe, excluding the Russia market, which we have withdrawn from, quarterly unit sales was up 1.8% as you move to stabilize production and meet back orders. In markets, unit shares were 22% – in other markets, unit shares were 22.7% lower than 113,000. Although production in these markets was flat, sales were severely constrained by logistics issues affecting export markets such as Gulf and Oceania. In summary, Nissan is continuing to address macro headwinds by rebuilding production and focusing unit sales on core models and prioritizing in long-term. Now, I will present our core model performance of our flagship models in key markets. Starting with Japan, we are pleased with the segment share achieved by our Note and Aura models, which rose 1.8 points to 15.7% in the third quarter. Revenue per unit goes up by 1%. The strong acceptance of our vehicles is also underlined by Sakura EV winning the Triple Crown of Japan of the Year, RJC Car of the Year, Car of the Year of Japan Hall of Fame. In addition, Note and Aura being the top selling electrified vehicle demonstrates our strong leadership in electrification. In China, our best selling Sylphy continues to hold 16.6% of the segment. Although revenue per unit on the Sylphy was down 1%, it remained China best selling sedan, an accolade that it has held for 3 years in a row. In the United States, where we have a strong position in SUVs, we saw an encouraging 9% increase in revenue per unit for Rogue, which rose to 7.5% segment share. We are also encouraged by the strong growth in other SUV segments. The segment share for Pathfinder rose by 2.5 points, INFINITI QX60 by 3.6 points. In the European market, we saw particularly strong sales and revenue per unit performance for the Qashqai. Revenues were up 13% per unit on a stable segment share that rose to 4.4%. The Qashqai is the best selling model in the UK. And our e-POWER technology was named best innovation by Grand Prix Auto Motor in Europe. As I explained, the industry remains to face uncertainties, but it is encouraging to see strong customer acceptance of our core models in each market. Now, I turn from these highlights to underlying the financial performance. The next two slides show our key financial performance indicators on both China JV proportionate and equity for the third quarter and the 9-month period. On an equity basis, which excludes contribution from China JV operations our net revenue for the third quarter rose by 28.6% to ¥2.84 trillion from ¥2.21 trillion in the same period 2021. On the same basis, operating profit for the period was ¥133.1 billion, with an operating margin of 4.7%. For the third quarter, net income was ¥50.6 billion. Excluding the one-time loss from the exit from the Russian market this year, net income would have significantly improved from the prior year to ¥137 billion. Our automotive free cash flow significantly improved in the third quarter to a positive ¥119 billion versus a negative ¥1.2 billion in the prior year. Net cash for the automotive business improved to ¥1.09 trillion. On a proportionate basis, which includes our China operations our net revenue for the third quarter rose to ¥3.19 trillion from ¥2.51 trillion last year. Operating profit under this measure reached ¥162.6 billion for the quarter, representing an operating margin of 5.1%. Nissan’s automotive profit continued to be positive for two consecutive quarters as we remain committed to strengthening the sustainability of our core business. In the third quarter, automotive free cash flow improved to ¥83.5 billion. Net cash for the automotive business reached ¥1.57 trillion on this basis. Nissan continues to maintain strong levels of liquidity. The next slide highlights our keep of financial performance for the 9 months ending December 31, 2022. On an equity basis, our net revenue for the period increased to ¥7.5 trillion from ¥6.15 trillion in the same period last year. On the same basis, operating profit for the period was ¥289.7 billion with an operating margin of 3.9%. Nissan automotive profit is also positive for the 9-month period. For the 9-month period, net income was ¥115 billion as I previously mentioned for the third quarter. The decline versus the previous year can be explained by the one-time loss from the exit of Russian market this year. In addition, last year, there was the one-time gain from the sale of Daimler’s shares. Excluding the one-time gain and loss, our net income significantly improved from the prior year. Free cash flow for the automotive business was a positive ¥21 billion for the 9-month period. As previously noted, our free cash flow significantly improved in the third quarter to a positive ¥119 billion. The positive free cash flow in the second and third quarter covers the negative free cash flow in the first quarter, which was due to low production. We expect our free cash flow to continue to be positive for the remainder of this fiscal year. On a proportionate basis, which includes our China operations our net revenue for the 9 months rose to ¥8.45 trillion from ¥7.11 trillion. Operating profit under this measure reached ¥375.2 billion for the period representing an operating margin of 4.4%. Despite China JV continuing to generate positive free cash flow, the automotive free cash flow on the proportionate basis was negative ¥32.2 billion for the 9-month period. This is because the dividend payment from the China JV to Nissan is not included in the free cash flow on proportionate basis. The net cash for automotive business reached ¥1.57 trillion on this basis. Now, let us look at the financial performance for the 9-year period. This is the income statement on equity basis. Net revenue increased by ¥1.35 trillion. Net revenue increased year-on-year despite the decrease in sales volume, which was primarily driven by improvement in net revenue per unit as well as the weakening of yen. The operating profit increased by ¥98.4 billion from the prior year to ¥289.7 billion, representing an operating margin of 3.9%. I will explain the details of the variance on the next slide. Net income for the nine-month period was ¥115 billion. The decrease from the previous year was due to one-time factors from the sale of Daimler shares and the exit from the Russian market. For the 3-month period, the net income increased significantly from the previous year despite booking an extraordinary loss on the exit from Russia this fiscal year. Turning now to operating profit variance analysis for the 9-month period, this slide shows the variance factors on the 9-month period from last year. Foreign exchange had a positive impact of ¥161.8 billion, again primarily due to the strong U.S. dollar and Canadian dollar as tailwinds, but also offset by headwinds in other currencies like Mexican peso and Chinese yuan. The increase in raw material prices had negative impact to ¥180.6 billion primarily driven by price hikes in materials such as steel, aluminum and plastics. Sales performance had a positive impact of ¥341.9 billion. The continued improvement in quality of sales was the biggest contributing factor with the decrease in incentives as well as improvement in pricing. Increased volume and mix and increased after-sales also were contributing factors. Monozukuri cost had a negative impact of ¥111.7 billion primarily driven by cost inflation in manufacturing and logistics, regulatory and product enrichment. Other items had a negative impact to ¥113 billion from the previous year due to primary ¥77.6 billion decline in profit for the sales finance business. This was primarily due to one-time gains last year from the release of credit loss provisions as well as decline in assets resulting from the decrease in sales volume due to the production constraint from supply chain disruptions. Used car price fluctuation has a negative impact of ¥29.5 billion as we had one-time gains in the previous year from the high used car prices. Increased G&A and other items had an additional impact of ¥5.9 billion. Turning now to our outlook for fiscal year 2022 during the first 9 months of the fiscal year, the automotive industry continued to face a challenging business environment due to the semiconductor supply shortage and the impact of China lockdown. As a result, we are lowering our global sales forecast from 3.7 million units to 3.4 million units, with adjustment mainly in China and North America. China is due to lockdown caused by COVID-19. In North America, there was a deterioration in DIV. And as I mentioned earlier, there were continued semiconductor shortages. This is full year forecast fiscal year ‘22 on a equity method basis. Despite the expected decrease in sales volume for the fiscal year, we have maintained the forecast for net sales of ¥10.9 trillion and operating profit of ¥360 billion, which represents an operating margin of 3.3%. The exchange rate assumptions for the current fiscal year have been revised slightly from ¥135 to ¥134 for the U.S. dollar and from ¥137 to ¥148 for the euro. Compared with the original outlook, which was announced in May 2022, operating profit has increased by ¥110 billion despite 600,000 units reduction in retail sales. Our forecast of net income remains ¥155 billion. As previously stated, this incorporates the extraordinary loss of ¥110.5 billion due to exit from the Russian market. Without the one-time impact of Daimler in the previous year and the Russia exiting this year, our net income would have increased significantly from the previous year. This slide shows the operating profit variance from the previous outlook. We expect a slight deterioration in ForEx and slight improvement in raw material and logistics versus the previous outlook. As we are revising sales volume forecast from 3.7 to 3.4 million units, volume and mix is expected to deteriorate by ¥16 billion. However, we will offset this by improvement in performance. As such, we maintain our operating profit outlook at ¥360 billion for this year. In addition to maintaining our financial outlook for the fiscal year and despite the expected decrease in sales volume, we are forecasting a positive automotive free cash flow for the fiscal year on an equity basis. Furthermore, operating profit for the Automotive segment is forecasted to be positive for the full fiscal year. Back in November, we decided to forego payment of an interim dividend due to this uncertain external environment. We are still forecasting a year-end dividend of ¥5 per share or more depending on the earnings and automotive free cash flow for the fiscal year. Improving shareholder returns continues to be one of our priorities and we will work to increase the amount to an appropriate level in the future. We appreciate your understanding and support. Finally, our results are strong, especially achieved against the backdrop of severe market headwinds. As I said in the beginning, this is driven by tireless efforts of all our employees and partners. And I would like to convey my deepest appreciation for their hard work. We have successfully built an agile and flexible foundation to be able to adapt and overcome today’s rapidly changing environment. And of course, this week we announced the exciting new initiatives of the Renault-Nissan-Mitsubishi Alliance. This will take our 24-year partnership to the next level and create fresh, new growth opportunities for us. Nissan is on the right path. Our passion, our innovation, and our challenges spirit will propel us through to the next decade as we close – as we come closer to realizing our long-term vision Nissan Ambition 2030. The entire team is prioritizing all efforts to achieve sustainable growth. And we will maximize our potential as we move forward towards a progressive future. Thank you very much. Yes, thank you for the opportunity. Citigroup, Yoshida-san speaking. The first question is about U.S. incentive – situation of incentive in the U.S. Up till December, it seems to have been fine, but now we are seeing that because Rogue and Pathfinder in these key models, zero interest loan has started if I understand correctly. In the United States, situation maybe changing, what’s the situation? How do you assess the situation in U.S. today? That’s the first question. And the second one, semiconductor supply and when are you going to recover from this? Besides China in other regions, between Q3 and Q4, retail volume is increased – is to be increased by more than 200,000 units. That’s your plan. Does this mean that production will largely recover or what’s behind this? Production recovery, how sustainable is it? How long will it last? Will it get better only going forward or could you give us the state of semiconductor supply issue? Thank you. That’s all. Thank you, Yoshida-san. So this is Ashwani. So, as far as the United States is concerned, as we have been saying always that we will align our incentives in line with the competition and in line with the markets. And we are strictly controlling the mix between rental and the retails and especially when I look at not only the quarter three, but when I even look at January we are doing so. There is one thing which are changing – which is changing is the product mix. So, the product mix is changing for sure from C and D segment more towards the B-SUVs and the B-sedans. And this is what we are trying to adjust our mix more having on Kicks, Versa and – Kicks and Versa and also Altima and this is what we are progressing. So, as far as my understanding and all the data which you can see in the public, our incentives are absolutely in line with the market. Of course, you can see that they are increasing but they are increasing in line with the market and we are not worried about that. In addition to that, we are trying to adjust our mix. When it comes to the chips shortage, I think beside China you would have seen that in Europe, we are increasing. And overall, I would say that the situation is improving, but whether the situation is perfect, I don’t think so and in FY ‘23 also situation will be better, but situation will not be 100% perfect which means the supply shortages will continue in FY ‘23 also. But what we have seen clearly the production recovery is in Japan and Europe, which is not only driven by the semiconductors, but which is also driven by other factors in terms of supply chain? Maybe Stephen you want to? Yes. For Yoshida-san, just add to Ashwani’s comment about the incentive in the U.S., we are trying to maintain competitiveness, but we are also very careful about how we do it. We might have noticed we don’t – we try not to give cash incentive, we try to do more in terms of interest rate subvention or lease support, because as you know U.S. consumers are much more carrying about monthly affordability and the interest rate is really hitting them hard in terms of monthly payments. So, the way we spend our incentive is more on the sales finance, many subvention for interest rate and also for some of the lease. So that means also that because it’s paid in this way, we keep them in our captive finance company for a longer term, so it’s better for the long-term cycle of our customers. Does that make sense, Yoshida-san? Yes, thank you. Talking about Rogue segment – in Rogue segment RAV4 and CR-V, these competitors are not built in large numbers. So did you really need the zero interest rate that was what I wanted to know? That’s why I asked you a question. Why did you need a zero interest rate? Let me go back and look at the specific offer on Rogue, I don’t recognize 0% on Rogue. It might be certain dealers who might do certain things by themselves, but I don’t think we as a company have offered 0%. Let me go back and check for you. Yes. Hello, Goldman Sachs, Yuzawa speaking. I have two questions. The first one is about the volume again. It seems like there is a big decline in the volume. So Sentra, Versa, Kicks, what kind of semiconductors are bottlenecks? Could you elaborate on what are the supply issues about the semiconductor? What will be the timing of recovery for the next year, for example, 4 million units which you have projected? Will there be an upside on this side? Could you give us projection of the production? That’s one. And the second question is about the landing between November and December. There are tailwinds of ForEx, but your profit is getting closer to 5%. Third quarter profitability, how long will it last? Is it sustainable? Is there any upside or downside to this profitability? These are the two questions Thank you. So I will do the second one and Ashwani will come back and explain the semiconductor and the chip bottleneck. So Q3 was a good result for us, I believe. And as Yuzawa-san you correctly noticed, is very high op margin for us. And I think if you just look at Q3, we have hit our Nissan NEX objective already on proportional base. Of course, Q3 is, as you saw, we have less volume than we wanted. So we refocus of course our semiconductors on the higher end and make sure we have richer mix. Q4, I am sure you might be asking us the next question, because you asked sustainability of the Q3 momentum. Q4, if you take the full year guidance 360 and subtract our year-to-date, you probably get to only ¥70 billion for Q4 profitability. And that’s probably what you are alluding to the Q4 outlook. To answer that question, let me give you a couple of facts because as you remember Q3, our Japan yen exchange rate was average about ¥140 or ¥141 to the dollar. In Q4, we are projecting or using ¥128 to the dollar kind of projection for now. It hovers around ¥130, but ¥120 I think is okay to use as an assumption. Given the increased volume, this ¥120 a stronger yen actually going to hit us negatively in Q4 versus Q3 by additional maybe negative ¥40 billion. So we actually have net FX pioneers quarter-over-quarter in terms of the yen strengthening, but because we have the increased volume, we can offset some of that, but the rest is just timing of raw material costs. Now, after we brought it throughout the year, they come through the inventory and actually hitting our P&L right now and also the seasonality of the cost. So Q4, the profit would not be as high as Q3 and not as high in terms of profitability. But for sure, our auto profit will be positive and auto free cash flow will be positive. That’s how to look at it for Q4. Then I think your next question is next year. And then next year, we are right now working on a budget. So, we will come back to you on that one. But I believe in Nissan next time, we already said we are going to hit 5% proportion of SOP for next year. So, that is still the objective we are striving for. So, maybe Ashwani, Yes. Thank you. I think I talked about the semiconductors. So, one thing is for sure that semiconductors supplies are improving, but this is also for sure that we don’t have 100% of the supplies. There are a couple of chips, which are the bottleneck. And if we don’t have two chips, which means even if we have chips for all other commodities in the car, we just can’t make the car. And to be honest with you that we have enough for our chips to even go up to 4.1 million, 4.2 million in this year. But because of these two chips, where we are struggling to get more than 3.4 million, we have to downsize our production to 3.4 million. In parallel we have started, we have already developed many second source and many things in other chips. So, definitely for these two chips also, we are starting the second source development, it will take some time. FY ‘23 not only these two chips, the shortage will continue, but will be better than this year. This is what we expect. You have answered 10 of my questions. Thank you. Second question, is it because I trust at two chips? Only two chips are a bottleneck? Are you sure? That’s what I heard in interpretation? So, if you ask me, my sales demand is 5 million. So, I am not talking about 5 million. I am talking about just to do 4.2 million. I needed only two chips. Yes. Thank you for the presentation. First, China, over the past few months, if you look at the retail volume of Nissan, it’s very slow, X-Trial three cylinder issue may be one and semiconductor supply issues. These are well understood factors. However, how are you going to increase the share or sales volume in China, including the competitive landscape? Could you describe where you are today? This is the first question. And another one, excuse me, dividend, what is the dividend policy? The other day you announced the likelihood of investing in Ampere. But net cash and free cash flow, you have good improvement on these two fronts. So, you need to strike a balance. Could you elaborate on the funding for investment and dividend? How are you going to strike the balance? These are my questions. Thank you. Maybe I will take that one, second one first. And then Ashwani can answer this China retail and the company landscape. Dividend policy I think we are saying the same thing as before. Eventually we want to get back to normal 30% level payout. But right now we are making sure that we have steady recovery and solid op net income, auto free cash flow, auto net cash. First, we want to make sure we are very solid and there is no worry. I think in Q3, we already demonstrated that. We have very good numbers in all four categories. And we just have to demonstrate it for full year to alleviate any concerns. This is why I think in the last slide of the presentation Ashwani mentioned. We usually don’t give full guidance on the full year free cash flow, but we wanted to do it this time. We want to say after 3 years negative, we will be full year free cash flow positive this year. Auto profit also will be positive. And our net cash is very healthy, as you can see from our financials. So, for sure, we will maintain this position of steadily increasing the dividend like up to 30% level. But at this point, I cannot say how fast we will do that we will do it very carefully in balance of all the factors, including what we announced on Monday. And just to help you consider the timing and the sequence of things, the Ampere investment will only happen if we decide to – it depends on how much we decide to invest. But if the investment were to happen, it will happen at the IPO of the Ampere, which I believe right now has indicated that it will be in calendar year, this year Q4 timing. So, it will not happen until three more quarters probably, maybe next year, given if the there is a recession and the market is not so conducive to IPOs. So, it will not be in the next two quarters, I think. So, it will be safe to say that. Given that, I think we have not demonstrated two quarters or three quarters without very good performance, and I think we will continue in the next year as well. So, I think as we do that and generate free cash flow, auto profit, I think the concern will be less. Then your next question might be okay, Ampere investment and also share buyback. And again, the share buyback, also Renault, very unlikely in the immediate short-term to be selling down the share that they transfer the trust, only because Nissan’s share price is so low right now. They would want to wait for higher share price before it’s time to sell and monetize that share. So, I don’t anticipate them doing that this year, maybe next year or following year. But that’s to give you an idea or image of the sequence of things that might happen. So, I am not so worried right now about the immediate future in terms of cash need. And we have plenty of liquidity and cash on hand right now. Yes. Thank you. I think the sales in China is slow, because of multiple factors. Just after the break, I think we are going to increase. We are going to put focus on increasing our sales. On the performance, yes, the X-Trial three cylinders still remains a challenge for us. When – normally we sell between 10,000 to 12,000 and we are selling in few hundreds. That is the only product in the world, which has not picked up, we launched 14 cars in last 21 months. And the X-Trial in China has not picked up, that’s the reality. Then we launched Ariya in the COVID pandemic. So, we don’t know exactly what is the real performance of Ariya. And we had to postpone the launch of X-Trail e-POWER because of the pandemic. So, I think soon after this is over, we will focus again on the new models which we have just launched or which we will be launching in the coming weeks to recover. So, when we will come back with the full year announcement. I think at that time, we will have a much more better picture of our China performance. Okay. Gupta san, thank you. Excuse me, now you have elaborated about China. So , I have another additional question if I may, in your presentation. Sophie, well the share is very high, understand for Sophie, but the share seems to be declining for Sophie. Sophie, could you elaborate on the performance of Sophie, whether it’s a competitiveness, and the Chinese new energy vehicles are growing. So, could you elaborate on the situation of Sophie and what’s surrounding it? I think there are two factors the one is that our friends are really bringing down the transaction price of sedans. And as you could see, we only did minus 1%, which is much more or less than what market we are seeing now on the sedan. This is the one, the primary factor, but why this factor is coming is obviously, as you mentioned that because of the new entrants, especially in the battery EV, we see the conquest from the sedans towards the new battery EV. So, I think these two factors which are seeing so. But once again, this is a temporary transit as you would have seen that from January. The Chinese Government has stopped the battery incentives, battery EV incentives. Now in February and March, we will really see difference in the China market. So, that’s why we have to wait for this quarter to see the real performance of the market and real performance of Nissan. I have two questions. One is that model mix in the third quarter, mainly around U.S. compared to last year model mix is largely improving. Going forward, KICKS or Sentra, VERSA will increase, that’s what you said, right, in the presentation. Overall, globally or overall, until fiscal year 2023, how will the model mix affect the overall results of the company? Could you elaborate on this? This is the first question. And the second question is about raw materials prices and other Monozukuri costs. The impact of these factors depending on the goods and precious metals, and some of the non-steels are coming down in prices. On the other hand, still in Japan and EV battery related costs are rising, right? So far, one of the big negative contributors like there is raw materials, logistics, going forward, how do you project for example, in fiscal year 2023, will the impact be less or smaller? These are the two questions. Thank you. Thank you Kunugimoto san. So, model mix, as we mentioned, especially when the supply is limited, when it’s short, of course, we are going to do everything we can to maximize and could use the higher end and also one is higher model within the Malahide as much as possible. So, the mix of course, in this kind of environment always going to be more positive and normal. As we get more supply of the semiconductors, then we can produce more of this lower end or smaller cars. And then the mix of course, will turn the other way a little bit to normalize. So, that it’s going to happen inevitable. You just question how fast or how slow that it will happen. And as mentioned earlier, one of the reasons in the U.S., where our market share declined a little bit is because we did not have the semiconductor produce the like sedans or smaller cars, which have become popular recently because of the inflation and the price going up everywhere. So, household income in terms of affordability, and they migrate towards the lower end of the segments. So, we didn’t have the cars at a time. But – so, as the supply come back, and then consumer behavior turns towards more affordable cars instead of buying higher end sedans and big cars, I think the mix for everybody will go a little bit the other way. The question is how much, so I don’t know the answer yet. But for sure long-term, you will not be staying at this level for a long-time. The next question is Monozukuri costs and PGM or precious metal. So, as you correctly pointed out, some other precious metal prices have come down, which is why when we revised the outlook, we already reflected the latest prices for the precious metal and what we can see. The steel prices are still high, aluminum as well. It has come down slightly now in the U.S., especially in the U.S., given that people anticipate a recession and that output, industrial output might come down, so steel prices has softened. I assume I remember we signed contract for a full year for steel and aluminum. So, as we enter into next fiscal year, we are now negotiating to try to lock in as good of a price as we can. So, that’s how we are trying to manage for the biggest impact which is steel. For logistics, unfortunately, globally, as Ashwani mentioned in the earlier session as well, we have logistics difficulties everywhere in terms of shipping capacity, rail, truck etcetera. It is not just one place, but in many places and it is a result of half the COVID, they don’t have enough people to work at those jobs anymore. So, they are trying to re-staff those levels. So, for short-term, there are still going to be some logistics bottlenecks and challenges for everybody in the industry. Is that answering your question? Yes, thank you. If so, overall, you are saying that next fiscal year ForEx will be tougher than today for 2023, but raw materials price wouldn’t be so impacted. The upside is the volume increase, am I right to say that about next year? We will not get the same effects. I don’t think game will go as much depreciation next year as this year. And I think the raw material seem to have flattened out on total. Some special raw material like EV related is still going up. Especially lithium has gone up 3x or 4x because of the demand in EV vehicles, still seem to have flattened out in terms of price or come down slightly. So, you are right, less FX good news, but less perhaps raw material, bad news. And then the rest is logistics and other inflation related costs that might come. Okay. Thank you. Anyone else? With that there is no question. [Operator Instructions] Nothing else. We are better in advance, but we would like to conclude this session. Thank you for joining us tonight.

EarningCall_42

Good day and thank you for standing by. Welcome to the First Quarter 2023 Spectrum Brands Holdings’ Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there'll be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. Thank you. Welcome to Spectrum Brands Holdings Q1, 2023 earnings conference call and webcast. I’m Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting and I will moderate today’s call. To help you follow our comments, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at www.spectrumbrands.com. The document will remain there following our call. Starting with slide two of the presentation, our call will be led by David Maura, our Chairman and Chief Executive Officer; and Jeremy Smeltser, Chief Financial Officer. After opening remarks, we will conduct the Q&A. Turning to slide three and four, our comments today include forward-looking statements, which are based upon management's current expectations, projections and assumptions and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated February 10, 2023 and our most recent SEC filings and Spectrum Brands Holdings' most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update our forward-looking statement. Also, please note we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filing, which are both available on our website in the Investor Relations sections. Thanks Faisal. Good morning, everybody. Welcome to our first quarter earnings update, and I thank everybody for joining us today. Today I'm going to kick the call off with an update on our operating - the operating environment and the company's strategic initiatives. Then I'm going to give an update on our current financial performance. Jeremy is then going to provide more financial and operational details, including discussion of the specific business unit results. If I could get everyone to turn to slide six, our financial results for the quarter demonstrate a renewed focus on profitability, financial discipline and cost management. We are pleased that our first quarter EBITDA exceeded expectations despite continued heavy inventory levels at retail, weighing on the volumes of product sold during the quarter. This was particularly evident in our HPC business where several of our competitors got excessively aggressive and sold products and material losses in the marketplace, causing overall sales to be less than expected in the quarter. This will require us to be even more aggressive in the marketplace around our clients business in the second quarter and beyond. Therefore, while our second quarter will be slightly better than our first quarter results, we still expect to liquidate large amounts of high cost inventory at aggressive prices, which we'll continue to pressure our margins in the second quarter. Based on current sales trends and our current inventory reduction plans, we believe our margin structure will materially improve starting in the month of March. We are excited to be only one month away from a profitability inflection point, and we expect our profitability to materially improve in our third fiscal quarter. As we anticipated and discussed with you during our last earnings call, our operations continue to be challenged by the difficult macroeconomic environment. We expect the challenging consumer demand environment and our customer inventory actions to continue. And as such we have put in place strong counter measures to offset these pressures, including further price increases and a strategic focus on fixed cost reductions to prepare the business for a more difficult environment. Our focus on simplifying our business model and reducing costs is starting to pay off, as we operate as a leaner organization with renewed financial discipline. In addition, our focus on cash generation also yielded positive results, as we reduced our inventory by another $65 million during our fiscal first quarter, including HHI. This means that we have now reduced our inventory position by $170 million during the last six months since we have shifted our operating priorities to maximizing cash over earnings and reducing our overall inventory levels. We will maintain this focus on reducing working capital and strengthening our balance sheet throughout fiscal ‘23 as we prepare for uncertainty and demand in the near term, given the higher interest rate environment. And lastly, we remain dedicated to our strategic transformation to become a pure play, Global Pet Care and Home & Garden company. To that end, we are committee to closing the HHI sale and expect to win the DOJ lawsuit. As previously communicated, we expect to close this transaction no later than June 2023, which will allow us to substantially reduce our debt and to return capital to our shareholders. We are confident that equity investors will look to allocate capital to a faster growing, higher margin, pure play, Global Pet Care and Home & Garden company, resulting in a significant rerating in the valuation of our publicly traded shares. Now, if I could have you turn to slide seven for our financial performance. As I mentioned earlier, our operating environment remained challenging, both due to customers actions as well as the consumer demand dynamics. Our retail partners remain focused on inventory reductions as their own inventory levels remain higher than prior year. The consumer demand environment has remained challenged compared to strong COVID related demand growth a year ago, especially for hard good categories where demand is continuing to normalize to pre-pandemic levels. These market dynamics, combined with the disappointing holiday sales for our HPC Appliance business, obviously put pressure on our top line and resulted in lower sales. Our total sales declined 5.8%, while organic sales, excluding the impact of FX and acquisitions declined 9.5%. While this volume decrease was the main contributor of the EBITDA decline in the quarter, EBITDA was also pressured by unfavorable FX year-over-year, as well as the impact of selling down the high-cost inventory accumulated during last year. As a reminder, we started this fiscal year with approximately $55 million of excess capitalized variances on our opening balance sheet that we expect to roll through the income statement in the first half of fiscal '23. Approximately $25 million of those capitalized variances have impacted earnings in the first quarter. We expect the remaining balance to roll through the income statement predominantly in the second quarter. Moving on to slide eight, and our high level '23 earnings framework. Generally speaking, inventory at retail continues to appear to be higher than the period a year ago in many categories, but particularly in hard goods. This is especially true for our HPC business where our retail partners are expected to continue their focus on lowering their inventory. We now expect that replenishment orders in our HPC business will continue to remain below POS throughout the second quarter, and we will see further reduction in inventory through the supply chain in that business. We will also continue to focus on inventory reduction in the second quarter by driving sales through discounting and promoting our products in our HPC business unit, which will further pressure the margin in that business during this quarter. Based on this additional revenue pressure, we now expect the top line for the year to be flattish to fiscal '22. As a result, we have made further fixed cost reductions and have executed additional reductions in headcount across the organization, but with a greater focus on our HPC business. We expect to maintain our framework for adjusted EBITDA as a result and grow EBITDA in low double digits. As I mentioned, we had approximately $55 million of excess capitalized variances in inventory on our opening balance sheet that will roll through our income statement in the first half of fiscal '23. Based on current input costs, this negative impact to our earnings will be mostly behind us as we enter the second half of fiscal '23. We are committed to strengthening our balance sheet and generating cash to pay down our debt. We will utilize cash flow from operations, cash from inventory reduction, and the proceeds from the HHI transaction to pay down debt and reduce our leverage. As I mentioned earlier, we are confident that we will receive $4.3 billion in cash upon the completion of the HHI sale. However, in the unlikely event that the HHI transaction does not close, we expect to have cash flow in excess of $500 million this fiscal year, which includes the HII break free. In either scenario, we expect to be able to decrease our net leverage to approximately 5x or less by the end of fiscal ’23. Before I turn the call over to Jeremy, I would like to thank our teams who are working tirelessly in the face of the current market headwinds, while making some very difficult short term decisions to prepare our businesses for long term success. You'll now hear more from Jeremy on the financials, and on additional business unit performance. Starting with net sales, which decreased 5.8%, excluding the impact of $39.6 million of unfavorable foreign exchange and acquisition sales of $67.8 million, organic net sales decreased 9.5% from reduced customer replenishment orders and they maintained focus on inventory reduction and from lower consumer demand for hard goods and consumer durables categories compared to last year. Gross profit decreased $17.4 million and gross margin of 28.3% declined 70 basis points from a year ago, from the reduction in sales and from sales of higher cost inventory accumulated during the prior year. Operating expenses of $222.1 million decreased 8.6% at 31.1% of net sales. The dollar decrease driven by the beneficial impact of fixed cost reduction efforts initiated last year and reduced spend on restructuring, optimization and strategic transaction costs. Operating loss of $20.2 million was an improvement from a year ago, due to the reduction in operating expenses, offset by a decline in gross profits. The increase in GAAP net loss and decrease in diluted earnings per share were primarily driven by the increase in interest expense, offsetting the decrease in the operating loss. Adjusted EBITDA was $39.8 million, declining due to the decrease in volume and unfavorable foreign exchange impact, offset by favorable price and fixed cost reductions. Adjusted diluted EPS declined to a loss of $0.32 per share, driven by the lower adjusted EBITDA. Turning to Slide 11, Q1 interest expense from continuing operations of $33.4 million increased $11.6 million due to a higher interest rate on our variable rate debt and increased borrowing levels. Cash taxes during the quarter of $6.1 million were $600,000 lower than last year. Depreciation and amortization from continuing operations of $22.6 million was $2.9 million lower than last year. Separately share and incentive-based compensation decreased $2.3 million. Capital expenditures were $10 million in Q1 versus $14.1 million last year. Cash payments towards strategic transactions, restructuring related projects and other unusual nonrecurring adjustments were $30.2 million versus $35.8 million last year. Moving to the balance sheet, the company had a quarter-end cash balance of $228 million and $253 million available on its $1.1 billion cash flow revolver. Total debt outstanding was approximately $3.3 billion, consisting of $2 billion of senior unsecured notes, $1.2 billion of term loans and revolver draws and $91 million of finance leases and other obligations. Pro forma net leverage was 6.2x compared to 5.4x at the end of the previous quarter as the trailing 12 month EBITDA declined sequentially. Now let's get another review of each business unit to provide details on the underlying performance drivers of our operational results. I'll start with Home and Personal Care, which is on slide 12. Reported net sales decreased 4%, excluding the unfavorable foreign exchange impact of $25.7 million and the impact of the Tristar acquisition, organic net sales decreased 15%. The organic net sales decrease was driven by category decline from lower consumer demand, particularly in kitchen appliances and retailer inventory reductions. Sales were also lower in Personal Care Appliances; however, Garment Care remained strong and posted growth as post-pandemic recovery continues and we continue to win market share. Sales in the U.S. remained challenged during the quarter as retailers continue to work down inventory. Sales were further adversely impacted by disappointing holiday performance in both Personal Care and Kitchen Appliance categories. Competitors were more aggressive with their pricing, which led to loss, holiday placement and POS. The EMEA region sales also declined, primarily driven by FX and the impact of the Russia-Ukraine war on consumer spending. Net of FX, the Garment Care category registered growth while Kitchen Appliances and Hair Care categories declined due to higher COVID sales last year. Adjusted EBITDA decreased to $13.2 million. Lower adjusted EBITDA margin was driven by lower volume, the impact of unfavorable foreign exchange rates and higher cost of sales as we continue to sell our high cost inventory from last year. Our continued focus on cost reduction measures, including the fixed cost restructuring we undertook during the second half of last year, offset some of the EBITDA pressure. Looking forward to the second quarter, we continue to expect softer consumer demand, particularly in the Kitchen Appliance category and expect retailers to continue their focus on inventory reduction. This will drive further sales pressure in the second quarter as retailers are not yet consistently ordering to POS trends. As such, we have also maintained our focus on inventory reduction and have further slowed down and in some cases stopped incoming orders. This has already resulted in a substantial decrease in the inventory levels in our HPC business. We are monitoring customer inventory levels closely to understand ordering patterns and will ramp promotional activities as needed over the coming quarters to drive higher volume. Commercially, our focus will be to drive fewer, bigger, better consumer relevant innovations that enhance our current position to simplify the operating model of the business. As a result of this business model evolution, we have taken the unfortunate, but necessary action to eliminate additional salary positions to right size the cost structure and to prepare for a more challenging commercial environment. The Tristar business integration is on track and is expected to be substantially completed during the quarter. Let's move to Global Pet Care, which is slide 13. Reported net sales decreased 8.2%. Excluding unfavorable foreign currency impact of $13.9 million, organic sales decreased 3.6%. The net sales decline was driven by customer focus on inventory management, leading to lower replenishment orders. This was partially offset by new price increases in EMEA and the impact of pricing actions taken in the Americas last year. Despite retailer inventory reductions, global sales in companion animal versus last year adjusted for FX. The sales decline was directly attributable to the overall aquatics category softness across all regions. Our European sales were adversely impacted by unfavorable foreign exchange rates as the dollar strengthened against the British pound and the Euro compared to last year. Adjusted for FX, sales increased in EMEA due to growth in the companion animal category, including our dog and cat food business, despite the decline in aquatics as we continue to compare to strong prior year aquatic environment sales. Sales in the Americas region declined across categories, and replenishment orders were below POS due to retailer focus, inventory reduction across most channels. Additionally, we continue to reshape our North American portfolio by exiting less profitable, non-strategic skews in categories such as litter and litter accessories and private label as adversely impacting sales. However, this will benefit us in the long run as we continue to move our sales mix towards higher profit, more strategic categories and product lines. On the POS side, our largest category of chews continues to experience strong double digit growth, and we gained additional market share in the category. However, our second largest category, aquatics, experienced POS declines compared to strong prior year sales, fueled by new hobbyists that entered the category during the pandemic. Despite the overall decline, POS in our aquatic consumables category, which is the largest segment in our Aquatics business, grew nearly double digits, and we gained market share there as well. This is a good sign as it signals that those who have entered and stayed in the category, they are choosing our brands and products for their aquatic nutrition and care needs. On the pricing side, we were successful in executing additional price increases in EMEA that we referenced during our last quarter call. The price increases are offsetting cost pressure from unfavorable FX and energy inflation that we continue to experience in our international business. We experienced inflation in line with our expectations and are encouraged by the fact that costs have either stabilized or in some cases, are starting to retreat. On the innovation side, while we are the clear market leader in the chews category, we're a small player in the instant gratification dog and cat treats categories; a great opportunity in this space to leverage our R&D capabilities, strength of our brands and our strong customer relationships. That is why we are excited about the launch of new dog & cat treat items in our second and third fiscal quarter. We've secured commitments from many of our top customers with some products being available for purchase in the next few weeks. Adjusted EBITDA for GPC declined to $37.2 million. The decline of $1.5 million was primarily driven by lower volume, the unfavorable impact of FX and the impact of capitalized variances as we continue to sell our high-cost inventory last year. Our continued focus on cost reduction measures, including the fixed cost restructuring we undertook last year, and incremental pricing actions in the EMEA region are helping to offset most of the FX volume pressure. We expect to see the first quarter's trend to continue in our second fiscal quarter. We remain cautious about performance of certain categories within the pet specialty channels, such as aquatic environments and hard goods within companion animal, as the rates of new entrants settle to pre-pandemic levels. Despite these short-term pressures, we remain encouraged by the category fundamentals, especially given the profile of our business, which has become more aligned to consumable products for your pet, which represents over 80% of our total sales. The GPC team remains focused on the execution of our long-term strategy. It is centered around and inspiring more trust through the delivery of unique and innovative products in order to drive demand for our portfolio of leading brands. The pet business is a historically recession resistant business, tremendous upside potential, as I remain bullish about the continued growth of this business. Finally, we'll look at Home & Garden, which is slide 14. Net sales decreased 5.2% in the first quarter, driven by lower early inventory investments from retailers across pest control categories, partially offset by positive prior year price increases. Cleaning products registered growth versus last year, increased distribution and the benefit of prior year price increases. This quarter is predominantly focused on preparation and staging for the highly seasonal Home & Garden business, starts to ramp up later this quarter. We are preparing for a normal season this year based on our discussion with retailers after an abnormally difficult weather season last year. But the timing of order ramp up still remains slower than historical trends. That said, retailers continue to remain positive on the season despite slower early inventory uptake. While the first quarter represents a very small portion of the annual consumer activity in this category, consumer demand has been gradually improving across all categories. We are experiencing constant POS growth, surpassing last year's demand in the last four weeks. Although our season has not really started yet, early signs for the year are positive and precipitation in southern regions of the United States is boding well for the drought impacted markets. Retailers have not made significant inventory investments yet. We are collaborating with our key customers and remain confident that sales will pick up as the season starts and normal seasonal POS materializes in our second and third quarter. Continuing to make progress, getting strong innovation into the market in advance of this year's season, our key initiatives have either made it to market already or are well on track to be delivered. With our Spectracide brand, we now have available the new one shot premium weed and grass killer. The product design is for a highly demanded consumer that is willing to pay a premium for superior results. Additionally, Spectracide has focused on consumers looking for strong results at a great value. The one shot platform allows consumers to find also a superior performance option with the brand they trust. In our HotShot brand, we partnered with top fragrance makers to deliver an exciting evolution for ant, roach and spider killer aerosols. New products continue to be extremely effective and also offer a superior experience as our new fragrances effectively mask that unmistakable bug spray smell, giving only a crisp linen scent, an innovation that received high scores in all of our consumer testing. Adjusted EBITDA for our Home & Garden business improved by $4.9 million. EBITDA increase was driven by prior year price increases and better operational performance during the quarter. We are also seeing the benefits of fixed cost restructuring and operational cost reductions initiated during the second half of last year. We experienced higher product costs from raw materials, labor and freight in line with our expectations. We continue to assess further price increases for fiscal ‘23 to ensure we maintain our margins going forward. All-in-all despite the slower start to the year, we remain confident in our strategy and will continue to drive innovative consumer solutions. We are carefully monitoring POS and watching for the increase as the season draws near and that will determine the timing of the ramp up of retailer orders. We have made strong progress, driving agility and speed in the organization. We are prepared to ramp up production and meet the increased retailer demand when it occurs. As we look forward to the balance of fiscal ‘23, we are pleased with our new distribution gains and we remain bullish on the cleaning and pest control categories based on our retail customers focus on these consumable, high velocity purchase products. The fundamentals of our Home & Garden business remain robust as our innovative products driven by consumer insights and our strong brands continue to excite our customers and end consumers alike. Let’s turn now to slide 15 and detailed expectations for the rest of fiscal ‘23. We now expect fiscal ‘23 net sales to be flat to last year with foreign exchange expected to have a negative impact based upon current rates. We continue to expect adjusted EBITDA to grow low double digits despite some inflation headwinds, which are offset by the annualization of current pricing actions and plan further price increases, as well as additional productivity gains, the benefits of our cost reduction actions. From a phasing perspective, we expect the second quarter to be challenging year-over-year as retailers continue to reduce their inventory levels, especially for the HPC business. First half profitability is also negatively impacted as we sell through our legacy higher cost inventory. Turning now to slide 16, depreciation and amortization is expected to be between $110 million and $120 million with a stock based compensation of approximately $15 million to $20 million, while your interest expense is expected to be between $130 million to $140 million, including approximately $5 million dollars of non-cash items. Cash payments towards restructuring, optimization and the strategic transaction costs are now expected to be between $60 million and $65 million. Capital expenditures are expected to be between $60 million and $70 million. Cash taxes are expected to be between $30 million and $40 million. Adjusted EPS, we use a tax rate of 25% including state tax. To end my section, I want to echo David and thank all of our global employees for their strong efforts during these challenging times and for staying committed to our long term strategic initiatives. David. Hey, thank you Jeremy. Again, thanks everybody for joining us on the call today. At this point I'd like to take a couple of minutes and just recap kind of our key takeaways. You can find those on slide 18. First, as I said earlier, our Q1 financial results demonstrate our renewed focus on profitability, financial discipline and cost management. Our operating environment remains challenging. We have resolved to navigate these headwinds profitably and with financial discipline is stronger. We expect some of these headwinds to continue in the second quarter, which puts further pressure on our revenues. We have proactively taken additional actions to ensure that we maintain our profitability in fiscal ‘23. As referenced earlier, we are targeting flat net sales with low double digit EBITDA growth for the year. We expect to reduce our leverage by generating free cash flow through improved operating performance and working capital management. Secondly, we’ll maintain our focus on operating a leaner business, focused on fundamentals, free cash generation and debt reduction, built around four key pillars. First, we are streamlining our organizational structure and reenergizing our employee base. Second, we are increasing operational efficiencies and limiting risk. Third, we are protecting and deleveraging the balance sheet, strengthening liquidity. And fourth, but not the least, we are transforming this company into a pure play, Global Pet Care and Home & Garden business with faster growth and higher margins pro forma. Last, and certainly not the least, we expect to win the DOJ lawsuit and to close the HHI transaction by no later than June 2023 and collect $4.3 billion of cash. I want to close by reiterating that despite the short term challenges, I remain quite optimistic about the future of our company, and I believe we are well positioned to execute on our operational goals and generate cash flow in fiscal ’23. I want you to know the future of Spectrum Brands remains bright and we continue to make living better at home. Very well, thanks. Hope you guys are well too. A couple of questions. I wanted to start with – and you touched on this a little bit, but can you talk about the current inflationary environment and inflationary impact you're seeing beyond the elevated cost on the balance sheet. So kind of the go-forward environment. You know where it is? How does it compare to you know I guess pre Covid, pre – when transportation took off, and raw materials took off and you know where are we now and where is that trending? I'll give you the broad brush, and then you know Jeremy can fill in on some more specifics. I would say look, clearly you have permanent and inflated labor costs, like across the board, right. That's from the factory floors, you know all the way through middle management. Freight rates, which continue to really burden the EBITDA, you know in Q1 and will hurt us in Q2 as well. you know they are through – they've dropped tremendously, and so that's why we believe – you know as I sit here today, we’re kind of 30 days away from seeing that inflection point actually flow through the P&L, right, because that new inventory at these lower freight costs are starting to hit the balance sheet and as we turn our inventories a little quicker, we think we'll see that margin uptick. And then look, I think certain commodities have come off. There's clearly more capacity in the factories around the world because of the slowdown of growth, particularly in the durable goods side. But you know it's only I guess the last couple of quarters we feel like we've got enough price to kind of offset the inflation. We do see some deflation now in certain materials, but you know freight has been kind of the big one, but we have yet to benefit from that in the P&L, and we're hoping that starts in the month of March and then you'll really see it kind of show up hopefully in the third quarter. Jeremy? Yeah, I agree with all of that and I would say, I think to your last part of your question Bob is around as compared to pre-pandemic, you know really across the board everything is still materially higher than it was pre-pandemic. I mean I would tell you that our P&L, you know even at current freight rates is probably burdened by $80 million to $100 million of incremental freight as compared to pre-pandemic. All materials are higher and to David’s point, labour, you know I would view it as permanently higher than if you go back three years. Got it. Okay, super. Thank you, I appreciate that. And then I know it's obviously easy to get fixated and caught up on both the macro, which we're kind of just discussing and the DOJ timing. So I wanted to step back to – and ask, you talked about this a little bit. Could we dig a little more into the company specific variables that you're focused on this year to grow revenue and margin? You talked a little about SKU rationalization, but just kind of refocus us on the revenue margin in your control variables this year, please? I mean look, the two big levers that we've been executing on since we pivoted the strategy, you know starting kind of summer of last year into the fall to run the business, to maximize cash was to kind of break the back of the ever-ballooning balance sheet, which was you know elongated supply chains to try to keep our retail partners happy. You know we've made a really concerted effort to bring that down and you can see – normally we consume capital in the first quarter and you see another $60 plus million of inventory coming out of the system. We pulled $170 million I believe in inventory out of our business in the last six months, and we're going to continue to drive that down to create cash for ourselves, and so that's the – we've got these working capital in the right position finally, and that's something that's within our control. The other big thing that we've done is quite frankly, you know as the tide has gone out from the COVID demand, we've got to materially lower our cost structure. And so it's been very painful for our company, but we've taken quite a bit of fixed costs out of our operating model, and we continue to be very, very disciplined around expense management. We're trying to get through the second quarter and then pivot the profitability of the business. We really got to get the P&L going in the right direction, get EBITDA growing again year-over-year and we believe we will do that by the third quarter obviously. But you know we want to reinvest some of this money into some promotional activity, into some discounting, and really try to drive that top line sensibly. Recently I think you know meeting with some people, we're doing quite a bit of work in some of the divisions on DTC channels, digital channels, really trying to get better yields on our investments and make them truly correlated to transactions, if that makes sense? So, I guess I wanted to ask this – Hey Jeremy! So I guess I just wanted to ask specifically about the phasing of the year from an EBITDA perspective. Can you maybe just provide a finer point on what you mean by 2Q will be challenged year-over-year? Is that kind of as a percentage of sales or is that more just in pure dollar terms? Just any color on that would be pretty helpful. And then I just – I guess just in that context, you know the ramp implied in the back half of the year is just pretty substantial. So just – can you just talk about the confidence in that ramp and kind of the underlying assumptions embedded in that? Thanks. Yes, I'll start Peter and David can follow on with any comments. So what we're expecting is that we'll see Q2 be down year-over-year. I think we do expect to see it improve sequentially, but you know the reality of this year is a tale of two halves with this $55 million of capital variances that we started the year. You know 90%-plus of that I think is flushed by the end of Q2. So you kind of got a $50 million benefit in the second half as compared to the first half, which by the way is something that all other things being equal would be a first half '24 benefit year-over-year as well. So that's a good thing, but it's painful to get through here in the first couple of quarters of this year. So we're very confident in that. That's math, it's in the system. We see those capitalized variances, we know as they flow out. I mean, our assumptions really are for a pretty consistent environment with what we're experiencing in the first quarter for the rest of the year, with the exception of Home & Garden, right, which we have to account for and predict some level of seasonality there, which is always challenging. And you know we've got to partner really closely with our retail channels to make sure we understand how they're thinking about, really each month to stage for the season. So there'll be some variability there, but that's kind of transparently how we're thinking about the year. We don't have an expectation that we see a strong improvement in consumer demand this fiscal year. I mean, I think current expectations for a soft landing are great, but I think we need to be prepared for even a further level of decline in the macroeconomic environment. Great. And then maybe just like a follow-up on that, a bigger picture question around the earnings power of the company. David, I think it was back in the summer, you kind of threw out a number around $400 million in adjusted EBITDA before the company normalized, and I know we are really still in a very tough environment, but I guess, has anything changed over the last six months or so where you feel differently about the earnings power of the company. And then I guess if not, when you take into consideration the back half ramps and Jeremy’s comments around some of the benefits flowing through ’24. I mean, how quickly can the company get back to that degree of earnings power. Thanks. Yes Peter, thank you to that. Look, I think the only delta at the current time is the appliance unit. That business has materially underperformed in the latest quarter, in the current quarter, because it’s durable product. Everybody stocked their kitchen with cooking equipment during COVID, but a lot of the competition entered the space. We acquired one of them to bolster our own platform, but there's just a lot of inventory and a lot of competition that is flushing product at very large losses. And so if you dig around, I think you'll see there will probably be some bankruptcies of some of these players you know over the next quarter or two would be my expectation, given what's going on in that space. And so look, do I think $400 million is the earnings power of RemainCo? Yes. What does that entail? It entails pet getting back to $200 million in EBITDA, and that requires pet run rating $50 million in EBITDA a quarter. You know once we get through these capitalized variances, we believe that's very achievable for pet. Secondly, it requires Home & Garden to be at least $100 million plus in EBITDA. We believe that's achievable this year, and we believe that we can grow materially above that, given our exposure to cleaning and our plans for rejuvenate, etcetera. So there's 300 of it, and then listen, appliances will not do $100 million in EBITDA this year, but it does have that earnings power potential, but you won't see that probably until fiscal '24. So that's how we'd lay it out. I would say, look, the $400 million of earnings power is intact. The big divot to you seeing it this year is going to be appliances. But Pet and Home & Garden is the future of where we're trying to take the businesses, and once we close HHI, we're going to look to solve for the appliance unit. Thank you. One moment for our next question. Our next question comes from Ian Zaffino with Oppenheimer. Your line is open. All right. Glad to hear the confidence in the deal closing with HHI. How are you guys actually thinking about the cash proceeds? And I guess what I mean by that is we're sitting here, you know you mentioned deleveraging, probably some buybacks, but you know you do own – basically you’re going to be receiving more cash than your market cap. So how do you handle that cash receipt? And maybe how do you think about potentially returning that to shareholders, and then I have a follow-up. Thanks. Yeah look, we're going to go to trial in April. We're going to win a case. We're going to close the deal in June. We are going to – I'd say if the money gets wired to me on a Monday, what do I do on Tuesday? Tuesday, I probably pay off all my bank debt at a minimum. I despise our leverage position. I am working every day with the teams to drive inventory, drive working capital out of system, run the business for cash flows and so that's a big focus. But again, we've said for some time, look, there's a lot of distortion here. I think what people – you know to Peter's earlier question, you've got the slack in the system between POS can be very strong. For example, POS in January is very strong for our Home & Garden business, but we're not yet seeing the factory shipments we want to see, right. That's just retailers continuing to wait, continuing to burn off a little bit of inventory they had last year and so that causes a lot of distortion to reported numbers until we can get into an equilibrium situation. We're clearly going to get into equilibrium on Pet, Home & Garden much faster than appliances. And so that's why you're going to see such a big rebound in the back half of the year as we burn through these capitalized variances, and we see profitability restored Q3, Q4. But look, we believe our stock is materially undervalued. I know that hasn't meant a whole lot in the last nine months. The company, you know last year did trade at over $100 a share, and we quite frankly think we're worth that. And so it would be silly for us to kind of sit on an extra couple of billion dollars. We'll probably call some of our notes. But quite frankly, while our leverage is still high, the liability side of this company is actually an asset in today's capital markets environment because we have bonds at 4% and less. That's a pretty attractive rate to finance yourself when the two year note is above 4.5%. So, we need to keep our capital structure in place, pay off the banks, buy back some stock and then look to see what bonds we take out. That's how I'd answer the question today. Okay. Perfect. And then also on the change in the revenue guidance, can you maybe bucket that for us? How much is FX? How much is incremental headwinds that you're seeing? And then when we get on to the EBITDA line, how much of that FX hit is a naturally hedged, you're not really seeing an impact of that? Thanks. I'll let Jeremy answer your real question, I'll just tell you straight up, the real reason that revenue is coming down is the appliance business, beginning and end of story. But Jeremy, you want to take the FX piece? Sure. Yes, I agree with David. It’s the appliance business. What we experienced in Q1 and really what we think now based on that experience for the rest of the year will look like. And then on the FX front, one, as compared to where we started the year, we've seen a benefit with the dollar weakening a bit. I think, we probably would peg at the start of the year parity with the euro. We're sitting around 107, 108 today I believe, yesterday. So that's a bit of a benefit. In general, we try to hedge 60% to 70% or so in our European businesses against FX. We fight both translation and transaction, obviously. You're not really hedging translation, so you still have some level of exposure as you go through the year. But the trend right now is a little bit positive and we reflected that in our updated forecast. So just a clarification then a question, I have another question. But Jeremy, I just wanted to clarify a prior question around EBITDA phasing. I'm looking at the Q2 consensus EBITDA of $80 million after roughly $40 million this quarter and you know commentary on headwinds persisting into Q2, margins don't inflect until March. Should we be thinking about an EBITDA number roughly at that level? And I apologize if you had said this and I missed it, but I just want to get that straight, just to make sure we're thinking about that correctly. Yes. I didn't mention a specific number for the quarter, and we don't give quarterly guidance. But I understand the question, certainly. Yes, I mean, consensus is sitting for Q2 above our last year performance. And clearly, I said that I expect we're going to be down year-over-year, pull up sequentially. I think we could talk through that business by business as we connect but definitely today. But it's you know the reality is, I think that we're going to see a decline in HPC and most likely given our comments around the H&G timing of loading inventory at retail. We're going to see a decline there as well. So the first and second quarter are impacted by a lot of factors that are frustrating, but they are real. We also know when they, when we get relief from them, and so I agree with David's comments that come March and certainly the third and fourth quarter, we expect much better margins. But as I said earlier, just I think take solace in the fact that we are not expecting a positive sequential change of consumer demand in our forecast. We're expecting this to be a slugged out year across the board with the exception of, I think a better weather season for Home & Garden. Okay, great. That's very helpful. And just David, you know you were just asked this and maybe I'll just pack it from a little bit different lens. But, the macro backdrop has obviously evolved a lot since the HHI deal was initially announced, and you know clearly at the time there were maybe nebulous and/or direct plans for debt pay-down and stock buybacks of potential M&A. And so obviously you still have some time to make the decisions should the deal come through as you expect. But does the backdrop change your thought process around, okay, well, we need to pay down more debt than maybe we wanted? We need to put more money into buybacks as opposed to doing M&A? Like, why would we do M&A in a volatile backdrop? Just conceptually, how does the macro impact how you're thinking about deploying capital should, and as you expect, the deal to go through? Thanks. I appreciate the question. But the whole reason that we agreed to sell HHI to ASSA was we really believed we had been the best steward of the asset we could have been and taken it as far as we thought we could take it given that we are a diversified business. We have four different businesses now. We had six a few years back, and we have a levered balance sheet. And so the simple fact of the matter is ASSA is in a great position to bring innovation, R&D, launch new products, give consumers choice and quite frankly, bring more competition to the market. So, the original deal is constructed. I think, it’s fantastic for the American consumer. Clearly, I wish the DOJ would see it that way, but any and all questions that you could possibly raise about any sort of competitive erosion is absolutely neutered by ASSA's sale of their assets to Fortune. And so that is why I am highly confident in winning a trial, and I look forward to that. In terms of your commentary around the environment changing and how do you allocate capital from here. Look, I remain one of the largest individual shareholders of the company. I absolutely dislike a mild or our current leverage. And so as I said earlier, if like the money gets wired on a Monday, Tuesday, we're going to pay off all of our bank debt, that's for sure. Again, you know this deal, I can't believe it's taken almost two years now. But the reason we did this deal, because we wanted to have basically a debt-free balance sheet, and we wanted to have tons of liquidity in case the market fell apart, multiples contracted, we would then be in the catbird seat to do accretive tuck-in M&A. And unfortunately, we've run into this snag with the DOJ and conditions have deteriorated, but we still don't have the cash. And so yes, I think paying down debt is the number one priority given current leverage. I think buying back shares is a lot less risky than buying some other business. And then we still need to solve for the appliance unit. And so you may see us buying, I don't know, 0.5 billion of stock, 1 billion of stock, we'll see where it is when we get there. But, we'll probably keep some extra cash slashing around also, because we're committed to creating a global Pet Care and Home & Garden business. And that's going to require us to merge, spin, solve for the separation of our HPC assets. Hi! Following up on the last question. Previously, you had a pro forma gross leverage target that was explicitly 2.5x after the deal. Is that no longer kind of in place? Are we now kind of going to rethink everything? Yes. So you know that - what I would say there is, that was a point in time when we were trying to get the market an indication of the volume of debt reduction that we would expect. So directionally, I think that's still in the right place, though mechanically with our EBITDA declining this year as compared to where it was when we made that kind of pinpoint time announcement, that would imply something different. So I would not expect – one of the things that we talked about originally Bill, is that we have the debt, the bank debt that David talked about, and we have two callable bonds. And our longer dated paper totals about $1.1 billion in total. That level of debt is probably a reasonable place for us to end the mechanism and which notes and pieces and notes, etcetera, yes, but that's still TBD. Once we get closer to closing, we'll figure that out along with our advisers. Great! And then just one follow-up. Jeremy, earlier, you mentioned that your freight costs have gone up by $80 million versus pre-pandemic levels, and you guys also talked about how those freight costs are now kind of on a cash basis, at pre-pandemic levels. Would we expect to see $80 million of rate come out of your P&L costs over the next year or 18 months, whatever it is, until those go through? No. So when we talk about cap variances as explicitly as we have, that really, that includes freight inflation. So it's not incremental to that $55 million that we talked about in the first half of this year. And my comments earlier were to say that even current market rates are heavier or higher than pre-pandemic levels. And I don't see that taking a further step down unless the global economy also takes a further step down and then that kind of adds to the rest – adds more challenges to the plate. So I would not expect, an incremental $80 million to $100 million of benefit next year as compared to the $55 million of capital earnings I was talking about earlier. Hi! Most of my questions have been answered, but one clarification. You talked a lot about inventory at retail and retailers destocking. Did you say, I may have missed it? Which categories are heaviest at retail and inventory and/or even on your own books that might take longer to work through? Yes. We're trying to point you to durable goods. So where we've got toaster ovens and coffee makers, it's still heavy. And we got undercut in the holiday season by some competitors doing things even beyond our wildest estimations. Fish tanks, those types of things. But again, the bulk of the business where we play, you know we're 80% consumable and Pets. Home & Garden had a very rough year last year with weather. Again, we're pretty optimistic on Pet Home & Garden going forward here. Yes. I would say in Home & Garden, as retailers have been slower to order, we have seen their inventory coming down. It's still a little bit higher than it was a year ago, but I don't think materially enough to impact the season as it comes. Okay. You guys had talked about stronger December. And I'm wondering, is that just the differences in the business or you think they're discounting? Is that why you've seen more of that promotional. Yes. I mean, it's business. They sell a lot of seed, you know growing weed. We're not in that business. We need the weeds to grow, and then we can kill them and so we're typically March to June is kind of our hotspot. That’s super helpful. Okay and then one on this recent acquisition, where Post bought some pet food brands from Smucker. I’m wondering how are you thinking about M&A. Did you look at that deal or is there certain or things you would stay away from as you're getting this big chunk of cash in soon, hopefully? We're not looking at any transactions, except for closing HHI, delevering the balance sheet and trying to deliver on our promises for fiscal '23. That's the reality of our situation. Thank you. And I'm showing no other questions at this time. I'd like to turn the call back to Faisal Qadir for closing remarks. Thank you. With that we've reached the top of the hour, so we will conclude our conference call. Thank you, David and Jeremy and on behalf of Spectrum Brands, thank you all for your participation today.

EarningCall_43

Hello. My name is Lisa, and I will be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group Year-end 2022 Earnings Conference Call. [Operator Instructions]. The webcast can be accessed at www.mdu.com. Under the Investor Relations heading, select Events & Presentations and click Year-end 2022 Earnings Conference Call. After the conclusion of the webcast, a replay will be available at the same location. I would now like to turn the conference over to Jason Vollmer Vice President and Chief Financial Officer of MDU Resources Group. Thank you, Mr. Vollmer, you may begin your conference. Thank you, Lisa, and welcome, everyone, to our year-end 2022 earnings release conference call. You can find our earnings release and supplemental materials for this call on our website at www.mdu.com under the Investor Relations tab. Leading today's discussion along with me will be Dave Goodin, President and CEO of MDU Resources. Also with us today to answer questions following our prepared remarks are Dave Barney, CEO of Knife River Corporation; Jeff Thiede, President and CEO of MDU Construction Services Group; Nicole Kivisto, President and CEO of our Utility Group; Trevor Hastings, President and CEO of WBI Energy; and Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources. During our call, we will make certain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For more information about the risks and uncertainties that could cause actual results to vary from any forward-looking statements, please refer to our most recent SEC filings. We may also refer to certain non-GAAP information. For a reconciliation of any non-GAAP information to the appropriate GAAP measure, please refer to our earnings release from this morning. I will start by providing consolidated financial results for 2022 and our initial look at 2023 guidance before handing the call over to Dave Goodin for his formal comments and forward look. This morning, we announced our 2022 earnings of $367.5 million or $1.81 per share on a GAAP basis compared to 2021 earnings of $378.1 million or $1.87 per share. On an adjusted basis, excluding costs related to our ongoing strategic initiatives, we earned $380.2 million or $1.87 per share in '22. Our combined utility businesses reported earnings of $102.3 million for 2022 compared to earnings of $103.5 million in 2021. The electric utility segment reported earnings of $57.1 million compared to $51.9 million in 2022. The increase was a result of higher retail sales revenue due to interim rate relief in North Dakota and higher net transmission revenues. In addition, retail sales volumes increased 2.2% due to colder weather in the first and fourth quarters of the year. Earnings were favorably impacted by lower operation and maintenance expense, partially associated with the Heskett Station and Lewis & Clark Station plant closures. Partially offsetting the increase were lower investment returns of $4.6 million on nonqualified benefit plans, higher interest expense and higher planned maintenance outage costs at the Station. Our natural gas utility segment reported earnings of $45.2 million in 2022 compared to $51.6 million in 2021. Results were impacted by higher operation and maintenance expense, primarily from higher subcontractor costs, lower investment returns of $7 million on nonqualified benefit plans and higher interest expense, largely related to higher debt balances and higher interest rates. The decrease in earnings were partially offset by 13.7% higher natural gas retail sales volumes to all customer classes due to colder weather and improved rate relief in certain jurisdictions. The pipeline business earned $35.3 million in 2022 compared to $40.9 million in 2021. Results were impacted by higher interest expense, lower investment returns of $1.4 million on nonqualified benefit plans and lower nonregulated project margins resulting from lower revenues. The business benefited from increased transportation revenues due largely to the North Bakken expansion project, offset in part by lower allowance for funds used during construction and higher depreciation expense. For 2023, we expect earnings from our regulated energy delivery businesses to be in the range of $140 million to $150 million. Construction services reported record revenues of $2.7 billion and record earnings of $124.8 million compared to revenues of $2.05 billion and earnings of $109.4 million in 2021. EBITDA increased 14.7% on a year-over-year basis to $193.4 million for '22. This business has experienced consistent earnings growth over the past 5 years, growing 18.5% when compounded annually over that time period. Electrical and mechanical services revenues increased 50% for the year with commercial and renewable projects largely driving the increase. Partially offsetting the higher electrical and mechanical revenues were slightly lower transmission and distribution workloads. This business saw lower margin percentages due mostly to higher operating costs related to inflation, including labor and materials and equipment costs. Due to the continuing high demand for construction services, we are establishing the revenue guidance range for 2023 in a range of $2.75 billion to $2.95 billion, with higher margins when compared to 2022, and establishing an EBITDA range of $200 million to $225 million for 2022. Our construction materials business also reported record annual revenues of $2.53 billion compared to 2021 revenues of $2.23 billion, and earnings of $116.2 million compared to $129.8 million in the prior year. Revenues grew 14% in 2022, primarily due to higher average material pricing across all product lines in response to recent inflationary pressures as well as increased contracting revenues of approximately 17% over the previous year. The impact of recently completed acquisitions had a positive impact on earnings. EBITDA at this business increased 4.5% to $306.7 million. Margins decreased as higher operating costs, mostly due to inflation, outpaced pricing increases in the first half of the year. In addition, increased interest expense and lower investment returns of $6.1 million on nonqualified benefit plans also had a net negative impact on the year. Looking forward to 2023, given the strong backlog and continued strong demand for construction materials, we expect revenues in the range of $2.5 billion to $2.7 billion with margins higher when compared to 2022, and EBITDA in the range of $300 million to $350 million for this business. As mentioned in the segment discussions earlier, our companies were impacted on a noncash basis by lower returns on nonqualified benefit plan investments. In total, the impact on a year-over-year basis was approximately $21 million or $0.10 per share when compared to the prior year results. The company attributed the change in investment returns to significant fluctuations experienced in the financial markets in 2022. Finally, the company continues to maintain a strong balance sheet and ample access to working capital to finance operations through our peak seasons. We continue to make great progress on our strategic initiatives that we announced during 2022. Business momentum is strong as we head into 2023, and we continue -- we'll continue to provide updates regarding our guidance and outlook as we progress through the year. That summarizes the financial highlights for the quarter and the year, and now I'll turn the call over to Dave Goodin for his formal remarks. Dave? Well, thank you, Jason, and thank you, everyone, for spending time with us today and for your continued interest in MDU Resources. Our construction businesses each reported record annual revenues and our construction services business also reported record annual earnings in 2022. As expected, we experienced inflationary pressures and also had weather impacts throughout the year. However, we finished the year very strong as pricing increases and other operational adjustments offset inflationary pressures. We are excited by our combined all-time record construction backlog now standing at over $3.1 billion, up 46.5% from 2021, and various growth opportunities at our regulated businesses. We see this momentum continuing into 2023 as we remain focused on safely and efficiently providing essential products and services to our customers while making great progress on our strategic initiatives to create 2 pure-play publicly traded companies. To summarize activity by business unit, I'll start off with our regulated businesses. Natural gas retail sales volumes increased 13.7%, and electric retail sales volumes increased 2.2% in 2022. In addition to volume increases, higher rate relief has a positive impact on the results. The utility saw a rate base growth of approximately 7.8%, along with customer growth of about 1.6%. This business continues to seek regulatory recovery for the investments associated with providing safe and reliable electric and natural gas service to our growing customer base. There are 3 rate cases pending before regulatory agencies, and we anticipate filing 4 additional rate cases in 2023. The pipeline business had record transportation volumes now for the sixth consecutive year, largely from ongoing system growth and steady demand for its services. Higher transportation revenues were largely attributable to the North Bakken Expansion project that was placed into service early in 2022. In 2023, revenues are expected to increase from the North Bakken Expansion project by approximately $10 million, largely due to contracted volume commitment increases of approximately 70% to now 215 million cubic feet per day. On January 27, the company filed a rate case with the Federal Energy Regulatory Commission, seeking rate increases for its transport and storage services. The business continues to work on a number of expansion projects that are expected to add incremental natural gas transportation capacity of more than 300 million cubic feet per day as they are completed later in 2023 and into 2024, pending regulatory approvals. Now I'd like to move on to our construction businesses. Our Construction Services Group had record revenues in 2022 with growth in nearly all of its business lines, highlighting this business' capabilities to perform a diverse range of projects. We experienced strong demand for electrical and mechanical-related work with a 50% increase in revenue for the year, specifically for commercial and renewable projects. We are also encouraged by the increasing demand for utility-related transmission and distribution work. Construction services ended the year with an all-time record backlog of $2.13 billion, up 54% from the prior year. And we have several large projects underway across all of our markets with our ability to successfully attract and retain a skilled workforce of over 8,900 employees across our footprint, we feel we are well positioned to complete these projects safely and efficiently. Earnings momentum is expected to continue into 2023 as sales and margin guidance are higher on a year-over-year basis. At our construction materials business, we also had record annual revenues, largely driven by increased product pricing. However, as Jason mentioned earlier, this business experienced inflationary pressures throughout 2022. While performance improved in the second half of the year as pricing increases in response to inflationary pressures took effect. Knife River's full year margins decreased because of higher costs on asphalt oil, labor, fuel and cement along with higher interest expense. The company also experienced unfavorable weather early in the year and during the fourth quarter, effectively shortening the construction season in several Knife River's key markets. We expect to see the benefits from price increases to continue into 2023. Knife River increased backlog 32% from the prior year, standing at year-end at $935.4 million. Looking forward, both of our construction businesses are well positioned to benefit from increased bidding opportunities. The U.S. national infrastructure is in need of improvement as it received a C- grade from the American Society of Civil Engineers here in 2021. With the funding from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, along with additional state-level funding, demand for our construction businesses excel in completing looks strong as we look to 2023 and beyond. This completes our individual business unit discussion. Looking ahead, we are pleased with the substantial progress we have made towards our strategic initiatives of creating 2 pure-play publicly traded companies. The tax free spin-off of Knife River is expected to be completed in the second quarter here in 2023, and in addition, we are well underway with the strategic review of our construction services business, which we also expect to complete in the second quarter. We expect to grow our rate base between 6% and 7% compounded annually over the next 5 years, driven primarily by investments in system infrastructure upgrades and replacements to safely meet growing customer demand. We are encouraged by the robust set of projects at our pipeline business as well, including ongoing system growth and steady demand for pipeline services. Overall, we have $2.5 billion in capital investments planned within our regulated energy delivery business over the next 5 years. As always, MDU Resources is committed to operating with integrity and with a focus on safety while creating superior shareholder value as we continue providing those essential services our customers need while being both a great and safe place to work. I appreciate your interest in and commitment to MDU Resources, and ask now that we open the line to questions. Operator? So maybe just starting on your 2023 guidance. For the energy delivery segment, the range of $140 million to $150 million in earnings, it implies a fairly wide year-over-year rate of change of -- could be plus 2% or up to plus 9%. And just given that you've got the rate base growth that you cited from the higher capital plan that you released last year, absence of drag presumably from the nonqualified plan, some new rates in place that you alluded to. Can you maybe talk about some of the offsets there that might potentially put you at the lower end of that range? And then alternatively, what are the factors that could take you to that upper range -- upper end of that range, if you could? Yes, certainly. Thanks, Dariusz. Thanks for the question. There is a little bit of a wide range. So to your point, as you've looked at there, I think the low end of that would include a small amount of growth, but you kind of take the midpoint there, I think it's kind of in line with historically what we've guided to for the most part. So items that could push us above or below, I guess, kind of towards the outlying ends of that range. I think when you think about -- as we go through the year and some of the strategic initiatives that we have underway, we've quantified a little bit of some potential dis-synergy costs were part of the year that we've built into our forecast as we think through the year, we've also built in some higher than what we've typically seen probably interest costs built into some of those numbers as well. So there are some impacts that we're seeing there. To the extent that those costs may come in a bit different than what we've built into our assumptions, I think it could push you to the lower or higher end of that range depending on the directionality of that. So that's just a couple of variables that are there. I mean, obviously, you have timing impacts as you think about rate cases we have underway and when those could get resolved and some of the items that maybe aren't certain as far as when the impacts would hit during the year. But as we go throughout the year, we'll continue to narrow that up and give a better view of things as we see more clarity later in the year. Great. That's very helpful. If I could ask another one, now looking at the Knife River results from Q4, you delivered higher margins, but some of the volumes looked like they ticked a little bit lower. Can you maybe discuss that a little bit? Was there any kind of weather impact? Are you perhaps seeing different bidding activity from customers? And maybe talk a little bit about how you're seeing volumetric trends potentially trend into next year? Yes. I'll maybe just start, Dariusz, but then I'll look for Dave Barney, if he'd like to add to it. In my more formal comments earlier, I talked about the shortened construction season. We saw that really early on in the year with the April and May kind of northern tier blizzards that really kind of limited construction activity until well into June. And then we really saw some kind of early winter set in on the northern tier as well. So that certainly was one of the factors. Dave Barney, would you like to add to that? Or do you think that really -- that was kind of the bulk of it, but Dave, anything to add? Dave, you covered most of it. I mean our record backlog, we got a good bid schedule. Volumes look good for next year. Our volumes are down, but when you look at our pricing, it's quite a bit up over the beginning of the year. So it looks good for us for us for 2023 for volumes. We're a little low on ready-mix volumes, so that's probably due more to the slowdown in the housing market, but everything else looks strong. Great. Really helpful. If I could sneak in one more here. This is just on some of the language that you used in your 2023 guidance. I know in the past, when you guys have adjusted guidance midyear, you've used the terminology slightly higher or slightly lower with respect to margins. And this time around, you're saying, you're expecting higher margins both at Knife River and Services Group. Is there any possibility to quantify that? Does higher imply 1% or more and slightly higher would be perhaps 0% to 1%? Or any possibility to give a range around what that language entails? Yes. Yes. No. I understand the question, Dariusz. And I think noteworthy for us as the language was different. When we said higher year-over-year, both at services and at materials, noting that other years we've said, comparable to slightly increasing or -- so in short, I'm not going to define what higher means. It's just obviously something that's incremental to what we've said in the past. And so I think that also gives us some confidence as we look into 2023. And then you combine that with over $3.1 billion in backlog between the 2 businesses, it kind of gives us some visibility into 2023 and then the margins being higher on a year-over-year. Just some follow-ups on the prior questions. The 2023 guidance and energy delivery, you noted the range. You have 3 rate cases ongoing, one in North Dakota, Montana and Idaho. Any idea when new rates will be effective in those 3 jurisdictions? And then secondly, what jurisdictions are the 4 rate cases you alluded to going to be filed in 2023, and when? Trying to get a sense of where we could see a full year of rate relief, which seems to be nearly all of your jurisdictions by 2024? Right. Right. I'll ask Nicole to go through that because she's really front and center on each of those cases to talk about the 3 that are currently and then the 4 that we have planned in addition to that here in '23. Nicole? Yes. Thanks for the question. So essentially, you alluded to the North Dakota and Montana electric cases and then Idaho gas. So those are the ones we currently have filed. We do have hearing dates for 2 of those in May and June. So depending on the outcomes there, we would hope for final rates following those dates. We do have interim in place in both North Dakota and Montana currently. And then I think your second question was, as it relates to what we are pursuing in 2023 for filings, we are pursuing rate cases in 4 of our jurisdictions, basically in line with the rate base growth that you heard Dave comment on. We've had a historic track record of about 7% growth on a year-over-year basis. And in 2022 alone, 7.8%. So good rate base growth as we look at serving our customers' needs and that would require then a rate case in South Dakota on the electric and gas side of the business, a North Dakota gas case and then in Washington, we intend to file a case next year as well. Okay. Great. So given that the active regulatory calendar, it's safe to -- is it fair to say that your guidance for 2023 assumes meaningful regulatory lag? And once you -- once those new rates go into effect, you should see improving earned returns on a higher rate base? I think the short answer there is, Brian, I would agree with that. I would also point you to the comments that Jason provided earlier is that we do have -- as we go through our strategic initiatives this year, we've tried to forecast what we believe might be some modest dis-synergies and also increased interest expense as well. So there's moving parts in both directions, but I'd like to believe the takeaway here should be is, our utility management team is very focused on timely rate recovery given the kind of the frequency and the number of general rate cases being filed. Okay. Great. And then quickly on the pipeline, the $10 million of revenue increase related to the North Bakken Expansion project, that is separate from revenue and/or margin you expect from the FERC rate case. Those are based on those contracted volumes of increasing our capacity about 70% on that pipe from '22 levels to '23. Okay. Got it. And then switching to the construction materials. You mentioned the unfavorable weather in the early winter. Are you referring to winter storm Elliott in the mid and upper Midwest? And/or -- and then what was the impact of the well above-average precipitation in California during the month of December, where you have a pretty big vertically integrated footprint? Yes. Both of those were key. I'll ask Dave Barney because he actually resides in the Pacific Northwest and experienced those kind of historic rains that we saw, too. Dave? Yes, we definitely saw weather impact just not in December and October and November, in spite of the poor weather we experienced in most of our markets. We did have higher -- we're able to continue to increase our prices in our product line. And we also have that record backlog, but the weather really affected almost all of our regions for Knife River in the fourth quarter. Okay. Great. And then a lot of news out of California in early January 2023 with the flooding and a lot of infrastructure restoration efforts that will be needed to the roads, bridges, ports, et cetera. And I'm just wondering, is Knife River and/or CSG seeing incremental activity because of that kind of weather impact, specifically in California? Yes. In California, we're definitely starting to see some of this work bid out, and we've already started doing some of the emergency work. And there'll be a lot more work to come out in the future, but it's still pretty wet out here and hard to get to some of these spots, but there's definitely going to be some work from the winter storms. We got 20 inches of rain, which was record rain in California for any month in the history of California. Jeff, could you respond to Brian's question, but then maybe even more broadly, other storm response work that we've been doing? Yes. Thank you, Dave. Thanks for the question, Brian. We did redeploy crews that were working on -- for our normal work assignments in California and helped out with the restoration of some of the power losses within that state. And of course, we've also deployed in other parts of the country, most notably the Eastern part of the United States for other storm work in the past. Our crews in California continue to be really busy, and we work mostly in this Tier 2 elevated or Tier 3 extreme fire threat districts. We've got equipment, the people and of course, the experience to take on the work that we have and of course, the upcoming undergrounding work, which is I'd like to give you an update on that. We're continuing to see packages come out in engineering and right of way, planning and permitting continues to develop. We are pricing a package now, and we've got a great track record with our utility customer in the northern part of the state, and we're going to get some of that work, and hopefully, it will align up with our resources and our available crews. And it will contribute to our record backlog in the future. We currently don't have any of the undergrounding work in our backlog today. Okay. Great. And then lastly, just on the margins in the commentary earlier, both on Knife River and CSG. Would you characterize the 2023 margins as kind of normalized margins? Or do you sense there's still margin improvement to be captured above and beyond what your -- qualitative direction on those margins. Sure. Sure. Yes. No, margins are always a key focus in those businesses, and we obviously are very focused on how we can enhance those margins going forward. And so what you're seeing as in our guidance, just increasing margin in both businesses. Dave Barney touched upon pricing increases in virtually all product lines within the aggregates business and the services and the asphalt and et cetera -- ready-mix, et cetera, there. And obviously, given Jeff's backlog, strong workforce, our ability to bid projects, again, margins being increasing year-over-year is, I think, also a function of demand that we're seeing out there. So it's really a combination of factors. Yes. We have a project that for the last couple of years has been a struggle. So we've got it captured accurately for GAAP standards, and we're working through completing that job. And we've got our good documentation and hopeful recovery on that side. In addition, we didn't have as much storm work last year as we did in prior years. So those are the 2 biggest factors on the T&D side. Okay. Great. Going into '23, I'm just kind of thinking about hedging for petroleum-related products. I wondered if Dave could maybe address where you stand for '23 hedging. Yes, we've been purchasing in advance, fixed forward fuel contracts and asphalt oil -- winter asphalt oil by a lot more this year than we did last year to protect ourselves from that inflation. So we've been doing a better job on that. And there's been other products whether it's cement or even on the supply chain, buying parts ahead of the problems we saw last year and have bigger inventory on supply. Okay. Lastly, Jason, this is a little different sort of guidance format. Are you thinking that post separation of Knife River, you'll revert back to EPS guidance? Or is this the new normal? Yes. Thanks, Chris. I would say, our long-term goal will still be to give really kind of similar guidance to what we have previously and really what carries in the industry. And again, as we talk about our future state of being 2 pure-play public entities, I think each one of those businesses will provide guidance that's in line with what you would see in the industry. So from MDU Resources standpoint, as you think about the forward look, we'll get back to an EPS guidance range at some point. I think that's where investors value regulated businesses at, is based off the earnings side of things. With all the moving parts this year with unknown exact timing of the spin and impacts of what will happen with the strategic review of the services business and timing of all those things, we just didn't really feel like it was a good year to give consolidated guidance to the top level, but we'll definitely get back to that in the future. In terms of ability to transact on the M&A front, historically, you've made a number of acquisitions on both the materials and service side. Are those -- that deal pipeline continuing in light of the potential strategic transactions? Or is there more of a pause for 2023 there? Yes, Ryan, good question. I would say, we continue to have active business development teams, but at the same time, we're very conscious of the strategic review at CSG along with our work streams associated with the Knife River spin activity. So while we've not stop those activities, I would say, it's maybe taking a little bit of a backseat given the other activity is going on. Clearly, both of those businesses are a product of ongoing M&A over the years, and so it's part of the DNA at both organizations. Okay. And then within construction service, what's included in the backlog from a T&D perspective? And how are you seeing a meaningful uplift in either of those 2 areas, recognizing the Northern California undergrounding work outside of backlog? Yes. Our backlog in the T&D space is a lot lower than it is in the E&M, of course. And what we're seeing is still strong opportunities. We're in negotiations on updating our MSAs with several of the utilities. And in that, we upgrade our pricing -- increase our pricing based upon fuel, labor. So we still see a line of sight of strong work opportunities and growth. Our transportation backlog is about the same as it was 12 months prior. And then our utility backlog itself is a little bit down, but the work outlook is strong. We expect growth in that area and that's reflected in the contribution that we have in the forecast in our overall revenue and earnings guidance. Is that growth more geared towards transmission or distribution? And is there a regional focus in terms of where you're seeing the opportunity? We're seeing not just the strength in the distribution market, but transmission is starting to increase in the Midwest, and also in the West, we also see a strong market for communications in Montana, the Rocky Mountain region, we're doing quite a bit of communication work in addition to the distribution work. And we also have underground gas services that is still strong, despite the challenges and the pressures on gas. We still have a lot of change -- upgrades and change outs and services to a number of our customers. So we are positioned for the undergrounding work, as I mentioned earlier, and we're doing some undergrounding work in Southern California right now. And we'll look to see if we can add that to our backlog in the future. And then you highlighted the Northern California undergrounding work. Do some of the forecast there have come in a little bit in terms of what their planning for from a 5-year planning per mileage plans? Does that have any implications for MDU? And does that change your bidding strategy as the near-term line of sight may be less than what was anticipated a few months ago? There's still a tremendous amount of work with that customer, and the undergrounding will be part of our work going forward, but we're diversified in not just that market with that utility, but up and down the West Coast. So those changes and updates of work packages coming out is not a concern of ours. We're positioned well to do that work and as well as the other work that we're exceptional at doing. And we'll continue to put forward the crews to be able to work safely and productively and with the quality that exceeds our customers' expectations. And then regarding the diesel comments made earlier, more broadly for margin expectations for 2023, is that a meaningful driver of the improved margin expectations for any of the segments? Or how should we be thinking about that as a driver for the outlook? Yes. Well, I would say, Ryan, it's a component of, but it's not the only part of as we think about our margins on a year-over-year basis. So it'd be part of, but again, it kind of goes into our overall bidding strategy that we have put in place as well. Just on CSG, I was wondering if you could talk about what bottlenecks you may be seeing or maybe seeing abate just related to supply chain? Is it tough to procure what you need? Is any of that contributing to delays or pushouts? Or do you feel like the industry is sort of beyond that? Because it seems like there's sort of an incredible amount of demand out there, but still some hiccups in the supply chain. So just curious if you could comment on that. We're seeing some improvements on supply chain, and of course, on the utility side where our customers provide most of the materials. We've seen some improvement there, but still impacts with delays or crews being canceled or repositioned to other parts of our areas. On the E&M side, it has gotten better, but we still have issues, and that does and can impact our schedules with delays and could add to trade stacking. And sometimes, it's not the materials that we are procuring, it could be another trade on a job site, which could impact the labor productivity on a job. So it is improving. Overall, it's gotten better. Yes, it's still not where it was prepandemic. Yes. Okay. Appreciate that, Jeff. And then just a question on Knife. I know the housing market isn't an especially big market for the business, but just as we think about the guidance for the business for the year, I mean any kind of feel for how you're building that into the -- to your expectations this year? Well, Brent, about 9% of our backlog is residential. So we have a slowdown in house in which we expect, we've seen a little bit of that. But most of our markets, the housing market is staying strong. If it's slow, it's slowing down a little bit in Oregon and Idaho, but we don't expect that to be a big pack of our next year's earnings. And when you look at our large backlog, our record backlog and 90% or 80% of it is public works, and we continue to pick up work in that sector. I feel good about 2023. And that marks the last call for questions. As a reminder, the webcast can be accessed at www.mdu.com under the Investor Relations heading. Select Events & Presentations and click Year-end 2022 Earnings Conference Call. After the conclusion of the webcast, a replay will be available at the same location. At this time, there are no further questions. I would like to turn the conference back over to management for closing remarks. Perfect, and thank you. Thank you for taking the time to join us on our year-end 2022 earnings call. We are optimistic about our growth opportunities and future regulated energy delivering projects. We also look forward to connecting with you as we progress through 2023. So again, I'd like to thank you and appreciate your continued interest and support of MDU Resources. And with that, we'll turn the call back to the operator.

EarningCall_44

Welcome to Aurobindo Pharma, Q3 FY’23 Earning Call. Please note that all participants lines will be in-listen only mode, and there will be an opportunity for you to ask questions after the opening remarks. Please note that this conference is being recorded. Thank you, Vandan. Good morning and a warm welcome to our third quarter FY’23 earnings call. I am Deepti Thakur from the Investor Relations. We hope you have received the quarterly FY’23 financials and the press release that was sent out yesterday. These are also available on our website. I would like to introduce my senior management team today on the call with us, represented by Dr. Satakarni Makkapati, CEO of Aurobindo Biosimilars, Vaccines and Peptides businesses; Mr. Yugandhar Puvvala, CEO of Eugia Pharma Specialties Limited; Mr. Sanjeev Dani, CEO & Head-Formulations, Aurobindo Pharma Limited; Mr. Swami Iyer, CEO Aurobindo Pharma USA; and Mr. S Subramanian, CFO. We will begin the call with some of the highlights from the management, followed by an interactive Q&A session. Please note that some of the matters we will discuss today are forward-looking including and without limitation, statements relating to the implementation of the strategic actions and other affirmations on our future business, business development and commercial performance. While these forward-looking statements exemplify our judgment and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors may cause actual development and results to vary materially from our expectations. Aurobindo Pharma undertakes no obligation to publicly revise any forward-looking statements to reflect in the future events or circumstances. Good morning everyone. I wish you all a very happy and prosperous New Year. We are here to discuss the results for the third quarter of the fiscal year FY’23 declared by the company. For Q3 FY’23 the company registered a revenue of INR 6,407 crores, an increase of 6.7% over Q3 of last year and 11.6% over the previous quarter. The EBITDA before FOREX and other income stood at INR 954 crores. EBITDA margin for the quarter was 14.9% and improvement of 30 bips over the previous quarter. The margins improved on a quarter-on-quarter, despite increased R&D spend during this quarter by INR 140 crores over previous quarter. The additional R&D spend amount to 1.7 on the EBITDA margin. The net profit stood at INR 491 crores, increased by 19% over the previous quarter. In terms of the business breakdown, Formulation business in Q3 FY’23 witnessed a growth of 9.2% year-on-year to INR 5,452 crores and 14.3% quarter-on-quarter and contributed around 85% of the total revenue. The API business contributed around 15% and clocked a revenue of INR 955 crores for the quarter. For the quarter the revenue from U.S, market has improved by 9.3% year-on-year to INR 3001.2 crores. On a constant currency business, U.S. revenue are flat year-on-year and improved by 10.3% quarter on quarter to $366 million. We have received final approval for 15 ANDA’s and launched 11 products in the quarter under review. We have filed 11 ANDA’s, including six Injectables during the quarter. Revenue for Aurobindo Pharma USA, the company making oral products in the U.S. has increased to 2.5%, year-on-year for the quarter in [inaudible]. Revenue for U.S. Specialty business in the U.S. increased by 6.1% year-on-year, to INR 501.5 crores for the quarter. Including the direct sale, the overall oral sales amount to USD $252 million against the USD $230 million of previous quarter, i.e., a growth of 9.5%. The company as of 31st December ’22 has filed 767 ANDAs on a cumulative basis, of which 542 has a final approval and 38 having tentative approval, including eight ANDAs which are tentatively approved under the preferred and the balance 187 ANDAs under review. For the quarter European Formulation revenue clocked INR 1,701 crores, marginal increase of 4% year-on-year growth, and increase of 12.2% quarter-on-quarter. On a constant currency basis, Europe revenue touches EUR 203 million against EUR 189 million of last quarter. For the quarter, the growth market witnessed a growth of 26% to INR 499 crores. The quarter performance was led by a strong growth in Brazil and Canada business. For the quarter ARV business stood at INR 251 crores, growth of 61% year-on-year, growth in dollar terms, the growth was 47%. R&D expenditure is at INR 415 crores during the quarter, which is 6.5% of the revenue against 4.8% of the previous quarter. Net organic CapEx during the quarter is USD $82 million. This includes normal CapEx of USD $43 million, Penicillin G project USD $23 million and third party development expenditure around USD $16 million. The cumulative Pen G capital expenditure is USD $89 million against estimated expenditure of USD $250 million as of 31 December. The average FOREX rate was 82.1075 in December ’22 against 79.6123 in September ’22. Net cash including investments at the end of September was USD $203 million. The average finance costed 4%, mainly due to earning multiple currency loan and with the increase in the Fed rate, the interest costs have gone up. Against the total finance cost of USD $45 million, we earned INR 42 crores as investment income from our investment. So net-net our net finance costs is around INR 3 crores. Gross debt remains at USD $495 million. The gross cash reduced from USD $831 million to USD $700 million at the end of quarter. Okay. Hi, everyone. So thank you for the opportunity. My first question is on U.S. So quarter-on-quarter, you have seen good recovery. So how should we see U.S. trending ahead, and which are your focus segments. So we understand injectable is one which is picking up well, but if you can just talk about U.S. outlook in coming quarters or so. Thank you, Daviti [ph]. So this has been a good quarter. For us, we witnessed a relative better quarter on all major parameters like demand, volume, net sales, and we had stable pricing. There have been higher demand for some of the product, partly due to seasonal factors. We also anticipate that the present trend would continue going into the next quarter and next fiscal year. Okay, you mentioned stable pricing. So this is for your portfolio or you are observing in general a similar trend for the industry? We can talk about our portfolio because that is something we have first-hand acknowledge. We really can't say beyond that. Some of our products – see this is on a net basis. We have some prices. There's always some price which goes down, some prices which goes up. We have seen in the past that mostly it has been going down. But now we see, if you ask in net-net I think we are pretty neutral. Okay. And my second question is in your R&D. So obviously, I understand due to some progress in clinical trials, etc. we have seen sharp jump. But in general how should we again look at this part moving ahead? So the overall already costs, we had INR 415 crores for the quarter, against INR 275 crores in the previous quarter. The main constraints of the R&D cost is the CuraTeQ's biosimilar. I suggest Satakarni, can you – like to elaborate on the biosimilar. Thanks Subu. So Daviti [ph] Subu has mentioned the contribution towards the R&D expenditure primarily is because of the advancing Phase 3 portfolio of our programs. As we talked now, we have three products in Phase 3 clinical trials. One of them reaching the closure of the clinical trial and two of them actually in clinical trials now, with about 30%, 40% of the recruitment done. So we forecast the clinical expenditure to continue for at least another six to seven quarters time from Biosimilars, because the pipeline is maturing, which is good news for the organization. So yeah, that's my guidance on the subject. Okay, and my last question. The last quarter, we obviously heard a lot of, I think issues due to what we saw on the – like what was there with the management team, etc. So in terms of governments improvement, what steps you have taken so far compared to previous few quarters. Okay, you are talking about that. In terms of during the quarter, what we have done is based on the discussion which was going on with the investors in the last one year, etc. We have increased our independent, I mean directorate by about one number and we have appointed, the Board of Directors have appointed Mr. Shantanu Mukherjee who was the ex-Managing Director of State Bank, one of the subsidiaries of State Bank of India. As an Independent Director he came with a rich experience of about 30 plus years and this is one significant step which we have taken. And he will be forming part of the governor’s board for the company. That is a very significant step we are taken. Yeah, 50% is Independent Director, and we have four Executive Directors, and one – I mean, I’m sorry three Executive Directors and two Promoter Directors. Yeah, hello. Hi! Good morning. I just want to understand, recently you got a U.S. FDA approval for linaclotide, so can you just throw some light on that, that what the expected revenue were and the service for the next few quarters. Okay. So we got a recent approval, but the issue there is we've also got a settlement on that, and we are not able to launch it now. I think you are talking about linaclotide capsules, yeah. So that we can’t do the – I mean, we can’t commercialize it, because we have a settlement on it. It's sometime beyond the immediate future. Yeah, good morning. In line with shareholder value and everything else, I think governance you addressed. But one of the things that you know for a company that's trading at 5x, 5.5x EBITDA, you know almost single digit P multiples. It's almost logical when you have net cash to look at buyback as a way of rewarding shareholders and reducing the undervaluation if you will, especially in comparison with other peer group, pharma players. Any steps towards that, because I noticed certain changes in articles that you've talked about, anything to do with this, that you can throw some light on. Yeah, I'll address it in two parts. The first part is, this question came up in the last quarter itself, and we have addressed it. This buyback, this will be addressed in the May Board Meeting. If at all it will be addressed, it will be addressed in the May Board Meeting. Because we have taken a very huge task of accelerating the Penicillin G project, which is one of the future potential for the company and that involves quite a significant money to the tune of around USD $250 million. So we said we will be addressing that. And in terms of the second part of the question, which you said Article. Yes, you are right to some extent because the articles which you are having is a pretty old one, and it is not in full complaints with the Company Act. So what we have done is, we have reviewed the entire clauses and we are replaced wherever it is not in concurrence with the Table F Schedule 1 of the Company’s Act. We have replaced it, which involves the buyback provisions also, apart from the other provisions. Yeah, because our existing articles of association will not permit for the Board directly to approve any buyback, if it is less than 10% of the network, right, we need to go to shareholder, which means another 15 days. So what we have done is, first, we want to amend the articles in line with the Company’s Act Table F of Schedule 1. That is what we have done, which means the Board will be at liberty as and when they decide to move ahead with the buyback, it can be implemented quite fast. Understood. I have in fact a second question, which is I don't know if I missed this things and it has been addressed earlier, which is the pricing pressures in the U.S. and logistics costs. I understand from other listings that the logistics costs in general have come down, which has been the cause of some margin compression in earlier quarters. Is that the case with us as well in terms of logistics - and in terms of pricing pressures at the EU significantly? Yeah, so the – as the logistics costs comes under, Subu can corroborate this, because India sends the product to us. We have seen better pricing in terms of logistics, that’s number one. As far as the U.S. pricing on our products is concerned, I’d mentioned earlier that we see some kind of stability. There will always be some price changes, there will be some downs and there will be ups. In the past few quarters, it has been mostly down. So now we see a fairly stable prices, that's what I would like to say. In terms of price cost which Swami has mentioned, we are seeing a significant price freight cost direction between last quarter – I mean Q2 as well as Q3, right. Overall, there has been an improved freight cost. I mean reduced freight cost, between last quarter to this quarter. I'm sorry, Q1 to Q2 as well as Q2 to Q3. Does it answer your query? Thanks for talking the question. I’ve got two, three questions. One is (A) on the U.S. business, have you started to see a pickup in new business orders again, you know given the fact there have been a recent round of FDA regulatory action on certain companies, and that has led to an increase in NGOs in the past. Have you seen the trend happening all over again? Sorry about that, okay. So, we have seen better demand, better volume growth in this quarter, and we believe that this will sustain. This could be various factors, one was seasonal, the other could be some other competitor or some other company not being able to supply, whatever. We have seen definitely better a growth, and we are confident that this will sustain going forward. And Swami, just on that, you now through the last maybe three or four months we've been through such examples, October to January and now. Have you seen this trend improving or it's been sort of steady? How would call it, such that? I mean the demand trend or the volume growth trend has been improving through the months, over the last three or four months. Is it getting better? I would believe so. You see part of this could be seasonal, but I think on an overall basis, even other than the antibiotics and seasonal products, we have seen some amount of surge, yeah. And then secondly on the U.S. business, apart from the base, now in terms of the new product launches, what can we look forward to? How many launches and how many potential launches that in your assessment could be more than USD $20 million plus for the year. In the last quarterly earnings call we had mentioned that we are looking at some new ANDAs being commercialized over the next 12 months. I think we talked about 40 ANDAs being commercialized. We still hold that view. In fact, we have got some approvals, and we are in the process of launching in the current quarter. In terms of top line, I would say that conservatively we would expect about USD $50 million on an annual basis, maybe a little higher, but that's what we would expect. Obviously, it's not going to happen next quarter, next month. It's going to be over a period of time. I'm talking over the next 12 months, we would see some kind of increase. And, just again on that, Mr. Yugandhar on the injectable business, we've seen a pretty strong recovery. This is probably one of the better quarters you’ve had with the injectable business in some time. How should we look at this business now on a next few quarter basis? We are quite positive Nitin in terms of the way we have weathered the storm and the past two quarters were not great, but third quarter we have seen stable pricing and increased volumes, and with the new products – I’m sorry, like we are launching almost five new products every quarter and some of the new products and the sustainable pricing and volume recovery. We feel like going forward into quarter four and quarter one of next year, we do feel it could be a double digit growth quarter-on-quarter. That's what we feel and we already launched Amphotericin B in January, and we do have some interestingly launches coming forward. Yeah just to reconfirm, you said you were about USD $74 million this quarter. Are your talking about Q growth in Q4 and Q1 on this number? Thanks, that’s very helpful. And lastly on the U.S., you know in terms of the non-oral presentations, non-orals, non-injectables, we've had some filings for [inaudible] and some of the other new presentation formats. Any of those do you see getting commercialized this year? So, I think that would be a really aggressive time frame. It could possibly a little later, but we have got an oral solution now from one of the facility. So obviously we are looking forward to other introductions. This could take a while. Just given one last one, Subu sir on the Pen G project, if you can give us some sense on the project size, the commissioning time and what can it really entail in terms of possible revenues at the current levels of Pen G prices. So regarding the Pen G project, the size of the project we are working is surrounded USD $250 million plus or minus 5% contingency, right, and so far we have spent around USD $89 million. The D-date for Pen G project is 1 April ‘24, while the D-Date is 1 April ‘24, it is always our endeavor to advance it, that's what we are working on. As on date the installation is expected to be over by September, October of this year, and we will be doing the pilot batches between November, December and – I mean, till the time it succeeds we will do it, but in any case it will not be later than March. And if the pilot succeeded in the first iteration itself, it can be advanced also. In terms of the execution, etc., a lot of people working and things are going up pretty far, and we are looking forward to this project really speaking. And I think – I'm sure the government being the major sponsor for the project by way of the PLA incentive system, they are also looking at it and every one of us are looking forward for that. Hi! Good morning to all of you. Subu, could you please explain a bit on this sale of non-antibiotic API and business to the subsidiary, what's the fashion or what’s the thought process? So the thought process is API business today we are having around – including antibiotic and non-antibiotic, etc. we are having around ten units. And what we are planning to do is bring all the regulatory units under one, all regulatory API units under one – wherever the major contribution is regulatory in nature, we will try to bring it under one number lot. This is to have – ensure that the mitigate the risk factors like regulatory lift, margins lift, everything. We want to bring it under and give a massive focus into the overall value creation for the stakeholders that is the whole idea. And this also will help in terms of improving the operational efficiency. And today if you release the regulatory units, what we have been majorly around there. More than 75% is applying internally and about 20% external. So by creating under one umbrella with a new management, can we able to focus more on the external also? Like that we are looking to all possible options, by which we can create value for the shareholders that is the overall idea. And at the end of the day, if we can have any strategic higher principle, we can always look into that. Like what we have been trying to do for Eugia, we will try to bring under a separate professional management, all these things we are trying to do that. There is no tax implication. It is a 100% subsidiary. Any 100% subsidiary, you know it is exempted under the – I mean no transfer, no tax on the transfer of the assets. It is exempted as per the income tax law, not an issue. Understood. My last question on generic rev limit now that the market has formed, a lot of your competitors have entered and you also have a settlement, will you be able to give some timeline about your launch or would it be FY’24 or FY’25? Yeah, thank you very much. Sir, I have two three questions. One is that, how we should see the compliance, especially when you guided that there should be increase in the revenue number by USD $50 million in the next 12 months. So we kind of see two, three plants we can associate with this revenue growth and how the compliance they deliver there in terms of FDA inspection and any 483 resolutions. Yeah, I should have discussed in these two parts, right no. One is relating to the increase, which Swami can address. In terms of the compliance, I think today if you really see the formulation, all the units are under VI and apart from that a couple of units – I mean, one unit has been inspected recently or two units, JPL [ph] and care of unit one and three that has been inspected, and that is also we have informed to the exchanges if you have noticed. So as on that in the formulation business, we don't have any issue in terms of the regulatory compliance. In terms of capacity, there is enough capacity to augment the supplies etc., In terms of the growth percentage, Swami can explain that. Yeah, in terms of you know – with regard to the what guidance we are saying, about forty products that's like they come over the next 12 months, we have factored in any compliance issue that could be there as – but it’s known as on date, if an API plant has a problem. We can consider those factors while deciding what are these 40 odd products that we are going to commercialize. So we believe at this point of time this is realistic. Going forward obviously if there is any inspection we need to see the outcome of it, but you know we have factored in this compliance matter. Thank you, sir. And one more question from my side is, how we should see the free cash flow generation going forward in the next two years? Where we need to factor in how much you spend on R&D, how much is [inaudible]. So I should have to put it, with this maximum we have achieved INR 415 crores per quarter is the maximum R&D spend we are done in any quarter, to the best of my memory, right? Even if you continue with that, and I don't think we'll be continuing INR 415 crores, probably it may be slightly lower, right. And with the Pen G project and some of the projects going to take place next year, this will – we will be able to achieve the good free cash flow coming from the project. Even the buyer also has sub-committed, they have already said in the past meeting, earnings calls, etc. We have filed two products. One more product also we are going to file it, etc. This is expected to generate cash flow starting FY’25 onward. So I can clearly see FY’25 Pen G project will generate cash and you are – our biosimilars will generate cash, plus the various projects are in the process of commissioning, etc. If one or two of them have been successfully commissioned, apart from what I mentioned, that also will generate in the cash flow. I think going forward I can see very clearly cash flow generation will be very good starting FY’25 onward. ‘24 also, I think you should be able to generate the cash flow, because apart from the existing, we have not undertaken any new project. No new project, except the one which we have announced recently, that biosimilar, one CMO facility we are thinking of putting it. Other than that, I don't see any new major greenfield projects are being thought of. If any decision taken at the time, we will be informing in the normal earnings call. Most of the projects are either 40%, 50% completed. Like biosimilar CapEx is over, so only the clinical trial, which is forming part of the R&D cost, which is being factored as part of the P&L. Then if you really see the U.S. CapEx, most of the projects have been completed. They are waiting for the exhibit batches and the final approval. You take China plant, China plant the installation is over and we are doing the exhibit back shared and like that, so and so. So we don't see a major stress on the cash flow on account of the project, and the business is also doing well and we expect to do a good cash flow. And sir, like we know that the U.S. business is finding it a bit more difficult because of the competition. So with that into consideration, we have less control on the revenue side. Anyway we are doing extremely well despite that. We don't see very meaningful growth coming on the top line. So the levers left out, how to control the cost side or the CapEx side. So do you see any levers which are visible inside ’24, ‘25 which have not been discussed so far. Yes actually, if you really see the annual report dated 31 March ’22, we have identified the five leavers and one is the biosimilars, and the second is the API and Pen G plant. Third is the API business, and the fourth is the Eugia, which in the earnings call in the last time it was – even though we have given a clear road map for the Eugia business and fifth is like India business. India business because of the other priorities is going – I mean, not taken out, but other things have taken out when going in an accelerated pace. As talking more on the, I mean absolute numbers in terms of cost side or the CapEx side, which probably will be you know… [Cross Talk] One of the significant – you are right. One of the significant steps which I taken is carving out the API business to achieve the operating efficiency to improve the capacity utilization and serving the market. We are already carving out, and we are in the process of doing, and this will take you around first year, well we are working on that and that also will contribute. We can see an improved performance from the API business, which means this is the main cost base for the entire company. You can see an improved performance. On the antibiotics side you know Pen G is coming, which is another major cost favor, because we have been buying all the later case and the intermediates, etc. So these are all the steps being taken by the company. Sure. Sir, I wanted to first check on the R&D side. Now there's a pretty sharp jump on a quarter-on-quarter basis. I understand that there are a few clinical trials that are ongoing, but I also wanted to check, is there some change on the R&D front, strategy front that has happened in the last quarter or so. Is it that the U.S. also seems a bit improved and because of that there is a step jump in the R&D spend, ex of biosimilars as well. Not ours. I think the key contributor to the R&D spend this quarter is the biosimilar. Compared to INR 75 crores expenditure of last quarter, this is INR 180 crores this quarter. We explained in the last quarter itself, our R&D spend for the year will be somewhere within 6% and 6.5%. The first half has not taken place and we’ll be focusing – we’ll be entering more costs because of the timing of the clinical trial, etc. also required, etc. and because of that, these two quarters there will be a good R&D spend that will happen, which has been already informed with the earnings call, last earnings call. Okay, so this quarter the R&D to sales at around 6.5%. Do you see a gradual moderation in this number in the coming quarters or year? Ideally we should take around 6% to 6.25%. 6.5% will be a outer limit, but I am talking from an absolute amount. It is a function of the turnover. So 6% to 6.25% on the existing turnover, I mean, achieved turnover is the non-invasive which we are looking at. Current, okay understood. And also Subu sir, I just wanted to revisit the CWIP number. I think at around September this was INR 3,200 odd crore. So what is the capital work in progress today? So the capital working progress today is something like it’s around INR 4,000 crores. It is around – the exact amount if you really see, it is INR 4,200 crores and even the intangible is around INR 800 crores, right. The major CapEx is the China plant, which more or less has completed INR 600 crores. As I told you its installation is over. Unit type we have already incurred the cost. It is a percent of the clinical trials only which I explained, right, and we are putting one Eugia manufacturing plant in Vizag. So that is – the expenditure is still going on. Like that, some of the project, either it has been installation level which is more or less 90% over or it may be in the process of 40%, 50% is over. As I said, these are all expected to start commissioning by 31/3/24 onwards. No, this this will get capitalized on or before – I mean at least some of them will get capitalized on or before 31 March ’24. Okay, understood. And also the – and the CWIP number, how much is the pre-operating expenses that has been capitalized, whether R&D or whether other plant they need expenses? It is getting – I will get that data separately Nikhil. I don't have it right now with me. I have the overall number only. [Cross Talk] Any project, if I’m talking 4,200 crores is the tangible no, you can take something like 10% will be the pre-operating including all, and that is a guess, but I will get the exact number later. Okay, understood. Also sir, I mean revisiting the PLI project as well, so UDS $90 dollars incurred out of budgeted USD $250 million. The timeline seems pretty tight. I mean you have only five, six months to incur the remainder CapEx. So I wanted to understand, is the entire USD $250 million needs to be spent to commence the project or you can commence the project partly as well, maybe I mean… You know I’ll say Nikhil, what we need to look at it, in the case of the projects, it is the – when we said USD $90 million is a cash spend, it doesn't mean we are going to start some of the work now. We have issued the purchase orders long time back. So this, all of the projects will have a gestation time in terms of completing the work and then installation, and the payments will be successful implementation of successful dispatch of the material. So most of the material will start coming between April to June, and it will get its commission – I mean installed. Not – commission is not the right word. Installed between July to September, so that's the way you have to look at it. But as and when they start dispatching no, we need to make the payment or based on the successful assembly that we pay, something like that, you got it? Civil works and more or less I would say around 75%, 80% is already completed. Even the mechanical and the electrical is also purchase orders are being – purchase orders are being issued more than INR 1,500 crores already. I think in the last earnings called if I'm right, we have issued more than INR 1,500 crores purchase order. Probably by this time they would have issued the balance also It could be another INR 200 crores, INR 300 crores. Right. And then also finally on this one, 15,000 tons was the planned capacity and there was a captive and a merchant share. Can you also again share those numbers please? No, no, no. 15,000 tons is the total Pen G capacity, and as we said in the, some of the previous calls, our captive consumption equivalent in Pen G is something like 6,000, around 7,000 tons, right, that is the thing and the balance will be for on – it will be for external sales. Okay, and sir what is the pricing scenario today? I mean when the project was envisaged versus now, how has the prices moved? I don't think, today the prices are very high because of various reasons, but we will not guess anything now because the project is at least one year away, and I don't like to guess any number right now. But, with China opening up, I mean, my limited understanding of what's happening in other commodities, I think normalization can happen. So do you think that or would you mind sharing some ballpark sensitivities around – if pricing despite this much percentage, you will still be making good economic value. Can you… Yeah. We will make economic value, that much I can say. But I will not like – even with all your contacts and the interaction with the international we are limited, so we don't know that much of interaction with anybody. But can say one thing, even if the price goes to pre-COVID levels, etc. also, we will be well within the selling price. Our cost will be well within the selling price. Okay, understood. And so one final question on the Biosimilars front, can you share some quantitative guidance on what absolute sales you are targeting for Biosimilars in two years, three years time frame. And also in the U.S. how many field force enter form the Spectrum acquisition, and would that be leveraged to commercialize the initial Biosimilars. So would there be any incremental spend required initially to commercialize the Biosimilars, especially in the U.S. Yeah, so I will answer your question in two parts Nikhil. With respect to Biosimilars, for the next two years, as you know that we have two products filed right now with EMEA. We have filed one or two antibody in oncology with MHRA. With the antibody and oncology segment, we have completed the necessary regulatory procedure with MHRA with one major pending action, which is the GMP inspection. The required on-site inspection is hindered by the availability of inspectors at this time, and our regulatory team is continuing to work with MHRA on this subject. At this time, the agency and we have agreed to take a clock stop until April, and I was hoping to have GMP inspection announced with each time frame. So once that happens, then I probably think we'll have at least one quarter of sales in this year, provided I will be able to obtain an approval for this antibody by Q2 of the next fiscal. With the Biosimilar filed with the European Medicine Agency, I have provided an extensive guidance in the last earnings call, but owing to the COVID-19 workload and positive of inspectors, we are struck at the 180 of the clock. And on the advice of European Medicines Agency, we have taken a clock stop until the June of 2023. Now the agency has mentioned that the satiation will change as and when inspectors become available to travel and audit us. At this point I’m pleased to state that auditors have indicated, end March are the dates for onsite GMP inspection. So in the last week of March, we are having the GMP inspection announced. So with this development, we are reasonably confident that the post audit regulatory process will conclude at least for one of these products, and we shall be able to initiate the commercial activities in EMEA or the European region for at least one product before the end of next fiscal, and for the second product probably in the first quarter or the second quarter of the next fiscal. So I am hoping for a continuing engagement with the agency and taking the free regulatory formalities at this point of time. Additionally, we have also stated filing with Health Canada and Health Canada also had acknowledged the receipt of our file and started the review procedure. We had an audit announced with Health Canada in the first week of May. So I believe if things go well, we would also have the commercial sales begin either in Q4 of the next fiscal or at least Q1 of the following fiscal, which is FY’25 in Canada as well. So I think overall, we are looking at least two Biosimilars to be commercialized in EMEA, Health Canada, and MHRA and importantly as you know that we have concluded, we are concluding the large metastatic cancer trail in 690 subjects. We will start the filing process of this antibody in India and emerging markets in July of the next fiscal and by September we will file it with European Medicines Agency, and by December it is our intent to file with the U.S. FDA. Now, I'm optimistic that in ’25 we will have this product approved in EMEA and also hopefully things go well, we’ll also be approved with the FDA. So I see ‘25 as an inception point with this antibody kicking in, in the commercial markets, both in EMEA and FDA. I expect at least one quarter of sales in the antibody in India to start within the next fiscal, with EMEA being ’24, ’25. So that’s the guidance on biosimilars, which is part one of your question. The second one is about the Spectrum or the commercial field force that we have in the U.S. with Acrotech Pharma. We have our presence in oncology segment. We are going to leverage the commercial front sales team or the team that we have with Acrotech, who will also be the front end for Biosimilars in U.S. We expect the first Biosimilars in the U.S. to be approved in 2025 and we will leverage on the field force that we have with Acrotech Biopharma to take this product into the market. We are also planning to bring an immunology Biosimilars by ’25, ’26 in the U.S. which his used in dermatology indication. Again, as we see if you have followed Acrotech Biopharma, they're investing in dermatology products and brands. So essentially, the idea is that Acrotech Biopharma will position our Biosimilars brands in the U.S. market. Yes, Dr. Satakarni, I think it's very clear and I think it's very helpful and all the best for this initiative for the company. Yes, three questions from me. First, one is on Europe. I think it's good to see that, you have come to a EUR 200 million quarterly run rate. The last time this happened if I recall was in March 20. But what I understand was there's some bunch-up of sales that happened then. So from here on, is this a base that we can expect you to maintain? If you could give us some sense on what's happening in Europe, and how should we look at it going forward from here. Yes, so we had a good partner in Europe in the third quarter, and you have seen that actually in a quarter two we were at a EUR 190 million and this quarter we have exceeded EUR 200 million. But quarter three is always the strongest for us, but on year-on-year we have a 7% growth and even on a quarter-and-quarter as I said, that is a seasonality, 2% growth. But considering the discontinued business, then the quarter-on-quarter was a 5% growth. So I guess that about EUR 185 million to EUR 190 million is the base line. And actually based on the seasonality and some of the opportunities which come up, we may grow at a middle level of a single digit growth. Okay. Thanks, that’s helpful. The second is for Yugandhar. When should we see the Vizag plant revenues starting in? My sense is you will commercialize it and the exhibit batches approval from the regulators. If you could just give us an updated timeline on this. And second, you know last quarter at least the commentary that we received was that especially injectables there was heightened competitive intensity, which are showing up in your numbers and also in the numbers of your peers. And that seems to at least from a number basis for Eugia that seems to have reduced. So if you could just give us some sense on what's happening in the injectables market space? So the first thing is on the Vizag plant. We will be starting it with batches from this month onwards, and we already requested European authorities to inspect the plant in November for this calendar year, which is November ’23. And we expect that in the best case scenario, it might be a quarter four of FY’24 commercialization, on worst case it might be quarter one. And we are also going to file some of the shortest products of U.S. to trigger an early audit for the plan, that's on the Vizag plant. So you can take it as, FY’25 is the commercialization for Vizag plant, and in this entire fiscal year we’ll go into verifying the batches, inspections and all that stuff. On the U.S. front, in terms of what we have seen. First two quarters, there was a significant pricing pressure for a variety of reasons, but quarter three and quarter four how we are observing is, the pricing has stabilized. The demand, the volumes are improving significantly, and also, I think probably regulatory actions on some of the other competitors is giving some minor tickling business at this point of time. But we will see, like how it goes, but what I'm very confident of and very hopeful of is my team can generate double digit growth going forward. Okay. And how much was nine months FY’23 revenues for Eugia and what was the similar number for nine months FY’22? It is flat, because we don't give a separate listing in the panel, because it's on a pro forma level. But as you can see it is just flat, FY’22, to FY’23. Okay. That’s helpful, thank you. The next is on biosimilars. Dr. Satakarni you spoke about doing some filings in Canada. Is it one of the products that you've already filed in Europe on MHRA or is it a different product? Essentially the same product that we have filed in Europe and MHRA. They are – one of them is filed in Health Canada, and we are planning to file the second one with also the Health Canada. Okay, that's helpful. And second, I mean I noticed that in Q2 of FY’23 there is a biosimilar subsidiary that was incorporated. If you could give us some sense, what was the purpose. And the second, some update on what's happening on vaccine? Specifically, you did get some regularly partnering in your PCV vaccine this quarter. Yeah Tarang. So on the vaccine trend, we are encouraged by the fact that the subject expert committee panel operating under the ages of CDSCO or DCGI has reviewed our Phase 3 pediatric data for the Pneumococcal 15-valenta vaccine. The data suggest that15-valenta Pneumococcal vaccine would be anticipated to help protect again the stereotypes covered by the [inaudible] and also expand coverage to include two additional Pneumococcal pseudo types causing potentially a serious disease in infant. Thereby, how do we view at this SEC recommendation. The SEC recommendation should be viewed in front, but they have granted a recommendation for manufacturing and marketing of the PCV 15 vaccine to our JV company. So at this stage, we are going to the regulatory process of obtaining a manufacturing license, which is a normal course of regulatory process. I am optimistic that this procedure will conclude in the next few weeks, probably around six to eight weeks’ time. Since the 15 stereotypes included in the vaccine, responsible for a good majority of global Pneumococcal disease cases, I'm excited by the potential, the broader coverage we can offer with the PCV 15 vaccine. I planned to commercialize it two quarters from now, provided I will – we will receive the manufacturing license in April, May. Then two quarters from now we would commercialize this PCV vaccine, so that's part two of your question on the vaccine spent. That is incorporated, and we talked about it in the earnings call, I think the last quarter or the previous quarter. So the idea is to expand on the capacities to all to support any CMO opportunities in biologic space. At the same time, with our oncology biosimilar coming in, we would like to scale it up to an extent where we become extremely cost competitive in these low and middle income countries, so that's the idea. Right now, we are still discussing on how to shape up this project in the next fiscal year. So I’ll provide guidance as things evolve, but the idea is to become a CMO and also use the initial capacity to make it more cost effective for our biosimilars to go into low and middle income countries. That's the vision behind this. Sir, I just wanted to get a clarification on this one. You told that there is some process that is going on for making the buybacks easier for this one. Technically I did not understand what exactly that was, but I just wanted to know whether the management is seriously thinking about to buyback, at least in the near future and what would be the timeline for that? See, it is not ours to buyback, okay. So at the same time the buyback management, it is a decision of the Board keeping in mind and Board will decide, keeping in mind various financial commitments on various projects, and another thing, board will take the decision at the appropriate time. There is a thought process going on. That’s the reason why we are being trying to make – commend the articles and other things. Okay, so another - last thing sir. Because it is repeatedly, it will be coming in the social media, so that if the clarification come from your side, it will be helpful for the like shareholder. What is the formal relation between the Aurobindo Pharma and Aurobindo Realty if you can just enlighten on that concept. No connection between Aurobindo Realty and Aurobindo Pharma. The only – if at all there is a small connectivity is the galaxy building where we are spaced, wherein that is held by a company called Raidurgam Developers, where Aurobindo Pharma is having a 40 stake and the other promoter group is having 60%, but Aurobindo Reality is no way directly connected. Hi! Good morning, and thank you for taking my question. Sub sir just on margins, just going back, I know R&D has gone up. But historically we used to be a 20% EBITDA margin company. So just want your thoughts on, when we can look forward to those kind of margins. We have now started growing and it’s looking from the commentary on this call, it seems to suggest that growth can be sustained. So just one some of the levers of say, reaching historical margins. So, is there any timeline or any specific product mix that you would like to highlight that will help us reach there, or is just ongoing growth. One is ongoing growth and second is one of the key thing which the management is speaking. Embarking on the action plan is to increase the capacity utilization. That is also one of the reason which you have said. We will bring more focus on the API, that's the reason why we are carving out into their separate subsidiary company. That 20% if you ask me, while we may not able to give you a guidance, but certainly with the Pen G project being successful, we might be able to reach that is my feeling at this point of time. First April 2024. That is the thing because it will add some more top line, as well as it can reduce some cost like that. But this is - I mean, we don't know to guess at this point of time. We nearer the date, probably in the November earnings call we may able to get clarity on this aspect. Just following up on this. So from a cost perspective, you talked about logistic cost. You also talked about input cost inflation. Those you are now having a better visibility, and the only thing that we. Yeah, we have been tracking all of the freight cost etc. We are trying to optimize all the cost from overall leveraging the capacity. The overall operational leverage we are doing, everything. Whatever possible we want to do, we have been doing that, and at the end of the day, all are a function of the top line, in which there is some improvement started taking place, which Swami has clearly explain with the new products coming, what is the new launches planning everything, Swami has clearly explained. With that hopefully, we will also move towards that go of 20% Got it, sir. Just my last question is on injectables again you know. I think USD $73 million, I'm just calculating it from the USD $366 million, at least for the U.S. business. But what is the global injectable size? I think Yugandhar mention it's flat Y-o-Y, but is it closer to the 100 million still and what are our aspirations for USD $650 million. I think we pushed it out by a year, but just want to know if some of those aspirational targets can be reiterated, please. Thank you. Yes Shyam, I think you said it right. We have USD $100 million plus for quarter, and we want to go towards USD $121 million, USD $125 million next financial year. And yeah, we are still quite hopeful that even after pushing by one year, like FY’25 we should be around the numbers what we indicated in the past. Thank you, as there are no further questions from the participant. I now hand the conference over to the management for the closing remarks. Thank you all for joining us on the call today. If you have any of your questions unanswered, please feel free to keep in touch with the investor relations team. The transcript of this call will be uploaded on the website www.aurobindo.com in due course. Thank you, and have a good day! On behalf of Aurobindo Pharma that concludes this conference. Thank you for joining us and you may now disconnect your lines and exit the webinar. Thank you.

EarningCall_45

Ladies and gentlemen, thank you for standing by. Welcome to Coursera's Fourth Quarter and Full-Year 2022 Earnings Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions] Hi, everyone, and thank you for joining our Q4 earnings conference call. With me today is Jeff Maggioncalda, Coursera’s Chief Executive Officer; and Ken Hahn, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our press release, including financial tables, was issued after market close and is posted on our investor relations website located at investor.coursera.com, where this call is being simultaneously webcast and where versions of our prepared remarks and supplemental slides are available. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure can be found in today’s press release and supplemental presentation, which are distributed and available to the public through our investor relations website. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations and beliefs. These forward-looking statements include, but are not limited to, statements regarding the potential impacts of trends affecting our industry and uncertainties in the current economic and educational environment; our ecosystem, platform, content, and partner relationships, our anticipated plans, and the anticipated benefits thereof; our strategy and priorities; and our business model, mission, opportunities, outlook, and future intentions. Actual results and events could differ materially from projections due to a number of risks and uncertainties discussed in our press release, SEC filings, and supplemental materials. These forward-looking statements are not guarantees of future performance or plans, and investors should not place undue reliance on them. We assume no obligation to update our forward-looking statements. Thanks Cam, and welcome everyone. It’s great to be with you all. I’ve been a CEO for over 25 years. And in that time, I have witnessed many economic cycles, societal challenges, and technological leaps that required individuals and institutions to embrace how to learn, change, and grow. The past year has proven to be one of those times. Organizations are exercising caution given the macroeconomic uncertainty. Students are demanding an education system that is more affordable, accessible, and relevant. And as the year came to a close and ChatGPT mesmerized the world, we were all reminded of the transformative power of technology to change the way we teach, learn, and work. Despite the dynamic environment, I am inspired by our team and confident in our ability to deliver on our long-term strategy. We grew revenue 26% over the prior year, with total revenue of $524 million. We rapidly expanded the Coursera ecosystem, welcoming new learners, educators, and institutions around the globe. And we deepened the advantages of our three-sided platform. The structural trends reshaping our world are not slowing down. Let’s discuss the latest on each, starting with digital transformation. The forces of technology and globalization have been accelerating the transformation of every institution in our society. And the rise of remote work has led to a globalization of talent that is reshaping the supply and demand for jobs, no longer confined to a specific city, state, or country. Over the course of my career, I have seen how eras of disruptive technology, be it the internet, cloud computing, social media, or mobile, have helped advance the world and create opportunity. But they’ve not been without consequences, including dislocation and job losses. I believe that AI is ushering in the next major inflection point, with implications that go beyond the traditional boundaries of automation. It appears that AI will impact the future of learning and the future of work more quickly and more profoundly than many of us had been expecting. This brings me to my second major trend, which is skills development. Employers are rapidly digitizing work processes and jobs that are repeatable and predictable. But generative AI has the potential to impact an entire new class of knowledge workers, unleashing a new wave of reskilling imperatives. We believe that generative AI will require businesses to retool systems, processes, and talent, while harnessing these new technologies to improve their customer offerings, increase productivity, and stay competitive. It will push universities to enhance their curriculums and the learning experience to make quality education more affordable, interactive, and relevant. It will drive governments to deliver job training programs at the speed and scale needed to keep pace with job dislocation and unemployment challenges. And it will push every individual, in every job, to keep learning in order to stay relevant. This leads me to the third trend driving our business, the transformation of higher education and adult learning more broadly. In a world where machines are increasingly capable of producing content at scale, we believe that trusted institutions will play an increasingly valuable role in education. The growth in online learning has provided more equitable access to learners around the world. But the design of traditional systems of higher education have not kept pace with the changing skill requirements that have been driven by technology and automation. These higher education institutions must meet this challenge with rapid speed and scale, evolving to better serve the needs of students, graduates, and communities in an increasingly digital and distributed labor market. And this is why I’m excited to share that Coursera has partnered with the University of Texas System. This is a three-year, system-wide initiative. Students and faculty at all 8 UT campuses have access to the Coursera catalog, including our entry-level Professional Certificates that have been created by some of the world’s best-known industry brands. Many of these industry micro-credentials come with ACE Credit Recommendation, and several universities have recently begun integrating content on Coursera into their for-credit curriculum, including UT Arlington, El Paso, San Antonio, and Tyler. We believe students will benefit not only from learning skills, but also from earning industry microcredentials that complement the degree they earn from their local campus. And the University of Texas System will be preparing the next generation of talent to meet the state’s Historically, collaboration between industry and academia has been slow and piecemeal. By integrating industry expertise into university curriculum, at the scale of entire systems of higher education and government, we are beginning to witness what our platform and our ecosystem can make possible. Coursera is increasingly becoming the platform through which institutions are able to drive powerful collaboration to better meet the needs of our digital world. We believe our platform has three distinct advantages that allow us to compete differently. First, our leading educator partners who have created a broad catalog of branded, high quality content and credentials. Second is our global reach and distribution. And the third is the data and technology that powers our unified platform. Let’s discuss our recent progress for each of these. First, our educator partners. Universities play a prominent role in society, fostering education, research, and knowledge, while teaching durable skills like critical thinking, communication, and collaboration. And the curriculum can be complemented by practical, hands-on learning from industry partners, who are better equipped to keep pace with the fast-changing skills landscape and evolving job requirements. Coursera’s learning ecosystem includes a powerful combination of 300 university and industry partners, and we welcomed many new partners to our platform over the last year. This includes top-tier universities around the globe, like Georgetown University, Indian Institute of Science, and King Abdullah University of Science and Technology, as well as industry leaders in the fields of technology, business, and health. This includes Accenture, Mayo Clinic, Nvidia, PwC India, and SAP. And these partners continue to expand the Coursera catalog. We announced 14 new degree programs in 2022, including two recent additions since our last call. We welcomed the first liberal studies degree on Coursera from Georgetown University. This is a bachelor’s completion program that offers an affordable, flexible way for adult learners to finish their degree. Additionally, we announced our first degree from West Virginia University. It’s a Master of Science in Software Engineering and is offered at an affordable price for students around the world. Next, we are rapidly expanding our catalog of entry-level Professional Certificates, adding new partners, job roles, and language translations, while creating stronger connections to career and degree pathways. A year ago, we had 18 of these certificate training programs. Today, we have 38 that have been announced, more than doubling the catalog with titles from new and existing partners. Recently, we announced the first entry-level Professional Certificates from two new industry partners, including SAP Technology Consultant and Goodwill Career Coach and Navigator. We believe that industry microcredentials will be a critical component of the transformation of higher education. They offer learners with no college degree or prior work experience, an affordable, flexible way to start or switch into a digital career. They provide a turnkey solution for campuses, or entire systems of higher education, to upgrade their curriculum with career electives and produce graduates who have the skills and capabilities that employers are looking for. And they enable businesses and governments to deliver workforce and talent development at scale. Our second major advantage is the global reach of our platform. We have a large, growing learner base that attracts educators looking to teach individuals and institutions around the world. Our freemium model, paired with the world-class brands of these universities and industry partners, allows us to grow our top-of-funnel, attract learners at low cost, and serve them at a range of price points. This year, we added nearly 22 million new registered learners, growing our global learner base to 118 million by the end of December. Learner growth continues to be broad-based, with double-digit percentage increases in all regions. We also grew the number of Paid Enterprise Customers to more than 1,000, including new business, campus, and government customers. As the reach of our ecosystem continues to grow, the data generated by our learner base, including catalog performance, learner assessments, and feedback from institutional customers, allow us to identify and prioritize sourcing opportunities, deliver skillset insights to our Enterprise customers, and create products, features, and pathways that deliver more value to our learners, educators, and customers. And this brings me to our final advantage, the ongoing product innovation on our unified platform. My first update focuses on the learner experience. Coursera is increasingly becoming a global destination for learners seeking job-relevant skills and recognized credentials that can unlock the next phase in their education or career. Our team has been focused on creating strong connections between our open content and career and degree pathways, and this begins with the discovery experience. As part of our Career Academy launch last year, we began surfacing credentials through the lens of career pathways, helping learners better understand the job roles, number of openings, median salary information, and in-demand skills associated with our entry-level Professional Certificates. This quarter, we focused on degree pathways, and started rolling out enhancements to our catalog’s search and discovery, with “Credit Eligible” filtering and badging that allows learners to more easily identify content and credentials that can count as credit towards a college degree. This is tied directly to my second update on the American Council on Education, also known as ACE, which offers credit recommendations. From our campus survey in 2022, we learned that more than half of students want to earn a Professional Certificate that counts as credit towards their degree, and we have continued to pursue credit recommendations across our catalog. These credit recommendations provide learners with the opportunity to earn academic credit towards a degree program, typically at a much lower cost. And universities can consider offering credit for these industry microcredentials, which can complement traditional curriculum with job-relevant skills, or what we like to refer to as “career electives.” This quarter, we secured ACE credit recommendations for two additional entry-level Professional Certificates, with a total of 14 now recognized for academic credit. We believe more of our Professional Certificates have the potential to receive this distinction in the future and we are pursuing similar credit recommendations from accreditation agencies in additional regions around the globe. Now, my final update is for institutions. Our Academies product is a complete skills development solution. It offers personalized, skills-first approach to enterprise learning for the most critical job roles. Today, we offer six Academies spanning technical and non-technical domains. Customers tell us that stronger leadership, change management, and human skills are needed across their organizations, not just at the executive level, particularly with the unique challenges that remote work and hybrid work are presenting. We recently created a new Leadership Academy with a targeted, more selective portion of the catalog, including 11,000 Clips, 500 courses, and 70 Guided Projects. This has been designed for buyers looking to offer high-quality leadership training at scale for all levels of the organization. As AI accelerates change and puts more jobs at risk, one job appears to be more important and less at risk than ever, the job of the leader. Leaders are responsible for managing people through change, which is more important now, but also more difficult than ever. Leadership requires human skills and an awareness of change and context that AI will likely never replace. We are seeing strong demand for Leadership Academy and believe that tailwinds will increase demand for this kind of workplace training. Before I turn the call to Ken for a closer look at our financial performance and outlook, let me remind you of several key priorities we are focusing on in the years ahead. We’re focused on growing our Enterprise segment across business, government, and campus customers, seeking to address their needs in this changing environment. We’re expanding our portfolio of degree programs, especially those tailored to meet the unique needs of working adults, including flexibility, affordability, and stronger pathways from open content and industry microcredentials into degrees. We are broadening our entry-level Professional Certificate catalog, expanding with new roles, new partners, new languages, and credit recommendations. We are focused on deepening our advantages while driving more scale and leverage across our platform. And we see exciting possibilities for the use of generative AI across our business model. Thanks Jeff, and good afternoon everyone. We are pleased with our fourth quarter results, which reflect the diversification inherent in our business model, including broad exposure to the needs of individuals, businesses, governments, and campuses, a global footprint, and the ability to serve learners at every stage of their career. In Q4, we generated total revenue of $142.2 million, which was up 24% from a year ago, driven by strong growth in our Consumer and Enterprise segments. Over the course of 2022, we closely monitored the changing economic environment. This included our partners’ and customers’ priorities, as well as the implications for our own business as we navigate lower growth rates in the near-term. We implemented a series of actions to pace our investments and resources with our revised growth forecast, most recently reducing the size of our global workforce and sharpening our focus on key investments. Please note that for the remainder of the call, all non-GAAP measures have been adjusted to reflect one-time charges related to our workforce restructuring actions of approximately $10 million, which is reconciled in our financial tables and supplemental slides. Gross profit was $88.9 million, up 24% from a year ago, and a 63% gross margin, which was in-line with the prior year period. As a reminder, there are two components of costs of services: non-content costs that serve all three segments and the content costs paid to our educator partners. Our non-content costs have been largely consistent over time at approximately 10% of total revenue. The second component, our content costs paid to educator partners, will vary based on the revenue mix amongst our three segments, as well as the content margin rate of each segment. Given the strong growth in our entry-level Professional Certificates, we have seen a large, positive variance in our consumer content margin rate, associated with the increased consumption of industry partner content, which tends to have lower-than-average content costs depending on the partner’s goals. As we’ve discussed, some industry partners have prioritized additional spend that is included primarily as part of our operating expense to promote their brands, reach, or social impact initiatives, as opposed to a higher revenue share. In conjunction with securing a multi-year contract extension of our strategic relationship as we began this new year, our largest industry partner has chosen to receive a more standard revenue share in the future. This will result in higher content costs and lower operating expense going forward, and I will provide more detail in the discussion of our financial outlook. Total operating expense for Q4 was $99.7 million, or 70% of revenue, compared to 83% in the prior year period. Sales and marketing expense represented 38% of total revenue, down from 44%. Research and development expense was 20% of revenue, down from 24%. And general and administrative expense was 13% of revenue, down from 15%. Net loss was $6.5 million, or 4.6% of revenue, and adjusted EBITDA was a loss of $5.8 million, or 4.1% of revenue. For the full-year, our adjusted EBITDA loss as a percentage of revenue was 7.1%, a 150 basis improvement over the prior year. We aim to show ongoing leverage in our operating model, while also pursuing growth opportunities in our large and early markets. As a reminder, our annual operating framework with regards to EBITDA margin has been consistent. At the beginning of the year, we set an annual EBITDA margin target, and we work within that plan based on the trajectory of our business, which we again demonstrated with our reset growth expectations and disciplined expense management in the second half of 2022. Now, turning to cash performance and the balance sheet. Free cash flow was a use of $7.9 million during the quarter, compared to a use of $1.9 million a year ago. This included cash payments of $4.8 million in Q4 related to the restructuring charges, with the remainder to be paid out in the first quarter of this year. We ended the year in a strong cash position. As of December 31, we had approximately $780 million of unrestricted cash, cash equivalents, and marketable securities, with no debt. We believe the strength of our balance sheet, in combination with the modest cash requirements for operating needs, is an asset that provides us the stability and the strategic flexibility to execute on our long-term strategy. Next, let’s discuss each of our business segments in more detail. Consumer revenue was $79.8 million, up 21% from the prior year. Segment gross profit was $58.2 million, or 73% of consumer revenue, compared to 69% a year ago. And we added another 5.2 million new registered learners, despite Q4 being our historically lightest seasonal quarter for top-of-funnel activity. Our strong consumer performance continues to be driven by our expanding catalog of entry-level Professional Certificates, along with the growing adoption of our Coursera Plus subscription offering. As Jeff highlighted, we believe our focus on world-class brands and job-relevant credentials has made Coursera a natural destination for learners looking to start or switch careers. Enterprise revenue was $50.5 million, up 41% from a year ago on growth across all three of our customer verticals, businesses, campuses, and governments. Segment gross profit was $33.5 million, or 66% of Enterprise revenue, compared to 68% a year ago. The total number of Paid Enterprise Customers increased to 1,149, up 43% from a year ago. And our Net Retention Rate for Paid Enterprise Customers was 108%. While we benefit from multiple channels of distribution within our enterprise segments, we are seeing customers, particularly businesses, exercise caution in their spending priorities amidst increased macroeconomic uncertainty. And finally, our Degrees segment. Degrees revenue was $11.9 million, down 11% from a year ago on lower student enrollments, consistent with our forward-looking commentary on recent calls, as Degrees growth in 2022 was challenged by enrollment headwinds associated with U.S. master’s degree programs where our revenue is concentrated today. The total number of Degrees students grew 12% from a year ago to 18,103. As a reminder, there is no content cost attributable to the Degrees segment, so Degrees segment gross margin was 100% of revenue. Before I turn to our financial outlook, I’d like to provide some additional detail with regards to a recent, multi-year contract extension we secured with our largest industry partner in this new year. As we’ve discussed previously, in lieu of a higher revenue share, some industry partners prioritize additional spend to promote their brand, global reach, and social impact initiatives, which is included as part of our operating expenses, primarily as sales and marketing efforts and content production. The effect of these partners’ success has driven large, positive variances in our gross margin, most pronounced in our Consumer segment margin, while also increasing our operating expenses. In consideration of the long-term, strategic relationship, as well as the changing economic environment, our largest industry partner has chosen to receive a more standard revenue share arrangement as part of the recent contract negotiations. We are excited about the opportunities this renewed commitment provides, and I want to be clear about how this change will affect our financial outlook in 2023. First, the transition to a more standard revenue share will result in a geography shift within the P&L of an estimated 10 percentage points of total revenue, from operating expense to cost of revenue. We now expect both total gross margin and our Consumer segment margin to be approximately 52% this year. Second, we will incur expenses of $25 million in 2023, which will be similar in nature to our historic spend for the program, including sales and marketing efforts, content production, and product development. These payments will be spread evenly across the coming four quarters and will not recur after 2023. As we work through these near-term impacts, we believe the multi-year contract extension is better aligned with our mutual priorities, reaffirms our strategic partnership, and allows us to best serve our learners and customers in years to come. Now, onto our financial outlook. For Q1, we are expecting revenue to be in the range of $136 million to $140 million. For adjusted EBITDA, we are expecting a loss in the range of $12.5 million to $15.5 million, inclusive of the $6.25 million related to the industry partner contract change. For full-year 2023, we anticipate revenue to be in the range of $595 million to $605 million, representing approximately 15% growth at the midpoint of the range. For adjusted EBITDA, we’re expecting a loss of $26 million to $34 million, or a negative 5% adjusted EBITDA margin at the midpoint of the revenue and EBITDA guidance ranges, inclusive of the $25 million impact related to the industry partner contract change. On a quarterly basis, we expect an adjusted EBITDA loss in the first half of the year and anticipate positive EBITDA by our fourth quarter. Additionally, for the first time, we thought it would be helpful to provide our expectations around free cash flow for the year. We expect a use of $12 million to $18 million, compared to a use of $52 million in 2022. Finally, as we enter a new year, we like to provide some color on the composition and pace of the business, particularly given the varying impacts of the changing environment across our platform. This includes one-time, segment-level annual growth expectations to help you better understand how we plan to deliver on our overall guidance. For Consumer, we believe that learner demand for our branded, industry credentials will continue, with our initial outlook anticipating more than 10% growth. For Enterprise, it is clear that businesses are being more cautious with their spending priorities, and we expect growth of approximately 20% to 25% as we monitor the environment closely. And for Degrees, we anticipate a return to growth in 2023 of approximately 10%, with modest declines at the start of the year that inflect as we enter the second half. We are confident that the structural trends driving our business have not changed, and look forward to providing an updated view of our long-term strategy, key initiatives, and financial targets at the March Investor Day. We enter 2023 in a position of financial strength and are committed to driving sustainable growth, with our outlook reflecting an increased focus on scale and leverage to position us for the future. Thanks, Ken. Growth in online learning, in combination with remote work, digital jobs, and broadband connectivity, is reshaping the supply and demand for jobs globally. For many companies, human capital is their most important asset, and they now find themselves competing on a global stage for in-demand skills. This presents a challenge, but possibly a larger opportunity. Remote work provides direct access to sources of the best talent in the world, no matter where it resides in the world. And online learning can build the next generation of talent with the skill sets needed for future [job roles] [ph]. I want to wrap up today’s remarks with a Coursera for Business customer example that is drafting a blueprint for how forward-thinking companies are managing their holistic talent needs. Sanofi, one of the world’s largest pharmaceutical and healthcare companies, has been a Coursera customer since 2017. And over the years, our partnership has deepened and scaled. Early on, Sanofi focused on providing high-quality training around the latest data, digital, and IT skills. Later, this expanded into a broader talent development solution that reached more of their organization and demonstrated their commitment to employee well-being. And recently, their ambition extended beyond the confines of their organization as they looked to make direct investments in marginalized communities and to grow a future pipeline of diverse healthcare professionals. As part of this effort, our partnership now includes an eight-year initiative to offer 20,000 training licenses for Career Academy. By leveraging Coursera as the delivery platform, they are broadening access to job-relevant training and enabling new career and degree pathways to learners in their company and in their communities as well. This is a complete talent solution: Advancing training for cutting edge skills. Learning as a benefit for broader organizational needs. And future talent pipelines, with diverse representation and a commitment to the communities in which they live and work. I’ve said many times that Coursera’s mission is what inspires our team members and attracts our partners, but it is also what enables our customers to fuel their human capital needs and improve lives through learning. With our Coursera community, encompassing leaders in higher education, government, and business, we are working together so that talent, and opportunity, can rise from anywhere in the world. Hey thanks. First, just wanted to ask about enterprise trends. As you talked about seeing more caution from business customers there, can you give some more detail about – on what that looks like? Are you seeing customers reduce the scope of contracts much or just being cautious about expanding, and also curious if you've seen any changes in gross retention, especially for some of your smaller customers? Hi, Steve, this is Jeff. We, obviously going into Q4, we're sure exactly how the year was going to finish up. It was pretty solid. We felt pretty good about it. To your point, there's definitely, especially in certain regions, increase sensitivity on budgets, certainly budgets have tightened. In some cases, that has led to people saying, hey, I want to pull back on the scope [my buy] [ph]. So that is not a total churn, but we saw pressure among many accounts and that did put some pressure on the NRRs, but we actually felt pretty good. In terms of the NRR, we saw that generally in emerging markets where you, sort of early markets like Coursera for campus and Coursera for government, especially Coursera for campus, which is still kind of in the early stages of higher education learning, have to incorporate these types of services, it was generally lower in more mature markets, like Coursera for business, it was a little bit better. So, I would say that we feel pretty good coming into this year, and that doesn't obviously mean that we didn't see some pressure though. Got it. That's helpful. And then on this, the kind of the large partner, the extension and kind of the change in the contract there, just to make sure I understand, does that have any impact on total revenue or how much, kind of – or is it just more about, you know, what – it sounds like it might be a shift in expenses from, you know, out of OpEx in the core and cost of revenue, but then also maybe a total increase. I guess just can you walk through that one more time just to make sure we understand? Yes, sure. And we wanted to be very clear about the seasons, Ken, of course. It was a shift in geography primarily from operating expense to cost of sales affecting margin of course. There is also for 2023 only roughly $25 million that will remain in operating expenses, incremental total expense if you want to think about it that way. So, there's a transition period where there's OpEx expense, but the majority of it is simply as you referenced a shift in geography from OpEx to cost of sales. Okay, got it. And that will not continue in 2024. So, if we kind of looked at the – I guess, if we looked at the guidance and strip that out, then you'd be more or less I guess, yep, please. Great. Thanks for the question. Jeff, you outlined some of your key priorities for this year coming up. I was hoping we could like fast forward to Q4 2023 earnings where you'll be reviewing 2023. Like what would a great and highly successful year for Coursera look like in your eyes? Yeah. I think it comes down to two things. It's obviously like how do we perform in the year and do we perform well against the expectations that we're setting with you all today. Of course, most of that is the top line growth, but we want to make sure we continue to exhibit leverage. That's part of the obvious part. But I think that a lot of why I feel pretty good is, I like where we're sitting right here at the beginning of this year. There's a lot of things that are changing. We believe that a lot of those play right into our advantages and our differentiation. There are some really important things that we're going to do this year that I think are going to capitalize on some of the advantage we have. Lot of focus on quality and brands and institutions, collaboration among institutions. So, at the end of the year, if we're bringing on more brands, more branded credentials, especially for gateway, the – sorry, job starters and career switchers, that will be big. These credit pathways that we're talking about helping people get into either career pathways to a job, but also credit pathways to a degree, we think is a really powerful, kind of system effect that we can create among institutions like governments businesses and campuses. So, I definitely want to create more of those institutional collaborations. On the Career Academy side, we see across all segments. We see a lot of interest in [commingling combining] [ph] these industries [indiscernible] with college degrees. And a lot of the people who are really looking for that are also looking to make the switch to a new career. So, we think that there's a real opportunity to help learners not only develop skills, but get a better and clearer path to a job. And with this globalization of talent that we talked about in the script, and my travels, I've been traveling a ton around the world, talking to business, governments and campuses. The CHROs that I talked to, especially in markets where there is emerging talent, got kind of affordable scale talent, they're saying, wow, it's really getting hard to hold on to my computer scientists and data scientists because they're getting really good offers from international employers. And when I go to the campuses and talk to students, they're all saying, hey, Jeff, we're going to be studying data science and computer science because there's a lot of great jobs from international companies that will hire us with pretty good compensation. So, I really think that there are good opportunities to help learners find new job opportunities in such a dynamic and globalizing labor market. So, at the end of the year, I hope we have something really interesting to say about that. And then I did mention a bit on AI. I think my sense is and as we look at it and work with it, we're getting a sense of this technology this generative language technology is really pretty interesting, especially if you start with high quality branded expert sources of material. And so, we think this could really play to some of our existing strengths. And I hope at the end of the year we can do something pretty special there. Thanks, Jeff. And a quick one for Ken on segment margins. I think the strength in consumer segment margins is pretty clear and understood as far as the drivers. Wondering on Enterprise segment margins, why it was down year-over-year and quarter-over-quarter? Was that mix driven as well or is there anything else going on there to consider around pricing or discounting or anything? Thanks. No, it was nothing more. It was down just a bit. It's a bit of a mix issue relatively minor in the big scheme of things, but you're correct on the trending. Hey, Josh. Just one thing I want to add. On the degree side, at the end of the year, you can probably see by the mix here. We are finding that there are certain kinds of degrees that seem to appeal pretty well to, sort of working adults who are thinking about switching careers, not unlike the folks who are taking these career certificates, these professional certificates and career academy. And I would like to be able to say that we have figured out a certain design of degree that really seems to resonate with more distinctive and different from the general online degrees that are out there and that that is driving a very clear growth rate based on clearly meeting a need for these working owners for certain kinds of degrees that aren't being met by the current standard and more traditional degree programs that are out there. Yes. Hey, good afternoon, gentlemen. Thanks for taking my questions. Hopefully, you all can hear me okay. Yes, I guess maybe Jeff, the first question for you is, maybe I'm just, kind of slow writing things down or typing things, but I think you said 18 certificates, kind of beginning of the year to 36, did I get them right or 38? I think the 38 is the amount. Now, we've got to get these things rolled out, but we've had a pretty good track record of getting these things rolled So yes, among the ones that we've announced, we have more than doubled the 38. Okay. Well, it feels like obligatory now for me on every call to ask about AI, and you talk about it. So, I'm curious out of these certificates, what's the exposure to data science and AI amid the mix of your certificates now? And then the second question is, and whether at an Analyst Day you could talk about this, would love to get a sense on like the cohort analysis of each of these certificates and as they mature and how the revenue ramps from each of those and what have you learned to help, kind of improve the newer ones? Yeah. So, on the question of impact of AI on these certificates, I kind of immediately go to two different things. One is, what is the impact on the jobs that these certificates train for. That's a tougher one in my opinion. But clearly, you look at [indiscernible] co-pilot that that Microsoft put out and some of the amazing things that can be done. I mean, not perfectly, but some pretty amazing things that could be done even with the GPT-3.5 in terms of writing code in different languages. It's got to change those jobs. So, I think that I'm not sure exactly what the impact will be, but the bar will likely be raised in terms of what humans are expected to do because the tools are going to be able to do a lot more. In terms of the impact that AI will have on the actual content and the demands of the content, I mean, clearly, like if the jobs all dried up, people being less likely to take those certificates, but of course, they're going to need some of their job. And so, that's one of the reasons why we continue to broaden the portfolio of certificates. In a really dynamic labor market, you don't really necessarily know all the time which ones are going to be the most – the jobs with the most upside. So, I think that the diversification and the broadening of the portfolio as we started the call is an important part of the strategy so that we can really cover our bases and make sure that whatever those high demand entry level jobs are, we could be training for them. I will say though that we believe that credentials are going to become more important and credentials from trusted brands will become more important. The ability to just learn a skill is going to be, I think, more straightforward in terms of, sort of bite size up skilling. But I think employers are going to be looking for more than just have you developed a bunch of small skills, I think they're going to be looking for, have you really developed a deeper understanding with the deeper conceptual ability to, whatever the current tool is, transfer those skills to the emerging tools, whatever those might be. So, I think that there's going to be a bigger premium put on credentials and those credentials are going to be highly associated, I believe, with the kinds of brands that we've been working with. So, I think AI, to a large degree, will help more people get into our programs. They'll make those programs more interactive and more personalized, but at the end of the day, the premium will be, I think, remaining on credentials because I think the credentials will be an important part of the employment equation. Yes. That's great. Thanks for that Jeff. And then Ken, in terms of – just so I understand it, because I was curious because you all have talked about reductions of expense run rate. And then when I saw the guidance, I was confused, but I think it really is explainable now with this updated partnership with one of your key content providers. But what I'm curious about is because I don't know if I got this in the prepared remarks, so the gross margin in consumer is going to take a large step down, is that right? And did you say what that would be? We did. The guidance is – yes, we'll be up roughly 1,000 basis points. The guidance is 52% margin, both overall and for consumers. So, we're pretty specific on both those accounts. Okay. Well, the one – so I'll end it with this. I'm getting some questions in terms of like the 25 million additional OpEx. I mean partners [are 2-way streets] [ph] like what do you want to get out of the incremental 25 million of OpEx? I mean what does it help you with in your business? And I don't want to sound shortsighted, but like what could you get out of that? Thank you. So, the – firstly, we've extended our most important strategic relationship that we're pretty excited about from a job ready as you hear thematically what's important to us from a job-ready standpoint. There will be incremental investment in the program overall that we do. We're excited about the growth that's going to drive. And I think we may see some additional opportunity there over the course of the year. Overall, yes, does it slow down the path to EBITDA breakeven that we were moving pretty quickly on. It does, but over the long-term, we're still improving 200 basis points, and we're excited to extend this contract for several years. And I think it's going to be an important part of what we're talking about to the previous question, a year from now as we look backwards and some of the growth we think we're going to achieve. But it is a 2-way street exactly to your point, and we're excited about it. It's actually a big positive over the next couple of years. Hey, thanks for taking my questions. Just two for me. Staying on this EBITDA topic, Ken, you are showing breakeven within rate here, especially in the second half. I think you alluded to your prior philosophy around setting a margin target and then reinvesting upside if there is. Should we think that this philosophy holds here still? Yes, 100%, Jason. It's just – it's how we manage the business, how we managed the business before we were public. And it's both upside and downside, right. As things slowed down, in the second half of last year, we pulled back our expenses to hit our targets. We've, in fact, beat a bit in Q4, although that's not our objective is not to beat on it. It's to come in at what we promise. And so, we'll manage over the course of the year again, getting to this target we have for this coming year operationally of negative 500 basis points or negative 5%. It's an improvement of a couple of hundred basis points. It would be nice if it were more, but it's steady progress. So, we're committed to continued scaling to driving towards EBITDA breakeven and profitability over time. And we aim to do that regardless of the shape of the revenue growth. We won't be silly. This is for the long-term. But so far, with some pretty dynamic time, both on the upside and not so, we've navigated to our targets over the course of the year. We have good control of the business, and it's important to us from a business discipline standpoint. So, expect the same behavior that it's what we commit to, and I think we plan to always fulfill those commitments to you. Okay. Perfect. Excellent. And then one question on the Georgetown Bachelor's completion degree. Interesting to see, both from a quality of institution standpoint and also because it's a bachelor's completion degree. How do – we think of this as an opportunity with other schools because I imagine there's a lot of folks out there with credits and they might not have finished. And is this an area that we could expect more announcements? Yes. This is Jeff. I think this is really important. I went to a [indiscernible] high school, so prostate with educational institutions who do have a mission of serving a broad range of people. When you really look at why Georgetown is doing this, especially with their stature, they're really a thought leader, I think, extending that kind of quality education to a much more diverse and broad population. The fact that it's affordable, the fact that it's online, the fact that is the completion degree I think, speaks to and not just in the U.S., but around the world, a lot more societies are realizing we need more flexible ways for people to continue to learn through their lives and to earn important credentials as they do that, credentialize learning through our lives is going to be important. And obviously, we're delighted that an institution with the, kind of a steam of Georgetown is really stepping into a leadership role here and saying, look, we can do this. We can make a high-quality and very elite education more available to more people. Hi thanks for taking my questions. Jeff, maybe the first one for you. Obviously, we continue to see layoffs picking up in the news and sort of the unemployment numbers likely to start rising here soon. I'm just curious at, sort of as we see that news flow, what you're seeing in terms of a reflection into, sort of pipeline or top of the funnel not only in the consumer segment for the professional certifications, but then also on the degrees segment and sort of the application of pipeline for the growing number of programs you have. And then just how that's sort of reflecting into the guidance you're giving for 2023 here? Thanks. Yes. Thanks, Ryan. The world is a pretty dynamic place, coming off of COVID and looking at what's happening with expected recession and you're looking at inflation, the secondary effects of that, and then we have this really tight labor market. We felt that Q4 ended up pretty decently with respect to new degree learners. And as I said, we're kind of getting a sense of the kinds of degrees that are in most demand, and affordability, flexibility and relevance to jobs are obviously three big parts of it with a big overlay that has got the quality institution. Clearly, well, we believe that if history is any guide, if the labor market gets softer, we expect that that will improve things. Even if it doesn't, we think better design degrees that really meet more of the key characteristics of what these lifelong owners are looking for. These adult working learners are looking for helps a lot, too. We launched a boulder degree that has really nice characteristics, sort of performance-based pathways, very reasonable price, about $15,000 and very high quality and in a high-demand domain like data science. So, we think that these, sort of degrees that have pathways from open content and even a performance-based admissions process is the, kind of a degree that people like. So, it's a combination. I think, generally speaking, it's countercyclical. And also, if we can put more of our focus on these types of degrees, they're well suited for working adults, we feel pretty good about next year's new degree – or this year’s new degree to student numbers. And Ryan, one other thing, we did include some hints on timing for our forecast and – as we did last year, we provided segment guidance to start the year to help everybody with their models, but as we've talked about degrees, we did forecast roughly 10% growth with modest declines in the first half. So because the degree is revenue model. So, we see some real acceleration in the business as throughout this year. Just to point that out, which I think directly addresses your question. No, yes. Super helpful color there. Ken, I really appreciate it. Maybe just my follow-up, a second question. Jeff, on the Coursera for government opportunity, we're starting to see more and more governments announce initiatives for rescaling and upscaling. And you mentioned you've been traveling quite a bit. Just curious what that demand pipeline is looking like? And we've heard about a number of other vendors in this space also, kind of going after the same opportunity. Are these opportunities becoming more competitive or any changes you're seeing in the competitive dynamics there? Thanks. Yes. It definitely looks like there's a growing recognition that reskilling is important. It will continue to get more important over time. The governments have a big role to play. And online is pretty much the way to do it. I mean the online model is really well tuned to the needs of governments. I mean, they're largely serving working adults who are trying to manage families and jobs and want to find something that's affordable. So, we definitely are seeing more interest. On the competitive side, I suppose that there's a little bit more, but I have to say that we find that the attributes that are distinctive about Coursera resonate particularly well among governments. And the attributes include the quality, the credentials, the brands, how well-known Coursera is by the citizens and the number of citizens in the country are using Coursera these institutional collaborations where Coursera can be used in higher education institutions, so up-leveling higher education system of public universities, also being able to do workforce development programs, like with the state of New York, being able to do a workforce development program where the graduates of these professional certificates can become eligible to be graduate of college degrees. And linking those two things together, Workforce Development with the Ministry of Labor and career elective with the Ministry of Education. So, it's not just the content and credentials, it's also the way that we can actually structure relationships and connections between institutions that government seem to think to be pretty compelling and generally speaking, it's pretty unique for Coursera. Wonderful. Thanks for taking my questions guys. Two that I'd like to, if I may. First, going back up to the ChatGPT, OpenAI question, I understand there's potential benefits as it becomes another skill that people need to learn. One question I've gotten a lot from investors and would love to hear your perspective is, how does ChatGPT itself kind of disrupt the way learning can happen and even [ad tech] [ph] as itself, is there a potential threat that you see or is it really the, kind of benefits and everything to your business model far outweighed the risk? And then I got a quick follow-up. Yes. Thanks, Rishi. So, in terms of the way the learning experience happens, the way I see it in very simple – in a very simple view, I sort of say, all right, there was, kind of arrow one of online learning was YouTube, for the most part, it's very passive. You sit back and watch a video. When Coursera came out along with other providers and it came out of universities where they introduced active learning. You'd watch a video, but then you'd answer questions. So, it was more engagement in the content. I think there's a new and next level of learning, which I will call interactive learning, where you are actually interacting. You are watching a video or you're doing an assessment. And not only do you do it, but you get personalized feedback on that and can even have, kind of conversations to better understand the concept to get more examples to role play a scenario. So, I think that, that interactive personalized learning is really going to be a big unlock with this technology. And so, I think the ability to learn is going to go way up. So long as people don't outsource their thinking to GPT. This is a little bit different than a calculator. Calculator is just basically follow instructions as you put into it. This technology can write stuff pretty much from scratch. And so, it is possible to outsource a lot of the thinking that would normally accompany writing. And I think that's actually one of the potential downsides or vulnerabilities, risks that comes from this kind of technology. But overall, we're going to really push on how do we unlock more of that personalized interactive learning. We think that in terms of the relative position is, I really like the fact that we have high-quality branded content because that is something that will be, I think, highly desired in a world where people don't always – aren't always able to distinguish fact from fiction. And it will be harder and harder to credentialize things when they're all kind of piece mill and totally personalized. So, I think grounding that, kind of the learning experience on branded credential learning, I think, is going to be key. I think the other major thing in terms – in addition to the, kind of learning being different and more interactive is the content generation. I mean, you can generate content far more quickly and productively than you can before. And people would say, Oh, gosh, but it can have a lot of mistakes in it. A human – at least if you're dealing with quality institutions, a human is always going to look at it before the course gets published. So, I think it's just going to, sort of super power instructional designers, it's going to super power the people that prepare this, kind of content, but the quality stamp of institutions is going to be a big part of this. And so, I actually think the cost of production of content will go way down and people will be looking with more, I think, seriousness at whether that the quality is maintained as the cost go own. Overall, if you could say, hey, Jeff, do you wish that GPT never existed, it only came out three years from now or now? I’d definitely say, now. I'm glad it's here. I think it's going to be exciting. I think it will be great for learners and I think it's going to be relatively advantageous to Coursera. Got it. That's really helpful. And then, Ken, just a quick one for you. I really appreciate the kind of granularity in terms of how to think about the segment growth for this year. Drilling on to the Degrees side, glad to see we're seeing an inflection in the back half of the year. Can you expand a little bit on what is giving you confidence in that? And maybe is there a certain set of macro expectations embedded in that or are you making the assumption about the, kind of countercyclical forces on degrees don't change relative to what we're seeing today? Thanks. Sure, Rishi. Happy to do. Firstly, based on the revenue model, we have amazing visibility, whether it's good or bad, around Degrees. And the vast majority of revenue will come from existing programs with wonderful visibility. It's about filling those student cohorts [indiscernible]. We've seen real improvements in our ability to fulfill. We have a number of new degrees rolling-out that we will be fulfilling. And so, the – really, any of my segments as far as the ability to look forward with certainty on a forecast degree is, in fact, the best. And so, we're not relying on every – on any particular trending. That said, as we look forward to 2024 then, some of the programs in the pipeline, we're pretty excited about with the changes that we're seeing, but 2023, no matter what the revenue recognition, nothing is in the bag, but our visibility is quite high in degrees so that inflection after the first half, I have a very high level of confidence in. That wraps the Q&A. A replay of this webcast will be available on our Investor Relations website, along with the transcript in the next 24 hours. We appreciate you joining us. Thank you Ms. Carey. Ladies and gentlemen, again that does conclude Coursera's fourth quarter and full-year 2022 earnings conference call. I like to thank you so much for joining us and wish you all a great remainder of today. Goodbye.

EarningCall_46

Good afternoon, and welcome to the Redwood Trust Incorporated Fourth Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. Thank you, Operator. Hello, everyone, and thank you for joining us today for Redwood's fourth quarter 2022 earnings conference call. With me on today's call are Christopher Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, Chief Financial Officer. Before we begin, I want to remind you that certain statements made during management's presentation today with respect to future financial or business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. We encourage you to read the Company's Annual Report and Form 10-K, which provides a description of some of the factors that could have a material impact on the Company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we might also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures are provided in our fourth quarter Redwood review, which is available on our website at www.redwoodtrust.com. As a reminder, the Company's financial statement audit a year ended December 31, 2022 is now complete and the results of your reporting today are unaudited and may vary from the Company's audited financial results for the year ended December 31, 2022, presented in our annual report on Form 10-K for 2022, including due to the completion audit procedures relating to the valuation of our deferred tax assets at December 31, 2022. The Company's 2022 annual financial statement audit is scheduled to conclude on schedule in late February in advance of our Form 10-K filing. Also note that the confident today's conference call contains time sensitive information that's only accurate as of today. And we do not intend and undertake no obligation to date this information to reflect subsequent events or circumstances. Finally, Today's call is being recorded and will be available on our website later today. Thanks, Kate, and thanks to everyone for tuning in this afternoon. We're excited to have the opportunity to speak with you today in our fourth quarter results. Now also update you underperformance the first month or so 2023. We'll also touch on how we viewed the opportunity in front of us for the remainder of the year. As you probably suspect a cover off and a high points and then Dash and Brooke will handle our business and financial performance in greater detail. Fourth quarter rounded out a year that brought about sudden change to the mortgage markets in a manner that was markedly different than we've seen through previous downturns and past housing cycles. In 2022, the Federal Reserve's efforts to curb inflation led to the most pronounced jump and rates in over four years, largely freezing mortgage refinance activity and profoundly affecting consumer behavior in the housing market. Significant increases in rates severe spread widening and ongoing bouts of volatility characterize much of the second half of the year. Our results during this period certainly didn't meet our expectations. We focused on prudently protecting our book value, managing risk and positioning our company for the path forward. As we all know, long-term focal points such as these are sometimes only fully appreciated in hindsight. Such a challenging year and now behind us, we resolved to break the huddle in early January, and quickly build momentum towards our 2023 priorities. That's exactly what we've done realizing a welcome uptick of activity and a few accomplishments worth noting that have helped to improve our GAAP book value thus far in 2023. Already this year, we've completed a preferred stock offering reopening a segment of the market that it seemed little activity last year, while expanding our balance sheet to an alternative source of capital. Next up, we completed a sale of $230 million at business purpose lending or BPL loans to a top institutional partner at a creative turn of terms for both firms. Sell this pool of loans was a bellwether of sorts for us, we created forward momentum for the platform that's positively impacted our new loan pricing and reaffirmed our BPL business potential to build from last year's record volumes. Generally with our BPL loan sale, in late January, our residential team completed our first Sequoia securitization in over a year. Once again, this deal helped reset the market and is now influenced a significant expansion of the RMBs issuance calendar by other sponsors a good fact for all market participants. Investor demand for a securitization was the strongest we've seen for any private label deal in over a year and it allowed us to increase bond prices and boost our GAAP gain on sale. Through these actions as well as other optimizations across our balance sheet, we grew our unrestricted cash position to just over 400 million at February 7th. This robust liquidity puts us in a strong position when considering our future debt maturities will allow us to proceed opportunistically in our markets, including through M&A, and other creative investments. Accompanying this boost in available capital has been a significant reduction in our go forward operating expenses. As Brooke will touch on the primary focus here has been to reduce costs that conflicts with loan volumes. We've been very strategic in this regard managing costs, while preserving full optionality to take advantage of market conditions as opportunities arise. As we think about capital allocation going forward, we expect consumer mortgage volumes to remain challenged, as the majority of homeowners are not financially incentivized to refinance their existing home or move to a new one with the prospect of assuming a much higher mortgage rate. In response, we have reduced working capital allocated to our residential mortgage banking business by about 70% throughout 2022. We acknowledge that January brought about some much-needed stability to the market, which was partially due to a modest decline in mortgage rates. It's simply too early to tell, however, if this is start of a trend or simply pent-up demand following a slow fourth quarter. In the meantime, a strategic focus of ours remains attending to our seller base and ensuring we have products that meet their needs as the market evolves. This includes refinement of our expanded prime products, as well as investor products that cater to consumers, who own second homes or looking to finance a single rental property. Despite our belief that consumer mortgage volumes will remain under pressure in the near-term, there remains heightened demand for BPL products in a sector that is very much still in growth mode. BPL borrowers unlike consumers are locked into low 30 year rates and are therefore not content to sit on the sideline. They are transaction-oriented, executing on business plans and require liquidity from our loan products to fuel growth. With demand for rentals still elevated, we continue to see investors actively seeking the range of solutions we offer. Rental market has been tasked in providing more alternatives households, including multi-family, built for rents and workforce housing. Our focus remains on originating BPL loans secured by assets with strong fundamentals and quality sponsors. That's why we remain particularly bullish on our BPL business, even with face for the prospect of the potential recession in 2023. Perhaps the overall positive market sentiment to start the year matters most with respect to our investment portfolio, as it remains the primary driver of our book value. While the fourth quarter mirrored much of 2022 with further credit spread widening, thus far in 2023, the story has been different. Market prices for securities have begun to firm up, reflecting lower mortgage rates, increased housing market activity and positive deal flow in securitization markets. I'd like to continue emphasizing that, the vast majority of mark-to-market declines we incurred on the portfolio in 2022 remain largely detached from the underlying cash flows, with the book continuing to display strong credit fundamentals and low overall delinquencies. With a weighted average year-end carrying value of $0.62 to principal face value and a projected forward loss adjusted yield of 15%, our investment portfolio had approximately $500 million or $4.33 per share of net discount at year-end that we have the potential to realize to earnings overtime. While the path of home prices and its impact on mortgage credit remains the critical question for 2023, we believe our portfolio construction with many seasoned assets and significant HPA realized to-date makes it resilient to a wide range of downturn scenarios for the economy. With our strong cash position, we remain intentional about steering capital and resources towards markets that we believe perform better in this environment and assets we believe to be undervalued, including Redwood's corporate debt and equity. We repurchased $88 million of our own securities in 2022 and continue to be active in doing so in 2023. We intend to use our unrestricted cash position and other sources of available liquidity to address the remainder of our upcoming 2023 convertible bond maturity, and remain opportunistic in repurchasing elsewhere across our convertible debt stack. While uncertainty is likely to linger well into 2023, we believe we're in the late innings of this fed cycle, remain confident in our ability to navigate further challenges for the pillars of our diversification, strong balance sheet, and most importantly, our people. Our platform offers a compelling opportunity and a unique access point to invest in a very dynamic housing market. Thank you, Chris. Following a turbulent 2022, we enter 2023 ready to take advantage of current market dynamics and drive a creative results across our operating businesses and investment portfolio. I will focus my commentary on the recent performance of these segments and our current outlook and positioning before turning the call over to Brooke current overview of our financial performance. Our investment portfolio, which now represents 84% of our allocated capital and remains a key driver of our dividends continue to deliver strong fundamental performance in the fourth quarter, notwithstanding further unrealized fair value changes that impacted book value. Cash flow durability remained robust across the book, an important input into our ability to realize the net discount and carrying value that Chris referenced. Delinquency rates were stable to improving across the portfolio for our organically created assets of book that includes BPL loans and securities and retained bonds from our Sequoia shell, quarter and 90 plus day delinquency rates stood at 2% down from 2.1% at the end of Q3. Elsewhere, delinquency rates on our core reperforming loan positions, what we refer to as SLST also improved, with 90 plus day delinquencies 0.5% lower quarter-over-quarter. Even with the recent slowing in HPA, and modest home price declines in certain markets, equity continues to build in these underlying loans as far as remain consistent in their payments. In aggregate, we estimate that the loans underlying our securities portfolio of LTV is of approximately 50%. Results have also been favorable in our home equity investment option portfolio or ATI, the majority of which is either securitized or financed through the warehouse line that Brooke will touch on. Live to date speeds on our securitize portfolio have been approximately 20% and realized returns have been strong. Protected in part by an average discount to initial home value of approximately 18%, this allows the holder of the AGI to withstand meaningful downward pressure on home prices before incurring loss of investment. Notwithstanding Fundamental performance, fair values and our investment portfolio were once again impacted by spread widening during the fourth quarter in sympathy with trends across the market. As Brooke will describe in more detail, these adjustments continue to be largely unrealized that have begun to reverse meaningfully year-to-date. As Chris referenced, our portfolios net discount to face now stands at $4.33 per share, the realization of which comes into clearer view with each passing quarter. We remained active in optimizing our capital deployment during the fourth quarter, putting in approximately $100 million to work across organic and third-party investments and repurchases of our near-term convertible debt maturities at attractive discounts. While spreads have stabilized meaningfully here today, we still see ample opportunity to deploy capital creatively across our operating platforms, third party securities, and our own capital structure. Our operating platforms have quickly turned the page on 2022 with strategic progress in the early weeks of the year, reversing some of the volatility induced P&L from the fourth quarter. In business purpose mortgage banking well broad market headwinds persisted through the end of the year, the team knocks and key winds that are already paying dividends in 2023, including advancing the Riverbend integration, growing our whole loan distribution capabilities, and adding a new non-recourse borrowing line for bridge loans that meaningfully enhanced our overall financing flexibility. We originated $424 million of BPL loans in the fourth quarter, down 26% from Q3 but in line with our estimated volume trend for the market overall. Our production mix for the quarter between BPL bridge and term loans rebalance compared to other quarters in 2022, as more sponsors opted to lock in long-term fixed rates where possible in lieu of shorter term floating rate bridge step. BPL term production volume was up 36% quarter-over-quarter, driven by a significant increase in term multifamily funding. The fourth quarter's fundings rounded out full year production volumes of $2.8 billion, a record year for the platform that lead increased importance to diversifying our distribution channels to position ourselves appropriately for 2023. We sold $92 million of BPL prison term loans during the fourth quarter and over $220 million more in January, recycling capital for a growing go forward pipeline across our products. Distribution and profitability on new BPL term production has been particularly strong, as we complement a best-in-class securitization platform with a deeper whole loan buyer base attracted to the structure and quality of our loans. Importantly, the overall improvement in sentiment in January carried over to our sponsors. We're once again leaning in on refinance opportunities or taking advantage of more constructive conditions to put fresh capital to work, either through traditional acquisition channels or newer partnerships emerging as a result of dynamics between the for sale and for rent markets. Our progress and loan distribution has proven well timed and it's both improving sponsor demand and significant uncertainty around funding capacity and certain of our competitors. Additionally, we continue to optimize financing on our bridge loan portfolio, inclusive of the $335 million financing line we completed in December, at year end 100% of our bridge portfolio continued to be financed on a non-marginal basis, with 70% of the financing also non-recourse. We maintain substantial excess capacity to support new production and future funding obligations on existing loans. Notwithstanding more favorable market conditions and the equity backing or BPL loans, given the overall environment, we continue to expect increased engagement from our asset management team in 2023, including with bridge loan sponsors seeking to refinance and managing earlier stage delinquencies within the turbo which are up modestly in Europe. As we have previously highlighted, our overall origination footprint and 2022 focus largely on sponsors with some sort of real estate stabilization strategy. Approximately 90% of originations were in bridge loans the sponsors improving and leasing off single and multifamily properties where fixed rate loans on already stabilized well. Given our progress in integrating riverbed in the past six months, we expect to round out that production mix with an increased emphasis on single asset bridge loans, focused on repeat customers of the Riverbend platform with strong liquidity profiles and track records. Importantly, capital markets distribution for these types of loans is relatively mature and we are well positioned to broaden our whole loan buyer partnerships and begin leveraging existing and creative financing to keep more on balance sheet. Our residential mortgage banking business maintain its defensive posturing in the fourth quarter, locking $43 million of loans and managing our lowest level of inventory since early to mid 2020. This was by design as jumbo mortgage rates during the quarter moved off their 7% plus highs down to the 60, an improvement but not enough to drive purchase money volumes higher in an environment in which refinance demand remains substantially muted. Improved market conditions in January allowed us to reverse much of the fourth quarters widening of our residential inventory, which at year end stood around $660 million and currently sits at roughly half that amount, after several small whole loan sales and the successful completion of our January Sequoia issuance are first in over a year. Execution on the securitization was indicative of improved market sentiment, with final pricing meaningfully through where the pipeline was carried at year end. In monitoring market sentiment, we believe, we will be able to further distribute remaining pipeline at favorable levels. As Chris mentioned, capital and costs allocated to our residential business have been reduced commensurate with recent transaction volumes. However, we have preserved the optionality to lean back in as conditions warrant to continue serving our seller base, including through enhanced rollouts of our expanded prime product offerings. The recent exit of one of the largest players in the correspondent market, highlights the durability of our partnerships even after a period of reduced activity, as many of our sellers continue to prioritize capital efficiency and continued rightsizing the costs, they put as much value as ever in our consistent speed and reliability. Thank you, Dash. In my comments today, I will provide an overview of our GAAP and non-GAAP results for the year end quarter ended December 31, 2022 and discuss select quarter to date metrics relating to the first quarter of 2023. We've reported GAAP book value of $9.55 per share, reflecting an economic return on equity of negative 3.9% for the fourth quarter. The primary drivers of book value were a $0.40 loss in basic earnings per share and our dividend of $0.23 per share. GAAP earnings were impacted by negative investment fair value changes of $0.21 per share, which continue to substantially reflect unrealized mark-to-market changes. Earnings available for distribution was negative $0.11 per share in the fourth quarter, as compared to $0.16 per share in the third quarter, driven by a loss of $0.28 per share from mortgage banking, due to credit spread widening on both the residential and BPL inventories. More specifically, our lower marks on our inventories reflected a lack of activity and available distribution channels at year end, a trend as noted by Chris that has reversed thus far in the first quarter. Overall, GAAP net interest income decreased from the third quarter due to lower mortgage banking inventory as volumes and average balances declined in the fourth quarter, while our cost of debt increased, partially offset by higher average coupons for our bridge loan. As Dash mentioned, during the fourth quarter, we closed a new $150 million borrowing facility for HEI investment, which contributed to the increase in interest expense. Importantly, economic net interest income was nearly $6 million higher than GAAP, primarily due to higher average balance of economic investments from capital deployment. Liquidity was solid as of year end and has been building. Unrestricted cash and equivalents increased by $141 million to $400 million from December 31st to February 7th. This is a function of various activities already covered such as the $70 million preferred stock offering as well as -- sales, securitization and financing optimization efforts. As we noted in the review, we also see incremental opportunities to generate over $100 million of liquidity beyond our existing cash position, by financing a portion of our $300 million plus of unencumbered assets. While our total recourse debt balance of $2.9 billion was unchanged quarter-over-quarter, the decline in tangible equity drove a modest increase in leverage from 2.6x to 2.8x. Given the financing and capital markets activities we conducted thus far in 2023, our estimated total recourse leverage ratio fell to 2.2x at February 7th. This decline in leverage is also attributable to our repurchase of nearly $60 million of convertible debt since the end of the third quarter, contributing both to reduce interest expense and realized gains for our shareholders. With respect to the term structure of our liabilities, we have $1.8 billion of recourse leverage maturing in 2023. As financing markets remain orderly, we foresee no issues rolling these facilities in normal floors. To further illustrate during 2022 we renewed or establish eight team financing facilities representing 6 billion of total financing capacity. In terms of our outlook, we are currently estimating book value to be of 2% through February 7th, and both GAAP and EAD earnings to re-approach our dividend level for the first quarter. We see several factors that support the return to more normalized return levels for the business throughout 2023. With the mark-to-market changes we've experienced, we are carrying the investment portfolio at a forward yield of approximately 15% and credit spreads affirming. Across both mortgage banking platforms we have largely clear the inventory overhang from last year, which further improves our gain on sale and volume outlets. Furthermore, in the business purpose lending we are building on our origination volumes from 2022 and are seen profitable execution fueled by improved distribution alternatives. Our nimble capital allocation has underscored the diversity of our revenue streams and our ability to optimize the business dynamically based on where the best risk adjusted returns are in the market. We have a variable cost driven model which has allowed us to reduce operating expenses at the residential mortgage banking segment by 40% year-over-year, reduced capital allocated to the business by 70%. Debt preserve the optionality of a flagship platform that is historically generated ROE is in excess of 15%. Given the changes we've made, even with the smaller opportunities that maintaining our historical market share and margins are sufficient to generate normalized returns for this business. And finally, in response to the challenging market conditions we face this year, we have been focused on rationalizing our overall operating footprint. General and administrative or G&A expenses increased slightly from the third quarter, primarily due to employee severance, and related transition expenses. However, for the full year 2022 G&A expenses were down 20% relative to the prior year. Pro forma for expense reduction initiatives completed since September 30th. We currently expect 2023 run rate units and be 5% to 10% lower than full year 2022 comparable levels, in line with our guidance on last quarter's earnings call. We expect these changes to our cost structure to lead to improved profitability in 2023. Thank you. And ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Stephen Laws with Raymond James. Please state your question. I guess first want to touch on the conduit business and I remember a year where we've seen it kind of move like it did as volatile through the year. As you look forward, what do we need to see to kind of see more stabilized margins there and solid profitability, although obviously lower volumes and much you've seen in the first Sequoia deal and some other transactions in the market year-to-date. Do you feel we've turned the corner there kind of what's your outlook on margins and margin volatility is for '23? Hi, Stephen, it's Chris. Good question. I think for resi in particular, obviously, it was a really tough year for mortgage banking and volumes and there's pretty well-known reasons for that. As far as turning the corner goes, I think the first thing that we got done this year was a Sequoia deal. We saw a much greater demand for the issuance. That was the first deal that we'd done in over a year. And I think that as demand returns, in the PLS markets, that will create greater confidence, certainly for aggregators like ourselves to begin acquiring and leaning in on rate. Now, that said, we're still I think a ways off in rate as far as where most people would be interested in refined homes, versus, where current rates stand north of 6%, and some cases 7%. So, I think we're cautious in declaring victory here in the first quarter as far as things fully stabilizing, but we've built some optionality, as Brooke said, we've taken a lot of capital out of the business. And one of the great things about Redwood is, you know, we're 29-year old business, and we've got the ability to shift capital and resources to their highest and best use. And so I think, when it's not a tremendously a great time to be issuing, it's usually a good time to be investing. And so, I think we've created a lot of optionality there to be an investor in resi. And so, I think, in 2023, we're going to proceed cautiously, hopefully, we can continue issuing. We'd like to issue and other securitization gear at some point in the next in the coming months. But in the meantime, I think we're focusing on growth areas across the business and in Dash had a lot of comments on the BPL business earlier on. And I think that, for a lot of reasons, you know, that businesses is something we're going to focus on the first couple of quarters of the year. And we're going to follow-up on one of the options on the resi side, the home equity investments, seeing the DAC, new financing facility put in place in the fourth quarter. Can you talk about the opportunities there? Is that an area you view as attractive now, or kind of how do you force rank your options for the investment side as far as new capital being deployed? Yes, I think it's very exciting. That's a great example of some of the optionality that we've built into the platform. Certainly, if people are not incentivized to move or refinanced their homes, they'd like to extract trapped equity within their homes, and anybody that's bought a home in the last two or three years is putting on quite a bit of equity, by and large. And so, our HEI initiative is really meant to sort of modernize the home equity process. And we'll have a lot more to say about it, I think in the coming months, but certainly, we see strong demand. We've completed a securitization in the past and Brooke's team completed a financing or warehouse financing of that product very recently. So, we're excited about things starting to institutionalize there, and we expect that to be a big focus area of ours in 2023. Thanks everybody for taking my questions. I want to talk a little bit about how to think of the residential mortgage banking income line and the loss in the fourth quarter. I'm assuming that because of the execution, that some of that was mark-to-market from pipeline from the third quarter, and I'm wondering with the Sequoia sale in the first quarter, if some of that sort of been reversed, I'm just trying to understand the locks and the purchases and the fundings and the timing of everything. Sure, Rick. It's Dash. I can take that. You are right. It was largely the resi mortgage banking outcomes for Q4 were largely a result of the mark-to-market on the book we held at 9/30. As we noted, we locked a little over $40 million of loans in Q4, so the position did not move meaningfully between 9/30 and the end of the year. So, the revenue outcomes for residential mortgages banking were really a result of just spread widening in the market. You are right. And some of Brooks' commentary on book value also includes an improvement in the carrying value of the pipeline here in January and in the early part of the year, half of which has been realized through the Sequoia deal that we executed. So the position since 9/30 has been fairly easy to trace just because we added to it barely in Q4. And you are right, much of that has reversed thus far in January with the Sequoia execution and the prospects as Chris said of doing another one. Got it. And again, looking at the loan sales in the fourth quarter, it was only $131 million. So there was presumably a realized loss on the $131 million, but the remainder whatever the outcome is on the Sequoia transaction, we will see in a few months. Yes. I mean, whether it was mark-to-market adjustments or realized losses, we reflected the value of that pipe at December 31st. And I think that is the right way to think about it. Since then, things have firmed up quite a bit in resi. We wanted -- we anticipated that and we prepared to issue that transaction right out of the gate. So it was a successful deal. And those again are some of the green shoots we did see in that space with investor demand, especially back for AAAs to feel confident to really lean into our rate sheets. Because ultimately, we control the volumes, it's just a matter of all the pieces coming together around inventories and volatility. Got it. Okay. Thank you. Look, there are a lot of moving parts here, but at the end of the day, the economics at Redwood are really determined by credit performance. You have alluded to related to the securities portfolio, no deterioration, no variance versus model. Can you talk a little bit and provide some additional insight in terms of what you are seeing, pockets of strength, pockets of weakness in residential mortgage credit at this point, from a credit perspective? Yes. I mean, I'll touch on consumer resi quickly and then Dash can touch on BPL because at the end of the day all of our businesses are, as you said, somehow tethered to resi credit. Our consumer resi book, which is our traditional jumbo, our expanded line and our RPLs, our performing loan book, just continues to perform remarkably well. Delinquencies have been essentially flat and in many cases declining. These are largely season loans, most of which have participated in significant HPA over the past few years. Looking at some numbers, our select book our estimate for average HPA adjusted LTV is under 40. Choice is around 40, just over 40 and the RPL book is in the mid-40s. So when you think about our embedded discounts there, which again for select is 28 million choices 34 and RPLs 278. They're sitting on significant, significant home equity, before any of these positions incur meaningful losses. So we continue to feel very, very good about, where the book is positioned, certainly including with some downside scenarios with a recession. And I think we're, our job is just to keep maintaining, monitoring the book and managing credit. But why don't I look at continue to BPL, which is the other piece of the puzzle. Sure. Thanks, Chris. I would say similar to the consumer part of the book, the empirical performance within BPL remains really, really good, bridge delinquencies. We're down from where they were earlier in the year ago, just over 2%, very strong level. The single family rental book, which is largely securitized, as I mentioned, in my prepared remarks, we saw a slight uptick in early stage delinquencies in that book and year-end that has been trending in the right direction, already year-to-date, just with our asset management team, as they always are just engaging very directly with borrowers. So just as a reminder, on the bridge portfolio, the vast majority around 90% of what we finance are in some shape or form a rental or stabilization strategy. And so while the durability of the cash flows remain really, really good. What we do is look around the corner, and try to anticipate where the areas of stress are going to be. And we try to guard for that up front with our underwriting, our multifamily loans are typically underwritten to close to a 9% debt yield or higher, we're very careful about how we try and rents and all that's overlaid with focusing on the most sophisticated sponsors with the best liquidity. I think the reality, Rick, even as rates have come down here, the 10 years sits right now probably 55 basis points below its peak from Q4. The reality is across the bridge space, there will likely be sponsors that need to come out of pocket by a few LTV points to refinance into an agency loan, et cetera. And our focus is making sure we're with sponsors that have the capital to do that, and they're executing on their business plans. We have a lot of bites at the apple, as I think in terms of our drawers, and ensuring that reserves are rebalanced and we're revaluing properties. And so as more and more of those data points come in. Here, we're more and more heartened by how those both sponsors are executing. But that's the area as you can imagine, have increased focus here. Rental growth has obviously tapered a bit we expect that but we're still seeing strength and average hourly earnings, which is a direct input into how we think the underlying tenants are going to perform. So, again, the empirical performance has been really, really good. But all that stuff that I just mentioned is really top of mind for us for the next few quarters. I think I've three questions, so just bear with me here. I mean, how would you say the return on capital and securitizing both the jumbo and BPL compares, say now versus a year ago when spreads were at some of their tightest levels? And then is the capital that you have in the jumbo segment more or less, kind of the minimum that you envision, just given where the market is. Is there any scale that you can achieve with the capital that you have there if origination volume improves? And do you see Wells Fargo exit, their exit from the correspondent channel being an opportunity. And then on the originations in BPL, how often would you say agency funding is a viable takeout for those loans? I think I just heard you mentioned that. In some cases, it is. Like, is there any connectivity to the fact that GE fees have risen for those loans? And in cases where it's not an agency loan, which does apply the takeout, what is the source of capital? But that typically does. Thanks a lot. We'll try to divide and conquer here. On the resi front, spreads, obviously, were quite a bit tighter, a year ago, but I think the bigger story is what's happened in the past few months. And in early December, mid December, prime, Jumbo, AAA as we're trading two to three points back of agencies, now it's closer to one and five eighths or so. So, there's been a big snapback, which is, significantly improved the economics of securitization. Again, for us, that's a very good sign but running that business and leaning in a rate involves a lot of different moving parts, one of which is you've got to carry fixed rate mortgages with an inverted yield curve, you're incurring all of the spread volatility. So getting up and down in a securitization requires additional risk, frankly. So I think what we're trying to do is continue to get more efficient with that business and we mentioned that we lowered the capital by 70%, over the course of the year. As we look to distribute our remaining sort of last year inventory, we think that capital number can go down further, could probably go down to something closer to 50 million. And really, what that does is creates a nice base case to lean back in, when we're ready to go, and that money doesn't disappear. They can be redeployed, and all of this sort of pencils out into the 400 plus million of unrestricted cash that we've amassed here, in the last few weeks and months. So all of that can be deployed, it can be invested, it can be used to buy back debt, buy back stock. So, I think the goal of the fourth quarter was, in some sense a modest restructuring to get us in a position to kind of go back on offense, which is exactly what we've done start here. On the Wells front, which I think you refer to, I think that's a tremendous long-term opportunity for us and for our long-term manage shareholders, that's somewhat of a bellwether of sorts, you know, I wouldn't say Wells by and large has been the largest corresponding aggregator in not agency, particularly jumbo since the great financial crisis. So exiting that space really is found opportunity for us, and potentially others. So it's not it's not an overnight shift. But I think, again, for a company that's heading into its 29th year, our business is the resi business. And as things evolve here, we expect that to significantly support our competitiveness in space, with a major and major forest like Wells, stepping back, so, I do think that's very notable and potentially a very big long-term tailwind for us. But in the near-term, the real emphasis is the fed its stability and rates, and particularly in housing, and the economy that we're most focused on. Eric, to take your questions around BPL, if you sort of divide the bridge portfolio into three areas, multifamily, built for rent and then the single family stabilization strategy, I would say, in majority of cases on the multifamily side, first sponsor that wants to hold on to the property and has the capital tenor to do that. Plan A will likely be most of the time an agency or a HUD takeout. Some of that, as you know is going to depend upon the nature of the underlying tenants, the affordability angle, things of that nature. Agency and HUD takeouts are we see that very commonly to extent the sponsor wants to stay in the investment. But many of our multifamily sponsors I'd say most do focus on tenants where the GSEs and HUD are actually in a spot of continuing to lean in around housing affordability and things of that nature. So those have historically led to more favorable execution outcomes that we would expect that to continue. Notwithstanding your point around the GV, just given where mission footprint is with the GSE is. We have often refinanced multi into our own term product, which we securitized. That tends to occur when the GSEs hit their caps, which they have annually as you know. We also can do that when a sponsor is stabilized and view it as more efficient to refinance private label, as opposed to waiting for a number of months of seasoning by the GSEs at certain stabilization levels. So, we do see opportunities like that. On the build for rent side, some of those are eligible for agency that depends upon how the property is partial. And then typically for single-family bridge stabilization strategies, it's a win-win for us to be the takeout. That's a huge source of our term business, which we securitize, as our bridge book for sponsors refinance with us into a longer-term fixed rate. Good afternoon, guys. With Wells exiting correspondent and some other smaller non-QM lenders hitting speed bumps, do you see that as more of a volume opportunity or a margin opportunity in the near term or a combination of both? And then just to tap into the capital allocation to the mortgage lending. I know you guys said you reduced it by 70% but how flexible is that capital allocation on the flip side on a quarter-to-quarter basis when you want to dial it back up? Thank you. As I noted, I think it's most fair to characterize the Wells exit as a long term opportunity frankly Wells in other money center banks remain very competitive on the retail side, on the branch side in mortgage. So, that piece of the puzzle hasn't meaningfully changed. But I do think as things stabilize, it could be quite a game changer for us in particular. As far as the flexibility of the capital, I think it's very, very flexible. I think we have put ourselves in a position where we can be very nimble with allocating capital. And we have got a workforce that's pretty attuned to operating and investment capacity, as well as an issuance capacity. So moving the capital around and optimizing it is one of the hallmarks of the platform. And I think what our goal is in residential mortgage banking is to preserve full optionality. We focused on variable costs. But as far as the integrity of the platform, the relationship of seller base, the technology, we continue to make investments in technology. All of that is something we focus on a day-to-day basis. So as far as leaning in again, we control the rate sheet. So, the points at which we feel comfortable from a risk standpoint, getting more aggressive? Well, I do think that, we need to see a little bit more here in the first quarter and potentially into the second quarter, to really get that that's why we will turning as rapidly as we'd like. But like I also mentioned, we've got a lot of uses for the capital. And growing them right now is a big, big focus of ours. Can you talk about, how long you think, kind of aggregation periods are now whether that's to securitization or the whole loan sale? And kind of what you might be able to do to even shorten that time further, just kind of given the volatile period that we just went through? Yes, again, we can speak to both businesses. On the resi side, I think the way, what we've most focused on is clearing out some of the 2022 inventory. And we were very fortunate to stay on top of it. And not be a forced issuer, if you will, as others were we took a year off, essentially, between securitizations. When the moment was right, we were able to hit the market pretty quickly. And we did a few weeks ago, that spoke for a substantial amount of our inventory. And as we've mentioned, we're hoping to do another deal here in the coming weeks or months. But going forward, I think, you know, capital turnover is going to be important because of the shape of the yield curve. So, pricing in a healthy margin, and as far as the rate sheet goes, it's going to be important just to factor in the extra hedging costs. So focusing on quote, unquote, mini bulk and in selling loans, as smaller bulk pools to investors is going to be an emphasis of ours. So I think there's, there's ways to manage it, but ultimately, we'd really like to do is get back to kind of the regular way, aggregation, that we've seen the past few years, we're just proceeding cautiously. And then can you just talk about kind of how you envision your capital structure? Obviously, have the converts coming through this year issued the prefer kind of what you see the optimal mix of the capital structure? Thanks Doug. It's a good question. We probably thought from our materials that through the first quarter in the fourth quarter. We bought back about 55 million of our 23s and 25s. Since we started buying back our converts, we've actually seen our capital structure tightening quite nicely, which I think was also aided by our preferred equity offering that price inside our convertible debt stack as well. I think we did a small inaugural issuance of preferred intentionally, and it is expensive, but relative to the cost of convertible and other unsecured forms of debt. We think they're perpetual capital that actually has a nice place in our capital structure and our future issuance, we expect to be tighter on the on the follow of that. So we and you also probably noted from our materials and prepared remarks that we have done a nice job continuing to raise cash on hand, as we are set with 400 million, we have 300 million in total unsecured that matures through 2024. So, we will likely see us continue to either repurchase at a discount or to cease it. If you even think about the level of costs that we have in our 2023 maturities. You can cover that interest expense with six months teasels today, which is quite amazing. So, I think we will continue to address our term maturities while balancing it nicely with other accreted forms of capital in the capital structure. Brooke, could you talk a little bit about how you're thinking about net interest income in Q1? And then maybe some of the pluses and minuses as you work through the year? Yes, it is a good question. I think, what you've seen out of our net interest income line item is stability. In the fourth quarter, we reached what we really view to be a good run rate. We've had a lot of more one time, season income that have come in to net interest income over the course of the year. And those represent upside from the levels we saw in the fourth quarter, but items such as yield maintenance have been as high as 5 million to 7 million in different quarters throughout the last year that was essentially flat in the fourth quarter. And so, we think GAAP net interest income in the fourth quarter represents a good run right, as I mentioned, we are continuing to deploy capital into bridge which continues to be a nice tailwind for NIM actually contributed a positive 4 million to an interest in not income on the quarter it generated a 27% return on capital for the quarter. So in terms of deployment opportunities, especially with the amount of cash that were sitting on today, that continues to be an area of focus. We actually saw that was driven not only by volume, which was actually done on the quarter, but weighted average coupons on bridge brands were about 50 basis points higher than cost of funds increases. I would really point you to economic net interest income as we head forward, that was 6 million higher as I mentioned in my prepared remarks and GAAP net interest income that's driven by some discount accretion and also effective interest on certain assets that aren't captured in our GAAP net interest income, but rather through investment for value changes, but those are run rates that is run rate income for us. So, I think we will do a better job highlighting economic than interest income, but we see tailwinds for economic NII continue to grow both from deployment and certain of those assets whose effective yields will continue to be realized through it. I would also just know our financing costs, they were up about 100 basis points last quarter, but they've really stabilized. So with the projected front ends of the curve, and also spreads on renewals, we've seen really stabilized we had been seen spreads widen a bit on financing lines throughout kind of the mid second half of the year and those we need to be very stable. So we continue to have more floating rate exposure on the asset side of our portfolio than on the debt side of the portfolio. So any further increases to rate should actually get challenged. And our next question comes from Bose George with KBW. Please state your question. Bose George. Your line is open. Please go ahead. Sorry. It was on mute. Hey, guys. Just wanted to ask about returns on the investment opportunities or the best investment opportunities that you are seeing and how returns compare to that 15% in force yield on your existing portfolio? Hey, Bose, this is Dash. I can take that. The organic, the organic creation largely through BPL is just articulated in that mid teens context or better for both bridge as well as the residual pieces that we can create through securitizing SFR loans are very much in that context too. Obviously, some of this is aided by the fact that, we are in a higher total rate of return environment with benchmarks and also our lending spreads have certainly widened the sympathy with the market over the past year or so, although they have tightened up, given the market dynamics in the past few weeks. Away from that, as Chris articulated earlier on the call, given market dynamics, we are definitely seeing more interesting opportunities on the third-party side as well. We have been a regular investor in agency CRT securities. Those have certainly tightened in this year, but those potentially remain interesting. There is some other shorter dated opportunities as well, more senior non-rated cash flows that others are issuing that we are focused on as well as other types of return profiles. We won't be investing in mortgage servicing rights. But obviously with the potential for certain banks to be divesting of those, there might be some interesting opportunities there as well. So in general, these will chin the bar, with that, mid teens or higher still based on where we see the market right now. Okay, great. And then actually just going back to the resi mortgage banking business, in terms of getting back to normalized returns, do you need to see some pickup in refi activity or as sort of industry capacity gets pulled out overtime, you can sort of get to normalized returns that way? Yes, it's kind of all of the above. I think the first and most important thing is stability in rates. I think that rate volatility has kept a lot of consumers on the sidelines with respect to buying homes, and obviously refinancing homes. But the business can function in high rate environments. I think the housing -- demand in housing market has picked up in January and we will be heading into the spring selling season here. So I think the capacity issue is a real issue. It's a bigger issue I think for mortgage originators than it is for us. If anything with the Wells announcement, there is going to be fewer players. So that piece is a positive. But I think the real answer is, rate stability, because it not only drives consumer behavior, but also demand for our bonds. And I think once we have had a really good January, frankly. And if we can continue the momentum here, I could certainly see the economics penciling out much better for the business in the coming months and certainly in the coming quarters. Thanks, Folks. Hi. I was a little late getting on, but I wanted to ask you if you haven't already covered it your January Sequoia deal the prime jumbo deal. If you talked about that, did you mention what we see the 5% coupon on the notes sold did you mention what the WACC was on the loan pool? Okay. So pretty tight in and was that you both of you mentioned sort of this mid-team kind of target hurdle. Was that deal the execution there that did that get you there or do you, was there something unique about that, that you needed to clear those out, get those permanently financed. But at the margin today with current loans, that your purchase money jumbo loans that you're originating and pricing. Do you think that 15% are we hurdle is doable on this loan product? Yes. So, the portfolio we securitized was probably among the more season that we've ever securitized, someone else asked the question. I think we typically securitized jumbos within a month or two. As you can probably glean by the coupon these were a bit more seasoned than just we saw a market early January. And securitize them and as you recall, Steve, the pieces that we keep from those Sequoia deals tend to be a lot thinner. And so yes, the piece we cap was sort of in that low- to mid-teens, contacts. But it was sort of 1% or less of the capital structure. And if you look at our current coupon, as I think Chris would have hit on it. So if you look at the model, mid high sixes, note rates, just from a term perspective. Should be able to get you there, the challenge is with the rates, stability, and all of that, and the consumer demand, just getting to actually be able to do that. Yes, that makes sense. And I appreciate it. Chris' comments about, this volatility and people just decide, okay, let's wait it out. And but we get into the spring people need houses. I think the purchase side will pick up and it's nice that you've tested the waters here. Everybody knows the SMT brand, and we'll see what the rest of the year brings, but I hope we'll get some a little more momentum in the purchase market for sure. Thank you. And ladies and gentlemen, that was our final questions for today. That also concludes today's conference call. All parties may now disconnect. Have a great evening.

EarningCall_47

Good morning, and welcome to the Hilton Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K and first quarter 2022 10-Q. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today’s call, in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the Company’s outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our fourth quarter and full year results and discuss our expectations for the year. Following their results, we’ll be happy to take your questions. We’re happy to report a strong end of another year of continued growth. Together with our team members, owners and communities, we’ve navigated through the most challenging times our industry has experienced and are deep into recovery throughout the world. During the year, we continued investing in new innovations and partnerships that meet guests’ evolving needs and further strengthen our value proposition for Hilton Honors members and owners. We remain committed to delivering reliable and friendly experiences to our guests and we continue to enhance our network through our strategic and disciplined approach to development, enabling us to serve even more guests across more destinations for any stay occasion they may have. Our strategy drove strong performance for the year with system-wide RevPAR up 42.5% versus 2021 and approximately 1% shy of 2019 levels. Both adjusted EBITDA and EPS surpassed our expectations and prior peaks with margins of roughly 69%, up more than 300 basis points year-over-year and more than 800 basis points over 2019 levels. Strong results and higher margins enabled us to generate the highest levels of free cash flow in our history and returned more than $1.7 billion to shareholders for the full year. Turning to results for the quarter. System-wide RevPAR grew 24.8% year-over-year and increased 7.5% compared to 2019 with performance improving sequentially versus the third quarter. We saw continued progression across all segments with leisure, business transient and group RevPAR all exceeding 2019 levels. System-wide occupancy reached 67%, up from the third quarter and just 3 points shy of prior peak levels. Overall rates remained robust, increasing 13% versus 2019 with all segments exceeding expectations. As expected, leisure trends remained strong throughout the quarter, with RevPAR surpassing 2019 levels by approximately 12%, modestly ahead of third quarter performance. Strong leisure transient demand continued to drive rates up in the high-teens compared to 2019. Business transient RevPAR also continued to improve, with business travel up 3% versus 2019, nearly all industries saw continued recovery compared to the prior quarter. Small and medium-sized businesses remained an important and growing part of our business travel segment, accounting for roughly 85% of our segment mix and enhancing our overall resiliency. Group saw the biggest quarter-over-quarter improvement with RevPAR fully recovering to 2019 levels, driven by both occupancy and ADR gains. Company meetings boosted performance improving more than 7 points versus the third quarter. As we look to the year ahead, acknowledging macroeconomic uncertainty we expect system-wide top line growth of 4% to 8% versus 2022. We expect performance to be driven by continued growth in all segments and aided by easy first quarter comps due to Omicron, meaningful recovery across Asia and solid growth in U.S. urban markets as group business continues to recover. Comprising roughly 20% of our normalized mix, group is a segment with the greatest visibility. For 2023, group position is up 25% year-over-year and nearly back to 2019 levels. Even with robust forward bookings, the pipeline still remains strong with tentative bookings up more than 20% versus last year, helped by rising demand for company meetings as organizations bring their teams back together. Additionally, pricing for new bookings is up in the low double digits and lead volumes in January were at all-time highs. Turning to the development side. We continue to deliver on our commitment to capital-light growth. For the full year, we added nearly a hotel a day, totaling more than 58,000 rooms and celebrated the opening of our 7,000th hotel. Since our go-private transaction 15 years ago, we’ve more than doubled the size of our system. Our rooms in the U.S. are up nearly 100%, and our international portfolio is now 3.5 times larger. Additionally, we’ve added 10 new brands to our system, more than doubling our portfolio of brands. We achieved all of this without any acquisitions and more than 90% of the deals in our current pipeline did not have any key money or other financial support. In the fourth quarter, we celebrated the opening of our 60,000th Home2 Suites room, our 150,000th DoubleTree room, our 200th hotel in CALA and 600th hotel in Asia Pacific, including our first Hilton Garden Inn in Japan. We also saw continued strength in construction starts throughout the year, leading to starts of more than 70,000 rooms for the full year. In the U.S., starts increased more than 9% versus 2021. We now have more rooms under construction than all major competitors. With a record pipeline of more than 416,000 rooms, half of which are under construction, we expect net unit growth of 5% to 5.5% for the year and remain confident in our ability to return to 6% to 7% net unit growth over the next couple of years. Our disciplined development strategy continues to enhance our network effect and enables us to serve more guests across more destinations for any stay occasion. Building on this commitment, last month, we launched our newest brand, Spark by Hilton, a value-driven product that delivers our signature reliable and friendly service at an accessible price. Spark provides a simple, consistent and comfortable stay with practical amenities and unexpected touches, filling an open space in the industry by creating a new premium economy lodging option to meet the needs of even more guests and owners. Premium economy represents a large and growing segment of travelers, totaling nearly 70 million annually in the U.S. alone, for which, we have not had a tailored brand to serve. This cost-effective all conversion brand offers a streamlined reinvestment plan, focused on core guest elements and enables owners to leverage our industry-leading commercial engines and powerful network effect. To date, we have more than 200 deals in various stages of negotiation, almost all of which are conversions from third parties. Additionally, we’ve identified more than 100 U.S. markets with no Hilton-branded products, providing a great opportunity for the brand and the Company to expand its presence. As a testament to the strength of our system and our continued success of our customer-focused strategy, Hilton Honors surpassed 150 million members during the fourth quarter and remains the fastest-growing hotel loyalty program. Honors members accounted for approximately 64% of occupancy in the quarter, up more than 300 basis points year-over-year and roughly in line with 2019. Additionally, we welcomed approximately 200 million guests to our properties during the year, exceeding pre-pandemic peak levels. We remain focused on ensuring Hilton has a positive impact on the communities we serve. For the sixth consecutive year, we were included on both the World and North America Dow Jones Sustainability Indices, the most prestigious ranking for corporate sustainability performance. And for the seventh consecutive year, we were ranked among the World’s Best Places to Work by Fortune and Great Place to Work. As our performance demonstrates, our team members have proven that we can handle whatever comes our way. And because of our hard work and discipline, we are incredibly well positioned for the future. We’re at a pivotal moment with great opportunities ahead and a new golden age of travel. And we’re more confident than ever that our team is poised to deliver in 2023 and beyond. Now, I’ll turn the call over to Kevin to give a little bit more detail on the quarter and the expectations for the full year. During the quarter, system-wide RevPAR grew 24.8% versus the prior year on a comparable and currency neutral basis and increased 7.5% compared to 2019. Growth was driven by continued strength in leisure as well as steady recovery in business transient and group travel. Strength over the holiday travel season also benefited results. Adjusted EBITDA was $740 million in the fourth quarter, up 45% year-over-year and exceeding the high end of our guidance range. Outperformance was driven by better-than-expected fee growth, particularly in the Americas, Europe and the Middle East, as well as roughly $30 million in COVID-related government subsidies, which benefited our ownership portfolio. Recovery in Japan following borders reopening in October also contributed to strong performance in ownership. Management and franchise fees grew 31% year-over-year, driven by continued RevPAR improvement. Good cost discipline further benefited results. For the fourth quarter, diluted earnings per share adjusted for special items was $1.59, increasing 121% year-over-year and exceeding the high end of our guidance range. Turning to our regional performance. Fourth quarter comparable U.S. RevPAR grew 20% year-over-year and increased 8% versus 2019. All three segments showed quarter-over-quarter improvement as compared to ‘19, with performance continuing to be led by strong leisure demand. Both business transient and group RevPAR recovered to above 2019 peak levels for the first time since the pandemic began, driven by continued recovery in occupancy and strong rate. In the Americas outside of the U.S., fourth quarter RevPAR increased 53% year-over-year and 25% versus 2019. Performance was driven by strong leisure demand over the holiday travel season, particularly at resort properties where RevPAR was up over 60% versus peak levels. In Europe, RevPAR grew 67% year-over-year and 20% versus 2019. Performance benefited from continued strength in leisure demand and recovery in international inbound travel, particularly from the U.S. In the Middle East and Africa region, RevPAR increased 26% year-over-year and 34% versus 2019. The region benefited from international inbound travel during the World Cup in Qatar. In the Asia Pacific region, fourth quarter RevPAR was up 29% year-over-year and down 19% versus 2019. RevPAR in China was down 37% compared to 2019, taking a step back quarter-over-quarter as loosening travel restrictions led to a surge of new COVID cases. Demand is expected to gradually recover throughout the year, but remains volatile in the near term due to rising infections. The rest of the Asia Pacific region saw significant improvement with RevPAR, excluding China, up 8% versus 2019. Performance was largely driven by strength in Japan following borders reopening. Turning to development. For the full year, we grew net units 4.7%, modestly lower than expected, largely due to the ongoing COVID environment in China, which weighed on fourth quarter openings. Conversions accounted for 24% of our gross openings for the year. And additionally, our pipeline grew year-over-year, ending 2022 at more than 416,000 rooms, with nearly 60% of those located outside the U.S. and roughly half under construction. Looking to the year ahead, despite the near-term macroeconomic uncertainty, we are encouraged by the robust demand for Hilton-branded products in both the U.S. and international markets. For full year 2023, we expect net unit growth of between 5% and 5.5%. Turning to the balance sheet. In January, we completed an amendment to our revolving credit facility to increase the borrowing capacity under the facility to $2 billion and extend the maturity to 2028. As we look ahead, we continue to remain confident in the strength of our liquidity position and financial flexibility. Moving to guidance. For the first quarter, we expect system-wide RevPAR growth to be between 23% and 27% year-over-year. We expect adjusted EBITDA of between $590 million and $610 million, and diluted EPS adjusted for special items to be between $1.08 and $1.14. For full year 2023, we expect RevPAR growth between 4% and 8%. We forecast adjusted EBITDA of between $2.8 billion and $2.9 billion. We forecast diluted EPS adjusted for special items of between $5.42 and $5.68. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return. We paid a cash dividend of $0.15 per share during the fourth quarter for a total of $123 million in dividends for the year. For full year 2022, we returned more than $1.7 billion to shareholders in the form of buybacks and dividends. In the first quarter, our Board authorized a quarterly cash dividend of $0.15 per share. For the full year, we expect to return between $1.7 billion and $2.1 billion to shareholders in the form of buybacks and dividends. Further details on our fourth quarter and full year results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Hey, guys. Thank you, and thanks for all the color you provided. Kevin or Chris, whoever wants to kind of tackle it, obviously, given the strength in the first quarter and acknowledging there’s seasonality and it doesn’t flow this simply, it does look like, at least for the back half of the year, you guys are looking at a flattening out. Could you kind of -- RevPAR, could you more or less frame kind of how you’re thinking about the back half from a macro perspective? And what’s more or less embedded in your guidance as it relates to the economy? Yes. I mean, listen, you can see in the fourth quarter -- first of all, thanks for the question. I think that is the $64,000 question on everybody’s mind. I mean, you could see in the fourth quarter, we had really good strength across all the segments. We’re early in the year. But in the first quarter, we continue to see that that strength continue in substance relative to 2019, obviously, versus 2022, it’s way up because of the Omicron impact. But we continue, from a fundamentals of the industry point of view, to feel very good about things. I mean, if the fundamentals are supply and demand, that’s what ultimately drives the result. The supply side is quite muted. We’re currently experiencing -- using the U.S. market, which is our biggest market, as an example, equal to the lowest levels of supply that we’ve seen. Thankfully, we get more than our fair share. But overall in the market, very low levels of supply. And that continues to be met with very strong demand. And we have not seen, for the record, any weakening. We have not -- we haven’t like seen any telltale signs. There are no threats of like any of our major segments sort of backing up. What I think is driving that is some of those cyclical and secular sort of tailwinds. First, you continue to see consumers shifting how they’re spending their money. So, maybe they’re spending a little bit less, but how they’re spending it, it continues to be shifted more towards experiences where sort of exhibit A on the experience side. The international markets are opening up. People -- you’re starting to see not just inbound to the U.S. but across the world, people traveling. Asia Pacific is opening up pretty fully. It will take a little bit more time. We saw that happen in Japan in the fourth quarter, which raged. We had strong results. So, we get the full benefit of that. China is obviously going through sort of what we went through 12 to 18 months ago with herd immunity and the like. But our view is that’s happening quite rapidly. On the ground, you’re already starting to see significant travel within China in terms of uptick. And we expect, particularly in the second half of the year, you’re going to have a big tailwind from that. And there continues to be broader pent-up demand across all segments. I mean, you could argue in the leisure side, some of that has -- the people have been doing a lot of it, but we don’t see them slowing down. So, we continue to think people partly because of the shift in -- as I mentioned, towards experiences, we continue to see strength there. On the business transient side, still good demand, very strong demand and growing demand, lots of pent-up demand. And as I mentioned in my prepared remarks, we finished the second half of last year on the group side as people really got comfortable, we were through COVID and they could start planning events. They’ve been planning them like crazy. Even the biggest groups, all the association stuff, that really starts to hit the second half of this year because of all of the planning. Some of that’s happening. I’ve been in a lot of big events, speaking at them lately. But the group demand, which I think is pretty resilient, just because people have gone years without doing things that they need to do for survival, is pretty resilient. So, those are -- the economics of supply and demand are really good. To be specific, Carlo, and a very fair question, when we’ve given you a range of 4% to 8%, what did we sort of build into it? I mean, part of the reason that you’re suggesting a flattening or decel because, let’s be honest, it’s math. I mean, we’re going to be way up. You saw our guidance for the first quarter. The world was partly shut down in the first quarter last year. So, that’s just a comparability issue. But we have anticipated, right or wrong, we’ve tried to be conservative that the second half of the year, you’ll see macro economic conditions slow. So, if you were to categorize it, I would describe it as we have assumed in the second half of the year sort of a plateauing related to what we think will be a moderate recessionary environment in the second half of this year. And that’s what we have sort of built into what we’ve suggested to you in the numbers today. Great, Chris. Thanks. That’s super helpful. And then just one follow-up. As you guys think about ‘23 and obviously, some projects that likely were slated for the fourth quarter, as you mentioned, kind of slipping into ‘23. As it pertains to conversion activity as a percentage of the unit growth this year, would you think that that 24% is better, or would you think it’s higher or lower than that 24% that you experienced in ‘22? Yes. Carl, we think it’s going to be higher. I mean a couple of different reasons. One, conversions continue to be more important as the world gets a little bit tougher, although those conditionings are loosening. It has been tougher for new construction, as you know. So conversions become even more important. And then, Spark, as we’ve talked about in our prepared remarks, is a 100% conversion brand. So, we don’t think there’s going to be a ton of those introduced this year. But by the end of the year, we’ll start delivering those. And so that will drive a little bit higher level of conversion. So, the way we think about it, we don’t guide specifically, but higher than that 24%, say, probably 30% or higher for the year. So, I just wanted to see, Chris, if you could talk about what’s embedded in the second half of this year’s guidance with respect to U.S. occupancy and pricing changes on a year-over-year basis? Yes. I mean, I’m not going to get highly specific because we gave you a range and it would be hard to do the range that way. But I would say, directionally, the way to think about it is that occupancy sort of flattens out. We don’t believe -- and at least in the numbers we’re giving you, we don’t anticipate that occupancy even gets back to 2019 levels. RevPAR levels, we think, throughout the year will be higher because of rate integrity. For all the reasons I described in my filibuster off of Carlo’s question, we do continue to believe we will have good pricing power, at least through this year, simply because there is no capacity addition really coming into the market. But in U.S. -- the question about the U.S. market, and we do have these both cyclical and secular tailwinds that are giving us increases in demand that we think are going to allow us to continue to have pricing power. We’re not -- assuming in the second half of the year that pricing power is increasing, I would say, we assume it’s flattening or maybe even modestly lower to get to the ranges in numbers that we’ve suggested to you. So, on the occupancy side, if the world is better than everybody thinks, there may be some opportunities. Again, we -- at a very high level, we’ve assumed not a crash landing, sort of soft to bumpy landing in the U.S. with a moderate recessionary environment in the second half. But with some structural things that are going to help the business globally that I talked about and help the business in the U.S. in terms of spending patterns, group demand and pent-up demand on certain categories of business travel. Great. And just as my follow-up, Chris or Kevin, when you think about the fees not related to RevPAR growth in the franchise and the licensing line, specifically the credit fees as well as royalty fees coming from timeshare, do you think that grows in line with RevPAR, or how are you thinking about how that changes over the course of this year versus last year? Yes. Joe, I think, look, historically -- or not historically, over the last few years, it’s been less volatile, right? So, if RevPAR was up 45%ish for the year this year, those fees were up something less than that, although still very robustly. And HGV is public, so you can look at what they’ve grown when they report. I think in a more normalized RevPAR environment of 4% to 8%, they should grow slightly high -- they should grow at a rate that’s better than the overall business. And so largely dependent on spend, although our credit card program set a record for spend in the fourth quarter and for the full year, would spend about 50% higher than it was even in 2019. So, that program is doing quite well, although it should be -- it should grow better than RevPAR over time, but it will be a little bit less volatile than it’s been just given what’s been going on in the world. Chris or Kevin, just maybe we could talk about the development side. I mean, obviously, the kind of shifts from China side, the overall outlook on the construction starts remains robust, and we just continue to get a lot of investor concern about the ability of developers to finance new projects. How has that changed with the interest rate environment or the economy? So, how did your conversations go kind of throughout the quarter? And then, if you could talk, maybe dig -- as my follow-up, dig a little bit deeper into Spark. There’s been a bit of concern or question in the past about kind of going further down in the chain scales and just hoping you could unpack that a little bit for us. Why is right now the opportunity set right for moving into the premium economy space? Yes. Sure, Shaun. Thanks. I’ll start with sort of maybe the construction trends more broadly and then maybe hand it off to Chris to cover Spark a little bit. I think what you’ve seen -- look, there’s a lot of puts and takes, right? So, you’re talking about the interest rate environment and availability of capital. And obviously, rates are a lot higher than they had been. And availability of capital is a little bit more constrained, but there’s still plenty of money available for the right projects in the world. If you think about what’s going on at the local and regional bank level is different than what’s going on at the money center banks in terms of capital constraints and things like that. You have some headwinds as we would say in terms of construction costs coming down. They’re still higher than they were in 2019 by about 20% to 30%, but that’s off of peaks and moving in the right direction. And then, as we’ve been talking about the fundamental environment gives people more confidence that when the hotel -- when they develop the hotel and it opens, it will perform at a higher level than maybe it otherwise would have. So, their pro forma goes up. So, you sort of put all that into gonculator, and that’s why starts started to build in the U.S. and ended up higher in the U.S. last year than they were the year before. It depends on where you are in the world. Obviously, it was really difficult -- not only was it difficult to get hotels open/impossible in China at the end of the year because, literally, the offices that gave you your certificate of occupancy were closed. And so, that’s why you saw a little bit of softness in our NUG. That same environment is going on in starts. So, if you’re in China, starts have been behind. But we think starts are going to continue to build from here. The fundamental setup does give developers optimism. And the way they’re thinking about it, they can absorb, not in all cases but in a lot of cases, they can absorb a higher cost of their construction loan and thinking that the world will be in a better place when they open the hotel, it will perform better and that when they roll their construction loan into a permanent loan, then hopefully, the rate environment will be a little bit more normalized. So, those are sort of some of the puts and takes of what’s going on in the world. Yes, supporting that, and I’ll talk about Spark. When we talk to our owners, I would say at this point, the majority of our system are making more money. Each individual hotels are making more money than they were at the peak of 2019. So, that’s driving optimism. And the reason they’re making money is more efficiencies, higher margins, obviously, rate integrity and pricing power has helped that. But they’ve got -- the bulk of the portfolio is producing more free cash flow than it ever has, and this is the business they’re in. And many of them are quite good at finding the money in a local and regional context as they have decades-long relationships. And as Kevin said, that’s why you saw in the second half of the year, we saw an inflection point where starts started to go up here in the U.S. and generally around the world. And we think that trend -- we don’t see anything that suggests that trend is reversing itself. On Spark, listen, we spent a lot of time. We -- the truth is we have been thinking about something in this space for a long, long time, almost the entire time I’ve been at the Company. We had a lot -- obviously, we’ve doubled the size of our brand portfolio. So it’s not like we’ve been sitting around doing nothing. We had not entered that zone. But three years ago or so, we started to look at it and say, like, because it’s a very big customer base, it’s a huge opportunity to better serve our existing customers, but also an important opportunity to acquire new customers, if you look at that customer base, at least half, probably, I think, arguably more than half of that customer base or customers that are early in their travel lives that are going to grow up and do other things. And the sooner you get them into the system and building loyalty with them, the better off you are. So, as always, when we look at brands, it starts with a sort of a customer acquisition and a network -- continuing to build the network effect for our existing customer base. So, we were confident when we started looking at it three years ago that there was a lot of reasons to be serious about it. Then comes the hard part of trying to figure out how do we engineer something at this price point that really works, that it works for customers, meaning that the experience they have with us is going to be great, friendly, reliable, consistent and that we can apply the same magic, if you will, from a commercial point of view to our ownership community that we have in our other brands so that we drive superior performance to our competition. And so, there’s a reason we spent three years on it because it’s not easy, but we think we figured it out. I would say, and time will tell, this will be the most disruptive thing we’ve done in terms of brand space because it is very ripe for disruption. If you go look at hotels at this price point in this segment, you will find a very high beta situation in terms of the physical attributes. And it’s very hard to fix when you have a big system that’s already out there. So, you’d say, well, this is all conversion. It is all conversion. But what we did over the last few years is figure out with our supply management team, with our design teams, with our brand teams and everybody else in this company, how can we engineer a product where every single hotel, 100% of the time when it comes in the system has been refreshed, everything that is customer-facing. We built it, we built the rooms, we put it in real hotels, we built the lobbies. And we brought customers in to say, is this what you want? Is it different? And so, what will be different about this in this space and why I am not worried about it and why, frankly, I’m -- I mean it’s not sexy, okay? It’s not as sexy as lifestyle luxury. But in terms of an opportunity to be a value contributor in the billions of dollars for this company and its shareholders, I’m as excited about this as anything else we’ve done because from a customer point of view, we are going to give them a high-quality, consistent experience at this price point that does not exist in the market because of the way we’ve engineered the retrofit of these properties. And this will ultimately take some time, but it can happen quickly. It will be thousands -- it’s the biggest segment in the U.S. It’s the biggest segment in Europe. I mean, it will be thousands -- it should be, over time, the biggest brand we have in terms of number of units. And as I said, most importantly, it always starts with what is best for better serving our existing customers and acquiring new customers. And how do we do it in a way that owners will get a superior return. We think we have cracked the code. We will have to prove it. It will come to life quite quickly. As Kevin said, we will have Sparks open this year, won’t have a too terribly big impact on this year’s numbers. But as we get into next year and beyond, we think it will have a meaningful impact. And as I said, ultimately, I look at these as opportunities as a consumer branded company to think about a new product at our scale, being able to be deployed at scale, deployed globally and have the opportunity to be worth billions of dollars to our shareholders. And I think this is -- checks all of those boxes. So, we’re super excited. We’re not nervous. We’ve done all the work. I hope we’ve proven at this point, given this is the tenth or 11th brand that we’ve created out of the ashes or out of the dust that we’re pretty good at this at this point. I just wanted to ask you a little bit on the owned and leased portfolio. I think you mentioned $30 million of COVID-related subsidies, I think, during the quarter. And I was just wondering, should we just assume that those start to kind of dissipate as we go through 2023, or are they just all gone at this point, or how are you thinking about that? Yes. I think it’s played through based on the programs that have been approved thus far in Europe. I mean, if -- there’s maybe a little bit more to come through based on things we’ve for that haven’t quite come yet, through a very small amount. And who knows, if anything more will come, but we’re not expecting any. And the thing I would say is if you look at it on a normalized basis, because remember, we had subsidies in 2021 as well, if you sort of pull all that out, the growth has been quite dramatic. And we continue to think that that portfolio will grow at a higher rate than the overall business this year. Great. Thank you. And then, Chris, I’m just wondering if you could just touch on -- you mentioned the U.S. pipeline, and we all see what’s happening there. Any change in the way that Hilton is thinking about using key money in order to maintain or grow share or potentially lend to developers at this point, or...? No, no. As I commented on in my prepared remarks, and if you look at the whole pipeline, more than 90% of it has no key money, no financial support. We have not changed our view on that. If you look at the aggregate dollars in CapEx, and you peeled out what we’re spending in key money, actually, if you average last year and this year together because we had some things we thought would happen last year that are happening this year, it’s actually lower than what we’ve been suggesting to everybody over the last couple of quarters. So no, I don’t -- we still view the opportunity to grow as very strong and without the use of our balance sheet and that ultimately is driven by what you would guess it is. Everybody investing in our portfolio of brands is doing it to get a return, and our brands are the highest performing brands in individual segments. But overall, when you aggregate them together, and people are continuing to want to invest with us in that way. So, a long-winded way of saying, no, we don’t see anything. In fact, I think the trend line for us overall in key money, I’m looking at Kevin, he runs development, too, so make sure he agrees with this. But the trend line is down, meaning over the last couple of years, we’ve had a little bit of elevated key money in aggregate dollars because during COVID, a bunch of things we’ve been working on a long time came together or some other people’s deals blew up, and we were able to sweep in on some very strategic things at a moment in time. And those were lumpy, but we always have opportunities we’re working on. But I think those lumpy -- there are going to be fewer of those lumpy things. So, I think -- honestly, I think in an aggregate dollar sense over the next few years, the trend line is down, not up. Just following on some of the earlier discussions about the thoughtful conservatism baked into the guidance. Could we talk about the capital returns a bit and just how you thought about pulling that together? And is that necessarily a kind of firm number in view of how the guidance is set up? And what could push that up or down going forward? Yes. David, I have to say that, yes, it’s a firm number. We wouldn’t have given it to you. I assume that goes without saying, but I can’t help myself. So yes, as of now, it’s a firm number. That’s what we think. It’s a range for a reason. There’s a lot of year left and a lot could happen. I think if -- I did read your note this morning, so I think I know where you’re going with this. Right now, we’re a little bit lower than our historic range of leverage. That range does assume effectively no borrowing for the year because we think that the borrowing -- and we don’t like the borrowing environment right now. It’s very choppy. Rates are higher than we used to. And so, that assumes that leverage stays roughly flat to slightly down for the year. And that’s what -- and yes, that’s what the range of guidance and EBITDA will spit out for capital return, again, recognizing that we’re a very high free cash flow business. And we don’t do -- other than what we were just talking about with a little bit of key money and a little bit of capital, we don’t do much else with the money other than pay a small dividend and use it for buybacks. And so, that’s the range for now. Yes. The only thing I would add -- all of that I agree wholeheartedly. The only thing I would add to that is that’s not -- our longer-range views on the balance sheet and return of capital haven’t changed. We have been very consistent since the beginning of time. It feels like saying we want to be 3 to 3.5 times. We’re at the low end or below -- a little bit below the low end of the range for the reasons Kevin just described. We think debt markets are choppy. They’ll get better. Over the intermediate and longer term, we don’t intend to run leverage at those levels. We would intend to be in the ranges, frankly, and that’s -- we’ve said it on these calls, probably towards the high end of the range, in a more normalized environment or even beyond that is something that we would certainly -- we’ve been asked and said many times publicly, we would consider. We just need -- we’re just looking for a little bit more stability in the debt markets. And obviously, as Kevin said, we don’t have the need. And as I commented in my answer to the earlier question on key money, which is the primary use in terms of CapEx, we don’t think we need a whole lot more. So, any borrowing, any re-leveraging or leveraging up, obviously, this affords us the opportunity to return even more capital. So, I think there will -- those opportunities will exist. We gave you what we think right now, and we’ll see how the debt markets and broadly how the macro sort of shifts going forward. I appreciate that. And everything is well received since I misspoken my question. I know -- mean what we say. Can we talk about the new brand just a bit? Am I taking away from the notion that you are fitting yourself into a space where there aren’t necessarily direct competitors, or there are and you believe you’ve come up with a better value proposition that will just compete? I would say we don’t think there are any real competitors. I mean, meaning that, if we do our job, we’re going to sort of come in plus or minus 20% below true, which would still probably be above, if you look on average, it will be above where most of the folks in the existing segment are. That’s why, like we like to do, we’re a branding company. We’ve made up a segment. We called it premium economy. So, our view would be it is above the traditional economy space. It will price above, both because of the strength of our system, our commercial engines, loyalty system and all those things, but importantly, because it will be a better, higher quality, more consistent product. My question and follow-up are both really sort of clarifications on earlier comment. Chris, you said in your guidance, you were assuming that pricing power would flatten or even be modestly lower later in the year. I just wanted to clarify, were you saying pricing power like the rate of increase modestly lower or actually some rate actually lower? Just to clarify. Okay. Perfect. Thank you. And then on occupancy, you mentioned that your guidance, you’re really not even getting back to occupancy in 2019. I’m assuming that’s just sort of a matter of time and that you would expect to be there by 2024, or are you -- do you have a view about… Yes. I mean -- honestly, I think it may be a bit of conservatism on our part. I do think we get -- by the way, Robin, we can get back there tomorrow if we wanted. But we could jump rates because we could occupy ourselves up. But we don’t want to do that. We actually manage, as you can see with the rate growth, we are trying to manage in this cycle, particularly given the environment, inflation and everything else, really effectively to drive the best bottom line results for our owners, in this case, that to a degree, our occupancy levels are driven by pricing strategies. Okay? Some of it is still -- I think there is more recovery and more pent-up demand, particularly business travel and the group segment. So, I absolutely believe there’s never been a cycle that I’m aware of that in recorded history where we will not go above prior occupancy level, so I think that we will. It may happen this year. Honestly, if we continue to have pricing power, I kind of hope it doesn’t. And I hope it happens next year that we continue to be able to drive rate and thus higher margins and more profitability for our ownership community. Great. And then just my other clarification on your net unit guidance. From the comment in the release, I guess, I kind of understood the sort of the coming in just under 5% of the COVID delays in China that it was maybe some openings that were sort of pushed past December 31 in China that would maybe make then Q1 opening sort of ahead of the full year number. But then in your comments, you made a comment about starts in China being behind. So I guess, I just wanted to get some clarification on whether it was just openings delayed by a few weeks or sort of a broader issue with the unit growth in China if starts are also behind? I think it’s both, Robin. I mean, the environment is creating a drag both -- created a drag in the fourth quarter on openings and also has created a drag on starts because it’s just broadly when they reopen and then -- before it was lockdown, now it’s they reopen and everybody gets sick, but the net result is the business activity comes -- is a drag on business activity. So signing starts and opens were all affected by it. We don’t think it’s a long-term trend in China. We think it’s timing. And yes, by definition, if we -- as I said earlier in the Q&A, if there was an environment where you literally have a completed hotel that can’t open because it can’t get a significant of occupancy, we don’t give you quarterly guidance. So, we’re not going to get into like when those hotels are going to open. But I think you can assume they’re going to open on a delay. I guess, if I stare long enough at your release, I find one negative number, which is pricing is down year-on-year for the Waldorf Astoria. Is there any particular pricing pressure at high-end hotels you’re seeing, or is that mix? And maybe more broadly on pricing, I guess what I observed is, you seem to have taken a little bit less pricing than some of your peers and your occupancies recovered a little bit quicker. Would that match what the strategy has been? And does that give you maybe a few more buttons to compress on pricing further through the recovery? Yes. First of all on Waldorf, there’s no -- that’s driven by individual hotels. Just the Waldorf brand, unlike our other brands, there’s not so many hotels that one dynamic in one particular market or two markets will drive it. So, there’s no -- we’re not broadly seeing slowdown in luxury. To the contrary, we’re continuing to see -- we’re continuing to see great strength. I’ll dish the second part of that to K.J. Yes. Rich, I’m sorry, I didn’t -- maybe a little bit of clarification on the second part. I’m not fully understanding where you were going with that. I’m sorry. Sure. I guess, when I look at your pricing relative to the market, relative to some of your closest peers, it seems you’ve increased prices a little bit less than some peers and your occupancies recovered quicker than some peers. Is that in line with your sort of strategy? No. Our market share is up across the board, right? So, we’re driving better revenue outcomes than our competitors. You may be looking at individual. I don’t know what you’re looking at in terms of our competitors or individual sort of spot rates for year-on-year. We’d be happy to… The simplest way to look -- system-wide last year, we finished in share at the highest levels in our history, and we gained share both in rate and occupancy. So -- but those numbers across the system would not support that theory. Okay. And maybe just a quick follow-up. The reasonable size adjustment in the net other expenses from managed and franchise, the pass-through costs that have been negative through the rest of the year. Looking like maybe you’re clawing back some of the losses through COVID. So, just wondering if there’s some specific program that’s pivoted that the other way in Q4? No. There’s always timing issues in terms of those line items. In the end, we have revenue and all of our various funds and programs are going to run breakeven over time, and then you’re just seeing timing issues on the P&L. I wanted to ask about the tight labor market that we continue to hear about in terms of the -- from the Fed’s reporting. Obviously, very strong in the experiential category on travel and lodging. So, do you believe this has peaked when you talk to your partners, kind of your builders? What are they saying just in terms of the labor market? And then secondarily, how does that factor into how you’re thinking about IMFs and kind of profits in the back half of the year if it hasn’t? Thanks. Yes. I mean, the labor market situation has eased a lot. So as we talk to -- I mean, listen, we employ a lot of people. We operate a lot of hotels because I talk to our team, but beyond that, talk to our franchise community. I think they would say that broadly, we are not fully back to where we were in terms of access to labor, but we’re getting awfully close. And so, if it was on a scale of 1 to 10 a year ago a 10 in terms of extremis, it’s a 4 or 5. I mean, it was something we were talking about every single day, every conversation, and it is not quite as topical, which is the good indication. So, I think the labor situation is easing. You continue to see across a broad universe of other industries, notwithstanding what the Fed is saying, a lot of layoffs, including, of course, through technology, but through banking, also through retail, where people had really staffed up thinking that the COVID retail demand was going to be maintained and it hasn’t. And so, there are a lot of people that are getting pushed back out into the job market, and that’s allowing -- affording us the opportunity to get the labor that we need. You’ve also seen, while wage rates went up a lot during COVID, net-net from ‘19 to now, you’ve seen that start to stabilize. And those kind of big increases are not continuing. They’re at a higher absolute level, but the level -- the rate of increase has diminished substantially. In terms of how we think about IMF, we feel good about IMF. I think for the year, we expect IMF to add significantly to the growth rate. We think this year we expect that it will get over our prior high watermark of ‘19. Great. And then secondly, just in terms of FX, the dollar has weakened a little bit against kind of the basket of the non-U.S. currencies. How are you thinking about an operational impact from that? And then also, as that kind of feeds into guidance, is there a translational impact with just a slightly weaker dollar versus what you saw in ‘22? Operationally, obviously, it has effects in each individual market where your pricing labor in those currencies. It’s a very small headwind single-digit millions of dollars headwind in this year’s numbers. You talked about the strength of leisure in the fourth quarter and all of last year. But when you think about leisure demand this year, how would your RevPAR 4% to 8% growth for the year, how would that -- would leisure be in that range, or there’s a lot of concern that it’s going to be significantly below that? Yes. I think we do think it would be within that range. We continue to see strength. We do expect like all the segments that you will see some plateauing as a result of a slower macro environment in the second half of the year. But we still feel very good about it. The demand trends here and now are really strong. And while there’s a lot of noise out there, if you go back -- just went back and looked at the number, consumers still have incremental savings in the U.S. relative to the month before COVID of $1.5 trillion. Now -- so that peaked at like $2.7 trillion. It’s down to $1.5 trillion. So, they are spending it, and they’re probably reading the papers and watching the news and getting more nervous. And so, that would be a behavior set that would say that maybe they pull back a little bit. But the reality is we’re not seeing it. And I think part of the reason we’re not seeing it, okay, and time will tell, is because of the phenomena that I described earlier in the call, which is they’re shifting their spending. So not only do they still have incremental savings in their pockets and feel reasonably good, but they’re spending a lot more of it at bars and restaurants and travel as a percentage of their overall spend. And so, we have anticipated, like all segments, there’ll be a little bit of a headwind in the second half of the year, but we do expect leisure to be in those ranges. If I could address my follow-up question on Spark, which is really an intriguing product. Does it kind of take care of two problems that are out there for the industry? And one is obviously a lot of deferred CapEx over the last several years. But the other one is the age of select service hotels Hampton and what started in ‘84 or ‘85. So, we’re dealing with hotels coming up on 40 years old. So, is there a -- is that part of the thought process is that you’ve got a lot of hotels that could ultimately fit within that brand? Listen, it is an ancillary benefit on the margin, meaning if we do have older Hamptons like other third-party products that we think aren’t fitting for Hampton, as you know, we’ve been quite disciplined in keeping the Hampton brand, the strongest brand in lodging, in my opinion, by pushing properties out that are past their prime and don’t make sense in the system. There -- I think over the next 10 years, there is some percentage of those that we will certainly look at keeping in the system. I think in the end, Bill, it will be a very small percentage of the overall system. And if I look at the deals that we have in-house right now, 98% of the deals we are processing right now are third-party brands. So, there are a few Hamptons in there. But there’s no other Hilton brands in there, but there are a few Hamptons. But I would say it’s an ancillary benefit on the margin. A lot of those hotels, frankly, over time, are going to exit the system as we’ve been doing for time and eternity. I apologize. So, we’ll have to move on to our next question. And the next question is from Brandt Montour with Barclays. Thank you. Actually, just one from me, Chris and Kevin. So, in terms of development and more medium to longer term sort of net unit growth, and your comments were well taken, Chris, on a couple of years. The world seems to have gotten a bit better for you, though, right, since three months ago, right, in terms of the speed at which China is reopening now, the excitement over Spark and then U.S. starts continuing to get a little bit better. So I guess, the question is, do you feel a little bit better about getting back to the 6 to 7 NUG than you did three months ago? And are we potentially even playing for maybe hitting that run rate in late ‘24? Look, I think we said what we said for a reason, Brandt, not to be sort of cagey about it, but there’s a lot can go one way or the other in the world. We still feel great about getting back to 6% to 7%. I don’t -- Chris may have a different view. I don’t feel differently today than I did three months ago about that. I think the world is coming our way a little bit. But we don’t expect -- none of these things stay constant, right? I mean, these trends will change, and we always think the world is going to come our way. So, I don’t feel that much better in three months from now. I’m probably more optimistic by nature than Kevin. That’s our roles. But no, I think we feel -- we felt pretty good about getting back to it a quarter ago. So I agree in the sense we don’t feel differently. And I think we were asked on the last call, what does it look like? And we said it looks like you get this terra firma with a view on the U.S. economy either in recession or -- where people have a little bit more certainty. I don’t think we’ve accomplished -- that hasn’t really changed. Then, we said China, okay, that we got to get China back and reopened. And while it’s not fully reopened, it’s happening. So I think on the margin, we feel better about that. And we didn’t have -- we in our heads had Spark, but we didn’t tell you about Spark. And so, we now have Spark there, and I think that provides, no pun intended, a little bit of spark to our progress in getting back there. So, we felt pretty good about it a quarter ago. I think we feel pretty good about it now. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Nassetta for any additional or closing remarks. Thank you, Chad, and thank you all for joining us. As you can imagine -- or I hope you would imagine, we’re pleased with the state of the recovery, fourth quarter numbers are great. While we’re sentient and watching the macro trends, we feel very good about what we’re seeing right now in the business and advanced bookings and all the things that sidelines that we have into the business. We think we’re going to have another really good year. And we appreciate the support. We appreciate the time. We look forward to catching up with everybody after the first quarter to give you more sightlines into what we’re seeing then. So, thank you, and have a great day.

EarningCall_48

Good morning, and welcome to the Bruker Corporation’s Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I'd like to turn the floor over to Justin Ward, Senior Director of Investor Relations and Corporate Development. Please go ahead. Thank you, Anthony and good morning, everyone. I would like to welcome everyone to Bruker Corporation's fourth quarter and full year 2022 earnings call. My name is Justin Ward and I am Bruker's Senior Director of Investor Relations and Corporate Development. Joining me on today's call are Frank Laukien, our President and CEO; and Gerald Herman, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today's call, we will be referencing a slide presentation that can be downloaded from the Events & Presentations section of Bruker's Investor Relations website. During today's call, we will be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com. Before we begin, I would like to reference Bruker's safe harbor statement which is shown on Slide 2 of the presentation. During this call, we will make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to elevated geopolitical and energy risk the COVID 19 pandemic, and supply chain logistics and inflation challenges. The company's actual results may differ materially from such statements. Factors that might cause such differences include but are not limited to those discussed in today's earnings release, and in our Form 10-K as updated by our other SEC filings, which are available on our website and on the SEC website. Also note that the following information is based on current business conditions and to our outlook as of today, February 9, 2023. We do not intend to update our forward-looking statements based on new information, future events or for other reasons, except as may be required by law prior to the release of our first quarter 2023 financial results expected in early May 2023. You should not rely on these forward-looking statements as representing our views or outlook as of any date after today. We will begin today's call with Frank providing an overview of our business progress. Gerald will then cover the financials for the fourth quarter and full year 2022 in more detail, and he will share our fiscal year 2023 financial outlook. Thank you, Justin. Good morning, everyone. And thank you for joining us on today's earnings call. In fiscal year 2022, Bruker achieved solid operating and financial improvements with 10% organic revenue growth, 150 basis points gross margin expansion and 11% non-GAAP EPS growth all while all with a non-GAAP return on invested capital above 20%. And while investing significantly in proteomics and spatial biology. We have made several key acquisitions and investments in the last 13 months in order to expand the breadth of our proteomics capabilities into proteomics consumables automation software and expert proteomics drug discovery services and also in order to enter attractive new markets in cancer research tools and neuroscience research tools and solutions. Our teams also have been effectively navigating supply chain and geopolitical challenges which are gradually improving but not fully resolved yet and probably will not be fully resolved until the end of 2023. And in some areas of electronics even into early 2024. Most importantly, we are advancing our Project Accelerate 2.0 high growth high margin initiatives with as you know a particular focus on the large opportunities in proteomics and the related field of spatial biology while also investing in operational excellence, productivity and our capacity growth for the next 10 years. Bruker again has introduced key lifetime tools innovations in 2022. And demand for our high value solutions and differentiated instruments is strong. In fiscal year 2022, our scientific instruments segment generated double digit year-over-year organic bookings growth and build additional backlog for good visibility into the year. In 2023, we intend to drive strong revenue growth and another solid EPS increase, while further expanding our focus strategic investments in the recently acquired additional proteomics capabilities and in our other key Project Accelerate 2.0 initiatives. Our medium-term goal is to continue to transform Bruker Brooker into a high revenue growth and consistent double digit EPS growth company with significant further growth and operating margin expansion potential. Turning now to slide 4, Bruker’s solid 8.9% year-over-year organic revenue growth in the fourth quarter capped off another strong year for the company. Continued demand for our differentiated high value solutions drove robust performance in bookings and revenues. And our fourth quarter ‘22 scientific instruments segment book-to-bill ratio was again greater than one. For the full year 2022, our BSI segment organic bookings and backlog both increase in the double-digit percentage year-over-year. For the fourth quarter of 2022, the BSI segment order bookings continue to grow nicely driven by broad based customer demand, with demand in Europe being particularly strong. Bruker’s Q4 ‘22 reported revenue increased 3.6% year-over-year to $708 million. This was in comparison to a strong prior year Q4 of ‘21 and with a 7% Q4 ‘22 headwind from FX. So on an organic basis, our Q4 2022 revenues increased 8.9% year-over-year. Our Q4 2022 non-GAAP gross margin increased 140 basis points year-over-year to 52.6%. While our non-GAAP margin was 21.0%, the same as in the fourth quarter of ‘21. Despite inflation headwinds, our gross margin expansion is clearly benefiting from Project Accelerate 2.0 margin mix, our operational excellence productivity gains as well as volume leverage, pricing and currency tailwind. In the fourth quarter of ;22, Bruker reported GAAP diluted earnings per share of $0.66 up 32% compared to $0.50 reported in the fourth quarter of ‘21. On a non-GAAP basis, fourth quarter ‘22 diluted EPS was $0.74, up 25% from $0.59 for the fourth quarter of ‘21. In summary, the fourth quarter of ‘22 was a quarter of good execution and continued broad demand for our differentiated portfolio. Moving on to slide 5, we show Bruker’s performance for the full year 2022. Our revenues increased by $113 million year-over-year, or by 4.7% to $2.53 billion on an organic basis fiscal Year 2022 revenues grew 10.2% year-over-year. For the full year ’22 book-to-bill for Bruker’s three scientific instruments group are all above 1.1. Geographically our ‘22 BSI odor bookings were led by double digit organic growth in Asia Pacific, South Asia and Australia, New Zealand, the APAC region as we abbreviated and with mid-teens percentage organic growth in Europe and Middle East Africa or EMEA and mid-single digit percentage organic order bookings growth in the Americas. In fiscal year 2022, we experienced particularly strong organic growth in our proteomics, biopharma, semiconductor metrology and industrial research markets. In fiscal year 2022, we delivered double digit organic revenue growth 150 bps year-over-year gross margin expansion, 60 bps year-over-year operating margin expansion and double-digit percentage non-GAAP EPS growth. Our non-GAAP return on invested capital of 24.3%, was again well above our long-term target of ROIC greater than 20%. And this continues to confirm our differentiated strategy and entrepreneurial management process and culture are working. Finally, we're also pleased with our 7% year-over-year, non-GAAP EBITDA growth bringing 2022 non-GAAP EBITDA to $547.5 million and the related non-GAAP EBITDA margin up 40 bps to 21.6%. So, please turn to slide 6 and 7 where we highlight the full year 2022 performance of our three scientific instruments groups, and of our BEST segments all on a constant currency and year-over-year basis. In 2022, BioSpin Group revenue grew in the high single digits percentage year-over-year to $697.7 million with strong growth in its services and support revenues as well as strong growth in preclinical imaging and a notable contribution from our biopharma process analytical technology software acquisition Optimal. Bruker BioSpin recognized revenue on 4 GHz-class NMRs instruments in ‘22 consistent with four systems recognized in ‘21. You may have seen our press release last week in which we detail the customer acceptance of the first two 1.0 gigahertz NMR systems already in the fourth quarter of ‘22, one at Ryokan in Japan and one in Barcelona, Spain. These acceptances were ahead of schedule as this new compact, single story 1.0 gigahertz product launch is technically going really very well. It resulted in some hot 1.2 gigahertz installations however, moving to this year 2023. And in 2023, we are going to expect to install four gigahertz class NMR and by the way there none are expected in the first quarter of 2023. I know some of you are following that quarter by quarter. Moving on for the full year 2022, CALID Group revenues increased in the high single digit percentage to $822 million with continued growth in our life science mass spectrometry business and notable strength in proteomics applications and our timsTOF portfolio with now more than 600 units installed in customer labs. We continue to experience some supply chain delays, however, slowing revenue execution in CALID and hence the backlog went up. Our timsTOF platforms are very robust demand in applications for 40 proteomics, PTM or epi proteomics as well as single cell proteomics and mass spec imaging all on the various models of the timsTOF platform. Our Microbiology and Molecular diagnostics revenue was up slightly year-over-year as aftermarket strength of said modest instrument demand which faced a difficult comp and comparable from 2021. Moving on to slide 7, our full year ;22 Bruker Nano revenues grew in the high teens, our growth start high teens percentage to $787 million. Nano’s revenue growth in semiconductor industrial markets was particularly strong. Our Nano surfaces division drove the Nano Group strength while x-ray and data analysis divisions also grew further versus 2021. Nano’s microelectronics and semicon metrology tools performed well in ’22 with strong bookings and a strong backlog that provide us with good visibility into 2023. Bruker Nano Life Science fluorescence microscopy showed strong year-over-year growth as a result of product innovation and life science research demand and that's also where we have made some additional acquisitions I'll discuss in a moment. So last but not least at all fiscal year’22 BEST revenue grew in the mid-teens percentage net of Intercompany Eliminations driven by contributions from big science, clean energy research and robust demand for our MRI superconductors by our medtech OEM customers. That superconductor demand appears healthy but we continue to experience supply chain challenges there as well, due to some material shortages. Moving to slide 8 and 9 now, we continue to make good progress with our Project Accelerate 2.0 initiatives which in ‘22 now represent 56% of our total revenue. On slide 8, we highlight two recent acquisitions in Inscopix and Biognosys, and Inscopix is part of our fluorescence microscopy business, although it's a very specialized way of doing life animal fluorescence microscopy, and Inscopix has really generated and pioneered that field of fundamental neuroscience, brain circuitry research. So this is not molecular and this is not just behavior this is crucial in between that we need to understand brain function in vivo brain function much better, they had about $20 million in ’22 revenue, their gross margins are well above 60%. And while this year, they only have a single digit EBIT margin because they're investing a lot and we support that we expect them to have not only a double-digit revenue CAGR, but also to become accretive to operating margin over time, and become one of our more profitable businesses over a few years. But right now, they're very much in growth and fast investment mode. Somewhat similar but, but also a slightly different story on Biognosys where we did go into this specialty drug discovery and development research services or DRO services, not a general strategy for us, as you may know, but very much beneficial in the specialty proteomics services field, where by the way Biognosys also has some very key consumables kits and software. So they're a mix of DRO drug discovery, and proteomics specialty tools businesses, they had about $15 million in ‘22 revenue, we're also expecting them to have a long-term double digit CAGR, CAGR in the double digits. And this year, because of in ‘23, because of significant investments that we support, including their rollout of their US facility, we expect them to be not -- do not expect them to be profitable. But over time, we think they will also then become accretive to our operating margin over time. This will take a few years, but a very key additional acquisition in proteomics. Moving on to slide 9, just very briefly, something that you probably don't have much visibility on, and we had a press release on this in December. But many of our technologies within BEST are not only used for high energy physics experiments, or big science or MRI, by our MRI OEM customers, but increasingly also by clean tech as clean tech technologies under development. And here are examples of contracts that we have received for over $50 million for superconducting materials from an Asian Pilot Plant on fusion magnetic confinement fusion Pilot Plant, as well as from ITER indirectly, for something that is part of the diverter, or I don't expect you to be experts in how magnetic fusion and ITER work. But those are the parts of the ITER machine that have the highest heat and radiation low and we have some very specialized materials there and got those long-term contracts. By the way, these are all multiyear contracts. This will not be all be ‘23 or ‘24 revenue. Superconductors also may play an increasing role in offshore 20 megawatt and larger wind turbines. The investments in Europe and Asia and particularly in the US that are planned for offshore wind are enormous and larger, more efficient wind turbines probably will get away from rare earth materials because they get too heavy. It also is only sourced in one country, China in this case. And so there may be a bright future for superconductors in offshore wind turbines, more of an outlook for some future growth areas on which you probably haven't had much visibility. So let me wrap up on slide 10 illustrates our revenue mix continues to improve, Project Accelerate 2.0 now present 56% of our revenues. Year-by-year the changes are incremental. But if you look at this at the last pre COVID year, not 2019. It's up from 46% to now 56%. This along with operational excellence obviously advances our growth and our operating margins, and opens up very new, very large new TAMs for us, particularly the large opportunities for this decade and the next in proteomics and spatial biology. We're still an instruments company and proud to be that one, an instruments company because that's where we innovate and create new markets. But our recurring revenue has advanced from the mid-20s percentage to 30% as you see in the lower left, and our geographic balance has really changed dramatically with fast growth particularly in the Americas, to where Americas and EMEA are at parity and about 33% and very, very similar to our broader APAC, South Asia revenue, which is about 34% of Bruker’s total global revenue, also quite a different picture than from a few years ago. Well, let me wrap things up. In summary, during 2022 Bruker again made excellent progress. We closed several key technology and capabilities acquisitions, particularly in fluorescence microscopy, neuroscience and proteomics in the last 13 months, and we are expanding the breadth and depth of our capabilities as well as entering new attractive markets as I've referred to earlier, very proud of the agility and responsiveness of our teams and addressing the supply chain challenges. Moving forward, our high backlog for 2023 gives us good visibility into another promising year ahead. And in 2023, we intend to combine rapid revenue growth, further gross margin expansion and solid EPS growth with additional strategic R&D and Commercial Investments, particularly in proteomics and spatial biology. And for 2023, we expect to reach our previously announced medium term target of R&D investment of 10% of revenues, which is a 70 bps step up or increase from 9.3% in 2022. So we are really investing very significantly while improving our financial performance year-over-year. It's a good strategy. It's a good process. And with that, let me turn the call over to our CFO, Gerald Herman, who will review Bruker’s financial performance and outlook in more detail. Gerald? Thank you, Frank. And thank you everyone for joining us today. I am pleased to provide more detail on Bruker’s fourth quarter and full year 2022 financials. Starting in slide 12, in the fourth quarter of 2022, Bruker’s reported revenue increased 3.6% to approximately $708 million, which reflects an organic revenue increase of 8.9% year-over-year. We reported GAAP EPS of $0.66 per share, compared to $0.50 in the fourth quarter of 2021. On a non-GAAP basis, the fourth quarter ‘22 EPS was $0.74 per share, an increase of 25% compared to $0.59 in the fourth quarter of 2021. Our fourth quarter 2022 non-GAAP operating income grew 3.5% year-over-year, with the fourth quarter ‘22 non-GAAP operating margins about flat year-over-year at 21%. Now the strong gross margin expansion was offset by higher R&D and Commercial Investments for Project Accelerate 2.0 initiatives as well as by inflation related costs. We finished the fourth quarter with cash, cash equivalents and short-term investments of approximately $646 million. During the quarter, we used cash to fund selected Project Accelerate 2.0 investments in our key strategic opportunities, capital expenditures, and of course, our dividend program. In the fourth quarter, we purchased approximately 435,000 shares of Bruker stock, for total consideration is about $26 million. For the full year of 2022, our repurchases totaled 4.2 million shares, or approximately $265 million. We generated $159 million of operating cash flow in the fourth quarter, which after a capital expenditure investment resulted in $135 million in free cash flow for the fourth quarter of ‘22. This represents a $25 million increase from the fourth quarter of ‘21 due primarily to higher net income in the quarter. Slide 13 shows the revenue bridge for the fourth quarter of ‘22. As noted earlier, organic revenue in the quarter increased 8.9%. We had a positive revenue contribution from acquisitions of 1.7% and a foreign currency headwind of 7%. From an organic revenue growth perspective, and compared to the fourth quarter of 202, BioSpin fourth quarter revenue for the fourth quarter ‘22 slightly increase in the high single digit percentage with a notable strength in our PCI and BioSpin software businesses. Nano organic revenue grew in the low 20% on strength in semicon metrology and our surface materials and Nano analysis tools divisions. CALID Group performance was constrained by supply chain delays in the fourth quarter of ‘22. But bookings were again robust. Order bookings in CALID in the fourth quarter were significantly higher than revenues for a book-to-bill meaningfully above one. Fourth quarter ‘22 BSI systems revenue and aftermarket were both up high single digit percentages organically compared to the fourth quarter of 2021. Geographically and on an organic basis in the fourth quarter of 2022, our European revenue is down mid-single digit percentage year-over-year, Americas grew in the high single digit percentage range, and the APAC region grew in the 20% range year-over-year. The rest of world fourth quarter ‘22 revenue was higher year-over-year in the high teens percentage. Slide 14 shows our fourth quarter ‘22 P&L performance on -- fourth quarter ‘22 non-GAAP gross margin of 52.6% increased to 140 basis points from 51.2% in the fourth quarter of ’21 due to increased capacity utilization, favorable revenue mix and volume leverage. Fourth quarter ‘22 non-GAAP operating expenses were up 8.2% compared to the fourth quarter of 2021 and reflect the continuing acceleration of R&D and Commercial Investments in Project Accelerate 2.0, including in proteomics and spatial biology, in addition to increased costs related to inflation. For the fourth quarter of 2022, our non-GAAP effective tax rate was 20.6% compared to 34.4% in the fourth quarter ‘21, primarily due to a favorable US tax clarification issued in the fourth quarter of ‘22. Weighted average diluted shares outstanding in the fourth quarter of ‘22 was $147.9 million, a reduction of approximately 4.6 million shares or 3% from the fourth quarter of ‘21, resulting from our share repurchase activity over the past year. Finally, fourth quarter ‘22 non-GAAP EPS of $0.74 was up 25% compared to $0.59 in the fourth quarter of ‘21. Slide 15 shows the year-over-year revenue bridge for the full year of ‘22. Revenue was up $113 million, or 4.7%, including organic growth 10.2% following a very strong 2021 organic growth comp of over 19%. Acquisitions added 1.4% to our top line, while foreign exchange was a 7% headwind for the full year of ‘22. P&L results for the full year ‘22 is summarized on slide 16. For the full year, gross margin expanded 150 basis points to 52.6% reflecting higher revenue, volume leverage and more favorable mix from Project Accelerate 2.0 while operating margins grew 60 basis points to 20.0% for many of the same reasons. The full non-GAAP tax rate was 27.7% compared to a 28% rate in /21. Turning now to slide 17, in the full year of ‘22, we generated $143 million of free cash flow, approximately $47 million lower than in 2021. Full year ‘22 free cash flow benefited from higher net income more than offset by higher working capital related to our increased volume, proper inventories and the timing of receivables. Our capital expenditures in the year reflect our continuing investments in growth capacity and productivity as part of our operational excellence drive. Our cash conversion cycle at the end of the fourth quarter of ‘22 was 229 days, an increase in 21 days compared to the fourth quarter of ‘21. This increases due to higher working capital needs to cushion supply chain risks. Turning now to slide 19, given our continued strong bookings growth and backlog in 2022, we expect solid growth in 2023. Our outlook for 2023 includes, we are now guiding to organic revenue growth of 8% to 10% year-over-year, we estimate a foreign currency tailwind of about 1.5% with acquisitions also contributing about 1.5% to growth. This is expected to lead to reported revenue of $2.81 billion to $2.86 billion, representing growth in a range of 11% to 13% compared to 2022. For 2023, we expect to reach our medium-term R&D target of approximately 10% of revenues. That's a 70 basis points step up from the 9.3% level we delivered in 2022. Nonetheless, we expect our innovative portfolio to continue to deliver solid gross margin expansion and operating profit growth in ‘23. And we're targeting 7% to 9% year-over-year non-GAAP operating profit growth in 2023. Organic operating margins are expected to expand approximately 50 basis points in 2023 with a combined transitory headwind in 2023 of about 120 basis points from foreign exchange and dilution from our recent acquisitions, is expected to decrease our non-GAAP operating margins by approximately 70 basis points to about 19.3% for 2023. We expect operating margins to rebound from this anticipated 2023 dip in 2024. And our medium-term goal continues to be to expand our non-GAAP operating margins well beyond our 20% level, which we achieved for the first time in 2022. As Frank mentioned, our recent acquisitions are highly synergistic and strategic. We expect them to develop to deliver double digit revenue growth, rapid margin improvement, and strong shareholder returns over time. On the bottom line, we're guiding to non-GAAP EPS for 2023 in a range of $2.52 to $2.57, or non-GAAP EPS growth of 8% to 10% compared to 2022. This would also represent a 13% non-GAAP EPS CAGR from our $1.57 pre-pandemic level in fiscal year 2019. We are projecting a non-GAAP tax rate of approximately 28% for the full year ‘23. Other guidance assumptions are listed on the slide. And our full year 2023 ranges have been updated for foreign currency rates as of January 31, 2023. So to wrap up, Bruker delivered strong bookings, backlog and revenue growth in the fourth quarter, capping off another year of very good financial improvement. We're carrying bookings momentum, innovative products and a record backlog in 2023, giving us good confidence in our ability to deliver another solid financial performance in 2023. Thank you, Gerald. I'd now like to turn the call over to the operator to begin the Q&A portion of the call. As a reminder, to allow everyone time for questions, we ask that you limit yourself to one question and one follow up. Operator? Yes. Hi, Frank. Gerald, thanks for taking my questions. So first one is on just book-to-bill that came in obviously greater than one. Could you maybe elaborate on bookings? Are they skewing to one segment versus the other among the instrumentation? And on CALID, you were supply, you said your supply chain constraint. We obviously have been hearing from other peer groups on instrumentations supply chains have been getting addressed throughout the year. So could you talk a little bit about that and what visibility you have on supply chains there and what instruments are maybe sort of impacted there. And then I have follow-up. Hi. I'd I'll start with that the book-to-bill greater than one in the BSI segment, strength in timsTOF for sure, BioSpin had very strong bookings. But it was really nothing that dropped out or something like that. Some of the applied and industrial areas remained pretty resilient. We kept an eye on that. And then geographically a bit of a surprise is that Europe had such strong bookings in Q4. I think those are maybe the more remarkable things that you may, some of them may surprise you and some are as expected. To the second point supply chain. Yes, it is getting better, but that just certainly not getting worse. But there still are some things that sometimes there's just a part or a few parts that delayed deliveries we got, for instance in the CALID Group, both the Bruker optics, molecular spectroscopy, but also our timsTOF line got delayed and some deliveries sometimes it's even just even the chromatography equipment and so on that can be delayed. So I don't want to bore you with the details, but it's not that it's all smooth sailing, this will still take some time to sort itself out, it is getting better, but that it's not gone. And so it still is a drag on revenue, which is we didn't really intend to build our backlog further in Q4, but that we delivered good revenue growth. But we also had delightfully better than expected, perhaps, or better than feared if you -- if we were all a little concerned what's going on with the economy. So we're pretty pleased that our bookings were so strong and yes, that our backlog went up yet again. So that's the bigger picture there. Got it. Okay, helpful. And then just general on off margin, dip in here in 2023. Could you talk a little bit about those R&D investments that you're talking about? How should we think about off margin cadence throughout the year, and then just if I could squeeze one in on China? Frank, we've been hearing – Appreciate it. But this is an important one, I would love to get your view on the RMB 1.7 trillion and 200 billion instrumentation, certainly sort of stimulus there. I know it's a loan, but love to get you because you're obviously strong in instrumentation. So we'd love to get your thoughts there that could be meaningful. Thank you. Sorry for that, I mean we're obviously delighted by that prospect, as you know from announcements until this gets into specific grants and budgets, and then into purchase orders take some time. But that along with the Inflation Reduction Act in the US, so the CHIPS Act in the US and potential also additional stimulus that may happen in Europe. In clean tech and other energies, it all caters to our strengths. And we're in principle very, we're delighted and excited. But I just don't want to caution it takes some time before, this probably won't show up at all revenue till ’24- ‘25. But it's great to have these medium- and long-term tailwinds as well. I'm happy to respond. So relative to the ‘23 guidance relative to the margin performance. I think, as you've probably heard from my prepared remarks, there's two major factors there. First of all, we posted, I think, very solid, full year ‘22 operating margin performance of 20%. That's a record for the company. Secondly, we do expect some combined foreign exchange and acquisition related dilution on the operating margin for ‘23. There's another factor which you've already referenced, which is accelerated R&D spend, we do think with some stabilization on the supply chain and some of the work we're doing there that we will be able to bring our R&D levels back up to a 10% level in ‘23, all of that pulls the operating margin down slightly for ‘23. We expect to be able to rebound that back in ‘24. Importantly, we expect to expand our gross margins, our non-GAAP gross margins in ‘23. And we've even on, if you look at the guidance slide and we're thinking that organically our operating margin, it's good, we're still going to grow about 60 bps. But yes, we are acknowledging some transition margin headwinds from FX and the deliberate and very good acquisitions. But in the first year, they're either not profitable, they have low margins. We're very glad we did these acquisitions; I think they'll be terrific for the company. But that gives us a temporary drag on in 2023, which we're accepting and we think that only gives us more growth and operating margin expansion potential in the future years as we're positioning the company continue to transform the company. Thanks for the questions. Frank, I think this is the highest growth number I've seen you guys put out to start a year. You guys are typically known for layering in a pretty healthy amount of conservatism. I guess with this elevated growth numbers, they're still that typical Bruker conservatism in there. And on the back of that, I guess what gives you the confidence to put out this type of numbers start of the year, bumping it even from what you were talking about JPM. I mean, clearly, the record backlog, I assume as part of it, does that just give you the visibility you didn't have in prior years to get to this number. It did headwind like that semi concern that you talked about last quarter, alleviate a little bit, it'd be great to get your perspective on kind of where we stand to start the year here. Yes, thanks for the question. Good question, I can give you some incremental because of, to your very last point, we already took out about a few orders from China semiconductor out of our backlog because of the probability or of either significant delays or it's not being feasible to export certain pieces of equipment. So that's all built into our forecasts. And we took care of that in Q4, if you like, so no additional risks there that we can see at the time. I think it's the usual balance of risks and opportunities. Yes, it is backlog, we acknowledged that, of course, that backlog will not come to normalized levels, all in one year, there'll be a two-to-three-year process. It's continued orders momentum, it's also in some of the areas where we were concerned, and we're wondering ourselves whether they would get quite a bit weaker, and while some of them are not growing as fast. We haven't seen any pronounced signs of weakness or any signs of real weakness. So it's just coming the order momentum. And then order momentum in BioSpin, timsTOF and number of areas is very strong we have. So it's just, yes, it is an unusual number early in the year for us, but I would think it’s the usual good balance that we hopefully will not regret, right? We, that's the number that we hope we can deliver. Okay, that's helpful. And then yes, I think this quarter, particularly, there's been an increased focus on kind of the 1Q and annual progression. Most of your life science peers have kind of guided 1Q to be a little bit light of expectations in the latest quarter as you think about kind of the growth progression throughout the year. Can you guys just give us some perspective on kind of the cadence throughout the year? How should we think about 1Q both on the organic growth side, and then Gerald, maybe on the margin side, just in terms of the build as we work our way through the particularly again, 1Q just given some headwinds via China? We expect Q1, yes, sorry, we also expect Q1 to be a little lighter. So, Gerald, do you want to expand there on some quarterly color but we do acknowledge that we also expect Q1 to be on the lighter side, but we still expect decent growth. Yes, we do. And I would say, from an organic growth perspective, we still expect H1 to be very solid, Q1 may be a little lighter. But remember, we are targeting some ultra-high field systems as we move through the years. So it didn't get – Sorry Q1, but it is clear that there'll be strength in the first half for sure. And in addition, you likely know, we had some supply chain constraints. And we hope to be able to release some of that as we move through the first half, including the first quarters so. And maybe I'll add to that for your modeling, Q1 of last year was very strong. So we're likely to be flat or down on margin compared to Q1 of last year, Q2 of last year was particularly supply chain constrained, so Q2 will be a weaker comparison for us. We don't expect to, we expect to have a more even revenue and margin flow this year than last year. So last year, Q1, strong comparison Q2, weaker comparison, and we expect that to even out in more -- be more even in 2023. So for your modeling, relatively speaking, our Q1 will not be that strong, because Q1 of ‘22 was so strong. I hope that help. So again on growth side, maybe 1Q below that 8 to 10, maybe like mid-single and then we build our way through the year. Is that kind of a fair ballpark? We're not giving color, numerical color. So we'd rather not comment because we don't get quarterly color this time. There's nothing that we, if there was something very unusual, we try to call it out. But I just want to make sure that I'm not giving additional numerical color that we didn't intend to. Thank you. Good morning. Wanted to talk about Nano, so 17% organic growth for the year over 20% of fourth quarter just really like an outstanding year. Can you dissect for us how much of this is coming from things like semiconductor versus the investments in spatial? And how big is that business today? Oh, yes, I mean, the spatial and fluorescence microscopy is still much, much smaller than the semiconductor and advanced electronics. Spatial biology and including the adjacent areas that we group up there, which include fluorescence microscopy, but also the new spatial neuroscience businesses that we've acquired, particularly in Inscopix are going to be needle moving in 2023, but they're still quite a bit smaller than the semiconductor business, And the semiconductor business is very strong backlog. We're not to expose to the memory area where indeed there is an oversupply in some areas that are a bit commoditized. But we expect semiconductor orders to be weaker and revenue will not grow steeply in 2023 in that area. But it's, it does, it looks like a soft landing and more than made up or at least made up by others areas of strength in our portfolio. In ‘22, semiconductor was a strong contributor margin wise and growth wise, for sure. Right, then wanted to move over BioSpin. Just ask about the single-story gigahertz NMR, can you give us an update on how many orders you have for that at this point? And just expectations for our ability to scale the manufacturing. So far, we just have three orders, two of which we delivered in Q4, we announced them all, they coincidentally all came in the second quarter of last year. So two of them, we delivered ahead of schedule that was just really amazing that a new product could really mature so quickly and indeed be delivered and getting smooth customer installation. So we're kind of thrilled with how that's going. And yes, there is another one that we expect to have in ‘23 revenue. There is quite a bit of activity. There's quite a few opportunities and things in the pipeline where people are trying to raise funding. But no orders to report yet. No additional orders report yet. Good morning. Thanks for taking my questions. A couple for you. I guess first on the margin guide. Frank, I wonder if you could provide more context on where the R&D and Commercial Investments are being targeted? And you kind of what the timeline is for when we start to see these show up in revenue growth? I mean it sounds like these are a bit more kind of one time-ish investments that show up in ‘23 and roll off in ‘24. Is that right? And then, I guess, Gerald, I guess a follow up on that. And you alluded to it a bit, I think in the prepared remarks, but curious if you're still targeting the 21.5% out margins and $3 of earnings for ‘24? Or is this kind of change that target? So the number of points, they are all very good questions. So no, the R&D 10% investment, that's going to be -- that's a medium-term target. That's not a onetime shot in ‘23. We had been ramping in that particularly in proteomics. Now in proteomics as you've seen, we've added early last year, we've added sample, consumables and automation. We added chromatography capabilities, all these in addition to of course continuing to develop our timsTOF portfolio. Now we've added CRO capabilities and software and further consumables capabilities. These will all require multiyear continued strong R&D investments and we do not want to be pennywise and pound foolish and under invested in this very large proteomics opportunity. So the 10% R&D , I don't want to predict for how many years but that's a multiple year level at which we want to be, I think it would be actually a mistake, a strategic mistake, it'd be under invested here. The second part of that R&D investment that goes heavily into spatial biology, which for us is a mix of fluorescence microscopy and neuroscience. And then the more traditional spatial single cell proteomics, single cell biology, particularly the canopy proteomics, and then the 3D structural, the 3D genomic spatial biology acuity, which is a whole new area that won't have any revenue or any products this year yet but that will begin to come out in ‘24. So there is very, very significant, very important R&D investments and the 10% R&D, we're not going to drive into 11% or 12%. I think that's just as finance, we're also doing disciplined growth investments. But the 10% is here to stay for not forever, but for quite a few years to come. The transitory effects, Josh, are more on the FX and the M&A, the newly acquired especially the larger ones in Inscopix, single digit margins in ‘23, and then improving from there and Biognosys in ‘23, and ’24 having investments that will lead to a P&L loss for these new significant acquisitions, but we're doing that with our eyes wide open, they will grow they will become important, they will need further investments. So that's why that 120-bps transitory effect from FX about half FX, and half from these reasons acquisitions that is indeed transient or transitory for 2023 and may still be a bit there, but much evaded probably in ‘24, whereas the R&D investment of around 10% is very, very much important for our growth in proteomics and spatial biology. We're not getting to your last question, Josh, we're not giving ‘24 guidance on operating margin, we're nowhere taking a dip in an operating margin this year, we hope to recover substantially from that and grow from there. But we're not giving ‘24 guidance. And by the way, we had a range that we've given for ‘24, not just the number, we are easily, we're already within our ‘24 revenue in ‘23. So that's happening much faster, and we're within, we're on the last few yards, on the few yards line here of reaching our EPS goal for ‘24 already in ‘23. So we're very likely to reach that in ‘24. And then we tend to give new multiyear medium-term goals, which we're planning to do in our June 15 Investor and Analyst Day, on June 15 of this year, where we'll probably give three-year financial goals for the medium term. Got it, and appreciate all the color. And then a follow up, Frank. Just wondered if you could give us an update on your view of the quoting and ordering activity among university accounts in recent months. Just curious your expectations for this end market in ‘23. Great. Thanks, guys, for taking the questions. And so maybe we could just spend a minute on Europe here, the region was down mid-single digits in the quarter. But you noted that bookings were exceptionally strong. So can you just talk about what you're really seeing in that region? You previously called out some of the energy headwinds and conversations with customers there? So are you seeing any pockets of weakness? And then maybe can you just point us towards what level of growth are you expecting in Europe for the year? Right, good questions. Yes. So I mean, I think the mood in Europe hasn’t changed a little bit. That's maybe you can see that in the currencies, right. Euro strengthening and related currencies, the fear of a broader war in Europe, rather than it being hopefully. And tragically, we understand that but contained to Eastern Ukraine, I think then fear of a broader war is probably reduced. Also, Europe had a mild winter and is not running out of gas anytime soon. In fact, the gas supply is very high. So the chances of energy blackouts and so on, they're much reduced. And at least for this winter, Europe still needs to develop their energy strategies for future winters. But this year, they probably will, Europe probably dodged the bullet. And everybody's more optimistic accordingly, energy prices that had absolutely peak three, four months ago or something like that has come way down again, not to the prewar levels, of course, they are still quite a bit higher, but not nearly as high as the peak levels. So everybody's kind of adjusting to that with energy saving measures and us making more investments for instance, in solar power all of this year, so hopefully ready for the summer season when that's particularly beneficial and other energy saving net-net. So the mood in Europe, in the European and also, I think UK and Switzerland and so on. And their willingness to continue to invest in R&D or pharmaceutical discovery or into their version of having a semiconductor supply chain in Europe and not only relying on Asia or the US as the US is rebuilding are all good drivers. And so, yes, I think the outlook for Europe is much more optimistic. And so we're not totally surprised that bookings, came up in Q4, although they did that to a greater extent than even, we had anticipated. So I don't think Europe will be a drag anymore. Maybe even the opposite, because it has to catch up a little bit. Yes, it seems like it was very broad from an organic perspective on the booking side, it seems as if it wasn't just focused in one particular area. So it bodes well, I think, for the whole – And Europe is now discussing political additional stimulus in the clean tech sector and elsewhere, somewhat in response to our Inflation Reduction Act, here in the US. So that's the update there. Perfect, great to hear. And then maybe just last one for me on pricing. So you took them incremental price, especially in the back half of 2022. Can you just let us know, where did pricing fully land for last year? And then what are you modeling for pricing increases and contribution there for 2023 as well? Thank you. Yes. Hey, Rachel, this is Justin, thanks for the question. So for the full year 2022 price realization was in that low single digit, as we mentioned, and again, it wasn't fully offsetting the inflation for the year. So we had call it about 100 basis point drag to operating margin from that net price realization inflation. For next year, we do think it's going to improve that net price realization as it's working its way through the backlog, we're expecting a little bit higher price realization next year, still in that low single digit. And we think it's going to be a better net against the inflation, but still a little bit of a drag on inflation, maybe about 50 basis points. So as you look at our implied guidance for and the commentary that Gerald had for 2023 op margin, that organic margin expansion we're expecting in 2023 does still include a bit of drag from the price versus inflation. Hi. Good morning. And nice quarter, Frank, and company. A couple of cleanup questions and then one bigger one. So share kind of assumption for fiscal ‘23. I mean, you do some incremental buybacks. So just want that. And how should we think about FX in the first quarter to sort of set the pace into the rest of the year and then I have a follow up. Derik, on the share buybacks, we don't typically comment on future buybacks. And numbers are baked into what we have there already so. And relative to foreign exchange, we actually rated our guidance based on the January 31 rates. You seem to think, I assume that the US dollar is weakened against some of the major currencies. And we've factored that into our analysis, which is currently predicting, as you saw for the full year, 1.5% of foreign exchange tailwind on the revenue line from that. Normally we take yearend FX rates for our planning, but since they had changed so significantly, still in January, we did the unusual step of looking at after baking in January 31 rates, because there had been quite a bit of change even in the 31st, 30 days. Got it. So can we talk a little bit about growth expectations by geographic region, Americas, EMEA, APAC in ‘23? And then also on APAC, just a little bit more color on the China's stimulus timing? Is there any preference for local companies versus outside of China political headwinds going on just a little bit more color and how we should sort of think about that situation. Thanks. Yes. So you've heard on the geographic side that Europe is making a comeback, right. And we were optimistic about Europe and bookings and this year, China as always difficult to read, right, one at some point you have zero COVID lockdown and you have whole country infecting from, getting a wave of infections. So far that all seems to not have such big disruptions. Although, I think China revenue growth was a little weaker in Q4, is that correct? Single digits. So a little bit slower than the year. But that's probably a transition effect. We're excited about the stimulus and the size of it and how much of it might go into scientific instruments. It's fantastic. I wouldn't say that at this point, we have more than headline visibility into all of that. So it's a little bit like when the first stimulus package or the CHIPS Act get passed until you then see until the rubber hits the road and we get orders or have visibility into grants and so on, that always takes a few quarters. And so often these announcements then, until they turn into our revenue and growth, is probably a ‘24 effect. But we're delighted to have more strong drivers in ‘24. China always has a preference for local products where they are competitive in some areas. Multi-biotyper, preclinical MRI and lower end X-ray systems that are local products, right. And we continue to hold our ground. People sometimes want the higher performance, but sometimes they buy local. That's nothing new. For most of our product lines, there isn't a Chinese substitute. And then the geopolitical risk with China around Taiwan or other things balloons that's just very, very, very difficult to see where that's going. So we have not built in any geopolitical major crisis. As that's just not predictable for us, but it is a concern, of course, for the next decade. Okay, so this concludes the question-and-answer session. I'd like to turn it back over to Justin Ward for any closing remarks. Great. Well, thank you everyone, for joining us today. During the first quarter, Bruker will participate in several investor conferences, including the City Healthcare Conference and the Cowen Healthcare Conference. And as Frank mentioned, we expect to host a Bruker Investor Day at the headquarters in Bruker, Massachusetts on June 15 of this year. So we look forward to welcoming all of you to that. Also, Bruker’s leadership team looks forward to meeting with you at one of those events, or speaking with you directly during the quarter. Please feel free to reach out to me if you have a follow up. Have a great morning.

EarningCall_49

Good afternoon, and welcome to the Lyft Fourth Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode to prevent any background noise. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator instructions] As a reminder, this conference call is being recorded. Thank you. Welcome to the Lyft earnings call for the quarter and fiscal year ended December 31, 2022. Joining me to discuss Lyft's results and key business initiatives are our Co-Founder and CEO, Logan Green; Co-Founder and President, John Zimmer; and Chief Financial Officer, Elaine Paul. A recording of this conference call will be available on our Investor Relations website at investor.lyft.com, shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will be making forward-looking statements. This includes statements relating to macroeconomic factors, the performance of our business, future financial results, and guidance, the impact of our cost reduction initiative strategy, long-term growth, and overall future prospects. We may also make statements regarding regulatory matters. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our Form 10-Q for the third quarter of 2022 filed on November 8, 2022, and in our Form 10-K for full year 2022 that will be filed by March 1, 2022, as well as risks related to the current uncertainty in the markets and economy. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and Lyft disclaims any obligation to update any forward-looking statements, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results, may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC, as well as in our earnings slide deck. These materials may also be found on our Investor Relations website. I would now like to turn the conference call over to Lyft's Co-Founder and Chief Executive Officer, Logan Green. Logan? Thanks Sonya and good afternoon. Today, I'm going to cover the team's Q4 performance, important updates to our non-GAAP financial measures as well as our Q1 expectations. But first, I want to reflect on the progress we made in 2022. I'm appreciative initiative of the team's execution in a challenging year, we took important steps to strengthen our business and deliver significant value to our customers. We connected more than 1 million drivers with nearly 40 million riders. We supported hundreds of millions of rideshare rides and more than 50 million bike and scooter rides which was a new record for us. Millions of people used Lyft to take trips, to get to work, vote, attend events, and connect with friends and family. The team worked incredibly hard and delivered significant value. We also introduced high impact product improvements. Upfront information is a major advancement to the driver experience, and our work in other areas, including with Lyft maps, is competitively, differentiating and delivers value valuable marketplace efficiencies. We've also expanded our market reach by relaunching our Lyft Pink membership program with new benefits and a lower price point. Additionally, by integrating services for car owners into the Lyft App like roadside assistance, parking and maintenance, we can deliver even more value to the roughly 75% of Lyft riders who have a car. With innovations like these, we can capture more of consumer transportation spend. Before I move on to our financial results, I want to highlight two items from the press release. First, we've updated our definitions of contribution and adjusted EBITDA to include reserve adjustments for prior periods. And in Q4, we took action to strengthen our insurance reserves by $375 million which given the definition change, affected our reported results. Elaine will discuss this in more detail. Now, let me talk about Q4. We saw important tailwinds in rideshare, including strong demand and more drivers organically using Lyft. Revenue was the highest in our company's history, and our results beat our outlook on every metric excluding the action we took to strengthen our insurance reserves. Rideshare demand was strong. We had 20.4 million active riders, which was the highest level in nearly three years, and revenue per active rider reached a new record. In particular, the airport use case reached another new high at just over 10.4% of rideshare rides with the absolute number up 25% versus Q4 of 2021. Additionally, on the enterprise side, managed bookings grew by more than 60% year-over-year and set a new record with continued strong adoption of our B2B offerings, particularly in the healthcare and retail verticals. In Q4, we are the most active drivers on our network in nearly three years, reflecting healthy organic tailwinds. Bookings per active driver were more than 50% higher than they were in Q4 of 2019 and near our all-time high. Drivers spent more time driving than they did in Q3 of 2022 or in Q4 of 2021. And across the US, our average rideshare ETAs improved. Even with these tailwinds, our marketplace was running hot in Q4, demand outstripped supply, and prime time went into effect more often than we would have liked. As a result, our conversion rates, meaning the share of ride intents that convert to rides taken, came down quarter-over-quarter. This dynamic contributed to revenue and adjusted EBITDA, exceeding the high end of our outlook, excluding the increased insurance reserves. But we know high prime time can hurt conversion and is not healthy over time. Going forward, we're prioritizing competitive service levels to maximize long-term growth and retention. Next, I'm going to address our Q1 guidance. There are three factors putting pressure on both revenue and adjusted EBITDA relative to Q4. First, seasonality. As we've shared before, our business faces pressures in the first quarter of the year, both in terms of ride share as well as bikes and scooters related to colder weather. Second, prime time is coming down dramatically quarter-over-quarter because of increased driver supply. This reduction in prime time is good for our service levels, but will reduce our Q1 revenue and adjusted EBITDA. Third, base price. In January, we slightly reduced base pricing to remain competitive with the industry. Given the combination of these factors, we anticipate Q1 revenues of roughly $975 million, relative to Q4, this is a decline of approximately $200 million. About one third of the sequential decline is due to seasonality, while the remainder is due to less prime time and lower base prices. We expect this will result in Q1 adjusted EBITDA between $5 million and $15 million. This is obviously not the level of growth or profitability we are aiming for or capable of, and we are laser focused on driving additional growth and managing costs. Relative to three months ago, the competitive dynamics changed. And the better marketplace balance we see today creates significant opportunities for long term growth. To take advantage of this opportunity and grow the market, we must prioritize competitive service levels. This will impact our 2024 adjusted EBITDA and free cash flow targets. We are assessing the impacts of these changes and are actively reviewing adjustments to the business, including cost cutting measures. We will share additional long term margin targets in the near future. Stepping back, the fundamentals of the business are strong. We're seeing healthy rider demand, and our driver supply position has significantly improved. We believe these conditions, paired with cost cuts, will ultimately enable us to build of a larger healthier business. Thank you, Logan, and good afternoon, everybody. To begin, I want to note that unless otherwise indicated, all income statement measures are non-GAAP and exclude stock-based compensation and other select items as detailed in our earnings release. A reconciliation of historical GAAP to non-GAAP results is available on our Investor Relations website and may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC. Excluding the action we took to strengthen our insurance reserves, our Q4 financial results beat our guidance. This reflects a combination of strong ride share demand, improving supply, and good early progress on our cost reduction. In Q4, we reported record revenue of $1,175 million, up 12% sequentially and 21% year-over-year. This was the highest quarterly revenue in Lyft's history, and it exceeded the top end of guidance of $1,165 million. As Logan mentioned, our Q4 results reflect our marketplace dynamics, including elevated prime time. For full year 2022, our revenue reached a new high of $4,095 million, up 28% versus full year 2021. We had 20.4 million active riders in Q4. Active riders grew slightly quarter-over-quarter and 9% versus Q4 of 2021. Within active riders, the sequential increase in rideshare riders more than offset reduced use of our bikes and scooters in the colder weather, and revenue per active rider reached a new high of $57.72, up 11% sequentially and year-over-year reflecting more prime time and longer rides. As Logan mentioned, we are now including insurance reserve adjustments for prior periods in our definition of contribution and adjusted EBITDA. Let me talk about why we are making this change and the impact. In December, the SEC updated its guidance related to non-GAAP measures, which applies to all public companies. Subsequent to this change and following consultation with the SEC, we have aligned our disclosures. To be clear, we are not required to restate our historical financials. We've already disclosed when we've had reserve adjustments for prior periods and the amounts. These disclosures are not changing. What is changing is we are now including these figures in our non-GAAP financial measures. We will also speak to past periods on a comparable basis. In Q4, we strengthened our insurance reserves by $375 million. This is at the high end of management's estimate of our potential exposure to past claims in light of past volatility, we believe this action will have the benefit of reducing the risk of insurance related volatility going forward. We reported Q4 contribution of $414.7 million, including $225 million of the reserve increase just discussed. Excluding this item and relative to our guidance, Q4 contribution was $639.7 million and contribution margin as a percentage of revenue was 54.4%, which is 290 basis points better than our outlook. Outperformance versus guidance was driven by rideshare. Let's move to non-GAAP operating expenses below cost of revenue in Q4. Each line reflects savings from the cost reduction initiatives we began implementing in November in addition to leverage from a higher top line. Operations and support expense was $95.1 million. As a percentage of revenue, operations and support was 8.1%, down roughly 250 basis points from Q3 and 260 basis points from Q4 ’21. Sequentially, in addition to the impact of cost savings initiatives, the decline in operations and support expense reflects seasonally less bike and scooter support. These modes typically have peak usage and support in Q3, which declines in Q4 and further in Q1 along with winter weather. R&D expense was $103.5 million, as a percentage of revenue, R&D was 8.8%, down roughly 140 basis points sequentially and 150 basis points year-over-year. Sales and marketing were $114.4 million, as a percentage of revenue, sales and marketing was 9.7%, down 150 basis points from Q3 and 190 basis points from Q4 of ‘21. Within sales and marketing, incentives were 2% of revenue. We reported G&A expense of $379 million, this includes $150 million of the $375 million insurance reserve increase that I discussed earlier, and it's related to certain insurance costs that are generally not required under T&C regulations. Excluding the impact of this action and relative to our outlook, G&A was $229 million in Q4, which is 19.5% of revenue, down 110 basis points from Q3 and 280 basis points from Q4 of ‘21. Let me provide an update on our cost reduction initiatives. In November, we spoke to this work in detail and shared our expectation that it would result in roughly $350 million of annualized savings when fully in place. We achieved $50 million of these savings between Q2 and Q3 of 2022 related to OpEx. In Q4, these initiatives resulted in incremental OpEx savings of roughly $20 million, sequentially reflective of a partial quarter impact of the reduction in force. In Q1, we expect to realize an additional $40 million in savings versus Q4 ’22. In Q4, we reported an adjusted EBITDA loss of $248.3 million, including the $375 million insurance reserve adjustment. Excluding this impact, we generated positive adjusted EBITDA of $126.7 million, which beat the top end of guidance of $100 million. We ended Q4 ‘22 with unrestricted cash, cash equivalents and short-term investments of $1.8 billion, in line with the level at the end of Q3 ‘22. Before I move to our outlook, it's important to note that macroeconomic factors are impossible to predict with any certainty. Future conditions can change rapidly and affect our results. Now, let me talk about Q1. As Logan mentioned, there are three key factors affecting our outlook relative to Q4. First, seasonality, we tend to see a different mix of rideshare. For example, shorter rides and fewer airport trips. And cold weather means bike and scooter usage is always lowest in Q 1. Second, rapidly improving supply conditions are resulting in less prime time. This is ultimately good for our service levels, but will reduce our revenue and adjusted EBITDA in Q1. And third, base price. We slightly reduced base pricing to remain competitive with the industry. Given these factors, we expect Q1 revenue of approximately $975 million which is down 17% sequentially. We anticipate roughly six percentage points of the decline will be driven seasonality with the remainder related to decreased prime time and pricing. Our Q1 revenue guidance implies year-over-year growth of 11%, driven by growth in rideshare rides. In terms of profitability, we expect contribution margin of roughly 47%, reflecting lower prime time in prices. We therefore expect adjusted EBITDA will be between $5 million and $15 million. The sequential revenue decline of $200 million translates into a sequential adjusted EBITDA decline of roughly $157 million at a midpoint of our guidance range. The decline in prime time and base prices flows directly to the bottom line, with the remainder driven by the seasonal component. This impact is partly offset by $40 million in incremental OpEx savings in Q1 from the cost reduction initiatives we began implementing last quarter. As Logan mentioned, and I want to reiterate, our profitability in Q1 is a consequence of the dynamics we are facing, and we are taking immediate action to improve our future financial results. We are looking very closely at our fixed and variable costs to ensure we are operating a durable and profitable model. We are looking for opportunities to significantly cut costs and drive efficiencies. As one example, let me speak to stock-based compensation expense. Our current plans are to reduce this expense to approximately $400 million in fiscal year 2024 through measures such as our previously announced headcount reduction and shifting more of our employee base to international locations. We expect stock-based compensation will vary, but generally come down quarter-to-quarter as we progress towards this target. To conclude, we are facing near term financial headwinds driven by current market conditions. However, with more demand and better supply and a healthier marketplace overall, we can build a much larger business. This, in combination with the cost actions we are taking, will position us to deliver strong shareholder returns. Thanks, Elaine. We have three key business initiatives this year, each of which aligns with our strategy to deliver our competitive service levels and capture more demand. First, strengthen our marketplace technology to drive improvements in price and ETA. Second, deliver more value to a growing population of Lyft loyal riders and third, create more opportunities for consistent and transparent driver earnings. I'm going to speak to some of the work we've done to execute on these initiatives already. Lyft Maps continues to be a great example of how we're differentiating and strengthening our marketplace technology. Today, over 60% of our rideshare rides are powered by our in-house mapping and navigation, which is up from less than 1% a year ago. With this foundational work in place, we can accelerate the pace of innovation across our network. It's the reason why we were the first to market to integrate our driver app with CarPlay and with Android Auto, which has been incredibly well received by the driver community. I got to drive on New Year's, and I can see why almost two thirds of drivers who Lyft Maps through Apple's CarPlay stick with it as their primary navigation experience. It's a big win for the driver to have turn by turn directions on the in car or display, and also creates nice route visibility for the rider. Next, I'm going to touch on our partnerships, which give riders more reasons to use Lyft and directly impacts their loyalty and frequency. Our Chase partnership is important. In Q4, we expanded our relationship with Chase, giving their millions of card members access to Lyft Pink and to accelerated points or cashback when they use Lyft through 2024. With this partnership, we can introduce millions of people to Pink, increase our touch points with business travelers, and capture more high value rides. We've also expanded our travel loyalty integrations with the addition of Alaska Airlines. We're thrilled to offer Lyft riders an easy way to earn miles when they link their Alaska loyalty accounts. Based on our experience with similar relationships, riders with linked accounts take on average up to 20% more rideshare rides with Lyft than those with non-linked accounts. For drivers, we're doubling down on initiatives that increase preference. As Logan mentioned, upfront info is now available on 100% of rideshare rides on our network. This is one of the biggest changes we've ever made to the driver experience, and it has been incredibly well received, resulting in a meaningful increase in the time drivers spend using Lyft. In addition, last fall we began rolling out our Stay Nearby filter, which gives drivers the ability to stay in a particular region, and the feedback has been incredibly positive. Innovations like these can have a significant impact on drivers' satisfaction and engagement. We are also working to make owning an AV and driving it on Lyft more affordable and convenient. Lyft drivers can now access charging discounts at EVgo stations, with gold and platinum drivers getting as much as 45% off in certain markets. We've also made it much easier to install a level two in-home charger by partnering with Wallbox to offer a Lyft specific discount on the hardware, along with pre-negotiated rates on installation. Given the high utilization Lyft drivers have of their vehicle, driving an electric vehicle can help increase their take home earnings. We'll continue building on this work to support drivers as they shift to electric vehicles. The team's various innovations and partnerships enhance the value of the Lyft network, position us to deliver better service levels, and ultimately capture a larger portion of consumers transportation spend. I'm grateful to the entire team for their continued hard work and look forward to the road ahead in 2023. Operator, we're now ready to take questions. Thanks so much for taking the questions. I was hoping you could just talk a little bit more about how the competitive environment has changed in the past three months. And just when you talk about 1Q dynamics and current market conditions, isn't this more of a return to normalcy in a healthier marketplace? Trying to understand the impact on prime time and base prices. And perhaps, I guess, a return to normalcy in that healthier marketplace maybe was not anticipated in your 2024 targets. If you could just flesh that out more. And then on the 1Q EBITDA of $5 million to $15 million, is there anything contemplated there in terms of reserves that we should be thinking about, or is that a clean number? Thanks. Sure. Thanks for the question. I'll pass the second part of the reserves Q1 EBITDA to Elaine after. But, yes, as you mentioned, the marketplace is much healthier, much more imbalance than it's been for several years. And this is a very good thing. The primary thing that has changed, and I will say it happened more rapidly than expected, is the supply side. So the supply side has come back in a very meaningful way, as we talked about already on the call, some top metrics on the supply side in nearly three years. So this is very good for our riders. This is a good thing. What is happening with the guidance, obviously, seasonality, which is expected in our business, both rideshare and bikes, but also price with that extreme improvement in supply, you have a lot less prime time. And so therefore, for price comes down. And then the last point I want to make is that there is a difference in timing with insurance renewals, and it's important to us to not wait for any of that to rationalize and to be smart about ensuring competitive service levels. Elaine, do you want to take the second portion? Yes. In terms of your question about adverse, we believe that having taken the reserve that we took in Q4, we are very well reserved and that reserve is appropriate. We are not anticipating any incremental adverse development at this stage, and we do not have any forecasted in Q1. We feel like the reserve we have is ample. Okay, thank you. I guess similar question to Doug's. In terms of the first quarter guidance, I guess the sequential decline that's implied here seems to be much larger than last year and even the step down in volume due to the pandemic. So is there sort of any other, I guess, accentuated seasonality factors that we should be thinking about? And can you help reconcile, I don't know, you're talking about sort of extreme improvement in price, and so I would be hoping that you would see an extreme improvement in demand also, because I think you're calling out sort of a healthy demand environment. So I guess what is happening from a ride frequency perspective, from an active rider perspective. Thanks. Yes, this is Logan. So in terms of seasonality, I think we've seen fairly typical seasonality effects and that accounted for roughly a third of the decrease, so that was baked in and not unexpected. I think the part that we talked about, that John just talked about, the reduction in prime time was much larger than anticipated. And I think that's a great thing for the business. We've been coming off of extremely tight labor market, still tracking the unemployment numbers. It's not showing up in the public numbers that there's any softening. But we have seen real softening in Q1. And so that shift, I think, is very healthy, but has and had a significant quarter-over-quarter impact. And then the other kind of key piece on insurance is we had previously increased base prices in Q4, right? This is not prime time. This is just the base fare. And in January, the competition reduced their prices as they eliminated the fuel surcharge. So we rolled back our base price increase to ensure that we had competitive pricing in the market. But the bottom line is that puts margin pressure on Q1, as you can see in the guidance. And then you asked a bit about, I think, active riders. We're happy to see quarter-over-quarter that tick up. And the increase on active riders on the rideshare side was large enough to account for what is typically a sharp decrease on the bike and scooter side because you have obviously snow and cold weather. Thanks for the questions. Okay, I'm going to get away from the quarter and just talk about big picture issues like or ask about big picture issues like regulation. So, two things in particular, New York City and then Prop 22 in California. What's the latest thoughts on handling those risks? Thank you. Cool. So in California, the Attorney General, along with the Protect App Based Drivers and Services Coalition, of which we're part of both that group and the AG, appealed the Superior Court's ruling against Prop 22, which you probably know, oral arguments were in December, and they basically have until mid-March to issue a decision. Regardless of which way the ruling goes, the next step is likely an appeal by either side to the California Supreme Court. That could then take a few months to even over a year, depending on whether the Supreme Court accepts that review. Although you didn't ask about it, in Washington State, there was a historic milestone last year where a new law was signed that did protect the independent contractor plus model. It's the model preferred by driver and notably, a labor organization. And elected officials, along with the companies, listened to drivers and work together to pass the bill. In New York, a classification bill does not seem to be a priority for either the legislature or governor this session, which ends in June. So we're focused on building the relationships and engaging the driver community to lay some groundwork for potential movement on that in 2024. Hi, there. Thanks for taking my question. So in the press release, you talk about reinforcing the competitive position. Do you expect to be stepping up promotional intensity across the business here for drivers or riders? And how should we think about, I guess, the structural level of growth spends for Lyft going forward? And how do you think about balancing your ambitions on growth and needing to spend for growth with the objectives that you have on free cash flow and EBITDA? Thank you. Sure. The balance is important. I think the largest point just to emphasize is what Logan said and kind of what we talked about the changes in impact over the last quarter. Number one, very positively, for the first time in approximately three years, the supply side has come basically into balance with demand. And it really feels like the pandemic is behind us. That was the biggest limiter over these past few years to growth. So there's pent-up demand, particularly at peak times, such that we don't need to necessarily coupon to get that demand. Our focus on growth will be on Pink, which is our membership program, which focuses on our most loyal users. And we're happy with the progress we've made there. We've actually doubled our Pink members in Q4 and recently launched a partnership with Chase. So we think partnerships are a smart and efficient way to lean into growth now that the marketplace is in balance. Chase is the top card issuer in the country. And now all Chase Sapphire Reserve cardholders receive two years of free link Lyft Pink. And that scaling of Lyft Pink is an important priority. And so the individuals who have signed up for Pink are seeing about $29 a month value from the program that they're paying just about $9.99 for. So I'd say that's the most important area of growth in the years ahead, and we're excited about that. Thanks so much for taking the question. Maybe I'll ask a multi parter just on relative market share and where you have most exposure. You've talked a fair bit about the West Coast, and obviously there's been elements of a slower return to work in the West Coast of the US. And now we're seeing layoffs and maybe some reduced benefits inside companies on the West Coast. Can you talk a little bit about the recovery trajectory you're seeing in some of your key cities on the West Coast and how some of the cost saving measures might be acting as a bit of a headwind as you think about how the arc of the recovery traject into Q1 in the first half of the year? Yes, absolutely. So in in Q4, the West Coast broadly was 60% recovered versus Q4 at ‘19. So it is still way behind in comparison, the East Coast was much stronger. If you look at a city like New York, it's more than 100% recovered, even on a rides basis. So we've seen general all the kind of typical use cases start to return. One kind of notable callout is that travel has been incredibly strong across the board. We think for the West Coast, one of the things holding it back had been supplying levels. So we do expect that as we see this broader national easing of pressure on the supply side of the market, that that's going to really benefit service levels on the West Coast. And then we think it's probably just going to take a little bit more time for the West Coast to get back to normal. And then since you asked a little bit about kind of company spend and how that affects us, I just want to comment on our enterprise business. We call Lyft business. We have a few different segments enterprise universities and healthcare. On enterprise, we're continuing to see that actually pick up. We're seeing the return of large events and conferences and Lyft, what we call Lyft business managed bookings grew by more than 60% year-over-year. We have some new offerings like Lyft Pass and Concierge. And then we're going to keep leaning in. We think that's a really nice margin opportunity and growth opportunity. We also, as I mentioned, have health care in our enterprise business. We're seeing great traction. Healthcare bookings in Q4 were 92% higher than the level of Q4 2019. And so that business is scaling nicely and there's actually more markets being authorized from a regulatory perspective to use our services, which expands the addressable market for healthcare. And then last I mentioned universities. We have over 200 partnerships with universities and colleges that give students access to all our products and we're seeing them back to school fully in October. And that Q4 was our university partnership's biggest quarter of the year, with bookings up nearly 50% year-over-year. Thanks for taking my questions. I have a couple, one just of a historical look back. I was just wondering, so we can sort of better understand the competitive dynamics, can you help us better understand a little bit how quickly trips or bookings growth in the core ride share business, how did that progress throughout the course of ‘22 or even a full year number just so we can sort of compare that to the overall industry trips or bookings? And the second one, I know in the past you've talked about sort of growing in line with the industry, et cetera. I know you're making some price adjustments now. Logan, how do you think about other sort of big picture adjustments you might have to make to the platform just to ensure that you can grow at those previous rates you spoke about called six, nine months ago. Thanks. So on the first question, we saw mid-20s growth for the year on the kind of overall bookings. Can you repeat the second part of your question or Logan, did you get that? Yes. I think you were asking what are the other investments we're making in the platform? The foundational investment is on service levels. We have a very loyal group of riders and drivers who prefer Lyft, and we need to make sure that we show up for them with competitive price and ETA for our riders and competitive pay for our drivers. That's kind of first and foremost. The second big area of investment that John mentioned is Lyft Pink. So we're very happy with the growth that we've seen. That program doubling just in Q4 alone. The great Chase partnership and the increasing suite of benefits that we've put behind Lyft Pink, I think make it hands down the best transportation membership program out there, and we're going to keep pushing to make sure that it remains in that position. Great, thanks. So you mentioned this is following up there on Lyft Pink. You were mentioning earlier that it's a great value. You pay $9.99, but you get $29 in value. How do you assess the economic impact then to Lyft? At the, in the early stages of a membership, I guess, lifecycle, presumably the economics aren't quite as favorable for you. How do you sort of calculate how long it takes to earn back what you're presumably giving away at the outset? So just to be clear that the $29 doesn't mean that we're, the individuals paying $9.99 and we're -- we have costs of $29. It means that the value they get from the program on things that we may have a large margin on is $29. We are running the program profitably. We look at two main metrics for Lyft Pink. One is incrementality when a person has Lyft Pink verse doesn't. They ride more with Lyft, and every ride more they take with us is incremental profit for us. And we look at retention on a month over month basis, and we're seeing industry level retention for these types of membership programs. So, again, we are running the program profitably, and still users are able to get that type of value. Okay, great. And then one last one here on just on stock-based comp. You mentioned that 2024 target, which is helpful. Thanks very much for that. I'm curious to hear how you're getting to that. Are you focusing on attrition? Are you just talking about SPC being a lower percentage of people's comp in general? What's your strategy for driving that lower? Thanks. Yes, there's two main things. One is that we did the reduction enforce last year, late last year. So that's accounted for in that new target. And also there's been a shift on some of our talent to international markets where your second point is more the case that individuals are primarily making cash, not equity. Hey, thanks for taking my questions. I just wanted to start with the first quarter guidance assumes that you're going to need to see a ramp and incremental margin to get towards the $1,024 million EBITDA. Can you just walk, talk about how you can balance your competitive positioning and EBITDA margin over time and if there's anything about the first quarter that's causing sort of transitory headwinds to profitability. And also want to ask quickly going back to sort of regulation, I believe in New York City, there is a proposed rideshare wage increase that recently announced. Maybe you could just talk about how are you thinking about that and if you believe you can sort of just price that through. Thanks. Yes, so I think, the most kind of important piece to understand as what we talked about before which is the timing of entrance renewal. And the significance that has had on our Q1 margin. I think if you look back at our earlier margins, Q2, Q3 last year that’s probably more instructive of a typical place for them to operate. But the market place dynamics have changed, the competitive environment is different and so we are stepping back and reassessing at this moment. On New York, you had ask about kind of the potential for pricing change, we are not party in that litigation that’s ongoing. If there is any pricing change it would at the industry level and so would be pass through. Hi, thanks for taking my question. I just said one. It's obviously been a very dynamic environment that you're dealing with over the last couple years. Based on what you know today, including the recent change in base pricing, how do we think about your expectations for what kind of driver supply you would like to bring on? What kind of ridership growth do you think is reasonable to assume? What is the normal pace of pricing decline going forward? How does the market place look to you from those aspects, say over the next 12-months? Thanks. Yes, broadly we expect demand growth has been healthy, I think we saw in the back half of last year and continue to see healthy demand. And they kind of most notable changes is the real acceleration in driver supply. So I think it's hard for us to, project out much further, but I think a lot of that kind of pandemic related swings are now behind us. And we're going to be in more of a healthy steady state growth where it looks like supply growth, we'll be able to track with demand growth going forward. Yes, just to emphasize that point. It's like Logan said, like much more stable growth for us. And, as you mentioned, like the swings that we saw over the past few years, are much more costly and difficult to manage through. And so happy to see more of that stability on the horizon. I guess, just a follow up real quick on that. I guess you don't want to put hard numbers on it, which I understand. But do we look back at what the pre-COVID business model looks like? Or are there distinct changes now when we think about pricing, or I know the technology is advanced, et cetera? Is there anything you would say, alright, this is a major change in how you look at the business versus COVID. Because of x, y, z. I think the major change structurally was just, the highest variable costs insurance, went up. And again, that's going up for everyone in the industry, that's the most material change. Other than that, I'd say our tools have gotten better, because we've had to manage those extreme swings, primarily from like a year plus ago. So we built all these tools for oversupply under supply that we're continuing to refine and use, on a market-by-market basis. But in general, the only major structural difference is the higher insurance. Yes, I had a question about the gain on sale and disposal of assets. I think it was about $61 million in ’22, am I right to assume that's all coming from sale of flex cars at kind of above carrying value. And does that flow through the new definition or the old definition of EBITDA? And how does this kind of fall in used car prices? How does it change the opportunity to continue to kind of monetize that fleet going forward? Thanks. Yes, largely that does reflect the remarketing of vehicles. And in this quarter-on-quarter, we project a modest decline related to that. And we continue to see that as an opportunity in our business as we all fleet vehicles to continue to put them for sale in the aftermarket. Okay, does that I mean, is that the core operating federate business? Something you guys are still see as an attractive business to provide your supplier or is it a function of, hey, we don't -- that supply comes back. We don't need that as much and so we can kind of offload some of the vehicles. I said still attractive because the individuals that use Express Drive, drive many hours and so it's a great high-quality lever for that type of supply. And the fleet remarketing is a steady state part of the business. there' very kind of subtle timing adjustments that we make. But that'll be an evergreen aspect of the business. Great. Hey, guys, thanks for taking the question. And really sorry, these are asked before just jumping on a couple of calls. But just trying to understand what is prompting this base price change? I know, you mentioned competition, removing fuel surcharge, are you seeing kind of demand sensitivity or market share loss due to this? And then how does this translate into driver earning sounds like you're absorbing something in [inaudible] now, but how confident are you that this is kind of a onetime adjustment and not a steady erosion in unit economics that happens going forward. Thanks so much. Sure. So on base price, just to kind of repeat what we've gone through in Q4, insurance prices went up significantly. We made a base price increase at that moment in the beginning of January, we saw our competition removed their fuel surcharge, which was a price, base price decrease. We know from years of operating in the market that riders are sensitive to price and ETA, those are the kind of the basics of service levels. So it's critical for us to maintain a competitive position. And we did so, right. First and foremost, we are always prioritizing competitive service levels that is critical for us. And we also know that we have different timing for insurance renewal, right, the majority of ours was renewed October 1. And so that is having a unique impact on Q1. What was the – Yes, I was just curious how should we think about the driver earnings in this context? And whether this is something that, is a onetime adjustment or has the potential to happen multiple times through the year? Yes, so the rider pricing is not directly connected to driver pricing. So the base price decrease is for riders. So there's no direct impact on drivers with that change, except for more sort of top line, more demand flowing through the system. So bottom line, it's always healthy for the business and healthy for drivers for us to stay competitive in the market. Any other questions? Did we get yours? Great, thanks, two questions. On Lyft, on Pink, what was the big driver of the doubling of sales in the fourth quarter? And any way to kind of quantify sub stand as a percent of revenue or bookings or the Pink subs plan versus non-Pink subs? And the second question on driver supply. What was the big driver of the increasing supply? Was it just macro? And it kind of went did it happen? Like you start to see it happen in 4Q or early part of 1Q? Any help there would be great. Thanks. Sure, thanks, John. So on Pink only towards, I'd say in early second half of last year did we kind of really relaxed that with the lower $9.99 price, which was obviously material and getting more interest versus $19.99 program, we adjusted the benefits as well to make that make financial sense. And as I said, with an earlier question, we run that program profitably. Some of the main things that we did, as we went into kind of Q4 is that we put more in app messaging just simply about the program as we got really confident in the retention levels, that we were seeing that again, or at industry levels for that type of membership program. At that point, we and when we saw that, we could do it profitably while driving $29 on average of value to the rider. We wanted to talk more about it with our users simply so we added more in app messaging, where it made sense and it worked. So that was the primary thing. You also asked about how we, or if we can share kind of as a percent of maybe bookings or something revenue, we do track that. And that is one of our internal targets for yearend that we are focused on, we're not sharing that externally at this time. And then I think your last question was around supply, and kind of why is that happening? And I would say it is broadly macro. For us supply was impacted dramatically by the pandemic, and important for drivers is consistency of earnings. And now that we're out of the pandemic, and the rideshare industry has moved past that there's consistent earnings. And so as a macro level, it's come back, it started coming back towards the end of the year, but really, I'd say, is Q1. Great, thanks for the question. So circling back on that 1Q guide, guy. Can you help us understand what's embedded from an incentive level or contra standpoint? Since driver supply levels are so strong? And then I just want to follow up on the 2024 EBITDA guide. I mean, I guess the question is, why are you reevaluating this early? It seems like that the issues that you're mentioning are really near-term challenges. So what's exactly changed over the last three months that you're rethinking the longer-term outlook. Thank you. Yes, so let me take that first. And then then pass it to Elaine for your question about contra. And so as Logan mentioned, there was a change in base price that we made. But then, as competition removed their fuel surcharge, we needed to ensure we had competitive service levels. We just want to ensure we prioritize that, that's critical in this really good opportunity that exists right now, where the market is finally back in balance, we want to ensure we make it really easy for people to choose Lyft. And so that is the priority obviously, we want to do that profitably. And we want to just because there was quite a bit of changes over the past few months. We want to share our go forward with a little bit more information and confidence. And then Elaine you want to take contra. Yes, in terms of Contra, just to set a little context in absolute terms in Q4 incentives in contra revenue were $337 million, which was up 17% versus Q3 flat year-on-year and still below the prior peak. But as we look to Q1 with the tailwinds, we're seeing to supply we expect contra revenue incentives will be down quarter-on-quarter, both in absolute terms and on a per ride basis. And this reflects the benefit from the organic supply tailwinds. However, the extent of our investment will always depend on the real time market conditions and supply demand balance. Thank you. That is all the time we have for questions today. I will now turn the call back to Logan Green for closing remarks.

EarningCall_50

Good morning. Thank you for attending today's EngageSmart Fourth Quarter and Fiscal Year 2022 Earnings Call. My name is Todd, and I will be your moderator today. [Operator instructions] During this call, we will be discussing certain forward-looking information. Actual results could differ materially from those contemplated by these forward-looking statements. Please refer to the Risk Factors section of our annual report on Form 10-K and other SEC filings for more information on the risks regarding these forward-looking statements and risk factors associated with our business. All metrics discussed during this call are non-GAAP unless otherwise noted. A reconciliation of non-GAAP metrics to the nearest GAAP metric as well as statements regarding why management believes these measures provide useful information can be found in our earnings press release and supplemental presentation, both of which are available on the Investor Relations section of our website. Thanks, Josh. Good morning everyone. And thank you for joining us on our fourth quarter and fiscal 2022 earnings call today. Fiscal 2022 was truly a phenomenal year for EngageSmart. We delivered record annual revenue of $303.9 million, representing 41% year-over-year growth, all organic. We also reported record annual adjusted EBITDA of $49.3 million or 16.2% of revenue for the year. Our excellent results reflect the strength of EngageSmart’s business model, which is characterized by our which is characterized by our proven customer-led strategy, our deep vertical expertise, our strategic alliances, and our highly motivated team. I'd like to thank our teammates for their strong passion and outstanding work throughout 2022, never wavering from their commitment to excellence for our customers. The fourth quarter and fiscal 2022 were marked by robust demand, favorable secular trends, and continued execution across our business segments as we drove product innovation and extended our market leadership. We entered 2023 from a position of strength, our dedication to simplifying customer and client engagement is resonating with the market, our products are gaining market share and we are expanding our footprint across all verticals. Before Cassandra dives deeper into the details of our financial performance and our outlook for 2023, I'd like to share some 2022 highlights. Our SMB segment is uniquely positioned to help address the shortage of mental health professionals and the high demand for care. SMB achieved outstanding revenue growth of 52% in 2022, driven by new customer adds, a favorable mix in subscriptions, the successful pricing and packaging changes that we implemented in Q1 of 2022 and our strength and transactions processed. We continue to see strong traction in mental health and are excited about our opportunity to drive growth and expand with group practices in 2023. Our Enterprise segment benefits from systemic, long-term, tailwinds, stemming from the need for organizations to digitize their operations. Enterprise delivered annual revenue growth of 29% fueled by customer go-lives and high digital and paperless adoption with existing customers. To provide more color on our strong results in the SMB segment, we continue to experience high demand for our SimplePractice solution, particularly in our core mental health vertical. The mental health market is characterized by a shortage of professionals coupled with an increasing demand for care due to a high prevalence of mental health disorders. SimplePractice designed to simplify administrative functions addresses those challenges by enabling practitioners to focus on what is most important to them, treating more patients with a network of over 160,000 mental health and wellness practitioners, SimplePractice helps many therapy seekers take their critical first steps, find the best provider, get in contact with that provider and successfully book an appointment, and we continuously evolve our offering with new features and functionalities that add value for our customers. Most recently, we launched our new Client app, which allows our practitioners to use their smartphone for scheduling, note taking, messaging, billing, and more. Monarch and SimplePractice Enterprise are extensions of our efforts to make care more accessible and to enable our practitioners to focus on what they do best, treating patients. Both Monarch and SimplePractice Enterprise, leverage our extensive customer base of over 160,000 practitioners. Monarch is a consumer facing website found at meetmonarch.com that enables a digital method for practitioners and patients to connect. It simplifies the process of finding and accepting new patients. It also builds the foundation for SimplePractice Enterprise, our B2B offering for employee assistance programs, EAPs and managed care organizations, MCOs. Our network of practitioners is particularly valuable to these organizations as they frequently struggle to match patients to therapists in a timely fashion. By enabling easy scheduling with SimplePractice for providers who are already within an EAP or MCO network, we help speed up that process. We recently signed our largest SimplePractice enterprise deal to date and have a robust pipeline of opportunities. We look forward to exploring the potential contribution to our SimplePractice flywheel as we partner with EAPs and MCOs to capture in-network providers who do not yet use SimplePractice In mental health we are excited also about the opportunity with group practices. In 2023 we are prioritizing this market segment with our product roadmap to expand on the efficiency SimplePractice creates for groups. By further enhancing the value we bring to groups, we believe we can attract new practices and enable our customers to grow their practices by adding more practitioners. Revenue cycle management is also an opportunity for SimplePractice. Insurance billing is difficult to manage for small practices and getting paid is a key challenge for our practitioners. This complexity is often a deterrent to our customers accepting insurance, which can lead to access and affordability issues for patients. We are prioritizing roadmap items to accommodate revenue cycle management and believe we can support our customers in better managing collections and maximizing reimbursement rates. Ultimately, we hope to increase financial transparency for our customers by helping simplify yet another administrative task. Finally, we continue to see a large addressable market opportunity with new verticals and plan to enhance specific features and functionality in the future to continue to drive value for our customers. In addition to product innovation, we continue to invest in marketing to drive a conflict. Word of mouth referrals are our most efficient marketing channel, particularly as we rapidly grow our referral base each quarter. At the same time, we are seeing great traction with our investments in digital marketing, which enables us to broaden our brand awareness beyond existing customers and their network. Now turning to our Enterprise segment, our strong results are driven by customer go-lives across all verticals, fueled by our partner-assisted selling motion, as well as record digital adoption with existing customers. Our verticals, Utilities, Financial Services, Government, Enterprise Healthcare and Giving are characterized by broad usage of legacy systems, many of which are outdated, expensive to maintain and time consuming to update. That's why many billers struggle with high operating costs, fail to meet consumer demand for digital experiences and often resist the idea of implementing new systems that is until they meet with us. Our core value proposition is driving superior rates of digital adoption by enabling a modern user experience, a wide variety of payment methods and omnichannel capabilities, ultimately increasing cost saving behaviors. We combine a modern commerce experience with engagement capabilities that are specific to the needs of our customers. Automated reminders, emails, text messages, and personalized bill pay capabilities, and we achieve all that through tight integrations with our billers, customer information systems or CISs. Our approach allows our billers to offer a modern billing and payments platform without the time consuming process to upgrade the CIS, while extending the useful life of their original solutions, and that's why we win. In the fourth quarter and throughout 2022, we saw great momentum in all verticals as we continue to realize efficiencies in deals where we have existing integration. We recorded several notable customer launches and utilities, including the City of Port St. Lucie Florida. In insurance we launched Phase 1 of the go-live process with our largest insurance client. And in tax we went live with several new clients including Union County, North Carolina. In addition, we drove record adoption with existing customers in all verticals. Our ability to quickly achieve results is highly valued by our new billers such as Truckee Meadows Water Authority in Nevada and EmPRO, a medical professional insurance carrier based in New York. Within a year of implementing InvoiceCloud, Truckee Meadows increased AutoPay adoption by 22%, decreased mail-in payments by 20% and achieved $175,000 in annual operational efficiencies. EmPRO saw a 211% increase in electronic payment adoption in the first year as well as a 7x increase in AutoPay adoption. Increasing AutoPay adoption is a key value proposition for our insurance clients as more customers automatically renew their policies. We focus not only on driving digital adoption, but also paperless adoption. In the fourth quarter, we had record levels of paperless adoption and achieved a significant milestone. Approximately half of our customers invoice are sent by us by email, a key step in reducing the use of paper and cost for billers. Soquel Creek Water District in California, for example, recorded a 33% increase in paperless enrollment within one year. The fourth quarter was also a phenomenal bookings quarter for Enterprise. Historically, we have seen an ebb and flow in new bookings due to fluctuations on big deals. In the fourth quarter, we achieved a records booking quarter driven by consistency in the mid-market and several large deals. Notably, we signed two of the four largest deals of 2022 in Q4. Our new customer growth continues to be driven by our strategic alliance go-to-market strategy. In Q4, we formed several new partnerships across verticals and strengthened existing alliances that contribute to our pipeline and extend our market share. In utilities, for example, we launched our FREY Municipal Software alliance, which further opens the mid-size market for us in 27 states. In our high growth insurance vertical, we signed several new customers, including another Guidewire customer, Franklin Mutual Insurance based in New Jersey. And in tax we finalized the integration with DevNet opening county tax markets in Illinois, Missouri and North Carolina. Additionally, we finalized a government procurement partnership that streamlines the buying process for local and county governments. Product innovation remains incredibly important to us as we continue to drive higher value for our customers. Most recently, we launched outbound payments for insurance customers. Approximately half of the payments and insurance are outbound, representing a large opportunity for us and we are quickly gaining traction. In Q4 we closed six outbound payment deals. In summary, we've had a strong fourth quarter and a great year. We continue to drive traction in the market for products that help save labor costs, increased operational efficiency and drive customer satisfaction. We delivered solid results across our vertically tailored SaaS solutions driven by continued customer demand, payer adoption on our platform, and great customer retention. We believe that this is a testament to the strength of our business model and our market leadership position in customer engagement software with integrated payments. Our fourth quarter results again exceeded our revenue and profitability guidance capping off an outstanding year in which we delivered record revenue, net income and adjusted EBITDA. Revenue in 2022 was $303.9 million, representing 41% growth from 2021 and adjusted EBITDA was $49.3 million or 16.2% of revenue. Delivering more than $300 million in revenue as well as a 210 basis point expansion in our adjusted EBITDA margin were important milestones that we achieved in 2022. In 2023, we are focused on driving continued growth in both segments and making product and go-to-market investments that are intended to help us achieve our next midterm milestone of $500 million in revenue, while we continue to expand our margins. For the full year, we expect revenue to be in the range of $380 million and $384 million or revenue growth of approximately 26%. Our revenue guidance implies roughly 30% growth in SMB and 20% growth in enterprise. The drivers of which I will cover in a few moments. For adjusted EBITDA; for the full year we expect to be in the range of $66.5 million and $69 million, which represents an adjusted EBITDA margin of roughly 17.7% or a 150 basis point improvement over fiscal year 2022. While we plan to continue investing in sales and marketing to drive top line growth and R&D to maintain product leadership, we are also committed to expanding margins as we continue to make progress toward our long-term adjusting EBITDA margin goal of 30% or higher. As a result of the outperformance of our business model in 2022, our guidance for revenue and profitability for 2023 is well ahead of our initial expectations from our September 2021 initial public offering. For Q1 of 2023, we expect revenue in the range of $86 million to $87 million, which implies 28% growth year-over-year at the midpoint of our range. We expect adjusted EBITDA in the range of $13.5 million and $14 million, which represents an adjusted EBITDA margin of 15.9% at the midpoint. We continue to see strong cash flow generation with free cash flow of $45.8 million in 2022, taking our cash balance to $311.8 million as of December 31, 2022. In 2023, we expected adjusted EBITDA to free cash flow conversion to moderate to approximately 50% due to higher cash taxes associated with the capitalization of R&D expenses, which is now required for tax purposes under IRC Section 174 coupled with significant utilization of our remaining NOLs in 2022. As you think about 2023, please keep the following in mind. Regarding SMB, we expect to see continued high demand for our SimplePractice Solution in our core mental health vertical fueled by a shortage of practitioners coupled with an increasing need for care. As our practitioners grow their practices and add more SimplePractice seats, they use additional features, purchase higher price packages, and process more payments through our solution. We are excited about the opportunity we see with group practices and our prioritizing features that will make it even easier for our customers to manage multiple practitioners this year. As you recall, we successfully launched our new three tiered pricing and packaging halfway through Q1 of last year. Due to customers migrating earlier than expected and more customers electing our plus package, we exceeded our expectations and drove growth of more than 50% in SimplePractice in 2023. In late Q1 of 2023, we will be increasing the price of our integrated payment processing solution by 20 basis points. This increase will help to offset the higher payment processing and infrastructure costs that we have been incurring and allow us to continue to provide and invest in the seamless experience our customers expect. Now, turning to enterprise. As we move into 2023, we remain highly focused on continued sales and implementation execution to fuel new customer growth. We are beginning to focus on larger deals and believe moving up market is a critical aspect of our future growth. Enterprise delivered strong growth in 2022, driven in part by consistency in the mid-market in the timing of several large go-live at the end of 2021 and the beginning of 2022. While the ebb and flow associated with the timing of go-live will result in moderating revenue growth in 2023. We remain confident in the long-term durability of our enterprise segments, driven by our record bookings quarter and Q4, and a robust pipeline that we believe will continue to fuel strong growth. We are excited about our success interaction in our newer insurance and tax verticals. In 2022 we invested in strategic alliances and signed clients in new states that we believe create long-term tailwinds for additional targets. Our DonorDrive solution is more susceptible to macroeconomic disruption and our guidance assumes a slowdown in revenue growth from fundraising events this year. In terms of seasonality, we expect to see a small step down in Q1 revenue on a sequential basis due to the timing of transactions in Q4 2022 associated with tax billing and invoice cloud, and the concentration of large fundraising events for DonorDrive. Beyond new customer growth, we continue to focus on product innovation and customer experience that enables us to drive superior rates of digital and paperless adoption. We are investing in further simplifying the customer experience by adding functionality that removes friction to drive higher value for our customers. Now, turning to Q4 and full year 2022 results. Total revenue for Q4 was $83.9 million, representing 36% year-over-year growth fueled by growth in customer count and transactions processed. As of the end of Q4 2022, our total customer count surpassed 100,000 to 102,700, a significant milestone for EngageSmart and an increase of 24% over the prior year. Our customer growth continues to be mainly driven by new customer additions from our digital marketing programs and word-of -mouth referrals in our SMB segment. We also delivered strong growth in transactions processed. In Q4 we processed 38.9 million transactions, up from 31.2 million in the year ago quarter, representing 25% growth. We also saw continued strength in our net revenue retention rate, which was 117% for 2022, driven by the pricing and packaging changes in our SMB segment and strong digital payment adoption in our enterprise segment. Our SMB segment continues to perform exceptionally well with fourth quarter revenue coming in at $45.2 million, representing 45% growth year-over-year. Subscription revenue of $33.5 million, grew 58% year-over-year driven by new customer ads and the impact of pricing and packaging changes. Transaction and usage based revenue of $11.5 million grew 21% year-over-year as more transactions were processed on our platform. Our enterprise segment also delivered strong results with reported revenue of $38.7 million, representing 27% year-over-year growth driven by new customer ads and strong digital payment and paperless adoption. Our adjusted gross margin for Q4 of 2022 increased to 79.5% from 77.8% in Q4 of 2021, primarily driven by the results of our SMB pricing and packaging changes. Sales and marketing expenses were $27.5 million, up $6 million. In SMB we continue to test new digital marketing channels to drive new customer acquisition and broaden our brand to create awareness for our solutions in all of the verticals we serve today in enterprise, our investments continue to be on our partner relationships as well as sales headcount to fuel pipeline and bookings growth. R&D expenses came in at $13.8 million, up $4.5 million. In our SMB segment we're investing in features for group practices and revenue cycle management. In our enterprise segment we're investing in features and functionality to continuously improve the experience for our billers and their payers and to accelerate digital adoption in all of our verticals. G&A costs were $12.6 million, up $1.1 million driven by an increase in headcount to support our business growth. Net income was $4.9 million for the quarter compared to a net loss of $0.9 million in the fourth quarter of 2021. Adjusted EBITDA was $13.6 million for the quarter, representing 16.2% margin compared to $6.3 million or 10.2% margin in the fourth quarter of 2021. In summary, we continue to believe we operate in defensive verticals that should remain attractive and vibrant even in an economic downturn. Regarding SMB, the unmet need for mental health treatment is large and widespread. Periods of economic uncertainty can further increase that need for care. In our Enterprise segment the majority of bills are non-discretionary in nature, and the secular trend of digitization remains strong. Overall we believe we are well positioned and remain confident in our ability to continue to deliver profitable growth. Cassandra, tremendous results again, feels a little like Groundhog Day. We founded EngageSmart because activities like paying bills, scheduling appointments, onboarding new patients and client communications shouldn't be that hard. It's great to see our team's efforts bear fruit. Our success is driven by three simple factors: first, our proven customer focused playbook driven by a) players. We are committed to recruiting, retaining and developing top talent. Our momentum is driven by their tremendous work and relentless pursuit of customer satisfaction. Second, product leadership is measured by adoption and retention. We leverage our top talent with deep vertical expertise to put our customers at the center of our decision making, ultimately delivering innovative market leading solutions. Third, our large market and runway. We address a $28 billion U.S. market across all zip codes and have captured about 1% of market share. We continue to invest in our solutions to unlock EngageSmart's full potential and look forward to expanding our footprint across all of our verticals. We remain focused on delighting our customers, growing our business, and creating shareholder value while we make a positive impact in the world. We appreciate you all joining us on this call this morning. Before we begin Q&A, I'd like to take a moment to thank our investors and analysts for the time and insights they provide us as we further EngageSmart and its potential. Your input is incredibly important to us as we work to build long-term shareholder value for this growth company. Thank you very much. The SMB segment, you do lap the price increase in the first quarter, the number of customers you're adding, good trend as you get larger, some deceleration but you're moving up market. Are you getting is the average guest clinicians per customer increasing? Do you expect that to increase or continue to increase? Yes. I mean, we've continued to see growth in the average number of practitioners per practice, Bob, through 2022 as well and I think as you it's kind of steadily moved up over the past few years. Certainly with our pricing and packaging changes, the opportunity with group practices was really highlighted for us, and that is why we are now prioritizing more features specifically for group practices on our roadmap. So, as we deploy those features we do continue to expect more traction there in the group practice segment for us. Got it. Thank you and follow up. Just, I mean, you had mentioned a 20 basis point price increase, but just generally around margins, your margin guidance is solid. You have 30% target long-term margins. How do you think about incremental margins to get to that 30% long-term margin, and then any materiality you can get or the 20 basis point price increase, when is that and what does that mean to revenue? Thank you. Sure. So just taking the pricing first, that will start to take effect in late Q1 here, so March timeframe. And so we'll certainly start to see higher transaction revenue as a result of that leading into Q2. And then on the margin side of things, at least in the near term, a lot of the expansion you're going to see is going to come specifically from G&A. We're starting to really get leverage from our shared services model across all of EngageSmart and as we've made kind of incremental improvements in gross margin in 2023, and we expect that effectively that level of improvement to continue in the medium term as well. So those are the two big areas we're still investing on the engineering side and also investing in our go-to-market market functions to drive long-term growth. Hey guys. Good morning. Nice results this morning. I wanted to ask on the enterprise segment. You mentioned a handful. I think your largest booking quarter in history seems like very strong momentum in the fourth quarter. I guess I'm just trying to kind of marry those comments with the outlook for 20% revenue growth in 2023. Should we be thinking about this as sort of just like an air pocket and implementation timelines? And do you guys have kind of line of sight towards an acceleration of some of these large bookings kind of start to flow into revenue? Thanks for the question, Will. You're thinking about it exactly right? So we did have a really strong bookings quarter in Q4. We do have to implement those deals, so there's a booking – a new booking cycle and an implementation cycle that we have to get through. So the ebb and flow that we see in go-live is really reflected in our guidance for this year. But as we continue to bring the record breaking bookings that we saw in Q4 live, we'll start to see them really positively impact revenue in the future. Got it. That's super helpful. And then I just wondering if you could talk a little bit about penetration rates within just the mental health vertical and SimplePractice. You guys are talking about going up market into group practices. How do you kind of delineate the size of the market in each and kind of where you stand from a penetration perspective? So I mean, we still look at the market holistically. So with SimplePractice still targeting $10 billion TAM with $5 billion of that more longer-term focused on medical specialties, $5 billion on the wellness market that we're serving today. Within the behavioral health portion of the market, which we estimate to be at least $1.2 billion obviously there's a huge concentration of solo practitioners, which we've been very successful at selling into. We're really focused on is slowly moving upmarket, so selling to – still what I would characterize as small group practices, but that's where we've been seeing the biggest traction to date and we'll continue to kind of slowly progress up into larger and larger group practices over time. But, we're not – we're not actively targeting large group practices today, if you will. This is a slow movement upwards. Hey, good morning, Bob, Cassandra and Josh. Nowadays I feel compelled to ask an AI oriented question but I'm not going to do it on this call, okay. The question – the first question I had is related, well, it's a multi-part question related to SimplePractice. First, in terms of, it does sound like there's still some things and I appreciate what you're saying, Cassandra, in terms of it's still opportunistic and it's not the main focus on group practices, but it sounds like there's still some deliverables you all need to provide in terms of product market fit. So could you give us a sense of when that's going to happen? And the second part, I'm intrigued by revenue cycle management. Maybe you could talk about when that could start becoming actionable and what kind of ARPU lift that could provide? And then I had a follow up for Cassandra. Yes. Hey, Terry. So the roadmap for our market expansion, new specialties continues to drive forward. We're definitely gaining traction very significantly with still speech language pathologist and with occupational therapist and a little bit of a – I wouldn't call it a pivot, but an adjustment to accommodate really strong growth we're seeing in group practices, in behavioral health and interdisciplinary type clinician outfits where they've got speech language pathology, occupational therapy and behavioral health, all in the same – in the same group. All of that is happening while we continue to align our product resources into the squads that can attack the chiropractic, physical therapy and some of the other wellness verticals where we still have a little bit of work to do to for a full product market fit. But again, what we continue to see is such strong demand in behavioral health and in the existing, I mean, SLPs are growing really well. So we just want to continue to be supportive of those groups and continue to enhance those groups so that we can continue to get strong customer satisfaction and the word of mouth, viral push towards new trials that drive new customer ads. It did, and I'm unfair because I'm asking a couple questions multipart, it's pretty annoying probably for everyone. But you mentioned revenue cycle management is an opportunity, though. That was the second part of the question in terms of just flushing that out a little bit more and potentially what kind of the impact and timing? Revenue cycle management, we are in trials. We're already in there. We're working to sort of eliminate that administrative burden for many of our practices already today. It's getting traction and we're plowing ahead with it, and it looks very favorable and encouraging to us right now. So that is a – we think a significant opportunity as we move forward to really eliminate the hassles around billing, insurance, claims and all of that by creating appropriate partnerships where we can bring very high visibility to our customers of what's going on with the insurance claims and eliminate the burden of administering to them. So we're in play on that right now going well. That's great. And then Cassandra, my second question was just related to the midpoint of the growth for the full year of 2023 is 26% growth. I mean, you had the product and pricing and packaging that really had a pretty meaningful impact on the SMB in 2022. Is there anything you could share at all about relative growth rates or just to kind of give us some sort of level setting between enterprise and SMB in 2023? Thank you. Sure. Sure. Thanks for the question, Terry. So as it relates to the segments, we expect roughly 30% growth in SMB in 2023 and 20% growth in enterprise. And really as you already highlighted we're going to be working through the compares on the pricing and packaging this year in SMB, so that's a driver of the growth right there. And then on enterprise, we did have several large go-lives at the end of 2021 in the beginning of 2022, that drove really strong growth for us in the prior year. And there's an ebb and flow associated with the timing of these go-lives, so given that we expect enterprise to grow roughly 20% in 2023, Good morning everyone, it's Nick on for Bhavin. Thanks for taking my questions. Looking at SimplePractice Enterprise and Monarch, can you talk a little bit more about how you see the opportunity growing there, going forward? So with SimplePractice Enterprise and Monarch; Bhavin, we see that there's a really strong need for connecting patients in a timely fashion to care. So with Monarch and SimplePractice Enterprise we actually enable these MCOs, Managed Care Organizations and Employee Assistance Programs to directly access data and our base of clinicians to set appointments up online, provide online onboarding for new patient, get visibility into whether or not the session actually happened. Did the patient show up? Did they actually onboard. Visibility into things that they don't have today in a normal – in their normal process? Plus, I mean, think about a picture yourself as an MCO, as a caregiver or somebody that's trying to set up care making 20 phone calls to solo and small group practitioners leaving messages trying to get ahold of somebody so you can align a calendar, they call back, you're on the phone. So all of that goes away with our automation and our online scheduling capabilities. So as we see a really strong need here for – well cost savings with the MCOs and the EAPs that we have, many fewer people that are setting up these appointments because it's all easily handled. And then we see on the other side of that Bob, and a really strong push from these MCOs and EAPs to get all of their customers, all of their non-overlapping clinicians that they refer to today to get onto a SimplePractice platform or onto the SimplePractice platform to ease the ability of scheduling those appointments and then getting the data on the other side of it of whether or not there's proper outcomes that happening from it. So it's all part of connected care, outcome tracking and improving what we think is going to be the long-term capabilities of our customers to treat patients in a timely fashion. Great, thank you. And can you give us, I guess, a little bit more color on how adoption's going kind of outside of sort of the speech and language pathology and occupational therapy verticals and sort of the rest of the wellness space? It continues to grow. I mean, our market expansion is growing more quickly than our – our new markets are growing more quickly than behavioral health, which has been the trend. And it continues to grow aggressively, can't really stop it because the viral word of mouth keeps driving it. We're not trying to stop it obviously, but we are – we're still more focused on groups, SLP and OT for the time being. Nutritionists and dieticians continue to grow well, as just on their own through organic word of mouth. But I think that the traction is good, strong. I would say it's steady. I was looking for some sort of granular help in terms of kind of the build out of the model looking at the SMB side, when we consider sort of the number of locations that are being added per quarter, and then the next part of that is the number of professionals per location. Why do you don't explicitly have has larger pricing like last year in explicit terms, but you sort of have implicit because more people are moving to group, right? So if you could provide any kind of color with regards to how someone like me outside looking in can build out that model, that'd be great? Sure. Thanks. Thanks for the question. In terms of gross customer ads, we see pretty consistent trends that as – consistent with what we saw in 2022 or 2023, really driven by the high demand for mental health treatment and care. So that trend remains strong and we think that will still fuel pretty consistent gross customer ads. We are kind of expecting a slight increase in churn as we work through some of the pricing changes that, that we have planned for this year. So I would say, again very small but largely consistent trends overall with 2022. Again on the gross customer ad side. And then just in terms of group practices, which I know you asked about, I mean, that has been growing pretty consistently and we expect that trend to continue for 2023. Understood. But is there any other granular detail that you can provide with regards to the penetration of group practices in the base or anything like that that would be helpful? I mean, overall we have again, I think, just north of 1.6 practitioners per practice, and that's been up over the past several years from 1.4. So we're focused on kind of that next segment up, if you will, in group practices, think still in the 10 to 20 practitioners, that's where we've been having some good success today, and I think that will be contributing to the growth that we see in 2023, especially as we roll out more features and functionality specific to them, which we expect later this year. Understood. And one last cadence question as we think of Rev. growth for 2022 and think of it in terms of segments, obviously the 20% on Enterprise, I took your comments to imply it would be sub-20% at least in 1Q and then be higher than that later on. And with regards to SMB maybe it goes the other direction north of 30% to start and gets a bit lower than that afterwards. Is that kind of a fair comment? Any other things to watch out for in terms of compares or anything like that? No, I mean, honestly, the impact in Q1 in terms of the seasonality that we see in Enterprise is very small. So, it's not going to be a huge step down here. And I don't think it's going to swing the growth rate too much. And then on SMB we do start laughing those compares in Q1. So, it will start impacting the growth rate here in the quarter for sure. Thanks guys. I wanted to ask about ARPU, you continue to see some healthy growth there. What sub-segments would you say are primarily driving that? And does ARPU become a bigger part of the overall revenue growth equation in 2023, 2024 versus what you've seen the last couple of years relative to customer growth? Yes, I mean, I think, what we still expect to see really strong contribution from ARPU expansion in 2023. I think 2022 was certainly an outsized year in terms of the ARPU expansion we drove, which really was associated with the pricing and packaging changes we made. So, the expansion will clearly be less than what we saw in 2022, but still a huge contributor for us. And the underlying drivers there are really around our expansion into practices, we have a seat model, so we charge for additional licenses as practitioners join the customers that we have and an element of pricing and payments processing. So more and more payments being processed on our platform. Right. Right, okay. And then maybe just a follow-up on margins looks like you'll come in this year around 18% in adjusted EBITDA. You reiterated the longer term target of 30%. Would you expect just sort of a relatively steady cadence over time, or are there points in time where just because of scale you start to get more of a pointed inflection, let's say, in terms of your G&A leverage? The next few years it will be steady progression and that will largely be fueled by expansion in G&A as we get efficiencies there and small incremental improvements in gross margin. Over the long-term, I do think we'll start to see real leverage come from sales and marketing. But that is still, I would say, a few years out here as we're really investing to drive growth and capture share. Sorry, I was on mute. Apologies there. Congrats on the nice quarter and thanks for taking my questions. I guess I got two. Customer adds in the SimplePractice business have kind of bounced around that 5,000 level all year, nice, healthy level, especially with the pricing increase. But we're seeing a number of software companies with exposure to smaller customers find a slightly more challenging environment in fourth quarter. I guess as you think about your 2023 guidance, are you expecting that environment to be that new customer environment to be similar to what you've seen recently, or are you anticipating any change in the macro? I mean, we're expecting similar trends in terms of gross customer adds for 2023. I think the demand environment, especially around mental health, still remains very strong. I think at least in terms of the customer that we're targeting, they behave a little bit differently than a typical SMB customer. So, I think in some ways that benefits us, but as of now, the demand environment remains strong and we're expecting consistent contribution in terms of growth adds. Got it. And then from a follow-up perspective, the way we calculate kind of transactional ARPU for your SMB customers has been trending down a little bit consistently the last couple quarters here. Any reason why transactions might be, or that transaction kind of dollar amount from your customers might be trending down? Just to know if there is something seasonally in the business that's a little bit better in the first half of the year than the second half of the year? Thank you. Yes, there is a bit of seasonality to be aware of on the transactional side and just with the SMB business overall. Q1 tends to be the strongest both in terms of the appointments that our practitioners have, which obviously drives our payments revenue or our transaction revenue. And also just in terms of even new customer adds. So Q1 is the strongest, and then it kind of slowly steps down through the year as people take more and more vacation. And I think in 2022 in particular, we certainly saw people return to a more normal way of life, taking more vacations, et cetera. And so I think that is a typical seasonal pattern for us. The other thing just to be aware of is we did make a lot of changes to pricing and packaging in 2022, and that did shift some revenue kind of between the buckets. So, we're maximizing for total ARPU expansion and as a result you can see shifts in growth between the categories there. Thank you so much for taking the question. I wanted to ask a little bit about the group pricing. Certainly as you get into even four, five clinicians per office, it's a really meaningful ARPU lift and certainly as you get into 10, it's certainly a really large difference versus your kind of average ARPU. So I'm curious on just with respect to the CAC associated with these group clinicians, are you finding that the channels that resonate for these large offices maybe different than the one to two type of offices and just how you are kind of modifying your go-to-market as group becomes a, it seems like a bigger theme. I mean, today our go-to-market is still pretty simple and very focused on targeted digital marketing in an e-commerce driven flow. We do have some onboarding assistance that we provide, but that still remains our primary go-to-market motion with groups. And I would say like even in those smaller customer segments like of the four to five practitioners that you were highlighting, we found that go-to-market motion to be working and effective. You certainly could see in longer term if we continue to move up into larger and larger group practices that we might need to augment our go-to-market in some way. But I think that's a ways off from where we are today, Just to add a little bit of color with the breadth and depth of our solution for these solo practitioners that come on, we also do see them migrating fairly quickly as they fill up their books to add others, add more clinicians to their practice. So there's a natural growth within, not just going after group practices, but we see a lot of natural growth within the customer base for them attaching other clinicians. Okay, that's great color. And maybe just a bit of a follow-up to the prior question about kind of transactions per customer or TPV per customer, within SimplePractice, if you look at your penetration levels, obviously you offer a solution through Stripe and good, quite attractive, I think, value in economics to your customers that way. I think there is other options if somebody wants to use maybe another provider, but just when you look at the penetration of your offering within SimplePractice, is that something that could be a needle mover in the years ahead where just greater attach, even though maybe the business itself isn't really necessarily your customers’ business isn't accelerating, but just your penetration within their business is perhaps expanding. Yes, I do think that will be a contributor to growth as though our customers continue to process more payments on our platform today, we're at about 75% penetration. So we're processing 75% of our customers’ payments directly. So, that is pretty high. I think we can still see that kick up a little bit, but more modest contribution going forward. Good morning Bob and Cassandra. And thanks for taking my question. I know you guys did highlight having your strongest bookings quarter on the Enterprise side, but just given the macro, are you seeing any changes in the sales cycle or any delays? I would say that it's been steady, Raquel, we've got – we have large deals, as we frequently talk about there is an ebb and flow and different – longer sales cycles for some of the larger deals. But I would say it's – we've got a very strong sales engine across Enterprise that drives pretty reliable results in terms of number of counts. Now the larger deals come in various quarters, and as we mentioned, we had two of the four largest coming in the fourth quarter of 2022. So anyway, I think that haven't seen a huge, we deliver for InvoiceCloud as an example, we don't charge an upfront fee. We remove pretty much all of the friction from the sale, because we are an enhancement to their user experience that they want and there is no – they don't have to come up with funds. And frequently we have the consumer paying the service fee that's associated with our revenue stream. So not really a big change for any of the customers for their citizens and for their rate payers that are paying a utility bill, for example. So I don't think that – yes, I think, we're very steady and continue to see good retraction. Got it. Thanks Bob. And just to follow-up for me, given your comments around seeing more mid-market traction with InvoiceCloud, are there any difference in that sale to a more mid-market customer versus the larger enterprise guys? Sales cycle is shorter for the mid-market, than a larger deal that might be an RFP, a request for proposal oriented, so there is a longer process, a more complex decision making unit frequently involved. So more drawn out if you will. I mean, I'd say our results are similar, but we only – I would say out of – I’m estimating out of 20 new customers, only one of them actually comes as an RFP. So we rely heavily on the mid-market and we're seeing a really strong top of funnel, better than ever a top of funnel for mid-market and Enterprise, frankly. So I think that we're very bullish in terms of our ability to continue to drive strong bookings this year and in the future. Hey, good morning, Bob and Cassandra. Cassandra on gross margins, those were quite a bit better than, I think, we expected. I think they expanded about 160 basis points year-over-year, which is a nice acceleration from 3Q. So obviously pricing is having some impact, but that would also have been in 3Q. So anything else going on the gross margin line and how should we think about that going into 2023? I mean, I think you are thinking about it exactly right, J.D., the biggest contributors really pricing and packaging. I do think we're getting just continued focus on driving efficiency of the cost that we incur to directly support our product and customer support delivery. So, those are leveraged for us as we continue to expand our margins going forward. But those were kind of the big three if you will. Okay. And then net rev retention was really strong at 117%. Any reason why that should be materially different in 2023? Obviously you had pricing last year, you have some pricing, probably a little bit less this year. How should we think about churn, your churn assumptions versus, versus 2023? Just anything you can help us directionally with net rev retention as we go forward from here. Yes, I mean, I think, the difference in the contribution on the pricing and packaging will, will certainly impact the net revenue retention in a similar way to what we are seeing in ARPU expansion. So, I would certainly highlight that. And then we are expecting some slightly elevated churn this year, so maybe a small impact from that as well. But still expecting really strong net revenue retention, again, well north of a 100%, which is just really driven by our business model and the levers that we have across both segments to drive growth. Okay. And one quick last one here. Once again, in the fourth quarter you guys flow through the large majority of the revenue upside to EBITDA. Any reason why that should change in 2023? Should we see revenue upside? Do you feel like you have the investments that you want to make already baked in the guide and we could see kind of top line upside flow through to the bottom line? Or are there plans to maybe spend more if you do exceed the top line? I think for the most part, to the extent that we see upside in revenue, we expect that to largely flow through at a consistent rate that we saw in 2022. Thank you. There are no additional questions registered at this time. I'll pass the conference to Bob Bennett for closing remarks. Thank you. EngageSmart, delivered great results in our fourth quarter and for our full year of 2022. Momentum for both segments drove record revenue and adjusted EBITDA performance. Standouts are our strong customer growth, the increase in average revenue per customer, our successful pricing and packaging changes and exceptional customer retention. Our positioning continues to be compelling as we address our huge U.S. market opportunity with large TAM and SAM. Thank you all for joining us today. We are excited to speak with you again later this quarter at Raymond James 44th Annual Institutional Investors Conference in Orlando, the Wolfe Research March Madness software Conference in New York and Truist 2023 Technology, Internet & Services Conference also in New York. Thank you.

EarningCall_51

Good day, and thank you for standing by, and welcome to the Matrix Service Company conference call to discuss results for the second quarter fiscal 2023. At this time all participants are in a listen-only mode, [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kellie Smythe, Senior Director of Investor Relations. Please go ahead. Thank you, Justin. Good morning, and welcome to Matrix Service Company's second quarter fiscal 2023 earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer; and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials we will be referring to during the webcast today can be found under Events in presentation on the Investor Relations section of matrixservicecompany.com. Before we begin, please let me remind you that on today's call, we may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for the purposes of 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 factors, including those discussed in our most recent annual report on Form 10-K and in subsequent filings made by the company with the SEC. To the extent we utilize non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on our website. Thank you, Kellie, and good morning, everyone, and thank you for joining us. I'd like to open today's call with a reminder that we are all accountable for safety. Responsibility for the safety of ourselves and each other does not stop when we work. We carry that responsibility into our personal lives as well. This personal safety responsibility is about accountability, communication and training, or short ACT. We use this acronym to focus our leadership and drive a culture of safety across the organization. It reminds us to be accountable to ourselves and each other and live up to the leadership expectations we each carry. It says we must communicate directly with purpose, the expectations and risk to execute better, and it reminds us that training improves outcomes, skills and leadership. Our road to zero injuries never ends at work or at home, and each of us have a personal role play in that journey. Now for our business update. As we have discussed on previous calls, some projects that we took into backlog during the pandemic were lower in overall margins and were affected by the operating dynamics over the last several years. As noted previously, we have one of these midsized legacy projects left in the portfolio, which we are in the midst of completing. This project at midstream gas processing facility, which is in the Process and Industrial segment was awarded in calendar 2021. Due to breakdown and commercial negotiations concerning the extensive scope changes that impacted our ability to progress the project work according to forecast as well as the impact of global supply chain issues and inflation, we have taken a charge of $9.6 million in the quarter related to the forecasted outcome. The project is expected to be mechanically complete in the fourth quarter of this fiscal year. We continue to manage our forecasted costs to complete and work with our clients to negotiate a reasonable outcome. This project aside, we continue to see strong momentum, driven by the recovery in our end markets, our focused business development approach, a streamlined organization and our strong brand across the operating segments. In addition, our strong execution performance continues to create repeat business with several major energy and utility clients. Our momentum is clearly reflected by the ongoing increase in project awards that I spoke about on our last call. This trend continued into our second fiscal quarter, with total awards of $319 million. This was our highest award total since the fiscal quarter -- first fiscal quarter of 2020. Second quarter awards resulted in a consolidated book-to-bill of 1.6, and we had a book-to-bill of 1.3 or greater in each of our segments. Year-to-date, we have received project awards totaling $553 million and achieved a book-to-bill of 1.0 or greater in each of our segments and a consolidated book-to-bill of 1.4. Bidding activity remained robust across all segments, and we're confident the strong award cycle will continue for the balance of the year. In Storage and Terminal Solutions, where we were seeing the largest individual opportunities, our second quarter book-to-bill was 1.8, on awards of $115 million. Included in these awards is another large ethane storage project, which is in addition to the enterprise products award we recently announced. In our Utility and Power Infrastructure segment, our book-to-bill was 1.9, on awards of $98 million, including an upgrade project for an existing LNG peak shaving facility. And finally, in Process and Industrial Facilities, our book-to-bill was 1.3, on awards of $105 million, which included a new fixed based maintenance contract and additional spring turnaround for our large refiner and a scope expansion of a previously awarded renewable fuels project. At the end of the quarter, project backlog was $740 million, a 26% increase for the start of the fiscal year and backlog up across each of our segments. Our capital projects opportunity pipeline, which is comprised of projects greater than $5 million, remains strong and includes $5.5 billion worth of quality opportunities. This pipeline does not include our normal day-to-day and recurring maintenance activities. Capital projects pipeline value can fluctuate from quarter-to-quarter given award progression, opportunity changes and our continuous evaluation of project quality. We expect the pipeline to remain healthy for the foreseeable future. The vast majority of our opportunities are in clean energy and energy transition projects, in addition to the broader shift that is occurring in the energy markets. Client spending decisions are being driven by concerns about energy security globally, aging infrastructure and energy reliability domestically. This is an exciting time for the company as we extend our expertise on the projects that support the development of the infrastructure needed to enable the transition to a lower carbon energy mix and energy security. In fact, about 70% of the projects in our pipeline support this transition with traditional energy, industrial and chemical projects making up the balance. Over the years, Matrix brands have been synonymous with best-in-class storage solutions. Building storage tanks has been an important driver of our revenue. What's well known to some investors is that our storage expertise extends far beyond the traditional flatline storage tanks used to store crude oil. The storage projects we are working on today are comprised of complex single and double wall cryogenic spears of tanks. As an example, you may have seen a recent announcement that we were awarded the Greenfield engineering, procurement and construction of a 600,000-barrel cryogenic ethane storage tank for enterprise products along the Texas Gulf Coast. We are fielding a growing number of downstream project opportunities, including those for both ethane and ethylene. These types of projects require a high degree of technical expertise and experience Matrix can offer. These specialty vessels, as we call them, are used for a variety of applications, including LNG, hydrogen, ammonia, ethane and other NGLs. In many applications, the storage tank is a critical construction path of an overall terminal project, thus giving us a competitive advantage to provide a complete facility to our energy clients. With that said, before I hand the call over to Kevin to discuss our operating results for the quarter, I want to emphasize that the momentum in our business is not yet reflected in our operating results, nor did we expect that it would be. We expect that the larger projects will positively impact our results starting in our fourth fiscal quarter. I'd like to express my gratitude to our shareholders and their patience they have shown as we've worked hard to optimize and protect our business following a rapid deterioration of our end markets during the first two years of the pandemic. We are seeing positive trends in our business as we win projects, build backlog and execute with our transformed organization. As is normal in our business, the timing of awards and starts of projects can have an impact on our quarter-to-quarter operating performance. That being said, our expectation is that we will achieve a revenue level in the fourth quarter that returns the business to profitable performance with gross margins at or near our target range of 10% to 12%. Thank you, John. The second quarter was shaping up to be in line with our expectations. As John discussed, project award activity was strong across all three segments. Our liquidity improved during the quarter, and operating results for the second quarter were similar to the first quarter with one exception. Unfortunately, the outlook or change order recovery and an increase in the forecasted costs to complete a midstream gas processing project in the Process and Industrial Facilities segment changed significantly just prior to our original planned release of earnings. As a result of that change, we recorded a significant adjustment through the project forecast and put the project into a loss position. We recorded a quarterly charge of $9.6 million or approximately $0.36 per share. The project is scheduled to be mechanically complete in the fourth fiscal quarter. We will continue efforts to manage the forecasted costs and negotiate a reasonable outcome of our claims with the client. This adjustment also triggered a goodwill impairment analysis for the impact of business unit in the Process and Industrial Facilities segment. To be clear, the long-term prospects of the Process and Industrial Facilities segment are strong across multiple markets, completed thermal banking chambers, refining renewable fuels, chemicals and mining and minerals. However, our recent project performance and near-term prospects in the gas processing portion of this segment required us to reevaluate the fair value of the related goodwill. Medium-term an impairment of goodwill was required for one of the business units serving this market and recorded a non-cash charge of $12.3 million or approximately $0.46 per share in the quarter. Our second quarter revenue was $194 million compared to $208 million in the first quarter. Consolidated gross profit decreased to a loss of $1.3 million in the quarter, including the project adjustment. Excluding the adjustment, our gross profit was $8.3 million in the quarter and our gross margin was plus 4.3%, which was somewhat lower than our expectations due to under-recovered overhead costs at this revenue level, which impacted gross margins by 230 basis points. We expect under recovery to improve as revenue levels increased in the fourth quarter. Consolidated SG&A expenses were $17.5 million in the second quarter compared to $16.8 million in the first quarter. The increase is primarily related to project Symcox [ph] as we continue our efforts to increase our backlog quality projects. Our effective tax rate for the second quarter was 0 as expected. We will continue to place valuation allowances on newly generated deferred tax assets and we'll realize the benefit associated with the reserve deferred tax assets when the company returns to profitable performance later in this year. For the three months ended December 31, 2022, we had a net loss of $32.8 million or $1.22 per fully diluted share. On an adjusted basis, we had a net loss of $14.4 million or an adjusted loss of $0.53 per fully diluted share, of which $0.36 related to the previously mentioned project loss. Now turning to our segments, starting with Utility and Power Infrastructure. Revenue from the Utility and Power Infrastructure segment increased to $51 million in the second quarter compared to $45 million in the first quarter, a higher revenue volume related to increased power delivery work. The company is substantially complete with the previous peak shaver projects, and the newly awarding peak shaver project will not begin to positively impact revenue until the end of the fiscal year. The segment gross margin was 4.8% in the second quarter of fiscal 2023 compared to 3.8% in the first quarter. The margin increase was related to improved overhead recovery. While margins are improving, the segment continued to be impacted by work on projects with previously produced gross margins and projects that were bid in a highly competitive environment. In Process and Industrial Facilities, revenue was $81 million in the second quarter compared to $87 million in the first quarter. The decrease was primarily related to the project adjustment previously discussed. Gross margin was a loss of 6.4%, excluding the $9.6 million adjustment on the cash processing project. The segment gross margin was a positive 5.6%, which improved modestly over the first quarter gross margin of 5%. The segment continued to incur under-recovered overhead costs in the second quarter, which impacted gross margins by 250 basis points at this revenue level. And finally, in Storage and Thermal Solutions. Revenue decreased to $63 million in the second quarter as compared to $77 million in the first quarter. The revenue volume was lower than expected as the award of a large storage project was delayed, and that project was previously expected to begin generating revenue in the second quarter. While the ultimate award of that project is not known, the company has successfully captured other storage project awards as evidence by 1.8 book-to-bill for the first six months of the year. These award projects will generate additional revenue that have a later start date than the affirmation project. As a result of the decline in quarterly revenue for the Storage segment is temporary, and we expect to see a substantial increase in the fourth quarter. The segment gross margin was 2.6% from the second quarter, which was impacted by two issues, lower revenue volume negatively impacted overhead recovery, which had a 460 basis point impact in the quarter and increased forecasted costs to complete a smaller capital storage project had a 260 basis point impact in the quarter. That project was awarded, and a competitive environment is scheduled to be completed in the fiscal year. Now turning to liquidity. As of December 31, 2022, we had total liquidity of $80.5 million, an increase of $23.9 million during the quarter. Liquidity improved primarily as a result of an expected decrease in working capital investment, resulting from the timing of cash flows on projects. Liquidity is comprised of $31.5 million of unrestricted cash and $49 million of borrowing availability. The company also has $25 million of restricted cash to support the credit facility and borrowings of $15 million. We expect our liquidity position to continue to improve for several reasons, including expected improved operating results in the fourth quarter, the receipt of approximately $13 million of tax refunds in the third fiscal quarter and positive cash flow from newly awarded capital projects. Overall, the operating results for the second quarter were disappointing. However, the latency projects that negatively impacted our results will be completed within the fiscal year and many of the headwinds we have been facing are abating. In addition, a number of our businesses are generating improved operating performance, with margins out of the near targeted ranges. Combined with the strong award activity and the strength of the project funnel, we are confident that our revenue will increase. Hey great. Good morning, John, Kevin. I guess just one question on the revenue volume. Just kind of wanted to gauge your temperature. I mean are you surprised by the time it's taking to kind of get some of these new awards moving forward? Kind of anything unusual behind that? And then I just kind of want to get your confidence what you're seeing happen with some of these awards, again, gives you confidence around pickup in the fourth quarter as you've laid out? Yes. So if you look at the revenues for the quarter, they were pretty much in line with our expectations. I'd say the only exception to that was the volume within storage internal solutions was a little bit lower than we originally expected. And that's the result of, as I mentioned in my comments, a large storage project that -- we expect it to be awarded in and we would have started during the second quarter, it would have had a pretty decent amount of revenue in the quarter. That project is still not awarded, and the timing of when it will be awarded don't know that. But the good news is that the segment had a bunch of other projects that we have awarded the last six months. And so the prospects for the increased revenue secular are still there. It just start a little later than the projects that didn't get awarded. So we're -- that's the only variance from the revenue standpoint. The timing of some of these projects that we were pulling into backlog, the work on -- generally on some of them takes -- could take up to two quarters before we get any kind of heavy revenue. There's some -- there'll be some upfront engineering. Some of the projects or a little bit more complex, so there's more time taken to negotiate contracts. Those are making us some final permits to get in place. So usually, as we said in our comments, it can take a quarter or two for those things that really start impacting our revenue. Yes. I mean -- even I mean larger capital projects, but even projects that are in -- sometimes are in the, say, $30 million to $50 million kind of range, depending on who the client is and how their processes work after they select a contractor. We can be selected and we could be able to put it in the backlog, but it could take a couple of months before we're really going to start putting money into it. So, it's just kind of sort of the nature of the business. And as we return our revenue levels, it's a little bit more impactful to the business on a quarter-over-quarter basis until we get back up to a revenue run rate that's foundational for the company. Okay. That's helpful. And then just on the midstream gas processing project. Just sort of curious why negotiations didn't sort of translate to the outcome you'd anticipated? And I think the bigger question here is probably just -- are there others of this magnitude, you're in negotiations with customers where maybe there's risk of a similar outcome or is this sort of truly unusual to you? Yes. No, I think this is sort of an unusual situation. This is -- as we said and we spent before in other calls, this is probably the last of our larger, what I'd call, our COVID contracts. And so, I would say we're not completed with our clients discussing through some of the commercial issues, but we felt at the time of the filing here that we needed to take a position that we've taken. Understood. And I guess, John or Kevin, I mean, any context for what sort of revenues left for that job as we work through the kind of fiscal second half? Okay. And John, I mean, John. It sounds like you're pretty confident. Book-to-bill is going to be pretty strong here over the next couple of quarters? I mean, any kind of highlighted sectors you want to point to, you're really seeing a lot of activity? Yes, I think whole thing storage. So, there's a lot of -- and there are obviously two words on the bigger projects are, but a lot of activity in storage around LNG, ammonia, ethane, propane, hydrogen, we continue to work in that sector. Those opportunities continue to keep flowing in on pre-feed work and hydrogen opportunities, both domestically and internationally. And so, we're continuing to work in that market. And so, I think what we see out in front of us, the opportunities for LNG shaving facilities, LNG plants related to ship on grain and export is pretty big. And so, we feel very comfortable where we are, and we're going to continue to see good awards and positive bookings as we move out over the next several quarters. And let is normal, our business and timing of all that, when we can take it into backlog that can move month-to-month. And -- but as we've said before, the trend in backlog growth for us is what's important work cycle. And I think what we see out of the future is a very positive trend in awards and building our backlog. Hey John, Kevin. Thanks for taking my question. Just to circle back to the midstream processing project. Was there anything unique about this contract that you didn't have to engage in before? I don't think it's anything -- as far as the process, the design, the fabrication, the erection of the facility, I would say it's not -- we do more complex things. Well, I really don't want to debate that in public. So, we're trying to give you guys a perspective of the challenges on the project. Certainly, the supply chain issues that I think the planet has felt over the last 18 months [indiscernible 0:27:24.5] had an impact from and both from us, from a delivery timeframe and inflationary pressure. And as we noted in the release, the job had want to changes in scope from the client. And when there's a significant amount of changes that can also impact our ability to perform as we had planned. And so those are things that we're working through with our clients, and we're continuing to do that. So, John, do you feel there's any -- in hindsight, I guess, any operational changes that you should make in order to prevent this kind of incidence to happen again? I mean we'll do what we normally do. We will do a lessons learned, and we will do a lessons learned with the client. If that's supported to us when we're done and to talk about how we interact with. There's continues to be possibility for future work with this client and certainly, that would be an outcome that that we would like. We have a lot of clients. We build complex projects with over and over and over again. And so, we're -- they're obviously happy with our performance. And so, I would say this is still a bit of a unique situation. But we're always honest with ourselves, and we'll look at the areas where we think we could have done something differently or better, and we'll make those adjustments. Okay. And it sounded like during the quarters, you made some minor structural change, closed down an office. It makes me wonder if the breakeven point for the company has changed at all, either positively or negatively in light of recent operating environment? So, I don't think it's changed significantly from what we talked about in the last quarter. 1.5 years ago, we were talking about $200 million was kind of a quarterly breakeven, and that's gone up a bit to probably 215, 220 based on inflation. So -- but there's not a big change in what we need to either fully recover or breakeven. Okay. And the revenue that was pushed out of storage, you said you expected it to close and be working on it in the quarter. That job hasn't closed. Is there any expectation it will close by year? Or do you think it's firmly pushed out for now? Yes, we've sort of taken the position here that this project will not be in this fiscal year as we look at our forecasting going forward. And so, it was a fairly sizable storage-related project, but the owner has had issues getting to financial close and permitting. So, we've kind of taken the position, and we're sort of -- we've been working with them for a while doing some fieldwork and that we were working towards converting that into a full contract. We're kind of out of that process right now until they get their situations together and straight on to make a decision on how to proceed with the project. So, we fundamentally taken it out and so came out of the -- in the middle of the second quarter, basically. And so that's why you've had this impact in the second quarter. Got it. And John, you said that the jobs in the backlog are closer to historic norms on the gross margin side. How far away, I don't know, across the whole business profile, do you think you're often getting normalized gross margins? And what kind of timing do you see on realizing that? So, we're driving the average is up in the backlog. One of the -- some of these newer projects that are in this $300-plus million of awards in the quarter are in that range. So, they're driving those averages -- the averages for the organization back up into that range, plus the opportunity that average range from a historical perspective might be on the low side, but we generally had good performance across our projects on a quarter-to-quarter basis. We're able to upsize our direct margins because we're either underrun our costs, we're able to convert other contingencies and things that are built into the projects to the bottom line. So that's -- our historical operating environment is that we've got more opportunities to drive the margins up than to drive the margins down. And -- so that also contributes to keeping those margins in that range. Okay. And I guess one last question, and I'll jump back in. There was once a time you talked about exiting fiscal 2023 with a $1 billion backlog. Is that number still on the table? Or has that been pushed to the left or right, either way? And thank you. And I am showing no further questions. I would now like to turn the call back over to John Hewitt, President and CEO, for closing remarks. So, thank you, everybody, for joining us today. Certainly, a challenging quarter for us, but we are making progress with the organization, all the things that we've done and we've invested in, and we feel very strongly about the direction of the organization and where we're going and going to continue to build backlog and we're going to continue to improve operating results here over the next couple of quarters.

EarningCall_52

Good evening. Welcome to the Alteryx Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this event is being recorded. Thank you, operator. Good afternoon and thank you for joining us today for Alteryx's fourth quarter and full year 2022 earnings conference call. I'm Ryan Goodman, Alteryx's Head of Investor Relations. With me on the call today are Mark Anderson, Chief Executive Officer; and Kevin Rubin, Chief Financial Officer. Additionally, Paula Hansen, our President and Chief Revenue Officer; and Suresh Vital, our Chief Product Officer, will be joining us for the question-and-answer session after prepared remarks. This afternoon, we issued a press release announcing our results for the fourth quarter and full year ended December 31, 2022 as well as the new shareholder letter with key metrics and commentary on the results. If you would like a copy of the release and shareholder letter, you can access both online on our Investor Relations website. During this call, we will make forward-looking statements related to our business, including statements about our financial guidance for the first quarter and full year 2023. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from expectations reflected in any forward-looking statement. For a discussion of additional forward-looking statements made during this call and the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and our Investor Relations website, as well as the risks and other important factors discussed in today's earnings release. Additionally, non-GAAP financial metrics will be discussed on today's call. A reconciliation of these measures to their most directly comparable GAAP financial measures can be found in today's earnings release. Thanks Ryan, and thank you all for joining us on the call today. We delivered a strong Q4 with all of our key financial metrics exceeding our outlook. Q4 revenue came in at $301 million, up 73% year-over-year. Annual recurring revenue or ARR came in at $834 million, up 31% year-over-year and Q4 non-GAAP operating profitability meaningfully exceeded our outlook at $68 million. We finished 2022 with strong growth momentum and an increasing focus on profitability, capping off a strong year for Alteryx with multiple key strategic initiatives. We significantly accelerated our cloud platform innovation roadmap. We realigned our go-to-market motion to focus on the largest global organizations with the greatest opportunity for expansion. We updated our partner program to efficiently scale our market reach and we invested in our customer success program to ensure that our customers are engaged and successful on their data democratization journeys with Alteryx. We are pleased with our financial results, particularly given the economic backdrop as our value focused sales motion is resonating with customers. Even so, we are seeing similar dynamics that are facing many of our software peers. In Q4 we saw this in the form of elevated deal scrutiny and elongation of sales cycles. I've certainly experienced similar macroeconomic headwind throughout my executive career and I'm confident in our ability to continue to execute at a high level with the transformational decisions we've made over the last two years. First, our Alteryx Analytics Cloud platform has catalyzed enterprise buy-in to the long-term Alteryx vision. Second, our focus on enterprise has driven a mix shift to higher lifetime value customers with increased net retention. Third, our executive facing go-to-market approach has aligned our sales engagement with the decision makers and budget owners of our customers. And last but not least, our level of engagement with customers is stronger than ever, supported by both our partner ecosystem and customer success initiatives. Underlying this is robust demand for data analytics as we are seeing CIOs prioritize core operational platforms like Alteryx, over front end applications, more exposed to headcount variations. Let me share a few highlights from the quarter. Our global 2000 penetration increased to 47%, up 4 points from this time last year as top brands across the globe are aligning with Alteryx. We saw a durable strength in our global 2000 net expansion rate of 109% and our overall net expansion rate of 121% and achieved record high renewal rates. We sold more ELA bundles in Q4 than the rest of the year combined. The increased flexibility and simplified pricing are resonating with our larger customer cohorts. We're also starting to see ELAs from 2021 creating tangible and more predictable upsell opportunities. Our Alteryx online community has now surpassed 400,000 members, a great milestone for these Alteryx zealots who continue to champion our mission across the globe. And our partner ecosystem, which continues to influence a growing percentage of our business, is providing an increased tailwind to the business, again influencing well over half of new business in Q4. Q4 was truly a great quarter capping off a strong year and another clear validation of the strategic direction of this company. Customers need our innovation now more than ever. The pace and scale of our innovation has never been greater and our commitment to governance across the platform is enabling our customers to scale with confidence across the organizations. Our cloud platform initiative is increasingly becoming a contributing driver of success with large enterprise companies looking to expand their Alteryx deployment. In fact, we're finding that the introduction of Alteryx Analytics Cloud is amplifying customer's commitment to the Xtend Alteryx platform. Our cloud innovation roadmap provides customers with a clear path to layer on cloud and expand data analytics to new personas and new use cases. We saw examples of this in Q4. We had a great win with Royal Caribbean Group, a leading international cruise company. Building on its existing Alteryx usage within finance, Royal Caribbean is expanding with new use cases and new personas in human resources. They leverage designer, server and machine learning in an effort to further unlock and optimize their crew experience and to drive financial efficiencies. They're also adopting Auto Insights as a means to more effectively disseminate information and insights throughout the organization. Commerce [ph] Company, a global specialty chemicals company that signed on with an ELA earlier in 2022 is now expanding with Auto Insights to provide enhanced data-driven clarity on cost and budgeting trends. And a mobile network operator that expanded with the designer ELA in early 2022 signed on for Cloud ELA in Q4 to utilize Auto Insights for cloud cost optimization analysis by the office of the CIO. With access now to machine learning and Designer Cloud, they can also explore new use cases such as network data analysis and financial forecasting, empowering new personas within other parts of the organization. Our technology partnerships with cloud-based data warehouses like Snowflake, Databricks, and Google BigQuery are also helping us win with companies driving cloud-based digital transformation initiatives. In Q4 Specsavers Optical Group, a multinational optical retail chain selected Designer Cloud to help drive their initiative to promote a data-oriented culture with self-service analytics. Designer Cloud's low-code, no-code interface and deep integrations with cloud environments like Databricks were key differentiators in enabling this new customer relationship. We have a highly differentiated data analytics platform and our enhanced go-to-market motion built on the pillars of enterprise, partners and customer success, is now enabling us to capitalize on this opportunity. We continue to see strong traction with large enterprise organizations. We more than doubled the number of $1 million ACV wins in 2022 versus 2021, and we closed the year with over 140 customers with ARR of $1 million dollars or more, up over 50% year-over-year. As I mentioned earlier, we now have a presence at 47% of the Global 2000. Many are using Alteryx in only a small initial capacity, which creates meaningful upsell opportunities in these accounts for the years ahead. Our ELA bundles are resonating with our larger customers as they provide flexibility to expand to additional licenses for a fixed period of time or what we refer to as First Capacity. First Capacity gives customers the freedom to use up to 50% more than their allocated license accounts at no cost during the first year without additional license or procurement administration complexity. When our customers are digitally transforming, this first capacity helps them go faster. And for the ELA sold in Q4 2021, some of which were multi-year contracts, over two thirds became upsells in Q4 2022. We are still in early days for the ELA strategy and momentum has been growing. Orange France, the largest subsidiary of the Orange Group and a leader in B2B and B2C telecommunication services in the country, selected an Alteryx ELA in Q4 to automate and optimize many processes within the financial team as well as to drive analytics on infrastructure and network usage. The ease of use of the platform coupled with the flexibility of the ELA, convince the finance teams and will enable Orange to begin expanding data analytic usage with new personas throughout the organization. As for the second pillar of our go-to-market motion partners, we are benefiting from ecosystem expansion and favorable engagement trends. We're pleased to welcome EY as one of our newest partners in Q4. Partners delivered over 50% year-over-year growth in new logo ACV contributions in 2022 and once again influenced well over 50% of the new ACV in the quarter. We deeply value our partner relationships and it is particularly gratifying when we find our partners broadening their usage of Alteryx as a customer. KPMG is a great example where we're seeing both regional expansion of the partnership and increased usage of Designer to provide differentiated offerings to their clients, particularly those looking to transform and optimize their corporate tax departments. In Q4 KPMG increased its Designer license count by over 50% as it looks to elevate Alteryx usage across more client facing consultants, plus further leverage Alteryx for internal analytics. Partners provide additional scale to our go-to-market motion, enhancing our ability to find incremental use cases and drive value for our customers. We saw this with West Monroe, a digital service firm who worked closely with the partner when they first explored Alteryx solutions over the summer. In Q4 West Monroe significantly expanded their Alteryx implementation after identifying opportunities to both accelerate and enhance digital analytic services they provide their clients. And the journey doesn't end with the implementation of our software. We've invested in our customer success team over the past two years and our customers are seeing tangible incremental returns on their Alteryx engagement. There are so many positive examples here of value creation in partnership with Alteryx customer success. A leading FTSE 100 financial institution identified over 1.5 million pounds in value via automation of manual efforts, upskilling and efficiency gains. A national retail chain identified a way to save 5,000 hours plus hundreds of thousands of dollars in costs within its supply chain optimization in just two months of working with the customer success manager. I'd encourage you all to take a look at the use cases on our Alteryx community site for real life examples that speak to both the value of our solutions and the effectiveness of our enhanced customer success efforts. As I look ahead to 2023, we have a massive opportunity in front of us and we expect to achieve a significant milestone of becoming a $1 billion dollar ARR company this year. Let's be clear, it won't be easy in this macro environment, but we have demonstrated the robust nature of data analytics demand, as well as Alteryx's ability to effectively execute in this market. We enter 2023 on even stronger footing and are focused on three key initiatives to ensure our success. First the Alteryx analytics cloud platform. We are seeing strong interest in our portfolio of offerings across Designer Cloud, machine learning and Auto Insights as customers look to consolidate vendors, we are uniquely positioned to provide a cloud-based, end-to-end, low-code, no-code data analytics platform for all, and we have some exciting updates to share on this front soon. Second, go-to-market. We made so much progress in upgrading our go-to-market motion in 2022, and I firmly believe we are just getting started. We enter 2023 with an upgraded and expanded sales force, partner program and customer success team, and we're just starting to lap early ELA wins, which will create incremental upsell opportunities at our larger customers. And third, profitability. As we move beyond the investment phase of last year, we are committed to increasing operating profitability. We plan to achieve this through both scaling the business and demonstrating spending discipline. Kevin will provide additional color in his comments . In closing, 2022 was an outstanding year for Alteryx and I'm so proud of the entire team. We are absolutely changing lives with what we do, empowering people to upskill themselves and drive value for their companies. Thank you to our customers, our employees, and our partners on an amazing 2022. Thanks Mark. Q4 was a strong financial quarter and capped off a year of robust ARR growth and an accelerated return to positive non-GAAP operating profitability. ARR of $834 million grew 31% year-over-year. This included a $7.9 million FX tailwind relative to our guidance. Even excluding this FX impact, ARR still would have exceeded the high end of our guided range. Revenue of $301 million grew 73% year-over-year, which was well above the high end of our guided range, benefiting from a strong renewal cycle and record renewal rates. Non-GAAP operating profit came in at $68 million, $13 million above the high end of the guided range. This was driven by both top line strength as well as elevated spending discipline. For 2022, revenue of $855 million increased 60% year-over-year and non-GAAP operating profit came in at $30 million, both above the high end of our guided ranges and significantly better than the initial outlook entering the year. Earlier in the year, we enhanced our go-to-market motion with investments in enterprise, partners and customer success, and we accelerated our cloud innovation roadmap with strategic investments in the platform architecture. As we move beyond this investment phase, we are already seeing points of leverage materialize in the financial model. We improved Q4 non-GAAP sales and marketing expense as a percentage of revenue by 7 points year-over-year. We benefited from early productivity improvements in the sales force in 2022 versus 2021 in terms of new ACV per sales rep. As we enter 2023 with a higher mix of ramped reps, more comprehensive sales enablement capabilities and an expanded product portfolio, we expect these tailwinds to persist and help us navigate this dynamic macro environment. And we improved Q4 non-GAAP G&A expense as a percentage of revenue by 3 points year-over-year, driven primarily by efficiencies of scale. On top of the natural leverage embedded in our financial model, we've identified additional opportunities for cost optimization to further accelerate our return to higher profitability. For example, given the distributed nature of our current workforce, we were able to rationalize our real estate usage by approximately 40% during Q4. In addition, we optimized headcount by approximately 5%, primarily from rigorous performance management as well as role eliminations. Looking ahead, we feel the business is on strong footing to deliver expanding profitability with scale. And with the majority of our costs being variable in nature, we believe we have the ability to stay nimble in this economic environment. Profitability is certainly top of mind and as we now move beyond this investment phase, we are focused on delivering durable, profitable growth going forward. Underpinning this success is our growing traction with large enterprise organizations. We continue to see our strongest ARR growth with our $1 million plus ARR customer cohort, bolstered by many of the strategic initiatives we've put into motion over the past couple of years. For example, we upgraded our enterprise sales force with well tenured experienced reps, and as we land winds with larger companies, we are effectively seating future upsell opportunities at a much higher scale. With approximately one third of our global 2000 customers generating less than $50,000 in ARR today and approximately 200 Global 2000 customers still within two years of their first Alteryx license purchase, we have a large runway for growth as we deepen penetration in coming years. Expansion is a key growth driver for our business with the vast majority of our new ACV in any given quarter continuing to come from existing customers, and now as the opportunities become bigger, we are seeing consistent growth in the average expansion deal size. To help us streamline this enterprise adoption, we introduced ELA bundles in mid-2021. ELAs come in tiered bundles that vary in size and burst capacity. This allows for progressive upselling and we are already seeing success with the 2021 ELA cohort. The investor presentation we posted on our website today helps illustrate how ELAs create expansion opportunities with Alteryx. Mark noted that over two thirds of the ELAs lapping one year upsold in the fourth quarter. Of those that expanded, we saw average ARR growth of over 50% year-over-year. While this is still a very early sample set, it demonstrates the positive impacts ELAs can have when coupled with proper customer success and a growing product portfolio. On that note, to further accelerate the customer land and expand motion, we've made meaningful investments in our customer success practice. We have found that accounts leveraging our customer success team are seeing net expansion rates more than 10 points higher than those that are not. To summarize, we are winning with larger companies, which is unlocking bigger opportunities and driving larger deal sizes. All of this is fueling robust growth momentum in our average ARR per customer, which reached a $100,000 in Q4. As we look to 2023, we are paying close attention to the state of the macro environment. While we are executing with a high level of success, our outlook incorporates an elevated level of conservatism to account for potential shifts in macro dynamics. We are keeping a close watch on all key forward-looking business indicators such as new pipeline generation, sales rep productivity and sales cycles, and we believe we can quickly calibrate the model should the need arise. That said, we have several incremental growth drivers to layer on in the coming year that we expect will contribute to our growth and profitability momentum. First, we have a meaningfully larger renewal base relative to 2022, which supports revenue growth and creates upsell opportunities. Second, we have a growing book of ELAs where burst explorations create additional upsell opportunities with a high level of visibility. Third, we expect to sell significantly more ELAs in 2023 driven by growing traction with large enterprise customers. Fourth, the Alteryx Analytics Cloud platform is unlocking new personas and new use cases as well as catalyzing adoption across the Alteryx offerings. Fifth, we view international expansion as a meaningful opportunity invigorated with new sales leadership. And last but not least, our growing partner program is contributing incremental opportunities within new and existing customers. With this framework in mind, let's turn to the Q1 2023 outlook. We expect ARR to be in the range of $856 million to $860 million representing year-over-year growth of 25% to 26%. Our guidance assumes FX rates remain at current levels. We expect GAAP revenue to be in the range of $198 million to $202 million representing year-over-year growth of 25% [ph] to 28%. We expect non-GAAP operating loss to be in the range of $23 million to $90 [ph] million. We expect non-GAAP net loss per share to be in the range of $0.29 to $0.25. This assumes 69.7 million weighted average shares outstanding and an effective tax rate of 20%. For the full year 2023, we expect ARR to be in the range of $1.015 billion to $1.025 billion representing year-over-year growth of 22% to 23%. We expect GAAP revenue to be in the range of $980 million to $990 million, representing year-over-year growth of 15% to 16%. In terms of linearity, our business historically has seen an approximate 40-60 split between the first half and second half of the year for net new ARR and revenue. As we derive an increasing portion of growth from large enterprise customers, we expect similar top line linearity dynamics in 2023. We expect non-GAAP operating profit to be in the range of $40 million to $50 million. We expect our spending to track similar to historical patterns in which Q2 reflects an uptick in spending for items, including our Inspire user conference, followed by a sequential spending decline in Q3. Given the top line linearity and timing of expenses, we expect nearly $100 million in non-GAAP operating profitability to come in the second half of the year. We expect non-GAAP net profit per share to be in the range of $0.36 to $0.46. This assumes 78 million weighted average shares outstanding and an effective tax rate of 20%. In summary, 2022 was an excellent year for Alteryx. We strengthened our go-to-market motion, we accelerated our cloud innovation roadmap and we delivered ARR growth of 31% with non-GAAP operating profitability. As for 2023, while the macro dynamics are certainly a factor, we believe we're on track to surpass $1 billion in ARR and we expect to achieve this scale with disciplined spending, expanding profitability and positive operating cash flow. Before we wrap up, I'd like to also let you know we are planning to hold an Investor Day in conjunction with Inspire being held from May 22nd to May 25th. We'll provide additional details on this soon. Thank you. [Operator Instructions] Our first question comes from the line of Brent Bracelin with Piper Sandler. Please proceed with your question. Good afternoon. Great to see the pivot back to profitability here. Mark for you, the $75 million build in net new ARR in Q4 is by far the most we've ever seen despite increasing deals scrutiny here, new ELAs and upsells seem to be the big contributor. What's driving EL interest in this recessionary environment and then why now? Yes. Hey, Brent, thanks for the question. Yes, listen, I think, you know, the ELA, the interest in the ELA is continues to grow. You know, we launched this about a year and a half ago, and as you heard from the prepared comments we've just seen incredible traction from our customers, primarily because the ELA gives them flexibility and doesn't restrict them. You know, like the old world software company used to wrap you on the knuckles when you went over your license account. I think based on what our customers use Alteryx for to help transform their tax department or to help them make better decisions in supply chain, we want our customers to go faster. We want them to do more, so, so we, we actually allow for a burst of 50%. And, and, and customers have just been eating that up as you've heard. So I think it's that, and I think also people are really aligned with where we're going as a company and how we're getting there and I think they're rooting for us. So I'm expecting even better results down the road. Helpful color. And then Kevin, just a quick follow up here on the guide, net new ARR, it looks like it's going to be about $9 million less this year than last year. You talked about elevated levels of conservatism in that guide. What's factored in that? Is that something that you're seeing in the pipeline today or more around trying to factor in some of the recessionary headwinds that could impact the business? Thanks. Yes, thanks, Brent. I think, look, at the end of the day, we are very cognizant of the economic backdrop and environment that we're in today, and we're just base lining our guidance on a weakening overall environment as we go through the year. Yes. Thanks for taking the question. I wanted to ask you just a product question. So if you could just level set how you're thinking about the rollout of some of the cloud SKUs for 2023, you know, to the extent you've baked in any contribution from some of those new product releases. And then just given all the excitement around open AI, ChatGBT, how are you thinking about that opportunity? Yes, hey great questions Ty. Thanks for all the questions. I think maybe I'll take the beginning of this question and then I'll hand it over to our subject matter expert, Suresh Vittal who runs product for Alteryx here. So, on ChatGBT, listen, I'm super excited about it. I think any kind of technology that aligns with our notion of democratizing analytics, being able to put capabilities in the hands of knowledge workers in the functional areas, because you can't train a data scientist to be a great supply chain person. You know, I'm all for it and super excited about it. And of course we've been very, very aligned with generative AI in the first place and large language model. I think, you know, I kind of see this in kind of three sort of buckets really. First of all, it's got to work with our products to help accelerate time to Insights, streamlining the development of analytics throughout the enterprise to go faster and to get better Insights. Secondly, as I said, it will help democratize access to better decisions with the data that scrolls around the enterprise. And third, it really already starting to see this, if you've looked at LinkedIn and seen what some of our partners have posted already between Chat GPT-3 and Alteryx, it's going to give us some really cool vertical applications that will dovetail very nicely I think as these technologies work very complimentary to each other. So, I'm super excited about it and I think, you know, just a quick note and I'll hand it over to Suresh, on innovation. I'm really proud of our team. We've come through 2022 and we've knit this Trifacta acquisition into our applications, and this year we're going to be cooking with gas, I'm telling you because we've got so much innovation rolling out. If you come to our Inspire conference in May, you'll be able to hear kind of what we're talking about, but a lot of innovation coming this year. Now I'll pass it over to Suresh. Thanks Mark. Tyler, great questions. So on the, on the cloud SKUs and the cloud rollout, we're super excited. We've been systematically, as Mark said, integrating the Alteryx Analytics platform and all the new innovation, whether it's Designer Cloud, Alteryx machine learning, Auto Insights, Location Intelligence, Metric Store, really getting innovation into the hands of our customers. We see this a great opportunity to expand, access regardless of where the customer wants to consume Alteryx innovation on a desktop, in a browser, on a mobile device, they get access to that. And so 2023 is going to be a continued set of rollout of the capabilities and adoption by customers, as I said, new personas, new use cases, lots of opportunity for our customers to try out the cloud technology. On the ChatGPT question, Mark kind of alluded to it, we think it's a massive acceleration, accelerating opportunity for us. What is, imagine a world where a customer could based on chat on generative AI trained against their libraries of previous workflows in Alteryx, they're synthesizing new workflows and giving creators a lot more time and flexibility in how they embrace our technology. We see great opportunity for generative AI to help augment our capabilities as well. We are already building tools that leverage generative AI technologies to translate between languages like SQL and Python and create huge time savings for the different technology and developer personas so they can start to incorporate massive amounts of SQL code and Python code into their Alteryx platforms. Mark talked about the reimagination. So many of our partners are already starting to reimagine and create vertical apps that bring a combination of generative AI and Alteryx. We think the end goal of democratizing analytics and indeed democratizing AI is very nicely matched between technologies like ChatGPT, generative AI technologies and large language models allow consumers to do and what Alteryx helps consumers do. So we think this is a real one plus one equals three opportunity for us. Great. And just to clarify maybe it's for Kevin, are you embedding some contribution in the guide just from some of the new cloud products that are expected to roll out, or is that all upside? No, we certainly are anticipating that the cloud suite of products become more significant to the business in 2023, and we've certainly contemplated that and how we think about the contributions of our business this year. Great, thanks. Congrats guys on a solid quarter and some nice nuggets in that shareholder letter. So maybe I'll start with and maybe Kevin, this is directed at you, but the one third of your, I think Global 2000 base generating less than 50K. Do you see the majority of those customers as targets to bring into the seven figure range over time? And then on the flip side, given that your strongest growth is coming from 1 million ARR customers today, can you just give us a sense as to where large engagements are tracking over the next several years? I mean, are these customers moving into the $3 million to $5 million range with, if you continue the success, just trying to get a sense as to what the scope of larger customers are trending towards? Yes, thanks Derrick. Let me take the first part of that and I'll have Paula jump in on the second. Yes, so the reason that I provided that level of color relative to the G2K is just for that reason, right? We're very early with a large portion of the Global 2000. They have small deployments. And we think the success that we've had with, with the longer tenured G2Ks will be replicated across this greater population, not to mention new G2Ks that will end up landing over time. So, to your point, we absolutely see these as an opportunity to significantly expand their footprint and be able to expand much more broadly across the organizations. I'll let Paula take the second part of the question around longer term growth. Yes. So we are, very excited by what we're seeing in the largest cohort of our customer base with over 140 customers now and growing that are at the million plus ARR rate, still with a lot of room to grow within that cohort. And then definitely with intentions to move many of the lower ACV cohorts into that same range and bigger, we have some eight figure customers today and we're excited to continue to add to that cohort as well. And what we're proving out with the strategy today with our largest customers is what we will continue to prove out across the entirety of the customer base. The same things that help customers to accelerate, their democratization with customer success works across all bands of customers. The portfolio that we have brings value to all sizes of customers. Our partner ecosystem helps us cover all sets of customers. So it really is continuing this strategy and motion that's working for us to move all of those customers up the growth track with us. Thank you for taking the question, and really impressive results to close out 2022, so congrats to the team. I wanted to come back to the topic of ELAs. And I think you addressed this a little bit in your script Kevin, but in terms of the percentage of bursting users that you are converting to paid users, given the cohort that you saw in 2022, any way to sort of quantify or frame that? So if you have a customer that's on a 100 user ELA, they have burst capacity to 200, sort of on average, what are you seeing that conversion look like over the last couple of quarters? Yes, thanks for the question, Sanjit. So may maybe I'll call back to the statistic that we had provided last quarter. The ELA burst customers that had been meaningfully in their burst period 40% of those were in burst. And then we mentioned in the prepared remarks that we saw, over two-thirds of expiring 21 ELAs upsell in Q4 of this year and the significance of that upsell was greater than 50% ARR. So the ELA with the burst is working. As we go forward, we sold a significant number of ELAs in Q4 and expect to continue to sell more. So we've converted a lot of those that are outstanding. So we're back, we're now at a very large population of ELA customers that are early in their birth cycle. And so we're going to continue to run the same execution strategy of surrounding them with customer success resources and additional products to, continue to see success as we convert these throughout 2023. Yes, it looks like it's working pretty well. Mark, I wanted to come back to you on just sort of where we are on the broader Alteryx sort of transformation journey. As you came in as CEO, you did a lot of work on the sales, go-to-market, ramping up the executive leadership team, and you've certainly seen that pay tremendous dividends over the last couple of quarters. When I look at Kevin's comments on the ramping profitability and your comments on cloud, the piece that we were sort of waiting for back then was progress on sort of the cloud portfolio. I'm trying to sort of read between the lines between Kevin's comments on profitability and all the progress that you've clearly showed over the last year on go-to-market. Is there a signal that the investments in sort of products have been largely made and now we're in a phase of the story where you're looking to basically push those products, the cloud portfolio from a go-to-market perspective or said another way is like the cloud portfolio ready for primetime, the two years after you've joined the organization? Yes. Hey, Sanjit. Thanks for the question. And by the way thanks for the well wishes as well. Yes, listen, I think we have done a lot of work to kind of get ready for this incredible opportunity that we have ahead of us. But I still think we're in early days of building out this platform. The Trifacta acquisition was pretty darn important, right? It was a, the replatforming option that accelerated our journey probably about 50% or more. And in terms of, saved time to be able to stand up our stack in all three public cloud environments globally and getting that done was super important. But now it's really just continuing to innovate and add more capabilities onto this platform so that customers can have fewer vendors and more consolidation of the elements in this journey that are important. And so that's absolutely what we're focused on. Profitability is very important. It's a kind of Tier 1 focus for us absolutely committed to driving leverage in this exceptional business, and it will be leveraged for a very long period of time. [Operator Instructions] Our next question comes from the line of Mike Cikos with Needham and Company. Please proceed with your question. Hey, guys. I did want to come back to the guidance here, and maybe this is more in relation to the first caller on the Q&A. I know we were citing the net new ARR contribution, and maybe it's for the newer audience, but just wanted to call out the level of conservatism here, just because calendar year 2022 did benefit from the inorganic growth, right? I believe at the time of the Trifacta acquisition, you guys had cited roughly a $20 million contribution to ARR from Trifacta. So first question on the net ARR is, is that $20 million assumption, did that still hold? Is that true? And then there is a follow-up, I know that you guys spoke about looking through your guidance, I guess multiple different lenses. You spoke about the pipeline gen, I guess your ongoing engagement with customers, but can you give us a little bit more color as far as how you, you sweated those numbers to arrive at the guidance that we're getting today? Thank you. Yes, thanks Mike. I appreciate it. So yes, that's a good call out. I appreciate with respect to Trifacta. So last year we indicated we expected Trifacta to contribute about $20 million in ARR for 2022. We actually closed out the year with Trifacta contributing $22 million. So it was a little bit above the estimate that we had. So that is certainly embedded in the 2022 results and should be considered as you look at 2023. In terms of guidance and the different dynamics in terms of how we think about the process, we certainly have a tops down approach. We have a bottoms up where we look at all the different components of how we're going to expect to deliver the year. Things like the size of the renewal base, the number of ELAs we have outstanding, how the burst affects that and provides visibility and then, we look at the macro and provide a perspective on, how we think that that's going to trend over time. And as I said in both my prepared remarks and in response to Brent, we really did want to ensure that we were baselining our guidance this year on a weakening overall environment as we go through the year. That's great. Thank you. And then just real quick, but I know that you guys had cited the macro as well with respect to maybe elongated sales cycles, it seems or feels, just given the way that you guys are talking and describing the successes here, like that's relatively minor in scope, but can you kind of delve into that a little bit more? And I'd be curious for those sales cycles, is that, is that elongation process impacting both new and existing customers, and is it impacting them differently? Again, anything there would be helpful and thank you again for the answers. I appreciate it. Yes, Mike, I'll take that question. This is similar to what we talked about on last quarter's call. We do see more scrutiny when we're working through deals with customers, sometimes a little bit more of an approval process or a review process, and that can elongate the cycle a little bit more. But I think perhaps what we feel really positive about is that we've been instrumenting the go-to-market for two years now to be focused on value and to be thinking about the outcomes that we can drive and quantifying it with value engineering engagements and making sure that our customer success teams ensure that previous investments get adopted and turned on quickly and that we're able to come prescriptively when we're expanding with an ELA or a renewal to be able to justify that investment. So I think that we are fortunate that that's been our strategy prior to the macroeconomic environment and that will continue to be our focus and I think will help us to fare a little bit better during these extra scrutiny that our customers are deploying. Yes, and Mike, I'll add a couple of things to that. First of all, Paula has really built an incredibly good team that's based on the sort of the foundation of high quality, salespeople with a very sophisticated large enterprise go-to-market motion, that is very different than it was a couple of years ago with Alteryx. So we now are sitting down with CFOs. We get visibility to their priorities and working with large partners like a PWC or a KPMG. And so I think, we've gone through this transformation to be able to plan out campaigns around renewals, right? And so that's why I think we have real strength in our execution because we're dealing with customers that love our software, and we're providing them with the kind of resources that helps them do a lot more with us. And without a lot, with a lot less friction. And it really is making a big difference. All around the table here, we work on deals with customers every quarter and I've been doing this for a long time. I can say, I've never been more confident about a team than I am now. Good to talk to you guys all as always. With the turn to profitability, I wanted to try to ask you a little bit more relative to the leverage you'll get on the sales and marketing side. So Kevin and Paula, maybe you could talk a little bit about, could quantify as much as possible how sales had count grew over time, what it was like in 2021, what it's been like in 2022 and what you think that would be like in 2023 and where we are going into 2023 in terms of grant reps from, give that some context too? Yes, thanks Michael. Let me go ahead and start off at least. So as we've talked over the last two years, we have hired and invested heavily in the go-to-market organization that has been, hiring a different type in skill of rep. It has been adding customer support and customer success resources. It's upgrading the technical resources that are in and around the sales organization to be able to help sell. And we did so pretty significantly through 2021 and most of 2022. We saw some of the hiring in sales and marketing start to slow down as we got in the back half of 2022. And I would expect that we are now kind of out of that investment phase and going into 2023, it would be a much slower clip, and it would be much more deliberate and surgical around areas of the business that we see opportunities. So to go back to Mark's commentary, we are very committed to driving higher levels of profitability as we've kind of exited this investment phase and are now into really driving scale. Sure, Michael. I was just a slight add, which is around the fact that it really is about deploying the same deep planning at this point of the year that we deployed last Q1, where we're really taking all of those ramped resources and the teams that support them to plan the business for the year and to deploy the same strategy that we deployed last year, so definitely much more about driving scale this year than it is about adding capacity. So just, I'd ask just about ramped reps. Can you contextualize maybe where you are now in terms of ramped reps to where you've been in the past and where you might end up at the end of next year? We're one year better than we were last year Michael. I'd say that slightly to facetious, we've got a really large cohort of hires that we hired over a year ago that are really coming into their own right now and these are people that on average have more than 15 years of experience, are mostly coming from billion dollar companies or greater like VMware or Palo Alto Networks. And I know, you know this, but from my experience when you have a product that is very differentiated and a need for it that's never been greater, like I think we have today, you can grow productivity per quota carrying head for a very long time. And I've been saying that for the last two, the last nine quarters, and we've seen that for the last nine quarters and I expect to see that for a very long time, as you have seen from the many more mature companies over a five to 10-year period. Thank you and congrats on the strong results. In your slides, you call out the companies that often use up to five analytics tools for each activity, and Alteryx addresses a wide range of use cases from discovery and prep to prediction and prescription. Can you talk about the role that vendor consolidation has played in your successful expansion in the G2K? And to what extent are these enterprise wins greenfield where the customers are adopting Alteryx, either any new use case and some setting and existing vendor? Yes, thanks Kamil. No doubt that today's economic time can drive companies to be thinking more about vendor consolidation and they're looking for platforms rather than single point offerings or stitching together a collection of discreet tools. So we definitely do find that to be a strength for us when we're out with our customers in positioning our platform as an end-to-end analytics platform that not only services the business analysts, but the data engineers, the business users and so forth. And so it puts us in a great position to talk to customers with a platform value proposition. And it resonates equally with existing customers where, of course, we're spending a lot of our time because there's so much growth opportunity within the existing customer base, but also serves us very well with new customers as well, who are thinking about, okay, if I'm just getting started on this journey, I want to have some investment protection for the future as I grow and know that this platform is going to grow with my business. Thanks, Paula. And if I could just squeeze in a quick one for Kevin, acquisitions and investments make cash flow a bit volatile in 2022. Can you provide some detail on how we should think about free cash flow margin conversion in 2023? Yes, I mean, we don't guide to cash flow. I did put some commentary in my script around positive operating cash flow this year and we do expect cash flow to generally track operating income with respect to M&A or other investments. We continue to look at interesting things in the market and should something present itself that is actionable and strategic, we would certainly take advantage. Oh great. Hey everyone. Thanks for taking my questions and congrats on the quarter. Just two questions here. Could you maybe dig a little bit on the 5% optimization in headcount that you talked about in the letter, or what roles did that impact broadly speaking? And I guess going into this year, have you -- what kind of change in sales compensation have you put in place? Is there a particular focus area? Are you putting in any kind of a cloud-based data out there? Any color would help. Thanks. Hey, Pinjalim, it's Mark here. I didn't hear the second part of your question. Let me answer the first part of it and then I'll allow you to repeat. I think it was for Paula, but with regards to headcount, yes, for sure. Listen, I think we're -- I'm really happy with the way we finished this year and mathematically, I feel really good about becoming a $1 billion company in 2023 from a revenue or an ARR standpoint. And it's my experience at this stage and really every year beyond, you got to run a tighter ship regardless of the economic conditions, but especially given the macroeconomic conditions, we took a hard look at the plan for FY 2023 and realized that we could benefit from the foundational investments we made last year in not only go-to-market, but also in product and engineering and really start to see some meaningful leverage out of this business. And, but to do that, I think we had to do a clean sheet of paper exercise and take a look across the company at roles that were no longer sort of valued, I guess for the next few legs of our journey. And so that involved about 150 people, I believe, 150 roles that were in effect eliminated and never an easy thing to do. But I'm really proud of the way, our Chief People Officer, Doniel Sutton, helped us manage this and do it in a way that hopefully allows people to get out there and do something different. Yes, understood. My second part was basically around any changes on the sales comp structure that you're putting in place? Any certain focus are you putting in a cloud-based quota? And I'll just add a follow-up there. Kevin, is there a way to understand kind of the savings from the 5% optimization in the headcount? I can be quick on the sales compensation question. No material changes to the way that we've structured our comp plan this year. Yes. And Pinjalim, just with respect to your last question, we didn't quantify the impact of the headcount adjustments on the business. But certainly, it's embedded in the improving operating profitability that we've guided to. I would just point out the other area of additional savings that we did drive in Q4 was the rationalization of our real estate portfolio where we reduced our footprint by about 40% and that did contribute about $15 million to 2023 in terms of order of magnitude. Hi, thanks, made it. Congrats guys. Nice quarter. Kevin, a couple of questions for you on duration, can you tell us how duration has changed and impacted your revenue recognition in the fourth quarter? Yes. Thanks, Ittai. I appreciate the comments. So with respect to duration, I think as we've talked over the last probably six quarters, we've seen duration stabilize in and around 1.5 years, which is kind of what we anticipated and signaled over time. I think we really are at a point where customers are self-selecting the duration that works appropriately for how they choose to buy and negotiate software. I would remind you that we did have a slight change in the rev rec in 2022 relative to product mix, which is included in our 2022 results. We don't expect that to change -- or we don't expect any changes as we go into 2023. Right. Okay, very good. And then last one from me. Trying to think again about ELA and specifically, the 2022 ELA cohort that will renew in 2023, can you give us two things, one anything about the size of that ELA cohort number one? And number two, what are -- from your experience, you've talked about your expansion rates and what they are for your overall business and for large customers, but can you tell us roughly what is common to see on first year ELA expansion, what is the expansion rate on those type of deals? Yes. So it's still early days for us with ELAs, which is what gives us so much excitement for the future opportunity with that. So it's had a lot of strength for us in 2022 and as we talked about, we did more ELAs in Q4 than we did for the balance of the year, so that gives you a good feel for how this is becoming a real pervasive sales motion and customer motion for us. And we saw a really high cohort of customers as they came up on the expiration of their burst even if they weren't expiring on their ELA but expiring on their one year burst capacity that that created a great compelling event to move them up. In some cases, they were doubling their licenses or as much as 4x the number of licenses at the end of that burst expiration. So it's a powerful motion for us, and we're just getting started. Yes, just as a heads up, Ittai. Just a reminder, the 2023 renewal base is significantly larger than the 2022 renewal base. Not just because it has a bunch of ELAs coming up for renewal, but it's because of the really solid work of the team in 2022 and in 2021. So listen, it gives us the kind of comfort to build a plan for FY 2023 that will allow us to continue on this journey and continue to be able to build a company that earns the right to expand and renew with customers. And we have reached the end of the question-and-answer session. I'll turn the call back over to Mark Anderson for closing remarks. Thank you, operator. And I'd like to say thank you again to our customers, partners, shareholders and our incredible team here at Alteryx. 2022 was a terrific year for Alteryx. I'm very proud of this team. As we look to 2023, we enter with an expanded platform of cloud offerings and up-level go-to-market motion, an unwavering commitment to profitability as we close out on a $1 billion ARR milestone. Thank you all and I look forward to seeing many of you at the upcoming Inspire Conference in May.

EarningCall_53

Good morning, ladies and gentlemen. Welcome to the TELUS International Fourth Quarter 2022 Investor Call. My name is Jonathan, and I will be your conference facilitator today. At this time all lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator instructions] I would now like to introduce Jason Mayr, Senior Director, Investor Relations and Treasurer at TELUS International. Mr. Mayr, you may begin the call. Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q4 2022 investor call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer; and Vanessa Kanu, our Chief Financial Officer. As usual, we'll begin with some prepared remarks where Jeff will provide an operational and strategic overview of the quarter and the year; followed by Vanessa, who will provide some key financial highlights. We'll then open the line to questions from prequalified analysts before turning the call back to Jeff for his closing remarks. Before we begin, I'd like to direct your attention to Slide 2 of the supplementary presentation available for download on this webcast and also available on our website at telusinternational.com/investors. The statements made during this call may be forward-looking in nature, including all comments reflecting expectations, assumptions, or beliefs about future events or performance that do not relate solely to historical periods. These forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections. We assume no obligation to update any forward-looking statements. Jeff and Vanessa will also discuss certain non-GAAP measures that the management team consider to be useful in assessing our company's underlying business performance. An explanation of these non-GAAP measures and a reconciliation to the comparable GAAP measures can be found in the appendices of today's supplementary presentation, along with the earnings news release issued this morning and regulatory filings available on SEDAR and EDGAR. I would also like to remind everyone that all financial measures we're referencing on this call and in our disclosure are in U.S. dollars, unless specified otherwise, and relate only to TELUS International results and measures. Thank you, Jason. Good morning everyone and thank you for joining us today. In the fourth quarter, TELUS International delivered a 5% year-over-year increase in revenue or 9% on a constant currency basis. For the full year, TI grew revenues 12% or 16% on a constant currency basis. As anticipated near-term recessionary headwinds continue to impact the timing and velocity of new projects in Q4, however, TI once again delivered solid revenue growth performance. Our team also delivered on our commitment to operate a highly profitable business with adjusted EBITDA in the quarter increasing by 10% year-over-year and an adjusted EBITDA margin of 24.9% and for the full year adjusted EBITDA growth was 12% with margin at 24.6%. These results demonstrate TI's resilience and sustainable business model, which enables us to successfully manage factors that are within our control whilst concurrently navigating challenging headwinds. This model equips us to simultaneously win new client accounts as well as to secure incremental business from the brands we already support. Indeed, our global sales team has been working diligently to identify and qualify new opportunities to not only replenish our sales funnel as deals are won or lost, but to also continue to grow it. To this end, our sales funnel as of December 31, 2022 stood at $2.7 billion. Notably, this does not include opportunities brought to us to our recent WillowTree acquisition. Among our key wins in the quarter, new logos included a consulting firm that supports complex government defense and intelligence projects, one of the fastest growing e-commerce companies in the travel and entertainment industry, a disruptive AI powered developer and service provider in the sales and marketing space, and a leading digital investment platform. Across our existing client base, we increased our share of wallet with a highly diversified list of brands, including an online food ordering and delivery platform, a global professional services company focused on HR and project management, a leading video social media network, a top provider of heavy equipment and power generation, and the largest American multinational telecommunications conglomerate. Notably, despite challenging macroeconomic conditions throughout 2022, we've maintained our focus on operational excellence. Our track record of exceeding client KPIs and our reputation as a trusted and innovative partner have positioned us favorably in the current down cycle. Additionally, with the closing of the WillowTree acquisition last month, our client base has increased by over 50 well known brands including FOX, Anheuser-Busch InBev, PepsiCo, Synchrony and Marriott. We've also become more diversified across strategic verticals such as telecommunications and media, healthcare and life sciences, financial services, consumer goods, travel and hospitality and technology and software. On that note, Tobias Dengel has now joined our executive leadership team as President of the newly rebranded WillowTree, a TELUS International Company. Together with Tobias, we've also secured an exciting infusion of digital talent at scale into our already robust end-to-end digital transformation capabilities, including premium content moderation services, AI data solutions and IT lifecycle services. The WillowTree acquisition has further elevated and differentiated our ability to design, build, and deliver premium customer experiences and digital products for the world's leading brands. Meaningful discussions are already well underway with many of our key clients, including our parent company, TELUS Corporation, a world leading communications technology company. In this regard, TI is uniquely positioned with TELUS as an anchor client given its differentiated asset mix that includes exciting growth oriented assets such as TELUS Health and TELUS Agriculture and Consumer Goods. Indeed, we're already pursuing several exciting opportunities to partner with these distinct businesses, which will also result in us displacing spend away from competitors, thanks to WillowTree's premium digital design and build capabilities. The large scale long-term projects we're currently discussing represent countercyclical revenue opportunities to help insulate TELUS International during the ongoing recessionary challenges. Moving on to my favorite part of these calls, sharing some of our client case studies. And the first example, TELUS international's engagement began with process consulting to streamline operations and kick start the digital transformation journey of a large U.S. based provider of financial services, property information, and business intelligence across consumer credit, real estate and capital markets. The project then progressed to TI building and implementing the solution. Companies that have seen robust growth often encountered challenges around standardizing their processes and consolidating business units. These challenges can lead to inefficiencies that negatively impact the customer experience. This was the case for our client, who saw a significant growth period resulting in many dispersed customer support centers throughout the country. The client engaged TI to assist them in assessing their existing contact centers and provide innovative solutions to drive efficiencies, improve technology and increase client satisfaction. The TELUS International team was able to identify quick win opportunities enabling the client to consolidate resources and maximize its people, processes and technology. We also uncovered ways to improve the clients' existing IVR design, including technology enhancements to address subpar call deflection capabilities and self-serve options. During the assessment, our team determined that findings focused on one area of the business could actually be applied across various divisions to further optimize the client's overall operations. These findings expanded the scope of our client engagement from a diagnostic exercise to a process designed consultation in which we created a fulsome digital roadmap for the clients' tax, real estate and platform services units. By leveraging information and data gathered by our team in the diagnostic phase, we built an improved IVR system that achieved a 25% reduction in average handle time across all business units. Notably, we achieved a 49% call deflection rate for the tax services business unit. The client has since selected TELUS International as its digital transformation partner to continue its journey to transform the company's customer experience to a full service omnichannel digital environment. This multi-faced project will include developing a robust knowledge base and customer facing chatbot, introducing additional support channels and automating select processes to drive further cost savings. Another client case study I'd like to share is focused on AI solutions, a leading technology client leverage TELUS International's AI data solutions to build a multilingual dataset that helps researchers scale natural language understanding technology. With longstanding linguistic dataset development experience, a diverse AI community and streamlined large scale project management protocols, TELUS International offered critical support to build the dataset, the first of its kind. Our client who's a pioneering innovator of conversational AI technologies has long prided itself on advancing natural language processing capabilities and providing research communities with access to extensive data sets that fuel AI innovation. Although voice assistants have advanced tremendously in the past decade, their multilingual language understanding capabilities are still evolving. Our client is on a mission to extend conversational aptitudes to other languages via a multilingual approach. The idea is to enable cross linguistic training where a single machine learning model understands inputs from many diverse languages. One challenge in executing this initiative was the lack of labeled data to assist with training and evaluating the models. The client required an AI data solutions partner with deep data collection expertise, who could provide realistic contextual data for a specific task. The project demanded language experts with linguistic translation, validations or localization abilities to create comprehensive and accurate conversational utterances in specified languages. Our team of experts supervised the project and delivered effective vendor qualification strategies that included preparing qualification quizzes for other participating vendors, building detailed instructions for tasks across more than 50 local languages and ensuring the delivery of high-quality data sets. We also custom engineered training and qualification materials to support frictionless data collection with carefully curated qualification tests, detailed training materials and clear task instructions. This enabled our AI community to surpass accuracy targets across all of the deliverables. Our AI community produced approximately 60% of the utterances in the data set. The project spanned nine months, during which time, TI engaged approximately 650 language experts to deliver over 600,000 high-quality language prompts in more than 30 languages or a total of 3.5 million individual language tasks. Tasks also included translating English utterances into local languages, validating utterances or checking translations for accuracy and defining localized expressions for particular prompts. The data set has many machine learning use cases and contains a million realistic parallel labeled text utterances spanning more than 50 languages as well as dozens of domains. With the release of this large language data set, along with the open source code, our client continues to promote research collaborations for natural language processing and upgraded natural language understanding, modeling to advance conversational AI systems. And to share one more example with you today another client of ours, one of the biggest global financial services companies turn to TELUS International to help safeguard its financial platform by ensuring overall customer safety, including customer verification and fraud protection. With the growth of e-commerce and increasing use of credit, financial institutions and consumers require rigorous security measures to help counter fraud. Our client was also driven by its desire to meaningfully enhance their customer experience journey through credit application, verification, fraud detection and investigation as well as billing disputes. As their partner, TELUS International scaled its program more than nine-fold from under 100 team members to nearly 900 in the span of a year, distributed across three global locations, the Philippines, Guatemala and the United States. Our team is proud to achieve an average quality score exceeding 90%, well above the target of 85%, while reducing the clients' exposure to loss of revenue from fraudulent activities. I'd like to stay on the topic of trust and safety for a moment to touch upon another key component of our portfolio, which continues to be a topic of discussion with our clients and across the broader industry, our premium content moderation services with several providers having made the decision to exit the space either in whole or in part over the past three years or so, I think it's important to point out that TELUS International remains steadfast in our commitment to performing this important work and continuing to play a critical role in ensuring safer digital spaces and online experiences for all. We also see significant short and long term opportunities to grow our market share in content moderation due to the exponential rise in user-generated content that's driven by a persistent influx of new social platforms and emerging virtual spaces like the metaverse as well as the growing popularity and prevalence of augmented and virtual reality. Additionally, this continued diversification of languages and dialects used online and younger generations continue to increase their reliance on digital services or education, work and social interaction. We're also encouraged by the evolution from more traditional content to more complex content types, such as live chat audio and video streams. We believe that new opportunities in content moderation will continue to emerge as the industry transitions from restrictive to punitive legislation, such as the Digital Services Act in Europe and several similar regulatory frameworks that are pending in the United States. And we expect to see a continued expansion of content moderation use cases as more and more brands grow their online presence. These factors and more are generating an increased demand for content moderation services. More importantly, however, is that the increasing complexity of content moderation work requires that it be completed by highly experienced, dedicated and trusted providers like TI. At TELUS International, we respectfully refer to our content moderators as digital first responders given the critical work they perform to help keep the Internet safe. Working alongside AI technology, where TI has a meaningful capability at scale to bring to bear, they are at the core of our approach, which leverages human intelligence to handle more contextual moderation decisions in accordance with our clients' guidelines. Key to our success in this area is our robust recruiting practices, onboarding programs and continued training and support. Like everything we do at TI, we leverage the strong foundation of our caring culture as a differentiator. These include individual and group counseling sessions, access to on-site fitness facilities and quiet spaces and virtual in-person social activities. Our global wellness team also focuses on providing preventative wellness practices and developing a curriculum to help educate and further empower our team members to take charge of their personal health and well-being needs alongside the strong support of their leaders. Indeed, we see a highly skilled and engaged team as critical to our collective success. And as of December 31, we had over 73,000 global team members, which represents a year-over-year increase of 18% and a sequential increase of 6% versus Q3. Some of this growth is attributable to team members joining TI in support of TELUS Health ongoing integration activities. Heading into 2023, we will continue to leverage our virtual recruitment tools as part of our broader talent acquisition strategy, including space, a virtual recruitment platform that provides job seekers with a fully immersive experience in an interactive digital environment. The platform also increases the speed of the recruitment and hiring process, broadens the global recruiting talent pool and maximizes candidate engagement. On the flip side, many companies continue to contend with a prolonged challenging macroeconomic environment and the tech sector, in particular, has been disproportionately affected. According to Layoffs.fyi, a website created in 2020 to track tech layoffs globally, goes to 160,000 workers from 1,040 companies lost their jobs in 2022, with more than half of them incurring in November and December and nearly 98,000 individuals have been laid off to date in 2023. Although many external factors, including a rapid series of interest rate hikes by central banks have contributed to these job losses, TI's thoughtful and agile approach to recruitment, intentionally adjusting the pace of our new hires in line with our cost optimization efforts and near-term demand dynamics has helped us avoid over hiring and minimize these difficult situations. Our intentional and sustained investment in upskilling and cross-training our team members has also helped in this regard. In 2022 alone, our team members completed or enrolled in nearly 16,000 courses on Udemy, an online learning platform featuring a curated collection of business and technical courses. More than 2,600 team members graduated from the TELUS International University with 65 different degrees and certificates. Over 850 team members from our sites in Guatemala and El Salvador graduated from our Language Academy at TI, improving their proficiency in English and French. Through our partnership with both Amazon Web Services and Google Cloud Platform, we now have hundreds of our team members, who hold cloud certification along with AWS cloud practitioners and solutions architect associates. And lastly, our team members also completed hundreds of tech certifications, such as open JavaScript, Node.js application developer, test automating engineering and professional cloud architect certification. Not only has our approach enabled us to transition team members between client accounts, we've also been able to address company-wide skill gaps and drive high engagement rates. In fact, for the ninth consecutive year, TI has achieved a top quartile engagement score as a result of a company-wide global survey conducted by a third-party provider. Our focus on culture naturally leads to better team member retention and helps drive TI's resilient margin profile and is at the core of how we delight our clients. We've seen the benefits of these investments first hand to TELUS International. For example, a global leader in tech real estate informed us that our commitment to culture and diversity was a major factor in their decision to initially do business with us and then to expand our partnership portfolio of support within the first year. Similar feedback was received from a global tech giant, who felt we differentiated ourselves among their other partners for the thoughtful and direct ways we give where we live at events like our TELUS Days of Giving, which are focused on strengthening social infrastructure and environmental stewardship across the globe. In this regard, I'm proud to share a sampling of events that we were held – that were held in partnership with local charitable organizations that our team members volunteered for in Q4. 1,500 volunteers cleaned and refurbished to school in the Philippines in time to welcome back 9,000 students to attend in-person classes since the beginning of the pandemic. We helped build a 12th school in Guatemala and 850 volunteers renovated the child development center at an SOS Children's Village in El Salvador. Team members in India planted 3,500 trees in partnership with SayTrees Environmental Trust. Our teams in North Charleston, Las Vegas held toy drives for their local Toys for Tots programs over the holiday season. And in North Charleston, our team built a storage unit to house supplies for victims of domestic violence, while 200 volunteers in Las Vegas supported local food banks and soup kitchens over two weekends. We'll also be releasing our first standalone TELUS International Sustainability Report in early April, focusing on our company's environmental, social, governance priorities, commitments, policies and progress. Last year, we included considerable ESG data in our 2021 annual report, which you can access from our website. TELUS International is a compelling ESG investing opportunity with our culture at the core of our commercial success, and we're excited to offer this new element of disclosure as we look to help investors see more clearly the value we're creating for all our stakeholders and striving to do our part in making our operations, partnerships, communities and environment more sustainable. Our commitment to our team members well being contributed to TELUS International being recognized for the sixth consecutive year on the Global Outsourcing 100, the annual listing of the world's best outsourcing service providers. Other contributing factors leading to this distinction included our impressive customer references, programs for innovation, CSR activities and awards and certifications. Additional award highlights from 2022 included our company being named to the Forbes Best Employers for Diversity List, Mogul's Top 100 Workplaces for Diverse Representation, and for the second year in a row, we won the Best Informational Bot Solution in the AI Breakthrough Awards for intelligent TELUS International’s assistance Agent Assist bot. On that note, our team has also been exploring the exciting possibilities of how we can leverage ChatGPT and other generative AI tools to further progress our proprietary intelligent bot platform, both for our clients and internal applications. Through our TELUS International iLabs, our R&D initiative launched in 2020 to design and build disruptive solutions for customer interactions, we have long been developing in-house chat bot solutions, leveraging natural language processing, speech recognition, and semantic understanding among other tools. The possibilities presented by ChatGPT and similar alternatives are seemingly endless in how we can leverage generative AI to design and build better bots that are more conversational, can better answer follow-up questions and admit mistakes and even reject inappropriate requests. Our team at WillowTree, a TELUS International company, have also started to experiment with various forms of AI in their digital build process and believe it will help to standardize our coding and enable us to increase our speed to market in delivering digital solutions to our clients. Of course, generative AI technology also represents an attractive business opportunity from a supply perspective to TI as even the smartest AI needs to be taught and tested with best-in-class data labeling that we provide to our human-in-the-loop AI data solutions. We'll have more to share on this topic of ChatGPT and generative AI more broadly at our Investor Day next week and in the month ahead as we continue to integrate the WillowTree and TI ecosystems, which will lead to many new use cases and enable us to create increasingly innovative solutions that leverage this exciting technology. With that, I'll now invite our Chief Financial Officer, Vanessa Kanu, to take you through a detailed review of our financial results, after which I'll return to answer your questions. Vanessa, over to you. As usual, in my review of the financial results, I will refer to some items that are non-GAAP measures. For descriptions and a reconciliation of our GAAP to non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning. Let me now expand upon the components of our financial performance. In the fourth quarter, we delivered revenue of $630 million, up 5% year-over-year on a reported basis and 9% on constant currency landing at approximately the midpoints of our latest guidance range. For the full-year, we generated revenue of $2,468 million, up 12% on a reported basis and 16% in constant currency. Resilient double digit growth is especially notable in what was a challenging year for a number of well-known reasons such as high inflation, rising interest rates, volatile markets, and recessionary fears that impact consumer confidence. Let's look at our revenues a little closer, starting with revenues by vertical. In the first quarter, our largest vertical, Tech and Games, grew 4% year-over-year on a reported basis, but on a constant currency basis, it grew by 10%. Our leading social media network client represented just under a third of the Tech and Games vertical revenues in Q4. Revenues from this particular client were down in Q4 and flat on a full year basis, although when adjusting for currency movements, revenues from this client were up 11% in constant currency on a full year basis. For the full year Tech and Games increased 15% on a reported basis and a strong 21% in constant currency driven by continued growth with existing clients for services ranging from AI data solutions, and trust and safety, to customer experience management. Within our eCommerce and FinTech, vertical revenues in Q4 declined year-over-year by 12% on the reported basis and 9% in constant currency terms due to challenges experienced by certain FinTech clients. For the full year, eCommerce and FinTech revenue increased 10% on a reported basis and 15% in constant currency. Growth in our Communications and Media vertical remains solid, driven by higher volumes and abreast of services we provide for our parent company, TELUS Corporation with revenues in the quarter increasing 6% year-over-year and growing 8% for the full year. Banking Financial Services & Insurance, or BFSI, continue to grow healthily with revenue in the fourth quarter, increasing 39% year-over-year, and 71% for the full year, driven by a large global financial institution that was added to our client roster at the end of 2021. Looking at our revenues by geography in Q4, Asia-Pacific and Central America continue to deliver strong growth, each up 21%. Revenues in North America grew 18% year-over-year. While in Europe, we continue to see recessionary pressures coupled with a weaker euro relative to the U.S. dollar, with a revenue decline in Q4 of 15% year-over-year, while on a constant currency basis the decline was 5%, primarily due to lower volumes with some of our Tech and Games and eCommerce clients. For the full year, Asia-Pacific posted a strong 30% growth in revenue, while North America was up 24%, followed by Central America at 19%, and revenues in Europe declined for the year by 4% on a reported basis, but grew at approximately 8% in constant currency. Moving on to operating expenses, salaries and benefits in the fourth quarter were $349 million, up 5% year-over-year. For the full year salaries and benefits increased 14% to $1.393 billion. Increases in both periods were due to higher team member counts to support business growth and higher average employee salaries and wages partially offset by the lower average exchange rate across a variety of currencies relative to the U.S. dollar. In 2022 salaries and benefits as the percentage of revenue overall remained steady at 56%. Our goods and services purchased were $124 million in the fourth quarter, a decrease of 1% year-over-year, while for the full year goods and services increased 8% to $468 million with these increases coming from our business growth including higher crowd contractor costs from the expansion of our AI business. Share-based compensation expense in the fourth quarter was $5 million, a decrease of $4 million year-over-year. Or for the full year it decreased by $15 million to $25 million. The decrease was primarily due to the lower average share price during the quarter and for the year overall compared to the prior year. Acquisition, integration and other charges in the fourth quarter were $23 million, an increase of $18 million, while for the full year it increased by $17 million to $40 million with the increase in the quarter and the year primarily due to the transaction cost incurred in Q4 in connection with the WillowTree acquisition. Our depreciation and amortization expense in Q4 was $68 million, slightly above $66 million in the same quarter last year. For the full year, depreciation and amortization expense was $258 million in line with the $257 million for the prior year with our investment in capital and intangible assets being offset by the lower average Euro to U.S. dollar exchange rates on assets held in our European subsidiaries where the functional currency is the Euro. Our interest expense in the fourth quarter was $12 million compared with $8 million in the same quarter last year, driven by higher interest rates. For the full year interest expense decreased 7% to $41 million, primarily due to lower average debt balances in our credit facility, partially offset by higher interest rates. Interest on our credit facility is based on SOFR plus a credit spread that is tied to our leverage ratio. In the fourth quarter, we recorded an income tax recovery of $3 million compared with an income tax expense of $21 million in the same quarter last year. And our effective tax rates decrease from 36.8% to a negative 9.7%. The Q4 recoveries primarily due to a change in the foreign tax differential that is driven by a change in income mix in the quarter in addition to recovery that is not expected to be recurring. For the full year income tax expense increased $3 million to $67 million, while the effective tax rate decrease from 45.1% to 26.8%, primarily due to a change in the foreign tax differential and a decrease in non-deductible items, which in the prior year were results of our IPO. Moving on to profitability. Our adjusted EBITDA was $157 million in the fourth quarter, a year-over-year increase of 10%, driven by business volume growth, and operational efficiency improvements and other cost realizations For the full year adjusted EBITDA was $607 million up 12%, driven by growth in revenue, partially offset by higher salaries and benefits and goods and services purchased to support overall growth in our business. We achieved an adjusted EBITDA margin for the full year of 24.6%, which was consistent with a year ago, a tremendous result given the challenging macroeconomic backdrop. Adjusted net income for the fourth quarter was $95 million. And on a per share basis, this translated into an adjusted diluted earnings per share of $0.35 up 25% year-over-year. For the full year adjusted net income increased 24% to $332 million and adjusted diluted earnings per share for the year was a $1.23, up 23%. Turning now to cash flows and our balance sheets, I wanted to point out some disclosure in the 20-F related to the presentation of cash interest paid, which changed in the fourth quarter of 2022. It is now included in cash flows from financing activities while previously it was an operating activities. This change is permitted by IFRS 7 statements of cash flows, and you can find further details in our audited financial statements filed earlier today. As a result of this change, all free cash flow amounts for comparative periods have been reclassified to conform with current period presentation. In the fourth quarter, we generated free cash flow of $60 million up 62% year-over-year driven by higher cash provided by operating activities for business growth and lower share-based compensation payments and lower capital expenditures. As a percentage of revenue free cash flow was 9.5% of revenue in Q4 compared to 6.2% in the same quarter a year ago, an increase of 330 basis points. For the full year free cash flow was $333 million, up 59%, driven by higher operating profits generated from our business, lower net outflows from working capital and lower share-based compensation payment. And as a percentage of revenue free cash flow was 13.5% in 2022, an increase of 390 basis points versus the prior year. Capital expenditures for the full year increased 3% to $104 million with increase primarily due to additional investments in our Asia-Pacific region as well as in our AI Data Solutions business. And for the full year capital expenditures as a percentage of revenues was 4.2%. We also continue to reduce our leverage lowering our net debt to adjusted EBITDA leverage ratio as defined per our credit agreements to 1.1x as of December 31 a further improvement from 1.3x as of September 30, 2022. Our total available liquidity as of December 31, 2022 was approximately $1.383 billion compared to $831 million a year ago. Liquidity increased in Q4 due to the timing of our upsize and extended credit facility. Our credit facility was extended for a full five years and now matures in January 2028. The overall facility size was increased to $2 billion to accommodate the WillowTree acquisition with a consistent pricing grid and an improvement on certain terms such as higher cash netting for leverage. Following the close of the WillowTree acquisition in early January, our net debt to adjusted EBIDA leverage ratio as per our credit agreements increase to 2.9x and remains within the target steady state range of 2x to 3x. We believe our robust cash flow profile will once again drive meaningful deleveraging, a proven ability we've demonstrated following large strategic acquisitions in the past. Now turning to our outlook. We anticipate continued, robust double digit profitable growth in 2023 amplified by our WillowTree acquisition. Our outlook for revenue is in the range of $2.97 to $3.03 billion, which represents revenue growth of 20.3% to 22.8% on a reported basis, and includes the contributions from WillowTree in the range of $255 million to $260 million. Excluding WillowTree, we expect organic growth of 10% to 12% for the year. Within this outlook range we are anticipating some near-term softness in revenues from our second largest clients, offset by meaningful incremental opportunities with our largest client TELUS and other enterprise clients. For adjusted EBITDA, we expect a range of $705 million to $725 million or 16% to 90% year-over-year growth with adjusted EBITDA margins of 23.7 to 23.9%. This includes WillowTree’s adjusted EBITDA margins of approximately 20% of revenues. Our outlook calls for adjusted diluted earnings per share in the range of a $1.20 to a $1.25, which includes certain near term dilutive impacts from the WillowTree transaction. Interest costs are naturally higher as a result of the debt financing. And as mentioned previously, our credit agreement pricing grid is based on SOFR plus a credit spread that is tied to a leverage ratio. For 2023 we expect an average interest rate of approximately 6%, which assumes a continued near term increasing SOFR, partially offset by improvement in the credit spread as our leverage ratio continues to decline throughout the year. Also factored into adjusted diluted earnings per share in 2023 is the equity issued in connection with the WillowTree acquisition in January in the amounts of 6.5 million subordinated voting shares. Our outlook assumes a weighted average diluted share counts of approximately 277 million in each of the quarters. And finally, for the full year 2023, we expect our effective tax rates to be in the range of 24% to 28%, reflecting the expected jurisdictional mix of earnings. While we do not provide quarterly guidance, I would like to call out certain seasonality factors that should be helpful in modeling seasonal cadence. We expect revenue seasonality of approximately 47% in the first half and 53% in the second half of 2023, and adjusted EBITDA seasonality of approximately 45% in the first half and 55% in the second half. Both skews reflecting our current expectation of the macro environment in addition to normal revenue ramp timing and the accretive nature of such revenue ramps on EBITDA in the back half of the year and continued realization of cost efficiency programs. Furthermore, our WillowTree cross-sell opportunities will naturally contribute to revenue and EBITDA more meaningfully in the back half, given normal contracting cycles and project ramp periods. Finally, our effective tax rate is also subject to seasonality being higher in the first half of the year and lower in the second half. In summary, while there continues to be broader, near-term macroeconomic uncertainty, we feel confident that TELUS International is well positioned to continue executing with resilience and growing the business profitably in 2023. With that, let's move over to questions. I kindly ask you to please keep it to one question at a time so that everyone can participate. Jonathan, over to you. Thank you, Ms. Kanu. [Operator Instructions] One moment for our first question. And our first question comes in the line of Ramsey El-Assal from Barclays. Your question please. Hi, good morning. Thanks for taking my question. I wanted to ask about the eCommerce and FinTech vertical. I mean, not surprisingly we're seeing some incremental weakness there. I just was wondering if you could give us some color on the sort of drivers and dynamics, what types of projects are slipping and also whether you're seeing some stabilization there or whether we should expect kind of headwinds to continue to intensify going forward in that vertical? I think we're cautiously optimistic that we're sort of stabilized in that portfolio. As I shared last time, our exposure there is not huge for the business and obviously as Vanessa just shared a little bit of challenge in terms of continued growth relative to previous trajectories, but I think what we've kind of, as I said, stabilized the kind of work we're doing for them as you might expect, is around trust and safety principally and support more broadly to help customers access their platforms, secure access to financial payments on both sides of the borrowing and lending equation. So I think what we're expecting for this year is fairly flat in terms of year-over-year growth and then hopefully towards the end of 2023, we'll start to see more meaningful recovery there. Thank you. One moment for our next question. And our next question comes on the line Tien-tsin Huang from JPMorgan. Your question please. Hi. Thank you. Appreciate the chance here to ask a question. And good morning. I wanted to ask on the – Jeff the TELUS. You sounded quite bullish on the potential for work there. I'm curious how much of that is just on the base business itself, WillowTree, cross-sell? I know there is a big opportunity there. And maybe can you just elaborate on the countercyclical nature. I heard you mention that a few times. Maybe you can just elaborate on that. That would be great. Thanks. Sure, thanks Tien-tsin. Looking forward to seeing you next week as well hopefully. There are multiple drivers in the TELUS relationship that have been hugely helpful to TI over our history and I think get even more exciting in 2023 and beyond. And admittedly, turbocharged, if you will, off the back of our WillowTree capability. Over our tenure, we have steadily displaced legacy incumbent partners that TELUS has relied upon for technology enablement, digital transformation, where, at the time, TI simply didn't have the requisite experience and expertise to support TELUS and its ambitions of transformation. As we, over the years, have continued to improve, extend, expand, increase our capability set, we've had to compete with those incumbents in order to displace them and once demonstrating our capabilities have indeed taken over that work and successfully so, hence, the continued growth of our franchise, if you will, and enabling TELUS across a myriad of services. The WillowTree addition on the mobile access, and design and build component of our ecosystem in particular, this is going to be an even bigger game changer for us as we can displace even more incumbent legacy spend and really help to accelerate TELUS' ongoing digital transformation journey. We've got nine really exciting shovel-ready initiatives that we're already digging into and starting to ramp up. These are all pretty exciting, and they are multimillion dollar multi-month or year programs. And I think this was one of the primary drivers of our excitement on the WillowTree transaction at first instance because we recognized out of the gate, the kinds of opportunities we had with sort of our anchor customer and partner at TELUS, TELUS Ag, TELUS Health, et cetera. And when I say countercyclical, what I mean is we're all seeing, reading and unfortunately experiencing some of the macroeconomic headwinds and challenges, uncertainty, reduced consumer volume driving at a minimum indecision or delayed decision-making, if not diminished demand in the near term from sort of the broader customer base, tech in particular, but not exclusively. While that's going on, this opportunity to serve TELUS in its ongoing transformation needs, really is helping us to overcome some of those challenges inoculating us from those macro cycles right now. Thank you. One moment for our next question. And our next question comes from the line of Keith Bachman from BMO. Your question please. Hi, good morning. And I feel a little left out. I don’t think I’m going to see you next week chief [ph]. But I wanted to ask about Europe, in particular. And Europe degraded from the September quarter and the variances with the rest of the geos widened. And yet it doesn't seem like the economic data would support it. And so really, it's a two-part question. A) What's going on in Europe that made the degradation, so to speak, more significant? And then secondly, and I'd say, argue more importantly, you gave the guidance for the year. And just what's your confidence level that the rest of the geos don't veer towards Europe as opposed to the inverse. In other words, does Europe represent a risk profile that we should be thinking about for the rest of Europe? And that’s it from me. Thank you. Thank you, Keith, it's Vanessa. I'll start and Jeff certainly top up as appropriate. Europe has been a challenged region, I think, even macro-wise. But you're right, I don't think there was a particularly singular events that happened in Europe macro-wise in Q4. What we are seeing, however, in our results for Europe is a lot of that decrease that we saw in Europe is actually from the tech and game sector. So I'm not sure if you put it up from my commentary, but that actually was what affected Europe disproportionately. A lot of the work that we do for that second largest clients of ours actually done out of Europe. So that client saw softness in Q4 that obviously drags down the overall European performance. So it is macro-wide, but it's also very specific to the clients that we're serving from that particular geography. To answer the second part of your – so I think as we go into 2023, we've continued to assume that we will continue to see softness in Europe, Keith. Our guidance actually has factored that we've taken that into consideration. We don't think that our large social media client is going to bounce up anytime soon. So we built that softness into our guidance, as I mentioned in my remarks. However, we have tremendous other offsetting factors as well, like other enterprise clients that we continue to see growth from like the opportunities with TELUS Corporation that we've also talked about. But those are going to be in other geos. They're not going to be in Europe. So we do expect to see a bit of a shift in our geographic mix of revenues in 2023, and we factored that in. And Vanessa, just to push on that for one second, if I could. Within the 10 to 12 organic guidance that you provided, is Europe – it remains at these levels? Or does Europe improve against the negative 15? Yes. So we don't guide by. Yes, we don't guide by geo. I don't think I want to get to that level of specificity, but we have assumed softness in Europe, so you can take that to mean, we expect a decline. I wouldn't get into the quantum of the decline. But overall, again, our guidance is not by geo, but it's a weighted view of what we expect to happen in these geographies. So while we expect Europe to decline, we've also factored in growth in other regions from, again, the opportunities that I just talked about. And let's remember as well, as we kind of think about the overall guidance, it is a robust guidance, but there are a number of factors that give me confidence, whether it's in the Americas or elsewhere. Number one, ample opportunities that we talked about in supporting TELUS Corporation through their own digital transformation journey that Jeff just spoke to and the countercyclical nature of that opportunity, which is offsetting some of the risks that we're seeing in the tech sector and the e-commerce sector that you just heard Jeff talk about. But two, a very robust funnel. You also just heard Jeff talk about the funnel being $2.7 billion. It's a very, very healthy and robust funnel, and that's across multiple geos. And of course, we again just talked about the WillowTree cross-sell and upsell opportunities and the capabilities rather than that brings to us now. And so yes, while we do have the softness in Europe, there's a lot of reasons for us to be confident and optimistic in the overall guide in terms of where we expect to see growth prospectively. Thank you. One moment for our next question. And our next question comes from the line of Maggie Nolan from William Blair. Your question please. Hi everyone. This is Kate Grunstein [ph] on for Maggie Nolan. Congrats on the nice quarter. So I wanted to quickly talk about hiring levels. Last quarter, we saw scale back in hiring, following the higher levels in the first half, but it looks like you guys hired quite a bit this quarter, despite some demand headwinds. Were those new hires primarily help tell us health integration that you mentioned? Or what was the biggest driver behind the increase versus the third quarter? Hey, Kate, welcome to the call. Thank you. Yes, you're exactly right. Meaningful hiring associated with the TELUS Health integration effort that that we are in the middle of enabling for TELUS and TELUS Health as a result of the LifeWorks acquisition that they completed late last year. Thank you. One moment for our next question. And our next question comes from the line of Cassie Chan from Bank of America. Your question please. Hey guys, I just wanted to switch gears and ask a little bit about margins. So you guys are expecting 2023 margins to be lower. Is that just purely due to WillowTree or are there any other factors such as like pricing or labor costs or attrition, utilization offsetting any of that and anyway to quantify? Thank you. Hey, Cassie, it's Vanessa. I'll pick this question. You're absolutely right. The 2023 margin guide does incorporate the WillowTree margins. So that is a little bit diluted. So that's the impact that you're seeing. But in terms of any other factors, there's always going to be client and portfolio mix impacts. As I mentioned earlier, as we were talking about revenue, we expect certain clients to flex down a little bit and other clients to flex-up. So the weighted balance of that margin profile is reflected in our guide. But in terms of pricing specifically just given that you asked, as I think you know and others know in 2022 we were pretty successful in passing on price increases along with other measures to help neutralize the impact of inflation. In 2023 while we do assume that the labor markets will start to get a little freer particularly towards the later part of the year compared to the last two years. We're still assuming a level of inflation, but we've taken a more conservative view to our expectations of pricing increases relative to what we did in the past just given the, the macro environment. So I think you're seeing a little bit of that caution reflected in our margin guidance as well. Thank you. One moment for our next question. And our next question comes from the line Divya Goyal from Scotia. Your question, please. Hi. Good morning everyone. So I had a quick question here, Jeff and Vanessa on the acquisition expense for the quarter. I do see that the number for the quarter is at $23 million. That seems pretty high for a due diligence. I understand WillowTree is a large enough acquisition. We were projecting a higher number in this coming quarter for the integration costs. I would appreciate if you could provide some guidance from a modeling standpoint and provide some color on the Q4 number there? Yes. Divya, and we can certainly spend more time on our – on the one-on-one call back later on. So we haven't incurred any integration costs in Q4 because we did a deal in close until January 3rd. So what we're referencing was actually deal transaction costs for M&A advisory, et cetera. So those costs hit us in Q4 2022 and those were significant. And that's what you heard in my commentary. But in terms of integration costs, you're absolutely right, those will start in Q1, just given the timing of when the deal closed on January 3rd. Thanks Vanessa. Yes. Like I think we were projecting a slightly lower number. That's why it came as a bit of a surprise for us from a due diligence call standpoint. But thanks a lot for the color. I look forward to speaking to you later today. Thank you. One moment for our next question. And our next question comes from the line of Stephanie Price from CIBC. Your question please. Hi, good morning. Jeff, I was hoping you could talk a little bit about the early conversations you've had with WillowTree customers and just in terms of what TI products are resonating the most with them? And then maybe related to the last question, Vanessa, how do you think about the timeline to get WillowTree onto the TI margin here? Hey, Stephanie. We've had some very exciting conversations with WillowTree clients and candidly, equally if not more exciting conversations with our clients about bringing WillowTree capabilities to bear. But on that former topic it's a combination of our content moderation capabilities in particular that seem to be attracting the most attention to several of the WillowTree clients as well as more broadly TI's what we call are deliver or run capabilities. The WillowTree historically has intentionally stayed away from that part of the client experience ecosystem. So they get engaged on the design front, the build front principally. And then once they've completed their work on many occasions their customers have invited them to continue to stay involved in terms of supporting the end user community, modernizing the back office support that's connected to those front end applications. And they have intentionally said, that's not our core competency. We're staying away from that. And now given TI's expertise at scale we're now having a much more holistic end-to-end conversation with the WillowTree customer community saying now we can actually bring the entire package to bear on their behalf. So we're pretty darned excited about how quickly we're going to realize the synergy thesis for the cross-sell opportunity. Our services to their customers, their services to ours. Thanks, Stephanie. So your question was how quickly can we get the WillowTree margins to the TI margins? We see WillowTree being accretive in 2024, and we'll talk about that a little bit later at our Investor Day next week where we'll actually talk a lot more about WillowTree as well. And we see that – we see it being accretive in 2024 for a number of reasons. Economies of scale as they grow and they're not going to need to add on some of the incremental SG&A for example, that they normally would have as a stand-alone entity leveraging the broader TI, leveraging our global footprint in terms of cost management et cetera. In addition to obviously as the revenue synergies continue to build up, that also comes with a margin uplift as well. So we are quite bullish and we do think that we'll be accretive here in 2024. Thank you. One moment for our next question. And our next question comes from the line of Dan Perlin from RBC. Your question please. Thanks. Jeff, I don't want to steal a lot from next week's event, but I did have a question just around AI and ChatGPT in particular. As to why you think it, one, it's an opportunity maybe versus a threat for content moderation and your digital CX business? We are obviously getting a lot more of these questions from investors. So I would just like to get your view on that. And then just Vanessa, did you say interest expense, I think you said was 6%, are you level setting that at a little over $100 million, if we think about it from an absolute dollar amount for 2023? Thank you, Sure. I said about 6% interest rates that'll be a little north of $100 million for 2023, about 110-ish in that ballpark. So Dan, I think ChatGPT is getting all kinds of media attention and understandably so given really the exciting natural language capability, which I think admittedly is probably the more revolutionary for lack of a better word, attribute of this capability. I mean, chatbots and that capability more broadly been around for years and years now. What I think really has ChatGPT standing out and why I think they had a couple hundred million downloads just in the first two months of its launch, is really what it's able to do in terms of sounding so human-like, so natural. And so much so that I think even millennials might be persuaded to actually ask for help now. Where we see the opportunity though is, as I said in my prepared remarks, the nature of AI is inherently retrospective in that you take a data set, you annotate it, tag it, label it, you feed that information into your machine learning algorithm, and then you invite AI to make predictions, if you will, to offer outcomes predicated on that historical data set. But by definition, if the data set is static, then the answers you're going to get will not necessarily be helpful if for example, there was no historical reference. So let me give you a specific example. If you asked ChatGPT right now, how to swap your SIM card out of your iPhone. It would in a very effortless, accessible way, talk to you like you're talking to an expert at your phone provider and invite you to take a paperclip and stick it into the little hole in the inside of your phone, and a little tray would pop out and you would manually remove, excuse me, the sim card and then insert it in the same way into your new phone. The problem with all of that though is that iPhone 14, which came out after 2021, do not have SIM card trays. And so you would actually be entirely misled despite how believable, how compelling, how accessible that instruction was because the dataset that ChatGPT ran it’s AI on is stale dated, and simply didn't know that iPhones would change their construct. So where we see the opportunity as we have done with our clients for many years now, is it's our annotation labeling, tagging capability at scale that can be used by open AI and other generative AI partners like Google, like Meta and others to ensure that those data sets continue to be refreshed on a reoccurring basis so that they're providing accurate information. And then bidirectionally, there's no question that incorporating that more comprehensive, accessible natural language processing capability into our own chatbot community prospectively is going to create even more opportunity for us to win more business. And the disintermediation of traditional live agent support that will be a consequence in part of this evolution. I think this is just a natural evolution of that dynamic that's been going on for several years now as automation and process improvement has naturally pushed the humans in the loop further up the food chain because simple, predictable, repeatable interactions can and frankly should be automated because it's a better user experience, never mind more cost effective. So we don't see this as a threat at all. We see this as an opportunity to be partnering bidirectionally with them and others similar to them. And we will indeed talk a lot about it Investor Day next week. Wondering if you can sort of talk about the current attrition levels of the employee base? Like how does it compare to the prior year? And how does it compare to the industry sort of in context with some of the comments you made earlier about the competitive landscape? Hey Richard. Thanks for the question. It's hard to compare like-for-like with the competitive landscape. I think, unfortunately, attrition has been one of those metrics that has so many variables in it and folks take, I guess, a differentiated or self-serving view sometimes, whether it includes or excludes voluntary, involuntary total front line, including training, not including training, so on and so forth. So what we tend to do is focus really inside TI and across each of those elements compared to prior quarters, prior years, et cetera, and where Q4 for us landed was continued improvement from prior quarters, still not quite yet back to pre-pandemic levels, but thank goodness, getting closer still. Always in my view, a critical element of our success is managing attrition effectively. A combination of the ever more complex work that we're invited to undertake on behalf of our clients, requiring more competent, capable, experienced tenured talented people to do the work and getting them keeping them is just so critically important to deliver great service on a sustainable basis to our customers. But equally importantly is the cost to replace them if they attrit – re-recruit, retrain, wait for proficiency, I think we've been fortunate in that regard and intentional and hence, why we continue to enjoy the margin profile that we do relative to others because I think we do a better job than most but always room to do better still. Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mr. Jeff Puritt for any further remarks. Thanks, Jonathan, and thank you all for your engagement and questions, as always. Despite the concurrence of a recessionary environment, rising inflation and geopolitical conflicts, I believe that at TELUS International, we've just barely scratched the surface of the opportunities ahead of us. Thanks to our resilient business model and focus on profitable growth, innovation and our unique caring culture. We believe that we're at the beginning of a tech super cycle that will impact all industries primarily driven by huge leaps forward in next GenTech like the generative AI revolution, augmented and virtual reality applications at a metaverse that bridges the digital and physical worlds. TI is well positioned to build deep relationships with existing and new clients as they seek to streamline, optimize and modernize their processes to enable scalable digital solutions. Furthermore, today's clients are looking for innovation and proactivity from third-party providers. They expect exceptional partners for human centered design thinking, customer journey mapping and digital road map prioritization and full cycle product development, including rapid prototyping. Through organic growth and strategic acquisitions, TI has deeply embedded each of these capabilities into our highly synergistic service offerings, and we continue to attract and retain the best talent to design, build and deliver our digital solutions, bolstered by our commitment to diversity, equity and inclusion, including through our impact sourcing programs. Sustainability and social responsibility are increasingly as important to our clients as they are for us. In 2022, our team volunteered more than 75,000 hours participating in 13 TELUS Days of Giving events and various other community activities focused on strengthening social infrastructure and environmental stewardship across the globe. Since 2007, TELUS International has meaningfully impacted the lives of more than 1.2 million people around the world through volunteer activities and charitable giving, and our team is excited to do even more. I'd like to thank each and every one of our team members for giving back so meaningfully and becoming part of our company's strong legacy that will positively impact future generations. I'll end my closing remarks today by noting that TI is hosting our first Investor Day on February 16th next Thursday at the New York Stock Exchange. We're particularly looking forward to ringing the closing bell, something we weren't able to do in person at the time of our IPO back in 2021 due to the pandemic. Vanessa and I hope to see many of you there in person where you'll also have the opportunity to meet members of the TI executive team and hear directly from them about the dynamic product portfolios they're running, how our technology and innovation drives our differentiated go-to-market approach and how our ESG focus sets us apart in the market. I won't go through the whole agenda right now, but suffice to say, I can't wait for this exciting opportunity to discuss more about my favorite subject, TELUS International. We'll be webcasting the event live, and the webcast link is available on our Investor Relations site. Please feel free to reach out to our IR team if you've got any questions. And otherwise, I hope to see you all again on our next quarterly call in May. Thank you all again. Please keep yourselves and your family safe and goodbye. Thank you. Ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

EarningCall_54

Greetings, and welcome to the Maximus Fiscal 2023 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only. 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, Jessica Batt, Vice President of Investor Relations and ESG for Maximus. Thank you. Ms. Batt. You may begin. Good morning and thanks for joining us. With me today is Bruce Caswell, President and CEO; David Mutryn, CFO; and James Francis, Vice President of Investor Relations. I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of the risks we face, including those discussed in Item 1A of our most recent Forms 10-Q and 10-K. We encourage you to review the information contained in our most recent filings with the SEC and our earnings press release. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law. Today's presentation also contains non-GAAP financial information. Management uses this information internally to analyze results and believes it may be informative to investors in gauging the quality of our financial performance, identifying trends, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented, please see the company's most recent Forms 10-Q and 10-K. Thanks, Jessica, and good morning. We are pleased to report solid first quarter results, as well as increased our revenue and earnings guidance for fiscal 2023. We have some important updates to share regarding Medicaid redeterminations that are now scheduled to commence later this fiscal year. First, I will discuss results for the quarter. Maximus reported revenue of $1.25 billion for the first quarter of fiscal year 2023, which represents 8.5% year over year growth. Organic growth was 10.3%, driven by new or expanded programs in all three segments. As we continue to see strong demand for our services across our markets. Adjusted operating income margin was 7.9% and adjusted EPS was $0.94 for the quarter. This compares to 9.0% and $1.12 respectively, for the prior year period, which included profitable short-term COVID response work in the domestic segments and less interest expense due to lower interest rates. Let's go to segment results. For the US federal services segment, revenue increased 6.2%, to $618 million, driven primarily by volume growth, tied to strong demand in the segments clinical services business and anticipated higher revenue on a large cost plus contract. The operating income margin for U.S. Federal Services in the first quarter was 8.3% as compared to 10.6% in the prior year period. Segment income results were in line with our expectation for a lighter quarter and our expectations for the full year are unchanged. For the U.S. services segment revenue increased 13.7% to $439 million. This was driven by contributions from new work wins across the portfolio in core business areas such as eligibility support, and clinical services that we have discussed on recent quarterly calls. The U.S. services operating income margin was 8.6% in the first quarter of fiscal 2023 reflecting the ongoing headwind to the segment's profitability caused by paused Medicaid redetermination activities. Now that we have clarity on restarting redeterminations, which has factored into our updated guidance, we expect improvement to operating margin for this segment. Turning to outside the U.S. segment. Revenue increased 5% year-over-year to $192 million for the quarter. This is net of currency impacts, which have been meaningful in the past year and reduce revenue by approximately 12% from the prior year period. Organic growth, which excludes the currency impact was 16.0% and driven primarily by volume increases on the U.K. restart program that has now reached its full run rate. Operating income margin for outside the U.S. in the first quarter was 5.3%. The segment had an operating loss in the prior year period due to contracts with planned startup losses, such as the U.K. restart program. Today that contract is performing to expectations, meaning, it is more than overcoming the planned startup loss and helping to drive overall profitability in the segment. Let's turn to the balance sheet and cash flow items, starting with cash flows. For the quarter ended December 31, 2022 cash used in operating activities totaled $135 million, and free cash flow was an outflow of $150 million. We had anticipated lower cash flows for this quarter, due to the timing of certain payments, like the final payment of payroll taxes that were deferred from 2020 and seasonality around collections given the holidays. Collections in December were lighter than expected, which brought DSOs at the end of the quarter to 74 days, above the range we typically expect of 60 days to 70 days, we expect the increase to be temporary, with DSOs quickly falling back into our targeted range. In the December quarter, we borrowed on our revolver to support the higher working capital, already in the month of January, we've used improved cash collections to pay it back down by $75 million. As a result of the lower collections, we finished the December quarter with total debt of $1.57 billion and our net debt to EBITDA ratio at approximately three times, putting it at the upper end of our target range of two times to three times. As a reminder, this ratio is our debt net allowed cash to adjusted EBITDA for the last 12 months, as calculated in accordance with our credit agreement. Looking forward, we expect our debt ratio to improve over the remainder of fiscal year 2023. I view December as a high watermark given the temporarily higher DSO. Over the next three quarters, our cash flow is consistent with our guidance range should enable us to finish the fiscal year below 2.5 times. Our capital allocation strategy remains unchanged from last quarter. In the near term, we plan to prioritize debt reduction using our free cash flow. Longer-term, our core focus remains strategic acquisitions intended to accelerate organic growth. Turning to fiscal year 2023 guidance. The Consolidated Appropriations Act, 2023 also known as the omnibus spending bill was passed in late December and included direction to states on resuming Medicaid redeterminations and the associated funding. Bruce will provide further remarks on the specifics of the policy and related schedule that states are targeting. But we now have a high degree of certainty that the redetermination work will commence during our third fiscal quarter. As a result, we are increasing our outlook for fiscal 2023 to reflect redeterminations volumes, which were not previously assumed and guidance. Working up from the bottom, our fiscal 2023 guidance is increased as follows. Adjusted EPS excluding intangibles amortization is now projected to be between $4 and $4.30 per share. This reflects a $0.30 raise from prior guidance. Adjusted operating income is estimated to be between $415 million and $440 million, which is before the estimated $94 million of intangibles amortization expense. Revenue is now projected to be between $4.85 billion and $5 billion. This represents year-over-year growth of 5% to 8% substantially all organic and overcomes the $300 million reduction in short-term COVID response work. This reflects an increase of $100 million from our prior guidance. While our profit forecast is up, we are factoring in some working capital increase in the fourth quarter, as a result of higher revenue. You may note, that the redetermination benefit we have assumed in the second half of the year suggests the lower end of our previously communicated range of $0.15 to $0.30 per quarter. There are a few things at play. First, as we've indicated previously, states are in varying degrees of readiness. Even those who have been deliberate in their planning for the unwinding, we see taking extra time to coordinate all aspects of their operations and systems. In short, we currently expect the redetermination volumes for us phasing and during our third quarter, and we forecast more of a full quarter contribute addition in the fourth quarter. Second, it still remains to be seen exactly how the volumes tied to redetermination activities will flow through our programs, which can have an impact on profitability, and was one of a few reasons why we previously provided a wide-range on the per quarter benefit. As a reminder, the impact to us is a function of each contracts specific pay points, as well as how beneficiaries ultimately interact with the process. And third, their states with whom we are in active dialogue, to potentially help them approach the unwinding tasks, now that there's clarity around the timeline. Our fiscal 2023 guidance assumes volumes for which we have a strong line of sight on our core programs, additional scope or volume with new or existing customers could represent further upside. As a final thought, I'd like to remind investors, that redeterminations are a normal annually recurring component of Medicaid programs, which we support with many state customers. While the resumption of redeterminations after a pause of three years will likely create a surge of activity, we would expect the volume impact to our core programs to continue on, as it did before-COVID. Turning to segment margins, we still expect U.S. federal services in the 10% to 11% range. U.S. services should finish stronger in the back half of the year due to the redeterminations. And the full year blended expectation is now nine to 11% and increase from our previous range of eight to 10%. We still expect outside the U.S. operating income margins near the low-end of the three to 7% target range. We are refining our interest expense projection, and reducing the top end of the range by $5 million. We now expect between $85 million and $90 million of interest expense. We expect a full year effective income tax rate between 24.5% and 25.5% and weighted average shares outstanding between $61.2 million and $61.3 million. Thank you, David, and good morning everyone. As David noted, a significant developments since our last call is the establishment of requirements and a specific timeline that states must follow for restarting annual redetermination of Medicaid eligibility. As a result, a number of our core programs, which have been operating with reduced volumes since the pandemic began are preparing for this major undertaking. In addition, demand in the broader Medicaid market has increased as all states must evaluate their entire populations for eligibility with only a few exceptions permitted. A brief background, signed into law by President Biden on December 29, 2022, the Consolidated Appropriations Act of 2023, also known as the Omnibus Spending Bill ends the temporary Medicaid continuous enrollment requirements of the families first coronavirus response act by decoupling it from the public health emergency or PHE, while also providing clear guidance on start and end dates for the unwinding process. While it was announced last week that the PHE is scheduled to end on May 11th of this year, the rules provided in the spending bill around redeterminations effectively superseded any reliance on the timing of the PHE. In terms of key unwinding dates. States were permitted to initiate the redetermination process as early as last week on February 1st, and must start by April of this year. With respect to this process, initiate means attempting to renew eligibility using pre-existing information on hand, including third-party data sources without contacting the individual. If a definitive determination of eligibility cannot be made, states will then notify beneficiaries who need to submit updated information in order to remain enrolled. These enrollments can be effective as early as April 1st, provided adequate notice is given to the enrollee. And then states must complete all renewals within 14 months from the beginning of the state's unwind period, which as I mentioned, cannot start later than this April. All of this means that redetermination work can begin as early as last week and end 16 months from now. As we've said in the past, we expect this work to stretch into the next fiscal year. CMS is encouraging states to distribute renewals in a reasonable manner and suggests processing no more than one-ninth of their total renewals in a given month. The enhanced federal funding known as the Federal Medical Assistance Percentage or FMAP, which has been at 6.2%, tapers down in sunsets at December 31, 2023. This further incentivizes states to approach the unwinding in a level loaded manner. We anticipate some states with larger populations, which include our current customers processing 112 each month, spreading the work over a full year and following, in most cases, their historical level loaded model for annual renewals. That means, including the initiation periods, there's more than a year in which Maximus will be supporting our state customers in working through this renewal workload. We see States taking advantage of the short runway they have now to get ready, which is why we anticipate seeing an uptick in volumes during our third fiscal quarter and achieving run rate levels in the fourth quarter, as David noted. In preparation for redeterminations, Maximus teams have been working with current and prospective clients to inform their plans and tailor our services to varying approaches and timelines. Our delivery model can accommodate these varied approaches, and we've been fortunate to be able to offer continued employment opportunities to hundreds of staff who were ramping down from open enrollment. The ability to scale staff and IT quickly gained during the pandemic, is paying dividends, as we approach this unprecedented period with our Medicaid customers. Meanwhile, we continue to deliver on the three to five year strategy outlined at our investor day last May and supported by the long-term growth drivers in our markets. I'll take the next few minutes to highlight a few of our recent successes, aligned with our three areas of focus, future of health, advanced technologies for modernization, and customer services digitally enabled. Aligned with our future of health focus, within our US services segment, we recently won a new clinical work with a long standing state customer. Our team of clinicians will be carrying out a variety of complex health assessments, including level of care, and Preadmission Screening and Resident Review or PASRR assessments. On behalf of the State agency, as well as providing helpline assistance and Medicaid LTSS application support, this win with a total contract value or TCV of $129 million over a four year base period, demonstrates our ability to successfully expand into adjacent service areas with longtime customers, as program policy and needs evolve. I would also like to share some exciting news at the federal level in our strategic focus area of technology modernization. As was reported on January 6 by Washington technology, Maximus was selected as one of two organizations to support the Enterprise Development Operations Services or EDOS contract vehicle for the IRS is information technology Application Development Office. The scope delivered via successive task orders includes IT services across a broad range of categories and functions to assist the agency in systems engineering and enterprise architecture, defect reporting and tracking, configuration management, and IT systems Programming and Source Code Development. This award for a position on the contract vehicle further demonstrates our deep understanding of the IRSs current challenges and capability to support their future modernization journey with a ceiling of $2.6 billion over seven years. This is a strategic win for Maximus. As was also reported, this award is currently under protest and the resolution is expected by mid-April. Given this uncertainty, we are not assuming any contributions in FY 2023 and look forward to providing updates as the procurement process moves toward completion. In our OUS segment, we recently were awarded a new contract in the Gulf region. The contract has a five year base period worth $215 million. This win is continued evidence of our unmatched ability to translate public policy into operating models that achieve outcomes for governments at scale. Working with the client and local charities, our team will be tasked with performing annual surveys of approximately 0.5 million social welfare beneficiary households to ensure new eligibility rules are consistently applied. So those with the greatest need are cared for. Expanding our services into an adjacent program domain, the award also evidences the trust our customers have built with Maximus over more than a decade in the region. Turning to our VES business, as mentioned on prior calls, the PACT Act volumes were anticipated to materialize in early calendar year 2023. We're pleased to report that our team members are starting to see this volume come to fruition. The PACT Act expands certain conditions under which veterans would presumptively qualify for benefits and therefore result in increases in Medical Disability Exam or MDE volumes. Due to the additional benefit, the increased volumes from the PACT Act are anticipated to be sustained well into FY 2024 as we work through initial claims. While it is still early, it's logical to assume that volumes will settle to a higher level than present over the longer term. I'm proud of the team that's stepping up in even greater service to our nation's veterans. With respect to Aidvantage, our student loan servicing program, at the time of our Q4 earnings call returned to repayment was expected to commence January 1. Since then, due to ongoing litigation regarding President Biden's Debt Relief Program, the Department of Education Federal Student Aid Office, or FSA, has pushed the end of deferrals to the earlier of 60 days after the litigation is resolved, or 60 days after June 30 2023. These prospective outcomes are contemplated in the updated guidance that we've laid out today. As the FSA looks toward return to repayment later this fiscal year, we remain committed to their stated goals of improving the borrower experience through improved performance, transparency and accountability under the loan servicing contract. Understanding that 2023 budget constraints exist within Department of Education, our plans to implement best practices in continuous review, performance management, and quality monitoring to promote greater transparency and maintain compliance remain. I'll now turn to award metrics and pipeline as of December 31st. For the first quarter of fiscal 2023, signed awards totaled $480.9 million of TCV. Further, at December 31st, there were $661.1 million worth of contracts that had been awarded, but not yet signed. These awards translate into a book-to-bill of approximately 2.2 times for the trailing 12-month period. Let's turn our attention to our pipeline of opportunities. Our pipeline at December 31st was $30.5 billion, compared to $30.7 billion reported in the fourth quarter of fiscal 2022. The December 31st pipeline is comprised of approximately $6 billion in proposals pending, $1.7 billion in proposals in preparation, and $22.8 billion in opportunities tracking. Of our total pipeline of sales opportunities, 74% represents new work. Additionally, 56% of the 30.5 billion total pipeline, is attributable to our US Federal services segment. On our last call, I noted that we’re fortunately entering FY 2023 with momentum, as evidenced by a record backlog, a healthy pipeline, strong core business delivery, minimal near-term rebid risk and solid progress delivering the business in a tough interest rate environment. Nothing in that regard has changed. But notably, we now find ourselves with improved visibility with respect to Medicaid redeterminations and evidence of pack stack volumes ramping areas that previously presented the greatest forward looking uncertainty. While David and I have been clearly note that the nationwide redetermination of more than 90 million individuals on Medicaid and CHIP is unprecedented in its scope. And states have significant discretion as to their approach. We also underscore our view that this work is very different from the short-term work we took on during the pandemic. The level loading of volumes into the next fiscal year, as well as the requirement to recheck eligibility annually, provides longer range visibility than we have had in some time. It's one thing to see our organization embrace our three to five year strategic plan, as I also noted last quarter, and another for to gain traction in the market. I'm pleased with the green shoots we've seen this quarter in the areas of clinical assessments and technology modernization and the directional affirmation they provide. Maximus is well positioned in addressable markets comprising $150 billion in annual government spending, and continues to benefit from favorable long-term growth drivers. During periods of fiscal and budgetary uncertainty, our under exposure to discretionary spending, compared to the broader gulf con community is in our view beneficial, as we continue into this period of greater stability. Scale is again building in the business. And with it, we're executing on our plans to structure the company optimally for the future, and deliver on margin expectations. Finally, I'd like to thank the more than 10,000 Maximus employees for their contributions to a very successful open enrollment season for our customers and in advance for their upcoming work on Medicaid Redeterminations. Across the company, as we did during the pandemic. We take great pride in being of service in support of some of the most critical government programs here and abroad. Thank you. We will now be conducting a question-and-answer session. Now, I will now turn it over to James Francis, Investor Relations. Good morning. A few questions on the redetermination restart here. As you think about the short term spike that you mentioned, how much of that is kind of incremental redetermination work and you can give us some additional context around that? Happy to, and I'll begin and then ask David to add his thoughts as well. So interestingly, part of our core work for our Medicaid customers, as we've been saying it's performed these redeterminations. In historically they're done on an annual basis for the population that we serve. During the pandemic, the states halted those, as we've talked about, and in many just didn't take any action whatsoever. But it's important to note some States continued their redetermination process, but just didn't take any case actions. So in some cases, there are states that have more recent and fresh information on the population than others. As I mentioned, during my prepared remarks, states will begin the process by using third party data sources, or what the government calls ex-parte data sources, which allows them to make really the most least invasive, if you will determination of re-eligibility for the program. And if that data is insufficient then they have a period where they notice individuals and try to collect fresh information. So that's a little bit on the mechanics, the population. When we began the pandemic, we were at about 71 million Medicaid and CHIP beneficiaries that's gone up by about 20 million. There's a good Urban Institute report that talks about this, and Kaiser has always been has been released aid and CMS as well. So 91 million is kind of the conventional wisdom of the current total enrollment which may have increased a little bit in since that was reported in October of last year. So with those many adults that need to be redetermined for eligibility, there's a 14 month period, we anticipate there being a high watermark, as you've noted, in that the reason for that is, first of all, while there will generally be level loading, there are states that are going to want to get through the process more expeditiously. Some states, in fact, even have mandates in place from their legislatures to move quickly through this. Similarly, the federal funding will end that's been enhanced that 6.2% of the federal match will end in December. So, we anticipate some states moving relatively quickly through that. However, as we look at it for the populations that we serve, we believe that these redeterminations will continue on through Q3 of fiscal year 2024. And then I'll add a couple of quick -- I'd say environmental caveats to this, and then turn it over to David for the actual number of where we think will land. There is obviously a high correlation between Medicaid enrollments and unemployment. So it's possible, depending on what the economic conditions are, as we move through the next year, that you could see enrollment stabilizing at a higher level, than we saw a pre pandemic, if the economy were to soften. Another point is that, one of the trades that was made in order to decouple redeterminations from the public health emergency was to provide enhanced eligibility and extended eligibility for certain populations, like postpartum women. And for children's, there are some states, in fact, like Oregon, now that basically have kids on shift, I think for six years without any redeterminations. So that could also contribute to higher, a higher final, if you will, water level. And then the last point I would make is that, I see this not dissimilar to the pandemic when we went out and work with 17 different state labor departments to provide unemployment insurance support. So, while by our calculations, there's about 39%, of the Medicaid population that is not currently in states that use vendors to support eligibility support, and therefore redeterminations. These are customers that, if they find themselves in a pinch, that we can develop relationships with and add, if you will, new state customers through this process, not dissimilar to what we did during the pandemic. So that could also affect the final number, but David is going to put a number on it. Thanks, Bruce. Yeah, I can say that at least $0.15 per quarter is a reasonable floor for our expected earnings contribution after the unwinding phase. I do have to caution that it's difficult to be precise here, given that we haven't begun the work yet and experienced the actual volume flows. And also, point out that if we experienced volumes that bring us towards the high end of that $0.15 to $0.30 range or even beyond, there's more likely to be a component there that's temporary surge in nature that may decline after the 12 to 14 months. And then last point is just a reminder, these are not typically separate pay points in our contracts, they really just drive volumes of interaction that have until 2020 always been a part of our contracts that we consider in our pricing structure. So, this specific item is not something we'll be able to continuously quantify, but we've done our best here to estimate and disclose the impact of our core programs returning to a more normal level of volume. Great, that's very helpful. Both you thank you very much for that. And then just turning to more on the margin side, do you need to ramp hiring to support the restart? And then follow-on to that would be what is kind of the state of wage inflation that you're experiencing -- that you have been experiencing prior and your ability to attract qualified candidates? Sure thing. Starting with the margin. So, yes, there is some cost ramp up, which plays into our Q3 having a partial benefit and Q4 and more of a full run rate as we talked about. But we still do believe that this volume will be highly accretive, as we've been saying for many quarters now. And that really relates to the fact that the pricing structure is where many of our contracts is contemplated this level of volume, which has been missing for three years now. But stepping back with some margin commentary, the FY 2023 guidance implies an adjusted OI margin of 8.6% to 8.8%, which is a function of fiscal year 2023 having a partial period where we do not have the redetermination from the first half. Last May at Investor Day, we set adjusted OI margin range of 9% to 12% once redeterminations begin. Our forecast for Q4, which has the full period contribution does have a falling within that target range. And as we committed at the May Investor Day, we intend to improve our margins over time. One component of which is continuously refining our cost structure and carefully managing our costs as we grow. We've been giving that even more attention recently, as I noted last quarter. And I should also mention that our strategy is to grow a higher mix of clinical and technology work, which we think can drive higher margins over time as well. And I'll jump in and give David a break and talk a little bit about the labor market and ask him to add anything he'd like. I've really been pleased, Charlie to see how the market has improved, since we really last had the opportunity to report on it. And we've seen some positive trends related to voluntary attrition rates that are declining across our business, really across all three segments. And we're pleased, for example, even outside the US where we're able to attract and retain clinicians on our flagship [Indiscernible] contract in the United Kingdom and get closer to the overall staffing levels that we've been seeking to achieve there. Furthermore, of course, there's been a real trend, as you're well aware in the tech industry, toward at least the temporary layoffs across a number of the major tech services companies. And I think the Gov Con community has really been benefiting from that we offer opportunities for stable employment and productive mission oriented work for a lot of individuals. And I think they're taking advantage of that. If you couple that with in many instances, the ability to work remotely, we found that to be a very attractive arrangement for candidates. So we -- one of the metrics we always look at is how many positions do we have in our technology services business that you -- but for having a candidate could be built out tomorrow. And that number has been steadily declining. In fact, just this week, we held a tech fair, a tech hiring fair here at our headquarters in Tysons which was very, very well attended. And there was quite a buzz in the building that day. So I'm feeling really good about that. The other comment I would add is that our customers are certainly understanding of the wage pressures that we've faced, and I said on a prior call, that we would not hesitate to go to customers well in advance of rebids of our contracts to discuss adjustments to accommodate rising wages in the marketplace. And we have done just that. And, and we've been met with I will say, more sympathetic and understanding, environment than I might have previously anticipated. So we've been able to make some progress in there in that area. And then lastly, as the portfolio gets rebid, right, that's the natural opportunity to reset and we level prices in the market. And we've continued to win and grow organically in that environment, which I think it's a good illustration of the market rates being higher than they were a few years ago. One of the things we've said around here is, you know, the $13 is now $18 in many cases, right, in some of these contracts, or more, and that's evidence that the market can bear those higher rates. So that's, that's our view on labor. I think the conditions have generally been improving. Great. And then just -- one final question of me looking at the – your US segment, I know are you focusing still on the kind of low end of the margin range there. Is that largely because of the new work you've just won in the Gulf region, or is it just more just related to absorbing some expenses as you've ramped contracts? Yes, I can take that. It's not necessarily related to the new win, Q1 came in at 5%, which is right in the middle of that range, it did have a small benefit from a contractual change, which brought it a little bit higher than the full year estimate. We're still targeting, as you said, the low end of that 3% to 7% range. But I'll say, again, that we're not satisfied at the low end of that range. And we're working hard. And we're committed to improving the margin in the segment. The segment was very volatile during the COVID period. And so it does seem to have stabilized, which is great albeit in the low single digit margin. So now we're focused on improving that margin up to the mid single digits and then high single digit.

EarningCall_55

Thank you for standing by. At this time, I would like to welcome everyone to the Q4 2022 CyberArk Software Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instructions]. Thank you, Chantal. Good morning. Thank you for joining us today to review CyberArk's fourth quarter and full year 2022 financial results. With me on the call today are Udi Mokady, Chairman and Chief Executive Officer; Matt Cohen, our Chief Operating Officer; and Josh Siegel, Chief Financial Officer. After prepared remarks, we will open the call up to a question-and-answer session. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our projected results of operations for the first quarter full year 2023 and beyond. Our actual results might differ materially from those projected in these forward-looking statements. I direct your attention to the risk factors contained in the company's annual report on Form 20-F filed with the U.S. Securities and Exchange Commission and those referenced in today's press release that are posted to the website. CyberArk expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations to the most directly comparable GAAP financial measures are also available in today's press release as well as an updated investor presentation that outlines the financial discussion in today's call. We also want to remind you that we provide the calculated revenue headwind for additional color on the impact of our subscription mix shift, but it should not be viewed as comparable to or a substitute for reported GAAP revenues or other GAAP metrics. A webcast of today's call is also available on our website in the IR section. Thanks, Erica, and thanks, everyone, for joining the call. We had another strong quarter to cap off an amazing year, where we outperformed, executed and delivered against each of our key strategic initiatives in 2022. We optimized our go-to-market engine, expanded our channel partnerships and enhanced our platform selling motion. Our breakaway innovation extended our solutions well beyond PAM and resulted in CyberArk being recognized as the leader in Identity Security. We are in a great competitive position, and we are taking market share, not only in PAM, but across our product portfolio. We entered 2023 with a more durable, more resilient and highly visible business model. CyberArk is in a position of strength well on our way to our $1 billion ARR target, and we have already reset our sights well beyond that. Because of this execution, as we are gearing up for 2023, we recognized that CyberArk was in the best possible position to make the executive changes we announced this morning. In early April, I will move into the Executive Chair role and Matt Cohen, our Chief Operating Officer, will become our CEO. Matt is an incredible leader, and I can't imagine a better person to be the next CEO of CyberArk. Since joining the company, he had a tremendous value and has been instrumental to our success. He experimented the subscription transition, transformed our go-to-market engine and has inspired people across the organization to deliver well ahead of expectations. With his support and leadership, we have delivered tremendous results and the company is set up for long-term success. While my role with CyberArk is changing as Executive Chair, I'll stay very active, working with Matt and the management team, I will focus on shaping our future by aligning our long-term strategy to our mission, preserving CyberArk's unique culture and brand and fostering relationships with key customers and partners. It is very important to me that we get this right and that we have a smooth transition, continuity of leadership and that we don't skip a beat in our execution. I believe that our plan accomplishes these objectives. Personally, Matt and I have formed a strong partnership based on shared values, a commitment to our mission and friendship. We will continue to work together closely to ensure CyberArk executes and that we deliver our vision. Matt has joined us today, and I'm going to hand it over to him for a few comments. Thank you, Udi. It is the honor of a lifetime to be named the next CEO of CyberArk. Udi, along with Josh, the leadership team and every site of our employees have worked hard to build an amazing company. Udi has been a mentor and become a dear friend over the last 3 years. He is a special leader with genuine empathy and measurable energy and deep passion for our mission, our culture and our people. I am looking so forward to working with him to scale CyberArk, drive profitable growth and deliver shareholder value. I will also focus on preserving the company's culture, which has been so critical to CyberArk's success. Our leadership team is completely aligned on our plan for 2023 and our long-term vision and our massive opportunity. Our future has never been brighter, and I am humbled to lead CyberArk's next chapter. Thank you, Matt. Moving into the quarter. Our performance demonstrates a few key points: First, the power of our business model; second, the durability of demand for our Identity Security platform; and lastly, the strength of our execution. The financial highlights include: subscription ARR reached $364 million, growing 99% year-over-year. We also added a record $63 million in net new subscription ARR from the end of Q3. Total ARR reached $570 million, growing 45% year-over-year, well ahead of our November guidance. ARR is still the best metric to measure our success. We ended the year with more than 1,300 customers, with over $100,000 in annual recurring revenue, growing more than 40% year-over-year. Total revenue came in at $169 million for the fourth quarter, with a subscription booking mix of 90% in Q4, well ahead of our guidance framework. The mix created a revenue headwind of about $24 million. Normalizing the mix for the fourth quarter of last year, our revenue would have grown by 27% this quarter. The license portion of our business, our SaaS subscription and would have grown about 42%. As we talk about the quarter, I will frame today's discussion around growth, innovation and profitability. Persistent secular tailwinds are contributing to our growth. I've spoken to dozens of customers and partners in the last few months, and they all face similar challenges. Digital transformation is leading to an explosion of identities, both human and machine. Implementing Zero Trust strategies remains complex and time consuming. And attacker innovation is only accelerated with the emergence of new technology and new attack vectors. Take ChatGPT, our lab team posted breakthrough research on ChatGPT, which can dynamically mutate malware, making it incredibly hard to detect and stop. With examples like this, there is a little debate that identity is the attack surface and taking an assumed breach mindset is the best way to protect the enterprise. In the fourth quarter, we landed with more than 380 new customers. And for the full year, we added more than 1,100 new logos, an all-time record for CyberArk. We continue to see strong diversity in our business and are signing customers from health care and biotech, hotel, fashion brands, hospitals, manufacturing, banking and insurance companies. A few examples include: a multinational health care company couldn't scale with its existing PAM point solution, particularly given the increasing number of machine identities within the organization. In a 7-figure rip and replace deal, the customer will protect human and machine identities with our modern Privilege Cloud and Secrets Management solutions. A large hotel chain is building its enterprise-wide Identity Security program on our platform. During the quarter, this cloud-first organization landed with Privilege Cloud, Workforce Password Management and Dynamic Privileged Access as its first steps with plans to expand to MFA and single sign-on in 2023. We Cyber insurance was once again a driver in Q4 across many examples, including a prominent clothing brand buying Privilege Cloud to meet the insurance requirements and lower premiums. Our subscription transition is increasing the velocity of add-on business, particularly with our SaaS solutions. A few examples. A major hotel chain is accelerating its cloud-first strategy with CyberArk expanding coverage from PAM, CyberArk Identity and Secrets Management to Endpoint Privilege Manager. A Global 2000 financial services company was our first Conjur Cloud customer and also Secret Hub. As customers implement Zero Trust strategies, they want the peace of mind with a single pane of glass into all privileged activity, visibility that only CyberArk can provide today. A Fortune 500 health care company expanded its Identity Security program and decided Cloud Entitlements Manager, Endpoint Privilege Manager and Dynamic Privileged Access as game changers for securing its cloud-first environment. We are seeing returns from strengthening our partner program in 2022. The new routes to market, enhance collaboration and improve efficiency across the ecosystem increased our momentum and significantly expanded our reach. As an example, the number of unique CyberArk certified partners grew by over 90%, and the certifications across our platform continue to grow, a great indication for future growth in our Access and Secrets Management solutions. Before moving into innovation, we wanted to comment on the macro environment. While Identity Security remains top priority, more approvals continue to be required in deals, consistent with what we saw in prior quarters. The demand trends, deal progression, win rates, renewal rates and sales cycles remain healthy across the board, which we see in our strong ARR growth. On the innovation side, we were thrilled to be named a leader in the 2022 Gartner Magic Quadrant for Access Management in early Q4, making us the only company to be named a leader by Gartner for both PAM and Access Management. We are already benefiting from the Magic Quadrant with the pipeline for our CyberArk Identity reaching new record. We believe this is another important validation of our strategy to deliver the most complete Identity Security platform in the market. The enhancements of CyberArk Identity, like flows and our innovations in PAM, including broader threat detection and response on VMs and self-hosted machines differentiate us in the field. Innovation continues to be the cornerstone of our success. In addition, we won our first deals for AWS Secret Hub and Conjur Cloud during the fourth quarter. Josh will cover profitability in more detail. But as we look into 2023, we will continue to invest with discipline and expect to leverage each of our operating expense lines. Most importantly, we plan to be agile in our investment plans and have the flexibility to make adjustments as we move through the year. When looking through the transition dynamics, we are operating CyberArk as a Rule of 40 company today and remain committed to delivering profitable growth. To ensure we capitalize on our growth opportunity, we expanded our management team adding Chris Kelly as CRO. Chris joined us from Adobe, where he scaled the Global Customer Solutions business. Chris is already making an impact. He hit the ground running and participated in our global kickoff last month. He fit seamlessly into the cyber culture and is fully supported by each of our 3 theater heads. As we look into the coming year, our top priorities for 2023 include accelerate our Identity Security platform sales motion across PAM, EPM, Access and Secrets Management, further leverage the channel and marketing alignment to extend our reach, enhance our customer success organization at scale to ensure we protect and expand our base of ARR and deliver cutting edge innovation and extend our leadership position in Identity Security. With our execution over the years, CyberArk is in a position of strength. We have a strong experienced management team focused on executing our strategy. We have a massive market opportunity and are taking market share. Our Identity Security platform is mission-critical, and our solutions are being prioritized even in today's challenging macro environment. I have never been more energized or enthusiastic about CyberArk, our leadership position, our team, our culture, and our future. We have put in place a best-in-class transition that will help ensure that we deliver against this massive opportunity. I'm looking forward to working closely with Matt, the Board and the entire CyberArk team as we build CyberArk to a $1 billion ARR company and beyond. I will now turn the call over to Josh, who will discuss our strong financial results in more detail and provide you with our outlook for the first quarter and full year 2023. Thanks, Udi. As Udi mentioned, we were pleased with the durable demand for our solutions. Customers are embracing our Identity Security platform and our subscription model is delivered, resulting in annual recurring revenue growing 45% and reaching $570 million. That's well ahead of our guidance. The subscription portion reached $364 million, increasing 99% and now represents 64% of our total. We had another record quarter for net new subscriptions and total ARR driven by the strong demand for our solutions, particularly for SaaS. Our progress is clear when you compare today to a year ago when the subscription portion was only $183 million, then just 46% of total and half of our year-end 2022 amount. Our guidance in February of last year estimated just 35% to 36% growth in total ARR to outperform and grow nearly 10 percentage points faster showcases the strength of our execution throughout the year. We have convincingly flipped our business to a fully recurring model, a key multiyear goal we set just under 2 years ago in our March 2021 Investor Day. The maintenance portion was $206 million at year-end. The year-over-year and sequential decline in maintenance ARR was due to the decline in the perpetual license sales expected and included in our guidance. We continue to see very strong renewal rates of more than 90% for our perpetual maintenance business. In addition, our visibility continues to increase with the remaining performance obligations now at $730 million at year-end. That's increasing 38% from December 2021. Total revenue of $169 million, grew 12% year-on-year and was impacted by our subscription bookings mix, which hit a record 90% for the fourth quarter. That's well above the guidance framework we provided. Economically, the revenue headwind created by the mix and duration was approximately $24 million in the fourth quarter. That's when we compare like-for-like to the fourth quarter 2021 when the mix was just 71%, taking the calculated revenue headwind into consideration, total revenue would have grown by 27% year-on-year. And if you include the $1.5 million in currency impact as well, we would have grown by 28%. If you isolate just the license portion of revenue adjusted for headwinds, our license revenue grew by 42% in the fourth quarter. On the macro environment, during the quarter, we continue to experience more approval of deal cycles. And in addition, some existing customers also wanted shorter commitments, opting for 1-year versus 3-year deals related to self-hosted subscription or our term-based license contracts, which impacted our duration, recognized revenue and long-term deferred in the quarter. Overall, we continue to be very pleased with our bookings and to see Identity Security programs being prioritized. Momentum in our business continued, and the demand environment is resilient with budgets being allocated as evidenced by the significant ARR outperformance and the strength of our new logos. Moving into the details of the revenue line for the fourth quarter. Subscription revenue reached $88.5 million, growing 86% year-on-year, representing 52% of total revenue in the fourth quarter. Consistent with our move to a subscription business model, perpetual license revenue came in at about $14.6 million. Our maintenance and professional services revenue was $66.1 million, that's $54.1 million coming from recurring maintenance and the balance of $12 million in professional services revenue. Recurring revenue reached $142.6 million or 84% of total revenue, growing 39% year-on-year from $102.9 million in the fourth quarter last year. Geographically, the business continues to be well diversified. The Americas revenue reached $99.5 million, growing 15% year-on-year. EMEA grew by 5% year-on-year to $51.8 million and APJ grew by 13% to $17.8 million of revenue. Normalizing for the mix and the duration, the Americas would have grown by 31% year-over-year and APJ by 30%. Normalizing the headwind and FX, EMEA would have grown by about 24% in the fourth quarter. All line items of the P&L that I'll discuss now are on a non-GAAP basis. Please see the full GAAP to non-GAAP reconciliation in the tables of our press release. Our fourth quarter gross profit was $140.2 million or 83% gross margin compared with 86% in fourth quarter last year. The lower year-on-year gross margin is in large part due to the significantly increased portion of SaaS revenues and the result of the declining of the perpetual license sales in the fourth quarter of 2022. While we continue to make disciplined investments to drive innovation and growth, our results demonstrate our operational rigor as evidenced by our operating expenses increasing 20% to $136.1 million, resulting in income of $4.1 million, and that compared to our headwinds adjusted revenue growth of 27% in the fourth quarter. We are still being impacted by the mix shift towards ratable revenue, which lowered our operating results. Normalizing for the headwinds, our operating margin would have been positive 14% in the fourth quarter. As a reminder, this only level set to the mix to the prior year, not all the way back to the beginning of the transition. Net income was $7.2 million or $0.16 per diluted share, beating our guide for the fourth quarter. For the full year, revenue was $591.7 million, accelerated to 18% year-on-year growth versus the 8% last year. For the full year, subscription bookings mix was 88%, which was higher than we were expecting and which resulted in approximately a $72 million headwind for the full year. This compared to a 66% subscription bookings mix for the full year 2021. Normalizing for the headwind, the total revenue would have grown 32% year-on-year. And for the full years -- for the full year, Americas would have grown by 23%, EMEA by 9% and APJ by 12%. Normalizing for the headwind for Americas -- normalizing for that headwind, though, the Americas grew by 38%, EMEA by 23% and APJ by 28% year-on-year. Moving down the P&L for the full year. Our gross margin for the year was better than we expected at 82% as we closely manage the expenses related to SaaS. Operating loss was $22.4 million. Normalizing for the headwind, operating margin would have been a positive 7% for the full year. Our net loss was $0.44 per basic and diluted share, which was also impacted by the same revenue headwind of $72 million for the full year. We also observed an FX impact for the full year of approximately $6 million on revenue, $7 million on ARR and $2 million on operating income. We continue to attract and retain top talent ending December with over 2,750 employees worldwide, including nearly 1, 160 in sales and marketing. For the full year, free cash flow was $37.2 million or 6% free cash flow margin, which came in nicely ahead of the free cash flow guardrails we set for the full year and demonstrates the strength of our subscription model. Turning to our guidance. Our guidance for the first year -- for the first quarter and the full year 2023, balances, the strong competitive position and the durable demand for our platform against the uncertainty in the macro environment. For the first quarter of 2023, we expect total revenue of $160 million to $164 million, which represents 27% year-on-year growth at the midpoint. We expect a non-GAAP operating loss of about $15.5 million to $12.5 million for the first quarter, and we expect our non-GAAP EPS to range from a net loss of $0.30 to $0.23 per basic and diluted share. Our guidance also assumes 41.3 million weighted average basic and diluted shares and about $4 million in taxes. For the full year 2023, we expect total revenue in the range of $724 million to $736 million. that's representing growth of between 22% and 24%, an acceleration from our 18% growth rate in 2022 and consistent with the playbook we outlined when we kicked off our subscription transition. For the full year, we expect our operating results to range between an operating loss of $5 million and an operating income of $5 million. We expect a range of net income per share of $0. 07 to $0. 28. And for the full year, we expect about 46.1 million weighted average diluted shares. We also expect about $20 million in taxes. For the full year, we expect annual recurring revenue to be between $730 million and $740 million at December 31, 2023, or between 28% and 30% year-over-year growth. To help model the expenses for the year, we expect to see an increase in marketing expenses in the second quarter related to our Global Impact Customer event and its World Tour, leading to a seasonally lower operating income in the second quarter. For the full year, we plan to leverage our P&L with each operating expense line growing at a slower rate in 2023 compared to 2022. The increase in our expenses fall into 3 main categories: increasing investments in our cloud infrastructure to support our record SaaS bookings in 2022, which we expect to -- which we expect will lower our gross margin for the full year to between 80% and 81%; second, making critical investments in R&D, including our SaaS and self-hosted solutions; and lastly, the investments in sales and marketing, we have deep conviction in the opportunity and our incredibly strong competitive position. As we think about our guidance for the year, we plan to be agile on our investments. If we see the demand environment change, we will adjust our hiring and investment plans for 2023. Moving to free cash flow margin. We anticipate that it will be approximately equal to our non-GAAP net income margin over a 12-month period. We remain focused on capitalizing on the massive opportunity in front of us that will deliver profitable growth and strong cash flow, creating long-term value for shareholders. If we sum up 2022, we were pleased to complete our subscription transition ahead of schedule already in the first quarter. The benefits of our subscription engine are already starting to kick in. Revenue growth accelerated to 18% in 2022, and there is further acceleration expected in 2023. As you saw from the guidance I just provided, we expect operating margins to have bottomed out in 2022 and to modestly improve in 2023. And what's even more exciting is that we expect even more meaningful improvement once we get beyond 2023 and the flywheel effect fully kicks in. Before I turn the call over for QA, I'd also like to congratulate Matt, we are aligned on our vision for execution and strategy and very much look forward to continue working closely with him in his new role. Let me just start by saying, Udi, it's been a pleasure working with you. Wish you best of luck as Executive Chair, very happy you're still staying with the company. And Matt, very much look forward to working with you as well after all the work that you've done through this transition. Maybe -- yes, absolutely. Maybe shifting to the business, Udi, maybe starting with you. I was wondering if you could just zoom out and talk about why you think Privileged Account Management seems to be bucking the trend in this macro. There are more headcount reductions happening in certain areas of the economy, not all security companies are seeing this type of ARR. I'm curious why you think PAM or just maybe even just the broader identity as a category seems to be doing better? Obviously, we're very excited that we continue to outperform and the 45% growth in ARR. Privileged Access Management is one of the few critical security layers that really make a difference in enterprise security. I would categorize it in one of the few that are on the must have side of enterprise buying decisions. And no matter how you dissect every attack that's in the news, there's -- that point of no return is when they elevated privileges, moved laterally, captured identities. And CyberArk captures both the human and machine identities in our PAM platform and in our Identity Security platform. And today, it's become clear that Identity is not just the new perimeter. Identity is the attack surface. And so it's one of the few things that enterprises do today. And of course, we pioneered the space. We're a market leader in the space. And the flip side of it is also executing on that opportunity that we created through our best-in-class go-to-market team, our channels and of course, delivering great solutions, all of these years. And I would say that the team is executing and firing all cylinders against a growing opportunity. That makes a lot of sense. Josh, maybe for my follow-up for you. Great to see the ARR guide for next year. I was wondering if you could just go one little deeper into some of your assumptions in terms of macro in terms of close rates, in terms of maintenance ARR, there's obviously a lot that goes into that ARR forecast. Is there anything you just want us to know given the -- what is still arguably an uncertain macro? Yes. Thanks, Saket. And you're right, there are a couple of dynamics that play for ARR. First of all, as we've been kind of talking about over the last year, we do expect maintenance ARR to decrease. It started to last year in 2022, and we can see it's decreasing of a couple of million dollars a quarter into 2023. And so effectively, you're seeing that we're guiding generally to a flat net new subscription ARR for 2023. The other dynamic is, if all things are held equal, if we look at our win rates, our pipeline and in the macro, we actually believe we can grow faster than that. But given the current macro and where we are in the year, I think we believe this is really the right starting point as we guide for 2023. But if I were to end, I'd say we're actually really confident in the underlying demand environment, and we have the pipeline to actually support a faster growth than in the ARR side. Congratulations, Udi, and look forward to working with you, Matt. Just for Udi, it seems like CyberArk is really separating itself from the pack from a lot of your competitors, which have been acquired and others that may be facing their own execution challenges. CyberArk has been a profitable company in the past. But just given that the opportunity that you're seeing and the success that you're seeing in multiple Identity categories, how do you think about just doubling down investment and continuing to just accelerate your share gain versus getting back to those very high margins that you saw prior to the transition? Yes. So thanks, Hamza. I think we've been very prudent in leveraging our market leadership in the space and in pioneering. I think as both Josh and I said, we're creating a plan that's very agile. We're going after this opportunity. We do want to return back to the beautiful profitability we had before the transition. And then -- and of course, coming to it with that position of strong -- of fully ratable revenue. But we are investing where we see the strong ROI coming, and we have a plan that's going to keep us agile on this front, and that includes PAM that includes going after the Access opportunity now that we're a leader in the Magic Quadrant there and includes going after the Secrets Management angle as well and of course, EPM. So we do have those great growth engines. SaaS delivered, and we'll invest, we'll do it like the CyberArk, agile but prudent. Got it. Josh, on that front, can you give any color around the percentage of ARR that's coming from some of the different categories like Access Management, PAM, et cetera? I think you've done that in the past as well. Yes. If we kind of look at the ARR pie, it's been pretty consistent. PAM is still around 55% of that subscription ARR, with EPM coming in a second at 2 0%, Access at 15% and Secrets around 10%. In the prepared remarks, you did talk about the record new logo additions that you had during the year and talked about optimized go-to-market extended channel partnerships. Maybe focus a little bit on the channel front with the new partners, what is their contribution to net new ARR at this point? And how do you expect that to ramp throughout '23 and into the future? Yes. I would say definitely strong contributors to the growth and in capturing the new logos. And especially as we expanded and have more and more channels trained on the new solutions also helping us land with Access and other fronts. I don't have the metric handy of how much do we attribute. But again, the majority of our sales involve channels. And probably 70%, 80% of our business, we attribute through direct work with channels. So there are definitely strong contributors to this net ARR. And I think, like I mentioned in the remarks, it's strategic for us to have them embracing our broad portfolio, and we see that through their certifications and training and through sales that they're continuously expanding beyond PAM with us also to Access and Secretes Management. And quickly for Josh, as you contemplate the profitable growth and the return of margin moving forward, having gone through the transition, how should we think about free cash flow and any hints there in terms of modeling it? Yes. Thanks, Rob. And as I talked about earlier in the remarks, we're -- I would look at over a 12-month period because we get a lot of seasonality and fluctuations from quarter-to-quarter. But on a 12-month period for 2023, we're looking at free cash flow at non-GAAP net income margin level. And then I think if I would add to that, because you also talked about kind of post transition as we kind of continue on through the transition, we certainly would expect to see that as expansion of free cash flow in the out years as our -- as we get to already back into '24 and '25, and we're post now roundtripping our full ARR base. And Udi, sad to see you go, but I'm looking forward to getting Matt hard times from here. So maybe I'll start with you. Just with respect to the model transition, as you essentially move it into Phase 2 of the transition with continued ARR growth, I'm curious what sort of changes if at all, that you're thinking about making by way of go-to-market bundling pricing strategy? So any of those inputs potentially changing the way you scale the ARR base from here? And would love to hear Matt chime in too, if relevant. And a follow-up for Josh, please. So it's Udi, first of all, thanks, Fatima. I'm staying, but I'm looking forward to giving Matt a hard time. And let's start with that. Maybe Matt, you take this. Sure, Udi. Thanks. I think as we look at 2023, we kind of just see continued momentum in the go-to-market channels that we've already put into place. We've started to rely and kind of build a much stronger engine in the marketing organization to help us with the kind of demand generation, and we continue to put more focus and frankly, more resources on that ability to be able to drive pipe that way. Certainly, our bundles have been a piece of the success over the last couple of years where we have our core PAM-C come with a little bit of identity and a little bit of other areas that help to drive and see those products in. We're certainly instituting a price increase in 2023 here, kind of matched to the inflationary environment that we've seen, and that will help us kind of get a little bit of uptick. And then as we were just talking about, we push on the channel partner program and making sure that these -- what we keep referring to is new routes to market, the focus with the MSP program, the distributors, even the marketplaces that are out there and leveraging them to help us drive demand. But I look at 2023 kind of as a continuation of what we've been doing because we've been seeing such success with that. Matt, congratulations on the new appointment there. Udi, I guess both a question for you and Matt. Looking forward, I mean, I guess, how do you think of CyberArk success? How much is predicated on successful moving into Access Management beyond, call it, Broader Privilege Access? And how meaningful do you push into that market over the next few years, given it is a more competitive market, and there's really a couple of large vendors that kind of already are large incumbents in the space. So how do you think about that initiative over the next couple of years? . Yes, absolutely. I think the beauty of the CyberArk chart right now is that we have such a great opportunity in PAM itself as such a critical layer of security and then this growth engine in Access, in Access, our business almost doubled in ARR. We're seeing a record pipeline or improving win rates. I mentioned that now with the Magic Quadrant, we're also invited to more and more RFPs. So the way we look at it is great upside for us in expanding into access. We are and we will and that we're doing it differentiated. You mentioned competition. We're coming to it as from the makers of PAM, those who really pioneered the hardest layer of security in identity, the hardest part of identity coming into securing all types of identities, the human workforce users, the third-party supplier, the machine identities and coming to it from that position of strength and trust as the security vendor. So we are going after it. And -- but we're going after it in a differentiated way. We have a great customer base to leverage. We have new lending -- new ways to land and so it is an upside along with, of course, the other growth entrants like Secrets Management. And I would just add here that I think increasingly, it's an Identity Security story with our customers, and we're able to talk to them about our platform, we're able to talk to them about all the solutions working together to drive value and to protect their environments. And so when we think about our recent Global kickoff that we just had where we had all our sellers together, the main story that we were training on is how to position the full Identity Security story. And that brings us then obviously with the foundation in PAM, but outside into these other areas in our conversations with our customers. Congrats, Udi. Congrats, Matt. Best wishes to you looking forward to working with Matt. Udi, what a ride. I actually had a question about machine identity, I think you just mentioned that you and Matt. At a recent conference, you made some, I would even say, both statement about machine identity the opportunity and CyberArk taking pretty much a nice share longer term within this market. Can you talk to us about what you see within the machine identity now you guys are doing absolutely great on the human side. But what should we be expecting out of CyberArk going forward within the machine identity arena? Yes, absolutely, Shaul. And again, thanks for the warm words. I think what we discovered in our surveys and also in the field is that with digital transformation and with cloud adoption, organizations are creating a multitude more machine identities than they have human identities even to the factor of 45 times more machines than you and that's what I mentioned in the conference. And as Matt mentioned earlier, we're going after this with a platform sale that covers both the human and machine under identity Security. And it's becoming this gaming hall. By the way, in some of the recent breaches the point of no return is -- was when the attacker achieved privileged access through credentials that were identities, and we're able to get into systems that way. And so our strategy is to do that with our platform and to make it easier and easier for the developers to adopt our solutions as we announced that at our last Big Impact event. And as we mentioned, we're seeing our first customers adopted. We announced Secrets Hub, which make it very completely transparent to the developer to work natively in the cloud environment. The first announcement was with AWS Secret Store, where CyberArk is the backbone securing Secrets for all types of applications, both on-premise cloud environments and it's transparent to the developers. So that's going to be our strategy going forward. Make it easy for the developer, but provide the security professionals, the single pane of glass, the -- and be the backbone to securing all types of credentials and identities. And Matt, congratulations from me as well. Hopefully, Udi, we still get to engage with you on a regularly frequent basis. So nice to see that you're sticking with the company, and we'll remain engaged. I guess for me, I'd like to maybe see if we can like dig into ARR a little bit. It looks like you had some nice new logo adds. It's almost like the new customer cadence didn't flinch in this macro and then net new ARR or the ARR contribution from those new adds. It seems like you're landing at a greater pace or at a greater amount for new logos. But I know you also mentioned some -- I think, Udi, you mentioned some shorter duration incidents in with revenue. Maybe could you dig in there a little bit and offset where are you seeing the headwinds outside of shorter duration? And what do you attribute the larger, I guess, land rates with new logos, too? So I'll start, Josh, and maybe you want to what to step in. And thank you, Brian. I would say from the new logos, we see that half of them land with PAM and additional solutions. So the platform sale is working. So we see that contribution of the wider portfolio to a growing deal size in our landing spot. And of course, it's a great for us as we work on the renewals and expansion in our ARR model. And again, that was something we've been proving throughout the years. Matt mentioned some of the bundling that we've done and that's all contributing to a better land. And I think like I've mentioned in other calls, we have more landing points. And of course, PAM is still the majority. And back to the first question for the day, PAM being so critical, but we're able to land with PAM plus additional solutions. And you asked about the duration. So Josh off to you. Yes. So Brian, when we think about the duration, it actually doesn't impact at all the ARR. The duration is we refer to as part of the headwind because it's part of our self-hosted term-based license contracts. And as you know, as duration goes down, you would recognize less in the end period. So we saw duration come in during the fourth quarter on those term-based license contracts, which had some headwind on our recognized revenue for the fourth quarter, but it's just a matter of when we'll recognize it and we'll just recognize more of it down the road upon renewals. So we think that certainly the shorter duration was kind of attributed to customers looking at their budgets and their intent for buying and deciding that they were going for 1 year instead of longer term. But from our perspective, given our very high renewal rates, particularly on all of our products that we're good with that because it's not an impact on the business. It's just purely creating more ratability. And congrats to both Udi and Matt. Maybe for Josh, you've talked in the past about a single-digit growth rate from ARR coming from converting the existing maintenance base to subscription and SaaS. And I was just curious kind of was that true for all of fiscal '22? And how should we think about the conversion mix in the context of fiscal '23 guidance? Yes, Adam. It actually was pretty consistent all through 2022. And if we look at it from an annual basis, it was exactly that kind of a single-digit percentage of the AR growth rate coming from conversions. And we're really happy with that because it really shows, first of all that we're getting a lot of new customers. And we're also getting a lot of add-ons coming in off of their existing installed base. And it continues to provide a lot of engagement with our existing customers going forward. So yes, it remains around just the single digits. No, at this point, we don't see signals for that. But clearly, we're monitoring it. And I think -- and our guide obviously contemplates our estimates for that. Udi and Matt, I want to echo my congrats on your respective moves. and congrats on what overall looks like a very smooth transition. Maybe for Udi or for Matt, you've consistently talked about a SaaS heavy transition. And it looks like that was even more so the case in 4Q with SaaS growing nicely above 100%. Any high-level thoughts on the expectations of Privilege Cloud versus term-based license '23? Yes, sure. This is Matt here. So I think that we continue to be really enthused by the momentum in Privilege Cloud. We see, obviously, most of our new logos that are choosing to land with PAM, they land with Privilege Cloud. It's definitely the default option the customers get to value significantly quicker. They're able to get to an expand motion for us in a faster rate, which is good for the lifetime value coming out of the customer. So we continue to see that kind of happen. There's pockets where there's holdouts certain geographies or regions around the world or maybe the access to the data center isn't as normalized or some government accounts. But we definitely see Privilege Cloud as kind of the leading entity for us moving forward. And mainly the self-based subscription -- or sorry, on-prem subscription is generally to existing customers who are buying more seats who aren't quite ready yet to lift and shift over to the SaaS environment. And I think that trend will continue to play out and accelerate over the next couple of years. At this point, to your last kind of point of your question, we are seeing not only full parity with our Privileged Cloud offering but we're actually seeing differentiation in our Privilege Cloud offering, where the kind of integration of our Dynamic Privilege Access into the Privilege Cloud offering, the ability to be able to actually offer even better threat analytics that really starts to set the stage for, I think, that being the premium offering that we have out in the market. Udi, if you need a partner for your next fishing trip, you know who to call. I have two questions. The first one is pricing. You mentioned that there is a pricing increase in 2023. What's the impact on your revenues on your ARR? How long does it take to translate the pricing increase to revenue growth and ARR? And the second question is -- let's do it one by one. That's right. Okay. So Tal, on that, it's going to be really a small amount during 2023. Any price increase impacting ARR and revenue, especially because we have more and more being ratable. So it's not a significant piece of the raise in the guide. Got it. The second question is to Matt. And Matt, every CEO brings new spirit and new kind of changes. What is your agenda? What do you see as your main focus areas for 2023 and beyond? Yes, I appreciate the question. I think that when you look at what has worked so well for Udi and I is that we do share a similar view on the market, on the importance of culture and the importance of the teams that we've built here. And we've been so kind of intricately linked from a standpoint of coming up with the strategy that we have today. So I think what I promise to the team and to Udi really is a continuation of the great momentum that we have. We feel like we've never been in a better position in a better place. . And we have a special opportunity here in the market and a group of special people here at the company. And so I'm kind of excited to continue the spirit, as you said, of where we've been and to bring it forward for the years ahead. And are there any areas where you're going to focus on more to try and even accelerate the growth? Or any things that you're going to focus in -- focus on especially to kind of try and bring either new revenues, new areas? Or is it going to be more of the same, basically? Yes. I mean, we believe that this kind of shift up into the Identity Security vision, the Identity Security platform and our ability to be able to go out there and help our customers across the entire identity landscape, human and nonhuman machine into access, into all the new areas we've been that the market opportunity for us remains huge. And we can go and tap into that over the next couple of years. We don't need to pivot to a new strategy. We need to go and execute or continue to execute against the current strategy to go get that opportunity. Udi, let me echo my congratulations as well. It's been a pleasure for all of these years. And Matt, congrats on the new opportunity. Just wanted to maybe dig a little bit more into sort of the new Secrets Management products that you guys referenced. Just -- what's been the initial reception from customers there? How do you think about sort of the total market opportunity? And how does this maybe augment your existing Secrets Management strategy? Absolutely, Jonathan. And thank you for those warm words, and thank you for getting to know me when we were an unknown category as we were pioneering time as a private company. Great. So to your question, I think the two that I would highlight is that we released Conjur Cloud. So the ability to consume Secrets Management as a service, where our customer can hit the ground running and they don't have to set of infrastructure, we have our first customers on that and the reception. That optionality is really well received by customers. They can still decide to have it on-premise or they can now have Conjur as a service, which really breakthrough innovation in the market. And the second one that I mentioned earlier, and it's very strategic process to is Secrets Hub. We're on top of our solution for, I would say, native applications And for dynamic applications, we allow organizations that decide to use the native cloud Secret Store and CyberArk as the backbone. That was announced that had impact and is very well received. The first the cloud supported is AWS, and we will follow with Azure and GCP. And again, customers are eager. And again, have started with the AWS aspect it also further strengthens our partnership with AWS. And so those are being well accepted. And in terms of the opportunity, it's really -- we've highlighted the multibillion opportunity in Identity Security and the machine identity is a big part of that. And we have a unique angle to take after it because we are coming as the trusted security provider, but understanding the unique needs of the developer. So bridging between security and developers is a very large opportunity. And Udi, it has been an absolute privilege. No intended. And Matt, congrats on the appointment. Just a quick one for me. I think in the prepared remarks, you guys touched on this tailwind from cyber insurance. Is there any way you can dive one level deeper on that? And just maybe how long do you think this tailwind could last? I think it's going to -- so thanks for the question and onwards. I think it's going to last because we're seeing just the early parts of it. It's mostly in North America. We believe similar drivers will show up in Europe and in the rest of the world. The insurers are -- they found themselves like every company in the world, every organization is being attacked. It's a given -- and we've recently showed in a conference that companies are being attacked multiple times, even after they recover. So the insurance providers had to step up and take an approach of we're going to enforce important layers that make a difference before we ensure your to lower the premium. So I think it's going to be another of those drivers that will last as long as that cyber insurance will exist and it's going to exist, it's becoming kind of table stakes at companies. And it gives an opportunity for CyberArk and companies like us, they also further partner with the insurance companies to educate their customers and make it very seamless for them to get on board. And the fact that we now have the SaaS optionality really serves that well that they -- when they need to meet the requirement, they can join CyberArk and be up and running fast and get that insurance set up. And congratulations, Udi, on everything you've achieved thus far in building such a terrific company. Congrats to Matt as well in an extremely well-deserved promotion. Udi, as you know, CyberArk is one of a select few software vendors that was able to execute at a very high level throughout all of 2022. Many investors wonder if you can continue to defy gravity in this environment. So it might be helpful just to hear a bit more from you on your confidence level and repeating this in 2023, even if we were to assume that the macro gets a little tougher from here? Yes. I would say that we're extremely confident. I think we've built a plan and like we mentioned, Matt and Josh and I and the executive team, we built a plan that factored the macro. Macro was in the room as we worked on the plan and really also very data-driven, analyzing our pipeline, analyzing our continued contribution from channels. And so we're very confident in the opportunity we have into this year. And for our ability to push those levers that we put in place. I mean, a lot of the components in CyberArk are actually behaving like growth engines, also like start-ups within the company, like the way the access business is growing. So we have the growth edge, we have the PAM market become -- it's a no greater security layer, and we're taking it all over the world. And so yes, I would answer that. And Josh, do you have a numerical answer for that? No. I think you said it well in terms of how we built our expectations for the year. I would also add that in our 2023 guide, it actually even includes a $20 million headwind when we think about the kind of the last a bit of the transition as we go from kind of the high 80% mix in 2022 to well over 90% mix into 2023. And so I think when you combine all that, I think that we're confident about where we're headed. And if our business trends remain as they are, well, we have the durability of demand and pipeline to support possibly even faster growth. All right. Udi Mokady for the record, but it's all good. So I really want to thank everyone for the warm congrats that we saw throughout the call, we all really appreciate and the support of , as you saw in journey. We're just getting started. We're very excited about the year ahead. And again, we had another strong quarter, demonstrating that durable demand that we talked about and our platform selling momentum in the market positioning us very well for 2023. So thank you to our customers, first and foremost, and partners that are the cornerstone of our success. And I want to extend special appreciation to the entire CyberArk crew around the world. for the hard work and strong execution, very mission-driven team. So thank you very much.

EarningCall_56

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Thank you. Good morning, and welcome to Equitable Holdings fourth quarter and full year 2022 earnings call. Materials for today's call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may materially differ from those expressed in or indicated by such forward-looking statements. So I'd like to refer you to the Safe Harbor language on Slide 2 of our presentation for additional information. Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; and Kate Burke, AllianceBernstein's Chief Operating Officer and Chief Financial Officer. During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website, in our earnings release, slide presentation, and financial supplement. Good morning and thank you for joining today's call. On Slide 3, I will highlight results from the year. Non-GAAP operating earnings were $5.08 per share, or $5.55 per share after adjusting for notable items, down 8% in the year, a strong performance despite 2022's turbulent markets, which saw equity markets fall 20% and bond values down 13%. Managing what is within our control is particularly important now. We have achieved our $180 million incremental general account investment income target, one year ahead of schedule, and realized net expense savings of $50 million. Assets under management at the end of the period were $754 billion, down 17% year-to-date, but up 5% compared to quarter three. We had a strong year with $10 billion in total company inflows with $4.6 billion of inflows in our core retirement business in addition to $900 million in asset management and $4.5 billion in wealth management. While we did see elevated mortality in the fourth quarter, this reversed favorable experience reported earlier in the year. And overall, our full year mortality experience was $20 million better than our expectations. The benefits of our economic management and hedging program continue. We have $2 billion of cash at holdings and the combined RBC ratio at the end of the year of 425%. In 2022, we returned $1.3 billion to shareholders, a 15% growth in free cash flow per share. This payout was 57% of our adjusted non-GAAP operating earnings, at the top end of our guidance range. Post LDTI accounting changes, we are increasing our payout guidance to 55% to 65% of operating earnings and expect 2023 cash generation of $1.3 billion. We see continued momentum in our retirement and asset management businesses. We benefit from the increasing demand for advice orientated retirement products, with total premiums up 6% over the year to $19 billion. At AB, Seth and his team are navigating the industry-wide pressures on flows and margins extremely well. We've completed the acquisition of CarVal Investors, helping shift AB's asset mix over the year and improving its annual fee rate by 3%. Interest rate increased over 230 basis points in the year, benefiting both our general account and new business values. On the general account, new money yields are 190 basis points higher than the average portfolio yield. And interest rate rises, combined with strong sales, have resulted in record new business value for the year. Turning to Slide 4. We highlight the unique opportunity we have to leverage synergies across our retirement, asset management and advice businesses. This demonstrates our businesses are stronger together and drive significant value for shareholders. As of the year-end, we have deployed 70% of our $10 billion capital commitment from our insurance business to see growth in AB's private markets platform, with meaningful impact coming through higher yields in our general account and supporting the acquisition of CarVal Investors. Similarly, AB's lifetime income solutions supports Equitable's institutional 401(k) business with nearly $800 million of premiums in the year. Looking forward, we see this as a largely untapped opportunity to benefit from the passage of the SECURE 2.0 Act. Turning to advice. We continue to realize the benefits of our proprietary sales force with Equitable Advisors delivering approximately 50% of our $19 billion retirement premiums this year, in addition to $10.4 billion of wealth management sales. In retirement, our strong premium supported $4.6 billion in core retirement inflows, up 89% compared to prior year. And despite the falling markets, we are delivering a 4% organic growth rate. We also delivered record new business value from strong sales and the benefit of rising interest rates. Turning to asset management. Flows and short-term performance remained under pressure, a consistent story for the industry, but AB's relative performance is strong, with $900 million in total inflows, driven by $3.2 billion in active strategies, excluding the expected redemptions from AXA. Despite fixed income outflows with rising rates putting pressure on performance this year, AB saw organic growth across the U.S. retail and Japanese markets, along with active equities and municipals, and the private wealth business grew organically for the fifth year in the last seven. Importantly, the strategic focus on AB's private markets and the acquisition of CarVal, brought our private markets platform to $56 billion, up 57% on the year, resulting in a 3% fee rate improvement and a healthy institutional pipeline. Through AB's track record of attracting third-party teams and building internal capabilities, we see meaningful long-term growth opportunities for AB and Equitable, leading to higher multiple earnings and cash flows. In our Wealth Management business, we reported $10.4 billion in investment product sales, of which over 85% were fee-based advisory accounts, our second best year in sales after a record year in 2021. Despite challenging markets, our advisors delivered $4.5 billion in wealth management net inflows, driving a 5% organic growth rate and productivity was up 2% over prior year. We look forward to breaking out this segment next quarter, providing further disclosure and transparency around the importance of our 4,300 advisors to our business model. I will now turn the call over to Robin to discuss the results from the year and fourth quarter in more detail. Robin? Thank you, Mark. Turning to Slide 5. We reported $2 billion in non-GAAP operating earnings this year, over $2.2 billion and $5.55 per share after adjusting for notable items in the period. As Mark mentioned, our earnings results performed as expected compared to prior year, impacted by market headwinds, which were partially offset by the continued execution of our general account rebalancing, achieving our target of $180 million incremental income a year ahead of plan. In addition, we realized $50 million of net expense savings in our retirement businesses as of year-end, and remain on track to achieve our $80 million target in 2023. Looking ahead, we also expect to benefit from $75 million in savings at AllianceBernstein in 2025 associated with our Nashville relocation. Turning to segment results. Our businesses continued their strong performance, demonstrated the significant demand for the client solutions we provide during these volatile markets. In Individual Retirement, we reported operating earnings of $1.2 billion after adjusting for notable items. Total premiums were up 5% this year with record sales and structured capital strategies, up 12% year-over-year. Results reflect the benefit of rising rates, helping us achieve record new business value. In 2022, an individual with a 60:40 portfolio had a negative return of 16%. But if that same individual bought our SCS solution with a 20% buffer at the start of the year, the market impact would have been fully absorbed, demonstrating the all-weather portfolio we offer for clients. In a market with heavy competition across variable and fixed products, Equitable is differentiated through our distribution, which allows us to operate in the most profitable part of the retirement market with RILA's and floating rate VAs. In Group Retirement, our operating earnings were $520 million after adjusting for notable items with total premiums up 16% year-over-year. Our primary market is our tax-exempt channel, serving the over 800,000 educators in the K-12 teachers market. Tax exempt delivered net inflows, benefiting from the differentiated advice Equitable Advisors provides to educators and schools across America. We also introduced our institutional channel this year within the Group Retirement segment, which demonstrates the synergies between our subsidiaries. The AB 401(k) in-plan guarantee product allows clients to benefit through an AB managed retirement solution with an Equitable managed income allocation. This allows us to provide secure income to retirees so that they can live long and fulfilling lives. Our retirement business benefited from nearly 800 million in premiums associated with the retirement plan AB1 earlier this year. And we expect to continue to see flows at the SECURE Act enabled us to address the growing need for income in the large 401(k) market. Turning to asset management. Operating earnings were 424 million. Net flows were positive for the full year, excluding low fee AXA redemption. AB benefited from its fourth consecutive year of active organic growth. While short-term performance was challenged in line with the broader market. Long-term performance remains strong with 70% of fixed income and 77% of equity outperforming over the last five years. And we remain confident in AB’s ability to continue to deliver profitable organic growth, leveraging the strength of their distribution and permanent capital from Equitable. In Protection Solutions, operating earnings were 307 million after adjusting for notable items this year. We continue to benefit from our strategic shift towards our accumulation oriented VUL offerings with total premiums and first year premiums up 3% and 8% year-over-year. In employee benefits, we’ve seen strong growth with 741,000 lives covered now, up 22% compared to prior year and premiums up 36% in the year. Taking a step back, we continue to make progress on shifting our business mix with over 50% of earnings coming from our Group Protection and Asset Management businesses. Additionally, we look forward to making two enhancements to our disclosure in 2023 that will further highlight the value of our businesses. First, we will split the Individual Retirement segment between our core business, which is more spread oriented and our legacy business, which will continue to run off. Second, we are going to break out our Wealth Management business from Corporate and Other. This is a business that generates a 100 million in cash annually. And when we break it out, you’ll see it’s a faster growing part of our overall business due to the strong organic growth the business unit has delivered. Together with the new segmentation and continued growth in free cash flows, Equitable Holdings offers an attractive value proposition for long-term shareholders. Turning to Slide 6, our highlight total company results for the quarter. We reported non-GAAP operating earnings of 436 million or a $1.11 per share, lower than the third quarter on a per share basis, primarily due to elevated mortality, which I’ll provide further detail on in a moment and lower alternative returns in the quarter. Adjusting for 93 million of notable items in the quarter, non-GAAP operating earnings are 529 million or $1.36 per share, down 17% on a comparable year-over-year per share basis. Turning to GAAP results. We reported a 789 million net loss in the quarter driven by higher equity markets on a point-to-point basis. Looking forward, our net income volatility will be reduced post LDTI due to GAAP liabilities being fair valued, which better matches our economic hedges. We have provided more detail on drivers and updated sensitivities in the appendix. Quarter end AUM was in line with market movements, as continued market volatility was partially offset by strong ongoing business momentum across all of our lines. Our results for the quarter should be considered in light of our business model, which derives a majority of its earnings from fees based off of account values. Our earnings reflect lower average equity markets on both an annual and sequential basis. That said, we are also benefiting from higher interest rates and spreads spearheaded by the continued demand for our leading SCS product, which generates spread based earnings and has a 35 billion general account value. Within our general account as well, we’re investing a new money yields of 5% in the second half of the year. And we’re generating higher net investment income and record levels of new business value, which will result in future cash flows. On Slide 7, I’ll dive deeper into our mortality experience over the last two years to better put in this perspective, the fourth quarter results. The chart on this page shows how actual mortality has fared each quarter versus what we expected in our GAAP reserving after accounting for our COVID-19 guidance. As you can see, looking back eight quarters, our experience is better than what we assumed in our GAAP reserving. In the fourth quarter, we saw elevated claims due to higher frequency, which was likely flu-related at the fourth quarter saw flu cases peak earlier than historical trends. Mortality was 57 million higher than we expected, and which primarily is driven by larger older age policies. As a reminder, our Protection business primarily serves mass affluent clients through our VUL policies, which have higher face amounts. GAAP reserving for these policies is based off the cash guided of the accounts and does not take into account the fees collected over the life of the contract. Therefore, you’ll see some volatility, but these policies generate double digit IRRs for our shareholders. Over the long term, our mortality has been better than our GAAP reserve expectations. In full year 2021, our mortality was 34 million more favorable than we expected. And in the past year, it was 20 million more favorable even after accounting for the fourth quarter results. Additionally, preliminary results, year-to-date should have mortality is performing in line with expectations. Moving forward, we do expect volatility but are comfortable with our 75 million per quarter earnings guidance with Protection Solutions. Turning to Slide 8. Our prudent capital management enabled us to return nearly 60% of our non-GAAP operating earnings adjusted for notable items to shareholders. At the higher end of our guidance, we are able to continue our consistency of capital return despite volatile markets and the health pandemic due to our economic management of the business. Throughout the year, we return 1.3 billion with 224 million in the fourth quarter, which includes 150 million of repurchases resulting in a 15% return to shareholders on a free cash flow per share basis in 2022. This brings our total capital return to shareholders since IPO to more than 6 billion or over 50% of our initial market cap in a span of less than five years. On a free cash flow per share basis, this translates to over 120% return to shareholders. We closed the year with 2 billion of cash at the holding company and a strong RBC ratio of 425% each above their respective targets. This was enabled by our organic capital generation and the ability of our highly effective hedging program to match the market movements. In January, we took advantage of market conditions to issue a 500 million of 10-year note to refinance our upcoming maturity in April. Looking forward, our next maturity comes due in 2028, meaning we will not need any new refinancing until then. Earlier this week, our Board of Directors approved an additional 700 million share repurchase authorization bring in our total repurchase authorization of 1 billion, which has no expiry date. Lastly, our continued mix shift towards a capital-light business model and unregulated cash flows enables us to generate more stable and predictable cash flows. Looking forward, we expect 1.3 billion of subsidiary dividends in 2023. Our cash flows will not be impacted by the upcoming LDTI accounting changes as the accounting moves closer to cash flows. As a result, our payout guidance increases to 55% to 65% post LDTI. Thanks, Robin. In closing, we delivered a strong performance this year, despite turbulent markets. Through our fair value management, we continue to protect capital and consistently deliver value to shareholders. We have maintained a strong capital position through a volatile market and our expected $1.3 billion of cash generation this year supports our increased payout target of 55% to 65% post LDTI. Additionally, our continued momentum in retirement and asset management can be seen as we remain a leader in the RILA market, pricing, economically sound, and in demand products. While our subsidiary AB continues to provide a strong value proposition for their clients with a favorable mix shift and private markets platform driving growth. We will continue our relentless commitment to bringing the best of Equitable in order to deliver results that benefit our clients, employees, and of course our shareholders. Looking forward, we will provide a restated financial supplement, reflecting LDTI accounting changes in early April, ahead of our first quarter results. And we are pleased to announce that we will be hosting an Investor Day in early May to provide further insight on our businesses and the opportunity ahead. Hi, good morning. My first question was on free cash flow. I think the $1.3 billion assumed markets are flat at year-end 2022 levels, is the sensitivity still about $150 million per 10%? And that's my first question and then I will follow up. Good morning, Ryan. Yes, we're pleased to provide the guidance of the $1.3 billion of free cash flow for 2023. That's based on year-end market levels and doesn't have any additional market sensitivity going forward built into it. Our sensitivity that we provided to the market previously, 10% of $150 million of cash flows remains. You've seen that last year when we had $1.6 billion, markets declined 20%. And as a result, the free cash flow guidance that we can give this year is $1.3 billion from our operating subsidiaries. It would – some of it would impact this 2023 and some of it would impact 2024. As you recall part, less than 50% of the cash flows now are coming from the insurance company, which is based on the prior year's dividend formula. So that will be less sensitive to cash flows in 2023. Got it. And then on – now that you've completed the general account repositioning, is there more repositioning that you expect from here? And can you give any sense of further potential upside to NII? Yes. We're pleased to finish the $180 million target one year advance from 2023. Going forward, I think you can expect us to continue to benefit from higher yields in the general account. As Mark and I mentioned in the call, we're benefiting from high yields with new money yields coming in above 5% at the current period. And so that will flow through earnings over time, along with the continued growth from our SCS product. In addition, to date, we've completed 70% or $7 billion of the $10 billion in committed capital to AllianceBernstein. So once we complete that, there will be an additional upside to the $180 million, along with additional upside at AllianceBernstein as we continue to build the private markets platform, which is approximately $56 billion today. So we continue to see upside benefiting from the rising rate environment and the continued business growth. And we'll provide more guidance – Ryan, more guidance to come on the Investor Day in May. Good morning. First question is on Slide 11. Robin, it says, net income volatility under LDTI is going to decline around 80%. I just want to confirm how to interpret that. If I look at 4Q results, you had $436 million of operating earnings, but negative net income of $789 million. If you think about the new math and the new accounting, would – what kind of spread should we expect going forward? If you overlaid the new accounting on 4Q results, would it have been – can you give some directional indication? Yes. So what we tried to provide is for Equitable going forward under LDTI, as LDTI accounting GAAP moves closer to fair value, that our net income sensitivity will reduce going forward. And as you see in Slide 11, the guidance I'll just point you to is based on equity movements. So if equity markets increased by 6%, under the old GAAP accounting, we would have had a negative $1 billion adjustment in the net income. Now going forward, if equity markets increase 6.5%, the adjustment will be $200 million. That's the major difference on the equity assumption on a full year basis as the liabilities move closer to fair value, and our hedging program is still designed to protect our free cash flow growth going forward. And once we report our LDTI updated financials in the financial supplement in April, you will get to see the numbers on a quarterly basis going back in time as well. That's helpful, Robin. So if I use that math – and again, I'm just – I'm not looking for a precision here, just some directional indication. If I looked at the spread of $436 million translating to almost an $800 million negative net income number, using that rule of thumb you just gave me, at a minimum, net income would have been positive this quarter, I presume. Does that sound about right to you? That does sound about right to me that I think under post LDTI, Q4 would have been positive net income. The number I can give you as well to go back to as a proof point, if you look at 2021, under the old GAAP net income it would have been about negative $440 million for the full year. Under LDTI financials, it's a positive $1.7 billion net income gain under the full year. And that goes to our point that net income should be less volatile going forward as LDTI moves fair value accounting closer to our economic model. That's really helpful. If I could sneak one more in, just RBC ended at 425% that came in above what I would have expected. And I know you mentioned organic capital generation and hedging performance. Was there anything else that drove the strong RBC? Did you release AAT reserves? Was there another reinsurance deal? Any other one-off items? Or was it all organic capital and hedging? Yes. The capital position, as we ended the year, remained quite strong, $2 billion of cash at the Holdco, and the RBC came in at 425%, as you mentioned. That's all reflective of organic growth coming in within our businesses. No one-time items. And at the same time, in 2022, we were able to mitigate the redundant reserves of Reg. 213 through the actions that we've taken. So we're quite proud of the capital position that we stand. It reflects our economic management hedging program and actions we'll take to address uneconomic accounting issues. Hi, good morning. I had a couple of questions. First, on just the competitive environment in the buffer annuity market. It seems like a lot of other companies have gotten into the market. And are you seeing them act fairly rational? Or are you seeing an uptick in competition or better terms and conditions? And partly asking just given the fact that your SCS sales, while strong in an absolute sense, were down from last year, I think, about 12% this quarter. Yes. This is Nick. First, as you highlighted, yes, the fourth quarter was a little soft, but we saw a positive improvement in our net flows, as Mark and Robin highlighted for the full year, record volume, record value of new business and over $4 billion in positive flows. And the higher interest rate environment helps our economics and/or the pricing benefits we give to consumers. We're focused on sustainable value and we really like where we play for the following reasons. First, being the competitive dynamics. We see the fixed annuity space as being crowded. There are over 40 players. The cost of entry is lower given the distribution dynamics they can be sold by non-registered advisors. Comparatively speaking, the RILA market is fewer main players and different distribution dynamics given the registered nature of the advisor to sell the product. And as a result, our belief is fixed annuity players are going to increasingly need to enhance our credit risk to make margin and create consumer value. The second really is that consumer value proposition. We are a pioneer in launching the buffered annuity note. Fixed players are more focused on principal protection, whereas RILA players are focused on protected equities, which gives more upside potential. And finally, I would say, is our privileged distribution, specifically the strength of Equitable Advisors are over 4,000 advisors that understand the value proposition and have deep client relationships, which means we don't need to chase the market to deliver sales or cover costs. So we like where we play. We think we're well positioned to capitalize on the current volatility of the markets and the longer-term structural demographics. Okay. And then on capital and buybacks and free cash flow, should we assume that the main source of buybacks for 2023? Is this going to be your free cash flow minus Holdco expenses and dividends? Or do you expect – which would, I think, be around $800 million or so, given the $1.3 billion guidance? So what do you expect to tap into your Holdco liquidity as well, which is significantly higher than, I guess, you need to keep? Sure. So I think our guidance on a post LDTI basis is going to be that 55% to 65% payout ratio as not only on top of the free cash flow generation of $1.3 billion that we have from our subsidiaries, we have the Holdco flexibility as well depending on how earnings proceed during the year. So we feel quite comfortable, and we're quite happy with the upstreaming of cash from the Holdco. Okay. But in terms of buybacks, would those be limited from the cash that's coming up to the holding company? Or is there a possibility you tap into your existing Holdco liquidity as well? No, it's not limited. As I said, we'll stick with that guidance of both LDTI 55% to 65%, and that should give you comfort on how we're going to proceed going forward. All right, thank you guys. I'm just wondering, the legacy annuity segment breakout, is the core spread-based segment is going to be purely SCS or might it include traditional VA? And should we think about it in any way as objecting you might look to further derisk legacy? Yes. So as we break out our Individual Retirement business, it's about $96 billion of AUM in the fourth quarter. Within the core business will be our leading SCS product that has about a $35 billion in general account AUM. In addition, our floating rate VA, which was business written outside the financial crisis and has downside protection related to interest rates. The legacy VA portion will be our pre-financial crisis, variable annuity legacy product. That's going to continue to be in runoff as we go forward. And we think by breaking those out along with wealth management, you'll be able to better value the businesses as we don't feel as though today that we're getting appropriate value for the strength of our distribution and franchise that we have in our variable annuity business overall. And as a reminder, that legacy business today is only 18% of our total AUM. And I think by providing more clarity at Investor Day and how that runs off over time should help. We'll always look at options to drive shareholder value over the long-term. A reminder, the policies are co-mingled between New York and non-New York. We'll continue to work on separating those policies. And over time that should give us optionality if we thought it drove shareholder value. Okay, thanks. And then – so my second one was on wealth management breakout. You mentioned $100 million of annual cash generation. Any sense of expected earnings – operating earnings from that segment? We'll provide more details on the operating earnings, the segmentation through Investor Day, but also in our LD – in our financial supplement that's going to be released in April, not only will we show the LDTI results, but we'll also break out the segmentation, so you'll be able to have that modeling ahead of Q1 earnings. Michael Kligerman, okay. It’s Andrew. And I guess my first question is around that New York separation of the business. Robin, maybe an update on sort of the timing how that’s coming along? And then, in conjunction with that, are you having conversations with potential reinsurers about transactions? Is that something that’s a very active dialogue? Thank you, Andrew. Appreciate your question. Andrew, as you know in 2022, we were first focused on addressing the uneconomic Reg 213. We resolved that. In 2023, our focus is going to be on – and separating these businesses between New York and non-New York policies. We’ve already done it with new business with a 100% of our individual retirement. New business now being written outside of New York for the non-New York policies. And then we’ll work this year on separating that business at. That does take time. It’s a lot of operational work, client notifications, et cetera. So that’ll take some time and then that should provide us optionality over time. It’s Mark, Andrew. I guess on the verbal annuity on the legacy side, we see no need to do anything. We’ll of course keep open to it. I think as we are showing right from the COVID year where we didn’t suspend buybacks and what we’ve seen last year in the 15% growth in the free cash flows, we show that we have de-risks [ph] portfolio through our reserving and through our hedging, and that we can continue to get cash out of it. So when we did the Venerable deal, Andrew, if you remember, we needed to prove to the market there was a positive seed and that someone else would pay money for that now. So we’re open to looking at it. But we’re not going to do something that is economically not sensible and we don’t need to. So that’s the position on it really. Okay. So it just sounds like you’re being very thoughtful in the way you’re positioning those blocks by separating out New York and… Yes, exactly. And if it was causing us pain on the cash flow generation or giving us terrible volatility, of course we would act as we’ve seen before. But it isn’t and it’s – there’s – the cash that we’re generating for you shareholders is consistently coming through. So we don’t feel it’s a burning bridge. We have to do something on it. But if there was a deal there that was attractive, we’d take it. Makes a lot of sense. Maybe just shifting over to Group Retirement earnings at 115 million. It was kind of in line Q-over-Q, but down quite a bit relative to the 140 million, 150 million range seen in the seven quarters prior to that. And I get that the equity market headwinds are dragging – a real drag. But the substantial spread component I thought would’ve benefited the rate – the benefits of the rate environment would’ve had an offsetting effect. So maybe a little color on what’s driven the decline over the last two quarters and kind of how you see those earnings coming in going forward? Sure, Andrew. So the Group Retirement business came in at about 115 million in the quarter. That’s a good run rate going forward at that level of AUM that we have in that business. If you go back over eight quarters, what’s really made the difference when you see it is the AUM coming down along with markets. And in addition, the alternative income is a big component that drives variation. As a reminder, we normalize to the bottom end of our alternative guidance. So we normalize the 5% on the low end and 15% on the high end. So that’s going to be a big delta as well when you look at it over time. In the fourth quarter, you did see the first impact from the Global Atlantic deal was roughly 4 million in the quarter as well. But we’re quite happy with the momentum we have in that business. The earnings power is there, but it’s certainly sensitive to equity markets. And just like all of our businesses, you’ll see we’ll benefit from the higher investment yield over time. Thank you. Good morning. Just a quick follow-up on separating non-New York in-force from New York is one mechanic of getting that done, reestablishing an internal reinsurance agreement with your Arizona entity? It’s not an easy process to separate business from New York to non-New York. We’ll continue to work with the regulator, certainly reinsurance to our Arizona company is part of it across the board. But we think it’s good practice and it’s prudent to separate those policies so we can have. The outside of New York policies operate in the same economic regime that the 49 other states operate and the New York policies will operate in the New York regime. So, as we mention mentioned earlier, we just think it’s good practice and prudent to do so. Okay. Also we’ve reviewed the statutory filings and it appears that Equitable lead New York insurer would have accumulated about 867 million in 2023 ordinary dividend capacity through the first nine months of 2022. And then it sounds like you had strong statutory organic surplus growth in the fourth quarter. So that would imply potentially greater than 50% of your cash flows coming from regulated subsidiaries. With the source of funds from regulated subsidiaries, is there any room to return in excess of 1.3 billion in 2023? Sure. The guidance that, again we’ll stick to is that 55% to 65% post LBTI earnings, reminder, we will always return capital when prudently to do so for shareholders, we returned 6 billion since our IPO, that’s 120% free cash flow per share. We’re one the few in the industry that has never shut down that program. So it’s not only a lot of cash that we’ve returned since IPO, but it’s been consistent and stable over time and will continue to do so. The subsidiary dividends are now less than 50% coming from the regulated company. A big piece of that is coming from AllianceBernstein, our Wealth Management business now, which is about a 100 million of cash, and then also the investment management contracts we have with the sub. The New York entity is always subject to the New York formula, which we should finalize by the time we file the K and we expect it’ll support the 1.3 billion. And if it stares [ph] more, there’s more, but we’ll continue to be consistent and prudent over time in returning capital to shareholders. Yes, thanks. Just first, I’m not sure if it’s a question or a comment, but would you consider when you separate the legacy VA from the new VA giving us not only the earnings, but the capital and the cash flows that are backing those businesses? Well, you certainly see the earnings split when we split out the legacy VA’s business across the board. And those earnings are going to go down at a good rate over time, and we’ll share that more in Investor Day. And then when we separate the different pieces in the company, we’ll provide more detail at that time. Okay. And then if and when you separate the New York block from the non-New York block, is that like a capital freeing event for you guys or not? No, I think again, we hold economic, we look at capital economically across all of our entities at once. So I wouldn’t relate that to freeing up capital. I would think of it more as prudent management. So we can operate on the NAIC regime like the other 49 states. And in addition, it gives us ability and optionality going forward if we chose to do so. Got it. And then maybe just the last one. I don’t know if it’s for Robin or for Kate. But on the AB operating margin, I think it came in at a little over 28% for the year. In the past we’ve talked about a 30% plus. I think Robin mentioned some Nashville savings. So maybe just give us a sense of what the current plan is maybe over the next couple years in terms of the margin, and then how does the Bernstein Research joint venture, if at all impact that margin go for it? Thanks. Hi, Suneet. Yes, I’m happy, Suneet, I’m happy to comment. Over the long run, we continue to want to be able to achieve that 30%. Clearly, the market environment has a major impact on our ability to do so. We’re happy with the 28.4% that we delivered this year. We do have a couple of margin improving things in the future. As you highlighted, the Nashville move will be completed and we will get those real estate savings coming through in 2025. That is a significant, that should have an impact on our ability to grind that margin higher. And then on the Bernstein Research, SocGen JV, we continue to make progress there. We’re hoping that it will close here in the fourth quarter of 2023. And we do anticipate that will also over time have improvement on our margins as well. So those are two margin improvement stories that are foreseeable in the future. Yes, thank you very much. Sort of curious your view on M&A at this point. You’ve got some nice businesses that are smaller that are emerging. You’re breaking up into some new segmentation. I’m thinking like employee benefits is growing pretty rapidly. How do you see potential for M&A and how do you view that as a use of capital? It’s Mark Pearson. Mark, thanks for the question. We have two phases, really. The first phase coming out of the IPO we set for the first four, five years. We need to establish our credibility. We need to show that we can run this business outside of AXA and show that we can deliver those targets that we set out, which we’ve done all culminating in the 6 billion cash we’ve returned to shareholders. The balance sheet is strong now, so we can look for M&A and we did so recently with the CarVal acquisition, and I think that would be a good model to – for us to look at it. We bought CarVal, it plugs into AB’s distribution and it’s in a part of the market where we have real strategic interest in particular on the private markets. Yes, you’re right, there could be opportunities on AB and asset management. But the only thing I would really emphasize on the call, we will always remain very, very disciplined in looking at acquisition opportunities. And we have to always compare it to what’s the hurdle rate on share buybacks. So, it’s a high hurdle to clear. Understood. And then you might have provided this, but on the SCS sales, how much of that was through proprietary distribution, your advisors for instance? Hi, good morning. I had a follow-up just on the capital questions that we were already asked. You talked about the strong IRRs you got on some of the new product sales this year. I mean, could you give us a feel for how much capital you’re deploying behind new business and how that compares with sort of what running off and will that as the legacy block winds down, will that change that dynamic a bit? Could we think about that increasing free cash flow over the longer term or maybe even the medium term? Sure, Alex, so as you noted, the new business that we write today has strong IRR. We serve a highest value of new business in this year benefiting from higher rates, but also continued client demand across all of our business. We’ve had 10 billion of net inflows which is really a testament of our all-weather product portfolio and the business model that we have, which is unique and differentiated across our peers. The capital that we invest in that business is included in the insurance side within that 425% strong RBC that we get. And what that means is that there’s going to be good returns for shareholders and increased free cash flow over time for shareholders as we proceed. We can provide and we’ll probably provide more details on the capital and that we invest in the new business and the value that’s generated on Investor Day as we think it’ll be a key component that you can see how Equitable is differentiated on how we deploy capital, but also how we get good returns from it.

EarningCall_57

Before we begin, I'd like to point out that both the press release and webcast presentation for this call are accessible on the Investor Relations section of Forward Air's website at www.forwardaircorp.com. With us this morning are CEO, Tom Schmitt; and CFO, Rebecca Garbrick. By now, you should have received the press release announcing our fourth quarter 2022 results, which was furnished to the SEC on Form 8-K and on the wire yesterday after the market close. Please be aware that certain statements in the company's earnings press release announcement and on this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, which are based on expectations, intentions and projections regarding the company's future performance, anticipated events or trends and other matters that are not historical facts, including statements regarding our expected first quarter 2023 and fiscal year 2023. These statements are not a guarantee of future performance and are subject to known and risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information concerning these risks and factors, please refer to our filings with the Securities and Exchange Commission and the press release and webcast presentation relating to this earnings call. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. During the call, there may also be discussion of financial metrics that do not conform to U.S. Generally Accepted Accounting Principles or GAAP. Definitions and reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued, which is available in the Investors tab of our website. Thank you, Brad, and good morning to all of you on the call. First things first, a big thank you to all of our teammates, our independent contractor drivers and our business partners, you did keep our commitment to the best service in the industry with the most intact damage-free LTL shipments. And I thank you for that. You also delivered a record year in all of our lines of business, top line, bottom line with EPS year-over-year growth by almost 70%. So that's top of the class in our space. Now still, we did not finish the year the way we expected, and we need to address that. In contrast to many of our peers, we had guided to Q4 to be sequentially better than Q3, and our peak planning efforts with our customers actually supported that guidance. We always pull our top 25 customers or even more going into the fourth quarter, and we felt good about the guidance that we gave. Well, it turned out we have no monopoly to wisdom and not even in concert with our customers as we plan together. We had modeled that the Forward 23 actions that we control would more than make up for the shortfall in demand, the overall sluggishness in the economy and also for fuel coming down. Where we ended up though was with the LTL tonnage going down by 13% in the fourth quarter, way more than the single-digit decline we and frankly, we, together with our customers, had expected. December was the worst month and January was equally sluggish. We're talking 15%, 16% down. Now the most recent weeks were a bit more promising. The most recent week that has a complete week, we showed at minus 10%. Still, Q1 will be tough. And also, I want to say, despite the Q1 being tough, our story and our drive towards high-value freight still holds. We are keeping all of our LTL customers. We're actually adding customers by adding direct shippers. We have more than 200 right now. And that's in the space, small, medium-sized businesses where they do not use forwarders. Even in Q4, the number of LTL shipments held stable. We were down by 0.4%. So it's pretty much the same as last year. The freight mix, as we showed in the release, is getting better and better. Evidence for that is also that on a per-piece basis, the weight increased 12% year-over-year. And we looked at four high-value verticals, and they used to be 18% of our freight mix a year ago and now they're 29% of our freight mix. Trade shows in the last quarter of Q4 went up by 50% compared to the last quarter of 2021. And finally, what's also important, we get paid for that higher-value freight. Our revenue per hundred rate is up 13% Q4 over prior year Q4. And so a lot of the journey that we are in works out to exactly the way we had intended. The challenge that we have right now that caused the year to end, the quarter that was less than what we expected, significantly less than what we expected, is our shipments that we still have, have way fewer pieces than they used to have and that they will have, 20% to 25% fewer pieces. We expect that sometime in Q2, inventories start normalizing and shipment sizes should be normalizing, too. At the end of the day, we do not rely on that to happen. We do have our Forward 23 initiatives in place. We have half of them that are focused on growth. We talked about them many times before, anything from selling more direct to events coming back. We also have initiatives that are focused on cost containment, and we call that Forward Game Shape. And for instance, including dimming and reweighing, which is a huge initiative as well as cost reductions in travel, reduction in force, we're down by more than 100 people in the last 2 months alone and we also have a hiring freeze in place. So also part of Game Shape is, for instance, making sure that we use our independent contractor drivers as much as possible, and we have minimum outside miles. We just updated our Forward 23, Forward Force Growth and Forward Game Shape initiatives for impact. At this point, we still believe that we can target to a 2023 that's ahead of 2022 in EPS. That's what the collective initiatives are telling us. We show about a $0.90 EPS headwind from sluggish economy. We show a $0.60 headwind from fuel coming down, but the initiatives collectively in our minds will make up for that. Also, please bear in mind, we did buy a beautiful company called Land Air Express that's helping us also with $0.18 EPS impact that we expect out of that. That's accretive to our model. And as you also know, if the economy keeps being sluggish longer, we tend to have beautiful tuck-in acquisitions, both in intermodal drayage as well as in LTL that would be on top of those initiatives that we are targeting. So at this point, we still believe that with Forward 23 initiatives in place and updated for the economic slowdown and for the fuel going down as well as with the Land Air Express addition to our team as well as potential additional acquisitions, we can still target a EPS 2023 ahead of 2022. And by the way, I'd rather shoot to do that and have initiatives in place with first-class team members driving them and getting very, very close than targeting 10% or 20% down and starting that with that as an ingoing proposition. In our models, we can get to an EPS in 2023 that actually is on top of what we had in 2022. This is Grant on for Jack. Just kind of curious on the big reversal in weight per shipment. And kind of with the volatility we've seen there over the last couple of years, kind of how are you thinking about that going forward? Yes. So this is the combination that we just talked about, right? So the weight per shipment for Q4 shows down by 13%. That in itself is not a good metric. It's also not something that we like to see. Then you kind of unpeel the onion and say what's happening here because our freight mix is getting better and better. And again, the weight per piece inside the shipment, most shipments have more than -- or many shipments have more than one piece. The number of pieces inside the shipment over the last several months went down by more than 20% because people still order two SKUs, but the third SKU is still in the warehouse, so they don't order that as part of the shipment. And -- so despite the fact that our weight per piece is going up, that the number of shipments is holding steady, the fact that we have more than 20% fewer pieces in a given shipment means the weight per shipment is going down. I know this is a lot of kind of math pieces coming together. But in essence, the quality of the freight is there. The number of shipments is there, what's inside the shipment currently is actually high quality. It's just less of what it was and less of what it will be. And that we're not relying on the economy coming back quickly. We are pulling all of these cost actions, Forward Game Shape, and we're also pulling all of the growth actions. And again, collectively between the Land Air Express acquisition and our organic growth initiatives, we just opened a terminal in Midway, third terminal in Chicago. We got five new docks on the map with Land Air Express. Between the Game Shape initiatives and Forward Force Growth initiatives, we do believe we have a good shot of 2023 being ahead of 2022, despite an economic headwind that we just updated, and despite the fact that we expect fuel to come down and normalize in 2023. So weight per shipment down by itself is not something we would like to see, but we need to understand what drives it. The quality of the freight is exactly what we want it to be. Got you. That definitely makes sense. And just a follow-on. You talked about growing earnings next year in -- or this year in 2023. Could you maybe just kind of try and quantify how that could break down quarterly? You kind of expect more of a positive inflection in the second half of the year. Just kind of any color you could offer around how the EPS breakdown by quarter maybe would be helpful. Yes. And we did guide for the first quarter, and that is continuing the sluggishness that we saw in Q4. So -- but let me just give a little bit of color commentary. So you saw the $1.32 that we guided for Q1. Obviously, if you multiply this by 4, that doesn't get you to past $7, which we still target. And again, we came in adjusted at $7.18 for 2022. And again, between our initiatives that we control between getting $0.18 EPS for Land Air Express and between a potential of wildcard acquisitions, which we tend to have highly accretive tuck-in acquisitions, we think we can still beat the $7.18. But it is more and more ramping up. As an example, Land Air Express is joining us. We're working with them very closely to make sure that the quality of the freight in a cleansed operating environment gets to standards that we expect that Forward Air and the Land Air Express team is wonderful to work with. They'll get us there. But this is a journey that's ramping up quarter by quarter by quarter. Most of the initiatives that we talked about, whether it's selling more direct, whether it's bringing events back, doing more in and out of Canada and Mexico, or on the Game Shape side, getting dimming and reweighing equipment in all of our terminals, all of that is ramping up throughout the year. So while it looks perhaps a bit thought lazy to say, okay, it's going to be back-end loaded or it's going to be second-half loaded, fact is all of these Growth and Game Shape initiatives are taking steam and are ramping up throughout the year. So you would see a bit more of an impact in Q3 and Q4. And you see more impact in Q2 than Q1. So yes, it is ramping the first quarter being the most muted one. And this is frankly driven by the fact that we expect continuous growth by each one of those initiatives, and therefore, you do see a ramping effect. Thanks so much for the color on the guide, but I just want to kind of make sure I've got it. So you have maybe $1.50 in bad guys from the economy and fuel, and then I'm rounding, but maybe call it $0.20 from Land Air and then maybe another few cents from Chickasaw, but can you kind of bridge that other $1 to $1.20 in savings that you think you can achieve? I mean, are there kind of three things, maybe kind of key things that might be driving that? Yes. So you got the math exactly right, Tyler. And both you and I are both pretty math inclined. So the $1.50 bad guys is absolutely correct. So from a pure math perspective, we finished the year with $7.18, not quite the $7.50 that we shot for because of what happened steeper and faster in Q4 than what we had expected. So -- and then we say we want to have more than $7.18 in 2023. And then you have $1.50 coming against us from the get-go, and that's the $0.90 or so from the sluggish economy and the $0.60 from fuel prices coming down. So now how do we get to a positive kind of $1.60 or $1.70 to make up for that $1.50. You mentioned that $0.20 and $0.18 is the one that we have in our model for Land Air Express. So that still leaves us to have to get at least $1.30 from the other initiatives. They break down roughly, Tyler, at 50-50 between the Forward, what we call Forward Force Growth initiatives, and I'm going to get a bit more specific in a moment and the Forward Game Shape initiatives, which are more about efficiency and effectiveness, including cost containment and cost management. The biggest items on the growth side would be doing more high-value freight with some of our core domestic forwarder airliner -- airlines 3PL international forwarder customers. That gives us about $0.17. Selling more direct to small, medium-sized businesses that do not use our core customer forwarders, gives us about $0.07. You have more coming back on the trade shows and you have more Canada and Mexico. So this is kind of stretching in existing areas because we are doing Canada and Mexico today and trade shows, obviously, that's another $0.08. We do have a lot of brokerage ramp up with our new leader in brokerage under Nancee, . That gets us backhaul efficiencies, both from a cost perspective and MT miles perspective, that's about $0.12. We're growing our final mile integrated customers. Integrated means it's more efficient for us to operate in a co-mingled system. That's about $0.04. We have an intermodal drive to grow more with BCOs versus intermediaries. That's about $0.12. And that's adding up kind of the impact on the growth of Forward Force side. On the Game Shape side, the single biggest one is staying in single digit with outside brokered miles at a highly cost-effective basis, where we expect an $0.18 -- sorry, a $0.37 delta between what we had last year and this year. Remember, we had last year, Tyler, quarters where we were in the low to mid-20s of outside brokered miles. We're in 3% to 4% territory today. And we expect the entire year to remain in single digits. Tremendously well managed by Tim Osborne, by Justin Lindsay, Chris Ruble's team members. So that's the single biggest block on the cost management side or on the Game Shape side. We do expect dimming and reweighing benefits and other technology enhancement benefits in our terminal system, that actually adds up to $0.37 between those two. Cost management, some of the ones I mentioned, travel, reduction in force. Initial wave got us to $0.11, and we may not be done there yet. And then we have surgical pricing efforts where we continue becoming more and more of a machine in pricing for the quality of the service where it's relevant to the customer. That surgical pricing gets us another $0.14. If you do the math between those, and again, we're more than willing to open up and be very transparent because these are real growth and real cost management and Game Shape initiatives that collectively add up to the $0.93 economic slowdown and a $0.61 reduction on the fuel side, add up to that and slightly more. And again, so even if we fall a bit short, we still have the possibility of another tuck-in acquisition or two. So when we are saying we are targeting a year that's actually up from last year, this is based on initiatives by our leaders, with their teams that add up on the growth side and on the Game Shape side and has a -- and if the economic headwind is steeper and longer, we do have additional opportunities with, again, Land Air Express already on board. You mentioned Chickasaw, and we also have -- we typically always have a couple of tuck-in acquisitions that we don't know at the beginning of the year which ones will come through, but they always come through. Sounds to me like you were prepared for that question. It was extremely helpful. Real quickly on fuel, what is the estimate in there on the $0.60? Is it, call it, $4.50 fuel or lower? So I'm doing this top of my head, Tyler, and I'll get it close enough to write , who runs our pricing. He would know the exact number. So what we do there is -- and I'll tell you directionally correct numbers. So what we do there is we look at the -- one of the best sources for forecasting, that's the Energy Institute in Washington. They have for this year -- and if they have it by month, by the way. So we have it by month 2 in our forecast. We don't try to outsmart people who do this for a living full time. So we took on average for this year something around $4.23, $4.24. That number was, I believe, in 2022 more like $4.89. So in rough terms, let's say, $4.90-ish to $4.20-ish step down by about $0.70. Once we actually get that through our math exercise, and we also have some employee drivers where the math works slightly differently. But this gets translated into at this point in the model a $0.61 headwind comparing 2022 to 2023. So it's a $4.90 to $4.20-ish step down. Yes. Okay. That is extremely helpful. And kind of going back to the weight per shipment. So I think you're around 730-ish pounds. Do you think that, that's going to be a low mark? Do you think it can build from here? Maybe can you talk about where your current weight per shipment is? I think that would be helpful. And just longer term, when we think about the model, where do you think you kind of pan out in terms of weight? Is this -- is 800 pounds more like a stasis kind of weight? Or could it be higher than that? Or should it be lower than that? Just kind of any broad thoughts there. Yes. My sense is this, Tyler. So your numbers that you have, and you just quoted are correct. That is where we are. I would want to believe that the 730-ish is kind of the low mark. Again, this goes back to way fewer pieces, way fewer pieces than we saw 6 months ago and that we will see again at some point. And if it doesn't come as early as we want to, then we need to pull a few extra levers, including a couple more tuck-in acquisitions. But we probably will never get into the 1,200, 1,500 kind of pound range because this is where you deal with bulk commodities where you deal with kind of big shipments that are more kind of in the retail and kind of consumer goods sector. We tend to be more specialized. I mean, remember, this is what used to be air freight being grounded in many, many cases. So there's a difference between what a world-class company like an Old Dominion or a Saia in the class freight space hauls and moves and what we move. Remember also, I mean, in some cases, for the more sensitive but smaller high-value shipments, some of these best companies in the LTL space are our customers. But 800 sounds like a good space, perhaps even 850, 900, we were there when shipments were full. So I think that's possible. Okay. And just my last one. On Land Air. So it sounds like it is expected to be accretive here in year 1. I'm calculating maybe $6 million to $7 million in EBIT. Yes. So when you think about '24, I feel like there's more to the story longer term from an accretion perspective. Can you just talk about maybe what you would expect over the next few years out of Land Air and maybe what's kind of the benefits were from this deal? Yes. I mean, so roughly speaking, the number you used $6 million, $7 million for this year is absolutely correct. What we're doing is we have a company that is now part of us that has some of the same DNA. They did airport to airport line haul extremely well. They were a formidable competitor, now they're part of us. Now we are in a compact way together with them doing our go-forward story very, very quickly. What took us 2 to 3 years, we're going to try to do here within a year or so, which means upgrade the freight to more high-value freight, operating in what we call a cleansed operating environment, which means all palletized, making sure we're pricing accordingly for the high-value freight and then also tapping into a larger customer base. A lot of that, including synergies, where, in some cases, we have duplicates in terms of buildings, we can consolidate some of them. We do get -- as I pointed out, we have five new origins and destinations in our network based on Land Air Express, Waco, Boise, Topeka, Springfield and Abilene, Texas. But -- so you probably see a ramp-up of the synergies throughout Q1, 2, 3, 4, and some of it will probably spill over into next year. So if you look at this Land Air Express, we said we think we're going to retain between $74 million and $94 million of the revenue. So just make that for argument sake $85 million and do assume that from a Game Shape perspective, that Forward Air and Land Air standards will be very similar in the year. So take a 15% margin to be conservative. Then you talk certainly more about a $13 million or so run rate impact from that acquisition versus perhaps half of that this year. Great. So maybe a similar thought on what you're just talking about with Tyler on the fuel side. The $0.90 headwind that you have coming from the economy. Can you break that down a little bit as far as how you get to the $0.90 headwind? Maybe how much of that's tonnage? What would be the assumption on the OR side for the environment that you're thinking about maybe on the expedited freight side? Just some thoughts on the $0.90 headwind. Yes. So what we did do was we -- and we modeled this basically, again, with some macroeconomic assumptions. Some of the reports, frankly, that you and some of your analyst colleagues put out are helping us with kind of validating and kicking the tires on some of those assumptions. So we finished the year with 13% down year-over-year in tonnage per day. So we took some of that, and we started actually even with a higher number down 15% to 16% for the first couple of months. And then we looked at that number getting somewhat better throughout the rest of the year, but we took a very, very steep double-digit year-over-year tonnage decline as the base case and then we build those forward force initiatives, the Land Air Express acquisition and some of those impact of effective kind of running off our system, including cost management or dimming and reweighing on top of that. But -- so it's a double-digit year-over-year decline in the LTL tonnage that makes up the base assumption. And then we also had a couple of margin points that we kind of took down and what the thinking there was in a very, very soft environment, we may have to work with our customers in some specific cases about competing and winning business that may be a bit more in the soft kind of profitability area. We are still going to be extremely pricing disciplined. We had a GRI. We put this in place for every single customer. So the pricing discipline is going to be there. But it's a combination of double-digit starting with 15%, 16% and then alleviating -- getting a little bit smaller throughout the year tonnage per day reduction coupled with a couple of percent margin points that we took off. Once you run this through our model, it ends up being the number that I quoted, which was $0.93 EPS impact. Got it. I'd say other than relying on our reports or some of my peers, maybe those are all prudent assumptions, Tom. So I don't... You got to be careful there. I don't know how granular you want to get on this question, but when I look at the extra freight OR in the fourth quarter, despite the falloff in tonnage, it was only 30 basis points or so higher in the fourth quarter of '21, at least what I've got in my model. What's your realistic assumption for '23 in this environment? I mean, can you hold the OR flattish on a full year basis? Do you see it move back by 100 basis points. You've got a lot of levers on the cost side. Just maybe any thoughts on the expedited OR as we move through '23. Yes. So it's probably flattish. And -- but let me just explain this one more time, too, because I think we had this conversation, and I think the logic holds, but you guys challenge us on that. So if you remember, we said we expect inside expedited trade, the 800-pound gorilla is our main show, the LTL business. The other businesses are in their own right, obviously, profitable and they need to be above certain ROIC and margin thresholds, but they also need to make the main show better with backhauls, with co-locating, co-routing and so on. But we did say going into 2022, we expect 150 to 200 basis point margin expansion in 2022 and in 2023. If you look at 2022, you've got probably about twice that. We were more like 390 or so basis points that we added margin on the LTL side. And some of that is temporarily inflated by fuel. So say, for argument's sake, we get 3.5, 4 percentage points LTL margin expansion in 2022, we, as a team, do not take credit for the 150 or so that come from fuel being temporarily at very high levels. Same is true the other way around. Now fuel is walking down. So if the margin remains flat, it still means the quality of the freight, the quality of the business, the way we operate our terminals, the way we dim and reweigh, all the initiatives that are part of Forward 23 still get us 150 to 200 basis points margin expansion in 2023. However, if you look on a piece of paper, it might show flat because fuel is going to be the headwind in this case. We want to get pound for pound as a company better, and we don't take extra credit for fuel, but we also don't want to take fuel as the determinant when we look flat, but de facto make the business better. So it's almost like put fuel assigned, sometimes it's a bit of a tailwind, sometimes it's a bit of headwind. The test is, is this business getting better by 150, 200 basis points in its own right and it did in 2022, and we expect the same based on these initiatives in 2023. Yes. Okay, Tom, those are all really fair comments, and I appreciate the thoughts around kind of how fuel helped '22 and you guys being prudent about what you can control and what you can't. I appreciate the thoughts this morning. Sure, Scott. So in October, our tonnage was down 11%. In November, our tonnage was down 12%. And in December, it was down 15%. And in January -- through the end of January, we're seeing about a 16% decline year-over-year. We can get those later. Okay. When I think about the fuel headwind that you guys talked about, is there any of that in Q1? Or is that really all starting in Q2? I just want to -- I mean, it feels like maybe Q2 is the biggest of that fuel headwind, so that could be the biggest year-over-year earnings decline. Is that fair as I think about the quarterly cadence, Tom? Yes, Scott, that's right. I mean if you remember, right, I think June was like the peak of all of the fuel that came in. It was up over like , I think, at that point in time. So it was -- I think Q2 is when we'll see those fuel headwinds. I think in Q1, we'll see a bit of a tailwind. So I think you're right in your thinking. Okay. Okay. And then just lastly, I think this year's GRI a little bit smaller than last year. Just any color around that and just how it's -- I know it's early, but how it's sticking so far? Yes, let me talk about this. And let me -- the first calibration, the -- yes, we used just to make sure everybody is on the same page here, we used 5.9% this year. It became effective on Monday. Always the first Monday in February. And last year, the number was 7.9%. The one thing that we should say upfront is, and I'm going to make two comments here. The first comment is we always look at pricing as an overall picture. Part of that big picture is actually fuel surcharge. And we always look at left and right, what do others in our space do as they service their customers and then we make adjustments. So late fall, Scott, we did make an adjustment in the fuel surcharge table that's worth about 2 percentage points. So we looked at that and then we looked at the GRI kind of as a package, we said we want to make sure we keep our customers and us in a space where it works for both of us. So there's a bit of an end proposition here between the fuel surcharge adjustment in November and the 5.9%. That gets us into similar territory as we were last year. And now in terms of how is it playing out? Every customer is getting a GRI and the sales team and the customers did a tremendous job collaborating over the last several weeks about where we can grow with them, and we have more than 200 agreements in place where in some cases, if there's real growth that's substantiated and we track this on a monthly basis, that customers can kind of save more as they do more with us, meaning there's a mitigation where if someone goes with us in key veins that are good for them and good for us by 10% or 15%, then there's a mitigation of that GRI. We always look at GRI in a combination of what's the actual take rate, so that typically is somewhere between 70% and 90%. And that's the mitigation where we gave some of it back for earned growth makes sense. And we have those kind of -- we call them value exchanges in place. We had them in place last year and this year. So you should expect 200 customers plus that actually have commitments to go with us because it's good for them and good for us. And you should expect a 70% or so take rate perhaps even more than that of the GRI. Both of these numbers are fairly common and are somewhat consistent with what we saw last year. And then can I just clarify one real quick thing. So with the $0.60 fuel headwind, is that including the benefit of changing the surcharge tables? Or is that separate? So that would be -- let me just do this real time. This is kind of a net number. So we look at it came down, and then we just looked at what it was last year. So if we adjusted in safe argument sake in October and we got 2 or 3 months with a higher fuel surcharge number, then the $0.61 would -- step down would include that step down from that higher number. So it's including the benefit of the new surcharge tables? Meaning if you didn't change the surcharge table, the headwind would have been bigger. Is that what you're saying? No. If we hadn't changed the surcharge table, the headwind would be smaller because the actual fuel surcharge collected was bigger last year because of that adjustment. So the step down is bigger now. So it may have been -- but that difference, by the way, just from a math perspective, is a few cents. So this would be going from $0.56 to $0.61. Tom, not to go back to mix again, but I think it was really illustrative when last spring, you shared that investor deck where you kind of let us visualize what the terminals used to look like before some of the changes you made and what they look like now. And I think maybe some of the investor concern around mix in the shipment weight is getting a little smaller is that we're going back a little bit in the way of where we were before. So can you help us understand, if we were to walk on the floor today, what does one of your LTL terminals look like? And just visualize the shrinkage in the shipment size and why it's not a step back and all the hard work that you've done in this very strong environment over the last 2 years. Yes. Thanks, Bascome, for asking. By the way, for those of us or you that looked at our investor relations side in our deck, we just talked about it over the last several days, that visual of what our unclaimed terminals look like before the cleanse and what they look like all palletized today, we probably have to take that picture back in because I think it is a big part of our go-forward story of better high-value freight operated in a cleansed environment. The one thing I do want to point out, we're not stepping back. We're actually sticking with this. So these terminals look the same as they did after the cleanse today, and they always will. What unfortunately looks a bit different is if you look at a big shipment that had last year 7 or 8 high-value treadmills in there, now it has 4 treadmills in there. We do like high-end consumer goods. They are good freight, but there's just -- the shipment looks smaller. So when you take a visit into any one of our terminals, you will like what you see from a cleanliness perspective, you just would like to see a few more of those boxes or you would like to see some of these boxes to be bigger. Understood. Maybe to cap it off, we've spent a lot of time on the LTL business today for understandable reasons. Can you walk us through some of the assumptions you're making for the intermodal segment on an organic basis pre-M&A? So how you are modeling that to trend versus seasonality? And maybe even a little structural reminder of your customer exposures between the larger asset using IMCs versus the smaller pure asset light or non-asset IMCs and ports in the shipping companies? Yes. So Bascome, on the intermodal drayage side, what you'll see is you'll see -- there's two customer segments. And -- so roughly speaking, it's not exactly half, it's probably 60-40. 60% of our customer base intermodal drayage are shippers that make or ship the goods that we move on their behalf. The other 40% or so are intermediaries that have the end customer as their customer. We like both of these customers a lot, and we work with them extremely well. We have found that when we get to work with some of the shippers directly, this is really, really good business for them and good for us. So we have a growth initiative in place. I mentioned it when I ran through some of the Forward Force initiatives before to grow over proportionately with some of those, they call BCO customers, customers that actually make and ship things directly. So that will -- so you'll see some of that good BCO growth as some of the organic growth, also our sales force has been much, much more focused on organic growth in intermodal. So yes, we grow by those tuck-in acquisitions, but we also need to grow organically. And the one thing you should expect this year is the absolute growth rate in top line for intermodal year-over-year is moderating. And that's not because we're not organically growing. We are, as I just said, specifically BCO business. What is happening, though, is we do expect some of the accessorials, specifically for storage fees, detention fees to come down to normalize. Remember, last year, we had the preponderance of the year, oversized storage fee, accessorial revenues and detention fee revenues because we were helping our customers as things were coming onshore mostly on the West Coast ports, but also on some of the East Coast ports. We helped them holding those goods until they could get moved. And we used our facilities in many cases for that. So that is something that will be expected to normalize. So when you look at year-over-year growth on the intermodal business, you will see a step down in percentage. That is mostly because of the accessorials normalizing. And from an operating income perspective, in your plan, does expedited freight or the intermodal segment feel more pressure for the full year? Expedited freight does. Difficult on each one of the three participants in that segment. The tonnage slowdown felt in LTL. Final mile appliance business is probably not intrinsically growing as much as it did. And truckload brokerage sees the same slowdown that LTL sees. Now having said this, just to take final mile as one example, that team has done a phenomenal job adding logos, meeting new customers, and that team has done a phenomenal job winning new markets with existing customers. That winning The Home Depot Appliance Carrier of the Year Award clearly helped us basically becoming the most compelling provider. But if you look at those two segments, the expedited freight segment, I think, is experiencing -- and this is -- I'm not taking any credit away from intermodal, but it's experiencing a bit more of a headwind. Perfect. Then I just want to say thank you to all of you for listening and participating. And I'll be more than willing to follow up on any of the models. We feel very, very good about what our team is driving on the growth side, but also on the efficiency and effectiveness side. And again, the target is for this year to end up better than last year. In our minds, the initiatives can get us there even with the moderated -- or the headwinds becoming less moderated. And again, we have an acquisition in intermodal that's already accretive, Chickasaw. We're having one with Land Air Express that's coming on top of the model. And I do expect us to have a pretty good shot at an additional couple of tuck-in acquisitions. So we feel good about how we're going to finish up 2023 as potentially another record year. So thank you. Thank you. That does conclude Forward Air's Fourth Quarter 2022 Earnings Conference Call. Please remember that this webcast will be available on the Investor Relations section of Forward Air's website at www.forwardaircorp.com shortly after this call. You may now disconnect.

EarningCall_58

Greetings, and welcome to the Equifax Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Trevor Burns, Head of Equifax Investor Relations. Thank you. You may begin. Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns. With me today are Mark Begor, Chief Executive Officer; and John Gamble, Chief Financial Officer. Today's call is being recorded. An archive of the recording will be available later today in the IR Calendar section of the News & Events tab at our IR website, www.investor.equifax.com. During the call today, we’ll be making reference to certain materials that can also be found in the Presentation section of the News & Events tab at our IR website. These materials are labeled Q4 2022 earnings conference call. Also, we will be making certain forward-looking statements, including first quarter and full year 2023 guidance. We hope you understand Equifax and its business environment. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors may impact our business forth in filings with the SEC, including 2021 Form 10-K and subsequent filings. We'll also be making certain non-GAAP financial measures, including adjusted EPS for Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the financial results section of the Financial Info tab at our IR website. In the fourth quarter, Equifax incurred restructuring charge of $24 million, or $0.15 a share. This charge was principally incurred to reduce headcount in 2023 as we realign our business functions ahead of completing our technology transformation. This restructuring charge is excluded from adjusted EBITDA and adjusted EPS. Thanks, Trevor, and good morning. Equifax delivered another very strong quarter to close out 2022 with continuing execution against our EFX 2025 strategic priorities. Fourth quarter reported revenue of $1.2 billion was down about 4.5% and down 4% on an organic constant currency basis, both as expected against an unprecedented mortgage market decline, but above the high end of our October guidance from broad-based strength across Equifax and stronger NPI rollouts. Fourth quarter adjusted Equifax EBITDA totaled $371 million with an EBITDA margin of 31%. Adjusted EPS of $1.52 per share was at the upper end of our October guidance range of $1.45 to $1.55 per share, and John will provide more detail in a few minutes. Equifax US mortgage revenue was down 41% in the quarter, but outperformed the overall market by 27 percentage points with estimated US mortgage originations down 68%. Our global non-mortgage businesses, which represented about 84% of total revenue in the fourth quarter, were very strong with 12% constant currency and 10% organic constant currency revenue growth, stronger than we expected when we provided guidance in October and at the top end of our 8% to 12% long-term growth framework. This strong growth was driven again by outstanding performance at Workforce Solutions with 17% non-mortgage revenue growth overall and 23% non-mortgage revenue growth in Verifier. As I'll discuss more later, Government continued very strong in Workforce Solutions with growth at over 40%, and Talent and I-9 boarding delivered over 20% growth but were impacted by slowing US hiring in November and December. Delivering 20% growth in that vertical against a slowing hiring market was a very strong performance. And second, USIS nonmortgage had an outstanding quarter, delivering very strong double-digit B2B non-mortgage growth of 10% total and 19% online, which was much better than our expectations. And last, International delivered another strong quarter with 9% constant dollar and 8% organic constant dollar growth, led by very strong performance in Latin America. We continue to make strong progress against the final chapter of our EFX cloud data and technology transformation in 2022. Currently, about 70% of North American revenue is delivered from the new Equifax Cloud. During 2022, we made the decision to increase capital spending by approximately $175 million to a total of $625 million to accelerate the completion of our North American cloud transformation. The progress made in 2022 will enable the substantial completion of North America transformation and customer migrations this year, including decommissioning of applications in our major North America data centers. Capital spending will decline significantly in 2023 due to the strong progress at completing the cloud last year. Our new EFX Cloud infrastructure is delivering always-on capabilities and faster new product innovation with integrated data sets, faster data delivery and industry-leading enterprise-level security. We're convinced that our EFX Cloud and Single Data Fabric will provide a competitive advantage to Equifax for years to come. New product innovation is also executing at a very high level. Our new product Vitality Index of 14% in the quarter is a record and a 500 basis point improvement from the 9% Vitality Index last year and 400 basis points above our 10% long-term new product vitality goal. Our focus on new solutions, leveraging the new Equifax Cloud is paying off. As a reminder, our Vitality Index is the percentage of Equifax revenue from new products launched in the past three years. As our fourth quarter performance highlights, we continue to execute very well, driving strong non-mortgage growth across Equifax and record levels of new product revenue. In addition to accelerating long-term revenue growth, two critical goals of our EFX 2025 strategic framework are significant and consistent EBITDA margin expansion and the lowering of the capital intensity of our business to drive our free cash flow. In 2023, we are executing a broad operational restructuring across Equifax, reflecting both the acceleration of our cloud transformation and a broader focus on operational process improvements. We will reduce our total workforce of over 23,500 employees and contractors by over 10% during 2023 as well as delivering cost reductions from the closure of major North American data centers as we complete the cloud and other broader spending controls. Total spending reductions from these actions in 2023 are expected to be about $200 million with about $120 million reduction in expenses and an $80 million reduction in CapEx. I'll cover our 2023 plan in more detail shortly, but first, we'll provide more detail on our strong performance in the fourth quarter. Turning to Slide 5. In the fourth quarter, we continued our strong non-mortgage performance with revenue growth up 12% in constant currency, led by EWS Verification Services non-mortgage revenue, which was up 23%, led by Talent, which was up 19% and Government up 43%; EWS, I-9 and onboarding, which was up over 40%; USIS B2B online mortgage was up almost 20%; and Latin America was up over 30%, all very strong performances. Fourth quarter constant dollar non-mortgage growth of 12% was at the top end of our 8% to 12% long-term revenue framework despite some slowdown in the US hiring activity impacting our Workforce Solutions Talent vertical. Non-mortgage revenue growth continues to be very strong across Equifax. Turning to Slide 6. Workforce Solutions delivered another outstanding quarter. Mortgage revenue outperformed the overall mortgage market as measured by originations by about 30% in the fourth quarter and 38% for the full year. And verifier non-mortgage revenue was again very strong with organic growth of 23% in the quarter and 40% for the total year. During 2022, we signed 10 new agreements with US payroll processors, including four in the quarter that will be added to the TWN database during 2023. Recently, we also signed a substantial direct relationship that added over 2 million new TWN records. These new partnerships, along with continued growth in existing partner records and the new direct contributors through our Employer Services business, are delivering continuing strong growth in our TWN database with current records of 6 million record sequentially, reaching 142 million records -- 152 million records with 114 million unique and over 600 million total current historical records from over 2.6 million employers. Industry-leading data security and operational processes as well as our ability to provide substantial value to our direct contributors and revenue share to our payroll partners are delivering exceptional record growth for Workforce Solutions. 114 million unique individuals in TWN deliver high hit rates and represent almost 70% of the 165 million US non-farm payroll. Adding gig and pension records, we have the ability to almost double our TWN records in the future, which is a big driver of EWS revenue and margins. As a reminder, about 50% of our records are contributed directly by individual employers, with the remaining contributed through partnerships principally with payroll companies. Workforce Solutions also continues to lead Equifax and new products, delivering a Vitality Index at over 2x of our long-term 10% vitality goal, which is a great proof point for the power of the Equifax Cloud to drive innovation in new products. Workforce Solutions Vitality Index has expanded from low single digits a short four years ago to over 20% vitality in 2022. Workforce Solutions, as you know, was the first Equifax business to be substantially complete with their cloud transformation over a year ago, allowing the team to fully focus on innovation and NPIs, leveraging their new cloud capabilities. The Work Number is also seeing accelerated expansion outside the United States in the UK, Canada and Australia. In January, Workforce Solutions signed an agreement with a leading UK payroll technology partner, obtaining access to over 40% of UK private sector employees. Workforce Solutions now has access to over 20 million active and historical records in Australia, Canada and the UK in addition to over 40 million active and historical alternative income records, including pension data and tax returns. Turning to Slide 7. Workforce Solutions delivered revenue of $508 million, down 4% in the fourth quarter. Revenue was slightly weaker than expected driven by slower growth in talent and onboarding businesses from declines we saw in US hiring in November and December. Verification Services revenue of $399 million was down 7%, driven by the unprecedented 68% decline in US mortgage originations. As mentioned earlier, EWS mortgage revenue outperformed the overall market by a very strong 30 percentage points, driven by strong TWN record additions, penetration, pricing and new product revenue growth with the strong adoption of our new mortgage 36 solution that was rolled out late last year. Verification Services non-mortgage revenue, which now represents almost 70% of Verifier revenue, delivered strong 23% growth in the quarter. We saw continued very strong 43% growth in the Government vertical, which is almost 45% of Verifier non-mortgage revenue, driven by strong growth in our Center for Medicare and Medicaid Services volumes. The EWS government vertical is benefiting from penetration, pricing, record growth and leveraging a strong new product portfolio, including our new insights data at the federal state and local level. We expect to continue this strong growth in our government vertical in 2023 in a big $2 billion TAM. Talent Solutions delivered strong 19% growth in the quarter despite the impact of the weakening overall hiring, which is estimated to be down about 8% in the quarter. We outgrew this market decline by over 25 percentage points and delivered 19% growth, a very strong performance, driven by continued penetration of our digital solutions and background screening, strong new product growth, continued expansion of TWN records and favorable pricing. In the first quarter, we will launch new products in the talent space targeted at the staffing and hourly segments designed to meet specific needs of background screeners in these high-volume segments, which will drive Talent growth. Employer Services revenue of $110 million was up 4.5% in the quarter due to strong growth in our I-9 onboarding and healthy FX businesses, which were up 17%. Our I-9 and onboarding businesses remained strong at 20% growth but were also negatively impacted by the declines in US hiring late in 2022. Our unemployment claims and employee retention credit businesses were down 11%, driven by lower jobless claims and lower ERC transactions as the COVID federal tax program expires. Despite the slowdown in hiring, we have not seen a meaningful increase in UC transactions yet. Workforce Solutions adjusted EBITDA margins of 46.8% were lower than our October guidance, principally due to lower revenue growth in talent and onboarding related to the slowdown in US hiring. We expect EWS margins to return to about 50% in the first quarter and will be above 50% for all of 2023. The strength of EWS and uniqueness in value of their TWN income and employment data in Employer Services businesses were clear again in 2022. Rudy Ploder and the EWS team delivered another outstanding quarter, outperforming the mortgage originations by 30 points and delivering strong 17% non-mortgage revenue growth. EWS is expected to deliver a strong 2023 and continue above market growth in the future. As shown on Slide 8, USIS revenue of $406 million was down 6.5% and slightly better than our expectations. USIS mortgage revenue was down about 46% and was in line with our expectations against an unprecedented 54% decline in credit inquiries compared to the 50-plus percent in our October guidance -- 50-plus percent decline that we had in our October guidance. Revenue outperformance relative to credit inquiries was strong at 8%, driven by favorable new mortgage business penetration, new mortgage products and new mortgage pricing. Credit inquiry performance continues to be less negative than estimated originations, reflecting higher relative levels of mortgage shopping behavior that we talked about before. At $67 million, mortgage revenue is now about 15% of total USIS revenue. B2B non-mortgage revenue of $280 million -- $288 million, which represents over 70% [ph] of total USIS revenue was up 10%, with organic revenue growth of about 6.5%. This was a significant sequential increase and much stronger than the levels we expected in October. Importantly, B2B non-mortgage online revenue growth was very strong at up 19% total and up over 13% organically, reflecting pricing and product rollouts as well as stronger volumes in banking as lenders continue to drive new originations. During the quarter, we saw strong double-digit revenue growth in commercial, identity and fraud and auto with banking at just under 10% growth. Financial Marketing Services, our B2B offline business had revenue of $72 million that was down 9% and slightly above our expectations. As we discussed during the year, we expect FMS to return to growth in 2023 with revenue up low single digits in the first quarter. USIS Consumer Solutions business had revenue of $50 million in the fourth quarter, up 8% from penetration and new product introductions. In 2023, we expect low single-digit growth from our US consumer direct business. USIS adjusted EBITDA margins were 35.3% in the quarter, up 120 basis points sequentially due to very strong double-digit B2B online non-mortgage revenue growth. EBITDA margins were down 400 basis points compared to prior year to declines in high-margin mortgage revenue. International revenue, as shown on Slide 9, was $284 million, up a strong 9% in constant currency and 8% organically. We're seeing broad-based execution from our international businesses with particular strength in Latin America NPI rollouts. Europe local currency revenue was up 3%, principally driven by 9% growth in our debt management business. We continue to see strong debt placements from the UK government as we have over the past several quarters. Our UK and Spain CRA business revenue was about flat in the fourth quarter and below our expectations principally due to lower new business penetration. Asia Pacific, which is our Australia business, delivered local currency revenue of 6%, driven by growth in our commercial, consumer, identity and fraud and HR identification businesses. Latin America, local currency revenue was up a strong 31% driven by very strong double-digit growth in Argentina, Uruguay, Paraguay and Central America from new product introductions and pricing actions. This is the fifth consecutive quarter of strong double-digit growth for the Latin American team. Canada local currency revenue was up 7% and above our expectations. Growth in consumer, commercial, analytical solutions and identity and fraud revenue were partially offset by mortgage volume declines and lower direct-to-consumer revenue. International adjusted EBITDA margins at 25.8% were down 100 basis points sequentially and below our expectations due to a greater mix of lower-margin debt services revenue and higher costs principally from purchase data. Turning to Slide 10. 2022 was an outstanding year for new product innovation, and as you know, NPIs are central to our EFX 2025 growth strategy. We delivered over 100 new products for the third year in a row and a record full year Vitality Index of over 13% and a fourth quarter Vitality Index of 14%. The 13% Vitality Index in 2022 was up over 400 basis points above our strong 2021 results and over 300 basis points higher than our 10% long-term growth framework goal for new products and our vitality. New product revenue in 2022 was $650 million, up over 50% from about $420 million in 2021. And in 2022, over 90% of new product revenue was from non-mortgage products. Leveraging our new Equifax Cloud capabilities to drive new product rollouts, we expect to deliver a Vitality Index in 2023 at levels similar to the 13% we delivered in 2022 which is well above our 10% long-term NPI Vitality Index goal. And this equates to over $700 million of revenue in 2023 from new products introduced in the past three years. New products leveraging our differentiated data, our new EFX Cloud capabilities and Single-Data Fabric are central to our long-term growth framework and are driving Equifax top line growth and margins. Turning to Slide 11. 2022 was also a strong year for bolt-on acquisitions as we continue to focus on our strategic M&A priorities and growing our non-mortgage revenue. Since 2021, we've completed 13 acquisitions that are delivering $450 million of principally non-mortgage run rate revenue. Our 8% to 12% long-term growth framework includes 1 to 2 points of annual revenue growth from strategic bolt-on M&A aligned around our three strategic priorities: number one, expanding and strengthening Workforce Solutions, our fastest-growing and most profitable business; number two, building out our identity and fraud capabilities; and number three, adding unique data assets. We expect these strategic acquisitions to deliver growth synergies in 2023 and 2024 as we complete their technology and product integrations. Last week, we announced the acquisition of the Food Industry Credit Bureau, leading provider of credit information for the Canadian food industry, with over 90% commercial data coverage. This acquisition expands our commercial product offerings in Canada. We also continue to work closely with the Board of Directors of Boa Vista Servicos, the second largest credit bureau in Brazil on the proposed acquisition we announced in December. When completed, the BVS acquisition will add $160 million of run rate revenue in the fast-growing Brazilian market. The transaction is subject to Boa Vista shareholder approval and other customary closing conditions. To the extent we're able to finalize terms with the Boa Vista Board, we expect the transaction to close in mid-2023. Turning to 2023 guidance on Slide 12. We ended the year with significant momentum in the underlying growth of our businesses and in the execution of our EFX 2025 strategic priorities. However, we also entered 2023 with a continuing decline in the mortgage market and broader economic uncertainty impacting our underlying markets. Our assumption for US mortgage market originations is a further decline of 30% in 2023, which is more than 30% below the lowest level of originations in the past 10 years. For perspective, MBA is currently forecasting 2023 origination units down about 22% versus our 30% assumption -- minus 30% assumption. Fannie and Freddie do not forecast units but are forecasting origination dollar volumes down 30% and 25%, respectively. In our planning, we've assumed the bulk of the mortgage declines in the first half with first quarter originations down about 55%. Secondly, in 2022, we saw hiring freezes and headcount constraints impact our background screening volume in November and December, and we expect these conditions to continue in 2023 with hiring down over 10% impacting our Talent Solutions and I-9 employee onboarding businesses. Even with these market impacts or market declines, we expect both businesses to grow over 10%. Finally, in our planning, we're expecting to see weakening in our key markets in the US, Canada, UK and Canada in 2023. We're assuming slowing growth in the US as we move through the year, although at this point, we have not assumed the US recession. Similarly, we are expecting to see economic slowdowns in Australia and Canada with perhaps a more significant slowdown in the UK. The slow growth in these markets compares to the 2% to 2.5% underlying economic growth, we assume in our long-term growth model. As we enter 2023, we have strong underlying growth across our businesses with execution of our EFX 2025 growth strategies. Despite the significant decline in the US mortgage market and slower economic growth across our major markets, we expect to deliver revenue growth at the midpoint of 4% in 2023. Total mortgage revenue should decline about 8%, over 20 points better than the 30% reduction in mortgage originations, and non-mortgage revenue should grow over 8%, which is within our long-term growth framework despite the slower economic growth in our major markets. We expect Workforce Solutions to deliver revenue growth of about 6% in 2023. This reflects a mortgage revenue decline of about 8% or over 20 points stronger than the expected 30% decline in mortgage originations. EWS non-mortgage verticals are expected to grow about 13% overcoming the expected 10% plus decline in US hiring and about 15% decline in our ERC businesses as that COVID program winds down. TWN record growth, strong new product rollouts and continued strong growth in both pricing and penetration will continue to drive Workforce Solutions outperformance. We expect USIS to deliver revenue growth of about 2% this year. Mortgage revenue is expected to decline about 7%, more than 20% -- 20 points stronger than the expected 30% decline in mortgage originations. In 2023, USIS will begin to benefit from their new mortgage credit file that was rolled out late last year that includes telecommunications, pay TV and utilities attributes to help streamline the mortgage underwriting process and support loans with the secondary mortgage market. Equifax is the first and only in the industry to provide these insights, which will be available to Equifax customers in the first quarter and can help create greater home opportunities for consumers across the US. We're also seeing the impact of pricing increases from one of our largest mortgage vendors that we pass on to customers at levels to maintain consistent margins. Non-mortgage revenue is expected to grow about 5% despite the slowing growth. Non-mortgage revenue growth of about 5% will be driven by strong commercial, identity and fraud banking and auto growth. And Financial Marketing Services expect to return to growth in 2023 after a disappointing 2022. International had a very strong 2022 with revenue up 12% in constant dollars, but we saw some weakening end markets late in the year, particularly in debt services. We expect International growth of 5% in constant currency in 2023. This is below our long-term growth framework for International of 7% to 9%, principally due to the expected weakening economic conditions in our major markets of the UK, Canada and Australia and also a decline in debt services off a very strong 2022. As we discussed last year, debt services revenue in 2022 was somewhat of a catch-up year as the UK government collections were put on hold during the COVID pandemic. We continue to expect international to operate within their 7% to 9% growth framework over the mid and long-term. NPIs will again be very strong, which is -- and consistent with last year's 13% Vitality Index, well above our 10% long-term vitality goal, and this will be led by Workforce Solutions in Latin America. As USIS and Canada complete their cloud transformation, we expect their NPI rollouts to accelerate as we exit 2023. As we complete our North American cloud transformation 2023, we will pivot to leveraging our differentiated data assets and new cloud infrastructure to drive new product rollouts and top line growth. Workforce Solutions will accelerate its focus on leveraging their new cloud capabilities, and USIS and Canada will complete their consumer credit, alternative data and IFS transformation this year. These are big milestones in completing the cloud that we've been building towards for almost five years. We're on track to deliver the cost and capital spending reductions from the cloud transformation that are central to our long-term growth framework. As I referenced earlier and as shown on Slide 13, our accelerated cloud transformation cost reductions and broader cost restructuring will deliver $200 million of cost and CapEx savings in 2023 that will expand our margins and free cash flow in the future. During 2023, we plan to reduce our total workforce of about 23,500 employees and contractors by over 10%. As we complete our North American cloud transformation in 2023, we expect to close about 15 data centers, consolidate development centers and continue to reduce our software application footprint, and we'll closely manage discretionary spending, including professional services. We expect these actions to deliver $200 million in spending reductions in 2023, representing $120 million cost and expense reductions or about $0.75 per share and $80 million in capital spending reductions. The savings in the first quarter are limited and accelerate in the second quarter and through the second half of 2023. In 2024, the run rate benefit of these actions will reduce our spending by over $250 million. The lower cost and capital spending accelerates as we move through 2023 from cloud transformation cost benefits and other costs and restructuring actions planned throughout the year. As shown on Slide 14, adjusted EBITDA margins and adjusted EPS improved significantly as we moved through 2023. In the first quarter, revenue is expected to be down 6% due to the about 55% reduction in mortgage originations. EBITDA margins and adjusted EPS are at their lowest levels in 2023 in the first quarter, principally due to the higher incremental margins from the declining mortgage revenue and the timing of the recognition of the majority of our annual equity incentive plan expense in the quarter. Normalizing for this timing compared to the fourth quarter, first quarter EBITDA margins are slightly below fourth quarter margins of 31%. As revenue growth improve throughout 2023 and cloud and broader cost reductions accelerate, EBITDA margins and adjusted EPS improve sequentially with EBITDA margins expected to exceed 36% and adjusted EPS exceeding $2 per share in the fourth quarter. For the full year, EBITDA will be up 4% or $70 million, in line with revenue growth, with margins flat to the 33.6% we delivered last year. Adjusted EPS is expected to be about $7.20 per share, down about 5% from 2022, principally reflecting higher depreciation and amortization of about $50 million as North American cloud system implementations principally completes, also from higher interest and other expense of about $60 million and a higher tax rate. Capital spending will decline by $65 million to about $545 million in the year, or about 10% of revenue as we move closer to completing our cloud transportation. We expect CapEx to decline again in 2024. We have a clear line of sight to executing these proactive actions that will expand our margins and drive our free cash flow. In addition to cost benefits, completing our North American cloud transformation will enable significant commercial benefits to drive market share and revenue growth, including our always-on capabilities, better data quality, faster data delivery and faster new product innovation. And we're beginning to see meaningful commercial benefits from our new Equifax Cloud technology transformation. And now I'd like to turn it over to John to provide more detail on our 2023 assumptions and guidance and also provide our guidance for the first quarter. Our 2023 guidance builds on our strong 2022 non-mortgage growth from new products, record growth, pricing and acquisition synergies. John? Thanks, Mark. Before we discuss 2023, I'll share a little more detail on 4Q 2022. As Mark referenced earlier, Equifax EBITDA margins came in slightly lower than expected in the fourth quarter at 31%, principally driven by lower-than-expected margins in Workforce Solutions, as Mark discussed, and also in International. Capital spending in the fourth quarter was $156 million, as we maintained investments to accelerate completion of North American cloud transformation. Capital spending will decline in 1Q 2022 to 2023 about $150 million and then sequentially further in each quarter of 2023, as we complete significant US and Canadian customer migrations. Total capital spending in 2023 is expected to be about $545 million. CapEx as a percent of revenue will continue to decline in 2024 and thereafter as we progress toward reaching 7% of revenue or below. Moving on to 2023 guidance. Mark provided an overview of our planning assumptions of a 30% reduction in mortgage originations in 2023. As shown on Slide 15, at these levels, and again, using credit inquiries as a proxy for the mortgage market, in 2023, the US mortgage market will be substantially below any level we have seen in the past 10 years. 1Q 2023 is expected to see the mortgage market down about 55% year-to-year. Sequentially, as we move through 2023, we're planning on a more normal pattern of mortgage activity with mortgage originations increasing sequentially on the order of 15% in 2Q 2023 from 1Q 2023, 3Q 2023 being about flat with the second quarter and normal sequential decline in the fourth quarter versus 3Q 2023. We expect with these sequential patterns, US mortgage originations would be up slightly in the second half of 2023 versus the first half of 2023, and the fourth quarter of 2023 would be up slightly year-to-year. And at least the first half of 2023, we are expecting USIS to benefit from mortgage shopping behavior with better performance than originations. Slide 16 provides a revenue walk detailing the drivers of the 4% revenue growth to the midpoint of our 2023 revenue guidance of $5.325 billion. The 30% decline in the US mortgage market is negatively impacting 2023 total revenue growth by about 7 percentage points. The mortgage revenue outperformance relative to the mortgage market is expected to offset about 5 points of the negative 7 percentage point impact of the mortgage market on overall revenue growth. As a result, the expected 8% decline in Equifax mortgage revenue has a negative about 2 percentage point impact on overall revenue growth. Non mortgage organic growth is expected to exceed 7% on a constant currency basis and is driving about 5% of the growth in overall Equifax revenue. As Mark referenced earlier, the growth is broad-based across all three BUs and is within our long-term framework of 7% to 10%, despite the economic uncertainty across our major markets in the US, Australia, Canada and the UK. The acquisitions completed in 2022 and year-to-date are expected to contribute about 1% of growth to 2023. For clarity, this does not include revenue from the potential acquisition of Boa Vista. Slide 17 provides an adjusted EPS walk detailing the drivers of the expected 5% decline to the midpoint of our 2023 adjusted EPS guidance of $7.20 per share. Revenue growth of 4% at our 2022 EBITDA margins of about 33.6% would deliver 5.5% growth in adjusted EPS. EBITDA margins in 2023 are expected to be about flat from the 33.6% we delivered in 2022. In 2023, the cost actions we are taking are expected to deliver about $120 million of expense reductions. These cost benefits are being principally offset by several factors. First, in 2022, variable compensation, including incentive and sales comp were at very low levels due to the substantial impact of the weak mortgage market on our performance. In 2023, our planning assumes we return to targeted levels of performance, and therefore, these compensation drivers. Royalties and cost for data and third-party scores are increasing as we continue to add new partners and broaden data sources. Also in 2023, we are also still incurring a level of redundant system costs as we continue to operate legacy North American systems prior to their decommissioning later in 2023. As we look beyond 2023, the impact of variable compensation moving to target and the cost of redundant systems in North America are behind us, and therefore, the benefits of our cost actions as well as accelerating high variable profit revenue growth are expected to drive significant improvement in EBITDA margins. Depreciation and amortization is expected to increase by just over $50 million in 2023, which will negatively impact adjusted EPS by about 4%. D&A is increasing in 2023 as we accelerate putting cloud native systems in production. The combined increase in interest expense, net other expense and tax expense in 2023 is expected to negatively impact adjusted EPS by just over six percentage points. The increase in interest expense reflects the impact of higher interest rates and also the increased debt from our 2022 acquisitions. Our estimated tax rate of about 26% is up about 150 basis points from 2022 due to a higher mix of non-US revenue and lower tax benefits as we reduce capital and development spending. Slide 18 provides the specifics of our 2022 full year guidance that Mark discussed in detail. The slide includes additional detail on expected BU EBITDA margins as well as guidance on specific P&L line items. EWS EBITDA margins in 2023 of 52% are expected to be up from the 51.3% delivered in 2022, given the strong non-mortgage revenue growth from new products, penetration and pricing and the benefits of the cost actions Mark discussed earlier. USIS EBITDA margins at over 35% are expected to be down from the 36.8% delivered in 2022. USIS is also benefiting from cost actions. However, revenue growth at 2%, again, due to the impact of the US mortgage market decline, is resulting in the year-to-year margin decline. International EBITDA margins at 27% are expected to expand versus the 25.7% delivered in 2022, driven principally by pricing and the 2023 cost actions. Corporate expense, excluding depreciation and amortization, is increasing in 2023 relative to 2022 due to the increases in incentive and equity compensation from the lower levels incurred in 2022 that I referenced earlier. Corporate functions such as finance, legal, HR and others are reducing costs in 2023, consistent with our cost actions. We believe that our guidance is centered at the midpoint of both our revenue and adjusted EPS guidance ranges. Slide 19 provides our guidance for 1Q 2023. As Mark discussed earlier, 1Q 2023 is expected to have the largest year-to-year decline in the US mortgage market that we'll see in 2023 at down about 55% as we compare to the relatively strong mortgage market in the first quarter of 2022. Despite the strong expected non-mortgage constant currency growth of about 9%, we will see a decline in 1Q 2023 revenue about 6% at the midpoint of our guidance. 1Q 2023 EBITDA margins are expected to be about 29%, down about 200 basis points sequentially. Overall, BU EBITDA margins in total are up sequentially from 4Q 2022 driven by Workforce Solutions delivering about 50% EBITDA margins in the quarter, which offsets declines at USIS and International. The decline in EBITDA margins in 1Q 2023 sequentially from 4Q 2022 is driven by higher corporate expense, specifically the higher incentive and equity compensation costs referenced earlier. The bulk of the expense related to our equity plans occurs in the first quarter and is reflected in corporate. Excluding the impact from the sequential increase in equity compensation expense, EBITDA margins are approaching flat sequentially at just under 31%. Corporate expenses will decrease meaningfully sequentially in 2Q 2023 as the equity compensation was principally reflected in the first quarter. Revenue increases sequentially in 1Q 2023 relative to 4Q 2022. We're not seeing the expected increase in EBITDA margin sequentially in the first quarter, driven by the same factors impacting all of 2023 that I referenced earlier and the fact that there is limited first quarter benefit related to our 2023 cost actions. In the second quarter of 2023, we will see both the benefit of reduced corporate expense and increased benefits from our 2023 cost action supporting growth and EBITDA margins. Business unit performance in the first quarter are expected to be as described below. Workforce Solutions revenue growth is expected to be down about 8.5% year-to-year due to the about 55% decline in the mortgage market. Non-mortgage revenue will continue to deliver double-digit growth. EBITDA margins are expected to be about 50%, up over 300 basis points sequentially, driven by sequential revenue growth from new product and pricing actions. Workforce Solutions will represent just under 50% of Equifax revenue in the quarter. USIS revenue is expected to be down about 5.5% year-to-year, again, driven by the about 55% decline in the US mortgage market. USIS credit inquiries are expected to somewhat outperform the overall mortgage market due to consumer shopping. The mortgage decline is partially offset by growth in non-mortgage expected to be up mid single digits. EBITDA margins are expected to be about 32%, down sequentially due to negative mix from growth in core mortgage and higher overall mortgage royalties as well as the normalization of incentive costs that I referenced earlier. USIS is also incurring incremental costs from customer migrations to data fabric that are occurring principally in the first half of 2023. International revenue is expected to be up about 5% in constant currency. The weakness relative to the strong 4Q 2022 growth of about 9% is principally a decline in the UK debt management business as we are now comparing to the very strong 2022 revenue driven by catch-up in our UK government business in 2022 as the UK government suspended collections during the pandemic. EBITDA margins are expected to be about 22%, down sequentially due to seasonally lower revenue in Canada and UK CRA and normalization of incentive costs as well as higher data costs. We're expecting adjusted EPS in the first quarter of 2023 to be about $1.30 to $1.40 per share. Looking forward, we remain focused on delivering our midterm goal of $7 billion of revenue with 39% EBITDA margins. Market conditions are significantly different than when we first discussed in November of 2021, our goal of achieving these results in 2025. The US mortgage market is expected in 2023 to be down over 35% from the normal 2015 to 2019 average levels we had discussed is expected to deliver $7 billion of revenue in 2025. Our core organic revenue has grown over 300 basis points faster than we discussed with you in November of 2021. However, recovery in the mortgage market around the order of two-thirds of the lost volume is still likely needed to achieve our $7 billion goal in 2025. We're focused on driving above-market growth including -- through accretive acquisitions and delivering the cost and expense improvements committed as part of our data and technology cloud transformation and needed to achieve 39% EBITDA margins. We'll continue to discuss with you our progress toward our $7 billion and 39% EBITDA margin goals as the mortgage and overall markets evolve in 2023 and forward. Thanks, John. Wrapping up on Slide 20. Equifax delivered another strong and broad-based quarter with above-market growth in 2022, more than offsetting the significant 55% decline in the US mortgage market originations. We delivered our eighth consecutive quarter of strong above-market double-digit core revenue growth and strong double-digit 12% non-mortgage growth, reflecting the power of the EFX business model and our execution against our EFX 2025 strategic priorities. At the business unit level, first, Workforce Solutions had another outstanding year, powering our results, delivering 14% revenue growth and strong organic non-mortgage growth of 24%. TWN current records reached $152 million, up 12%, and total records surpassed 600 million. Workforce also delivered a Vitality Index of over 20% from innovative new products and solutions, leveraging their cloud capabilities while further penetrating the high-growth Talent and Government verticals. USIS had a very strong finish to 2022 with fourth quarter non-mortgage growth of 10% total and 7% organic, driven by online non-mortgage growth of 19% total and 13% organic. The USIS team remains competitive and is winning in the marketplace. International delivered 12% local currency growth, their second consecutive year of double-digit growth. And our 2022 Vitality Index of 13% was a record as we delivered over 100 new products for the third consecutive year in a row. And since 2021, we completed 13 strategic bolt-on acquisitions to strengthen Equifax and identity and fraud that we expect to deliver over $450 million of principally run rate revenue going forward. And sixth, we made significant progress in 2022, executing against our EFX cloud, data and technology transformation with about 70% of North American revenue being delivered from the new Equifax Cloud. And we're laser-focused on completing our North American migration in 2023 to become the only cloud-native data analytics company. We're in the early days of leveraging our new cloud capabilities but remain confident that it will differentiate us commercially, expand our NPI capabilities and accelerate our top line. Our strong progress on the cloud allowed us to accelerate cost savings and launch a proactive restructuring across Equifax that will deliver $200 million of cost savings in 2023 that will expand our margins to 36% as we exit 2023 and position us for an uncertain economic environment. As we look to 2023, we're committed to completing our North American data and technology transformation, while delivering continued above-market revenue growth and a substantial and consistent EBITDA margin growth and a reduction in capital intensity that is a key benefit of our data and technology cloud transformation. As mentioned earlier, the cost actions were taken in 2023 reducing our spending by $200 million this year and over $250 million in 2024 will expand our margins and position us for a more uncertain economic environment. I'm energized about our strong above-market performance in 2022, but even more energized about the future of the new Equifax in 2023 and beyond. We're convinced that our new EFX cloud-based technology, differentiated data assets that are now in our single-data fabric and our market-leading businesses will deliver higher growth, expanded margins and free cash flow in the future. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Manav Patnaik with Barclays. Please proceed with your questions. Thank you. Good morning. Mark, you said you assumed a weakening economy pretty much globally but not a recession. But I guess my question is more the weakness that you've assumed, the magnitude of what you're seeing already today versus what you're assuming gets worse, if that makes sense? Yes. So I think there's a couple of levels there, Manav. As you know, we've been living through a mortgage market recession here in the United States for the last nine months and that's going to continue. And it's really unprecedented. So I think you and our investors understand that pretty clearly. It's really a massive impact on our business. And what's positive is our non-mortgage businesses are performing exceptionally well. We talked about where we've seen the impact of hiring declines in late in the year. We expect that to continue being down about 10% in 2023, and that impacts our Talent business and also our onboarding and online businesses. So that's certainly in our outlook. And then we did factor in what we would characterize as an uncertain or slowing economic environment really more in the second half of 2023. It's hard to forecast where the economy is going to do, but it certainly feels like at these higher interest rates and higher inflation, and you've got the impact of mortgage and now in the hiring space that we're going to see slowdowns as we go through 2023. Got it. Just to clarify on that. I guess, can you talk about what you assume more on the, call it, card and auto side because those things still find today that -- how much you're assuming? And then, John, just for you on free cash flow. Can you just walk us through what the working capital moves this year was and how we should think about what free cash flow will be in 2023? Yes. So on your first half of your question, John can take the second. You're correct, Manav. In a lot of verticals, we haven't seen that economic impact yet. We're expecting to see that as we go through 2023. So that's a part of our guide and a part of our outlook in verticals like cards, like P loans, like auto, we've seen some limited economic impacts there. But as you point out, cards, for example, are still operating quite well. But given where interest rates have been and where they're going and where the Fed is signaling they're going to take them and the challenge of taming inflation, we think it was prudent to include in our outlook for 2023 a softening of the economy as we go through the year. As you look around outside the US, right, we saw a weakening in the UK. That's already occurred, started to happen in the fourth quarter, and we saw relatively weaker performance in some of the other markets around the world as well. So to free cash flow -- so as we look through 2023, Manav, we're expecting to see expanding margins, as Mark talked about, and we're expecting to see, obviously, therefore, expanding EPS as well, and we're also expecting to bring down capital spending. So we expect to see very nice growth in free cash flow as we move through 2023 sequentially, as we go through the quarters. In terms of working capital, as we've discussed in prior calls, as we were going through a significant billing system migration, we did see some increase in our accounts receivable. The bulk of that is now completed. We've completed all of North America, and there's just -- there's a little bit more to go as we go through 2023 in some of our international operations. Our internal metrics are showing a nice improvement in terms of our operational performance in those systems in terms of what we're seeing in terms of collections activity. And so although we haven't really seen it yet in the numbers you would have seen in the fourth quarter, we're expecting to start to see some benefit as we move through 2023 in terms of AR, which would affect overall working capital. So net-net, I think free cash flow, we're expecting to see, obviously, expanding margins, improving profitability, lower CapEx and then improvements as we move through the year in working capital in general. Hi. John, I just want to make sure I understand the $120 million of OpEx reduction on Slide 13. Is this $120 million for 2023 could be realized in year, or is that a run rate by the end of the year? And then I have a follow-up question. As John pointed out, those will be executed principally the actions of the contractors and attrition in some Equifax FTEs will be executed in the first quarter, so the benefits will accelerate as we go through second, third and fourth. And then as we said, we get a benefit -- positive benefit in 2024 from the full year impact of that. Okay. And then on the $120 million of expense savings, OpEx savings, is this really an acceleration of the original plan, or does this add to total target cost savings of the cloud transformation? Yeah. It's a combo of the two. We tried to be clear about that, Andrew, in our comments because of the extra efforts and additional work we did in 2022, it's allowed us to accelerate the cloud savings that we've talked to you about for multiple years. So a big piece of the $120 million is the cloud savings, but there's a meaningful increment to that of just a broader restructuring of the company to improve our efficiencies and how we operate the company. Some of that from the investments of the cloud that are outside of technology just allow us to operate more effectively. So it's a combo with the two. Thank you. Our next questions come from the line of Kyle Peterson with Needham & Company. Please proceed with your questions. Great. Good morning guys. Thanks for taking the questions. I wanted to dig into the Talent Solutions piece. It definitely seems like there was some softness there compared to what you guys were expecting. And I know you kind of mentioned that hiring was a headwind and became more challenging. But I guess, was the softer result in that sub-segment of EWS, was that purely a kind of quantity and kind of hiring volume headwind, or did you see any clients like trading down to kind of less expensive products or doing anything else in kind of that area that might have caused some pressure? No. Our analysis of it is it's all Q and when we talk to our customers, meaning there's just less background screens happening. I think we were watching this as we went through the fourth quarter. I think all of us saw companies as we went through the tail end of the year and they've accelerated in the first quarter here, announcing layoffs, announcing hiring freezes. That all is going to impact the hiring market. It's a bit bifurcated. I think we all know that the hiring at the, call it, the hourly wage area is still very strong. So that really wasn't impacted. This is more white collar impact, where companies are just tightening their belts and being more cautious around hiring. So we haven't seen any impact from our new product rollouts, the penetration that we have. And just as a reminder, this is a $2 billion TAM for us, is Talent. And we have a lot of penetration opportunities, meaning we're continuing to work in to bring new solutions and convert our customers from their manual work to digital, and that's what really allows us to outgrow a declining market, which we expect to continue to do in 2023. And then as we also mentioned, that same hiring impact where companies are tightening their belts around adding new resources impacted our onboarding or our I-9 business in the latter part of the year, we expect it to impact in 2022. As we said in the comments earlier, we expect both of those businesses to grow double-digit even with those market declines because of the new product capabilities, the new penetration opportunities that we have and, of course, our normal pricing that we rolled out on a 1/1, on January 1. Got it. That's helpful. And then I guess just my kind of follow-up was on pricing. I know kind of last quarter, you guys mentioned that pricing would be a tailwind in 2023 to margins. And I know like the 1Q guide kind of implies a couple of hundred basis points of pressure on EBITDA margins. I get some of that's seasonality. But is some of this that compared to what you guys saw in 4Q that just volumes in mortgage and some of the other areas are just facing pressure that's offsetting some of those price effects that went into place on 1/1, or did you got temper in any of those? Yes, I'll let John jump in. No change in what we told you we were going to do in October and price and what we actually did. Obviously, what's happened is the mortgage market -- first off, we have a very challenging comp in the first quarter and the second quarter versus last year. A year ago, the mortgage market was super strong. So you start with that, and that was as expected, although as we talked about, we've reduced our mortgage outlook for 2023 from what we thought in October. So that puts pressure on the quarter and on the year, from a margin standpoint. There's some small pressure from the lower growth in talent and onboarding in I-9 because of the tightening belts around hiring taking place, but the bulk of the first quarter impact is what John described of, really, from a cost standpoint in 2022, our incentive compensation was well below target because of the decline in the mortgage market. As John said, we expect 2023 to be paying at target. So that's a higher expense to us. That flows through the year. And then we typically have in the first quarter when we make our retention equity grants to our team, an equity expense that takes place. And there, I don't know, what else would you add, John? No. Just in terms of price and product, you can see the benefit of price and product in the fourth quarter, obviously, in USIS. Very strong performance in online. We saw volume in banking. But we had very strong performance in auto and in banking and lending and cards. So -- and some of that was product and some of that was price. And you're certainly seeing it in the first quarter in EWS, right? As Mark mentioned, pricing increases going in January, and we're seeing the benefit of both product and price and in EWS with their margins expanding in the first quarter. So no difference, and you're seeing it in the performance of the business. I think, John, you also said in your comments that if you look at first quarter versus fourth quarter and isolate around these expense items around incentive and equity, our margins are basically flat, which means we're absorbing a weaker mortgage market than the fourth quarter and still getting the benefits of operating leverage and price and everything else to kind of offset that ex the cost items that we had that we talked about. Thank you. Our next question is coming from the line of Kevin McVeigh with Credit Suisse. Please proceed with your questions. Great. Thanks. Obviously, still a lot of volatility in the mortgage market. Is there any way to think about kind of purchase versus refinance? And as you get into 2024, I know 2023 is hard enough, but do you expect a little bit more recovery in refinance off of 2022, or just any way to think about kind of that base level of originations and how it trends over the course of the year? I'll let John jump in. As you might imagine, refi is virtually gone, right? Refi really disappeared from the mortgage market, I don't know, six months ago as rates started increasing. We don't anticipate refi coming back until there's a change in interest rates, meaning that there's some interest rate decline. What's really very unusual, and we've never seen before is the meaningful decline in purchase volume at this level. I think as John pointed out, our outlook for 2023 as mortgage inquiries 30% below the 10-year average. And that's really -- the 10-year average includes purchase and refi. So you've got purchase down dramatically. So at some point, purchase volume should improve. There's no question. If it's 30% below a 10-year average. Now we're assuming that doesn't happen in the second half. Should it improve in 2024, I think it's part of it's tied to what's happening in the economy. Are we stabilized around inflation and interest rates, if the interest rate increase has flattened out and consumers that are thinking about a home can have some confidence around where the economy is going. That should help purchase volume. But at some point, whether it's in 2024 or 2025, the mortgage market should move up on the purchase side as the economy stabilizes to get back to that, call it, 10-year average. It's never had this kind of an impact. Of course, we've never seen interest rate increases at this pace ever before. Add, John? Great. And then just real quick, as you think about kind of -- you mentioned the gig and pension workers a couple of times. Is that aggregation process similar to the traditional kind of record aggregation, or is it -- how does that process occur? And is it at the same price point, or is it kind of less profitable? Yes, no, they're very attractive records. We want them all. First, let me just make the point. We've got a long runway in traditional non-farm payroll. And I think as you saw a 12% growth last year in TWN records, was very, very strong. We signed, I think, 10 new partners that will come online in 2023. I think we said before that in our existing partners, think about payroll partners, there's meaningful records that we still haven't brought onboard with them. And there's a lot of incentives to do that. So that's kind of the base records. And over the last couple of years, we've scaled up resources that are going after pension records. I think it was in the third quarter last year, we signed our first pension partner to bring pension records into our data set. And we've got a pipeline of those. And process-wise, that's quite similar. If you think about pension records, they're probably in three different places, it's more than that, but three principal places. One is there are companies that are much like payroll processors that process defined benefit pensions for legacy companies that have those. So, going to those companies and developing those partnerships is strategy number one. Number two is large legacy companies process their own pension payroll, lots of them. So we're already collecting their employee payroll, so going in and collecting their pension payroll as a part of that strategy. So we know how to do that in just a matter of executing it. And then the third is in federal, state and local governments. Many of them have their own pension processing operations, so going to collect those records. So that's where we're going on the pension side. And then on the gig side, there's a lot of different strategies, individual companies, as you might imagine, going to get that and other entities that will have those gig records. And as we've talked before, it's the 114 million uniques that we have. There's about 220 million working Americans between non-farm payroll, gig and pension. So over the long-term, we've got the ability to double the scale of our records going forward. So that's a big lever for growth from workforce. I think as you know, the day we add a new record, we're able to monetize it instantly, because we're already getting inquiries for the record we don't have, right? With our 50-plus percent hit rates, as we add that 51st, 52nd set of data records, we're able to monetize instantly. So it's a very powerful part of the revenue engine and margin engine for Workforce Solutions, which is why we have such a dedicated team focusing on it. And if you think about the scale of our records, if you go back four years ago versus the 114 million uniques, we had something like 70 million and 300,000 companies. We ended last year with 2.6 million companies contributing their data to us. So the cloud has allowed us to really scale that, and there's a long runway for future growth. Thank you. Our next question is coming from the line of Kelsey Zhu with Autonomous Research. Please proceed with your questions. Hey, guys. On EWS margin, just kind of playing devil's advocate here. I want to understand a little bit better what's the biggest risk factors for margins to drop below your guide at 52%. Is this just mortgage market down more than 30%? Is it fields overachieving their targets again in maybe government the verticals? Just wanted to understand it a little better? John, this was on EWS margins. And the question was, we've said that we expect them to be 50-plus percent in 2023. What are the risks of that? Yeah. Let me talk about what's driving the margins to be at those levels, right? And it is heavily driven by what Mark talked about in terms of the record growth and therefore the outperformance relative to mortgage and the very, very strong non-mortgage growth. And then the cost actions that they're taking in order to not only maintain but enhance their margins as they go through the year, right? So EWS has been executing extremely well. Obviously, if the mortgage market was to be substantially weaker, that's very high revenue and high margin -- very high-margin revenue, that would be a risk. To the extent that there is risk to revenue in general, obviously, that can be risk to margins. But overall, we think we've taken a very reasonable view in terms of what 2023 looks like for EWS. Their execution has been very strong. The record growth has been very good. They've already executed their pricing actions. Their performance in new product has been outstanding, as Mark said, growing at twice the rate of our 10% goal for Vitality Index. So we feel like we've given a very balanced view of EWS as we look into 2022. Maybe I just add to that, John. I think John mentioned, we rolled out our pricing actions late in the year in effective 1/1. So we know what those are. So that's kind of baked in. So that gives you a lot of confidence. As I mentioned earlier, and John did too, we already know some meaningful record additions that we've signed agreements for that will come in, in 2023. That's revenue and margin. We've got new products in workforce that were rolled out in 2022 that gets full year benefit in 2023. And we know our pipeline of new products we're expecting to roll out in the first quarter and second quarter from workforce going forward. So we think there's a -- we have a lot to give us confidence in our outlook there. And I think as John pointed out, to me, the factor would be if the economy is worse than we factored into this or if the mortgage market is significantly worse than we factored into this outlook, that would put pressure on that. And then we would take actions to respond to it. Got it. Super helpful. And then just on Boa Vista, I think that would be a really nice addition to your LATAM portfolio. And I was wondering if you could give us a little bit more color on how you're thinking about their data assets and their strategy. On the merger -- on the acquisition call, you mentioned Boa Vista is very strong regionally. Is there a strategy to expand them kind of more towards nationally. Would appreciate any color you can share with us. Yeah, sure. So first, we're working to try to finish the acquisition. We've been negotiating since December with the Board of Boa Vista. We're pleased with the progress, and we're -- we want to conclude that. So that's kind of priority number one. But everything we talked about in December, we're still quite energized about. First and foremost, we would bring all of the Equifax capabilities to Boa Vista, whether it's our new cloud technology our products from around the globe, our big platforms like Ignite and InterConnect, we'd really bring their capabilities up substantially versus what they have today as a standalone number two credit bureau in the market. So that is a real positive. And the underlying business is performing exceptionally well. They've got strong double-digit growth. It's a big market in Brazil that's expanding. There's a lot of alternative data available there that we would want to focus on. We just see a bunch of potential. As we pointed out, they have some unique data outside of the normal banking data that's unique to Boa Vista, which is another element that we like about it. So we're focused on completing our negotiations, so we can try to move forward in closing it. Hi. Good morning. Appreciate you taking the question and all the details as usual guys. Mark, one of the things that happened, obviously, that drove your mortgage growth before the sort of collapse of the overall market was greater digital engagement. And I think you've talked to mortgage shopping a little bit today, too. Has -- given that mortgage volumes are down so much, purchase and refi, do you think there's anything that's structurally changed in the market such that your customers either want to engage more digitally with you or less digitally? So I guess what I'm asking is when mortgage recovers, is that lever, which was such a nice driver for you when volumes were booming, is that still there? Is it -- do you get more leverage, less leverage, about the same? Can we think about that structurally, if anything has changed? Yes, it's a great question, and we believe that it's more leverage or more opportunity to really drive our digital solutions. And if you think about a mortgage originator, that clearly is under significant financial pressure now because of the reduced -- the reductions in volumes. They're looking to improve their productivity, and the only way to improve your productivity is through instant decisioning. And the goal that they always have and the leading players in the space are working to really shorten the time frame between application and closing. As you know, it's a very long time frame and that time frame has cost involved in it. It also has risk involved in it around the consumer changing. It has risk involved in it, and the consumer deciding, I'm not going to buy the home, meaning you've spent a bunch of COGS on it. And you've heard us talk before, the average mortgage originators spending $5,000 of expense in a mortgage application if they can shorten the time and take labor out of it by using instant data. That's a positive. So we expect our conversations around using our Instant data, particularly around TWN, to accelerate in this environment, meaning we're going to become more embedded and more instant, which has been a trend, as you know, over the last couple three years, even in the stronger mortgage environment. Some of that over the -- in 2020 and 2021 was challenged by the -- just the pace of the volume they had. They didn't have time to really focus on changing their processes. Now they do. So it's clearly a focus of ours, and we think a positive going forward that Instant is going to drive speed and drive productivity. And that doesn't only apply to mortgage, that applies to really all our verticals. Think about government, think about talent. If we're able -- they're under cost pressure today. And those verticals, whether you're a background screener or a government agency, improving your productivity and improving the speed of the service you deliver is very, very valuable to them. And the way to do that is to use instant data from Equifax like our twin data, our income and employment data. Hi. Good morning. Thanks for taking my questions. I wanted to first touch on a comment you made about a win for EWS and Verification Services within the U K, I believe. I wanted to ask, I think you said 40% of the private sector employee base, if I heard correctly, if you could clarify that. And then just curious, is that an exclusive relationship? And how important could that relationship be to getting a foothold or the pole position in the UK market, especially given a competitor of yours ambitions to build a similar business there? Yeah. I think we've been quite clear that over the last couple of years, as we completed the cloud, we were looking for new international markets to take Workforce Solutions into. As we talked on the call earlier, we've been building out businesses in Australia and Canada, and then most recently, a year ago, really in the first quarter, we launched our UK business using our new cloud capabilities and started to go into the market and talk to both individual contributors and payroll processors around adding data records. So we've made some positive traction over the last, I guess, four years in Australia and four years in Canada and over the last 12 months in the UK. We're looking to continue to grow and expand our capabilities there. We had -- I don't know the number, but we've had a handful of agreements signed in the UK, and we also signed an agreement with an entity that has tax data that is a proxy for income and employment. So that's been a positive addition in the UK. That gives us a lot of coverage so we can start rolling out solutions there. In Australia, we've got -- had an agreement with a pension administrator that brought that kind of data in, which is -- and also has the equivalent of W-2 type data in it that's quite accretive also. So it's clearly part of our strategy to continue to build out and invest into international footprint for workforce. Great. Thank you. And then for my follow-up, I just wanted to ask a question on margins. It looks like you're expecting 30% plus type margins exiting the year. Is there any reason not to believe that's a good starting point for 2024? And I know you're not going to give guidance for that year, but mostly asking about if there are kind of cost-saving actions that you expect to still be underway that late in the year or if that fourth quarter number is a decent run rate to think about kind of a stable base for out years? Thank you. Yeah. So I think as we talked about in the presentation, we're expecting in the fourth quarter to get to 36% EBITDA margins, driven by some recovery in revenue but also really significantly by the acceleration of the cost actions. And the cost actions have a continuing benefit in 2024. So we're expecting additional benefit from the cost actions as we go into 2024. And we're also expecting to get additional cost benefits as we continue to complete the cloud transformation beyond North America, and we'll start to start to see some of those benefits occur in 2024. So we think we still have tailwinds on the cost side that will benefit our margins as we get into 2024. And then obviously, as we get closer to 2024, we can start talking about revenue. But there certainly are cost tailwinds that continue out of 2023 and into 2024. Hi. Thank you for taking my questions. Hey, Mark, I want to ask you a little bit about the main functional areas for headcount reduction. And what I'm trying to focus on is NPI has been a big driver and driving particularly non-mortgage growth? And how do you make sure that you're going to not harm kind of the goose that's laying the golden eggs in terms of the ramp of revenue that we should expect over the next several years by reducing your headcount by 10%. And then I have a follow-up. Yes. We're obviously quite thoughtful about that, as you might imagine, we want to make sure we're quite strategic about where we're doing it. Remember, the bulk of the actions are really related to the cloud transformation and accelerating those. So you've got a lot happening in technology. And the bulk of the actions are also in contractors. We hired a bunch of contractors to do the cloud work, and we're taking actions now when we complete that and decommission the legacy infrastructure to take those out. The rest of the actions, I would characterize as kind of normal focus and thoughtful focus around where do we have opportunities to be more efficient and more productive while protecting our focus on growth. And growth includes our new products. The only thing I'd add is as transformation completes the effort necessary to launch new products comes down substantially, right? It's one of the real benefits from cloud transformation that we've been talking about substantially. And as data is on fabric and everything is running through Ignite and InterConnect, then the level of investment necessary to launch those new products really starts to become something that we can do faster and cheaper. So as Mark said, we do a very good job of making sure we understand who is working on what. So as we reduce resource, we take it out of specifically transformation. But also as we go forward, we expect to get a lot of leverage in product launches in terms of being able to launch them faster and cheaper because they're on the transform cloud infrastructure. And we've seen that in EWS by the way. It isn't something that we haven't seen. It's already happened in EWS. I think it's a great point, just to add on that. I think we mentioned on the call today that EWS new product rollouts, kind of 2x our long-term goal, north of 20% last year. And as you know, they were in the cloud a year ago, 18 months ago, and it's really shown what we envisioned happening, that the ability to bring more new solutions to market more quickly and more productively, as John pointed out, and efficiently would happen when you're cloud native. And that's part of what we expect to happen as we go through 2023, and we expect to continue in 2024, meaning we're going to have additional cloud benefits, as John pointed out in 2024, and then we get the full year run rate impact of our actions in 2023. Got it, got it. And then just as a follow-up, I want to ask a little bit more about the competitive environment on The Work Number. You have a competitor in the market that's talking about signing more contracts with mortgage processors, and the vast majority of those are being -- putting them at the top of the waterfall. I'm just trying to square what they're talking about and some of the growth that they're trying -- they're communicating to the analyst community with kind of the market position and what you're seeing. I mean, are you seeing increased threats to your market position and the volumes that are coming through? We're not. I'd clarify with them if you want to try to understand better the top of waterfall comment. We don't know where that is or how that happens. We haven't seen them as a competitive threat in the marketplace. I think as you know, our record additions are quite substantial. We're -- we added in the quarter more records -- more unique records than they have. So we've clearly got an ability to attract new partnerships and individual relationships given the scale of the company. And then on the commercial side, our integrations are so deep and so substantial, we haven't seen an impact from a revenue standpoint. As you can see, the numbers are super strong in Workforce Solutions across all of our verticals, including mortgage. Their outperformance is exceptionally strong and hasn't slowed down. And just please remember, our historical record base is incredibly valuable to our customers, certainly in Talent, certainly in Government, increasingly in mortgage, we talked about mortgage 36 on in the conference call. And that's a place where we have tremendous strength in general and Verification Services and an even stronger position in historical records. Thank you. Our next question is coming from the line of Toni Kaplan with Morgan Stanley. Please proceed with your questions. Thanks so much. First, I was hoping you could talk a little bit about the bearishness within the mortgage forecast. The 30% inquiries decline I think would imply that originations are even lower than that. And I think just -- I know sometimes the third-party forecasts are a little bit optimistic. But I just felt like there was a pretty big delta there. And so if you could just go into maybe why your mortgage forecast is so bearish? Thanks. Yeah. It's -- first off, it's very difficult to forecast. And I think we've shown over the last year that it's a hard thing to do. We've been pretty good about forecasting inside of a quarter, meaning out for a couple of months because the trends are pretty clear on what we're seeing on a daily and weekly basis. But as you get out a couple of quarters in this uncertain environment, it's much more challenging. And John, correct me if I'm wrong, I believe for the last year we've had our outlooks south of the other forecasts, like MBA and stuff consistently. So that's not a new approach for us. And Toni, as you know, we have real visibility to originations that are actually happening on a near-term basis, which is what we try to factor into our forecast. And you could call it bearish or conservative or, in our case, we tried to put it the most realistic outlook in place, that's what we put out there. Just a reminder, EWS, which is the bulk of the mortgage business, right, their transactions tend to look a lot more like originations, right? USIS does have that shopping behavior, which is better. But EWS now it's really much closer to originations. It's a much better proxy. And so also, as we talked about, I mean, what we did is we looked at run rates and then it just assumed kind of normal seasonality. I think what you're hearing from some of the third-party forecasters is an expectation of some type of substantial recovery in the mortgage market. That could occur, and if it does, we'll benefit, okay? But right now, what we're assuming is we're going to see a market that looks a little more normal in terms of its seasonality versus this year, and we're going to wait to see that recovery before we start saying it's going to happen. Terrific. And I wanted to ask a little bit more broadly on consumer spending. When you think about your -- what are you seeing, I guess, in year-to-date trends and how are you expecting that to play out throughout the course of the year? Thanks. Yes. Toni, really not a lot of change from the consumer from October, meaning they're still strong. They're working -- like unemployment being so low, unemployment being so high and all the open jobs, that's a good thing for the consumer. They've clearly -- we've seen they spent down some of their COVID pandemic savings, but there's still positive savings from where they were in 2019. So that element is quite positive. Obviously, at the low end, inflation is still pressuring the subprime consumer, and we've seen some uptick in delinquencies there. But broadly, we would characterize the consumer as being quite strong. Now when we look out for 2023 here in February, that's where we talked about and we factored into our outlook a more uncertain economy, which should impact the consumer, call it, in the second half perhaps in the way we're thinking about it with these continued rising interest rates. And every day, you see another company announcing layoffs or hiring freezes. And that's going to have to have an impact at some point, and that's part of our outlook. On the B2B side, I think we talked at length about what we're seeing in the hiring space that we've already -- I just talked about. But that's impacting our businesses in background screening and talent and then an I-9 and onboarding. We still expect to grow over 10% in those two businesses because of pricing and product and penetration. But the actual volume, we expect to be down on a year-over-year basis. So that's going to have an impact. Hey, guys. Good morning. Maybe for John, is there any way to quantify what the delta is from -- on the compensation side where you're going from below plan last year to plan this year? Is there any way to just quantify what that represents as a year-over-year change? I think in the quarter, you talked about -- in the first quarter, if you exclude that in the equity impact, margins are basically flat. And just really the equity impact were pretty close to flat. So we didn't -- so we tend to try to list things in order of importance. So what you can take from the listing we gave is it's fairly substantial. No, we haven't quantified our -- the total incentive and sales incentive difference year-on-year. But we're saving -- the $120 million savings is obviously quite substantial. And the most substantial area we're offsetting is that change in overall sales compensation and incentive compensation as well as equity compensation. So it's the biggest factor. Also, we are seeing increases in royalty costs. It's both in mortgage. We talked about one of our mortgage vendors, increasing prices. We do get some benefit from that on the revenue side as a pass-through, but it also significantly increases our expenses. And then also as we continue to substantially grow in Workforce Solutions, our partners, which we had an outstanding year, growing 10 new exclusive partners for in the fourth quarter, we do see royalties go up. But EWS is able to outgrow that and drive their margins higher. So anyway, those are the biggest things that we're offsetting with the -- that are offsetting the $120 million in cost savings. Got it. You actually anticipated my follow-up question. Just you mentioned this higher royalty and data costs to you. Is that kind of just a catch-up do you feel like, or is this more of the new normal going forward that these costs are going to be higher -- structurally higher going forward for you guys? So the specific comment around mortgage, I think that was probably -- there was a large increase from a vendor, and everyone knows that. So that was a onetime effect or we'll see what happens in the future. On EWS, we've seen an increase in their royalties over time as they continue to grow partner records, and that's just part of the business model. And we think they can deliver 50% plus margins even as that grows. So it's just -- it's a cost that we have to incur in the business, but it's an extremely beneficial cost because the variable margin on those -- on the revenue that those records generate continues to be high, but those costs are increasing. The other costs I didn't mention, right, that we're offsetting is we are continuing to see duplicate costs because we're continuing to run the major US systems in credit and the major Canadian systems in credit through the middle of this year or into the third quarter. And so that duplicate cost is something we're still incurring, and that's also something that's partially offsetting the cost savings we're generating. Thank you. Good morning. Looking at Slide 13 with the $250 million total spending reduction for 2024, how much of that is a CapEx reduction versus OpEx? And then of those two numbers, particularly the OpEx reduction, how much will flow through to earnings versus being offset by additional expenses? So in terms of the split of capital and expense, we didn't give specifics, but it's probably reasonable just to use the same split that you have in 2023. And I think I'm going to have to ask you to wait until 2024 before we talk about -- we give -- we talk about 2024 guidance. But what we did talk about, right, is there's substantial expense savings that we expect to see not just from this but also from continuing to execute on our transformation. And we do expect our margins to grow, right? So we're going to get margin enhancement through revenue growth because it's obviously -- we have obviously a high -- very high variable margins as the mortgage market even just normalizes at these levels, our revenue growth starts to accelerate. And then also, we'll get cost savings. So how do you decide to decide what goes where? It's up to you. But we do expect to see margin enhancement with a better revenue growth environment and a more stable mortgage market. Got it. And just as a quick follow-up, if you could quantify the EWS price increase at the beginning of this year? Yeah. I think you know, we don't -- for competitive reasons and commercial reasons, we don't talk about any price increases. I think we've been clear that we have more pricing leverage in EWS than our other businesses. We've also been clear that we generally do our price increases effective 1/1 and roll them out in the fall or fourth quarter to our customers. And so price for EWS, USIS, International, we got real clarity because it's in the marketplace and already negotiated with our customers. So that gives us a lot of confidence in that element of our margin and revenue levers for the year. Hi. This is John Mazzoni fill up for Ashish. Thanks for taking the question. Maybe just building more on this new Equifax theme and in terms of the kind of restructuring efforts, could these tech layoffs benefit the company in terms of hiring engineering talent? Your comments suggest that kind of the white collar layoffs are really concentrated in that type of kind of high-growth, high-tech area and maybe that had to go into investor session could actually help you in-source tech talent. Any color there would be appreciated. Thanks. Yes, I'm not sure I understand the question. Could you just clarify that? About -- tech is an important function for Equifax for sure. As you know, we're a data analytics technology company. It's actually our largest number of employees and, by far, the largest number of contractors. Most of the cost savings have always been planned, and that's what we're executing in 2023 come from completing the cloud and then exiting the plan -- the contractors that we're working on that are principally contractors and exiting those out. Go ahead. Yes. We're always looking to improve our talent and upgrade it. I think we've got a very strong technology team today, but for sure. Maybe I'll answer the question a little bit differently. If you asked the question a year ago about what's it like to hire tech talent a year ago, 18 months ago, 24 months ago, it was very hard. Today, when we're hiring tech talent, which we do all the time with -- in the environment as you described, where a lot of tech companies are pulling back, that is a positive for Equifax. We're able to get great talent and it's just shorter time frames between opening a job and finding great people to come onboard in this current environment. So for sure. Great. Very helpful. And then maybe just building a little bit on that question but in a different lens. Layoffs are broadening out across different industries that are non-tech in nature. Is any of that baked into the unemployment claims assumptions in 2023? And maybe due to the lag effect of severance, could there be a potential upside in the back half of the year as these unemployment claims could pick up? I think you've seen before at Equifax, if you follow it closely, that in a rising unemployment environment like in 2020, we get substantial upside from our unemployment claims business. Today, we don't have that really baked in, in 2023 because we just haven't seen that yet. But if it comes forward, that will certainly be a positive. Hi. Thanks. Good morning. You provided assumptions for industry mortgage volumes for 2023. Can you discuss your expectations for card and auto origination volumes for this year as well? Yes. We haven't disclosed those in the past, George. As you know, we've -- in the past, we've been very transparent around mortgage just because of the volatility, if you will, in that space and the impact it's had in Equifax. I think what we have talked about is we were seeing -- we saw a nice growth in card in the fourth quarter in terms of volumes, not just -- our revenue was very good in banking, but also we saw a nice growth in banking and volumes in general. So that trend continues to be positive. Auto was kind of flattish, right? We think we performed well because of product, pricing and some penetration gains. So we think we did very well in online auto. We didn't see substantial market growth in auto in terms of transactions in the fourth quarter. So -- and as Mark said, as we go through next year, we've assumed a general weakening of the economy relative to where we are today. Got it. That's helpful. And related to the trends that you're seeing on the card side, can you discuss growth trends you're seeing with credit card marketing and prequalification volumes? Yeah, that was fairly strong in 2022 and in the fourth quarter. And we would expect that to continue at a fairly strong level in certainly the first quarter, which we gave you guidance on. And I think in our broader guide for 2023, we expect kind of a broad softening in the economy in the second half, and that's factored into our outlook for the year. Just as a reminder, our Financial Marketing Services business was weak last year, right? And we talked about that throughout the year. And what we expect is we expect to see it kind of flatten out in 2023, part of it just because we're lapping a weak year and part of it because we think we're improving some of the product offerings we have. But -- so overall, for us, our Financial Marketing Services business was generally not strong in 2022, but we're expecting a little better performance and some growth in 2023. Thank you. Hi, Mark, just following up on the questions from the last analyst. Just big picture-wise, I mean, does the relative strength of kind of what you're seeing in like auto card, P loans, at this point in the economic cycle both from like a marketing spend perspective and as well as volumes, does that kind of surprise you at this point? And maybe how should we generally think about the cyclicality of the business? I mean, if the economy was to maybe fall into a recession late 2023, is that when we would maybe expect to see lenders pull back a bit more? Just trying to gauge if there's structurally anything different that we should be thinking about this time around? I think this is a different economic event than we've ever seen before, right? You've got interest rates increasing rapidly. You've got inflation at a level that it hasn't been in 40 years, but you also have people working. That usually doesn't tie together. Normally, you see unemployment increase as there's an economic event. And I think the real question is that -- I'm not an economist, but the real question is that -- is there going to be the so-called soft landing with interest rates and inflation? With the labor report from last Friday, it doesn't feel like that, meaning there's going to be continued interest rate increases to try to tame inflation. But the variable on all the verticals you described in financial services, where financial services companies, I ran a credit card company for a decade, where a credit card company or a financial service company will start tightening up is when people aren't working. And when they're not working, they can't pay their bills or they slow down their payment of their bills. So that's the dichotomy that we have in 2022 and I call it the early parts of 2023, is you've got an economy that clearly is seeing pressure. You've got companies that are tightening their belts, which is impacting some of our B2B volume. But you got a consumer that's still fairly healthy. Their consumer confidence is down, but they're working so they're still paying their bills. Our assumption for 2023 is that doesn't continue, meaning there's some weakening of that in the second half is kind of how we laid it out. And then, of course, on top of that, we're disproportionately impacted versus some of our peers by the massive mortgage market decline that we've had. We've been living in a mortgage recession for six-plus months, and we've got another six months until we get the first half strength of 2023 behind us. But last year, the mortgage market decline impacted us -- just the market impact of that was close to $0.5 billion, a little over $0.5 billion. So we've been living in a usual economic environment. And from our perspective, quite positively, Equifax has continued to grow through that. And just as a reminder, as you think about USIS, right, two of the areas that are performing extremely well that are driving a lot of our growth are commercial and identity and fraud, right? So segments that are not necessarily embedded within the consumer, but where we think we have differentiated capabilities and benefits that should allow us to grow nicely in markets that may even weaken. Thank you. Our next questions come from the line of Heather Balsky with Bank of America. Please proceed with your questions. Hi. Thank you for taking my question. I'd love to ask about the -- on workforce, the non-mortgage verification side of things and how you're thinking about those businesses into the year, especially given sort of the macro backdrop that you're layering into your guidance and both on the Talent and Government side, how you see those businesses shaking out? Yes. I think we talked about that, and John can jump in. But we expect those businesses to still perform very well. Remember, the underlying levers that verification has, it starts with records. So our 12% increase in records last year benefits 2023. And then we've got 10 new processors that we're going to be adding records in 20 -- during this year in 2023. So records were positive in all the different verticals that we sell into, whether it's government, talent, auto, cards, P loans, the non-mortgage verticals in verification. We've got price increases in the marketplace. We're rolling out new products in every one of those verticals that really benefit growth going forward. So that's a positive. And then just underlying penetration. Remember in every one of those non-mortgage verticals for verification, we have fairly low penetration in cards, in auto, there's a lot of penetration opportunity. P loans is pretty high. Like mortgage, we do a lot -- we have -- we cover a lot of the ground in P loans. But then you go into talent and government, there's just a lot of market penetration opportunities. So then the flip side of that is the underlying market for those. What's happening to the economic impacts in there? And the one place that we've highlighted is talent and around verification where there is some reduction in hiring, but we said that we expect that business to still be up over 10% for 2023. Government is also a vertical that if there is an economic event, there's going to be more people going for social services, which will be a positive for that vertical. We expect that to grow positively through 2023. Yes. And just as a reminder, and Mark already mentioned that we're expecting total non-mortgage for EWS next year about 13%. So still very, very good and that even reflects weakness that we're going to see in ERC, right? ERC was very strong. And now with the end of that program, that pandemic-based program, you'll see a significant reduction there, which is non-mortgage, and we'll still grow 13% through that, so. Great. Thank you. And on -- in terms of your sort of overall non-mortgage business, so you talked about the fact that you're assuming a weakening economy in the back half. Can you just help us -- I know you don't necessarily guide the individual quarters, but how to think about the cadence from 1Q to 2Q and then into the back half? And just sort of what's baked into your outlook. It's tricky to do without getting into the quarter. I think we've given you an outlook for the year and an outlook for the first quarter and then -- which we don't typically do. We also gave you some visibility around what we expect margins to do because of the unusual -- the acceleration of the cloud cost savings and the broader restructuring of the company, that kind of 30% to 36% EBITDA margins gives you a lot of visibility around the profitability side. What else would you add, John? I think it's about all we can add, right? So I mean, we gave fairly good visibility on how we expect margins to substantially enhance through the year, going from about 30-ish, right, to 36% by the end of the year. And we said we'll start seeing those cost savings really kick in, in the second quarter. So beyond that, not much more to say. Thank you. Our next question is coming from the line of Faiza Alwy with Deutsche Bank. Please proceed with your questions. Yes. Hi, thank you. First, I just wanted to follow up on the USIS B2B online growth that looks like it accelerated in 4Q. I'm curious how you expect that business to trend in 2023. Like was there something specific that drove the acceleration, or was it just a matter of comps? And maybe if you can comment on what type of pricing benefit you expect to see in that business in 2023? Yeah. So what we -- what Mark mentioned is that the way the planning was built is we assumed about a 5% non-mortgage growth. And overall, you were referring to acceleration in online, right? I'm referring to overall non-mortgage growth of about 5%, which is a little lower than it was in the fourth quarter but still very, very strong. And I think the decline from the fourth quarter is principally driven by the fact that we've assumed that we're going to see weakening economic conditions as we move through the year, right? And I think what we're doing is just reflecting that in the 2023 guidance we provided. So we think that 5% growth with a US economy that weakens through the year, we think is a very nice outcome, and it shows very good performance and continued good performance across banking across auto, across other verticals and then also a return to some level of growth -- not high, but some level of growth in our Financial Marketing Services business. Okay. I guess is the cycle price increase that you mentioned, is that primarily in mortgage, or is that you think going to positively impact the B2B online business, the nonmortgage business as well? Yeah, we take price up generally in all our products every year, varying amounts dependent upon our market position and our commercial position, et cetera. Yeah. Mortgage has a very defined price change. On January 1, it's pretty much industry wide, right? So across other verticals, generally speaking, price increases do happen early in the year but that isn't always the case, right? So they tend to be more distributed throughout the year. So it isn't as unified an event outside of mortgage. But yes, we do expect to continue to get price. We certainly had a price benefit in the fourth quarter, and we expect to continue to have price benefits as we move through 2023. Thank you. Our next question is coming from the line of Andy Grobler with BNP Paribas. Please proceed with your questions. Hi. Thank you very much for taking my questions. Firstly, just one on the compensation. Just to clarify, you've noted that it's going to come back in 2023 relative to 2022. Where would that stand versus 2021? In other words, it was just 2022 kind of artificially are unusually low, and we're going back to a more normal level now? Yes. I think that's the right way to think about it. In 2022, we set out a plan for the year at this time last year, where we didn't anticipate a mortgage market change or interest rates going up or inflation where it was. And we missed that plan. And the way our compensation structures are aligned, as you might imagine, are tied to the performance against our plan for the year, and we underperformed that. So our compensation was substantially down in 2022. In 2023, we're assuming we get back to target levels, which would be more like 21%. 2021 was a very good year, right? So our comp was strong in 2021 because 2021 was a strong year overall. Yes. Yes. And just to kind of follow-up on the costs and so forth. You had cost savings plans from the cloud transformation baked into expectations anyway. And now you've talked about the $120 million of savings next year. What is the increment versus your previous expectations within the $120 million? Yes. And we didn't break that out for you, but the $120 million is a combination of accelerating some of the cloud cost savings that we had planned. So the -- I think we said in the call earlier, no change in what we expected to deliver from the cloud savings. We're accelerating some of that into 2023. We also said we expect additional cloud cost savings in 2024 and likely some in 2025. And then on top of that, in 2023, inside the $120 million is at a broader restructuring and efficiencies across the company to deliver additional cost savings that are incremental our long-term cloud savings that we've talked about for the last couple of years. I suppose that's the question. In terms of your incremental savings on that longer-term plan. How much is baked into this year's guide? Yes. We haven't broken that out as a part of our conversation this morning. We really just highlighted that, obviously, it's a sizable number. It's going to have a very positive impact on the company, and its -- there's an incremental piece to the accelerated cloud savings. Okay. Thank you. And if I may, just one more. Just from the EWS perspective, when you're having discussions with clients and data providers, now that there is a fairly determined competitor in play, are those conversations changing at all? They're not. We still have a very effective ability to add new relationships. I think we talked about adding 10 that will come online this year during 2023. And we have the scale of workforce solutions, the scale of their technology, the scale of our security and capabilities and the longevity we've had in the business. So we've been in this business for over a decade, and then the ability to deliver a rev share immediately at scale for those records from a partner gives us a lot of power to continue to grow our record base. And there's a long runway in front of us of records that we'll be adding to the TWN data set. Thank you. There are no further questions at this time. I would now like to hand the call back over to Trevor Burns for any closing comments. Thanks for everybody's time today. And if you have any questions, you can reach out to me and Sam. We'll be around, and have a great day. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and enjoy the rest of your day.

EarningCall_59

Hello, and welcome to Universal Logistics Holdings’ Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. A brief question-and-answer session will follow the formal presentation. During the course of this call management may make forward-looking statements based on their best view of the business as seen today. Statements that are forward-looking relate to Universal business objectives or expectations and can be identified by the use of the words such as believe, expect, anticipate and project. Such statements are subject to risks and uncertainties and actual results could differ materially from those expectations. As a reminder, this conference is being recorded today. It is now my pleasure to introduce your host Mr. Tim Phillips, Chief Executive Officer; Mr. Jude Beres, Chief Financial Officer and Mr. Steven Fitzpatrick, Vice President of Finance and Investor Relations. Thank you. Mr. Phillips, you may begin the call. Thank you, Joe. Welcome to Universal Logistics Holdings 2022 fourth quarter earnings call. I'd like to take a minute and reflect on Universal’s performance for the full year of 2022. I'm extremely proud of all our employees, agents, drivers, and contractors who helped achieve such remarkable results. How far we have come since the onset of the pandemic almost three years ago, the Universal team executed on their commitment to excellence, focusing on training, quality of service and transparent collaboration. We all worked extremely hard to record top line revenue in excess of $2 billion, which was a 15% increase over 2021 and more than doubled our operating income and earnings per share. For the full year 2022, Universal reported record operating income of $240.4 million, and $6.37 per basic and diluted share. In 2022, we made great strides not only in our financial performance, but also on an ongoing cultivation of associates in the warehouse, office and on the road. We continue to add and train new associates as we expand our business footprint, which unfolded in a tight labor market. The financial improvement is a credit to every associate willingness and effort to execute at the highest level. We've added train talent to a number of locations to further expand our foundation set course for continued performance and growth in 2023. As we close out 2022, Universal’s transportation sector was not insulated from a lack luster peak season brought about by high inflation and inventory destocking. Our Intermodal group experienced rapidly declining import volumes. And our Brokerage group saw the number of tendered loads declined throughout the quarter. Our Truckload group held their own by retaining pricing and elevated fuel surcharge levels. While we saw a year-over-year deterioration in our transactional transportation sector, our contract logistics segment which includes dedicated transportation, and value-added services expanded top line revenue and operating margin because of our diversified service offerings, Universal proudly printed its best fourth quarter operating income and EPS in company history. Fourth quarter capped off a year of incredible positive change. We remain committed to identify, reshaping and improving processes among the various service sectors. We successfully reimagined our large automotive launch in the city of Detroit, enhancing our employees skills, employing process improvements, and ultimately elevating our service levels to meet the customers’ needs. On the West Coast, we set for with a new business plan in the state of California, brought about by the implementation of AB5. We work diligently to obtain company assets in a tight equipment environment, hire new qualified drivers and transition existing contractors to company employees. We successfully entered into a partnership with the Teamsters to help set course for building a skilled and talented driver group accessing the port of LA and Long Beach. Overall, we have taken great steps to strengthen the fiber of our associates around the country as we prepare for the next stage of expansion. Now for the quarter, and yesterday's release Universal reported 2022 fourth quarter earnings of $1.27 per share on a total operating revenue of $458.7 million. We continued on our record setting streak reporting Universal’s best ever fourth quarter operating income and earnings per share, increasing each by over 100% compared to the fourth quarter of 2021. This marks the fourth consecutive quarter, meaningful margin expansion, and operational efficiency progress. While we have experienced the decline in transportation spot rates and volumes, we’ re optimistic our contract logistics business was well positioned to grow entering into 2023. Now for some color on each of the service lines. In our contract logistics segment, we experienced some fluency improvements in regard to parts and chips in the auto sector, which provided a consistent five-day work schedule, but still lacks some of the extended weekend run. While the SAR remain muted throughout 2022, the demand for vehicles still remains strong. We are very pleased with the performance in the auto sector and across the various verticals. Operational performance of our early cycle launches continued to improve. 2022 Class 8 production finished a solid year with over 315,000 units produced. 2023 forecasts still remain elevated, and we expect the solid year for new and existing customers we service. It is no secret that Class 8 orders are still waiting to be filled. And we remain optimistic in regards to our operating -- operations servicing those plants. We continue to get positive year-over-year production guidance from our partners in light truck and SUV space, new vehicle sales are forecast to increase in low single digits over ‘22 due to resilient demand and low inventory levels. Our accumulated contract logistics talent has expanded over the last year and we are extremely confident in our position to efficiently operate new business. We are confident our technology and experience management team will continue to deliver and execute on new opportunities from our expanded pipeline. We were recently awarded five new value-added operations with nearly top line revenue exceeding $11 million once in full run rate. The awards are supporting industrial, agricultural, automotive and Class 8 facilities around the country. Our active value-added pipeline has expanded by almost 35% over the same time last year, highlighted by several large EV projects that are sure to shape the future of automotive production. Our dedicated transportation group continued to grow top line revenue and margin by providing its best-in-class high velocity service. Here we expanded our talent pool both on the road and in the office. Our dedicated driver count has continued its upward trajectory expanding by 16.7% in Q4 of 2022, over the same period in 2021. We continue to rationalize new equipment allocations in a tight environment, but successfully replaced over 35% of our tractor fleet. While adding 130 new tractors into new programs in 2022. We also shifted trailing equipment from an underperforming facility, as well as adding 421 new trailers into the dedicated segment. We see continued opportunity for dedicated transportation and will continue to invest in the fleet in 2023. We will need the equipment as we launched several new opportunities over the first half of 2023 with expectations of $5 million in additional topline revenue with a potential full run rate around $20 million a year. We're very bullish on dedicated transportation solutions and the potential moving forward. The pipeline remains robust with quality win opportunities. Our Intermodal drayage group did experience volume headwinds caused by reduced imports during the quarter, which led to a 13.2% decrease in top line revenue and a 25.7% decrease in load move. The average revenue per bill was sequentially lower but still above Q4 ’21 average excluding fuel by 15.1%. Declining accessorial charges was the biggest contributing factor to our top line declining revenue per dm, storage and demurrage were down over 36% or $13.2 million to $22.5 million in the quarter, influenced by less congested supply chain and a more normalized operating environment. But the largest headwind in our intermodal business was caused by increased operating costs in California is due to the transition from independent owner operator model to our AB5 compliant company driver model, as well as a massive fall off in import traffic into the LA and Long Beach ports. Our drayage revenues in Southern California were down over 50% from Q4 of last year, and operating profits were down $5.3 million. This cost us an estimated $0.15 per share in the quarter. While the Q4 intermodal volumes were a headwind, we experienced year-over-year increase of 181 drivers or about 8.9% increase in our driver count from 2021. Our driver and contractor pipeline remains elevated by more than 40% from the same period in January of 2022. We have definitely seen a shift of drivers who have obtained their own authority for coming back into our intermodal network. We remain focused on servicing our current customer base while adding additional volumes through various value propositions in the first part of the year. Sales has been extremely aggressive in mining new customer opportunities, allowing us to explain our value creation for the supply chain needs, including company chassis in an expansive terminal network. Our current drayage pipeline remains strong with several large customer bids, completing in Q1 of 2023 Our trucking segment experienced some of the same volume headwinds created by inflation inventory destocking. While our rate levels have held for the most part on our open deck and specialized division, van rates deteriorated over the quarter. Open deck steel and metal loads were down over 10% in the quarter, but pricing remained elevated. On the van side, our retail and consumer good thing was down over 10%, with prices slipping slightly more. Top line revenue of $89 million was down 12.3% for the quarter, while operating income of $5.7 million was an increase of $4.6 million over the same period last year. Our agent base truckload model with its variable cost structure delivers consistent margins as it bends with top line revenue. Owner operator costs remain consistent with a low single digit decrease in broker purchase trends. Owner operator count was down almost 15% at the end of the year, and low count followed suit down 32.9% over the same period in ‘21. We are committed to increasing the size of our agent network by adding new agents and independent contractors. The segment’s business development team has been busy evaluating leads and expanding the opportunities in the pipeline. The current truckload pipeline is equal to about 50% of the segment’s trailing 12-month revenue. Company-managed brokerage saw top line revenue dropped 36.2% in the quarter to $39.6 million as inflation and consumption created less tender opportunities. We continued discipline approach in regard to operating margin was put an additional strain on spot opportunity, as their balance shifted over 80% contractual freight. Operating revenue per load decreased 14.8% to $1,684 per load, and the load count was down 19.9%. Gross margin was 13.7% for the quarter and was better than 11.7% margin in the same period of ‘21. Purchase transportation continued to decline entering the quarter but we saw a leveling mid quarter and a spike around the Christmas holidays. We were awarded a significant volume for the upcoming year from one of our top customers and are awaiting several others who have yet to announce their award. The current environment has our team aligned on pricing and performance. We continue to build on our power only offering and plan additional units as part of our 2023 CapEx. We will continue to partner with our carrier base to drive realistic price expectations while expecting a high level of service. We are cautious on the economic environment entering 2023, inflation, customer destocking and the general mood of the consumer continue to evolve. We will look for optimization opportunities to help take costs out of our intermodal and brokerage segments and add density to our variable cost agent truckload segment. While we face near term transportation headwinds, we are extremely optimistic on continued growth of our high margin contract logistics segment. Finally, performance equals results. And I cannot say enough about our team of employees, contractors, and agents that were the foundation of our 2022 success. I'm extremely happy with the progress of the Universal team. We are well positioned with talent at all levels as we navigate 2023 opportunities and challenges. Our team's efforts continue to create new customer value and shareholder return. Universal will continue to supply people driven solutions. I would like to now turn the call over to Jude for detailed view of our financial performance and capital needs. Jude? Thanks Tim. Good morning, everyone. Yesterday, Universal Logistics Holdings reported consolidated net income of $33.4 million or $1.27 per share on total operating revenues of $458.7 million in the fourth quarter of 2022. This compares to net income of $16.2 million or $0.60 per share on total operating revenues of $467.4 million during the same period last year. Consolidated income from operations was $48.2 million for the quarter compared to $23.8 million, one year earlier. EBITDA increased to $28.3 million to $68 million, which compares to $39.7 million during the same period last year. Our operating margin and EBITDA margin for the fourth quarter of 2022 are 10.5% and 14.8% of total operating revenues. These metrics compared to 5.1% and 8.5%, respectively, in the fourth quarter of 2021. Looking at our segment performance for the fourth quarter of 2022, in our contract logistics segment, which includes our value-add and dedicated transportation businesses, income from operations increased to $24.1 million to $30.1 million and $205.6 million of total operating revenues. This compares to operating income of $6.1 million and $160.7 million of total operating revenue in the fourth quarter of 2021. Operating margins for the quarter were 14.7% versus 3.8%. last year. The fourth quarter of 2021 included $5 million of previously disclosed pretax losses that adversely impacted the contract logistics segment’s operating margin by 310 basis points. And our intermodal segment, operating revenues decreased $18.6 million to $123.1 million compared to $141.7 million in the same period last year, and income from operations decreased $2.7 million to $11.1 million. This compares to operating income of $13.8 million in the fourth quarter of 2022. Operating margins for the quarter were 9% versus 9.7% last year. In our trucking segment, operating revenues for the quarter decreased to $12.5 million to $89 million, compared to $101.5 million in the same quarter last year, and income from operations increased $4.6 million to $5.7 million. This compares to operating income of $1.1 million in the fourth quarter of 2021. Operating margins for the quarter were 6.5% versus 1.1% last year. Also the fourth quarter of 2021 included $6.1 million of previously disclosed pretax charges that adversely impacted this segment’s operating margin by 590 basis points. In our company-managed brokered segment, operating revenues for the quarter decreased to $22.4 million to $39.6 million compared to $62 million in the same quarter last year, while income from operations decreased $1.6 million to $900,000 compared to operating income of $2.5 million in the fourth quarter of 2021. Operating margins for the quarter were 2.3% versus 4% last year. On our balance sheet, we held cash and cash equivalents totaling $47.2 million and $10 million of marketable securities. Outstanding interest-bearing debt net of $4.4 million of debt issuance costs totaled $378.5 million at the end of the period. Excluding lease liabilities related to ASC842, our are net interest-bearing debt to reported trailing 12-month EBITDA was 1.2x. Capital expenditures for the quarter were $31.3 million and totaled $117 million for the full year of 2022. Based on the current operating environment, for the first quarter of 2023, we are expecting top line revenues between $400 million and $425 million and operating margins in the 8% to 10% range. Given current macroeconomic headwinds and volatility in the transportation space, it remains somewhat difficult to forecast in this environment. Our forecast is predicated on stable operating environment for our contract logistics business offset by low double digit revenue declines in our trucking, intermodal and company-managed brokered segments compare it to the fourth quarter of 2022. For the full year of 2023, we expect capital expenditures to be in the $160 million range and interest expense for the year is expected to come in between $20 million and $25 million. Finally, Wednesday, our Board of Directors declared Universal’s $0.105 per share regular quarterly dividend. This quarter’s dividend is payable to shareholders of record at the close of business on March 6, 2023, and is expected to be paid on April 3, 2023. With that Joe, we're ready to take some questions. Hey, thanks. Good morning, guys. Appreciate the color and the outlook for the first quarter maybe just want to dig a little bit deeper on the intermodal side. Just want to get a sense I want to be clear about maybe how much of some of the issues in the quarter are ring-fence specifically to the quarter versus how much you think will be ongoing headwinds to the profitability of that business as we think about both 1Q as well as the full year 2023. Chris, this is Tim. I think what we saw leaving the fourth quarter is I explained in my prepared remarks was a transitional phase for our Southern California operation, which includes equipment onboarding, driver recruiting costs, driver training costs. And then in conjunction with that transition to accompany driver profile. We also saw about a 50% dip in load count, in that 50% dip was a combination of inbound imports coming into Southern California. And our profile as it comes to our customers about eight of the top 10 on our customer list is retail and consumer goods. So we saw a sharp falloff in that. So if you take that into 2023 and look at January as a whole, we still saw some deterioration of the overall load count and top line revenue as we see it on intermodal side. Our customers are telling us in that retail and consumer goods space, that they expect some rebound after the Chinese New Year. But they're not committing and they're holding their cards a little tight to their vest on what it looks like as we stretch our legs into the summer of ‘23. So we're prepared to see import levels probably at a lower rate in the first quarter, which means we're going to have to equally be out there on the hunt for additional market share. And then of course with any good company, we're going to make sure that we're containing our costs as we push forward. Okay, I guess as I think about the differences between the model you're running before and an employee model there first three quarters of the year in that business, I think you're running, let's call it close to mid-teens margins. Is that doable in employee model for that business? Or is it something lower than that? No, I, let's take the first crunch of that, the first byte of that. I think it is obtainable in an employee model, but that employee model’s jar has to be full so we can optimize the assets and the drivers. And not only did we have the whole runway in the fourth quarter of obtaining assets in a very tight market, we also had in Southern California, there's a lot of contractors that run in and out of the port. So our recruitment of new company drivers came with the huge cost of onboarding and training to put them in those assets so they can be successful. So why the downturn in imports it's troublesome, I guess it's also an opportunity to get our sea legs and get our new drivers, properly trained and ready to go compliant. So we feel good about that. But I think that once this is at full run rate, the jar is full, we'll have the ability to optimize company assets, I think that you'll still enjoy the same type of margins. Okay, that's helpful. And then I guess maybe the final question would just be sort of maybe taking a step back and thinking bigger picture. I think there's a general sense, particularly with retail exposed freight, that we are going through a meaningful normalization of inventories as it stands currently. And that maybe by late spring, there's the potential for some, that normalization to have largely occurred in maybe the return of a degree of strength. I don't know if that's sequential or year-over-year, but generally want to get your sense of how you think about at least on the retail piece of your business, and frankly, on the industrial side too whether you think there might be offsets that could sort of dampen that potential second half recovery? Yes. on the retail side, like I said, the customers are holding their cards pretty close, we feel that the Q1 will be challenged, we think that when we get out of the Chinese New Year, they start ordering again, we should see some rebound in Q2, but don't expect there to be any kind of normalization, as you put it prior to the second half of the year. And to this degree, we don't know exactly what yet. Some of the retail customers that said there would be a normal type season. But what's normal mean, over the last couple of years, because there's been so many peaks and troughs. So we think positionally, though the second half of the year will definitely be better than the first half of the year. And on the industrial space, I think that, let's break that down a little further Class 8, I think that we're going into a solid for first half of the year. And I think a lot of that will run its cadence into the second half of the year. All indications on automotive plants that we serve is a very strong year. Inventories are rising, but there seems to be a strong demand for those products in the plants that we've serviced. So we feel good about that. Our steel and industrial goods that we haul from a transportation perspective, our load counts had decreased somewhat, although pricing has remained pretty stout. One area we see is our agriculture and heavy machinery business is some positive forecasts for 2023 that there's still demand. And I think if you encompass that all together, I think you'll feel if you ask whether it's a Class A, an automotive, agriculture and heavy machinery, I think there's still part issues and supply chain issues out there, maybe not to the degree we saw in 2022. But I think they still linger out there that cause some disruption of cadence, but overall on the industrial, the auto space, we feel comfortable with 2023. And with no remaining questions, this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks. Thank you, Joe. I appreciate everyone dialing into the call today. As I mentioned, I'm extremely excited about the opportunities in front of Universal in 2023. We've already hit the ground running with new contract logistics programs and are cautiously optimistic about inventory restocking in the second half of ‘23, which will help drive transportation growth. Finally, I cannot wait to see our compliant Southern California company driver model to deliver certainty into our valued customers supply chains, as import volumes grow seasonally. I look forward to talking to everyone on our Q1 2023 call in April. Thank you.

EarningCall_60

Good morning, ladies and gentlemen, and welcome to the Indigo Books & Music Inc. Financial Year 2023 Q3 Analyst Conference Call. [Operator Instructions] This call is being recorded on Friday, February 10, 2023. Good morning, and thank you for joining us to review Indigo's fiscal 2023 third quarter results. My name is Craig Loudon, and I'm the Chief Financial Officer of Indigo. Regarding the materials for this conference call, we issued the press release yesterday. It can be found at indigo.ca and on SEDAR. The conference call will be recorded and archived in the Investor Relations section of the Indigo website. A playback of the call will also be available by telephone until February 17. This conference call may contain forward-looking statements, and to the extent that it does, we refer you to our cautionary statement regarding forward-looking statements in the press release and the MD&A for the quarter. We are proud of what we have accomplished this quarter despite facing a challenging external environment. For that, I would like to thank our loyal customers who continue to call Indigo their happy place. And of course, our hard-working Indigo teams who, after years of challenging pandemic constraints, are still working to manage the current macroeconomic environment while building a winning product strategy. Like the broader retail market, we felt the adverse impact of inflationary pressures on consumer behavior this quarter. Customers were increasingly focused on price, and the tightening of discretionary spending was yielding a more value-oriented shopper. These headwinds have reduced impact from Black Friday onwards as the holiday gifting season reignited strong demand. In the online channel, we had a record-breaking Black Friday and in the retail channel, sales exceeded the prior year, and we also achieved a record breaking Boxing Week. Our strength in the month of December demonstrates the power of our brand and Indigo's position as a key gifting destination for Canadians. The general merchandise business delivered another strong quarter, led by double-digit growth in the baby, toys and wellness categories. The ongoing success of this business underlines the value of the company's carefully selected assortment and the strategic expansion of core product offerings to meet the evolving needs of our consumers. The print business continued to show resilience and despite a slight decline to the prior period grew in both sales and market share compared to pre-pandemic levels. The retail industry on a whole is operating in a challenging macroeconomic environment. As mentioned, our teams have been working hard to manage various pressures, including supply chain disruptions, significant increases in fuel prices and higher cost of inventory amongst others. From a profitability perspective, much of the benefits of Indigo's strong Black Friday and holiday performance has been tempered by these economic factors. Moving forward, we continue to focus on our long-term strategy to increase productivity, generate sustainable and profitable growth and increase overall shareholder value. The results we are discussing for the 13 weeks ended December 31, 2022, and comparative figures referenced the 13 weeks ended January 1, 2022. Some discussion also surrounds the comparable pre-pandemic period being the 13 weeks ended December 28, 2019. The company generated revenue of $423 million in the third quarter compared to $431 million for the same period last year. As Peter discussed, this reduction in sales reflects the impact of the current macroeconomic environment on consumer behavior, which was most heavily felt at the beginning of the quarter. From Black Friday onward, the company generated revenue growth compared to the prior year. As a result of social distancing and the government-mandated capacity constraints in stores in the prior year, we believe that comparable sales are not currently meaningful to evaluate performance. Instead, we have focused on total revenue. Sales in the retail channel increased by $8 million or 3% to $306 million for the quarter compared to $298 million for the same period last year. This was driven by strong holiday demand, which drove December retail sales above the prior year. The channel also delivered a record-breaking Boxing Week. While traffic remains below pre-pandemic levels, it continues to rebound and was higher than the prior year, most notably when comparing to periods impacted by Omicron capacity constraints. Revenue from the online channel decreased by $15 million or 12% to $107 million for the quarter compared to $122 million in the same period last year. This decline was largely a result of the shift in channel mix as the retail network recovered from last year's Omicron capacity constraints. Consistent with the strength noted in the retail network, the online channel had stronger demand in the second half of the quarter and delivered record-breaking demand on Black Friday. It is important to note that while there was a decline to the prior year, the online channel has sustained sales at 63% above pre-pandemic levels. It continues to be a strategic lever of growth for the company. The impact of the current macroeconomic environment extended past softer customer demand and the associated top line decline, but also had a negative impact on costs. Cost of sales increased by $4 million to $256 million for the quarter compared to $252 million in the prior year. Excluding the impact of online shipping costs, cost of sales increased by $3 million to $233 million for the quarter compared to $230 million in the prior year. As a percentage of total revenue, this represents an increase to 55% compared to 53% in the prior year. This was driven by the inflationary impact to cost of inventories and incremental international freight costs. The penetration of promotions, while still below pre-pandemic levels, has also increased since the prior year when the company had elevated full price sell-through. Despite softened demand in the online channel, associated shipping costs increased, driven by the elevated cost of fuel and associated delivery surcharges. Operating, selling and administrative costs decreased by $3 million to $109 million for the quarter compared to $113 million in the prior year. The decrease in cost was primarily driven by a reduction in labor incurred in the retail network in addition to lower online volume costs from softened demand in the channel. Adjusted EBITDA was $41 million for the quarter compared to $52 million in the same period last year, a change of $11 million. As discussed, this was driven by the top line decline and compounded by the adverse impact of the current macroeconomic environment on costs. This included elevated cost of inventories, incremental freight and a higher penetration of promotions in the quarter. Additional costs were also incurred on enabling infrastructure to support a modernized e-commerce technology. The company recognized net earnings of $34 million for the 13-week period ended December 31, 2022, or $1.23 net earnings per common share compared to net earnings of $45 million or $1.62 net earnings per common share for the same period last year, a change of $11 million. With regards to inventory, the company finished the quarter with a balance of $317 million compared to $275 million in the prior year. Last year, the company was still measured in purchasing in response to uncertainty surrounding the impact of COVID-19 on consumer behavior. Here to support anticipated growth of the general merchandise business to expand core product assortment and to mitigate supply chain risks, the company increased inventory levels in advance of the holiday sales season. However, as sales were softer than anticipated, the company finished the quarter with inventory levels above what was planned. This was compounded by the inflationary impact on product cost, which has also increased the value of inventory on hand. We are prioritizing our inventory health while remaining promotionally disciplined, most notably through a more conservative replenishment strategy. I'd like to highlight that our general merchandise inventory is predominantly core assortment, which is relevant year-round. In addition, our print inventory is returnable to the publishers and therefore, carries minimal risk. Overall, we are confident in our inventory management strategy. With regards to our related party credit facility, Indigo repaid the amount in full during the quarter, and we have no other outstanding debt. We continue to deploy capital prudency to maintain a strong financial position. Indigo experienced a cybersecurity incident commencing on February 8, 2023, resulting in internal operational disruptions and service disruptions to both the e-commerce and retail channels. The company is working alongside third-party experts to resolve the situation and to understand if customer data has been accessed. Indigo's main priorities are to protect customer data, limit the operational and financial impacts of the incident and safely resume full operations as quickly as possible. Please note that while our press release and the transcript of this call will be available on our website, they will only be accessible there once this disruption is resolved. Hi, thank you. A couple of questions. So you talked about increased promotions or discounting in the quarter. I was wondering if you would be able to quantify the increase year-over-year on -- what the impact would be on the gross margin? I don't know those at my fingertips, David, but the interesting thing is, I would say, it's still -- the impact of promotions is below pre-pandemic levels. Year-over-year, it is up because last year was very unusual, in that there was a product shortage last year still with even more significant supply chain issues than we're experienced this year. And everyone in the retail space was short of products. There was literally no discounting happening last year. So I would say our markdowns and promotions are still this year below pre-pandemic levels. So I wouldn't say it was substantial. Okay. I'm just wondering what can be done or I'd be interested to get your thoughts on what can be done to improve the gross margin going forward? Yes. Well, the first one is staying on top of inflationary impacts. There's no question this holiday period, the price of goods coming in was literally changing just before goods were shipping. So staying on top of inflationary impacts is important, and we're on it. We will start to see the benefit of freights coming down. International freight from Asia, in particular, was a real drag on margin this year. I think year-to-date, it's $6 million that dragged on gross margin. So good shipping now, are seeing lower, much lower freight rates than we experienced during the holiday. Now all these goods take a little while to work through the system. But in future quarters, we'll see the benefit of reduced freight on margins. Yes. I said this year-to-date so far, it's $6 million. So I'd estimate on the full year, it's something like $10 million. Okay. And then just a clarification. So the SG&A was offset by $1 million from the Canada book fund in the quarter and the cost of operations was also offset by $2.5 million from the Canada book fund in the quarter, is that correct? Yes. And last year, we had other external support in the quarter. So there's a bit of offsets going both ways there. But yes, you're correct. We are certainly trying to apply for those, but I can't -- obviously, there's no guarantees, and I can't really speculate on that. But it is a program where the Canadian government is trying to encourage Canadian authors and the sale of Canadian books. Yes. Certainly, January has been better than we'd anticipated. But I would say it's still a little softer than -- since the first half of the year, there's no question in the second half that consumers are being far more careful and they're more deal-oriented. However, as we did note in some of our materials, October and November were very soft. And certainly, I know when speaking with other retailers, they experienced the same issues. And then once we had Black Friday, things came alive, got a little quiet, but then at -- we had a very strong final week into Christmas. And then Boxing Week, it was off the charts. As we noted in physical retail, we had a record Boxing Week. And so that demand has been good. And then I'd say that's carried into January that we've been either on or ahead of our forecast, whereas in October and November, we were behind. So we're certainly encouraged with what we're seeing at the moment. But again, no promises going forward. It has been a real roller coaster, I'd say, since September. Some weeks just way down and then other weeks really strong. So I must admit it is a bit of a head scratcher at the moment. Thank you for your time and attention today. We appreciate you calling in and look forward to reconnecting on a quarterly basis. Our fourth quarter results will be announced on or around June 1. Thank you again for your support, and have a good day. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.

EarningCall_61

Okay, everyone. We have got a good forum to get started today. So welcome to the DigitalX December 2022 Quarterly Investor Webinar. Thank you for joining us this afternoon. Just a few housekeeping items before we get started today. If you have any questions, please direct them into the Q&A box and we’ll endeavor to answer those at the end of the session. The session will be 30 minutes. We do welcome as many questions as possible. If we can’t ask them today, we will reach out to you. Thanks, Liz and hi everybody. Well, I am super excited. This is as you probably all know our – only our second ever quarterly webinar. So thank you for joining us today. I wanted to start by acknowledging the traditional owners of the land, the Gadigal people of the Eora Nation and elder’s past, present and future and thank them very much for the land on which we work and live. We might just jump straight into the webinar. From there, usual disclaimers and obviously, this is the DigitalX webinar and we are an investment management company creating transparent investment management at the intersection of technology and finance. Next slide, please. So today, we thought we would start just by running over the strategy slides again and I am just getting really clear on the benchmark and the measurements that the leadership team and management team use. Firstly, we are aiming to be – to lead the market in positive social impact and be a leader in cultural environment and a stand for positive social impact while generating sustainable financial returns. It’s really important, I think for shareholders to understand that we benchmark and measure ourselves internally and use constant measurement. The key results for having social – positive social impact we believe is moving to profitability and looking at the impact of our treasury investment. The overall aim of the business is to build shareholder wealth and to increase our market capitalization. And to do this, we use revenue as a benchmark and to drive revenues. In our funds business that is, looks like investing and our total value locked. And as we grow the business, we have customer at our heart and soul and to measure that we have a net promoter score. Now in this quarter, I am really excited, because we started this strategic initiative in June when we did a refresh with the board. And the way we have been sort of coining this strategy internally is strategic simplification. And we really have been looking at and focusing on what we believe is the foundations for success of DigitalX Now, Next, and Beyond. And to do this, we have been focusing on right people, right roles and intensely laser sharp focus on costs and growing revenue – reducing costs and growing revenue, and making sure we are spending money in the right areas for sustainable growth. One of the highlights that I will go through is we do have a new finance and ops team and they have been working very hard managing the costs of the business, stripping out costs, excesses that we don’t feel we need to be in areas we don’t feel we need to be spending money and I am happy to go through that in more detail. So next slide please. Just a quick refresher on the structure of DigitalX and how we describe ourselves as digital investment management and we do operate across two main spheres, which we will describe as Web 2 and Web 3. So we have our Web 2 business which is our Sell My Shares business and that was acquired in August 2021 as a channel to monetize and to create Drawbridge, which is our RegTech Web 3 offering to create profitability for that. We also run an investment management business which has currently two products, which is a Bitcoin Fund and a Digital Asset Fund. And as we will describe later on in the presentation, our strategic focus for that is growing new opportunities in that funds business which have been the growth of our ETH staking nodes and the development of a real world asset tokenization fund. Just to round out the structure of the business, although Sell My Shares, it’s not a deviation from what we have been doing, we have been working on amplifying revenue channels inside of that business, which you have seen in this result. We have had some really positive results from that and they are in the deceased estates area and the same day settlement areas. Next slide, please. And just on that, I see a question which I will be addressing around the execution of Automic. Now, as you know, we are subject to continuous disclosure requirements from the ASX. And in order to put our links up on the Automic website, Edward, we did have to pass penetration testing and get through a compliance layer at Automic and there will be some news on that in the next day or two and we will have some dates – some firm dates of when we believe that we will be rolling that out onto the platform and that will be an ASX release, possibly tomorrow, but more likely on Monday. So we will have some movement in that which we will be very excited to share with the market. So I just wanted to go through some highlights of this quarter. And really, as I said, management is focusing on building scalable sustainable revenue. And we are very laser sharp focused on that. Pleasingly, we had – we recorded a quarterly record for revenue generation for Sell My Shares. And as you would know, if you have been – as you’ve been following us that really was our number one strategic focus for the quarter. We put all our development efforts into that. And our aim was to grow two different streams within that business, which was the deceased estates and the T+0 opportunities. And as you will have read in the quarterly, we had some really pleasing results from that. In November and December, the deceased estates were 27% and 20% respectively for deceased estates and T+0 is creeping up. Now, T+0, because it’s a risk management element, which we will speak to that is a slower growth opportunity for us, because we had to test internal systems, but deceased estates really was plug and play business as usual and a new marketing channel for us. And we have had some really pleasing results in that area. We also have a surprise – had a surprise revenue kicker, which was in international share sales. And we are really building out in this quarter that avenue and pathway and working with our team to streamline that process as well. That resulted in 20% overall increase in recurring revenue and we will be looking forward to replicating that over the years to come. The most exciting piece of news there to build off that foundation was that focus for us of landing the Automic referral agreement. Now, as we did discuss in that question, we have not uploaded ourselves onto the Automic platform yet, we had to go through penetration testing and there will be an announcement to market for that. However, in that – what I can say about that partnership is there were many parts to it. And as we onboard this most simple part, which is Sell My Shares as a team, we are really looking forward to growing and developing that Automic relationship as the years unfold. And we do see a lot of potential upside in the Now, Next and Beyond for Drawbridge and we are looking forward to growing that in the future. We began with our new finance team, looking at active treasury management, and really putting our balance sheet to work for shareholders. Now, there have been already a number of questions around a sale of Bitcoin that we made before Christmas and the timing of that in the market. Now obviously, we have seen stronger markets in January. We do and our investment team do believe that there will be continued volatility in digital assets in 2023. And we made that Bitcoin sale we felt as a prudent measure to not only shore up our cash flow for growth initiatives and we have put that Bitcoin sale to very good work in funding our strategic initiatives in terms of T+0 and the real world asset tokenization initiative. And we will be looking forward to sharing more color and information on that as we go through the presentation. But I do – I can assure everybody that that was a very conscious decision. It’s not a move away from Bitcoin treasury management. In fact, we see that we will be much more active in managing the Bitcoin in our treasury and a bacon of the future of corporates where we believe that one day we will facilitate and be part of a conversation where all corporates have Bitcoin on the balance sheet and we are putting that to very good use in the development of our real world asset tokenization fund and other growth initiatives in a non-dilutionary manner for shareholders. If we could skip to the next slide, please and I am happy to answer more questions on that as the day progresses. So we just wanted to go over a little bit more detail in the quarterly business activity in this webinar. Obviously, we have talked a little bit about so much shares. It really was very exciting to see records getting broken, left, right and center last quarter. And we know we do have direct line of sight into our strategic initiatives really paying dividends for shareholders and we are really proud of that we focused we knuckled down and we saw the benefits and the fruits of our labor. So, we had 33% revenue growth over the previous quarter. And as I have stated, there is direct line of sight into 27% and 20% of revenue in November, December respectively being from deceased estates. T+0 was a smaller percentage. However, that’s a much higher margin. And as we grow that avenue of the business with the growing risk appetite with the support of the board and moving that into the real world asset opportunity, we do believe that that is going to be a very profitable channel for us going forward and for shareholders. The Automic referral agreement is exciting. And we seem to always have a little bit of a timing mismatch between being able to make exciting announcements and quarterlies and AGMs and things like that. But I can reveal looking forward that we – the pen test has gone well and we will be making announcements on timings and really landing that. We have all of the work ready to go. The team is poised. And in the – any perceived gap from the pen testing taking a little bit longer than we thought, the team has been working on that new channel that we haven’t spoken about very much, which is the overseas trading. And that will be something that will be a feature once we have knuckled down some small dev changes so there is less pressure on the sales team for that. We are again focusing on really maximizing those initiatives, so that we are not doing too much in the quarter. And we do see much more potential in deceased estates and the T+0 as we expand those offerings. So in the deceased estates, we are launching enhancements for the lawyers and the uplift in the December quarter really was down to marketing. And we look forward to seeing the fruits of our labors of the dev work that was done in the previous quarter. In the digital asset management space, obviously last quarter was another truly volatile quarter with the damage caused in the markets by FTX. As I alluded to, the investment team is still very cautious. There is still a few more Chapter 11s to come from the fallout of that. The market has moved into a risk-on phase post-January, whether that’s the January effect or long-term market move to the upside, I think remains to be seen. However, there still will be we believe volatility across all financial markets. Our funds in December did fall 26.5%, which is obviously very disappointing, that’s the Bitcoin fund and the Digital Asset Fund declined 22% – and sorry, the Bitcoin fund was 18.8%. One thing we have done very consistently, however, is to really improve the consistency of the offering in that business. We now have monthly analyst information sessions. We now write weekly and monthly information letters to investors and to the market. And we will be introducing more of that this year into our channels such as daily notes and really maximizing the fact that we are on some platforms. And as we have talked about and I will talk about more on the outlook, we are at the very end stages of launching our real-world asset tokenization offering which we see as incredibly scalable and we feel it’s a very exciting offering for both the market and for our funds business to reach and achieve our goals, which we have some very large internal targets for the funds business and are looking forward to really moving into this real world asset space in 2023. And as you will notice, it is starting to become a very powerful theme in the market, of which we believe we are leaders in that space both in Australia and globally. In terms of our product development, aside from the wonderful work that the team did tokenizing and running proof-of-concepts with the ASX around the T+0 investment pool, we also increased our ETH staking nodes from 1 node to 4 to continue to experiment in that space. We are generating small amounts of revenue in that area. And we also did a lot of planning around Drawbridge and how that will be integrated into – particularly into our new client Automic and how that will play out. Definitely happy to answer questions on that as we go through. If we could just go to the next slide, please. Great. And just in terms of the corporate activities, I have mentioned the sale of Bitcoin that we did, so an amount of Bitcoin to shore up our growth cash position for – to have capital for growth into some exciting initiatives in relet and T+0 in a non-dilutionary manner for shareholders. We also, as I said just before, started to build some revenue and yield of 3.8% on an annual basis in the ETH staking node. Now, I do want to point out that one of the things we have instigated internally is a Board Risk Committee. And in this Board Risk Committee, we have put guardrails around internal investment and the internal hurdle is greater than 5% for internal return on revenue. And so we will be looking to expand the yield on ETH staking node to 5% as we go through and we believe we can do that through engaging customers and expanding the way and rationalizing the way that we are doing that. We did have another cash flow event, where we divested 100% of our human protocol tokens, which generated $1.1 million in cash. And in the last quarterly there was in – we did have some movement on that, but we weren’t able to speak to it. So again, that cash is being put to work for growth initiatives in a non-dilutionary manner for shareholders. We continued making strides in our ESG sort of citizenship – corporate citizenship if you like, which I don’t think it sort of takes much to see that, that has become essential corporate hygiene in the 2023 world. So we worked with social suite for that. And we are working on some exciting initiatives with some large buyers on that in the world of carbon and hoping to really advance that and be a global leader on that. During the quarter, we also had an executive change, a couple of executive changes. And I am super excited to announce that the Board has appointed Christopher Alexander as the Interim Chief Financial Officer. And when we go to the outlook, Chris and I have been working very tirelessly. Chris has been working very tirelessly with also, Jaime Underdown, who is our new Director of Ops, to really look at and bring some strong and powerful, sustainable costs out into the business, and to really make sure that we are humming on all cylinders. And I think that’s a super exciting development for shareholders. So if we could skip to the next slide, please. Great. I think this is probably my favorite part, because obviously, next week is my one year anniversary with the firm and I really looked at the first 100 days is getting to know the company. Then we presented the strategy to the board. The last 6 months has been massively a focus on just execution, execution, execution, right people, right roles, making sure we are spending money in the right areas, focusing on revenue opportunities, mapping that pathway to profitability, which we all would know is essential for this company going forward and getting real clarity on how that pathway to profitability will be managed and how it will manifest and super exciting to see how the team is really firing together. I believe we have a great team, everybody working together across Sydney and Perth, and really executing on these great initiatives. Obviously, we have achieved some of our goals in the Sell My Shares business and we do see more growth opportunity there. We are where I really see that coming from is continuing to position Drawbridge as a centerpiece for listed companies to bridge compliance and digital financial services. And really, I can’t underestimate the importance of that Automic relationship in that. It gives us a really key strategic relationship, a really key partner to work with and to really excel in what we see as a growing thematic and used case for blockchain, which is this regulatory and compliance tool. And we are super excited to advance that as we advanced the Automic partnership. And I hope to have exciting news on that. Now, Drawbridge in and of itself does not make a lot of revenue for us. The Sell My Shares business was really acquired to monetize the Drawbridge offering and we see huge potential for that with Automic and beyond. One of the things that is personally a big focus for me is developing and strengthening strategic partnerships. Not only to support draw Drawbridge, but to support the funds management business, and to establish DigitalX’ place in what we describe as this Web2.0 to Web3.0 transition. We probably – if you know me, one of my favorite quotes is if you want to go fast, go alone, if you want to go far, go together. And what you will see from this team and this company has some really exciting announcements over this quarter in these partnerships, and in really developing these strategic initiatives, both offshore and onshore. And really looking at it, we are not going to shift our focus. We will really be drilling down into this laser sharp focus we have for developing so much shares in the Real World Asset Tokenisation space. And we are going to have some exciting announcements coming to market. And the team is working very hard to be able to make those announcements. And I am excited by some of the deals. People do question, our use cases for blockchain. And the way we are looking at it is, if we can solve Real World problems with Real World Asset, then we can see a really great foundation for our Real World Asset Tokenization Fund products. And we are very excited to be launching that in this quarter. That will generate returns for both investors, and for the company in terms of management fees, and bringing strategic partners into that world and to bring in funds under management. And we have been having some exciting conversations. They are at the nascent and preliminary stages. However, we are working very hard to bring those to life for shareholders and for our colleagues. And some of the things we are working on, we believe we are going to be dissect so much as it helps Australians realize cash flow out of selling shares when they don’t have access to brokerage accounts. We believe we will be able to create financial products that help give people access to capital and access to investment returns that they previously haven’t been able to. As I mentioned right at the beginning, in terms of the operations of the business, which always flies under the radar operations, but we really have been focusing on organizational transformation. My definition of transformation is incremental change. From my point of view that’s coming from simplification, implementing the revenue initiatives, and then really focusing on costs. So, you will have seen that the cost reduction of 36%, yes, the September quarter, there was a lot of one-offs and a number of things like legal fees. But actually underpinning that 36% cost reduction was real work and effort going on cost discipline in the business and ownership of costs and accountability. I am really honing in on that area. And Chris, as I mentioned, has been appointed as Interim CFO by the Board. And he is working towards delivering and is confident on delivering which I believe we can attend to 15% reduction in the cost base. And really beginning to paint for shareholders a picture of this pathway to profitability that we believe is really important to do that. It’s simple, grow revenue, cut costs, and that is, management team is super focused. And we have also had an announced that exciting hire over the quarter, where Matt Dent, formerly of Macquarie Bank and Bendigo Bank, we announced at the AGM has joined us. And he really is starting to map and build this revenue function, which we believe not only plays out into our own ecosystem, but also in the ecosystem. A lot of the startups that sit on our balance sheet and really leveraging the heart and soul of the success of the Sell My Shares business is, we have this brilliant customer success engine, and working with that team on growing and building that supporting that, and making sure that we share that ecosystem and grow that ecosystem, as I mentioned also through strategic partnerships. One of those is the Digital Finance CRC, where we are doing a lot of work in the adoption of Web3.0 and that transition from Web2.0 to Web3.0, and working with the market to build new digital financial infrastructure. I particularly enjoyed, I play a role sitting on the commercialization board. And we are starting to see some really great opportunities come through. We have got the work with the Reserve Bank on the Central Bank digital currency. That’s going to play into stablecoins and how we are looking at tooling the Real World Asset Tokenization Fund, which actually is going to manifest as like cost savings in our business, as we rationalized through tokenization, how we manage that funds management business, and also some great initiatives. And I think everybody would have seen the conversations with National Australia Bank around stablecoins, and really honing in on what we see as these thematics in 2023, Real World Asset Tokenization, yielding stablecoins, and the role we play in the market. All that boils down to and where I want to finish this webinar is we have continued focus on long-term strategic execution, and building this solid sustainable revenue base and foundation with a continued ESG and cost conscious approach. And every single day, every single employee of DigitalX walks in every morning with the shareholders in their crosshairs to maximize shareholder returns. Now, I did make an effort to leave a few minutes for more questions. And I can see a couple coming through on the chat. And I am happy to answer those. Each quarter, I will try and get better. And this – last time, we had 30 seconds for questions. So, we have got four minutes, we will try and keep it to maybe 10 minutes for questions, or even extend the webinar as we get better at it. This was our second one. So, thank you everybody for attending. I hope you are as excited about the future of Digitalx’ me and the team are. And I might just jump to questions. Liz, I can read them out, because I can see them here. The first question from Edward is now if staking has been set up, will the company state that if the tokens from the digital fund, so it will generate returns for the investors and the company? Absolutely. So, that is work that we have been doing. And there is a little bit of legal work around that – in that there has been – there is no liquidity in the ETH staking right now. And in April there will be the ability to withdraw from the ETH staking node. And that will make the legal easier for us to stake in the funds. The reason we did have the fund, obviously, as an investor in the fund with the balance sheet funds, that was our end game, because we are super conscious of putting any assets to work. And absolutely, that is our intention. And then some accidental conversations around that could look like also partnering with others in facilitating at staking for others. However, that is very early days. And it really is our intention, yes to give the fund investors the benefit of that knowledge and that internal learnings as well. So, thank you for asking that question. Because I think people can see that’s probably a pet project of mine. And something that I think would be really great for DigitalX to bring to Australia because as we come into regulation, coming into this space, we haven’t talked about it very much. But the team is working on the token mapping with the Australian Government both in my role on the Board of blockchain, Australia, and an individual submission from DigitalX. And I do believe that one of the things that will happen is that we will need to have Australian domiciled, ETH staking nodes and infrastructure built in Australia. And I think that’s really important. And I do think DigitalX as a listed company, with Bitcoin on our balance sheet and other digital asset exposure through the funds. And through our investment in the funds, we have a massive role to play, leading that conversation for the benefit of shareholders and for Australia, keeping up with the world and having infrastructure in Australia. And then I have got a question on why the share price has bottomed. I like to think that it’s because of the great work that the team is doing in this new strategic focus and building the foundations for our success. And also, we are highly leveraged to the Bitcoin price because we do have digital assets on our balance sheet. And we have – we did see a massive route in Bitcoin price and digital asset prices overall last year. Our share price is very – better and highly correlated to that. And I believe our share price has rallied largely due to that Bitcoin rally. And I do look forward to the day that we do get priced on the strategic initiatives that they are running and our passionate drive for generating revenue for our shareholders. But at the moment, I do believe it’s the rally in the Bitcoin price over the last five weeks to six weeks. And that is time. Thank you very much for your questions. And I am so excited that the number of people that joined us. This was only our second quarterly webinar, and I look forward to seeing you in the next quarter. And keep an eye out for a few more announcements over the next week or so. Thank you. Thank you, Lisa. Thank you everyone. The recording of this webinar will be made available later on today. Feel free to send any questions through to investors@digitalx.com. Have a great evening. Goodbye.

EarningCall_62

Good day, and thank you for standing by. Welcome to the Acadian Timber Fourth Quarter 2022 Analyst Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Susan Wood, Chief Financial Officer. Please go ahead. Before discussing Acadian's results, I will first remind everyone that in discussing our fourth quarter financial and operating performance, the outlook for 2023 and responding to your questions, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on our known risk factors, I encourage you to review our news release and MD&A, which are available on SEDAR and on our website, at acadiantimber.com. I'll begin by outlining the financial and operational highlights for our fourth quarter ended December 31, 2022. Adam will then comment on our results for the year and our outlook for 2023. The fourth quarter was a particularly challenging quarter for operations with the impacts of limited contractor availability being exacerbated by unfavorable weather conditions, including a late start to winter, particularly in Maine. Though harvest levels were below our targets Acadian experienced steady regional demand and increased pricing for its key products. Sales for the fourth quarter were $23.8 million compared to $25.9 million in the prior year period. Sales volume, excluding biomass, decreased 26% compared to the prior year period, primarily as a result of limited contractor availability, combined with the delayed start to winter, which impacted both harvesting and hauling activities. Weighted average selling price, excluding biomass, increased 17% year-over-year, benefiting from strong sawlog prices and improved pulpwood prices driven by strong demand as well as the recovery of elevated fuel costs from our customers. Overall pricing for softwood sawlogs and softwood pulpwood increased 19% and 16%, respectively, compared to the prior year period due to strong demand. We also continued to experience solid demand for our hardwood sawlogs, which combined with our continued merchandising efforts has resulted in hardwood sawlog pricing increasing 16% overall compared to the prior year period. Decreased inventories due to the lack of harvesting throughout the region contributed to an increase in hardwood pulpwood pricing of 23% over the prior year period. Biomass sales volumes were up 25% compared to the prior year period as a result of improving market conditions during the quarter, with pricing increasing by 8% year-over-year allowing us to begin increasing shipments to our customers. Operating costs of $19.8 million in the quarter were consistent with the prior year with the decrease in harvesting activity offset by higher contractor rates and fuel cost adjustments paid to contractors. These higher costs drove a 27% increase in weighted average variable costs as compared to the prior year period. Adjusted EBITDA totaled $4.1 million during the quarter compared to $6.3 million in the prior period. Adjusted EBITDA margin for the quarter was 17% compared to 24% in the prior year period. Our net income for the fourth quarter was $22 million compared to $6.5 million in the prior year period. The increase in net income was largely due to the impact of higher gains on noncash fair value adjustment in 2022 compared to 2021, resulting from the increased fair value of our timberlands, offset by lower operating income due to lower harvesting activity. Acadian generated $2 million of free cash flow and declared dividends of $4.9 million to our shareholders during the fourth quarter, or $0.29 per share. I will now move into the fourth quarter results for our New Brunswick operations. Sales for our New Brunswick Timberlands were $18.6 million compared to $18 million during the prior year period. Sales volume, excluding biomass, decreased by 10%, primarily due to limited contractor availability in the current period. With regards to softwood sawlogs, demand remained strong. However, sales volumes decreased by 15% due to the limited trucking contractor availability. As mentioned in prior quarters, there's an increased regional demand for softwood pulpwood, resulting in volume increases from 13,000 cubic meters to 22,000 cubic meters compared to the prior year period. Hardwood sawlog volumes in New Brunswick decreased by 16% and hardwood pulpwood sales volume decreased by 21% being negatively impacted by limited contractor availability. However, demand has strengthened and due to the shortfall of supply in the region, prices increased by 18%. Operating costs in the fourth quarter totaled $14.9 million compared to $13.6 million in the prior year period, reflecting higher contractor costs and higher land management costs. Weighted average variable costs, excluding biomass, increased 29% as a result of higher contractor rates and fuel adjustment costs paid to contractors compared to the prior year period. New Brunswick's adjusted EBITDA in the quarter was $3.8 million compared to $4.6 million in the prior year period. Adjusted EBITDA margin was 20% compared to 25% in the prior year period. Switching over to Maine, sales during the fourth quarter totaled $5.2 million compared to $8 million in the same period last year. Sales volume, excluding biomass, decreased 52%, also reflecting limited contractor availability, but was also combined with unfavorable weather conditions. These factors resulted in softwood sawlog volumes in Maine, decreasing by 62% as compared to the prior year and softwood pulpwood volumes decreasing by 48%, although softwood pulpwood volumes are relatively modest. Hardwood sawlog volumes decreased by 66% for the same reasons. Hardwood pulpwood sales volume decreased by 20% compared to the prior year period. However, with strengthened demand, price increased by 18%. The weighted average selling price, excluding biomass, in U.S. dollar terms increased 23% compared to the prior year with higher prices across all products benefiting from favorable market dynamics as well as fuel cost recovery from customers. In Canadian dollar terms, prices increased 32%. Operating costs totaled $4.5 million in the quarter compared to $6 million during the same period last year, primarily due to lower harvesting activity offset by higher contractor and land management costs. Weighted average variable costs, excluding biomass, increased 32% primarily as a result of higher contractor rates and fuel adjustment costs paid to contractors. Adjusted EBITDA for the quarter was $0.8 million compared to $2.1 million during the prior year period, and adjusted EBITDA margin was 15% compared to 26% in the prior year period. With respect to Acadian's financial position at the end of the quarter, it remained strong, ending with a net liquidity position of $19.5 million, including a cash balance of $6.2 million in our revolving credit facilities, which remain undrawn. The DRIP was in place for three quarters during the year and contributed $3.4 million to our liquidity. As a final note and as a reminder, in the current interest rate environment, Acadian's debt has fixed rate terms expiring in 2025 through 2030. Thank you, Susan, and good afternoon, everyone. As Susan mentioned, I will first comment on our 2022 results and then move into our outlook for 2023. As always, Acadian remains committed to health and safety as our number one priority. During the fourth quarter, there were four recordable safety incidents amongst our contractors. The incidents were mostly minor slip and falls that resulted in minimal lost time. However, incident reduction will be a primary focus for our team in 2023. As we have said before, we believe that emphasizing and achieving an excellent safety record is a leading indicator of success in the broader business. With respect to fiscal 2022, it was an operationally challenging year, not only for Acadian, but for the Northeast forestry industry, with contractor availability issues beginning in the first quarter and persisting through the remainder of the year. These issues were combined with warm and wet weather in the fourth quarter that significantly impacted the industry and the volumes we were able to deliver to our customers. However, as Susan discussed, we continue to see strong demand and pricing across our key products increased throughout the year. As a reminder, demand for our softwood sawlogs is driven primarily by regional dynamics. And although softwood lumber pricing decreased from recent highs to more normalized levels, demand for softwood sawlogs remained stable and pricing increased in the regions in which Acadian operates. Demand for softwood pulpwood continued to strengthen and both volumes and pricing increased over the prior year. Similar to what we experienced with softwood sawlogs, and despite volatile hardwood lumber markets in the second half of the year, demand and pricing for Acadian hardwood sawlogs also continued to increase. Contractor availability issues were not unique to Acadian and the overall lack of harvesting in the region resulted in decreased roundwood inventories, which in addition to increasing demand for sawlogs it also drove an increase in demand for pricing for hardwood pulpwood. During fiscal 2022, Acadian generated sales of $90.5 million compared to $95.7 million in the prior year. Sales volume, excluding biomass, decreased 13%, primarily as a result of the factors previously discussed. Acadian's weighted average selling price, excluding biomass, increased 12% over 2021 due to strong demand across all products as well as the partial recovery of elevated fuel costs from our customers. Increasing costs across the business, including fuel costs and contractor rates, further impacted our results. However, our team worked hard to control these costs and where increases were unavoidable to recover these costs from our customers. Adjusted EBITDA for the year ended December 31, 2022, was $18.2 million compared to $22.5 million in the prior year. While adjusted EBITDA margin was 20% compared to 23% in the prior year as a result of decreased volumes in 2022. We generated free cash flow of $12.2 million compared to $16.9 million last year and declared dividends of $19.5 million to our shareholders. As we discussed in previous quarters, Acadian advanced its first carbon development and marketing project on the approximate 190,000 acres of the main timberlands that are subject to a working forest conservation easements. We are currently at the registration stage. And although the timing is somewhat later than we had originally expected, we are nonetheless pleased with the expected outcomes of the project. Projected credit volumes have been verified by an independent third party and registration of the first 713,000 credits is expected in the first quarter of 2023. Following registration, the credits will be immediately available for sale. We have always referred to this as a training wheels project and it has provided valuable experience to Acadian and has formed the foundation for any potential further carbon credit development projects. Turning to our outlook for 2023, we are all well aware of the interest rate hikes in both the U.S. and Canada during 2022 to try and curb inflation, which has slowed housing sales and price growth. Our forecast in the U.S. housing starts have been lowered to approximately 1.24 million starts in 2023 as compared to 1.55 million in 2022. These estimates are still consistent with pre-pandemic historical levels. Accordingly, we remain confident that the stability of the Northeast forestry sector, combined with the long-term demand for new homes and repair and remodel activity will support the demand for and pricing of our products. However, given the short-term pressures from end-use markets, we may experience some slight pricing pressures. Though decelerating, inflation is expected to remain a challenge in the near term and to continue to exert pressure on our financial results through elevated contractor rates and fuel surcharges that we pay our contractors. However, we will continue our efforts to recover these incremental costs from our customers to mitigate this impact. Labor shortages resulting in limited contractor availability throughout the region is expected to continue as the industry works to resolve the issue. However, we have already begun to increase contractor capacity with expectations of further improvements in 2023. Based on regional market dynamics, the stable softwood and hardwood sawlog demand and prices experienced in 2022 are largely expected to continue into 2023. Despite normalized softwood lumber prices, we continue to see stability in our sawlog prices with potential modest increases in the near term. The impact of market uncertainty on hardwood lumber prices may result in a softening of the hardwood log markets. However, prices are expected to remain above historical norms. And hardwood and softwood pulpwood markets are expected to remain strong into 2023 in light of supply shortfalls. In closing, through 2023, we will continue to actively work with our contractors to find innovative solutions to meet the delivery demands of our customers, including increasing our contractor capacity. Our focus will remain on merchandising our products to obtain the highest margins available and making improvements throughout the business to maximize cash flows from our existing timberland assets. We are always exploring opportunities for growth, both internally and externally, with a disciplined and prudent approach and we'll use the experience gained from our first carbon credit project to determine our next steps. At Acadian, we have the team, the assets, and the balance sheet to successfully weather challenging operating or market conditions as they arise, and we are dedicated to providing long-term value for our shareholders. On the 0.7 million carbon credits, do you expect to collect those revenues in the first quarter? And then also just a bit of a follow-up, I was looking at pricing, and you indicated last year, pricing was in the high-20s. What is pricing looking like today? Yes. Thanks, Gabriel. We have a third party selling those credits for us as we introduced the project a number of quarters ago. As we mentioned, we're hoping to have them finish being registered in the first quarter, which would make them available for sale immediately. Not quite sure whether they'll be sold in the first quarter and then there will be a little bit of a delay for payment, I assume, just from changing hands as far as cash from that third party to us. Sorry, yes. And from a pricing perspective, we understand for the carbon credits that we are producing, the pricing is still in that mid-20s range. Okay. Great, great. And then turning to New Brunswick, do you have any visibility on the timing for stumpage changes in the province coming up? The next change will come in the spring. Technically, the government year is March -- end of March 31. I'm not sure if that's exactly when they plan on making the change. We'll see. The last change we thought was going to come in from March 31 was a little bit later. So I'd hate to actually try and figure out exactly when it's going to happen, but it should come in the spring we expect. Yeah, thanks. Good morning, guys. Or at least it's morning where I am. This carbon credit thing, is this a one-timer, is it annual, quarterly? Or how does that work? Yes. Hi, Paul. How are you? As we outlined in our press release back in September, we have about 10 years of developing credits under the current project. We have a big upfront registering credit this quarter, hopefully, the 713,000. And then over the next 10 years, the volumes decrease every year, but this credit -- this project will produce we expect cash flows for the next 10 years. Okay. That's helpful. And just on the issue of contractor availability, I'm sort of confused by this because -- I mean, I seem to have covered the company for about a decade. It never really came out it used to be a pretty stable business. What's the issue there? Yes. I think high level, we have an industry where there's a shortage of workers in both Maine and New Brunswick right now. And we're looking at it. Interestingly enough, just a little bit more color depending on which side of the border, there's a little bit of a different situation. So in New Brunswick, we're missing truckers and hauling capacity, which we've been focusing on significantly over the last four, five, six months to try and figure out the problem. We've done a lot of research, gathered a lot of data. Obviously, the rates have changed, which you've seen in our variable costs. And so we're continuing to work with our truckers, and we believe that we're going to have a little bit more capacity come on board here over the next couple of months. In Maine, a number of things happened. We had some truckers that retired -- actually, sorry, in Maine, it's harvesting, and we had some harvesters retired in the last 12 months. But again, fortunately, again, since January 1, we did get a couple of more contractors, a couple of more pieces of equipment onto the land base, and we were able to increase our capacity by about 30%. Now there's always challenges, but the stated capacity should come up about 30%. Yes. We haven't stated that, Paul. And given what we've gone through over the last 12 months I'm not sure we're about to state it today. We'll have a lot better feel for it when we -- you see us again in May. Well, I would say we're planning to recover what we've lost in 2022, back to what I would call a normalized level, but we're not -- as you know, we don't give guidance. Okay. So if I look at the last 10 years on that sort of 1.25 million total average. But this year, you're kind of at 9.15 million [ph]. Will you make up that difference plus get back to the average or --? We won't get back to the average. I would look probably closer to our last few years as opposed to the last 10 years. Thank you. And I'm showing no further questions in the queue. I'd like to turn the closing back over to Adam Sheparski for closing comments. Thank you. On behalf of the Board and management of Acadian, I would like to thank all of our shareholders for their ongoing support. Thank you. Stay safe, and we look forward to you joining us for our Virtual Annual General Meeting and First Quarter of 2023 Conference Call, both on May 4. Goodbye.

EarningCall_63

Welcome to Tucows’ Fourth Quarter 2022 management commentary. We have pre-recorded prepared remarks regarding the quarter and outlook for the company. A Tucows-generated transcript of these remarks, with relevant links is also available on the Company’s website. In lieu of a live question-and-answer period following these remarks, shareholders, analysts and prospective investors are invited to submit questions to Tucows management via email at ir@tucows.com until Thursday, February 16. Management will address your questions directly or in a recorded audio response and transcript that will be posted to the Tucows website on Tuesday, February 28 at approximately 4 p.m. eastern time. We would also like to advise that the updated Tucows Quarterly KPI Summary, which provides key metrics for all of our businesses for the last eight quarters, as well as for full years 2020, 2021 and 2022, and also includes historical financial results is available in the Investors section of the website along with the updated Ting Build Scorecard and investor presentation. Now for management’s prepared remarks: On Thursday, February 9th, Tucows issued a news release reporting its financial results for the fourth quarter ended December 31, 2022. That news release and the Company’s financial statements are available on the Company’s website at tucows.com under the Investors section. Please note that the following discussion may include forward-looking statements which as such are subject to risks and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in the Company's documents filed with the SEC, specifically the most recent reports on the Forms 10-K and 10-Q. The Company urges you to read its security filings for a full description of the risk factors applicable for its business. Finally, as discussed previously starting in Q1 of 2022 we started reporting as separate businesses;Ting, Wavelo and Tucows Domains; in addition to Tucows Corporate. As a reminder, we have a video available for additional detail and rationale for the change on the Tucows website. I would now like to turn the call over to Tucows President and Chief Executive Officer, Elliot Noss. Go ahead, Elliot. Thanks, Monica. The last quarter of the year is always an important time to reflect on the past year’s performance, challenges and lessons learned and channel that into the work for the following year. 2022 was both productive and challenging as we restructured Tucows into separate businesses at the start of the year. This has successfully provided the financial flexibility we hoped for, allowing Ting to access infrastructure capital without impacting the rest of the business, which I now refer to as ex-Ting. We did okay with the provisioning of shared services across the business but more importantly learned how to operate a holding company. We have also dealt with increasing costs of capital and economic uncertainty and a world restarting life post-pandemic. And in times like these, as I’ve said before, it’s important to focus on what you can control. So that’s what we’ve done. Now for 2023, we have more exciting growth plans in each of the three businesses than we have had for years, but for the first part of the year, work continues on the long-term funding of the business. More on that in the close. I’m pleased to report that we finished 2022 with total adjusted EBITDA of $59.1 million for ex-Ting, beating guidance of $53 million to $56 million. We had an EBITDA loss of $21.7 million for Ting, comfortably inside the guidance of a $20 million to $25 million loss. The year is notable for the base it established for each business. Tucows Domains is towards the end of a years-long integration of multiple platforms and is poised to be able to do new things. Wavelo has finally commenced the migration of Boost customers in earnest and is now poised to take advantage of the revolution coming to telecom. And Ting is now built to scale and is able to turn to refined execution. You will now hear directly from the heads of each business in these remarks, as well as from our CFO, Dave Singh, who will cover our financial results in detail. The first speaker is Dave Woroch, Chief Executive Officer, Tucows Domains. Go ahead, Dave. Thanks, Elliot. Tucows Domains finished the year with another quarter that was in line with our expectations, as both the domain industry and our business continue to normalize at pre-pandemic levels, albeit within a broader challenging environment. For 2022, adjusted EBITDA was $44.8 million and consistent with our guidance of $45 million. Revenue for Domain Services for the fourth quarter was $60.3 million, down 2% from the same quarter of last year, while gross margin was $18.4 million, down 7%. Domain Services adjusted EBITDA was $10.6 million in the fourth quarter and down 4% from Q4 of last year. The results reflect the normalization of transactions to pre-COVID levels that we have discussed on previous calls. The decline in domain transactions has slowed sequentially and it appears that our channel has worked through the demand that was pulled forward by the pandemic and we may be starting to move back to a path of modest growth. Our results also reflect the tail end of the impact of the Euro devaluation to the U.S. dollar, which escalated in 2022 through the end of Q3 and has since recovered some. We did implement two price increases in the second half of 2022 that addressed the cost of us buying domains in U.S. dollars when selling to customers in Euros. This is expected to help our margins in 2023. Additionally, our careful management of expenses, both for efficiency and in support of adjusted EBITDA is ongoing. With results now available for the full year of 2022, I would like to share our view of the health of the business over a multi-year timeframe that normalizes for the pre- and post-COVID periods. When looking at our results comparing 2022 with 2019, the last full year before COVID, domain transactions are up 2% and gross margin, absent a domain portfolio sale in 2019 as we were divesting of that business, is up almost 6% over that period, even with the post-COVID business slowdown. This is consistent with our track record of operating a mature business as efficiently as possible. Our focus continues to be on growing gross margin in excess of transactions, leveraging all available options from product mix to pricing. Looking at the channel segments of our business, in our Wholesale channel, revenue for Q4 was down 3% from the fourth quarter of last year and gross margin down 12%. Within the Wholesale channel, Domain Services’ gross margin was down 9% from the same period last year, while Value-Added Services’ gross margin was down 18%, due to reduced demand in the after-market for domain sales. In our Retail channel, revenue increased 3%, while gross margin was up 12% year-over-year. And our combined overall renewal rate, at 80% in Q4 across all Tucows Domains brands was consistent with Q3 and remains well above the industry average. And finally, a topic I wanted to pick up on again, and one I know many of you are interested in; the initiatives we are exploring to bring new and complementary services to our core business and distribution channels. Having been with the business for over two decades, I am very familiar with our efforts in the 2000s and early 2010s to launch Value-Added Services. And we did achieve some success with email, SSL certificates and aftermarket domain sales. More recently, our focus from 2016 through 2022 was on acquisitions and the related integration to provide our business with scale. Now, with our platform integration work nearing completion, our sights are turned again to how, leveraging the capabilities we already have, we can generate incremental revenue and gross margin for the Domains business. A domain name is the foundation of a web presence. We understand that our resellers spend and invest significantly more in the services to develop that web presence, and that we do not facilitate that development currently. For the last year we have been quietly exploring how we might bring additional value to the older parts of our channel through hosting automation and payments. In 2023, we will be looking for product market fit and do not expect to see a material contribution, but we are excited to get back to thinking about how to best leverage the unique distribution channel we possess. And importantly, consistent with our vigilance on operational costs, the development of these initiatives is being done within our current operating cost structure. So now, being able to find creative ways to streamline the business operationally and develop new services for our distribution channels that provide incremental revenue for the business is something I’m really excited about bringing to bear. Thanks, Dave. Wow! What a year. 2022 marks Wavelo’s first year as an independent business. Overall, I’m very pleased. In 12 months, we launched the Wavelo brand, built the team, productized and developed a feature-rich platform, and built a business with two anchor customers that will generate between $25 million and $30 million in revenue. But of course, we’re just in the first inning. And it’s a long game. Since the very beginning, I’ve spoken about the opportunity for Wavelo that there is a chasm between the fragmented collection of legacy billing and provisioning systems used today and a flexible solution that aggregates fixed and mobile networks, allowing for multiple brands and services into a single platform. I emphatically believe the gap exists and the opportunity is large. You’ve heard us say, “Everything is billing and provisioning.” It should not matter the service, customer or network type for the platform to deliver a seamless experience. That platform is Wavelo, and we are excited to wrap the year with something no one else has. We continue to be pleased with our partnership with DISH. As they add Boost Infinite, the cheapest unlimited service in the country, they continue to push on a legacy market with disruptive pricing. Between our shared focus on a superior customer experience, DISH’s progress towards 5G, and their launch of a competitive and fulsome product lineup, we are optimistic about the growth of DISH’s subscriber base. As always, when we speak about DISH, we recommend investors supplement with DISH’s own disclosure. While we’ve spent decades at Tucows sharpening our migration toolkit across domain names, email and mobile customers alike, telecom has struggled often with clunky experiences and doing so on the customer’s dime. We now have the most robust migration tool on the market. This means less pain in switching, ultimately making it easier for new telecoms to try Wavelo and fall in love with the simplicity. And that brings me to the topic of our go-to-market activities. I’m not announcing a new customer here today, but we are expecting to announce a new one sometime this year. We’re getting a lot of interest from a diverse range of operators all over the world; MNOs, MVNOs and ISPs. The common theme is fixed-mobile convergence which, of course, forces them to revisit their back office systems. I remind investors that our business model is primarily based on reoccurring user fees. Currently, a significant portion of our revenue is professional services. We have spent much of Q3 and Q4 migrating existing Boost subscribers in addition to adding new organic subscribers. We ended Q4 with 2 million total subscribers on the platform, up from 1 million at the end of Q3. As I read this, we’re at 3.2 million. So you can see the pace accelerating. We continue to expect most of the Boost subscribers to be migrated by midyear. The topline report is that for the full year 2022, Wavelo reported $3.9 million in adjusted EBITDA, which was within our guidance of $3 million to $6 million. I do recognize we were cash negative from capitalized labor as we built the organizational foundation. Having Wavelo generate cash, a Tucows tradition, is my number one job. Elliot will talk about 2023 guidance in the close of today’s remarks. As of Q4, Wavelo’s revenues were $4.5 million, up 10.6% from Q3 but down 53% year-over-year. Gross margin was $3.8 million in Q4, flat from Q3 and down 56% year-over-year. These numbers illustrate my point earlier on the lumpy revenue transition as Wavelo moves from largely professional services revenue to recurring user revenue and revenue recognition impacts from the DISH agreement which Dave will cover in more detail. Our adjusted EBITDA number for Q4 was negative $1.1 million, down 27% from last quarter and 119% year-over-year. This reflects both the gross margin decline noted above and the burn at this point in the growth of the business. I will note that, because of the macroeconomic environment, we will be more conservative with hiring in 2023. We expect the challenging economic environment to continue over the next four quarters. As a business born out of Tucows, we know this well. It is a feature, not a bug. And I have complete confidence in our management team’s ability to navigate the challenging waters ahead. Thanks, Justin. In Q4, Ting delivered another strong quarter of fiber construction, including in Alexandria where construction started in September and is accelerating nicely using microtrenching. We expect the first serviceable addresses there in late Q1. The total serviceable address number for Ting-owned infrastructure for Q4 is 96,200 and 19,500 Partner addresses, taking us to 115,700 total serviceable addresses. Our Q4 fiber CapEx was $23.6 million, consistent with the previous quarter. Annual CapEx for 2022 was $86.3 million, which is up 53.5% over 2021 as we have been increasing our build velocity to a consistent, higher level the last three quarters. And I note that, in addition, we spent about $25 million in inventory additions to address any potential supply chain issues. Our total for both Ting-owned and Ting Partner serviceable address additions was 7,200, taking us to that nearly 116,000 we talked about. We expect those numbers to continue to ramp in Q1 in both Ting-owned footprints as well as some of our Partner footprints. We added 2,000 net subscribers in Q4, taking us over 34,500 in total. Our total subscribers have grown 34.5% year-over-year. I’ve mentioned before that high subscriber growth is largely a function of serviceable address growth. And we did have good serviceable address additions in Q4. The challenge is that they were lit with service at the end of the quarter and during the holidays. So the corresponding bump in subscribers will be in Q1 as we’re currently working through installing preorders. It is worth mentioning again this quarter that despite the ongoing macroeconomic factors in the U.S., we continue to have a strong preorder pipeline. The mature market contribution for Q4 is $2.4 million, up 8% from Q3 and 45% year-over-year. Gross profit grew by 8% quarter-over-quarter, and 31% year-over-year to $7.2 million. Ting’s revenue grew 4.8% quarter-over-quarter and 38% year-over-year to $11.5 million. A reminder that our numbers will continue to tell a growth story on the top line, but it will be more uneven on the bottom line as we continue to build in ever larger footprints. For market updates, microtrenching continues in our markets in Culver City, California, Alexandria, Virginia, and our partner markets in California. We’re also continuing our accelerated build using microtrenching in Centennial, Colorado, although that market will see some winter weather delays. Our partner market of Colorado Springs has also started their construction, and we’re ramping up our marketing efforts there. In the South Denver suburbs, we will be moving some of our attention from Aurora to other surrounding areas as we work to best deploy our construction crews. We will be updating our Build Scorecard accordingly. We continue to be pleased with our partnership with Generate Capital and Ubiquity. The teams from each company are working productively together, and the shared knowledge is benefiting both parties. We’re especially pleased to see the delivery of serviceable addresses in their Encinitas, California, market begin to accelerate. I also want to share that Jill Szuchmacher, our EVP of Networks at Ting Internet, is moving on to an incredible new opportunity. Jill was with us for two years and in that time built a great team and laid the operational foundation that we will build on for years to come. I want to thank her personally, and we all wish her great success and know that she will continue to dare mighty things. She is ably succeeded by Jason Smith, who Jill brought in to the organization very early in her tenure. Both she and I know the group is in great hands. Within the week, we expect to post the video we discussed last quarter providing a deeper dive into CapEx. This will give you all a chance to see Jason firsthand. You’ll be able to find it on our website in the Investors section under Videos. It’s a great opportunity for investors to gain insight into how CapEx is spent during a build and learn about the components of the build spend. And a housekeeping issue; our Ting Build Scorecard has been slightly streamlined. We’ve begun grouping local cities into regional footprints for measurement and reporting, which at this point primarily means our Denver and Raleigh regions. And now, I’d like to turn the call over to Dave Singh for a deeper dive on our financial results. Dave? Thanks, Elliot. Total revenue for the fourth quarter of 2022 decreased 4.3% to $78.9 million from $82.5 million for the fourth quarter of 2021. Ting had revenue gains of 38% year-over-year, increasing to $11.5 million in Q4 of 2022 from $8.3 million in Q4 of 2021. The gains were offset by a decline in revenue of 53% year-over-year from Wavelo, mainly due to reduced professional services revenue from DISH, as well as a revenue recognition impact related to a reassessment of fixed payments in the DISH agreement. There was also a decline in corporate revenues of 17% year-over-year, from $3.2 million in Q4 of 2021 to $2.7 million in Q4 of 2022, driven by the expected decrease in low margin transitional service revenues with DISH. Domains revenue had a modest decrease of 1.8% year-over-year, from $61.4 million in Q4 2021 to $60.3 million in Q4 2022, as transaction levels normalized following the pandemic. Cost of revenues before network costs for Q4 was up slightly at $49.2 million as compared to $48.2 million for the same period of last year. As a percentage of revenue, cost of revenues before network costs increased to 62% from 58% in Q4 2021. This was primarily due to the lower high-margin impact of the Wavelo business which had both lower revenues and proportionally higher cost of revenues in Q4 of this year versus last year. Gross profit before network costs for the fourth quarter decreased 14% year-over-year to $29.7 million from $34.3 million with the decrease due mainly to the lower Wavelo contribution and lower contribution from Domains. As a percentage of revenue, gross profit before network costs decreased this quarter to 38% from 42% in Q4 of 2021. Breaking down gross profit by business, Tucows Domains’ gross profit for the fourth quarter of 2022 decreased 6.5% from Q4 last year to $18.4 million from $19.7 million. As a percentage of revenue, gross margin for Tucows Domains was down slightly at 31% for Q4 of 2022, compared to 32% in Q4 of 2021. The numbers reflect both the normalization of transactions to pre-COVID levels as well as the tail end of the impact of the Euro devaluation to the U.S. dollar in 2022, which increased our costs of buying domains in U.S. dollars that were sold to customers in Euros. That impact has now been mitigated from domain price increases we implemented late last fall for Euro-priced domains. Wavelo gross profit declined by 56% to $3.8 million from $8.6 million for Q4 2021. As a percentage of revenue, gross margin for Wavelo was 85% compared with 90% in Q4 last year. As discussed earlier by Justin, Wavelo gross profit is down, driven by a reduction in professional services revenue from DISH and a revenue recognition impact related to the reassessment of fixed payments in the DISH agreement. Ting gross profit for Q4 increased 31% year-over-year to $7.2 million from $5.5 million for the same period of last year. As a percentage of revenue, gross margin for Ting continues at a healthy 63% in the fourth quarter, down slightly from 66% in Q4 last year. Network expenses for Q4 increased 30% to $12.7 million from $9.7 million for the same period of last year. The increase continues to be driven by higher depreciation and amortization of our fiber network assets, up 60% year-over-year. Total operating expenses for the fourth quarter of 2022 increased 16% to $30 million from $26 million for the same period last year. The increase is primarily the result of the following: People costs were up $2.7 million this quarter with increased workforce costs to support business expansion related to Ting Internet growth, as well the continued Wavelo ramp. Sales and Marketing costs increased by $0.4 million year-over-year, mainly driven by increased investments in the Ting Internet business expansion. Facility and third-party contracting and support costs were up $0.9 million, and credit card fees were up $0.3 million, while stock-based compensation increased at $1.9 million year-over-year. These were offset by a reduction in professional fees of $1.1 million and lower bad debt charges of $0.4 million. And lastly, foreign exchange impacts decreased expenses by $0.2 million this quarter, primarily driven by the year-over-year impacts from the revaluation of our of foreign-denominated monetary assets and liabilities. As a percentage of revenue, operating expenses increased to 38% for Q4 of this year from 31% for the same period last year. We reported a net loss for the fourth quarter of 2022 of $13.4 million, or $1.25 per share, compared with net loss of $2.0 million, or $0.18 per share, for the same period of last year. The net loss was driven predominantly by higher interest expenses, including the new preferred debt with Generate Capital; the accelerated build of our fiber network and ongoing ramp of the Ting Internet operations and related higher operational and depreciation expenses; and higher stock-based compensation and investment into the Wavelo platform. Note, our tax expense reflects our geographic mix, with taxes payable in Canada on our legacy domains business. Adjusted EBITDA for Q4 was $6.7 million, down 47% from $12.7 million for Q4 2021. That total breaks down amongst our three businesses as follows: Adjusted EBITDA for Tucows Domains was $10.6 million, down 3.7% from Q4 of last year, reflecting the normalization of renewals to pre-COVID levels. Adjusted EBITDA for Wavelo was negative $1.1 million, a decrease of 119% from a positive $5.9 million last year. The decrease is primarily due to lower high-margin professional services from DISH, an impact of $2.9 million, and a contract asset-related revenue recognition impact related to the reassessment of fixed payments in the DISH agreement. The contract asset and associated revenue recognition varies based on the estimated relative mix of variable and fixed payments. The year-over-year impact of the contract asset change was negative $2.1 million this quarter. As of December 31, 2022, the contract asset balance is $7.5 million, and it will unwind as a contra revenue over the term of the contract, which is up for renewal in Q3 2024. Adjusted EBITDA for Ting was negative $6 million compared with negative $4.8 million in Q4 2021 as we continue to invest in our fiber network expansion. And finally, the Corporate category had adjusted EBITDA of $3.3 million this quarter as compared to $0.6 million in Q4 last year with the increase primarily driven by lower corporate expenses this year versus last year, including one-time items in Q4 2021 and a higher earnout from the sale of the Ting Mobile customers to DISH. Turning to our balance sheet, cash and cash equivalents at the end of Q4 were $23.5 million, compared with $30.5 million at the end of the third quarter of 2022 and $9.1 million at the end of the fourth quarter of 2021. During the quarter, we had $2.9 million in cash from operations compared with $10.5 million in Q4 last year with the decrease being due to our lower net income once adjusted for non-cash items. The working capital impact was consistent year-over-year. Our cash was more than offset by our investment of $36.7 million in property and equipment, primarily for the accelerated build-out of the Ting Fiber Internet network, in addition to the continued investment in the Wavelo platform. Note; that number reflects the actual cash paid for capital assets in the quarter on our cash flow statement. The gross book value of fixed 10 assets, including capital inventory, capitalized internal and external software-related labor in both Wavelo and Domains, and, to a lesser extent, servers and networking equipment in our data centers, was $35.5 million this quarter. A reminder that the difference between the $35.5 million and $36.7 million is a cash difference. U.S. GAAP requires in the statement of cash flows to present actual cash paid for capital assets in a quarter, as opposed to showing it on an accrual basis. Also, we drew a further $27.5 million in preferred financing under our arrangement with Generate. We have now drawn a total of $87.5 million, and as a reminder, cash interest payments are deferred for the first two years. I also wanted to note that our December 31, 2022, syndicated loan balance for covenant calculation purposes was a net $235.3 million when factoring in letters of credit and cash on hand of up to $5 million, resulting in a leverage ratio of 3.98 times. Finally, deferred revenue at the end of Q4 was $145 million, down 1.4% from $147 million at the end of the third quarter of 2022 and down 1.8% from $148 million for the fourth quarter of last year, primarily reflecting the reversion of Domains renewals to pre-COVID levels. Thanks, Dave! First some housekeeping. With the added complexity of three businesses and a holding company, I am pleased to announce that Tucows will be hosting its first investor day. We will hold it in May at a date and time and mode to be determined after receiving your input. All investors who are interested in participating should let us know whether they would like to attend in person or remotely; any timezone restrictions or preferences; and, if in person, the dates when they could be in Toronto. We will try to accommodate the broadest range of investors possible. This idea has been discussed with shareholders over the last couple of quarters, and we want to be on the other side of some of the balance sheet work before holding it. We’ve been informed here by other companies like Constellation Software. The Tucows executive team and business heads will participate. We are also interested in your views on specific content you would like addressed, although we note we have a pretty good idea of what we need to cover. Also, I note that we announced today that we have reinstated our buyback for 2023. It is at the same level as the past several years of up to $40 million. This is always important to allow us to be opportunistic. In the rest of these remarks, I intend to quickly look back on 2022, look forward to 2023, and then discuss the balance sheet. In terms of 2022, and meeting guidance, you heard the positive numbers upfront. Operationally, each of the businesses performed roughly to plan. This was true across all three businesses and the holding company. We continue to operate our businesses in a remarkably predictable and reliable fashion. The biggest negatives in 2022, the delayed Generate closing, the slower-than-hoped-for DISH subscriber loading and the rise in interest rates; were all externalities that we had to deal with. And I wish to be clear externalities happen, and we are likely moving to a world where they’ll happen more often. We feel grateful that our business is able to digest these things and look forward. In Tucows Domains, we made a number of acquisitions from 2016 to 2022. Those numerous legacy platforms have taken significant effort to integrate. We do not and did not underestimate that work as we have seen this done, both successfully and unsuccessfully by a number of our larger customers. As you heard in Dave Woroch’s remarks, we are as excited about our growth prospects as we have been in a long time. With Wavelo, the platform is now loading at a brisk pace. You can best see that by the end-of-year number Justin shared of 2 million subscribers and the current number of over 3 million. Wavelo has now turned in earnest to building a pipeline of new customers. With the team they’ve built, I have every confidence in them. This is already a business that will generate north of $25 million in revenue next year. With Ting, we are nearing the end of an over two-year journey to lay in the right funding structure. Patience has proven to be a virtue. Funding structures have evolved to better match the nature of the industry, and patience while continuing to build has helped us to likely maximize the value for TCX shareholders in any potential equity transaction if we choose to do one. Ting moves into deep execution mode, and we take what we believe is a best-in-industry ISP to a whole new level, hopefully changing the way people think about ISPs forever. What this all translates to is EBITDA guidance of roughly $45 million for Tucows Domains, roughly breakeven for Wavelo and an EBITDA loss of around $40 million for Ting. Don’t be alarmed by that Ting loss; it is the cost of ramping so significantly in a business where paybacks are fantastic but long term. When you hear my comments below, remember they are all made in light of this number, meaning this loss is well understood by industry participants. I also note we have essentially built the scale in the operation to handle the remainder of this period of building in the U.S. coax-to-fiber transition. Finally, I would like to talk about the balance sheet. And when I say that, I am really talking about two separate balance sheets. First, and most importantly, while there is work to be done on both sides of the business, I expect that work to be complete or substantially complete by the time we report our next quarter. Obviously, specifics will only come as we make announcements, but I note that this has been a long journey. For my work specifically, this journey dates back to the winter of 2020. On the ex-Ting side, the solutions are likely to be straightforward. Our leverage on that side of the business is higher than either we or the banking syndicate would like it to be. At the same time, we both understand that the primary reasons for that in 2022 were the delayed close of the Generate financing, which required us to draw down an extra quarter of capital to continue to fund the fiber build; the slower-than-hoped-for load of DISH subscribers, which was a negative cash outcome for all the right business reasons; and the rise in interest rates. As you see with the EBITDA results for 2022, the underlying businesses performed remarkably well to plan. I said straightforward. Simply, we expect to start deleveraging ex-Ting over this year and beyond. On the Ting, side I was at the Metro Connect conference last week, and the excitement over the coax-to-fiber transition in the U.S. has reached a new level. Operators who are already participating in this land rush are heads down and focused on their work. Infrastructure funds that are already participating are looking to deploy more capital as they see the inevitability. Those who are not yet involved are on the outside looking in. People are realizing that it’s too late in the cycle to stand up new platforms. There are also two themes that have clearly emerged, and to our good fortune, they are themes we are well ahead of the curve on: fixed-mobile convergence and wholesale fiber builds. I intend to cover both these topics in detail at the investor day. At a macro level, the inevitability of fiber is now accepted by all. On a micro level, we are respected and admired by our peers and the industry in general. With Tucows Domains and Wavelo, I am excited for the growth prospects in 2023. With Tucows Domains, I am more excited than I have been for years. With Ting, there is a feeling of being in the right place at the right time with the right people and the right business that I have not had since the early days of this century. There is still work to do, and that work is well underway. This is still a very dynamic macroeconomy and it is susceptible to shocks in our view. But our now deep tradition of building and running businesses that are predictable and reliable, and generate cash by delighting customers, puts us in a fantastic position. And with that, I look forward to your written questions and exploring areas that interest you in greater detail. Again, please send your questions to ir@tucows.com by Thursday, February 16 and look for our recorded Q&A audio response and transcript to this call to be posted to the Tucows’ website on Tuesday, February 28, at approximately 4 p.m. Eastern time. Thank you.

EarningCall_64

Good day, everyone, and welcome to the First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call maybe recorded. Thank you, Gretchen. Good afternoon, everyone, and welcome to the Live Ventures fiscal 2023 first quarter conference call. Joining us this afternoon for the call are Jon Isaac, our Chief Executive Officer and President; David Verret, our Chief Financial Officer; and Eric Althofer, our Chief Operating Officer. Some of the statements we are making today are forward-looking and are based on our best view of our businesses as we see them today. The actual results could differ material due to the number of factors, including those outlined in our latest forms, 10-K and 10-Q, as filed with the Securities and Exchange Commission. We have no obligation to publicly update any forward-looking statements after this call, whether as a result of new information, future events, changes in assumptions or otherwise. You can find our press release and 10-Q referenced on this call in the Investor Relations section of the Live Ventures Web site. I will direct you to our Web site www.liveventures.com or www.sec.gov for our historical SEC filings. Thank you, Greg, and good afternoon, everyone. Overall, the company delivered $69 million of revenue, $1.8 million in net income and $7.5 million of adjusted EBITDA, in spite of a challenging economic environment. As evidenced by our acquisition of flooring liquidators, we continue to execute our multi-level buy-build-hold strategic plan to maximize stockholder value. In addition, we repurchased 24,710 shares of our common stock during the quarter. Before we jump into the numbers, let's briefly discuss the Flooring Liquidators acquisition that we announced in January. We are very excited about the Flooring Liquidators acquisition. Flooring Liquidators is a leading retailer and installer of floors, carpets and countertops to consumers, builders and contractors in California and Nevada. Over the years they have established a strong reputation for innovation, efficiency and service in the home renovation and improvement market. The transaction valued at approximately $84 million was financed through a combination of cash, debt and the issuance of 116,441 shares of our common stock, representing a 3.78% dilution of Live Ventures fully diluted common stock. Our expectation is that, Flooring Liquidators will add a significant new revenue stream of approximately 125 million per year. We believe there are strong growth opportunities in all three of Flooring Liquidators' divisions, retail builder and franchise mobile store model. We look forward to sharing the results with you beginning with our next earnings reports. Now, I will discuss the financial results for our first quarter. Total revenue for the first quarter decreased to 69 million, down 8.2%, as compared to 75.2 million in the prior year period. The decrease in revenues is due to lower revenues in the flooring manufacturing, retail and corporate and other segments. Flooring manufacturing revenues of $26.4 million decreased approximately $6.4 million or 19.6% as compared to the prior year period. The decrease is primarily due to reduced demand as a result of general economic conditions. Retail revenues of $23.3 million decreased approximately 2.9 million or 11.2% as compared to the prior year period. The decrease is primarily the result of reduced demand due to inflationary pressures, supply chain issues in the overall product sales mix. Steel manufacturing revenues of $18 million increased approximately $5.6 million or 45.4% as compared to the prior year period. primarily due to the acquisition of kinetic. Corporate and other segment revenues decreased approximately $2.4 million partly due to the decreased revenues at SW Financial. Gross profit for the quarter was $21.9 million, down from $27.6 million in the prior year period. The gross margin percentage for the company decreased to 31.8% from 36.7% in the prior year. This decrease is primarily due to the tightening margins in our Flooring and Steel segments. Flooring manufacturing segments gross profit margin decreased to 17.6% as compared to 27.5% in the prior year. This decrease was primarily due to increases in raw material cost and lower demand. Retail segments gross profit margin increased to 52.5% as compared to 51.1% in the prior year. The increase is primarily due to fluctuations in product mix. Steel manufacturing segments gross profit margin decreased at 24.4% as compared to 29.2% in the prior year period. The decrease in profit margins, primarily due to increases in raw material costs as well as the acquisition of Kinetic. General and administrative expense increased by 3.1% to approximately $14.6 million as compared to the prior year period. The increase is primarily due to the acquisition of kinetic, partially offset by decreases in professional fees and other general and administrative expenses. Selling and marketing expense decreased by 9% to approximately $2.8 million as compared to the prior year period. The decrease is probably primarily due to a decrease in trade show and convention activity related to our flooring manufacturing segment. Operating income decreased to $4.6 million for the first quarter of 2023 as compared to $10.4 million in the prior year period. The decrease in operating income is primarily attributable to lower gross profits as a result of inflationary costs increases. First quarter interest expense increased approximately $1 million as compared to the prior year period. The increase is primarily due to increased debt balances as a result of the Kinetic acquisition and increased interest rates. Quarter net income was 1.8 million as compared to net income of $6.5 million in the prior year period. Diluted EPS for the first quarter was 60 cents per share as compared to $2.04 per share in the prior year period. And adjusted EBITDA for the first quarter was $7.5 million, a decrease of approximately $4.6 million as compared to the prior year period. Turning to liquidity, we ended our first quarter with cash of $12.8 million and cash availability under our various lines of credit of $21.2 million for a combined total liquidity of $34 million. I would like to highlight our low level of leverage. As of the end of our first quarter, our net debt to last 12 months adjusted EBITDA ratio was 2.3 times. We maintained a low level of leverage, while purchasing two new businesses in the last 12 months, repurchasing shares and making significant capital investments in our businesses. We have working capital of approximately $78.1 million as of December 31, 2022, as compared to $78.4 million as of September 30, 2022. Total assets increased $279.1 million as compared to $278.6 million as of September 30, 2022. In total stockholders' equity increased $1.2 million to $98.4 million. As part of our capital allocation strategy, we may make share repurchases from time to time. We believe our stock repurchases represent long-term value for our stockholders. As previously disclosed, the company announced a 10 million common stock repurchase plan in 2018. During the first quarter, we repurchased 24,710 shares of common stock at an average price of approximately $25.16 per share. As of December 31, the company had approximately $3.4 million available for repurchases under this program. In conclusion, while we continue to face significant macroeconomic headwinds, we believe we are well positioned to continue to deploy our capital in a smart, focused, disciplined manner to create long term stockholder value. At this time, we will open the floor for questions. [Operator Instructions] And our first question comes from Theodore O'Neill with Litchfield Hills Research. Sorry. Hi, guys. Yeah. Well congratulations on a good quarter despite the issues here. Last quarter, and this quarter both sided inflation as issues for the retail segments and the flooring segment, do you see any abatement of that now that we're here in February? We are seeing some abatement in that, but we believe it's just going to take some time for it to really funnel through, and be able to start driving up our margins. And I know you talked about the flooring acquisition, in your prepared remarks at the beginning, is there any kind of guidance you can give us as to how the revenue might flow in over the subsequent quarters coming up? We don't give guidance on – but I mean, we have noted that, we expect around 125 million per year, so I would just kind of prorate that. I think it's a great start. None of the figures that you see in the queue here reflect anything from Flooring Liquidators, because it was purchased after the end of the quarter. So next quarter, you should see revenues flowing from Flooring Liquidators, and we put in our press release that we expect about 125 billion here, could be more, could be less than just a high level number. Okay. Thanks, guys. In the steel manufacturing segment is there. Is there any seasonality to that – to that business that would – that would make revenue maybe go up next quarter or few quarters here? Hi, gentlemen and thank you. Thank you for the hard work and good quarter. I have several questions. So just stop me if I'm taking up more than my fair share of time. If that's all right. First one. First one is I'm not an accountant. And I just want to understand the dilution compared to the increase in the asset value. I mean, we are getting a new asset for that dilution. So it sounds like some stockholders equity is up. Does that mean that that each share actually owns more even after the dilution, given the new asset that has become part of the portfolio? That dilution is just representative of the number of shares that we issued in connection with the deal and that – so there's no – it's just strictly the number of shares that are outstanding. How many did we add and to what percentage is that I would say overall. That I understand. That I understand. What I'm asking you is that the actual assets that each share owns, did that go up, given the new… Yes, yes, we'll have assets that will allocate that you know, towards that. We've also noticed that it's – we're valued at roughly 84 million, so we have 84 million of additional assets. Deal for the shareholders because there's a very small share issuance valued at around 5 million for what we disclosed. So you will see equity, shareholders equity rising and then you will see in the future, the future cash flows hitting, the return per share will be hopefully higher. Thank you for pulling the word out that I was looking for. I appreciate it. That is what I was looking for. And I appreciate the elucidation. It's what I thought from when I first read it, but I just wanted to make sure that I was correct on that. Why do you use a fiscal year compared to a calendar year? I mean, is there a benefit to the company? Is there a detriment, or is just you know, because you have? I just don't know… There's a plethora of companies listed. Good question, Joe. There's lots and lots of companies that have fiscal year ends that are not 12/31 Many of them. I think Apple is using June 30 or something. You know, I don't think that there's an actual reference. I mean, I think our auditors prefer that we're not 12/31 because that's when they're super busy doing their slower times, so there's no real good answer for that. Okay. All right. That's fine. I just didn't know if there was a business benefit and that's why it was done or not. Okay, you mentioned macroeconomic headwinds. You both mentioned it and I just wondered if that's – you expected that in all areas, in all of your subsidiaries or in more in particular areas than another's? Yeah, I believe that. I mean, the macroeconomic conditions really is going to impact everyone but to different levels. I think right now we're kind of seeing more of it on the manufacturing side, particularly with respect to flooring, which they've got issue just with housing market and the increase in interest rates that will impact kind of the demand for flooring. Thank you. And then my last question, so I guess I made it through them all. Salomon Whitney, are you still planning to buy the remainder of the shares outstanding? Number one, I guess, actually, there are several questions relating to Salomon Whitney. What is their total assets under management? And what made you decide to go after them in the first place? I don't know that it seems to fit with the other purchases that you've made. Yes, so -- yes, a bunch of questions in there. In terms of the go forward plan, we continue to review strategic alternatives and assess what makes the most sense in terms of the remainder of the ownership shares. In terms of what we liked in the first place, it was an accretive acquisition and we saw a lot of opportunity for growth. So while we have historically been more focused on manufacturing and asset intensive businesses, we liked and like the ability to open up new offices and continue to grow through investment. We always look to be able to invest further, continue to invest in the acquisitions we make and look for ROI there. And we think that provides an attractive opportunity. I don't know that I have that number off the top of my head. But it hasn't been disclosed. I can certainly try to look for the next quarterly earnings call. I appreciate that. And the last question about them is, last time I asked you about them, you mentioned that they were -- it was a smaller focus on RIA then on brokerage, and I wonder if that's changing or if that's still the case? No. And I -- and in fact, I misspoke. It's entirely on the BD and not on RIA. So appreciate you actually bring that up, because that was a misstatement.

EarningCall_65

Good day, everyone, and welcome to Klabin's conference call. [Operator Instructions] As a reminder, this conference is being recorded and also broadcast simultaneously via webcast which can be accessed through Klabin’s Investor Relations website, where the presentation is available. Any forward-looking statements eventually made during this conference call in connection with Klabin's business outlook, projections, operating and financial targets and potential growth should be understood as primarily forecast based on the company's management expectations in relation to the future of Klabin. Such expectations are highly dependent on market conditions, on the overall economic performance and on industry and international market behavior, and therefore, are subject to change. Present with us are Mr. Cristiano Teixeira, CEO; Mr. Marcos Ivo, CFO and IRO, along with other company officers. Initially Mr. Cristiano Teixeira and Mr. Marcos Ivo will comment on the company's performance during the fourth quarter of 2022. After that, the officers will be available to answer any questions that you may have. Welcome everyone to Klabin's results conference call to discuss fourth quarter of 2022 results. During 2022, Klabin achieved record results with EBITDA of BRL7.8 billion, an increase of 13% over the previous year [Technical Difficulty] the company's third year history of EBITDA in the pulp business. [Technical Difficulty] with a highly resilient demand and positive expectations for the future. In softwood, we sustained our leadership in Latin America with a substantial price premium over hardwood. As for hardwood, which accounted for only 30% of Klabin results of 2022 in the beginning of the deterioration of this more commoditized market -- started the sales of Machine 28, formalizing the contract of about 60% of [indiscernible].The contracts that's started in across 2023, we will have prices significantly above what was in 2022. It has marked definitely the technology transformation of the paper patterning industry [indiscernible] in the context of a low visibility market, the cargo business guaranteed security and stability to the results showing the importance of this integrated business model. Thank you, Cristiano. Good morning, everyone. Thanks for following our conference call. In the fourth quarter of last year, we achieved solid results reaffirming the strength of Klabin's business model. And the highlights of the period, I would like to mention 3, net revenue was BRL5.1 billion in the quarter, up 11% year-on-year. Adjusted EBITDA of BRL1.9 billion, up 1% compared to the fourth quarter of 2021 and shareholders remuneration of BRL1.6 billion in the fiscal year of 2022.On Page 4, the sales volume in the quarter was down 5% compared to the same period of 2021, reflecting the lower pulp production and a demand accommodation for kraftliner and corrugated boxes. The net revenue in the period was of BRL5.1 billion, an increase of 11% compared to the previous year. This increase is explained by the price adjustments implemented throughout 2022, which more than offset the reduction in sales volume and the depreciation of the Brazilian currency compared to the U.S. dollar. With that, adjusted EBITDA amounted to BRL1,905 million in the quarter, benefiting from net revenue growth, which has more than offset the increase in cash cost. On the next page, in 2022, net revenue was at BRL20 billion, a growth of 22% compared to 2021. This increase is the result of higher sales volume and price adjustments, which were partially offset by the strengthening of the Brazilian currency compared to the dollar. Adjusted EBITDA, excluding nonrecurring effects was of record amounting to BRL7.8 billion in 2022 for the 13th consecutive year of Klabin's EBITDA growth.Moving to Page 6, Pulp EBITDA performed strongly both in the fourth quarter and in the year of 2022. The growth compared to 2021 of 18% and 8% respectively. This result was benefited by high price levels as well as the flexible sales mix between geographies and the portfolio with 3 types of fibers, hardwood, softwood and fluff, which more than made up for the reduction in sales volume and the increase in cash cost. The cash cost of pulp production in the quarter was of BRL1,338 per tonne in the quarter, representing a 5% drop from the immediately preceding quarter, confirming the indication that we gave to you on our last call.On Page 7, in the Coated Board segment, which remained with a healthy demand and good prospects for the year 2023, the production volume was of 193,000 tonnes in the fourth quarter and 727,000 tonnes in the year 2022, stable compared to the previous year given that Klabin operates at the limit of its production capacity. Coated Board revenue reached BRL932 million in the fourth quarter of 2022, an increase of 12% year-on-year. As for the year of 2022, this segment's revenue was of BRL3.5 billion, a growth of 15% versus 2021. Both performances were driven by the price adjustments made during the year.Going on to Slide 8. Adjusted free cash flow, which excludes discretionary factors and expansion project, was positive at BRL1.8 billion in the quarter. In 2022, adjusted free cash flow was of BRL4.1 billion, representing a free cash flow yield of 17% higher than the 13.2% that we had in 2021.Going to Page 9. At the end of December, Klabin's net debt was of BRL21 billion, a reduction of BRL397 million when compared to September 2022. This reduction is substantially explained the positive impact of the foreign exchange variation on the dollar debt and a positive free cash flow in the period. In turn, leverage as measured by the net debt over EBITDA indicator in U.S. dollars ended December at 2.6 times, stable compared to the previous quarter and close to the minimum level of the company's financial debt policy.Moving forward to the next slide, Slide 10, Klabin's liquidity remained robust and it ended the quarter at BRL9.1 billion. This liquidity consists of BRL6.5 billion in cash and the remaining in the revolving credit line. The company's cash position is sufficient to repay the debt maturing over the next 40 months. The average maturity of the debt at the end of 2022 was 109 months, which corresponds to more than 9 years. It's worth noting that Klabin has financing contractor that have not yet been withdrawn in an amount greater than the CapEx that will be [ disbursed ] until the completion of the [ Puma II ] project, as detailed in our earnings release.Going on to Page 11. As for the notice to shareholders published yesterday, the company approved the payment of dividends in the amount of BRL345 million to be paid on February 24. In the accrual basis, the dividends distributed to shareholders pertaining to the year of 2022, totaled BRL1,628 million, which represents a dividend yield of 6.8%, a clear evidence of Klabin's ability to combine growth, payments to shareholders and at the same time, maintain discipline in its capital structure.On Slide 12, the first phase of the Puma II project, MP27 continues its ramp up as planned, having reached production of 354,000 tonnes in 2022. The second phase of the project, which will include a coated board machine, is under construction on schedule, having reached 82% of physical execution and a measurement performed on January 29 and has its production startup planned for the end of the second quarter of 2023. Since the beginning of the project, BRL11.1 billion have been disbursed of which BRL794 million in the fourth quarter of 2022.Moving on to the last slide, Klabin continues advancing in its ESG journey and working to achieve the goals of the Klabin Agenda 2030. As a result of our effective actions and commitment to the ESG agenda, we have received important recent recognition of which I would like to highlight, AAA rating in CDP in the categories, climate change, water and forestry for the second consecutive year, renewed participation for the third consecutive year in the Dow Jones Sustainability Index global portfolio, inclusion in the B3 ISE for the 10th consecutive year and inclusion in the S&P Global Sustainability Yearbook 2023, as the only Latin American company in the top 1%. I have two questions. The first is about cost. The cost dynamic drew my attention in this quarter, on one hand, pulp dropped 6% quarter-on-quarter and I believe it's because of the cost of fiber dropping. You talked about reduction in the share of third-party timber. So this quarter-on-quarter reduction called my attention in the quarter when you had a maintenance stoppage at Puma. And this reduction of third-party would more than offset the increase in other costs or lower dilution of fixed costs. On the other hand, your total costs per tonne also increased substantially. The cash cost per tonne increased 8% quarter-on-quarter showing that paper posted a relevant increase. So could you help us understand a little better this mismatch between the two, between the paper cost and the pulp cost? Do you have a strategy to reduce the share of third-party timber in pulp and increase it a little bit in paper? What would be the rationale explaining this? And how does this impact your pulp cost expectation increasing in 2023? Could we expect a change in the cost for the coming quarters? Second question. Another thing that drew my attention is the reduction of volume in packaging paper, in the quarter, in annual comparison. You mentioned that you had some strategic stoppages in some of the mills and plans. You mentioned the international demand for kraftliner a little weaker and the fourth quarter also has a weaker seasonality in Brazil for a number of events. So I would like to know how the demand is evolving and if we can expect a volume recovery in the first quarter, particularly for these two markets? Caio, I'm going to turn the floor to Marcos and then I will be back to speak about the reduction in volume. But to start, just to kick us off and to clarify this straight away, there is no wood strategy per product or per business. We have a forestry basket. It's not that we have more third-party timber in one business and not in another, there is a Klabin strategy for the whole region, but Marcos will detail this. This is Marcos. Hello, Caio. First, I'd like to remind you that in the past call, we had given a signal of a reduction in the pulp cash cost, given that the pulp cash cost had been affected by one time-off events in Q3. If you hear the previous call, you will hear us mentioning this. So this happened as expected, as we indicated. Cristiano has already explained that there is no business differentiation. We try to minimize the total cost of Klabin, without really choosing business A or B. And regards 2023, Klabin's cash cost -- the Klabin's COGS per tonne for 2023, our expectation is exactly what we also shared with you in Klabin Day in December. So considering all Klabin products and all effects, including a mix effect, we expected COGS per tonne for Klabin in 2023, growing a 2-digit growth per tonne, low 2-digit growth. We have an IPCA inflation of around 6% expected for the year. We had a change in the estimated mix for 2023 because in 2023, we are going to have a greater share of coated board that is living a very excellent moment and we'll have the start-up of the M28 that changes the mix of the company and the cash cost per tonne. In addition to greater integration, the same effect with a higher volume of coated board [indiscernible] to that timber. We have been explaining this to you for a long time. We give you a lot of information in the Klabin Day. Since we announced the project in 2019, we had the first cycle being supplied by third-party timber starting in the second cycle, in the second cycle means 2025 and beyond, in the [curve] that we shared with you in the Klabin Day, we start replacing third-party wood by our own wood.So putting it all together, we maintain the signal we gave you in Klabin Day. I'd like to remind you that this is a year view. As regards volume, Caio, perhaps, it's important to remind you, we came from very two strong years. Perhaps you didn't realize that, but these market oscillations are a routine in our day-to-day business. I'm sorry to be repeating this and perhaps going into too many details, but we have a planning dynamic at Klabin that has been consolidated for many, many years now. It's called sales and operations planning. We meet weekly with our managers and monthly with our officers and we meet daily with the rest of the team and we operate the machines, always focusing on the best results, since times. And this is Klabin's flexibility, sometimes we reaches the bridges of third-party paper, sometimes we manage production or reduce output, particularly of recycled paper, for example. Sometimes, we adjust or bring forward paper machines, stoppage of virgin fibers. So it's a nutshell. This is part of a normalcy for all our business, it's part of our flexibility. Now of course, and we knew that the market tends to be a little bit weaker in the fourth quarter. Kraftliner had an impact, we brought more kraftliner for the domestic market for corrugated boxes. So these market oscillations are more normal than you expect [indiscernible] how flexible Klabin's operations are in our sales and operations planning. So there was a reduction in volume as a [indiscernible] market. And yes, we had market stoppages for some of the paper machines. Thank you, Cristiano. How do you see this evolution in the first quarter? Should we expect a recovery or is the market behaving similarly to the fourth quarter? Okay. In Q1, the packaging market, actually, the corrugated box market is in its non-seasonality. The market starts dropping after the end of year holidays. It moves slowly until March. In June, it gets a little better and it's a little bit of drops again and it achieves a peak starts in July in the peak, is reached, October, November is strong and December the cycles that all over again. It's all part of the normal curve, the expectation for corrugated boxes is aligned with what we expect for the country's GDP. We spoke that we're always a little higher than the Brazilian GDP with corrugated boxes. And it's the same. We are in the normalcy curve for the beginning of the year. The first question is about kraftliner. Could you give us more color on the price and demand dynamics currently. You mentioned in the release about a slightly weaker demand with higher inventories. So I would like to understand to what extent this is seasonal or is this a trend that you see intensifying now in Q1 and in the first half of the year? My second question is about corrugated boxes. I know you don't like to look at market share quarterly, but we have seen market share dropping in recent quarters. So I would just like to understand the trend you see for 2023 in the market share price strategy and if there is any price pressure from the market? Well, the dynamic of the fourth quarter and we see based on the world market, particularly if we look at the two big markets, U.S. and Europe, all demand is not helping. There is some excess in capacity, more capacity starting in full market and production reasons in the U.S. because of all of that, we see more pressure of the prices, reflecting the supply and demand dynamic that I just mentioned. And when we look at the whole picture, you see price impacting the cash cost of marginal [indiscernible] and that makes high cash costs, find it hard to continue to operate in the coming months. This is Douglas, Rafael. Good morning. We don't like to look at market share. We look at the integration of markets, means flexibility. But looking at the number, indeed, in Q4, we had 2 factors that impacted and caused a different performance in the market. We had two factors in which Klabin has a higher market share, performing a little less. So that drives down Klabin's number, such as fruit and protein, fruit for climate reasons and protein because it was reduced export to market reason. And another important factor was a greater utilization of lower weight paper. We've been talking about the Puma II machine, PM27. And that makes available of tonnes of Klabin to meet weight of the package. But when we look at square meters, it doesn't correspond to the same proportion. So when we look at the tonnes number, we get a false impression. Now looking at 2023, we should follow the market in most segments. And in talking with our clients and with the market in general, particularly in these segments that I just mentioned with the fourth quarter underperformed, we see that the fruit and protein sector, where Klabin has a higher market share, there they have a better outlook. So as Cris mentioned, the segment is growing more than the GDP. If these industries come stronger, we should perform better. But we need to be cautious. We need to follow the performance of these segments. Regarding price in the past, we performed a lot better than inflation. And our quest this year is to be aligned with the IPCA inflation rate. Just a follow-up question. I don't know if I had a [indiscernible]. But regarding kraftliner, you mentioned that you're seeing a current level of price hit the marginal level. Is that it? Yes. We have a curve that differentiates producers like us from producers that are more impacted by inflation in their cash cost as well as particularly for producers in the northern hemisphere. Current price levels added to logistics impacts that are still present, caused the net price to touch the cash cost curve. Now during the month of December and January, we also observed a reduction in inventories of the chains. There's a lot to do. Inventories are still higher than historical levels, where there is now a process of reducing the inventories. I have two questions on my side. First about the future downtime at Monte Alegre, if the studies continue to evolve, if you have any update that you could share with us about the potential project? I remember there were some studies or different studies that you were looking at. So if you have any update on that side, it would be interesting. And the second question, I don't know if Nicolini is [indiscernible] the pulp market, especially in China, post the Chinese New Year, you see the demand is evolving in China. And if we can talk about, in Europe recently, it will be interesting to us. I'm just going to try and interpret your first question. If I'm wrong, you please tell me. But I imagine that you're saying about the future downtime in Monte Alegre, of course, that doesn't exist. The only thing that I remember about Monte Alegre is boiler -- recovery boiler. To answer and I think it will be sufficient. I mean, I may be redundant in the beginning, but Monte Alegre was a bit planned for many years in terms of results. They have the coated board Machine 9, Machine 7 that we mentioned. It's a very important site for Klabin from the 1940s until today, the site with an order of 1 million tonnes. It's a very important site for Klabin. So there, we have a one boiler or have boiler one, that we have been studying to repair it for many number of years. Of course, we've worked with a very high safety level. We're always very conservative. When we started to look at this, we consider the worst cost scenario or maintenance. And as I mentioned, at Klabin Day, and we can go back to what I said then, it's the same thing. We are more and more confident that within the vision that we outlined initially were in the first quarter of investments or rather costs in the operating amount for this boiler. So if we had an original idea, this number is closer to a third of what we had figured. So this retrofit will be done over the next 2 or 3 years during the general downtimes without any impact on the result or the guidance for the business at that side. So this is something that started for us with a high attention level, because it is an important site, it's best site. And now I'd say it's in the routine of the company. So the boiler will be retrofitted in the coming years and you will see it with us, but the effect will be very small, both in terms of the investments made by the company and the results, of course. Just to add Isabella, we remain with the information from the Klabin Day in terms of disbursement for the boiler in 2023, if it occurs, it's an amount of BRL150 million. That's within what we -- the number that we gave you for the CapEx indication for 2023. So there's no change in the assets. It's Nico. At this time, we're still analyzing and looking at the developments in China after the Chinese New Year and the expectations in the sense of the improvement of the Chinese economy to understand how this may impact other markets. What I can tell you is that the month of January was a good month in terms of demand, but it's too early to form that there will be a recovery in the coming months. In terms of the European market, the year began in a more challenging way since the middle of last quarter, we saw demand that was more repressed in the print and writing and specialty segments and the market as a whole already expected some correction in terms of prices in eucalyptus pulp after a few months of complete standoff in terms of price. But it's worth remembering that the year started at prices much higher than the initial projections. And now we're looking at the developments in the markets to feel how this is going to develop in the quarter. First, I would like to see whether you can talk about the softwood market. We see some players in North America announcing price increases in USD20 to USD30 per tonne. I'd like to see if you understand the dynamic of this market of this fiber if there is room for any type of increase? And second, if you see any movement towards the replacement of softwood with hardwood seeing the levels that are above historical indexes? The softwood market starts to give us some positive indications of a steadier market. It's worth noting that this segment suffered first with price corrections in the middle of last year and considering the context, especially in Canada with the production stoppage and downtime announced because of lack of fiber and closing due to capacity or reduction of capacity that led to an announcement of a $30 price increase in international markets. Brazil follows the price in the Europe and these prices are being implemented now in the month of February. It's worth noting that when we compare the dynamics of the markets, the differential, the gap of prices between softwood and hardwood in China and in Europe, it's out of place, it's different. We talk about the prices in China between softwood and hardwood. It's $120 per tonne. And in Europe in January, it was around -- that's a very small gap in Europe. We see the softwood market steadier due to what has already been discussed and how we will keep watching and see how it develops in coming years. My first question is related to [potential] decision to invest in the new big project for [indiscernible] expansion. We are close to finalizing the second PM of Puma II expected for midyear. So you're already thinking about the future agenda. So I would like to know, do you have any time expectation to take to the Board of Directors to have approved that bigger project that you have in [indiscernible]. And how if you could elaborate on the kraftliner dynamic. I know we talked a little bit about this. But it recalls my attention to the cost reduction in the international market more recently in the high-single digit, low-double digit crop. Could you elaborate on the price expectation of kraftliner [indiscernible] U.S. economy can wait a little bit? And has there might be a little more kraftliner left to the exposure there? And so regards to Santa Catarina, here is what I can tell you. The paper and pulp market characteristics. I mean, we study and plan projects we win ahead. So my answer to you is yes, we continue with that in our radar, not only in the radar of the management of the company, but also in the radar of the Board of Directors. We have a strategic approach of softwood. However, this is the year [indiscernible] I said it a couple of times, the coated board machine, it brings embedded technology, which is sophisticated. It has sensors, increase in [indiscernible] product in the new world to have low weight coated wood compared equally to U.S. virgin fiber coated boards in the many categories of [indiscernible].We worked many, many years for this machine. The coated board market is not as big as the containerboard or even the pulp market. So it is a more select market in terms of producers to consumers. It has a premium value profitability of long-term contract. Just one detail, we have contracts for Machine 28, which have 3-year contracts with excellent negotiation and ensuring a good part of Klabin's stability of results. So I'm estimating a number that will be communicated to you in the future.Looking at Klabin today projecting for the next few years, Klabin and its 3 primary businesses, make a parallel with the U.S. market because I think it will be more direct [indiscernible] to understand. We have a co-market as a number of companies call bio material, it's bio-materials market. As you well know, we have 1.1 million tonnes of hardwood and many, many more thousand tonnes of softwood with a premium price for softwood. You have seen what has happened in recent years and Klabin with softwood and for consolidated throughout Latin America and approved by all brands in the world. When we look at the other business, I will take a risk here and say containerboard with corrugated box. The company typically you're looking at an IP or IPCA in the U.S. In this market, Klabin is highly integrated, with the market share that was mentioned. We don't look at this and it's a good time of the moment. But we have about 25% of the Brazilian market of corrugated boxes and we sell paper to practically all other Klabin competitors in these segments that require virgin fiber paper. Now when we look at Klabin's third market and bringing a relative innovation for you, dividing it by 3, and that is the coated board. That's what they call consumer board in the U.S. This market with PM 28 projecting for the next 2 years, you will divide Klabin, will break it down into 1/3 biomaterials, 1/3 corrugated boxes and the 1/3 of coated board. So these 3 segments absolutely consolidated with niche products. And for all 3, we have projects in the future vision. However, at this moment and this can extend to the next year, we will be focusing on this division, consumer board and of course, consolidation of our other businesses as well. We'll focus on increasing efficiency, always trying to increase efficiency. So at this point, I prefer not to mention the focus on the Santa Catarina project because the future of softwood is consolidated for us in that region. So, there is no relevance of materiality to speak about projects this year and perhaps next year. BRL323 million is our new capacity we want to deleverage the company and gain operating efficiency. As for the liner market, well, I spoke a little too much I apologize, but I wanted to give you this kind of detailed level, and I'll turn the floor to Flavio. I elaborate a little more. We have a situation that is very different compared to previous cycles, some big numbers. The U.S. market to get of the market 2 million tonnes, if we had the main producers, in their published releases. And the U.S. exports are at their lowest possible level and compared with a long historical series, which is a counterintuitive normally with the weakening of external markets, the U.S. market exports more. And as I explained before when answering Rafael's questions, now we have a situation of low profitability. We stop capacity, and we export less. And I am going to enter the new element, which is an element of Klabin. Klabin has its own mix, we do a lot of virgin fiber, low-weight paper, Eukaliner brought a little more of this context to our products. Klabin has its own geography. We have also in America some markets, which are very relevant in our portfolio. So this is a market. So we have a high market share in these markets. We also have a mix, which is very much favored by fruit, vegetables, fat, protein. And these markets continue to do well. So we reap the fruit of operating in specific mixes that help us in a macro view. Now looking at the U.S. market, even before they actually have a recession, if a recession ever happens, now they are reducing capacity and they are exporting less. We have seen some news of a greater potential payment from Brazilian companies and taxes either by MP 1152 or yesterday's Supreme Court decision. Can you give us a view of how these measures can impact Klabin? Andre, as for MP 1152, it's in Congress, waiting for approval. But we have the text so we can make our statements based on that. Klabin has always had a more conservative attitude in its tax decisions. In the past, this has led Klabin to adopt what the ODC -- OCD defense and what you'll see in the tax cut bill 1152. And to make it simpler, that if approved, it will bring a change in the transfer price of Brazilian companies when they sell to their own subsidiaries outside of Brazil. So Klabin, since we opened our subsidiary outside of Brazil and it became more relevant with Puma I as of 2016, we always have a very conservative position, understanding that there was a high risk of falling an aggressive practice in terms of tax payments.So which was a conservative path, which means that if this bill is approved as it is today, it will have no impact for Klabin. Now, I mean, you were talking about Supreme Court's decision yesterday that may bring a big change to the results in certain situations of lawsuits and we don't see anything that may affect Klabin, looking at our past, other than greater legal and security for future decisions. But in terms of the decision, the best decisions that have been made in our cases, there's nothing we can see that would cause an impact. Excuse me, if there are no further questions, I would like to turn the floor over to Mr. Cristiano Teixeira for his final remarks. Please, you may go ahead. So thank you. First, I would like to give you a side note, before talking about the perception of the last quarter. The side note is our -- about our new Legal Director at Klabin, Mariangela who came from the Grupo Votorantim Cimentos. She's been at Fibra, Vale. She is a highly qualified professional that is now joining our team and adding her structured view, acknowledge to our company in tax and legal terms. So welcome, Mariangela. It's a pleasure to have you with us. So now I'll give you our perception on the first quarter of 2023. Usually, the first quarter of a year is a period with a lower seasonal demand at a slow pace in all markets. Especially this year, due to the macro scenario, visibility is low. At Klabin, we have positive perspectives for this first quarter with results expected to be above the same period on the previous year. We remain steady in the constant search for operating efficiency and cost control. Our main focus remains on MP 28, which now presents 82% of its works concluded and we're confident for the start-up of production in the second half of 2023.I thank you all for your participation and I'll see you on Klabin's next earnings conference call. This is the end of the conference call held by Klabin S.A. I thank you very much for your participation and have a nice day.

EarningCall_66

This is Patrick Nolan. I apologize about the technical difficulties we've had this morning, but we're in a kickoff today's call. So we have issued our press release earlier this morning. It's posted on our website, borgwarner.com, on our homepage and on our Investor Relations home page. Before we begin, I to inform in joining this call, we may make forward-looking statements which involves risks and uncertainties as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. During today's presentation, we will highlight certain non-GAAP measures in order to provide a clearer picture of how the core business performed and for comparison purposes with prior period. When you hear us say on a comparable basis, that is excluding the impact of FX, net M&A and other noncomparable items. And here say adjusted that means excluding noncomparable items. When you hear us say organic, that means excluding the impact of FX and net M&A. We also refer to our growth compared to on market. when he say market, that means the change in light vehicle and commercial vehicle production weighted for our geographic exposure. Please note that we've posted an earnings call presentation to the IR page of our website. We encourage you to follow along with these slides during our discussion. Thank you, Pat, and good morning, everyone. I have a bit of an allergic reaction this morning impacting my speech. So Kevin will cover the prepared remarks. I'll stay with you and answer the questions. Kevin? All right. Thanks, Fred, and good morning, everyone. We're pleased to share our results for 2022 and provide an overall company update, starting on Slide 5. We continue to be very proud of the strength of our sales relative to the overall industry. With about $15.8 billion in sales, we were up approximately 14% compared to our market, which was up a little less than 4%. Importantly, our BEV-related sales contributed meaningfully to this growth. We're also pleased with our solid margin performance, which we delivered despite the significant production volatility and inflationary headwinds that we faced during 2022. This performance was achieved while continuing to significantly increase our R&D investment to support the continued growth in our e-product portfolio. We also delivered record free cash flow which allowed us to continue to make inorganic investments that support our future while at the same time returning cash to our shareholders. Beyond our near-term results, we continue to drive our long-term positioning during the quarter. We took several leading steps in our sustainability efforts. I'll detail those more in just a moment. We made a significant advancement in charging forward with the announcement of the planned separation of the Fuel Systems and Aftermarket segments. And we also secured multiple new electrification program awards since our last earnings report. Next, on Slide 6, I'd like to give you more color with respect to our progress in our SBTi targets. In mid-December, BorgWarner announced its commitment to reduce its absolute Scope 3 emissions by at least 25% by 2031 from a 2021 baseline. The Scope 3 target along with our previously announced target to achieve 85% absolute Scope 1 and Scope 2 emissions reductions by 2030 was formally submitted for validation to SBTi. These science-based targets align with charging forward or accelerated path through electrification by aiming to achieve a net 0 carbon emission future for all. We've made some meaningful progress in 2022 toward achieving our Scope 1 and 2 emissions targets as we had tied employee bonus opportunities across our global operations to reducing energy intensity while also promoting energy management certification and the procurement of renewable energy. To meet the Scope 3 target, BorgWarner intends to focus its efforts on a number of actions including transitioning the product portfolio to electrification, increasing content of recyclable remanufactured material, reducing product weight and driving sustainable raw material selection. We'll also be working with our supply base to do the same. Next, on Slide 7, I'd like to summarize the planned separation of our fuel systems and aftermarket segments, which we refer to as NewCo. We announced this planned separation in December as we believe that now is the right time to separate these businesses and unlock shareholder value. For NewCo, we've driven significant margin improvement over the last couple of years despite the challenging industry environment. From a product leadership standpoint, we solidified NewCo's position in the commercial vehicle segment, including with hydrogen injection in the passenger car segment with our cutting-edge GDI technologies and in the aftermarket business. We believe these things position NewCo well for success as a stand-alone public company. For BorgWarner, we believe the intended separation accelerates our Charging Forward strategy and focuses all of our energy towards electrified propulsion. It enhances all of our management attention, our focus and our flexibility to pursue attractive EV investments and supports our vision of a clean, energy-efficient world. The intended separation will allow each company to pursue its own strategies with an overarching focus on maximizing the value opportunity for our shareholders. The teams are progressing well through the various work streams and we plan to provide updates as appropriate. We continue to expect the intended separation to close in late 2023. Now let's look at some new electrification awards on Slide 8. First, BorgWarner will supply a major German vehicle manufacturer with innovative battery cooling plates for the OEM's next-generation electric vehicles in Europe and the United States. This is our first award for this new organically developed product with an expected launch in 2025. Compared to alternative solutions, the BorgWarner cooling places provide greater cooling capacity within a smaller installation space as well as reduced weight and cost. We believe that as a global market leader in exhaust gas recirculation cooler technology BorgWarner's expertise and thermal management and the associated manufacturing processes positions the company to be an ideal pioneer of new developments for the battery cooling market. On the right side of the slide, you can see that we're announcing a sizable expansion of our silicon carbide inverter business with a top global OEM with an 800-volt award. After partnering with this car manufacturing on a 400-volt inverter product, we're now being sourced to launch two new 800-volt variants in 2025, 250 kilowatts for an all-wheel drive crossover utility vehicle and a 350-kilowatt module for the OEMs performance vehicles. This expanded business strengthens our position as one of the strategic inverter suppliers for this long-standing customer as that customer transitions to the next phase of its BEV strategy. As you can see, we've made further progress toward our charging forward objectives. So let's look at what this means in our progress report on Slide 9. Starting first with organic electric vehicle sales growth. With the awards secured as of this call, we now have pure BEV programs that we estimate accounts for about $3 billion of booked sales in 2025. Of note, this estimate reflects about a $150 million headwind versus our prior disclosure, stemming from an update to reflect the FX rates underlying our 2023 guidance. This FX headwind was partially offset by the new business wins I discussed on the prior slide. Turning to M&A. We've now completed or announced 5 acquisitions since the start of Charging Forward; Akasol, Santroll, Rhombus, SSE and Drivetek. Based on our due diligence, we believe those businesses will generate about $1.3 billion of EV-related sales in 2025. This is higher than our previous outlook based on our revised projections for Akasol, which is seeing a faster ramp-up in sales than we initially anticipated. But we're not done here. We continue to expect that we'll execute additional acquisitions and are actively engaged with a handful of potential targets that we think will enhance various parts of our EV portfolio. And finally, the planned separation of NewCo will address the third pillar of charging forward for which we set an original goal to complete about $3.5 billion in dispositions by 2025. With all that we've accomplished in the last couple of years, we believe we're already on track to achieve about $4.3 billion of pure electric vehicle sales in 2025 and we believe it puts us within striking distance of our $4.5 billion EV sales target for 2025. Now let's move into the financials, starting on Slide 10 for a look at our year-over-year revenue walk for Q4. After adjusting for the disposition of our Water Valley facility, last year's Q4 revenue was just over $3.6 billion. You can see that the strengthening US dollar drove a year-over-year decrease in revenue of over 8% or approximately $307 million. Then you can see the increase in our organic revenue about 21% year-over-year. That compares to a less than 1% increase in weighted average market production, which means we delivered another quarter of strong outperformance. The sum of all this was just over $4.1 billion of revenue in Q4, a strong finish to the year. Turning to Slide 11. You can see our earnings and cash flow performance for the quarter. Our fourth quarter adjusted operating income was $428 million, equating to a 10.4% margin. That compares to adjusted operating income of $398 million or 10.9% from a year ago. On a comparable basis, excluding the impact of foreign exchange and the impact of M&A, adjusted operating income increased $74 million on $769 million of higher sales. The biggest positive driver of this performance was that we converted at approximately 15% on our additional sales. But this conversion was partially offset by our planned increase in e-products R&D. In Q4, we increased these R&D investments by $38 million relative to last year. Our adjusted EPS improved by $0.20 in the fourth quarter driven by the improvement in our adjusted operating income and a nearly 400 basis points lower year-over-year tax rate. That lower tax rate was driven by a favorable mix of earnings across taxing jurisdictions, qualifying for more favorable tax rates in certain jurisdictions and the impact of ongoing tax structuring initiatives, all of which we believe should contribute to a lower tax rate going forward than what we've experienced over the last few years. And finally, free cash flow. We generated $670 million plus of positive free cash flow during Q4. The year-over-year increase was driven by 3 things: the improvement in operating income, the timing of collection of a meaningful amount of inflationary price recoveries from our customers and the nonrecurrence of a onetime $130 million warranty payment to a customer last year. Let's now turn to Slide 12, where you can see our perspective on global industry production for 2023. When you look at this slide, you can see that our market assumptions continue to contemplate the types of macro uncertainty we've been experiencing over the last few years. With that background in mind, we expect our global weighted light and commercial vehicle markets to be flat to up 3% this year. Looking at this by region, we're planning for our weighted North American markets to be up about 2% to 5%. In Europe, we expect our blended market to be up 1% to down 2% year-over-year. And in China, we expect the overall market to be roughly flat to up 3%. Now let's take a look at our full year outlook on Slide 13. First, it's important to note that our guidance assumes an expected full year headwind from weaker foreign currencies of $285 million. Second, as I previously mentioned, we expect our end markets to be flat to up 3% for the year, which contributes to the organic net sales change you see on the slide. But more important than that slight growth in end markets, we expect our revenue to continue to grow well in excess of industry production driven by new business launches and higher electric vehicle revenue. In fact, in 2023, we're expecting to deliver between $1.5 billion and $1.8 billion in EV revenue which is up significantly from the $870 million we generated in 2022. Finally, the Santroll and Rhombus acquisitions are expected to add approximately $35 million to 2023 revenue. Based on these assumptions, we're projecting total 2023 revenue in the range of $16.7 billion to $17.5 billion, which equates to organic growth of approximately 7% to 12%. Switching to margin. We expect our full year adjusted operating margin to be in the range of 10.0% to 10.4% compared to our 2022 margin of 10.1%. We do expect some variation in the margin level across the quarters in 2023. Specifically, we believe that Q1 is likely to be the weakest reported margin during the year. as we work with our customers and suppliers on finalizing the extent to which inflationary pricing actions negotiated in 2022 carry over into 2023. In the end, our current expectations are that the year-over-year impact of inflationary pressures on full year margins is likely to be negligible. However, we could see some negative impact in Q1. As it relates to R&D, our full year 2023 guidance anticipates a $60 million to $70 million increase in e products-related R&D investment. With our continued success securing new electrified business wins, we're continuing to lean forward and invest more in R&D to support our eProducts portfolio. But importantly, as you see on the slide, the year-over-year increase in 2023 is expected to be lower than the year-over-year increase in 2022. Excluding the impact of this increase in eProducts related to R&D, our 2023 margin outlook contemplates the business delivering full year incrementals in the mid-teens, which we view as a solid conversion given the amount of product launches and ramp-ups occurring this year. Based on this revenue and margin outlook, we're expecting full year adjusted EPS of $4.50 to $5 per diluted share. This EPS guidance contemplates two slight headwinds relative to 2022. First, we expect an effective tax rate of approximately 25%, up a couple of percentage points relative to last year. However, that rate remains far lower than what we've experienced in recent years, and we think it's a rate that's likely to be sustainable on a go-forward basis. Second, our EPS guidance assumes a $0.13 per share negative impact coming from higher net pension expense as a result of higher discount rates. Turning to free cash flow. We expect it will deliver free cash flow in the range of $550 million to $650 million for the full year. This cash flow outlook includes a onetime cash cost of approximately $150 million related to the intended spin-off of our Fuel Systems and Aftermarket businesses, arising from outside adviser fees, cash tax payments to facilitate the separation and IT costs to create a stand-alone IT environment for NewCo. Excluding these onetime costs, our cash flow guidance would be $700 million to $800 million which is only slightly lower than the record free cash flow of $846 million we generated in 2022. That's our 2023 outlook. So let me summarize this morning's remarks. Overall, we delivered strong performance in 2022 despite a volatile end market environment and significant inflation headwinds. In the face of this environment, we outgrew the market significantly. We maintained our adjusted operating margins above 10% by delivering incremental margins on our higher sales and successfully completing commercial negotiations with our customers. while also investing $150 million more in R&D to support the future growth of our e-business. And finally, we delivered a record year of free cash flow. As we continue to successfully manage the present, we were also continuing to successfully deliver on the future by making significant progress on our charging forward plan. Now as we look ahead to 2023, we'll be keenly focused on continuing to manage the present by sustaining strong high single-digit revenue outperformance compared to industry volumes and driving conversion on this revenue growth, successfully executing the intended spin-off of our Fuel Systems and Aftermarket businesses, and continuing to make disciplined investments, both organic and inorganic, that will help secure our growth and financial strength long into the future. Just a little follow-up on the comments on inflationary costs. I think you said the guidance implies a negligible impact. I mean so far, it seems like other suppliers have kind of guided to pretty large headwinds. And particularly around labor. Any color on the underlying growth impact that you're expecting that you'll need to get price concessions to offset? And any color why you're not seeing as big of a factor are the suppliers is just the business structure or some other benefits? Yes. I think our expectation right now is that we're going to continue to manage inflationary levels at the way we exited 2022. So to the extent that we continue to see elevated levels of inflation from the supply base, we would expect to continue to maintain the pricing in place with our customers on a go-forward basis to mitigate that. So that's really what's underlying the guidance. And based on your comments, it sounds like you're really just renegotiating what you've gotten last year? Or are you seeing more increases in the [indiscernible] these costs this year too or no? I think we're expecting that we're going to enter the year and the focus of the negotiations last year was really about how we are 2022, and then we essentially align with the customer base that we would look ahead to 2023 as we were entering the new year and see what types of pricing levels were appropriate to continue to mitigate those impacts. And so as you can imagine, we'll have those discussions here as we enter the new year about the pricing and cost environment. Got it. And your outlook based on your market guidance, it looks like it's about 8% over market. And I believe you used to historically talk about more 4% to 5%. So what's driving the strong growth over market this year? Is that sustainable? How should we think about it going forward? Yes, Colin, the outgrowth next year is -- you're right around midpoint of 8%, and we're very proud of that. About 2/3 of it is be products and other products for plug-in hybrids. So next year, we'll be between $1.5 billion to $1.8 billion of fuel BEV revenue which is approaching 10% of our revenue. I'm very proud about this acceleration. Not at all. This confirms that we are on track, marching towards our target of $4.5 billion of fuel BEV revenue in 2025. And you see a 2x increase this year versus prior year, and that's pretty much part of the plan. I was hoping you could give us a little bit more color around the year-over-year walk and puts and takes in terms of your margin outlook. And as you mentioned yourself, the at midpoint, it's basically just slightly better than flat sort of like operating margin despite what seems to be incredibly strong organic growth and I guess growth overall. I understand the R&D, so that going up a bit, but anything else going on? And then can you just maybe talk about R&D overall? Like are you offsetting some of that R&D increase by cutting back on R&D? Or is that sort of like how much the full R&D will be going up by? Yes. The walk going from 2022 to 2023 is fairly simple. It's really -- as we look at that organic net sales change, we're converting on that effectively in the mid-teens, call it in that 15%, 16% range. But then we're also investing incrementally in eProducts-related R&D of about $60 million to $70 million on a year-over-year basis, which is what brings the overall conversion down and shows only then a slight improvement in our margin profile on a year-over-year basis. But we're pretty pleased with that mid-teens conversion given that the bulk of the revenue growth we're seeing in 2023 is really related to product launches and ramp up, not recovery in end markets. And so with some of the start-up costs you see there, we're pretty pleased with that performance. Fred, do you want to comment on the R&D? R&D side, as Kevin mentioned, we expect to be up again this year year-over-year. We're also looking at a lot of R&D efficiency on the combustion side. And I think we expect that long -- midterm the R&D is going to stay between 5% and 5.5% of revenue, working in not constraining the growth but also making sure that we're doing the right thing on the foundation and products. Okay. And then following up on this then. So is this year within this range as well the total R&D 5% to 5.5%. And I guess in the past, you've sort of spoken about the tail end of 2023 is sort of like being this turning point where sort of like your EV business is essentially breakeven or getting profitable is fully loaded as you have enough revenue scale to sort of like match the size of this R&D. Is that still the case? Or will these additional investment, does that push out the time line a bit? A couple of things on the on the question about R&D, they were really only guiding at the moment to the eProducts-elated R&D, which we are seeing an increase in investment that we're choosing to make of $60 million to $70 million. the overall R&D budget, I'll say, the foundational R&D is just being managed in totality with the way that we manage the profitability of those foundational businesses. As it relates to EV, the trajectory of profitability. As you see the growth that we're generating this year and the incremental margin that we're generating on that revenue growth this year, 2/3 of which comes from our eProduct portfolio you can see that the growth in contribution margin is effectively outpacing the growth in the eProducts related to R&D, which means that 2023, we are seeing improving profitability coming from that portfolio in totality, and continue to believe that we're on track that as we exit 23 and added to the beginning of '24, that portfolio is approaching breakeven. Good morning, everyone. Just back to the growth over market, I thought in 2022, there was almost like a 4-point benefit from commodity recovery bedded within your revenue growth. So I do just want to clarify that the 2023 high single-digit 8 points of outgrowth, that, that does not include any ongoing commodity recovery, cost recovery type benefit? That's correct. I mean pricing is not a net tailwind in that -- effectively that organic growth number as you look at the 2023 guide. Okay. Understood. And then just back to the EV profitability time frame. Any -- given the $60 million to $70 million R&D step-up, I think previously, you guys have talked about maybe late '23, early '24 in terms of achieving breakeven for the business. What does that time frame look like now given better visibility on the R&D commitments you have? I think as I was just mentioning to Emmanuel, it's essentially unchanged. I mean we think last year and heading into the beginning of this year was really the inflection point of the business from an electrification standpoint. We leaned forward pretty significantly last year with a $150-plus million step-up in eProducts related to R&D. And now as we head into 2023 and you're seeing all that EV-related revenue growth coming through and the contribution coming on that revenue growth that contribution margin growth this year is outpacing the growth in eProducts R&D and continues to put us on pace, as I mentioned, to Emmanuel for us to be approaching breakeven as we exit '23 and enter the beginning of 2024. Got it. And just any clarity on what the SpinCo's targeted net leverage could be? I know you've previously communicated a lot have a healthy cap structure. Just curious if there's a finer point on that. I'm not going to provide any more color on that at this point. And we're still on target to execute the spin in late 2023. And as we approach the spin-off date, get closer to that, you should expect that both companies are going to hold investor days, at which point in time we'll provide more clarity around the financial outlook and capital structures of both businesses. But the overall concept is as it relates to both NewCo and BorgWarner on a go-forward basis that we're going to continue to maintain moderate levels of leverage in a way that supports the ability of both companies to execute their respective strategies. Good morning, everybody. Fred, you feel better. Kevin, I think I have a few questions for you. First of all, is it correct that already a significant amount of additional inflation 2023, but you are not assuming any real recovery in terms of incremental pricing on that? And that if you do achieve incremental recovery, that would actually be accretive to your revenue forecast and your earnings forecast. Am I understanding that right? I think -- I mean, the way to think about it, we exited 2022 at a level of pricing from the supply base and pricing with the customers that we think is likely going to continue at or around that level heading into 2023. And that's effectively what's underlying the guide. Okay. So in other words, you already had this from the beginning of the year. There's no like spillover effect from negotiations that you had benefited from over the course of the year or in the middle of the year last year? I think the spillover effect is what I mentioned with respect to my comments about the potential volatility in margins in Q1, as we exited -- as we negotiated with our customers in 2022, the focus was really on how we make sure that we're recovering a fair share of the inflationary impacts we were seeing in 2022. And as we head into 2023, we would discuss with our customers and our suppliers, the extent to which some of those pricing increases need to continue to offset the inflationary environment. And so we could see a little bit of choppiness in Q1 as we go through some of those discussions. But overall, our outlook for the full year is that we don't expect to see a material impact from the net pricing environment on a year-over-year basis relative to '22. Understood. Can you maybe clarify what the magnitude of the inflationary burden is for you that is already embedded in your numbers and you're seemingly offsetting in part through additional productivity. Is it correct that the scope of that inflationary burden is beyond parts and materials like it's extending to things like energy, labor and other factors at this point? Yes. That's fair to say, Rod. I mean, what we've disclosed to date is that the biggest impact we see is really on the material cost inflation side and the net impact on our P&L on material costs from last year, the cost net of recoveries from customers was about $90 million of headwind. But obviously, we have other productivity issues that we're managing through from a labor, freight and other things. I just wanted to follow up on something you had in your other investment banks outside of the response you showed here. I mean, it shows like the content per vehicle opportunity all on EVs through 2025 and what you've developed through your acquisitions. But I'm just curious, as we're looking at a big chunk of the business still being ICE. Just curious if you had a view of how you think about the content provision on an ICE vehicle developing through 2025 and 2030 in million similar ways as you showed the EV content per vehicle? Yes. I would say if you look at 23, the ICE products, whether in pure combustion powertrain or in hybrid powertrain or our positive contributor to the outgrowth. So we see still a lot of pull from the market for our energy-efficient ICE types of products. Okay. And also, I mean it looks like in the slides, you're kind of indicating the breakeven on an operating basis and EV's occurring sometime between '23 and '24, roughly just in the slide that you showed. When do you think that the returns on that business start to become -- return on invested capital starts to become sort of adequate? is it looks like it's '24, '25, '26 that you kind of highlighting the margins might get closer to "normal". I mean when do you think the return on invested capital is sort of an adequate level for you? So John, maybe I start and turn it over to Kevin. The EV products that we are booking announcing are going through the same ROIC threshold at appropriation request processes than any other products. And so the ROIC program by program use there. There's no doubt about that. Not from a timing standpoint, I'd turn it over to Kevin… No. I think that's the key point. We price all of these programs so that on a stand-alone basis, they're profitable, as we've mentioned in the past, that what makes the e-business a little bit different than some of our other businesses, our foundational businesses today is that to drive the revenue growth in these product categories, we have to invest a lot in upfront, eProducts-related R&D. And so that provides an overhang to the in-year margins any given year. And you see that this year, even in our '23 guide. We have good levels of conversion that we're pretty happy with. But we're continuing to invest another $60 million to $70 million to support new business wins 3, 4 and 5 years out. And so as long as we continue to see the prospects for growth in this business, we're going to continue to invest in the eProducts related to R&D to make sure that we have long-term viable business here. And again, as long as those programs are all individually meeting our ROIC targets on a stand-alone basis, we're very happy to continue to invest in that R&D. And maybe just lastly, I mean to kind of put this all together, I mean, it looks like the margins on the ICE business in '23 will be 12% to 13%, maybe even there as we think about the aggregate margins being in the 10% range, do you think we're at a point where those ICE margins may improve even a bit over time and that this transition is kind of hitting sort of a low point on margins and returns in '23? Or do you think that's still in front of us? Because I mean, you match part that we show on the EV business getting a breakeven sometime between '23 and '24 roughly, kind of indicates that we may be hitting the low point and that as we get through '24, things may actually sort of on an average basis far to improve. I know we're kind of looking far out, but people are just trying to really understand what this transition between EV to return? John, our product leadership and scale in the foundational product is very, very strong. And I would say the margin will remain top quartile and strong as you've seen in the past. Also, don't forget that the foundational products that we have an impact on our EV growth and one of the announcements that we made this morning around the battery cooling plates is a great example of that. We're leveraging product foundational know-how with cooler applications in the world of combustion. We are leveraging processes, know-how around brazing around leakage control from our proving technology into the battery cooling plate. So this is a great example of losing foundational know-how to create a new organically developed product for the EV world. Okay. But, is it fair to say, I mean, given the volatility that's going into the markets right now and this transition and just kind of being the last year where you might be using money based on what you're showing on an operating basis that we may be looking at a sort of a point in time or '23. I know it's hard to say, but just in the transition conceptually may mark one of the -- it may mark a low water mark in margins that's going through this transition all else equal? John, we are approaching breakeven. Is it end of '23? Is it beginning '24? I mean it's tough to say. But it is absolutely clear that now the turning point both from a revenue and a path to breakeven, that's absolutely pretty visible. Fred or Kevin, it'd be great to just get your perspective on what you're seeing industry-wide in terms of the push and pull between 400-volt and 800-volt architectures. Do you think the consensus, if you will, is moving more towards 800-volt? And just curious with what happened with the customer award that you mentioned today? Does that animate this industry-wide dynamic at all? Look, the two voltages will leave and have a space in the market. 800 volts leads to a few efficiency improvements, but also comes with additional features and cost and we believe that depending on the end application, the vehicle type and the price point that OE wants to set the vehicle and both technologies will remain active. And what we're doing at BorgWarner is really focusing on the module design of those inverters so that we have building blocks depending on level of voltages or silicon, silicon carbide level of output necessary so that we are using a modular approach that will be pretty agnostic to the voltages. Good. Appreciate that. And then for my follow-up, I was just hoping you could comment on the Wolfspeed partnership that you announced in November, specifically around your ability compete incrementally and ensure supply for and after that partnership? And most importantly, to what extent you think your supply chain position now could be advantaged versus peers in silicon carbide? So very, I think with the fact that we've secured a corridor of supply that is pretty significant and can meet our expectations going forward and our fast growth, 2 points. One, this supply agreement is not exclusive meaning we can work with other silicon carbide supplier should we want, but also if our OEM want us to work with other silicon carbide suppliers, the door is absolutely open, too. So I think we secured a significant capacity corridor, but we also have the ability to be flexible to decide who we work with down the road. Fred, I hope you're feeling better. Buddy, I hope you feel better. I noticed on Slide 8, the cooling plates is kind of so beautifully nesting that 4680 cylindrical cell. I'm curious what you're thinking about pouch and prismatic versus cylindrical because it seems like given some reports around GM, maybe not doing their fourth plan or possibly changing form factor and Tesla ramping up 4680 and getting others to make it that, that might be -- become more of an industry standard, even though there's still a lot of form factors? I was curious whether you're witnessing a bit of a gravitational shift or momentum, not just from Tesla to 4680, but others as well. Is that possibly what's going on? Because I thought that the argument was pouch and prismatic was more energy dense but are some of your products like your cooling plate able to get around that with the cylinders and get the better energy density with the cylinder and versus pouch? Yes. So first, what I would say that, first, in the commercial vehicle side, where we are really active from a battery pack manufacturer standpoint, we see cylindrical as the mainstream. In pass car, where we won that business with a major German OEM, we have different technologies that will be in the marketplace. What we've created here is focused on cylindrical. I've got to comment on the applicability to other technologies. But to answer your question simply on CV, which is cylindrical cooling mainstream and on the different views. Again, different technologies will be hitting the market, and they all have their pros and cons. The only thing that I would add, I mean, those battery cooling plates for those types of battery architecture, are generating a pretty significant market opportunity, and we estimate that market opportunity to be around $3.5 billion in 2028 already. So it's not as significant. Got it, Fred. Just a follow-up. The world really changed, continues to change in terms of cost of capital, interest rates consumer slowing Tesla's dramatic price cuts, et cetera. And your electrification portfolio gives you a really long-dated view into the forward. Are you seeing any hesitation or maybe pushing out of the commitment from OEMs on EV investment at the margin. I know they're still committed, but I didn't know if there was a rate of change that might have -- you might have picked up on in your forward over the last quarter or so. No. I would say to the contrary, I see accelerate program, a tremendous focus on management, both sides, OE and Tier 1 to launch. And also, as I mentioned in prior calls, when we book a program a few months after, we're talking about capacity increase. What we see, though, is that also from the customer side, what we see is that they want partner with someone who can be impactful on the east side but also on the foundational side so that we pivot together. I'll stick with the battery theme for a minute here. So just given BEV is driving the majority of the organic growth outlook for this year, you mentioned battery is a significant contributor this quarter. And then you also called out higher growth expectations at Akasol, I guess, over the medium term? And just help us understand what's driving your increased expectations for your own battery business? Is it just higher sell-through on the commercial EV side? Or are you picking up share gains in new platforms? No. It's simple. We have multiple customer awards for us higher volume from our core customers, and that's leading to Akasol moving slightly -- from under slightly $300 million last year to about $1 billion in 2025. And the impact that you see this year is part of that glide path. And we're very pleased with our inverted role too and also very pleased on our motor or other wins across the portfolio. But on cases, about $1 billion already in 2025. Okay. And then just a follow-up. I'm curious how much of your 2023 CapEx might be allocated to battery manufacturing in the U.S. And how the 45x production tax price that might benefit you if you're making any investments. Yes, because of the acceleration we're seeing in the revenue in Akasol, as Fred mentioned, even up through '25, we are accelerating some of the investments that we're making both in Europe and North America related to that business. And then we're also seeing part of the increase in capital expenditure on a year-over-year basis related to our other electrification businesses on the light vehicle side. So definitely a contributor. And as it relates to North America, we're looking at the tax credits and how those might apply to us from a production standpoint as we go through '23 and beyond. I mean there's some of that, making sure that we understand any clarifications that need to be had, but we're pursuing the credits that we think were -- that are available to us based on the production that we are executing here in the United States. When you speak to your auto OEM customers, what do you think the gating factor is to light vehicle production volumes in 2023? And to what extent is volume gated by supply as opposed to demand? The semiconductor availability is still alive, unfortunately. And I would say, to answer your question, it's more capped from a supply availability standpoint and from a demand standpoint in 2023. And second question was just in terms of how customers have responded to the announced separation of the business. You spoke about all the great momentum Werner is having on the product side. I'm wondering though, have you seen any change in customer engagement to design in NewCo products with the announced separation? No, we've obviously talk to almost all our customers, and they understand. And we're actually happy to see those two strong companies being able to execute their own respective strategy and be happy with all with the announced spin-off. There's no noise from that are nil. Now I'd like to thank you all for your questions today. Again, we apologize for the technical difficulties earlier in the call. If you have additional follow-ups, if few reach out directly to me and my team. With that, operator, you can conclude today's call.

EarningCall_67

Good day, everyone. Welcome to VeriSign's Fourth Quarter and Full Year 2022 Earnings Call. Today's call is being recorded. Recording of this call is not permitted unless preauthorized. At this time, I'd like to turn the conference over to Mr. David Atchley, Vice President of Investor Relations and Corporate Treasurer. Please go ahead, sir. Thank you, operator. Welcome to VeriSign's Fourth Quarter and Full Year 2022 Earnings Call. Joining me are Jim Bidzos, Executive Chairman and CEO; Todd Strubbe, President and COO; and George Kilguss, Executive Vice President and CFO. This call and presentation are being webcast from the Investor Relations website, which is available under About VeriSign on verisign.com. There, you will also find our earnings release. At the end of this call, the presentation will be available on that site, and within a few hours, the replay of the call will be posted. Financial results in our earnings release are unaudited, and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on Form 10-K. VeriSign does not update financial performance or guidance during the quarter unless it is done through a public disclosure. The financial results in today's call and the matters we will be discussing today include GAAP results and two non-GAAP measures used by VeriSign: adjusted EBITDA and free cash flow. GAAP to non-GAAP reconciliation information is appended to the slide presentation, which can be found on the Investor Relations section of our website available after this call. Thank you, David. Good afternoon to everyone, and thank you for joining us. I'm pleased to report another solid quarter of operational and financial performance for VeriSign. Throughout 2022, we delivered strong financial results while continuing to strengthen our critical Internet infrastructure. We complied with the high operational standards required by our ICANN agreements and extended our record of .com and .net DNS availability to over 25 years. I'd like to thank our team for their dedicated efforts, which enabled us to realize these results. The critical infrastructure we operate provides to the domain name system navigation service which people around the world depend on for commerce, work from home, education, healthcare and much more. During 2022, we acknowledged the uncertainty that macroeconomic and other challenges beyond our ability to influence presented and we said that we would focus on what was within our ability to control. We also indicated what that meant. First, reliably maintaining operating and investing in our critical Internet infrastructure. Next, exercising careful expense control where appropriate. And additionally, it meant keeping focused on long-term value creation and efficient return of capital. During 2022, revenue grew 7.3% year-over-year and operating income by 8.8% year-over-year. Additionally, shares outstanding at the end of 2022 decreased by 4.8% from those outstanding at the end of 2021. Our financial and liquidity position remained stable with $980 million in cash, cash equivalents and marketable securities at the end of the year. During the full year of 2022, we repurchased 5.5 million shares for $1 billion. At year-end, $859 million remained available and authorized under the current share repurchase program, which has no expiration. At the end of 2022, the domain name base in .com and .net totaled 173.8 million domain names with a year-over-year growth rate of 0.2%. In the fourth quarter, there were 9.7 million new registrations compared to 9.9 million last quarter and 10.6 million in the year ago quarter. While there are many factors that drive demand for domain names, we saw lower new registrations during 2022 as a result of factors that I've already mentioned in prior calls. These include pandemic-driven acceleration of new registrations in 2020 and 2021 which has subsided, global macroeconomic headwinds, reduced new registrations from China and lower first-time renewal rates. We believe that the renewal rate for the fourth quarter of 2022 will be approximately 73.2% compared to the 73.7% final renewal rate last quarter and 74.8% a year ago. For the full year 2022, the renewal rate for previously renewed names remained similar year-over-year. However, first-time renewal rates were lower year-over-year with the largest single driver being names renewing from China, which were registered during 2021. Looking to 2023, our expected 2023 domain name base growth rate is between 0% and 2.5%. This guidance reflects our knowledge about our domain name base, our channel and the broader macroeconomic backdrop. As announced in today's earnings release, we have given notice of a price increase of $0.62 to the annual wholesale price for .com domain names, which raises the price from $8.97 to $9.59, effective September 1, 2023. Even after this increase, we believe .com will remain highly competitive with other TLD choices. As a reminder, any of our domains may be registered for terms of up to 10 years at the current price. While we do not guide to pricing changes, I can say, as I did last year, that under the limited pricing flexibility we have the wholesale price of a .com registration cannot exceed $10.26 until at least October of 2026. Turning to web. The parties made their submissions to ICANN during Q3 and we are still waiting for ICANN to complete its process. And now I'd like to turn the call over to George. I will return when George has completed his financial report with closing remarks. Thanks, Jim, and good afternoon, everyone. For the year ended December 31, 2022, the company generated revenue of $1.425 billion, up 7.3% and delivered operating income of $943 million, up 8.8% from 2021. Operating expense totaled $482 million and was up 4.6% from the prior year compared to a similar 4.5% increase experienced in fiscal 2021. The full year 2022 operating margin was 66.2% and free cash flow was $804 million. For the quarter ended December 31, 2022, the company generated revenue of $369 million, up 8.5% from the same quarter of 2021 and delivered operating income of $245 million, up 10.5% from the same quarter a year ago. During the fourth quarter of 2022, we executed a transition of the .tv agreement to a new registry operator. As the proposed contract terms in the new .tv request for proposal, no longer aligned with our strategic framework, we decided not to participate in the RFP. Revenue related to this agreement during the full year of 2022 was approximately $19 million, of which approximately $10 million was recorded in the fourth quarter. Operating expense in Q4 totaled $124 million compared to $118 million a year earlier. Net income in the fourth quarter totaled $179 million compared to $330 million a year earlier, which produced diluted earnings per share of $1.70 for the fourth quarter of 2022 compared to $2.97 for the same quarter of 2021. As a reminder, net income for the fourth quarter of 2021 included the recognition of a deferred income tax benefit related to the transfer of certain non-U.S. intellectual properties between wholly-owned subsidiaries which increased net income by $165.5 million and increased diluted earnings per share by $1.49. Operating cash flow for the fourth quarter of 2022 was $217 million, and free cash flow was $209 million compared with $206 million and $193 million, respectively, for the fourth quarter of 2021. I will now discuss our full year 2023 guidance. Revenue is expected to be in the range of $1.485 billion to $1.505 billion. This revenue range reflects our expectation that the domain name base will grow at a rate between 0% and 2.5% as Jim mentioned and is also impacted by the transition of the .tv agreement at the end of 2022. Operating income is expected to be between $985 million and $1.05 billion. Interest expense and non-operating income net, which includes interest income estimates, is expected to be an expense of between $35 million to $45 million. Capital expenditures in 2023 are also expected to be in a range between $35 million to $45 million. The GAAP effective tax rate is expected to be between 22% and 25%. In summary, VeriSign continued to demonstrate sound financial performance during the fourth quarter and the full year of 2022, and we look forward to continuing our focused execution in 2023. Thank you, George. We believe our strategic focus and disciplined management served us well during 2022, allowing us to deliver solid financial results in a challenging environment as the economy struggled to recover from disruption caused by the pandemic. VeriSign's mission is about security and stability, not only in the operation of our critical infrastructure, but financial stability is also important for our customers, employees and shareholders. Today, we reported profitable revenue growth for 2022, and we guided to profitable revenue growth for 2023. This was possible through modest domain name base growth, limited pricing flexibility and responsible expense management. We believe that the long-term fundamentals of our business remain strong. As I said earlier, our strategy prioritizes reliable, uninterrupted operation of our critical infrastructure, along with long-term value creation and its efficient return to shareholders with consistent, efficient management. We believe this strategy will serve all of our constituents well for the long term, and you can expect us to maintain this focus. Thanks for your attention today. This concludes our prepared remarks, and now we'll open the call for your questions. Operator, we're ready for the first question. Appreciate the opportunity to ask a question. First one for me is, just around the macro, obviously, second half of last year you guys really focused on kind of what you can control operationally, a lot of moving parts in the macro. And I think that, that approach really served you well. Looking out here into '23, also obviously, tremendous amount of moving parts, layoffs, macro uncertainty; on the other hand, China reopening. So just curious if you could add a few finer points to your thoughts relative to the outlook, having seen many cycles as well as to the domain guide that you guys offered of the 0% to 2.5%? And then I had a quick follow-up. Okay. Thanks for that question. Well, first, for 2022, looking back on that year, as soon as we recognize that the pandemic-driven growth was subsiding, we began planning for what I'd called responsible expense control, meaning that, first and foremost, we make all necessary investments in our infrastructure and then look everywhere for efficiencies. As far as layoffs, we did not, as many companies did accelerate hiring during the pandemic-driven growth period. And I would also point out that the average employee tenure at VeriSign is over nine years. So we're fortunate to have a loyal experienced and stable employee base. I should also point out, we also try to take advantage of opportunities to return value to shareholders with more effect as we did in 2022, retiring nearly 5% of our shares outstanding. These are all the parts of our business that we can control. So that's where we focused in '22. Looking forward, we're hearing what you're hearing. Many economists and CEOs talking about 2023 say that the macroeconomic and geopolitical factors suggest some continued uncertainty. I suppose it should be no surprise that the recovery from the pandemic and with all the global impact in '20 and 2021 is going to take more than one year to fully recover. So it seems prudent to factor that uncertainty into our guidance for 2023, which we did. And as far as strategy, what you can expect from us in 2023 is a continuation of our 2022 strategy. It's actually not that different from what we try to do every year. Okay. Great. Thanks, Jim. And a bit on the road marketing for the last couple of weeks and particularly in the news now is ChatGPT. And I just wanted to get your thoughts relative to that. It's obviously very early, and we're in the high stage around this new technology now. And we've seen -- I've seen with you guys many times over the years where there have been calls for the demise of the domain. But I just wanted to get your preliminary thoughts relative to ChatGPT and potential risks, it seems to direct people towards information rather than directing them towards websites at least at the outset and just wanted to get your thoughts? Okay. Well, that's an interesting question. Well, first of all, I'll say this. I mean, right now, ChatGPT looks like a very interesting and potentially beneficial thing for us. We are actually looking at it quite closely. We have a product called NameStudio, which we use in some of our channel users to help them when they go to register a domain name, if it's already taken by somebody else, which happens. ChatGPT and NameStudio will actually help you find a similar and equally good or maybe even better name and we're looking closely at the ChatGPT to see about using its capabilities to enhance what NameStudio does. So I see it as actually a benefit to those efforts. I would say, ChatGPT similar. I mean, I guess, at one point, a lot of people said, "Well, voice assistants are going to replace the DNS" I just -- that one had me shaking my head. Voice assistants go out and collect data and report it to you. And the data that they collect is found by searching the Internet for the relevant data that they seek. And that's navigated using the DNS. So they're completely complementary. Maybe just starting on China. You just mentioned it before a little bit. But given the reopening there and some of the factors, think about some of the puts and takes that are kind of driving -- moving the needle there or impacting your expectations for next year? Well, I guess just -- well, first of all, just understanding. Oh, I'm getting an echo there. Do you hear that? Okay. All right. Maybe there was some feedback there. So in 2022, we did see a lot of China names that were registered in 2021, renewing with lower first-time renewal rates. That was a factor in 2022. And also, China, as you know, has treated the pandemic differently. It's somewhat unique in that sense. And those are the factors that contributed to lockdowns, which are ongoing. There's zero COVID policy increased regulation, economic uncertainty, the proportion of names renewing from China that's higher. We mentioned last year that we did see some signs of returning. I think my comments about the -- what -- if there's any consensus about 2023, I think it's that uncertainty still exists and that the recovery is maybe a little bit slower than people thought. So we're sort of just factoring that in. China is certainly part of it. But things are changing in China. I think it's too early to say exactly what that impact will be. But certainly, the economy seems to be moving in a different direction there with some of the COVID restrictions lifting. Maybe after a quarter next quarter, we'll be able to tell you more about what that's doing to the 2023 outlook. And obviously, we'll update our guidance if we see something meaningful that we consider worthy of reporting and representing a trend. At this point, I think it's just too early to say. Okay. So one -- a couple of questions we get on domains. One is, I know the environment was different in the early part of the pandemic. But I get the question on counter cyclicality. We're seeing a lot of layoffs in the tech world right now. And often that can lead to kind of new business formation, people starting projects. Are there any indications of that are you seeing that? Is that factored into your guidance at all? And then the other thing people kind of ask us about regularly is how we think about normalized domain growth going forward, right? We've got some macro headwinds here, but prior to the pandemic, domains were growing at about 4%, plus 5% or let's just call it 4%, growing about 4%. We've been well below that now for duration this year. Our guidance is well below that for next year. How do you guys think about a normalized growth rate for domain? Return back to the levels of pre-COVID? Or are there other factors to think about? Well, let's see. I think there's a couple of questions in there. But I guess, first of all, we -- to answer directly part of your question, we have not tried to assess and factor in the impact of layoffs the new business starts might have, although that is a data point that we do track. I think you can map new business starts going back to 2020 with a fairly good sized jump then. And some elevated activity in 2021, and then you see it declining in 2022. So that does tend to correlate a bit to the domain name activity and registration activity that we saw what. That's going to mean for the future? I'm not sure it's not a planned part of our guidance for 2023. I will just say, and I'll invite George to comment as well. But we think that the fundamentals of our business and the long-term prospects for the business are fundamentally strong. Domain names are established, have tremendous utility and tremendous value and registrations. We think long-term, it's a great business to be in. We think it will return to pre-pandemic levels. But 2023 is a tricky year to predict. So we haven't gone as far as predicting a return at that point. So I do think, one of the overriding sort of macro factors and all of this is just a complicated longer recovery from COVID than people thought. I think it's pretty clear that we're seeing that some of the ups and downs and the bumps that we're encountering. George, do you want to add anything to that? The only thing I'd add, Ygal, is that when you look at our business and what we've previously indicated, we look at factors such as Internet adoption, Internet penetration and the growth of e-commerce influencing our business. And I think if you look back during 2020 and 2021, clearly, we saw a lot of those statistics increase significantly. And while they've come down, there's still, I think, a longer growing trend that I think bodes well for domain names. Yes. And I would just add one statistic, one trend is that even the names that we registered in 2020 and 2021 exclusive of some of the China names that are now renewing for the second time or even the third time, are renewing at the traditional previously renewed rate, which is in the mid-80s. So I think that's a good indicator about the long-term strength of the business. Great. That's helpful, and I agree on the trends on e-commerce and all that. Last question. The operating margins, if I'm looking at it correctly, since have come in quite better than where the guidance applied for 4Q. Can you just talk about what is driving that and how that fits into the expense control that we're talking about? Or is it a separate thing? Yes. Thanks, Ygal. I think a couple of things. As I mentioned in my prepared remarks, we did during the year, it was actually late in the fourth quarter, transition out of .tv management at TLD and in doing so, we -- as we completed all our obligations there, we did recognize about $8.4 million of deferred revenue in the fourth quarter. Again, total revenue for that contract in 2021 was about $19 million. But as Jim mentioned, we -- in the beginning, I would say, in the second quarter, we started looking pretty closely at our expenses and did more responsible management of those expenses, and we were able to get those expenses down. Overall, our expenses grew by about 4.6% this year which is similar to last year. As far as the fourth quarter, we did do a little bit of seasonal marketing more than we had done in the third quarter, in the fourth quarter. And so, some of the increase there sequentially was a result of some of those marketing activities. Thank you, operator. Please call the Investor Relations department with any follow-up questions from this call. Thank you for your participation. This concludes our call. Have a good evening.

EarningCall_68

I would now like to turn the conference over to James Doyle, Head of Corporate Development and IR. Please go ahead sir. Thank you for joining us today. Welcome to the Eneti fourth quarter 2022 earnings conference call. On the call with me are, Emanuele Lauro, Chief Executive Officer; Robert Bugbee; President; Cameron Mackey, Chief Operating Officer; Hugh Baker, Chief Financial Officer; Sebastian Brooke, Chief Operating Officer of Seajacks. Earlier today, we issued our fourth quarter earnings press release which is available on our website eneti-inc.com. The information discussed on this call is based on information as of today, February 9, 2023 and may contain forward-looking statements that involve risks and uncertainty. Actual results and events may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release issued today, as well as Eneti Inc.'s SEC filings which are available at eneti-inc.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the Internet, and it is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at eneti-inc.com on the Investor Relations page, under Reports and Presentation. The slides will also be available on the webcast. After the presentation, we will go to Q&A. Thank you, James. And welcome everybody to our fourth quarter and full year 2022 results. In the fourth quarter, the company generated around $46.5 million of revenue and around $12 million of net income, which is a significant year-over-year improvement. 2022 was a profitable year for Eneti. We've generated around $200 million of revenue and more than $100 million in net income. This includes a realized gain on the divestiture of the STNG investment. It was also a productive year. We confirmed our thesis, significant demand for offshore wind and constraints in the WTIV supply create tremendous potential for increasing day rates, cash flows and returns in this space. In December, we've announced the initial employment contracts on our first newbuilding vessel, a leading day rate in our industry and one, we feel reflects the tightening market for our assets that we are experiencing. We are in discussion to secure the initial employment contract for our second newbuilding, which we'll deliver in 2025. And at the same time, we continue to build our backlog, even on our smaller assets with the three NG2500s, which are experiencing an increase in both, utilization, as well as day rates. Our balance sheet is in a much stronger position than it was at the beginning of -- or a year ago. In 2022, we completed the restructuring of the Seajacks' balance sheet, with a new loan facility, which reduced the company's overall leverage, as well as its borrowing costs. Through strong cash flow from our existing asset base and the sale of our investment in STNG, we have maintained a healthy liquidity position. And today, with €130 million in cash and a conservative leverage, we feel well positioned to capture the opportunities that 2023 will present to us. We are now focusing on closing our previously announced underwritten proposal for a €436 million loan facility to finance up to 65% of the purchase costs of our newbuilding assets at Daewoo. At the same time, as mentioned a minute ago, we're looking at securing initial employment on our second newbuilding. And once these two milestones will be achieved, I expect the company to start looking at the next opportunities and focus on further development. Much of the progress we are making today has yet to be realized, but it will greatly benefit the company in the coming years. We remain and are excited to capitalize on these opportunities, the good news ahead and our role in the transition to a cleaner and more sustainable future. Thanks for your time. My opening remarks are over and I will now turn the call to Sebastian and James which will walk us through the slides material. Sebastian or James? Great. Thank you, Emmanuel. Jay, if we could go to slide 7 please. As Emmanuel indicated, I'm Sebastian Brook, I'm the COO of Seajacks, which has been installing wind turbines since 2009. Seajacks is the operating platform of Eneti and is responsible for operating and contracting the fleet of five vessels that are currently on the water and the next two generation newbuild installation vessels, which are scheduled to deliver in the second half of 2024 and the first half of 2025, respectively. We've been busy building backlog over the past two years and you can see from the chart on the bottom left that we've not only increased revenues through new contracts, but also through extensions of contracts beyond their original contractual periods. In Q4, we negotiated extensions for one NG2500 class vessel, which has resulted in additional revenue generation of €2.9 million over the fourth quarter of 2022 and first quarter of 2023. In addition, we extended the contract on the Scylla, which resulted in additional revenue generation of €2.6 million in the first quarter of 2023. The Gantt charts on the right-hand of this slide, shows that employment has already been secured for our two installation vessels Scylla and Zaratan through the end of 2023 and we have numerous conversations going on about potential follow-on work in Europe, APAC and North America for 2024. The outlook for the smaller vessels remains very positive. And while the NG2500s are no longer installing turbines the demand for turbine maintenance, hookup and commissioning of offshore wind substations and the maintenance and decommissioning of gas platforms continues to increase. Case in point, during Q4 we signed two new contracts for one of the NG2500 vessels for between 75 days and 102 days of employment, which will generate between approximately $5.7 million and $7.1 million of revenue in 2023. We continue to benefit from the reduction of supply of NG2500s and similar units in the North Sea in recent years. You may recall that just a couple of years ago there were six similar vessels operating in the region, but this number has reduced to four. Improvements on the demand side stem from the fact that many of the smaller turbines are approaching 10 years in the water and require increasing levels of maintenance, the number of substations requiring hook-up commissioning and maintenance in the North Sea continues to increase in line with installed capacity and that the recent energy crisis has prompted utilities and operators to maintain the critical gas infrastructure in the region. Slide 8 please. Eneti's core market is wind turbine installation and based on industry fundamentals the outlook here is bright. Why is that? Firstly, we are operating in a growth industry. While analysts may have different views on exactly what the growth rate is they're all agreed that growth is robust and the revisions to forecasts are up rather than flat or down. This will lead to an increasing demand for installation vessels. Secondly, there are significant barriers to entry. So the increases in supply are relatively muted and typically limited to companies with an existing footprint in the offshore wind industry. Thirdly, CapEx associated with WTIV installation is relatively low around 2% of the total spend of an offshore wind farm. So increases in day rate are not going to jeopardize the financial viability of the wind farm. Eneti is well-positioned to benefit from these positive market fundamentals not only with Scylla and Zaratan, but also the two newbuildings that are scheduled for delivery in 2024 and 2025. Slide 9 please. As we mentioned, Eneti's two newbuildings are scheduled for delivery in the second half of 2024 and the first half of 2025, respectively. As Emmanuel mentioned, we signed the initial employment contract for a newbuild, which will start early in 2025. The contract will be performed by the company's first newbuild vessel Nessie, which will be delivered in the fourth quarter of 2024. The engagement is expected to be between 226 days and 276 days and generate approximately €60 million to €73 million of net revenue after forecasted project costs. This equates to an effective day rate of €260,000 per day after project cost. This contract confirms the value capability and flexibility that these newbuild assets provide to our customers. We are obviously in contractual discussions for our second newbuilding and believe that market fundamentals will enable us to deploy Siren on attractive terms. As for the longer term, contracting activity remains high for the newbuildings and we continue to see serious interest for work in Asia-Pacific, Europe and the US through to the end of the decade. Clients continue to look to secure capacity early in a market that is predicted to have a shortage of vessels as we move into the second half of this decade. We remain focused on finding the right contracts for these highly capable vessels and we believe that, this strategy will enable us to generate the most attractive returns for our shareholders. Thank you, Sebastian. Slide 11, please. Fourth quarter revenue was $46.6 million, which was higher than expected and the result of optional days being exercised, as well as extensions of contracts that were set to finish during the fourth quarter. Given the additional operating days and the extensions, $5 million of project costs that were expected to occur in Q4 will occur in Q1 this year, as these vessels continue to work at the end of the year. We expect $9.7 million in project costs in the first quarter. Q1 is a slower part of the year and we expect $9.4 million in revenue during the first quarter, which includes optional days that have already been exercised by the customer. For the first quarter, we expect higher OpEx and would recommend using a daily OpEx of $65,000 on the Scylla; $52,000 a day on the Zaratan; and $30,000 a day on the NG2500s. The increase in OpEx is due to maintenance, which was postponed as a result of extensive work history on the vessels throughout 2022. As Emmanuel mentioned, 2022 was a profitable year. Slide 12 please. The company generated almost $200 million in revenue, and $63.3 million in operating cash flow. Excluding, the realized gain on the STNG shares, the company generated $85 million and adjusted EBITDA of 42% EBITDA margin, and $49 million in net income. It was also a productive year. Slide 13 please. From September 2021, the company refinanced all the legacy debt inherited from our acquisition of Seajacks. We reduced the leverage from $198 million to $66 million today, lowering our borrowing costs and simplifying the balance sheet with one loan facility. Our balance sheet continues to improve and we are pleased with the conservative leverage and a healthy liquidity position. Slide 14, please. To-date, we have paid almost $100 million of installment payments at our newbuilds. On the financing side, we have received an underwritten proposal from Credit, Agricole and SocGen for a $436 million term loan facility or 65% purchase cost of the newbuilds, which we are focusing on finalizing. Net of newbuilding finance the company has $120.3 million in remaining CapEx for its newbuilding program. To the right, you can see, our CapEx schedule, the company has $99 million in CapEx payments this year. Slide 15 please. December 2022, we announced the first employment contract on our newbuild, which equates to a day rate of €265,000 per day or $280,000 per day at today's exchange rate. To the right is a newbuild sensitivity analysis, at 85% utilization for the year a day rate of $280,000 per day would equate to $70.4 million in EBITDA, or a 21% cash-on-cash return. This day rate confirms our thesis increased demand for offshore wind and constraints in the supply chain have the potential for a higher rate environment. We are both excited and focused on securing the employment contract for our second newbuild. Yes. Thank you and good afternoon and good morning, everybody. And congratulations on the contract for the first newbuild the Nessie. Sebastian, I was hoping you could talk a little bit more about potential opportunities for the second vessel and really kind of looking for an overview of what that newbuilding market looks like. Clearly Eneti has a vessel. There's a couple more but not a lot. Could you kind of like give talk a little bit about the broader strokes of how the offshore market is shaping up for 2025 and how you're thinking about that? Yes. Thanks for the question. So I think we're in part of a structural change where as I said previously we've been in this kind of two-dimensional European market for the prior decade. And we're now seeing demand coming from kind of numerous regions, Asia Pacific, multiple regions in Asia Pacific, the US, Europe, and every month we hear about another country that has kind of aspirations in offshore wind. And I think as part of that the longer-term kind of macro top-down picture is very positive. And so the level of inquiries that we see continues to increase. And again, just from a top-down approach, I think that the fundamentals are very, very strong, and that manifests itself by clients looking to secure capacity earlier, because they may be concerned that they won't be able to meet their own time lines and again, just strengthening fundamentals for us. And just under that backdrop and I think Emanuele talked about the future opportunities. As we think about the ability to add capacity realizing it's early 2023. Could you talk a little bit about if one were to order a newbuild WTIV, clearly the prices you paid were pretty attractive. Could you talk a little bit about maybe where current pricing is on newbuilds today? And then where we should think about those delivery windows potentially being. Happy to Emanuele. Greg, since sort of the start of the pandemic and all the inflationary pressures around shipyards, you would have expected to see prices increase by somewhere between, I don't know, 20% to 25% and the delivery positions move out now to somewhere late in 2026 or even 2027. Thank you. Your three smaller vessels are seeing improving utilization rates, especially looking into 2023. In terms of their strategic value as assets, is there any change on how you currently view them? Hi. Thanks for the question, Liam. There is no change from what we have discussed before. We remain open to explore alternatives on the assets. The good news is that in the -- whilst we are doing that the market fundamentals have improved and so utilization and day rates have. So directionally the market is going up and this enhances and gives us more flexibility in the way we'd like to -- or we will be able to look at divesting from these assets which we have identified as non-core. Great. And on the macro front, in Europe it seems that permitting had been a big gating factor in the development of some offshore wind farms. There was some discussion that the EU is now streamlining that process and making it a little faster to get permitting. Do you see that as pulling in or providing additional opportunity on European offshore wind? I think, generally, from a macro perspective, the amount of activity that we see at the moment kind of underpins not our story but our industry as installation vessel owners. So there's significant demand for the foreseeable future. And that for every decision such as the used decision on accelerating the permitting you're just looking at kind of increased demand. So what's already an attractive market for us in a way becomes even stronger. And I know that permitting has been an issue for actually many countries. There's, some people making sure who are trying to streamline theirs as well. But again, that's just a process and that's a process of making their permitting more efficient and to get these wind farms online quicker. But again, that's incremental demand. So to my point of view even regardless of that we see robust demand for the foreseeable future and that just layers on additional demand. Thank you, Operator. I do not have any closing remarks. I just would like to thank everybody for your time today. And look forward to being in touch separately. Thanks a lot. Goodbye.

EarningCall_69

Good day, and welcome to the Nautilus, Inc. Third Quarter 2023 Earnings Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity ask questions. [Operator Instructions] Please note today's event is being recorded. Thank you, Paul. Good afternoon, everyone. Welcome to Nautilus' fiscal 2023 third quarter ended December 31st conference call. Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer; and Aina Konold, Chief Financial Officer. Please note, this call is being webcast and will be available for replay for the next 14 days. We will be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1:05 PM Pacific Time and may be downloaded from our website at nautilusinc.com on the Investors page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. Please note, we will be comparing results versus last year fiscal 2022 and also versus fiscal 2020, as we believe comparing to the last pre-pandemic period is helpful in demonstrating our growth and progress. For today's call, we have a presentation that management will refer to during their prepared remarks. On Slide 2 is our full safe harbor statement, which we ask everyone to read. You can access the presentation now by going to the Investors page on our website and clicking on Events and Webcasts. I'd like to remind everyone that during this conference call, Nautilus management will make certain forward-looking statements. These forward-looking statements are based on the beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the safe harbor statement and to our SEC filings, which can be found in the Investor Relations section on our website. Thank you, John, and thank you all for joining us. Before I review our Q3 performance, I would like to highlight three key topics we will focus on during today's call. First, through our focus on operational excellence, we have implemented strategic margin management initiatives that drove significant gross profit and EBITDA improvement in the third quarter. Second, we are continuing to face headwinds in our retail channel and have taken deliberate actions to address them and return to positive EBITDA in 2024. Third, we are confident in the long-term opportunity because we are on the right side of industry trends. Turning to Q3, I'm pleased with the results we delivered. Q3 net sales were $98 million with direct sales, up 30% compared to Q3 fiscal 2020. Growth was driven by our broad portfolio of strengthened cardio offerings reinforcing our strategic advantage of being able to offer products in both. Our strategic actions to enhance supply chain and improve our inventory position are yielding margin improvement. As such, gross margins for the third quarter expanded 300 basis points year-over-year, largely driven by our planned improvements in inventory levels. In Q3, we continue to reduce our operating expenses driven by our efforts to optimize and lower advertising spend. These results translated to continued improvement in our adjusted EBITDA, with Q3 adjusted EBITDA loss reducing by 67% year-over-year. We see continued momentum in our differentiated digital offering. We added more than 50,000 JRNY members in Q3, reaching approximately 450,000 total JRNY members, an increase of over 88% compared to the same period last year. Of these members, 156,000 were subscribers, representing 134% growth year-over-year. While we continue to see solid demand in our direct business and with sales up 30% to Q3 fiscal 2020 and momentum on JRNY, the retail headwinds that we've been discussing at length have persisted. This resulted in retail net sales decline of 6% compared to Q3 fiscal 2020, excluding sales related to the Octane brand. Retailers continue to take a conservative approach across many categories, including home fitness, as a result of inventory positions and uncertainty in the near-term economic environment. So while sell through to consumers at retail is progressing, we are seeing lower levels of reorders, which is impacting our sale outlook for our retail segment in the fourth quarter and likely into the first half of fiscal 2024. We have taken additional near-term steps to rightsize our business to reflect our current expectations. With our strong market share and having significantly increased the number of retailers and retail doors over the past couple years, we believe the retail channel will remain an important long-term component of our business model as the macro environment stabilizes. As part of our ongoing commitment to operational excellence, we have driven operational efficiencies across our business, including enhancements to our supply chain, improvements to our inventory management and optimization of our advertising spent. As challenges in the retail business persist, we have taken additional proactive steps to reduce our cost by an expected $30 million on an annualized basis. We operate an asset-light, semi variable operating model, which enables us to adjust our cost structure to align with demand trends. Leveraging the flexibility of this operating model, we reduced our contracted labor. Separately, we also implemented a reduction in our workforce by about 15%. These actions, while difficult, are grounded in our priority to continue to align our cost structure with our revenue expectations and are aimed at driving profitability and improving cash flow. We are also taking the necessary steps to strengthen our balance sheet. We continue to improve our inventory position per our plan, inventory was $77 million at the end of Q3, fiscal 2023 down 40% versus Q3 last fiscal year. And we expect inventory levels to come down further in the coming quarters. We are implementing cost reduction initiatives aimed at improving cash flow and we believe we have the right levers to pull to maintain our balance sheet. We are actively managing near-term challenges within the business while maintaining – while remaining committed to our North Star strategy, which is made up of five key pillars: adopt a consumer-first mindset; scale a differentiated digital offering; focus investments on our core businesses; evolve our supply chain to be a strategic advantage and build organizational capabilities to win. We have made strong progress on all these pillars over the past two years, and I firmly believe we have set the foundation for our path to becoming a leader in connected fitness by leveraging our equipment business and scaling a differentiated offer. At our core, we excel at equipment, we continue to see demand for our fast moving top sellers and traction in our direct channel. Our focus remains on providing consumers with a broad variety of superior products at a range of price points. We have an exciting pipeline of new products planned for calendar year 2023 with a strong lineup of updated connected fitness equipment carrying our innovative new Bowflex digital branding. It's important to stress that we make money in the equipment business and this will be key to our path back to profitability. At the same time, we've continued to enhance and scale our differentiated digital offering JRNY, enabling us to better serve our customers and capture long-term revenue and profit. While we have made tremendous progress in bringing hyper personalized experiences to JRNY members. We recently debuted JRNY with motion tracking, which offers personalized form coaching and feedback, rep counting and individualized workout recommendations. This enhances our strength offerings with workouts that are designed to use with Bowflex SelectTech 552s and Bowflex SelectTech 1090 dumbbells and can be used on Android and iOS tablets. We continue to target approximately 500,000 members by the end of the fiscal year, which implies approximately 54% year-over-year growth in fiscal 2023. We are also seeing progress on conversion to paid subscribers, which are growing faster members. The groundwork for JRNY is late thanks to our investments to date, which enables us to reduce near-term spend while continuing to drive consumer adoption. Moving forward, we will be disciplined in our investments in JRNY with a focus around quality, personalization and adaptability. We have conviction in the long-term opportunity of home fitness. Our research shows the shift to home exercise remains steady now for two plus years. Over 65% of U.S. adults recently surveyed continue to say they work out at home up from 43% who reported the same at the beginning of 2020. In our target segments, this trend is even more pronounced with about 85% working out at home. This is a prevailing shift in trends and Nautilus is well positioned to take advantage of this sustainable increase and demand in our long-term addressable markets. I would also like to touch on our updated outlook on which Aina will expound. Due to the current economic environment and the conservative position of our retail partners, we are lowering our previous revenue and profitability expectations for the remainder of fiscal 2023. We are taking the necessary actions that will best position us to operate more efficiently, minimize cash consumption, return to profitability and ultimately progress towards our goal of being EBITDA positive for fiscal 2024. I will now turn it over to Aina who will give us more detail on the third quarter results and the guidance for the full year. Aina? Thank you, Jim, and good afternoon, everyone. Today I’ll be speaking to total company results for Q3 fiscal year 2023, and will provide guidance for full year fiscal year 2023. Please visit our investor relations website to view our press release and the slides accompanying this call for more information on Q3 and year-to-date results. Given the unique nature of last year’s results, we’ll be comparing this year’s revenue to fiscal year 2020 to gauge our growth in overall company improvements versus more normalized pre-pandemic results. Turning now to Slide 8. Total company P&L results for the quarter with comparisons primarily to last year. Net sales for the third quarter were $98 million, down 33% versus last year and up 9% versus the same quarter in fiscal year 2020, excluding Octane. Our Direct segment grew 30% versus the same quarter in fiscal year 2020, while the Retail segment declined by 6%. Gross profit was $23 million and gross margins were 23.3%. Gross margins were up 3 percentage points from last year and up sequentially 6 percentage points to last quarter. As Jim mentioned earlier, we’ve executed on several initiatives aimed at driving operational efficiency. In addition, we’ve lapped unfavorable pandemic-related supply chain costs. We are pleased that our equipment gross margins are beginning to return to more normalized levels. I’ll now review the drivers of this quarter’s gross margin improvement from last year. Up 2 percentage points due to improved product costs and up 3 percentage points due to decreases in inventory adjustments. These improvements were partially offset by 1 point of deleverage of logistics overhead, 1 point related to higher outbound freight and 40 basis points of deleverage in JRNY investments, which were lower in dollars year-over-year. Turning now to adjusted operating expenses. The next few lines of the P&L have been adjusted to exclude acquisition and other costs related to the purchase of VAY and last year’s legal settlement. Please see our press release for a reconciliation to GAAP. Adjusted operating expenses were $33 million, down 33% to last year’s $49 million. The primary driver of the decrease was lower media spending, which was $10 million versus $22 million last year. Adjusted operating expenses, excluding advertising were $23 million down 13% versus last year even with continued investments in JRNY, which dollar spent was down slightly versus last year. We controlled variable expenses across all functions to ensure that they remained in line with lower sales. Adjusted operating loss was $10 million compared to $19 million last year. And adjusted EBITDA loss from continuing operations was $5 million, a $10 million improvement compared to last year’s loss of $15 million. Turning now to the balance sheet as of December 31. Cash was $17 million, per our plan quarter ending inventory was $77 million down 40% versus last year and down 30% versus year end fiscal 2022. About 18% of our inventory at 12/31 was in transit and continues to be weighted to our best-selling SKUs. AR was $43 million and trade payables were $35 million, both down from year end. Debt was $60 million, we had $27 million available for borrowing, bringing our liquidity at the end of December to $44 million. We’re introducing free cash flow to enhance our disclosures around our balance sheet and liquidity. At 12/31 free cash flow was negative $5 million in the quarter, an improvement of $2 million versus last quarter, and an improvement of $34 million versus last year. While we recognize the headwinds impacting our business, we feel good about the levers available to us to continue to support our balance sheet. As Jim said earlier, we’ve implemented additional cost reductions to keep us on path to profitability despite market headwinds. We’ve structured our operating model to give us flexibility to respond to evolving market dynamics, to take advantage of attracted demand trends and streamline in softer periods. Consistent with this approach, we are proactively realigning our cost structure to support our current expectations for the business. As such, we’ve reduced our contracted labor and yesterday implemented a reduction in force, which affected about 15% of our employees. As a result, we expect to recognize annualized cost savings of approximately $30 million beginning in Q4 fiscal year 2023. We also expect to incur restructuring and other one-time charges of approximately $3 million over the next six months between Q4 fiscal 2023 and Q1 fiscal 2024. We believe these actions better position Nautilus to manage through near-term headwinds in our Retail segment, while continuing to drive performance in direct and serve our growing base of JRNY members. Turning now to guidance for the rest of the year. Our revised guidance reflects lower expectations in the Retail segment as our retail partners have taken very conservative inventory positions amid an uncertain macro environment. As a result, we are lowering full year revenue guidance to about $270 million, which implies Q4 revenue of about $52 million. Given the adjustment to our revenue expectations, we are now guiding to full year adjusted EBITDA loss of approximately $50 million, which implies Q4 adjusted EBITDA loss of about $15 million. Our adjusted EBITDA guidance excludes the impact of about $3 million of restructuring costs. Lastly, we continue to target approximately 500,000 JRNY members at year end 2023. While we expect retail headwinds to impact sales for the first half of 2024, the cost actions we’ve already taken give us a flexibility to navigate the near-term and keep us on path to improving cash flow and returning to profitability. Thank you, Aina. For the near-term, we are taking necessary actions to realign our cost base, while executing on ongoing strategic margin management initiatives. We recognize the impact some of these actions have on our employees and are focused on supporting those impacted. I want to thank both our current and departing employees for all that they have done to advance Nautilus’ noble mission to build a healthier world one person at a time. Looking further ahead, we are confident in the long-term because we are on the right side of industry trends as we continue to execute on our vision of being a leader in connected fitness. We excel at equipment and are building and scaling a strong differentiated digital platform. The shift to home fitness remains solid and we see an attractive opportunity for upside over time. Lastly, our comprehensive review of strategic alternatives is ongoing, and our board remains focused on identifying partner of opportunities to accelerate the company’s strategic transformation and enhance shareholder value. We have no additional information to share regarding this process at this time. Thank you. [Operator Instructions] Thank you. Our first question is from Sharon Zackfia with William Blair. Please proceed with your question. Hi, good afternoon. I was guess, I was hoping to give some clarity on the Retail channel and, I’m sorry if you mentioned this, but how are inventories in the Retail channel? Is it just a matter of retailers being cautious? Or are they still over inventoried? And then I guess kind of with that question, as you look for this decline in revenue in the March quarter, I mean, how should we dimensionalize or think about the delta between the Direct and Retail channels as we’re here in the March quarter? Sure, I’ll start and then I’ll kick it to Aina for the second part, Sharon. I think it’s a good question. Retailers continue to sell down. So, we are seeing active sell-through through the Retail channel not as much as we’d like it to be, but we’ve continued to see that all the way through the end of the fitness season. I think the – really what we’re seeing is this very cautious nature where retailers are kind of acting instead of acting as they normally act as, I’ll call it sales optimizers and margin optimizers. They’re willing to stock out on certain products in order to just drive down their overall inventories, not just in our category, but in several categories. So when faced with those choices, they’re choosing more often to continue to drive down their inventory levels and not take on much, much more inventory. And then as we kind of looked at the outlook, as you get to the end of our fitness season, as you well know where things start to tail off a bit at the end of January and this is kind of our low period between kind of right now and when they start to reorder for next year, then you have a realization that it’s probably not going to cut. If they’ve been conservative so far, they’ll probably continue to be somewhat conservative and we baked that into our outlook and that’s why it has changed quite dramatically from the last time we spoke. And we’ve taken the actions we think are necessary to address that, so that no matter how long that takes to come back since that’s uncertain that we are here to address that. It’s also; I’d also say there hasn’t been anything structural changed. So it’s not like retailers have dropped the product, dropped the number of doors or any retailers drop the category altogether. So that structurally is held up. It’s just this conservative nature of reordering that’s been at play here. And then Aina maybe you could… The one thing, Sharon, maybe to help you, I want to just reiterate that the reduction in our Q4 expectations is really primarily driven by Retail. Hi, Jim. Hi, Aina. Thanks for taking the question. Maybe if we could just start high level, it’s perhaps a little follow-up from the first question, but maybe what are some of the biggest takeaways from the holiday season, whether that’s on the equipment you are selling whether that’s where buyers are meeting your product, just kind of as we move into the last quarter here and into next year. What are the biggest takeaways we saw over the holidays? Yes, I mean, so talking about Q3 including the holiday period, we had a strong Black Friday start and really Direct held up for the entire quarter up 30% as we mentioned versus pre-pandemic. We continue to be able to both discount products to be competitive and increase our gross margins while where we’re doing that. And that allowed us other things down, the income statement allowed us to also reduce the EBITDA burn. We definitely managed down our inventory, so you can see that. I think that’s a highlight of the quarter. I mean, this continues to be from, I think a peak of $160 million down to $77 million at the end of last quarter and even lower now as we sit here in early February. So, I think that’s part of it. And we continue to make progress on JRNY. I think those are kind of the highlights of that holiday season. And then we did start to see that Retail down 6%, so we started to see a little bit of that, but most of what we’re reacting to is our forecast, what we think will happen going forward, and we’re trying to proactively get ahead of that. So, I think again, kind of a solid Q3, but when we look at Q4 really all about Retail and retailers not acting like they would normally act, we think that does regulate over time, but right now we have to be smart in the way we address that and we’ve taken those actions to do just that. So, Aina anything? Nope. Yes, yes, that’s helpful. Maybe kind of as a follow up there. When we think to kind of the best of your understanding about sort of the market share in at-home fitness, without trying to quantify any one company’s market share, I guess maybe over the holidays, how would you categorize your market share relative to your expectations going into the season? It’s a great question, and as you well know, it’s very difficult to get the denominator for this industry. We spend a lot of time with our own numbers, and science, a number of other alternatives and trying to calculate that. We think, I think we’ve – as we talked before, we talked about the at the peak of the pandemic we think this market size probably tripled, double tripled, and now it’s come down, we think it’s still about 20%, 25% ahead of where it was pre-pandemic. So it’s still relatively high. And if you take that as a given and we measure our performance versus our competitors. We picked up share pretty steadily as the market declined. We had lower market share when everyone was buying everything. As things have come down over time, I think, you start looking at, people looking at the brands they know and trust, and you look at our product portfolio, which is very choiceful in the price points and the options that they offer consumers and then JRNY being a value relative to other connected fitness experiences. So that’s kind of how we’ve – we believe, we’ve picked up market share during that period. And we’re quite proud of it. I mean, nobody’s taking victory laps as the market decreases, but we knew this was coming. We knew there was some kind of regulation over time. And so that’s as far as we know it, we’ve picked up share at times during the pandemic. We were number one in unit share. I was just speaking to dollar share at timeframe. The pandemic we’re number one. We think we’re either number one or number two now in unit sales. And that’s helped out a lot by our 552 dumbbells. Great, thanks. Good afternoon, Jim and Aina. With respect to the $30 million of cost savings, could you sort of break out where we should expect to see that from, between COGS and the different categories of operating expenses? Great question. Thank you. So as we said, this was a proactive choice to right size our model to lower revenue expectations. So, you’re really going to see the cuts enterprise-wide. Now, some of our functions are part of COGS, so you’ll see most of them coming through OpEx, but some of it coming through COGS. And then incrementally, the lapping of those supply chain headwinds will result in margin expansion in the upcoming quarters as those costs are shared and we can now benefit from lower input costs. And also, tailwinds now in supply chain like inbound, freight costs being down compared to the pandemic highs. Got it. Okay. And I would expect, I mean, you’ve already taken down your selling and marketing by quite a bit. I would expect that, that’s going to, there’s probably not much left there for retail selling and marketing. It’s probably largely the support, the Direct business. It’s enterprise-wide and but the one thing that I will tell you, because we are pleased with how Direct performed, especially in the last quarter, we’re going to make sure that they remain supported as they continue to drive performance and support our JRNY members. Got you. So as you look forward to next year, just playing around with the model, it’s hard to get sort of anywhere near EBITDA profitable or EBITDA breakeven. Obviously the $30 million is a chunk of that, but that would imply, some fairly meaningful revenue growth for next year. And I know you’re not guiding to next year, but is that sort of part of the assumption or the plan is that you guys will grow pretty meaningfully next year? So, we’re not guiding to 2024 revenue right now, but I will remind you that we have gross margin expansion coming from reduction in supply chain costs. So a lot of what happened to us starting in latter part of fiscal year 2022 with all those supply chain market issues like high inbound freight costs, the detention and demerged costs that we talked about, that we’ve now lapped and are no longer in there, our standard costs are much lower than they were, and that’s really going to drive margin expansion. So the past profitability is a combination of these cost cuts we’ve already taken and then continued margin expansion. Okay. Got it. And then lastly for me, as you look at the next 12 months or 18 months should we expect, any new products or modalities from a hardware perspective? Or is all of your, sort of your investment pretty tightly focused on improvements to JRNY? No, in fact the contrary, we are – we excel is the hardware business. We know our path back to profitability centers around continuing to be good at creating great hardware and selling it. And as I mentioned on the call, we do have some really exciting new products coming out for this holiday. I say calendar 2023. We’re not prepared to announce what those are yet for competitive reasons, but we are very, very excited about that. And they’re also going to be wearing our new visual brand language, which we know a lot more externally, internally than you know externally. But we are taking a really, we’ve invested in taking the Bowflex brand to a new level and really have changed the branding and the brand identity. And that’s going to come across on this equipment. We’ve learned a lot in the pandemic about how people are using equipment, which rooms of the house it’s migrated to, how many pieces people are buying. All of these things have changed profoundly. And so you’ll see our lineup for calendar year 2023 reflecting all of those learnings. And we’re very, very excited to launch these products and then keep going with the same in 2024 and beyond. But yes, center around that, we’ll continue to scale our differentiated digital offering. But we think look, connected fitness is our play and connected fitness isn’t JRNY. Connected fitness is our equipment portfolio, paired up with JRNY and that’s what consumers want. That’s what our target wants. And we will continue to deliver both those things. Thank you. There are no further questions at this time. I’d like to turn the floor back over to Jim Barr for closing comments. Thank you, Paul. And thank you all for joining us today. We look forward to speaking to you again following our fourth quarter results. Everyone have a good day, onwards and upwards.

EarningCall_70

Good day, and thank you for standing by. Welcome to the Radian Group 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. I would now like to hand the conference over to your speaker today, John Damian, Senior Vice President, Corporate Development and Investor Relations. Please go ahead. Thank you, and welcome to Radian's fourth quarter and year end 2022 conference call. Our press release, which contains Radian's financial results for the quarter and full year, was issued yesterday evening and is posted to the Investors section of our Web site at www.radian.com. This press release includes certain non-GAAP measures that maybe discussed during today's call, including adjusted pretax operating income, adjusted diluted net operating income per share and adjusted net operating return on equity. In addition, specifically for our Homegenius segment, other non-GAAP measures in our press release that maybe discussed today include adjusted gross profit and adjusted pretax operating income or loss before allocated corporate operating expenses. A complete description of all of our non-GAAP measures maybe found in press release Exhibit F and reconciliations of these measures to the most comparable GAAP measures maybe found in press release Exhibit G. These exhibits are on the Investors section of our Web site. Today, you will hear from Rick Thornberry, Radian's Chief Executive Officer; and Rob Quigley, Controller and Chief Accounting Officer. Also on hand for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage. Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2021 Form 10-K and subsequent reports filed with the SEC. These are also available on our Web site. Now I'd like to turn the call over to Rick. Thank you, John, and good afternoon. Thank you all for joining us today and for your interest in Radian. Despite headwinds in the macroeconomic environment and continued cooling across the mortgage and real estate markets, I'm pleased to report another solid quarter for Radian. In a few minutes, Rob will discuss the details of our financial results, expense management progress and capital actions. Before he begins, let me share a few thoughts on the environment, our strategic focus and how we are positioned to navigate the road ahead. In terms of the macroeconomic environment, the weakness in the economy continues to be driven by the dual headwinds of high inflation and interest rates. Although there are concerns related to a potential recession, inflation has begun to ease somewhat in 2023, which the Fed recognized with a reduced interest rate hike last week. And despite these economic factors, there continues to be a strong labor market with the lowest unemployment rate in more than 50 years. And from a mortgage and real estate market perspective, despite near term challenges, our outlook for housing remains surely positive over the near and long term. In 2022, the doubling of interest rates negatively impacted volumes with mortgage applications falling to recent record lows. For 2023, recent industry mortgage origination forecasts call for a bottoming out of the origination market with a decline of approximately 20%, followed by a return to growth in 2024 with increased purchase loans and expected strong participation by first time homebuyers. And after a two year run where the real estate market saw a significant gain in home prices, many regions across the country are seeing home prices coming off their record highs that we believe should support a healthy real estate market in coming years. And although the rapid rise in mortgage rates has created pressure on affordability, another important variable in the market is the supply and demand imbalance. There are millions of millennials expected to continue to reach the prime homebuying age for the next several years. And there is an extreme shortage of affordable housing stock, which is further impacted by homeowners that have a mortgage note rate in the mid 2% and low 3% range and are less likely to move. While the shortage of affordable housing, combined with the strong market demand creates affordability challenges for first time homebuyers, it is a positive for our insured and portfolio as it helps to mitigate downside risk in terms of home values. And it is also creating pent up demand, which is expected to drive purchase market growth in 2024 and beyond. As you've heard me say from a strategic perspective, our team remained focused throughout the year across our three areas of strategic value creation, growing the economic value and the future earnings of our Mortgage Insurance portfolio, growing our Homegenius business and managing our capital resources. In terms of growing the economic value of our Mortgage Insurance portfolio, by leveraging our proprietary analytics and RADAR Rates platform focused on driving economic value along with our deep customer relationships and dynamic pricing strategies, we wrote $68 billion of high quality Mortgage Insurance business in 2022. This contributed to a 6.1% growth in our mortgage insurance in force portfolio year-over-year. We've been able to calibrate our dynamic risk based pricing to address the risks and opportunities that we see in the current market. We increased our prices in 2022 based on the environment, particularly in the second half of the year and have continued to increase pricing in 2023. While we believe NIW volumes will slow over the next year, we expect to see continued opportunity to put our capital to work at attractive risk adjusted returns. Higher mortgage interest rates are driving higher persistency across our large and valuable $261 billion insurance in force portfolio, and the increase in interest rates has resulted in higher yields across our $5.8 billion investment portfolio. The higher yield support returns on our Mortgage Insurance business and generate incremental income that flows directly to our bottom line. In terms of growing our Homegenius business, during 2022, we experienced a decline in Homegenius revenues due to the rapid decrease in industry wide mortgage and real estate transaction volume. Over the last few quarters, we've been making adjustments to our Homegenius cost structure that are reflective of the depressed market environment. We remain focused on building awareness of our Homegenius suite of products and services and continue to believe in the growth opportunities for this business, albeit at a slower pace than originally expected due to market conditions. Throughout the year, the team concentrated on expanding our market reach in a number of ways. We launched Geniusprice, our intelligent pricing engine for more accurate home price estimates and Homegenius Connect, a digital referral and rebate network that seamlessly connects homebuyers with our network of high quality real estate agents. We introduced the real estate sector's first automated valuation model that uses both artificial intelligence and computer vision technology. We also increased the availability of our purchase title offering by adding 22 states and further enhancing the digital features of our Titlegenius platform. And most recently, we launched a new version of homegenius.com, positioning us to transform the search to close experience for homebuyers. And in terms of managing our capital resources. In 2022, we returned significant capital to our stockholders, paying dividends of $135 million and purchasing $400 million of Radian Group common stock, representing 11% of total shares outstanding. As we announced last month, we completed a series of capital actions in the fourth quarter that resulted in a $382 million distribution from Radian Guaranty to Radian Group. And for the first time since the beginning of the great financial crisis 15 years ago, Radian Guaranty is positioned to resume paying recurring ordinary dividends to Radian Group this year, which we project to be between $300 million and $400 million in 2023. Ordinary dividends in 2024 and beyond are expected to approximate Radian Guaranty's ongoing statutory earnings. In addition, last month, our Board approved a new share repurchase program of $300 million over two years. And at December 31st, Radian Group maintained nearly $1.2 billion of total holding company liquidity. It's also important to note that we continue to make the necessary adjustments to manage our expense structure across all of our businesses based on the changes that we see in the environment with a focus on driving greater operational efficiency. While this effort involved very difficult decisions related to our people, I'm pleased with the team's focus on addressing the dramatic market shift, and I believe the result will help position us as a stronger, more agile competitor while continuing to deliver exceptional service to our customers. Rob will provide more details regarding the expected savings related to these initiatives. Let me spend a few minutes discussing how we are positioned to successfully navigate the current environment. For our Mortgage Insurance business, in terms of defaults and claims paid, one of the most important factors is the ultimate level and duration of unemployment through the cycle. As I mentioned, the labor market currently remains strong with very low unemployment. Our insurance portfolio has been well underwritten and has a strong overall credit profile with meaningful embedded equity. Credit trends remain very positive with new default counts back to pre-pandemic levels. We expect new notices of default to increase throughout the year as the portfolio naturally seasons and the economic environment potentially becomes a bit more challenging for borrowers. As I mentioned previously, we've been increasing our pricing to reflect the environment and continue to see evidence of price increases among our mortgage insurance peers as well. And perhaps most important is the quality of the mortgage industry's loan manufacturing and servicing processes remain strong, including exhaustive efforts to support borrowers experiencing hardship. And we continue to execute our aggregate, managed and distributed Mortgage Insurance business model focused on lowering the risk profile, mitigating tail risk and through the cycle volatility of the business by utilizing risk distribution structures, optimizing between the capital and reinsurance markets. As you've heard me say before, our company is built to withstand economic cycles, significantly strengthened by the PMIERs capital framework, dynamic risk based pricing and the distribution of risk into the capital and reinsurance markets. We remain committed to our business strategy across our Mortgage and Homegenius businesses and have made adjustments to our cost structure that are reflective of the economic environment to help ensure our success. Additionally, we believe the strength of our capital position following the transformative year end transaction significantly enhances our financial flexibility now and going forward. And while we continue to navigate through the reality of lower industry volumes for the near term, we will remain nimble in this economic climate, leveraging our outstanding customer relationships and our diversified set of innovative products and services as well as our experienced and passionate team to provide the solutions our customers need and to drive our future success. Now I'd like to turn the call over to Rob for details of our financial position. Thank you, Rick, and good afternoon, everyone. I appreciate the opportunity to speak today on behalf of the Radian team about our fourth quarter and full year results, especially given the strength of those results and the positive impacts from the capital actions that we completed during the quarter. As reported last night, in the fourth quarter of 2022, we earned GAAP net income of $162 million or $1.01 per diluted share compared to $1.07 per diluted share in the fourth quarter a year ago. For the full year, net income was $743 million or $4.35 per diluted share compared to $3.16 per diluted share in 2021. Those earnings helped produce an 18.2% return on equity for the full year 2022 compared to 14.1% for 2021 with the year-over-year improvement driven primarily by favorable credit trends that benefited our mortgage insurance loss provision. Adjusted diluted net operating income per share was $0.04 higher than the GAAP amount for the fourth quarter and $0.52 higher for the full year as reflected in the detailed reconciliations provided in our press release. Turning to more detail behind these results. I will first address our revenue and related drivers, which were impacted by the broader macroeconomic environment in both positive and negative ways. As detailed on Exhibit D in our press release, we reported total net premiums earned of $233 million in the fourth quarter of 2022. Compared to prior periods, this amount reflects a decline in revenues, resulting from fewer single premium policy cancellations in our Mortgage Insurance portfolio as well as lower title insurance volume, both due primarily to the significant reduction in mortgage refinance activity during 2022. Changes in the size and average premium yield of our in force Mortgage Insurance portfolio also impacted our net premiums earned. Our primary insurance in force grew 6% year-over-year to $261 billion as of December 31, 2022, including 10% year-over-year growth in monthly premium in force, which is expected to be the most significant driver of our future revenues and now represents 86% of our total insured portfolio. Contributing to this growth was $68 billion of new insurance written for 2022, including nearly $13 billion written during the fourth quarter. In both the fourth quarter and full year 2022, monthly and other recurring premiums accounted for 95% of our new volume. The new insurance written in 2022 reflects a decline from the record pace experienced in 2020 and 2021 due to the reduction in the overall mortgage origination market. However, while the market slowdown in purchase and refinance originations has had a negative impact on our new insurance written, it has significantly benefited our persistency rate. In the fourth quarter, our persistency rate increased to 84% on a quarterly annualized basis compared to 72% a year ago. We expect our persistency rate to remain elevated, in particular, since approximately 86% of our insurance in force had a mortgage rate of 5% or less as of year end 2022 and are therefore less likely to cancel in the near term due to refinancing. Given the shift in mix of our insured portfolio in recent years toward our monthly premium products, we believe this increase in persistency is an especially positive indicator for our future premiums earned and recurring cash flows. As shown on webcast Slide 13, our in force portfolio premium yield for our Mortgage Insurance portfolio was approximately 38 basis points for the fourth quarter of 2022, reflecting a decline over the past year that was more moderate compared to prior years and consistent with our previously stated expectations, as the composition of our insured portfolio continued to shift to more recent vintages. Given elevated persistency rates and the current industry pricing environment, we expect the in force portfolio premium yield to stabilize further and remain relatively flat over the course of 2023. As a reminder, the total net yield of our insured portfolio can fluctuate from period to period due to several other factors such as changes in our risk distribution programs, profit commissions earned and single premium policy cancellations. In addition to the positive impact on persistency rates, another benefit from the rising interest rate environment has been a notable increase in our investment income to $59 million in the fourth quarter of 2022 compared to $37 million in the fourth quarter of 2021. The book yield on our investment portfolio increased to 3.5% as of year end 2022 and the higher rate environment should continue to be positive for the reinvestment of future cash flows. In contrast, rising interest rates have had a negative effect during the year on the fair value of our investment portfolio, resulting in increased unrealized losses that had a temporary negative impact on our book value since these unrealized losses are primarily recorded directly to our stockholders' equity, as shown on webcast Slide 9. We do not currently expect to realize these losses as we have the ability and intent to hold these securities until recovery, which may be to their maturity dates. As Rick noted, the industry wide decline in mortgage and real estate transactions also negatively impacted our Homegenius segment revenues, which totaled $19 million for the fourth quarter of 2022 compared to $25 million for the third quarter of 2022 and $45 million for the fourth quarter of 2021. Our reported Homegenius pretax operating loss before allocated corporate operating expenses was $25 million for the fourth quarter of 2022 compared to a loss of $20 million for the third quarter of 2022 and income of $3 million for the fourth quarter of 2021. The loss for the fourth quarter of 2022 included $5 million in severance and related charges as we made necessary adjustments to our expense structure to align with current market conditions. Moving to our provision for losses. The positive trends that we have been experiencing continued this quarter. As noted on webcast Slide 16 and consistent with the direction in recent quarters, we had a net benefit of $44 million in our mortgage provision for losses for the fourth quarter of 2022 due to favorable prior period reserve development. For full year 2022, we had a net benefit of $339 million in our mortgage provision for losses, which was the result of $160 million of loss provision for new defaults, more than offset by $499 million of benefit from positive reserve development on prior period defaults. The number of new defaults reported each period is the driver of our provision for new defaults, along with our estimates of both a number of those defaults that will ultimately be submitted as a claim and the corresponding average claim paid. As noted on webcast Slide 17, our new defaults of approximately 10,700 in the fourth quarter of 2022 were slightly elevated by defaults in areas affected by Hurricane Ian as well as by an operational reporting change introduced in the quarter, neither of which are expected to have a material impact on our reserves or ultimate claims paid. Although current cure trends have been more favorable due in large part to forbearance programs and the strong home price appreciation experienced in recent years, we maintained our key default to claim rate assumption for those new defaults at 8%, given the risks and uncertainties associated with the current economic environment. Similar to recent quarters, we lowered our ultimate claim assumptions in the fourth quarter for defaults from certain prior periods due to continuing favorable cure trends, resulting in the release of $89 million of prior period reserves in the quarter. Turning to our other expenses. For the fourth quarter of 2022, our other operating expenses totaled $110 million, an increase compared to $91 million in the third quarter of 2022 and $80 million in the fourth quarter of 2021. Our other operating expenses were elevated in the fourth quarter of 2022 due primarily to two items; $15 million in impairment of long lived assets and other nonoperating items, primarily from impairments to lease related assets, as well as $12 million in total severance and related charges. Based on our expense savings actions to date and consistent with our previously shared estimates, we anticipate our 2023 full year consolidated other operating expenses to be approximately $330 million to $340 million, while 2023 full year cost of services are expected to be approximately $50 million to $60 million. On a combined basis, these amounts represent a reduction in total expenses on a year-over-year basis of $60 million to $80 million or 13% to 17%. As a reminder, these expenses can fluctuate due to changes in items such as variable incentive compensation and volume related costs. Moving finally to our capital and available liquidity. As Rick highlighted, we reached an important milestone for the company this quarter with the return of Radian Guaranty's ability to pay ordinary dividends, following a series of capital actions completed as part of our ongoing efforts to enhance financial flexibility. In December, we completed an agreement with an unrelated third-party insurer to novate the entire insured portfolio of our Radian Reinsurance subsidiary, which consisted of credit risk transfer transactions issued by the GSEs. Following the novation and as part of this overall strategy, we completed the merger of Radian Reinsurance into Radian Guaranty, our flagship mortgage insurer. Once this merger was completed, the Pennsylvania Insurance Department approved a $282 million return of capital and a $100 million early repayment of an outstanding surplus note from Radian Guaranty to Radian Group, and both were paid at the end of 2022. As a result of the favorable impact of these capital actions as well as our outstanding financial results discussed earlier, Radian Guaranty ended 2022 with a positive unassigned funds balance of $258 million as shown on webcast Slide 22. As Rick highlighted, given this favorable position, we expect Radian Guaranty to resume paying recurring ordinary dividends to Radian Group without the need for prior regulatory approval beginning in the first quarter of 2023. It is important to note that the payment of recurring ordinary dividends does not prohibit us from seeking approval from the Pennsylvania Insurance Department to pay an extraordinary distribution, which we've been able to do successfully in the past. As Rick also noted, based on current balances and projections, we expect the amount of the ordinary dividends to approximate $300 million to $400 million in 2023. Beginning in 2024, when more sizable contingency reserve releases are scheduled, we anticipate Radian Guaranty's ordinary dividend capacity to be primarily driven by the entity's ongoing statutory earnings, consistent with the limitations under Pennsylvania insurance laws. Radian Guaranty's excess PMIERs available assets over minimum required assets increased during the fourth quarter to $1.7 billion, which represents a 45% PMIERs cushion. Our available holding company liquidity increased during the fourth quarter from $573 million to $903 million as a result of the capital actions described earlier. During the fourth quarter of 2022, we returned approximately $33 million to stockholders through both dividend and share repurchase activities. While for the full year 2022, we returned over $535 million to stockholders through these activities. While we are mindful of the risks and uncertainties in the broader macroeconomic environment, we believe we are well positioned to deliver meaningful value to our customers, policyholders and stockholders, given the expected future cash flows from our in force Mortgage Insurance portfolio, the level of risk distribution we have in place and the current financial strength and flexibility at both our holding company and Radian Guaranty. I will now turn the call back over to Rick. Thank you, Rob. Before we open the call to your questions, I want to highlight that we are pleased with our results and remain focused on executing our strategic plans. We are driving operational excellence across our businesses and aligning our overall expense structure and resources to reflect the market environment. Our $261 billion mortgage insurance portfolio is highly valuable and is expected to deliver significant earnings going forward. We continue to strategically manage capital by maintaining strong holding company liquidity and PMIERs cushion, opportunistically repurchasing shares and paying the highest yielding dividend in the industry and stockholders, and are now positioned to pay recurring ordinary dividends from Radian Guaranty. We continue to focus on our ESG efforts and recently issued our first DEI annual report. I am also pleased to report that Radian was named for the fifth consecutive year to the Bloomberg Gender Equality Index in recognition of our commitment to advancing gender equality in the workplace. And as I've mentioned previously, we are extremely proud of our success over the years in ensuring the American dream of homeownership and we know we are in a unique position to do even more. As a cornerstone partner of the MBA's Convergence Philadelphia Initiative, we look forward to the launch next month into working together with the MBA and other local partners to help address homeownership barriers for people and communities of color. And finally, I want to thank our team for helping to drive our 2022 results and for the outstanding work they do every day. Now operator, we would be happy to take questions. Hoping you could talk a little bit about how you're viewing the competitive environment. It still seems like there are still big market share shifts kind of across the industry and just kind of how you're seeing the competitive pricing dynamics. So I wouldn't say we've seen necessarily bigger market share shifts. So we typically do see shifts when we see kind of a change in terms of cycle. So you tend to see market share shifts if you're in a down cycle from pricing or an up cycle. And I would characterize that we're in an increasing cycle right now. I think we've seen, on the competitive side, more increases in Q4. We actually started increasing prices in July and have continued into 2023. So overall, I would say in the aggregate, an increasing cycle continue to be very focused on picking our spots where we find the most economic value with a particular focus on geographic pricing, and that's played out pretty well for us. We've been pretty aggressive in terms of how we price geos. And we've seen pretty good correlation geos that we've priced up that we've been under allocated from a share perspective. And that has also correlated closely with the geos where we've seen more of a decrease in home prices recently, and I would say the reverse was true. The geos that we were leaning in, we have outsized market share and we've seen prices hold up better. The unusual expenses that you mentioned, how much of that was at Homegenius? And also, what do you think Homegenius could do -- I mean, could you think Homegenius could get to breakeven if the mortgage market remains sub $2 trillion, say, for the next couple of years? Let me -- Bose, thank you for the question. And Rob may add to this, but let me just give a little bit of a Homegenius kind of update, because I think that covers both of your questions. I think 2022 is really kind of a -- was a challenging year from many perspectives across Homegenius. Kind of a bit of a perfect storm and so like many others in the space across the mortgage and real estate markets, we saw a rapid decline in volumes, as you've seen in some of the other businesses that you follow. And that clearly disrupted our kind of near term plans for growth. We anticipated some of that change in our plans, but we also -- like we all know, the market volume declined at a pace and size that no one contemplated. Certainly, the speed at which it occurred. So the greatest impact across our plans throughout the year and even today has been the rapid decline in title business as the revenue and contribution from this business is off materially year-over-year. Regardless of the reasons, the '22 financial performance of Homegenius was just not acceptable from our perspective, which is why we took aggressive expense management actions and are making other adjustments to better position us for 2023 and beyond. So for Homegenius, we reduced overall direct and allocated expenses, to your question, including cost of services, approximately 15% to 20% through today. And so given the volatility in the business that continues and specifically related to market volumes and the direction that volume will go both in the real estate and mortgage market, we're not able to provide guidance related to this business. But based on all the seasonality factors and the current run rates in the overall market that are somewhat challenged, we expect the first quarter to be -- continue to be challenging, but albeit at a lower expense base, right, as we prepared for it. That being said, our team remains focused on developing the high level components of our platforms and continuing to navigate this business towards a profitable contribution, and that is the focus. And I think by virtue of our actions that we took throughout last year as we saw really the market changed dramatically, I think we're positioned better now, obviously, than we were throughout 2022, positioned towards benefiting from growth, benefiting from a lower expense base. And I think in certain of our businesses, we certainly see them bottoming out. We see new technologies that we're bringing to the market that we're receiving positive feedback, too. And so as we look forward in the year, our focus is to kind of guide this back -- not guide, from a financial guidance point of view, but to navigate the business back to profitability. So that's our focus, and I think that's a little bit of the history of how we've operated throughout the year. And then actually just one more. Just given the increased, I guess, flexibility on statutory capital, can you just remind us of sort of the other constraints like debt to capital that you have as we kind of model what could be the level of capital return over the next couple of years? So maybe again, Rob and I can maybe tag team this. I think in terms of -- one of the great things that occurred in the fourth quarter is we crossed over a very important threshold, which was to -- that was 15 years in the making, really since the great financial crisis to kind of move from a regulatory point of view, our negative out of sight surplus to positive, right, which puts us in a situation to pay ordinary dividends from Radian Guaranty to Radian Group on a recurring basis, right? And so that -- for us, that's a transformational change in the overall capital structure. When you think about like binding capital, obviously, the regulatory requirements, I think we're in good shape on from an overall kind of risk perspective. When you look at PMIERs, we've got significant cushions. So from a Radian Guaranty, I think the strength of the current capital structure puts us in a position to pass capital to Radian Group, as Rob and I both stated in our comments. When you look at leverage, the overall leverage of the business today, we feel really comfortable where we sit. And I think this business, one of the great things about our business is that it naturally deleverages very quickly, and so you can see that kind of over time. We also have kind of maturities on our two debt securities, which we commented on when we did the 2025 maturity issuance, that they align very well with the capital flows. So we feel like we're in a great financial flexibility position to manage leverage, feel good about where we're at and we don't think it really creates any barriers for us in the future in terms of our ability to leverage our financial flexibility across our capital structure. I'll add a constraint on the statutory side. As we said in our remarks, we expect Radian Guaranty for 2023 to distribute $300 million to $400 million up to our holding company. We'd expect that to happen relatively evenly throughout the year. And then in future years, we'd expect the distributions from Radian Guaranty to Group to mirror the statutory earnings of Radian Guaranty. And that is still one of the constraints around ordinary dividends under the Pennsylvania insurance laws. So in terms of sizing that amount of capital flowing up to Radian Group, we think it would mirror closely Radian Guaranty's statutory earnings. I did want to ask about the Radian -- I wanted to follow up on Bose's question about just the capital distribution. Maybe talking another way, does the fact that you now have ordinary distributions available, does that change in any way your view around capital return weighting between dividends? Maybe you want to grow the stock dividend a little bit more because now you have more confidence, you don't have to go through the extra approval process. Anything on that? By the way, we love the sounds of children in the background. We've all gotten used to that over the last three years, and never feel like you got to apologize for that. But look, I think we have -- thank you for the question. Really, really, I think, thoughtful. We've been good -- I think we have a history of being great stewards of capital. I think over the last five years, we returned $1.7 billion of capital to shareholders. Last year, we returned $535 million through a combination of $135 million of dividend and $400 million of share buybacks, of which we bought back about 11% of our outstanding shares. And our Board just recently authorized the $300 million in January from a share repurchase plan over the next two years. So I think our track record and our history kind of says we take managing capital very seriously. And I do -- as you highlighted and Bose highlighted, this change for us that occurred in December is transformational. It gives us tremendous financial flexibility around how we connect earnings to capital flows to Radian Group, how we manage the overall capital growth from -- capital position to kind of drive growth. So having said that, the team has worked incredibly hard to get to this point. I couldn't be more proud of them. It's a big monumental accomplishment. As you know, that's a long winded way of giving you this answer. But as you know, we don't comment on kind of future capital plans. But I think again, our track record speaks for itself. And I think we have a track record of managing it appropriately. We will obviously manage this on any kind of share buybacks as we have in the past on a value based approach. I think given the economic environment that we're all kind of monitoring very closely today, we're going to take a very balanced approach and make sure that we're considering the changes in the economic environment as we navigate through our capital plan. And then as we have in the past, we'll update you each quarter on kind of our plans and our planned execution from a progress point of view and different capital activities. But we're very proud and very happy with where we sit today in terms of our overall capital position and the ability, as Rob described, to continue to release capital from Radian Guaranty based on future earnings as we go forward, and puts us in a position to exercise our capital strength as we go forward. And just one other question for me. In terms of going to the -- last thing you mentioned about just the economy and where we fit in just some kind of general softening. Is there anything, whether in your portfolio that you're seeing, in the environment that you're steering from originator partners, that makes you worry about housing credit specifically? Like obviously, I understand the macro concerns and potential if you have a recession, unemployment goes up. But is there anything related to like credit standards or some -- or just something related to housing specifically that is giving you pause, making you maybe be a little bit more cautious? It's a great question. It's one Derek and I probably talk about it on a daily basis kind of in the teams. I would say today, and I think we're cautiously optimistic about kind of where things are because the economy, there are legitimate fears about a recession. I think more economists are kind of leaning towards the direction of that being not an extended harsh kind of environment. But that the things that we're encouraged by from a housing credit, housing value point of view, are really unique to this environment, so maybe coming out of COVID where we have a significant home price appreciation, kind of embedded equity within our existing portfolio. Today, we have a supply -- demand-supply imbalance across the housing market where you have millennials -- as my comments suggested, where you have millennials entering the market at just huge numbers with no homes to buy, especially in our market. Remember, we operate in kind of the bread and butter market of the housing market across the country. We're not in $10 million homes in New York or in Naples, Florida or in San Francisco. We're in the basic first time homebuyer, middle income, that market is undersupplied by significant numbers. So from a home price appreciation, we see and we challenge every day, we actually see more balance in that and are, I guess, more comforted by that than you might otherwise expect going into a recession. So I think when we look at it, we're -- obviously, I wouldn't want to leave you with the impression that we've let our guard down at all. But we do have a level of confidence around housing today that I think informs our view about the future and makes us feel good about kind of our overall position. Derek, do you want to… I would just add. I mean, the credit quality, the underwriting quality continues to be very solid as well as the servicing quality. So when you look at all of those metrics, very positive. From a macroeconomic perspective, Rick alluded to the fact of just supply and demand imbalance, which is kind of helping from a home price perspective. So when we talked last quarter, at that point, the FHFA Index, again, most representative of the business that we write, we saw that decrease in July and August. We've actually seen that kind of flatline the last several months. So we've talked in the past, our base cases still for home prices did go down. I would say I'm a bit more optimistic than what I was last quarter in terms of some of the data we're seeing from a home price appreciation perspective at this point. I think I got a couple here. I'm curious how to think about the loss provision on current period defaults going forward. Like which cohort of loans do you see defaults maybe being concentrated, what are the variables at the loan level which you're looking at to make that determination? And then I'm curious how you see pricing developing in response to lower mortgage rates from here? Like are there any cohorts of the market where you could get maybe more aggressive because rates are lower and there's more visibility for certain elements of that kind of borrower cohort? I'll take the two parts. In terms of cohorts or what we're looking at in terms of defaults, a lot of it is going to be driven by seasoning. So as you kind of have certain vintages go through their peak kind of default years, you're going to see those go bit higher rate. But in terms of the indicators, I think the traditional ones you're going to look at, right? So it's going to be driven by FICO and LTV. What we're finding in terms of new default is the embedded equity is holding up. So we talked about the embedded equity in our default portfolio. But when we look at new defaults in Q4, again, they gradually shift from a vintage perspective but importantly, they still have significant embedded equity. So that's what we're looking at. Then on the macro side, what we're looking at is our home price projections and unemployment and reemployment rates, right? So the propensity to cure is driven very much by that reemployment rate and the HPA or embedded equity in the houses, that's why it's very important when we construct the portfolio that we're doing it at a very kind of granular geographic level, because that embedded equity can be quite a bit of dispersion in terms of performance embedded equity. So those are some of the things we look at there. In terms of your second question in terms of products and given -- I think it was related to interest rates and the decline, not a huge impact. The way we would view it is depending upon where rates are, it will affect the persistency potentially. So as we kind of think about that, you'll have different durations. And so that can affect how we would price it. But I would say on the margins, I don't think rates being down 100 basis points significantly affects how we're pricing in different segments. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Rick Thornberry for closing remarks. Thank you. And thank you all for joining us today and for your interest in Radian. Before we sign off, I have to note the excitement of Sunday Super Bowl match up as the Philadelphia Eagles, which is home to many of our Radian team, as I'm surrounded by many of them here in Wayne, Pennsylvania, take on my Kansas City Chiefs. We hope you enjoy the game as much as we will. Whoever you favor, I want to wish my Philadelphia based teammates good luck, but I will be rooting for the Chiefs as they're all quite aware. And we hope you take care, and we look forward to talking to you soon. Thank you again for joining us today and we will talk soon. Take care.

EarningCall_71

Hello. This is the Chorus Call conference operator. Thank you for standing by. Welcome to Boston Pizza's Fourth Quarter 2022 Quarterly Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded on February 09, 2023. After the presentation, there will be a question-and-answer session. Participants on the call may also post their questions via email to Boston Pizza's Investor Relations department at investorrelations@bostonpizza.com. [Operator Instructions] Thank you, and welcome to the call. Today, we’ll be discussing the 2022 fourth quarter results for both Boston Pizza Royalties Income Fund, or The Fund, and for Boston Pizza International, or BPI. For complete details on our financial results, please see our fourth quarter materials filed earlier today on SEDAR, or visit The Fund’s website at bpincomefund.com. Should you require additional information after the call, you can reach us via the Investor Relations phone number that is listed in our press release. The Fund is a limited purpose, open-ended trust established under the laws of British Columbia to acquire indirectly certain trademarks and trade names used by BPI in its Boston Pizza Restaurants in Canada. BPI pays royalty and distribution income to The Fund based on franchise revenues of Royalty Pool restaurants. For a complete description of The Fund and its business, please see the annual information form dated February 08, 2023, which was filed on sedar.com. Before I turn the call over to Jordan Holm, President of BPI, I would like to note that, certain information in the following discussion may constitute forward-looking information. For a more complete definition of forward-looking information and the associated risks, please refer to The Fund's management discussion and analysis issued earlier today. Forward-looking information is provided as of the date of this call and, except as required by law, we assume no obligation to update or revise forward-looking information to reflect new events or circumstances. Thank you, Michael, and welcome, everyone, to Boston Pizza’s fourth quarter investor conference call. Today, I'll be discussing our fourth quarter results and share a brief outlook. Michael will summarize our key financial highlights. And as usual, we will save time for your questions at the end of today's call. COVID-19 continued to impact the business of Boston Pizza during 2021 and the first half of 2022. Since then, COVID-19 case counts have improved, government restrictions related to COVID-19 have largely been eliminated and sales levels at Boston Pizza Restaurants have returned to pre-pandemic levels. Turning to our financial results, The Fund posted franchise sales from restaurants in the Royalty Pool of $227.2 million for the quarter and $855 million for the year, representing an increase of 24% and 29.5% respectively versus the same periods one year ago. Same restaurant sales were 24.5% for the quarter and 30.4% for the year. The increase in SRS for the quarter and year compared to the same periods in 2021 was principally due to increases in restaurant guest traffic, mainly due to the easing and elimination of dining restrictions and increased average guest check. We are pleased that our sales results have supported another monthly increase to The Fund's distribution rate and a special cash distribution, which Michael will elaborate on later in the call. From a marketing standpoint, we began the fourth quarter of 2022 with our Hockey Night in Canada partnership, which was supported by significant TV, digital and social media channels, along with in restaurant promotions at participating Boston Pizza restaurants across the country. In addition to this, we launched our 2022 holiday menu, which featured a selection of innovative items along with a promotion or bonus card offer. Guests also receive a free Ferrero Rocher 3 pack with the purchase of any qualifying holiday menu item. Also, we have the highest gift card sales in 2022 that we've had in any previous year, helped by a successful yearend holiday gift card promotion. Turning to restaurant development. Boston Pizza open no new restaurants and closed three Boston Pizza restaurants during the quarter. BPI also completed 8 restaurant renovations during the fourth quarter, and 18 renovations for the full year. Restaurants typically closed or partially close for two to three weeks to complete a renovation, which incorporates updated design elements that result in a refreshed and more appealing restaurant. We have some exciting initiatives planned to drive sales in 2023, which I'll speak about in a moment. First of all, I'll turn the call back to Michael for a review of The Fund's financial performance. Michael? Thank you, Jordan. The Fund posted royalty income of $9.1 million for the quarter and $34.2 million for the year, compared to $7.3 million and $26.4 million, respectively, for the same periods one year ago. The Fund posted distribution income of $3 million for the quarter and $11.3 million for the year compared to $2.4 million and $8.8 million respectively, for the same periods one year ago. Royalty and distributions income for the quarter and year were based on 383 Boston Pizza restaurants in the Royalty Pool that reported franchise sales of $227.2 million for the quarter and $855 million for the year. For the same period in 2021, royalty and distribution income more based on the Royalty Pool of 397 Boston Pizza restaurants reporting franchise sales of $183.2 million for the fourth quarter and $660 million for the year. The Fund's net and comprehensive income was $6.4 million for the quarter, compared to $12.6 million for the fourth quarter of 2021. The $6.2 million decrease in The Fund's net and comprehensive income for the period compared to the fourth quarter of 2021 was primarily due to a $7.5 million increase in fair value loss, an increase in income tax expense of $0.7 million and an increase in interest on Class B units of $0.6 million, all partially offset by an increase in royalty and distribution income of $2.3 million and lower interest expense on long-term debt of $0.2 million. The Fund’s net and comprehensive income was $30.6 million for the year compared to $37.4 million in 2021. The $6.8 million decrease in The Fund’s net and comprehensive income for the year, compared to the same period in 2021 was due to a $13.5 million decrease in the fair value gain an increase in income tax expense of $2.6 million and an increase in interest on Class B units of $1.2 million partially offset by an increase in royalty and distribution income of $10.3 million and lower interest expense on long-term debt of $0.3 million. The Fund’s cash flows generated from operating activities was $8.9 million for the period compared to $8.5 million for the fourth quarter of 2021. The increase of $0.4 million was due to an increase in a royalty and distribution of income of $2.3 million partially offset by a decrease in changes in working capital of $1.1 million, and the increase income taxes paid $5.8 million. The Fund cash flow is generated from operating activities was $34.4 million for the year, compared to $30.5 million for the same period in 2021. The increase of $3.9 million was due to an increase of royalty and distribution income of $10.3 million partially offset by a decrease in changes in working capital of $4 million and an increase in income taxes paid of $2.4 million. Well, net and comprehensive income or loss and cash flows from operating activities are both measures unrelated under International Financial Reporting Standards, or IFRS. The Fund is of the view that net income or loss and cash flows from operating activities do not provide the most meaningful measurement of The Fund's ability to pay distributions. Net income contains noncash items that do not affect The Fund’s cash flows, whereas cash flows from operating activities is not inclusive of all of The Fund’s required cash outflows, and therefore is not indicative of the cash available for distribution to unit holders. Noncash items include the fair value adjustments on the investment in Boston Pizza Canada Limited Partnership, the Class B unit liability, interest rate swaps and changes in the deferred income taxes. Consequently, The Fund reports the non-IFRS metrics of distributable cash and payout ratio to provide investors with a fund's opinion more meaningful information regarding the firm's ability to pay distributions to unitholders. The Fund generated distributable cash of $7.2 million for the period, compared to $6.1 million for the fourth quarter of 2021. The increase in distributable cash of $1.2 million, or 19.2%, was primarily due to lower repayments of long-term debt of $0.7 million, an increase of cash flows generated from operating activities $7.4 million and SIFT Tax on this adjustment of $0.2 million partially offset by increased Class B entitlement, a $0.2 million. The Fund generated distributable cash at $25.6 million for the year, compared to $20.4 million for the same period in 2021. The increase in distributable cash of 5.2 million or 25.2%, was primarily due to an increase in cash flow generated from operating activities, a $3.9 million and a decrease in repayments of long-term debt of $2.3 million partially offset by increased BPI Class B unit entitlement of 0.9 million and SIFT Tax on units’ adjustment of $0.2 million. A fund generated distributable cash per unit of $0.0336 for the period compared to $0.0282 per unit for the fourth quarter of 2021. The increase in distributable cash per unit of $0.054 or 19.1% was primarily due to the increase in distributable cash as previously described. The Fund generated distributable cash per unit of $1 and $0.0189 for the year compared to $0.95 per unit for the same period in 2021. The increase and distributable cash per unit of $0.0239, or 25.2% was primarily due to the increase in distributable cash as previously described. The Fund's payout ratio for the period is 115.1% compared to 90.4% in the fourth quarter of 2021. The increase in The Fund’s payout ratio for the period was primarily due to distributions paid increasing by 2.8 million or 51.8% partially offset by distributable cash increasing by $1.2 million or 19.2%. The Fund's payout ratio for the year was 99.4% compared to 109.5% in 20 21. The decrease in The Fund’s payout ratio year-to-date was due to distributable cash increasing by $5.2 million or 25.2% partially offset by distributions paid increasing by $3 million or 13.7%. The payout ratio is calculated by dividing the amount of distributions paid during the applicable period by the distributable cash for that period. Accordingly, the payout ratios for 2021 factored in the 2020 special distribution that was paid on January 29, 2021, even though the cash generated to fund the 2020 special distribution was generated during 2020. This 2020 special distribution was excluded in the calculation of payout ratio for 2021. The payout ratio would be 88.4%. The Fund's payout ratio is typically higher in the first and fourth quarters compared to the second and third quarters, since Boston Pizza Restaurants generally experience higher franchise sales levels during the summer months, when restaurants open their patios and benefit from increased tourist traffic. As Jordan mentioned earlier, with the recent solid financial performance of Boston Pizza International and The Fund. The Fund increased its monthly distribution rate payable to $0.102 and issued a special cash distribution of $0.085 that were both paid on December 30, 2022. A new monthly distribution rate per unit is now equal to the level it was at immediately prior to the start of the pandemic. Trustees will continue to closely monitor The Fund's available cash balances and distribution levels, based on the goal of stable and sustainable distribution flow to unitholders. On February 08, 2023, the trustees of The Fund approved a cash distribution for the period of January 01, 2023 to January 31, 2023 of $0.102 per unit, which will be paid on February 28, 2023, to unitholders of record at the close of business on February 21, 2023. The trustees objective in setting a monthly distribution amount is that it'd be sustainable. The trustees will continue to monitor closely The Fund's available cash balances, given the volatile economic outlook. Thank you, Michael. Boston Pizza began its first quarter of 2023 with our new Pasta Tuesday all month long promotion, where guests were able to enjoy pasta every day and a week starting at $10.99 and Gourmet Pastas were $14.99 throughout January. This promotion paired perfectly with the line up sporting events this winter, as we continue our partnership with Hockey Night in Canada throughout the full regular NHL season. On Saturdays, guests will be offered access to a predictive hockey trivia game with every qualifying purchase, and many franchises up for grabs throughout the hockey season. We are also looking forward to our popular Valentine's Day promotion next Wednesday when heart-shaped pizzas will be served and $1 from each pizzas sold will go to held local charities. This year, the iconic Boston Pizza Paper Heart is celebrating its 30th anniversary of raising funds to support charities across Canada. We continue to be extremely pleased with the efforts of our team and franchisees during the current recovery phase. The easing and elimination of government-endorsed prescriptions in Canada related to COVID-19 has enabled Boston Pizza to continue to drive improved performance and guest traffic. However, with supply chain challenges, rising interest rates and increasing input costs and labor shortages impacting most of the restaurant industry, BPI's management remains cautious. BPI's management continues to adapt the business to mitigate these challenges and capitalize on the recent sales momentum resulting from the elimination of COVID restrictions across the country. Megan, thank you for the question. So as background during the COVID period, Boston Pizza, many Boston Pizza restaurants across the country were restricted to takeout delivery only. And we saw as a result of that the percentage of our sales from off premise grow considerably. Pre-COVID, it would have been 18% of total sales. And throughout the pandemic period, depending on what the restrictions were at the time it was, at times double the volume that we have been doing previously through takeout and delivery. We have seen a continued over indexing on off premise or takeout delivery sales throughout 2022, while we have reopened the dining room, spires and patios of Boston Pizza restaurants and most are in all regions, certainly since about mid to late February of 2022 despite the on premise activity ramping backup. We still saw an over indexing or a higher level of takeout delivery sales. Part of that was evident before COVID started, that was an area of guest demand, people were choosing the convenience of eating at home or eating off out of the restaurant versus coming and dining in, in restaurants. But nonetheless, we are continuing to see a higher percentage of takeout delivery sales. And that's one of the reasons that the January passed a Tuesday. All month long promotion was specifically targeted at in restaurant dining to attract people back into the restaurants. Another question that I have is, have you had any feedback from customers on the price increases with the larger check sizes? We haven't, we are very careful with how we take menu price increases. And we know that consumers are seeing the effects of inflation in all aspects of their lives. So we don't want to stand out and we want to avoid sticker shock. We are a value player in the midscale casual dining space and we want to make sure that each visit for Boston Pizza guests result in them feeling good value for their money. So we haven't had any specific feedback and we want it to stay that way. So appreciate the question. And then can you speak a little bit about the pipeline for new restaurants if you have any that you expect to open in 2023 and how it's going with new franchisees? Yes. So, obviously during the last couple of years, we haven't been able to move forward on some of the projects that we have in our pipeline, but we expect to get back to new restaurant development in 2023. The last restaurant, we opened brand new restaurant would have been Keswick Ontario in August of 2020. But we do have a few in the pipeline for 2023. We don't give a specific forecast. But I know one in BC has already been published locally in a small town in British Columbia, that it's under construction currently. And just depending on how the construction cycle works for, for this season, now we expect to add to that maybe a couple more as we ramp back up to new restaurant development. And one final question here. Can you speak a little bit about the system sales growth throughout the previous quarter and then going into 2023? How have system sales been so far? So system sales on a franchise basis, and on a same restaurant sales basis for the fourth quarter of 2022. So just the quarter we finished, compared to the fourth quarter of 2019, which would be the pre-pandemic baseline. The same restaurant sales were up 10.8%. So that was a very kind of positive trend and a very good indicator for us that on a same restaurant sales basis. The average restaurant in our system was kind of seeing some growth compared to the pre-pandemic numbers. And so that was a positive trend that built towards Q4 the back half of 2022. And as Jordan mentioned, we started 2023 with a strong value promotion in the form of a pastor promotion. But in terms of the overall trend, it's been positive. Jordan, anything to add. Just a follow up to that. I guess, I was kind of looking month by month. So to kind of ramp up towards the end of the quarter. Was it pretty steady throughout the quarter? It was pretty steady throughout the quarter. We tend to when we report publicly anyway, look at kind of quarter-by-quarter results, just because there can be quite a bit of variability month to month. If you look at the quarter-to-quarter results throughout the year, we definitely saw a positive trend in that respect. This concludes the question-and-answer session. I would like to turn the conference back over to Jordan Holm for any closing remarks. Thank you, operator. There are no further questions, I'd like to thank you all for taking the time to listen in. We look forward to speaking with you again at our first quarter conference call in May 2023. Thanks everyone.

EarningCall_72

Please also note that this event is being recorded today. I would now like to turn the conference over to Kim Golodetz with LHA Investor Relations. Please go ahead. Thank you. This is Kim Golodetz with LHA. Thank you all for participating in today's call. Joining me from Sensus Healthcare are Joe Sardano, Chairman and Chief Executive Officer; Michael Sardano, President and General Counsel; and Javier Rampolla, Chief Financial Officer. As a reminder, some of the matters that will be discussed during today's call contain forward-looking statements within the meaning of federal securities laws. All statements other than historical facts that address activities Sensus Healthcare assumes, plans, expects, believes, intends or anticipates and other similar expressions will, should or may occur in the future are forward-looking statements. The forward-looking statements are management's beliefs based on currently available information as of the date of this conference call, February 9, 2023. Sensus Healthcare undertakes no obligation to revise or update any forward-looking statements except as required by law. All forward-looking statements are subject to risks and uncertainties as described in the company's Forms 10-K and 10-Q. During today's conference call, references will be made to certain non-GAAP financial measures. Sensus believes these measures provide useful information for investors yet they should not be considered as a substitute for GAAP nor should they be viewed as a substitute for operating results determined in accordance with GAAP. A reconciliation of non-GAAP to GAAP results is included in today's financial results press release. Thank you, Kim, and good afternoon, everyone. I address you today with the highest of confidence that Sensus Healthcare is better positioned today than ever before in our history with all the pieces in place for even greater execution of our business plan. We believe our superficial radiation therapy technology remains the #1 choice for noninvasive treatment of skin cancer by both physicians and patients. Our improved reimbursement, combined with our fair market value lease program, provides our customers with an excellent patient acquisition tool, making the acquisition of our lead technology and easy transplant. Our new and improved high-resolution ultrasound technology provides see-and-treat capability, which leads to great outcomes and patient reassurances. During the fourth quarter and throughout 2022, we strategically executed delivering strong revenue and profits. Importantly, we also took a number of steps to position Sensus for future success. These included assembling the staff and strategies to drive exceptional growth, building inventory, developing new aesthetic products that are anticipated to receive FDA clearance in the latter half of 2023, further investing in our Sentinel IT solutions capability and increasing sales and marketing programs, headcount and capabilities. As we've been saying for some time, with better reimbursement of superficial radiation therapy for non-melanoma skin cancer and lower reimbursement for Mohs surgery along with data suggesting that 1 in 5 Americans will develop skin cancer, we have powerful tailwinds to support our programs. Recall that in January '21, our SRT therapy received improved reimbursement from the centers for Medicare and Medicaid services when they revalued our main code upwards by 66% for a course of SRT in non-melanoma skin cancer. In addition, ancillary codes received a double-digit boost. We continue to capitalize on these reimbursement changes, and more and more practitioners are recognizing SRT as a best practice for the noninvasive treatment of non-melanoma skin cancer. Our rigorous physician education program, highlighting the improved return on investment for SRT is ongoing, especially at dermatology conferences and trade shows. In fact, this weekend at the important South Beach Symposium in Miami, a key opinion leader, Dr. Michael Gold, will be discussing SRT and its benefits. This will be followed up 2 weeks later at the Winter Clinical Conference in Miami by another key opinion leader, Dr. Mark Nestor. We recently launched important upgrades to this system, including new state-of-the-art, solid-state, high-frequency ultrasound, which provides the industry's best view of the epidermis and utilizes a new ergonomic design probe with single-use disposables. This upgrade system is garnering interest among physicians and the SRT-100 Vision has become our leading SRT product. The fair market value lease program we launched earlier last year continues to support purchases of our feature-rich SRT-100 Vision system, and its percentage of system sales continues to increase. While we are maintaining focus on our core dermatology business and providing products our customers need and want, radiation oncology is another important avenue for growth. We're gaining awareness among radiation oncologists and recently sold an SRT-100+ system to a large luminary hospital in the Northeast. And with that overview, I'd like to turn the call over to Michael Sardano for a bit more color on the quarter. Thanks, Joe. We've been executing extremely well as evidenced by record high revenues for both the fourth quarter and the full year. We expect continued top line momentum in 2023 and beyond from our unique line of superficial radiation therapy devices, which will continue to lead our revenue growth throughout the coming years. We expect the recently acquired aesthetic devices to materially add to our revenue in the latter part of 2023 as we advance through the regulatory process. Additionally, we now have a dedicated and experienced aesthetic sales professional to manage this part of our business. During the fourth quarter, we shipped 36 SRT units, of which 27 were the SRT-100 Vision. Despite higher interest rates, our fair market value lease program continues to draw interest as an efficient way to acquire our devices. Our international business is also doing well as we shipped a record 16 units during the 2022 and 6 during the fourth quarter, most of which went to Asia. We are concentrating on opening new markets in Latin America, Australia and the EU. So we have enormous potential outside the United States. Thanks, Michael. It is a pleasure to be speaking with all of you this afternoon. Our revenues for the fourth quarter of 2022 were $13.1 million and this compares with revenues of $13 million for the fourth quarter of 2021. Gross profit for the fourth quarter of 2022 was $8.4 million or 63.7% of revenue compared with $8.9 million or 68% of revenues for the fourth quarter of 2021. The decrease was primarily driven by the higher manufacturing costs in 2022, all due to inflationary pressures, yet our gross margin remains in our target range of the mid-6s percentage. Selling and marketing expense for the fourth quarter of 2022 was $1.6 million compared with $1.3 million for the fourth quarter of 2021. The increase was attributable to higher advertising expense and higher compensation expense due to increased headcount. General and administrative expense for the fourth quarter of 2022 was $1.4 million compared with $1.1 million for the fourth quarter of 2021. The increase was primarily due to higher professional fees along with higher compensation and bad debt expense. Research and development expense for the fourth quarter of 2022 was $1.2 million, unchanged from the current year quarter. We expect R&D expense to remain at this general level each quarter of 2023. We recorded a provision for income tax in the fourth quarter of 2022 of $1.6 million as we had no such provision in the fourth quarter of last year. Net income for the fourth quarter of 2022 was $2.8 million or $0.17 per diluted share and this compares with net income of $5.3 million or $0.32 per diluted share for the fourth quarter of 2021. The decline was largely attributable to the income tax in 2022, and to a lesser extent, increase in cost of goods. Adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization and stock compensation expense was $4.3 million for the 2022 fourth quarter compared with $5.6 million a year ago. Turning briefly to full year financial results. Revenues for 2022 were $44.5 million compared with $27 million for 2021. The 65% increase was driven by a higher number of unit sold in 2022 due to the increase in demand. Cost of sales for 2022 were $14.9 million compared with $10.1 million for 2021, with an increase reflecting the higher number of units sold. Gross profit for 2022 was $29.6 million or 66.5% of revenue compared with $17 million or 62.8% of revenue for 2021. The increases were driven by a higher number of units sold in 2022 and service revenue on installed units. Selling and marketing expense for 2022 was $6.3 million compared with $4.8 million for 2021. The increase was primarily attributable to higher spending on marketing activities and increase in headcount. General and administrative expense for 2022 was $5 million compared with $4.6 million for 2021. The increase was primarily due to higher compensation and bad debt expense. Research and development expense for 2022 was $3.5 million compared with $3.4 million for 2021. As I just indicated, we expect R&D expense in 2023 to be generally consistent with 2022. The company reported other income for 2022 of $13.2 million compared with $0.01 million for 2021. The increase was mostly related to a gain on the sale of a noncore asset. Net income for 2022 was $24.2 million or $1.46 per diluted share compared with $4.1 million or $0.25 per diluted share in 2021. Net income for 2022, excluding a gain on the sale of a noncore asset, was $11.5 million or $0.69 per diluted share. Adjusted EBITDA for 2022 was $28.1 million compared with $5.1 million for 2021. Turning now to our balance sheet. Cash and cash equivalents were $25.5 million as of December 31, 2022, compared with $14.5 million as of December 31, 2021. The company had no outstanding borrowings under its revolving line of credit as of December 31, 2022 or 2021. In preparation for the future growth [indiscernible], we placed orders for inventories. We stood at $3.5 million in inventory and $6.3 million in prepaid as of December 31, 2022, up from $1.8 million in inventory and $1.9 million in prepaid a year ago. Accounts receivables were $17.3 million, up from $12.1 million on December 31, 2021, reflecting the increase in sales. I'll underscore what we have been saying for some time. Our attention to expense management is front and center, and we continue to be in a stronger financial position in the company's history. Our balance sheet positions us well to take advantage of the compelling growth opportunity we may come across. As a final comment, please see the table in the news release we issued earlier today for a reconciliation of GAAP to non-GAAP financial measures. Thanks, Javier and Michael. As Javier just said, Sensus Healthcare has never been in a better position to meet the challenges of the future. We are well capitalized and have business momentum. In addition, we're very excited about the portfolio lineup we have planned for later this year, and especially, in 2024, along with future enhancements to our SRT-100 Vision and Sentinel IT Solutions software. Sentinel is a proprietary HIPAA-compliant software solution and is available on all our new products. It allows physicians to easily and accurately document and store patient data for clinical billing and asset management purposes. This technology has been a game changer for our SRT customers and for Sensus as it clearly demonstrates the attractive ROI for the SRT-100 Vision and the SRT-100+ systems. A priority focus for Sensus is expanding the capabilities and indications of our Sentinel technology. Under the leadership of our newly promoted Chief Technical Officer, we have already doubled the number of engineers at Sensus to 6 as we work to include artificial intelligence and diagnostic capabilities in Sentinel. I want to add that our new lasers, including all 6 of our Sensus-branded aesthetic smart lasers, will have the Sentinel IT Solutions capability embedded in them. In recent months, this portfolio has expanded to include silk diode laser, a truly portable laser with a lightweight handpiece, super cold cooling tip and the highly repetition ring. The ability to blend wavelengths while emitting light vertically towards the skin increases efficiency by maintaining the density of the laser in the selected area, resulting in deeper and better penetration and more homogeneous energy distribution. Importantly, the laser is sensitive to all skin types, making this laser removal available to everyone. We have showcased Silk at the Fall Clinical and will also showcase the Laser this weekend in our booth at the annual South Beach Symposium. While we're very excited about the potential of Silk, we're also excited about the new lasers we plan to introduce later this year and early next year once cleared by the FDA. We have stepped up our marketing as well. We're pleased with the early success of our new digital advertising initiatives to increase patient awareness of SRT. Our Facebook page remains very active as we work to engage the public. We will continue to increase our SEO activity, which is resulting in many more patients visiting our website to learn about SRT treatment. Our SRT systems are well positioned in a large and largely untapped market consisting of some 14,000 dermatologists and 1,000 Mohs surgeons in the U.S., representing more than 8,500 offices, not to mention a further 6,500 plastic surgeons and 5,500 radiation oncologists. Our systems provide a compelling alternative to surgery for millions of patients and arguably, the only solution to prevent the recurrence of keloids following surgical excision. In addition, skin cancer is a large and growing condition with estimates that 1 in 5 Americans will develop skin cancer during their lifetime. This tells us that nearly 70 million people will contract non-melanoma skin cancer in this country. So clearly, this is a need for our SRT systems both now and even more so in the future. In summary, we have our strongest team ever in place to support our growth with thoughtful programs, efficiency and leadership. We are deploying capital to invest in Sensus, deploying and bringing in new technologies and adding to our sales force. As evidence of our enthusiasm for our future, we repurchased $3 million of our common stock through a share buyback program. First off, for me, on the 510(k) submissions that are going in this year offer aesthetic products, should we think about those all as lasers? Or are there other 510(k)s that will be going in? And any color on conditions that those might treat outside of the laser submissions. Ben, thanks for being on. Good to hear in your voice, and I appreciate the question. It's going to be a variety of aesthetic products that are going to be submitted to the FDA products that we've been able to acquire this technology, and we're excited for that offering. But I would tell you that it's going to be a variety of various aesthetic products that are going to be unique to the market that is going to have a very, very nice niche into the marketplace. Okay. And do you plan to let investors know about those upon submission? Or do you wait till approval or launch? I think that we want to try to wait until we get to the launch period. And it's going to make sense because as we go through this process of getting the equipment ready as it's going through all of its testing with the various regulatory people and assembling all that data, we have to get that to the FDA, which could take a little bit of time. But we're expecting to submit either by the end of the first quarter or the middle of the second quarter, and since their 510(k)s, they usually result in a 90-day approval process. But as we get closer to that, I would say that we would be able to announce it to the world as it works with progress sometime around the American Academy of Dermatology meeting. Okay. So stay tuned. Got it. And then on the -- congrats [indiscernible] luminary on the Northeast radiation oncology. What are your thoughts on the kind of the sales cycle that these radiation oncology apartments will require and kind of initial level of interest? Any color you could provide there. Yes. The hospital market is a very difficult market, and I describe it as when they -- when everybody at the hospital says, yes, we want to buy it, it could take up to 12 to 14 to 16 months, 18 months before you get a purchase order. So it's a very long selling cycle. This -- but we're starting to see some hospitals that are requesting some quotes, if you will, for our system because there's a lot more interest in that hospital market or in the radiation oncology market to get involved with skin cancer. And I think one of the reasons that we're seeing that is that centers for Medicare and Medicaid services are working hard to reduce reimbursement in other areas of cancer. For instance, breast cancer, lung cancer, all of these cancers because they're high-volume types of cancers with very high expense. We're starting to see reduction in those reimbursements across the line, and as those reductions happen, your hospitals are starting to look at additional sources of revenue. And if they're looking over the fence, if you will, looking at greener , one of the things that they don't have access to or have not accessed, whether it's on purpose or not, is the skin cancer market. And when you look at skin cancer, it's 4x greater than all the other cancers combined. So the acquisition of a technology like SRT is very minimal compared to the millions of dollars they spend on the radiation oncology products in those other areas yet the return on investment for them is very, very good and very strong. So I think that they see an additional cash positive opportunity in cancer, in an area that they're not addressing. And I think that the bigger hospitals, the smart hospitals that look at the future are looking at this and are asking us about SRT. Okay. That makes sense. And then lastly for me on the share repurchases, you gotten a little bit more aggressive there. Maybe my recollection is wrong, but I think you had 3 million authorized or plans to kind of re-up the authorization there and continue with the share repurchase activities. We went to the Board and the Board was more than happy to provide us with $3 million to repurchase our shares. We did that. To the fullest extent, we spent the 3 million shares. We think that we were as good as investors as anybody else in getting those shares at a very decent price, and we think the best investment is in our own company. And so is the opportunity out there in the future? I think the Board is always open to making things like that happen, and we'll definitely look at it if that opportunity should come across again. The reimbursement increase has been a big boost in the business over the last couple of years. And as investors, we all get it, but I'm curious about physicians. When you go out there in the field and speak with them, the physicians, do they all get the reimbursement change at this point? Or is it still, call it, a minority of physicians who get the reimbursement? And really what that would do for their practice? Just curious where we are in that process of physicians starting to figure this piece out. Alex, again, thanks for being on. Appreciate the question. It's an ongoing process. You have to remember that these individual business owners are very, very business -- very, very busy in doing a lot of things to keep their practices open. They faced with a lot of challenges. Every time we touch base with them, every time we're face to face, every time we go to these meetings, it has -- they have to be reminded of what the reimbursement is. And so it's ongoing. We continue to push it now, the ones that have it already are recognizing the reimbursement increases because they're the ones that are reaping the benefits because they already have the product. As these references go by or continue to move, I think that's where we gain additional sales and additional references because it is good for them. And now keep in mind that last year was the first year since COVID, 2 years, that we've been able to go to meetings and talk to these doctors face to face. That's where we have the biggest impact. When we're in the field, we're knocking on doors, they're busy. They're listening. Sometimes they comprehend, but it always takes additional conversations for them to understand. But I would tell you that we're getting there, and -- but it's never easy to make these sales. And when you look at our technology, you could say, well, we're the only technology in the market, we have no competition. I would tell you that the competition is everybody who's knocking on the doors of dermatologists because they have a dollar, everybody is trying to get a percentage of that dollar, and we have to have a good story in doing it. And so far, I would say that a 65% increase in our business over last year, I think that we're making headway. I think that we're doing well there. So we are getting across to them, and as we go to the meetings and more presentations are made, I think that we'll continue to achieve the goals that we're looking at. That's very helpful. I mean -- and it still sounds like it's still building. So I mean it kind of leads into my second question here. You committed to growth this year on the top line and also on the bottom line. But on the top line, how do we think about that growth? You've got ramping on the dermatology side. You've got this radiation oncology piece started to flow through, new products coming in the second half. Just how do we start to think about growth for this year? Well, again, we haven't provided any kind of guidance, and I don't know if we're going to get to the guidance piece because I think sometimes there's levels of expectation that -- I don't know how they're derived, but there's levels of expectation for us that might not be as accurate as they should be. But I can assure you this, and I think that you've been around for a long time, Alex, and you know what kind of a company we are. We're ultra conservative, but we work very, very hard, and we try to make the right decisions all the time to grow our business, and we're always thinking of the future. So how do I think of future business? I have to look at it, and I have to look at my team and we have to challenge ourselves to how do we do better the previous year. And I think that we'll do better than the previous year. We keep adding products that will add revenue. We know that, that revenue based on our FDA submissions are going to probably happen around the fourth quarter of this year where we're going to have any kind of impact whatsoever. So I would say that our SRT business will continue to grow organically, and we'll continue to grow our top line as well as our bottom line as we continue to pursue these technologies that we'll add to our portfolio. And again, we want to add technologies that are different, that are better than what anybody else has and that provides what we think is the same theme, and that is a noninvasive way of a treatment that provides the patient with no pain in their treatment, a much better experience and with better results. So that's what we're looking for. That's our goal. That's helpful. And then priorities for capital allocation, obviously, you did the share buyback here, but you reinvested cash back into the business. It goes more towards M&A on the go forward, just the current thoughts? The M&A is always something that's on our minds, and we've had the opportunity to evaluate a lot of companies this year. We've talked to a lot of principles in those companies, and you still have a lot of people that believe their company is worth probably a little more than what we're willing to pay. And one of the things that we're committed to is, we do not want to go into debt. We do not want to dilute our existing shareholders. So with that in mind, we're looking for an opportunity that's going to add to our portfolio while at the same time adding revenue to what we're trying to accomplish with exceptional products. And so rather than biting off more than we can chew, we're looking at technologies that could add to our portfolio that we can get fairly reasonably, that we can find a payback or an ROI in a very rapid succession. And so what we look for is something that we can pay back within 6 to 12 months, and that's being very, very aggressive for what we're trying to do. And then just real quick, can you maybe comment on the accounts receivable balance? It did spike up here in Q4. The days sales outstanding did increase. So just curious if there's any onetime items in that number there? No. I mean what we had was, we had some exceptional growth with some great revenues for -- over the course of various months, and customers requested some terms. So we provided them with the terms, but we know that everybody is good for it. So when you look at where our cash position, it was something that we were able to afford while at the same time encouraging and helping our customers accomplish their goals and objectives as well. So we work very, very closely with our customers. Their success is very important to us because as they've proven over time, the customers end up buying more than one system. I mean we have a single doctor, for instance, that has 10 of our systems in 14 of his offices. That hasn't been done without any kind of sensitivity with helping him with his business and with his patients, and it's the same thing with all of our customers. So extending the term here or there doesn't hurt us, and so we will continue to do that when it helps us drive the business and helps our customers as well. Congratulations on all the success. This is Jake on behalf of Yi Chen. I guess, I think it's fair to understand that the increase in SRT systems sold is primarily related to the increase in SEO or digital marketing efforts that you guys have put in place so exceptionally well. So related to that, what are your expectations for this year in terms of advertising, digital marketing and/or KOL engagement as it relates to the SRT systems? I know you're referring from providing any sort of guidance, but any expectations on the kind of marketing activity and also the kind of sales that you expect that would be very helpful. And the second quick question I have is on the Silk laser hair removal systems. Any update on the commercialization process so far? How is it going? And any feedback, especially on the international markets, as I understand that there are global hubs where people visit for hair removal treatment. So any color on that would be very helpful. Thanks for that question regarding SEO. Let me tell you where we're at as what we've accomplished in just the last 6 to 8 months of aggressively pursuing a digital strategy. We went originally from about 2 patient inquiries per week to now we're getting about 30 to 35 per day. With that SEO, we moved up on Google from approximately Page 9 to Page 4. We feel that within the next 3 months with continued efforts here and continued emphasis, we'll be on Page 1. So we're excited as we progress and invest in that part of our business. Now we also expect the number of patient inquiries to increase, and so what we have done is, we have our own personnel involved with speaking to every one of those patients as they call in for the inquiry. And we are able to set up those patients with meetings with their doctors, with consults, with doctors that have our equipment in their physical area. And sometimes, we give them a choice, but we always follow up, and we find out that they've reached out to one particular doctor or another because of their proximity to where they're living. And those doctors are gaining a whole lot more patients and patient flow for the treatment of skin cancer with SRT because these patients are specifically demanding a noninvasive approach once they learn about it. So we educate them, we answer their questions and then we set them up with the appointments. Now on the other hand, these physicians are extremely thrilled that we're providing them additional revenue opportunities by directing those patients to them. On the other hand, there are many dermatologists in that specific area that are not getting to those patients. They're not getting those. So our sales force, obviously, gets that information as well and says -- we've directed I don't know how many patients in your area over the course of the last month, 2 months, 3 months that you're not seeing. And so that becomes a good selling tool for a lot of our salespeople, and that's going to continue to grow as we talk through this and as we continue to add to our CRM program, working with our sales and marketing force. So we're going to continue to emphasize it. We're going to continue to put more dollars into it and more time into it. We see where our patient advocacy group is going to grow from the existing person that we have now to several over the next year or so. And so we're excited about that, and I think more patients will continue to learn about SRT than ever before. Regarding hair removal, this is a very unique product because it offers a multitude of wavelengths, which we think is going -- is very unique and because it applies to various skin colors. And so this is going to be exciting. Now the real introduction of this is going to be at the AAD, where more people will be exposed to it, and we'll have several of the units on display and for demonstration during that period. So we're excited for that. We have a certain number of units that we expect to sell during the course of 2023 that will add to our bottom line as well as our top line. So we'll gain a lot of market in that area. And then also keep in mind that just a few weeks ago, we announced that we did hire a professional in the aesthetic world to help us take this market to another level. And so all of those things are heading in the right direction, and of course, we feel that it's going to add more revenue to the company. Congratulations, Joe. Really a tremendous 2022. So I had some specific questions. I recognize that you're seeing growth on the top line in 2023 and growth on the bottom line. And I know expectations, there's been some disconnect. So I wanted to flush something a little -- a couple of specific questions with regards to the bottom line. When you say growth in 2023 on the bottom line, are you pulling out onetime events from 2022? Just trying to get a sense of what base you're using for 2022. Scott, first of all, thanks for being on, and we're very much looking forward to attending the ROTH Capital Conference in March in Southern California. It's always a great event, and we're excited to be there. The -- we're definitely taking out that one event, okay? So when we look at increase in the bottom line, it's -- every product that we're bringing on board is going to add to that bottom line. Hopefully, it adds to our margin as well because we model everything along those margins. So yes, you're absolutely right, we're looking at -- taking that one event out of that and still growing our bottom line. Okay. Great. And another thing, and this might be for Javier. And I look forward to seeing you as well, Joe. I want to throw that in. The accounting rules, when you make money consistently, at some point, you have to take -- you have to book a tax gain for your deferred tax assets, and you start to calculate earnings on a fully tax basis going forward. I mean you're starting to stack a lot of positive quarters together. Would you expect to report 2023 on a fully tax basis? And then again, for clarity, it sounds like when we look for growth in 2023 over 2022 on the bottom line, should we be thinking on a fully tax basis to a fully tax basis? So otherwise, you started at a disadvantage. Okay. Great. And then final question just with regards to -- I was just hoping to understand kind of the process a little bit because the lease program is important to your revenue model. We get higher interest rates. Obviously, someone has to pick up the cost of those higher interest rates, not that it's a huge amount, but does that come from the customer? Or do you kind of shrink margins a little to accommodate that? I'm just curious the nuts and bolts of what you do with the lease program when the rates increase? Yes, it's coming directly from the customer, okay? So just to give you some idea behind that. The rates have gone up this year, and we've always tried to tell the customer that your breakeven with the SRT-100 Vision based under those fair market value leases is approximately 2 patients a month. Well, the realization of it at the beginning, before all these rate hikes, it was probably somewhere around one in the quarter patients, but you can't breakup a patient into a quarter. So we just said 2 patients a month. As the rates have gone up, it -- you could say now that it's really 2 patients a month. So it's not over 2 patients a month, it's really 2 patients a month, and we're still fairly safe in having it just under the 2 patients a month. But you have to keep in mind that what the real opportunity is for our physicians is that we're offering a nonrecourse off-balance sheet program that doesn't take away from the customer or the doctor's regular credit line, okay? So that in itself is worth a whole lot of money to these doctors where they don't have to put their credit in any other way. So this is a great program for them, and it gives them all of the things that they need to be able to afford the Vision product, which is what they want because it has all the tools and benefits. Let me go also to the previous question that you pose to Javier. This quarter alone for the fourth quarter, we paid $1.6 million in -- to the IRS. Our goal is to continue to pay to the IRS, all right? And it's probably going to be more than $1.6 million and probably closer to $1.8 million to $2 million, but it's going to be a lot of money, and we want to continue to pay to the IRS. So that's an objective that we have because we're making money, but it wasn't accounted for by whoever derived whatever our earnings per share were, but I think that we're happy to pay that, and we look forward to paying even more for 2023. So you talked about the fair market. Joe, you talked about the fair market value lease program as being a program that's helped with 2022 sales. Interest rates went up, but maybe it's had some impact, but you said, obviously, on the fair market value lease, they may have to see only about another 1, 1.5 patients. I think it's a month to still be able to make that. The program itself profitable. In other words, I think it was like one a month, and then if they see now 2.5 a month, it still comes -- after 2.5, it's still profitable. Could you just -- I might not be getting those numbers exactly right. So if you just go through that with me. And then as best you can say, how much of an impact has rising interest rates you think had on the -- on your sales or the fair market value lease program? And just what's your outlook for that program? I think it was 80% of sales last quarter. What was it approximately this quarter? And do you expect that trend to be the same in '23? Okay. Thanks, Anthony. The -- again, I'll go back to the analogy that in the early times when we introduced fair market value lease, the interest rate was low, but we still told the customer that they required 2 patients a month to breakeven. It was actually about 1.25, 1.5 patients, but you can't breakup a patient into a quarter or half. It's either a full patient or not. So we consistently told the customer being as conservative as we were requires 2 patients a month. Now with the increase over the last year as the Fed increased it, it really is about 2 patients a month. It's still slightly under, but maybe 1 in 7/8 of a patient, but we still claim we still show pro formas based on 2 patients a month. And the physicians are okay with that, but it does require an additional conversation because of the increase. So it's not like we say, oh, okay, your interest rate is 4%. We have to go to and say, okay, now your interest rate is 9%. So there is a difference, and it requires an additional conversation or two to go through that, but the breakeven is still 2 patients a month. Now the ROI is still very, very good, as we were saying. It still provides them the opportunity to get into that technology, and we still don't see any of our customers doing less than 10 patients a month. So they don't have a shortage of patients. And then the big point of the fair market value lease is the fact that its characteristics is that it's a nonrecourse off-balance sheet lease, which means the doctor, if he's in business for 3 years, and we deal with all doctors that are in business for more than 3 years, they don't have to come up with any personal guarantees. Not signing personal guarantees and having off-balance sheet financing is tremendously important, especially when they bring in their CPAs. Their CPAs are telling them this is -- it's a no-brainer, you need to go into this. Now with all that being said, we're still seeing the majority of the physicians buying in cash, okay? They have the cash because they have the volume, and they have the confidence with the cash to buy the products. So the majority of our sales are still with cash purchases. And these -- the fair market value lease is a great adjunct to get into the conversation, but when push comes to shove and it comes to the end and they're starting to talk to their CPAs, their CPAs are saying, buy it outright? You got the cash do it. I think -- a lot of it has to do with Section 179 of the IRS code. And I remember, and I say the story often, we were sitting at dinner in a month of December with a physician talking about buying a system. And at the time that we were having dinner before we took our first bite, his CPA called him and was telling him about his financial situation and is there something that he could buy. And he says, well, I'm just sitting with the Sensus guys now talking about buying a machine. And you could hear the CPA at the end of the round say, buy 2. So we only sold one, but the CPA said, buy 2, and that's because there was so much money being made that the guy needed a tax deduction. So that's where it is with the fair market value lease. It's been a tremendous tool for us. It's a tremendous topic of conversation. But again, when push comes to shove, the majority of these doctors are buying in cash. Okay. And yes, no, I know Section 179 always helps out with fourth quarter sales. In terms of China because I know that, that's been sort of volatile on a quarterly basis. Were there any sales to China at all this quarter or no? Yes. We announced that we had 6 systems shipped to China. And overall for the year, we had our best year of all selling -- sending 16 units to Asia altogether. Now there was one in Korea and Taiwan was another place where we sold the unit. So you had 14 units to China, 16 units overall to Asia. So that's a very good year. We -- and keep in mind that for the entire year, especially in China, you have the COVID problem that really locked everything up there. That's starting to open up. As we understand, China opened up from COVID just prior to their new year, which allowed a lot of their citizens to be traveling overseas, of which many came to the United States. So if China remains open, which we think it will, we are hoping to do even better in Asia for 2023, but that's a good business for us. Okay. Great. And then last question on the Silk laser hair removal system. I know you've just introduced that. Do you have any feedback in terms of orders? Can you talk about that a little bit? Yes. I mean the feedback has been very, very positive from the initial introduction at the Fall Clinical in Las Vegas in October. So we're seeing some good volume that's being generated with our prospect base. And now that we've hired what we consider a real specialty guy who's going to drive our aesthetics business, I think that we're going to be successful with the product because it is unique. It does have multiple energies that can be used simultaneously. It is portable. It is very cost effective at a low range as far as the cost, and without consumables, which is exactly what the physicians are requesting. So I think that as we become more known as we start to show it more, I think that we're going to be more going to be selling more systems. We will have several units available at the American Academy of Dermatology, the upcoming meeting this weekend. It's going to be displayed following 2 weeks later at the Fall or the Winter clinical, it will also be displayed. And so as we gain exposure, I think that we're going to see some sales coming about. So we're excited about it. That's all the time we have for questions today. And this concludes our question-and-answer session. I'd like to turn the conference back over to Joe Sardano for closing remarks. Okay. Well, listen, thank you, everybody, for the questions. Thank you for being on. And once again, thank you for your time this afternoon and for your interest in Sensus Healthcare. Again, I want to and wish to repeat that Sensus Healthcare is in the best position that we've ever been based on our technology, our people, our ever-demanding patient population seeking a noninvasive solution to their skin cancer needs. We're looking forward to another great year. I also want to mention that we'll be presenting at the 35th Annual ROTH Conference. It's being held March 12 through the 14th in Laguna, California, and we hope to see as many of you there as possible. In the meantime, thank you very much. We look forward to talking to you again at our next results conference in early May. Thank you.

EarningCall_73

Greetings and welcome to the First American Financial Corporation Fourth Quarter and Full Year 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] A copy of today's press release is available on First American's website at www.firstam.com/investor. Please note that this call is being recorded and will be available for replay from the company's investor website and for a short time by dialing 877-660-6853 or 201-612-7415 and entering the conference ID 13735364. Good morning, everyone, and welcome to First American's fourth quarter and full year 2022 earnings conference call. Joining us today on the call will be our Chief Executive Officer, Ken DeGiorgio and Mark Seaton, Executive Vice President and Chief Financial Officer. Some of the statements made today may contain forward-looking statements that do not relate strictly to historical or current fact. These forward-looking statements speak only as of the date they are made and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on these risks and uncertainties, please refer to this morning's earnings release and the risk factors discussed in our Form 10-K and subsequent SEC filings. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company, relative to earlier periods and relative to the company's competitors. For more details on these non-GAAP financial measures, including presentation with and reconciliation to the most directly comparable GAAP financials, please refer to this morning's earnings release, which is available at our website at www.firstam.com. Thank you, Craig. At the very beginning of 2022 many expected the strength of 2021 to continue into the year. Early on, however, we saw that the cycle was turning. As a result, we began to sharpen our focus on expense management. Due in part to these early expense management efforts, the benefit of growth in net investment income and a record-setting year in our commercial business, First American achieved a full year title segment pretax margin of 10%, or nearly 12% excluding net investment losses on total revenue, that declined 9% to $7.5 billion. Continuing challenging market conditions weighed on our fourth quarter financial results. In the quarter, we generated revenue of $1.7 billion and earnings per diluted share of $0.52 or $1.35 per share, excluding net investment losses. In our title segment, we delivered a pretax margin of 7%, or 10% excluding net investment losses. The key drivers of these results were our ongoing focus on expense management and continued growth in investment income. Our Specialty Insurance segment also contributed with a pretax margin of 14%, or 18% excluding net investment losses. Turning to our key title businesses. Refinance has been declining for the past two years, so it's now at trough levels. In January, we opened 324 refinance orders per day, down from over 1,100 per day a year ago. Our open purchase orders were down 37% this quarter. Based on our order trends, we are seeing early signs of stabilization, with open purchase orders improving from down 40% in November to down 37% in December, and down 31% in January. The recent decline in mortgage rates, combined with lower home prices has led to some improvement in affordability and therefore, demand which makes us cautiously optimistic that the purchase market is in the early stages of recovery. Our commercial business had a record year in 2022, with revenues up 2%. However, open orders have been meaningfully declining over recent months. Open orders were down 27% in the fourth quarter, and this downward trend has continued in January with open orders down 20% compared with last year. While uncertainty remains high, our expectation for our commercial business in 2023, is that it will be another good year, but below 2022's record level. Despite the challenging environment ahead of us, we believe the company is well positioned to emerge even stronger when the current down cycle ends. Our healthy balance sheet allows us to continue to actively pursue capital deployment opportunities including, investing in key strategic initiatives, and acquisitions as well as returning capital to shareholders. We continue to make good progress at Endpoint, our digital title and settlement company and our instant title decisioning initiative, for purchase transactions. These investments today will pay out over time by adding efficiency, improving the way customers interact with us and importantly, freeing up our people from process-oriented tasks, to further enhance their ability to focus on delivering superior customer service. On the M&A front, we continue to have the financial flexibility to pursue attractive opportunities that may arise. And during 2022, we returned $658 million to shareholders through share repurchases and dividends. In closing, I want to thank our employees for all their hard work and accomplishments in 2022, and for their dedication as we navigated through the sharp downturn in the real estate market. It is their professionalism, talent and customer focus that drives our company's continued success. Thank you, Ken. This quarter we earned $0.52 per diluted share. Included in this quarter's results, were $0.83 of net investment losses. Excluding these losses, we earned $1.35 per diluted share. Two items contributed to our net investment losses this quarter. First, we realized $79 million of losses on our fixed income portfolio in connection with our tax planning strategies. Second, we incurred $46 million of unrealized losses, related to our venture portfolio. Revenue in our title segment was $1.6 billion, down 29% compared with the same quarter of 2021. The Commercial revenue was $251 million, a 34% decline over last year. Our escrow balances, which are largely driven by commercial activity, totaled $10 billion at the end of the quarter, down from $11 billion in the fourth quarter of last year. Purchase revenue was down 30% during the quarter driven by a 36% decrease in the number of orders closed, partially offset by a 9% increase in the average revenue per order. Our revenue per order for purchase transactions continue to benefit from recent acquisitions of escrow companies in Southern California. We include escrow revenue from these transactions in the numerator without a corresponding title order in the denominator. Excluding acquisitions, average revenue per order would have been up 1%. Refinance revenue declined 74% relative to last year due to the increase in mortgage rates. In the Agency business revenue was $753 million, down 25% from last year. Given the reporting lag in agent revenues of approximately one quarter, these results reflect remits related to Q3 economic activity. Our information and other revenues were $241 million, down 25% relative to last year. The decline was the result of lower transaction levels across several business units, driven by the decline in residential mortgage originations, including the company's data, property information and post-close services. Investment income within the Title Insurance and Services segment was $132 million, a 169% increase relative to the prior year. Rising short-term rates are benefiting the interest income we receive on our cash and investment portfolio, escrow balances and tax-deferred property exchange balances. As short-term rates have risen, we expect investment income to continue to be a tailwind for earnings in 2023. On the expense side, we continue to manage expenses given the decline in transaction activity. Excluding acquisitions, our success ratio was 46%, meaning that our personnel and other operating expenses declined $232 million and our net operating revenue declined $503 million. Though below our long-term target of 60%, we believe our success ratio was a good outcome, given the sharp decline in transaction activity and our commitment to continue to fund strategic initiatives. In addition we recorded $17 million of severance expense this quarter. As Ken highlighted, we continue to invest in businesses and innovation initiatives that we believe will positively contribute to our profitability in the long-term but at this point in the life cycle adversely impact our financial results. Last quarter, we discussed three initiatives: ServiceMac, Endpoint and instant decisioning for purchase transactions, which together generated a pre-tax loss of $21 million this quarter, impacting our pre-tax title margin by 150 basis points. Notably ServiceMac turned EBITDA positive this quarter. Pre-tax margin in the Title segment was 7.1% or 10.4%, excluding net investment losses. Turning to the Specialty Insurance segment. Total revenue in our home warranty business totaled $108 million, up 4% compared with last year. Pre-tax income in home warranty was $15 million, down from $17 million in the prior year. Excluding net investment gains and losses, pre-tax income was $21 million, up from $15 million last year. The loss ratio in home warranty was 47%, down from 52% in 2021, driven in part by a lower frequency of claims. The financial results of our Property and Casualty business are no longer material. The effective tax rate for the quarter was 6.9%. Excluding the impact of our net investment losses, our tax rate would have been 18.0%, less than our normalized tax rate of 24%, due primarily to a shift in the mix of earnings to insurance businesses, which generally premium tax and real estate income tax. In the fourth quarter, we repurchased 687,850 shares for a total of $34 million at an average price of $49.47. For the full year of 2022, we repurchased 7.5 million shares for a total of $441 million at an average price of $58.65. Our debt-to-capital ratio as of December 31st was 30.0%. This ratio is impacted by both our accumulated other comprehensive loss and our secured financings payable. Excluding these two items, which is more in line with how our banks view the ratio our debt-to-capital ratio was 22.9%. On February 1st, we repaid $250 million of senior unsecured notes that matured, using cash on hand at the holding company. Later in the year, we expect to either draw on our line or issue new senior unsecured notes to replace this debt depending on capital market conditions and other factors. As of December 31st, we recorded accumulated other comprehensive loss of $868 million. This quarter we elected to sell fixed income securities which produced $79 million of capital loss, in connection with our tax planning strategy to offset capital gains we recognized in 2019, 2020 and 2021. We expect this strategy to ultimately generate $24 million of cash benefit. Finally, in order to provide additional transparency to investors we are making two enhancements to our disclosures. First, in addition to disclosing purchase and refinance orders we will break out commercial orders and our monthly disclosures beginning with our January report. Second, in the first quarter we will move our property and casualty results to our corporate segment and disclose home warranty as a stand-alone reporting segment. Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bose George with KBW. Please proceed with your question. Hey, guys. Good morning. Mark can you repeat what you said about the severance expense this quarter? And then, going forward, do you think we could see more of that, or do you feel like you've kind of right-sized to the current environment? Hi. Good morning Bose. So we had $17 million of severance expense, in the fourth quarter. I think heading into the first quarter, we'll have a little bit more severance but not quite to the extent that we had in the fourth quarter. Okay. Great. Thanks. And then, on the tax rate going forward, should we just use kind of the normalized rate, or did anything kind of change? No, we look at that, because if you look over the last couple of years, normalized tax rate has actually been less than 24%, because we've gotten discrete benefits here and there. But I think for 2023 and moving forward, somewhere between 23.5% and 24% is our normalized tax rate. Yeah, thanks. I was hoping to get some color on just the mix of the commercial business in the quarter. You still seem to be benefiting from a pretty large ARPO, kind of what's your expectation for that as we get into 2023? I would say, we're going to -- we've had obviously a lot of momentum in commercial throughout most of 2022. Fourth quarter was a little bit more challenging for us. Revenue was down 34%. It was still good relative to historical standards. It just wasn't as good as the prior year which was a record. Looking at 2023, I'd say, orders are definitely softer now, closing to softer, I think, in first and second quarter. And we actually think that things will pick up in the second half of the year based off of conversations we're having with our customers. But I think in terms of ARPO, certainly for the next six months we would expect to see a decline in ARPO in commercial just because we're not seeing the same level of larger transactions that we have historically including last year. Okay. Got it. And then just a related question on the investment income. I know there's probably still a little bit more tailwind from a few more Fed hikes. But as the commercial orders trend down, is there a headwind there on investment income from just having kind of lower 1031 exchange balances? There is a headwind. I would say, just on investment income, the good news is that when we look at the Fed forward curve, it's actually more favorable now than it was a year ago -- or sorry last quarter. And so the Fed rate 75 basis points in November and 50 basis points in December, we still haven't gotten the full effect of that which we will get here in the first quarter. That's the good news. The bad news is balances are falling and balances are falling for two reasons. One is, there's just natural seasonality in January commercial, we typically close a lot of deals at the end of the month and then our escrow balances fall heading into January. So we're seeing a normal seasonal impact to our balances. But we're also, of course, seeing more of a cyclical impact or balances to with commercial down and the purchase market down. So, overall, we think investment is going to continue to be a tailwind for us, but certainly balances coming off has hurt us a little bit. I think we've always given this guidance for the last couple of years of -- we would generate $15 million to $20 million of annualized investment income for every rate increase. Now we're probably at the low end of that range given where our balances are. The ARPO, you talked about this phenomenon where you're helped by the M&A on the residential side would have been 1% otherwise. When do you lap that? And does it go back to the kind of 1%? We'll lap it in the first quarter. So Q4 here is going to be the last quarter that we talked about that, Q1 will have a pure kind of year-over-year ARPO for the Southern California escrow issue. Yes. Okay. And then success ratio still seems pretty good under the circumstances. Would you anticipate the success ratio should improve? It certainly all depends on order trends and a lot of things you can predict. But given what you see on the personnel front how are you thinking about success ratio? Hey, Mark, this is Ken. We think the success ratio will probably improve a little bit. But I'll add too is we've always been real conscious about expense management and that level of consciousness will continue if the market continues to deteriorate, we're forever conscious on expenses. Hey, just a two-part question here on the Specialty Insurance segment. Obviously, really good results there. We were thinking that pushed up a bit with the home warranty business, kind of, rising the surface. But you guys were well ahead of us. So the first question is could you maybe talk to what drove the sequential revenue growth in operating revenues and then why also the [indiscernible] and other owes up so much? And then from a bigger picture do you think you've positioned that segment to return to growth this year? Well, I'll give some high-level comments and then Mark can come in on the numbers. But I think, yes, it was a good quarter considering the pressure in the real estate market and the resulting impact on the real estate channel in our home warranty business. Our claims are still -- the severity is still high on claims, but the frequency is down. So we think frequency is probably in more normalized levels. I'll note that we've been deploying more resources in our direct-to-consumer business and we're seeing good results there. And we're also realizing some of the benefits of the price increases we've been making as well as a pretty meaningful pick-up in renewal rates. Yes. The only thing I would add there John is at the end of the year in our home warranty business we do an annual kind of revenue true-up depending on how the claims patterns came in. And we got -- our revenue true-up in home warranty was $8 million this quarter. So we did get a benefit of that. And there was about $2 million of expense associated with that too as we trued up our deferred acquisition costs. So it was about a $6 million impact to pretax for Home Warranty. Okay. That's helpful. And then I wanted to drill down on the segment earnings. I think that was probably the best segment margin you guys have probably ever had. What's a good margin to think about for the full year just assuming that we run with -- it sounds like you're not going to have much of an impact of the wind-down of the P&C business moving forward. But maybe just think about what that segment margin looks like and then where you think you can take that maybe over time? Yes. And one thing I'll point out too is that we're also seeing a benefit of the P&C wind-down a year ago we lost $8 million in our P&C business on a pretax basis. And this quarter was effectively breakeven. Even in the third quarter we lost $9 million. So we're getting that kind of cleared out of our specialty segment. But in terms of like going forward typically the Home Warranty margins have been somewhat better than the Title margins. I mean I would say low double-digit margins is kind of a normalized market for Home Warranty. And they've done a really good job of growing revenue particularly the direct-to-consumer channel. And so we think the home warranty will grow through the cycle a little bit faster than the overall type of business. There are no additional questions at this time. That concludes this morning's call. We would like to remind listeners that today's call will be available for replay on the company's website or by dialing 877-660-6853 or 201-612-7415 and enter the conference ID 1373-5364.

EarningCall_74

Ladies and gentlemen, thank you for standing by. My name is Laura, and I will be your conference operator today. Welcome to the Fortis 2022 Annual Earnings Conference Call and Webcast. During the call, all participants will be in a listen only mode. There will be a question-and-answer session following the presentation. [Operator Instructions] Thanks, Laura, and good morning, everyone, and welcome to Fortis' fourth quarter and annual 2022 results conference call. I'm joined by David Hutchens, President and CEO; Jocelyn Perry, Executive VP and CFO; other members of the senior management team, as well as CEOs from certain subsidiaries. Before we begin today's call, I want to remind you that the discussion will include forward-looking information, which is subject to the cautionary statement contained in the supporting slide show. Actual results can differ materially from the forecast projections included in the forward-looking information presented today. All non-GAAP financial measures referenced in our prepared remarks are reconciled to the related U.S. GAAP financial measures in our annual 2022 MD&A. Also, unless otherwise specified, all financial information referenced is in Canadian dollars. Thank you and good morning, everyone. 2022 was a great year for Fortis. Our utilities invested $4 billion of capital for system resiliency and modernization and to interconnect cleaner energy to our systems. These investments translated into strong earnings and rate base growth, demonstrating the value of our organic growth strategy and supporting our roughly 6% dividend increase in 2022. On the sustainability front, we reduced our 2022 annual greenhouse gas emissions by 28% since 2019, keeping us on track to reach our carbon reduction targets. As part of their annual Board Games report, The Globe and Mail ranked Fortis number one among 226 companies in the S&P/TSX Composite Index for good governance, reflecting our board's commitment to best-in-class practices. And most importantly, we remain focused on delivering safe and reliable service to our electric and gas customers across our North American utilities. These are the core tenets of our value proposition. And at Fortis, as we keep this at the forefront as we mitigate and respond to the impacts of climate change. And while our reliability metrics continue to outperform industry averages in 2022, our utilities remain committed to investing in their energy systems to better withstand the increasing frequency of severe weather events. And with the backdrop of inflation reaching 40 year highs, our teams have successfully managed average annual increases in controllable operating cost per customer to approximately 2% over the past five years by finding efficiencies through innovation, and process improvements. And while we have limited ability to control energy commodity costs that are passed through directly to our customers in some jurisdictions, we are helping our customers manage their bills by extending recovery periods and through energy efficiency and payment assistance programs. Over a 20 year timeframe, Fortis has delivered average annual total shareholder returns of approximately 11% or 751% in total, well above the benchmark indices shown on the slide. While our one year total shareholder return for 2022 was below our historical average returns, we expect to continue to deliver stable and compelling returns over the long run. At Tucson Electric Power, the closure of our last unit at the San Juan Generating Station, removed another 170 megawatts of coal-fired generation from our portfolio and contributed to our 28% reduction in Scope 1 emissions compared to 2019 levels. With this progress, we are more than halfway to achieving our target to reduce greenhouse gas emissions 50% by 2030 and are on track to meet our 2035 target of 75% reduction. Upon achieving that target, we expect our assets will be primarily focused on energy delivery and renewable carbon free generation. Last year, we also established a 2050 net zero Scope 1 greenhouse gas emissions target, reinforcing our long-term commitment to decarbonize while ensuring we preserve customer reliability and affordability. In the fourth quarter, we rolled out our new $22.3 billion five-year capital plan, our largest to-date. The plan consists of virtually all regulated investments and a diverse mix of highly executable projects supporting rate base growth across our portfolio of utilities. It also includes $5.9 billion for investments that directly support cleaner energy. Over the next five years, we expect rate base to increase by $12 billion from approximately $34 billion in 2022 and to over $46 billion in 2027, supporting average annual rate base growth of 6.2%. From a growth perspective, our teams continue to pursue opportunities beyond the base plan. Key areas of focus include incremental investments, supported by the Inflation Reduction Act in the U.S., Climate Adaptation & Grid Resiliency, as well as LNG and renewable fuels. Progress also continues on MISO's long range transmission plan. As we previously discussed, ITC anticipates transmission investments in the range of US$1.4 billion to US$1.8 billion through 2030 for Tranche 1. ITC currently has US$700 million of this estimate included in their five year capital plan. Tranche 2 is well underway with the initial concepts identified by MISO in late 2022. The second tranche will look at a new future, DOV2A, which calls for more renewable penetration and higher electricity demand. And while it is still early in the planning process, MISO Board approval of Tranche 2 projects is targeted for the first half of 2024. The Inflation Reduction Act is expected to support TEP's clean energy transition by reducing the cost of new renewables and providing funding to aid the communities impacted by the exit from fossil fuels. The TEP team continues to work through its all source request for proposals, which seeks to secure renewables and energy storage to support their transition away from coal. In total, we estimate incremental investments of approximately US$2 billion to US$4 billion through 2035 will be required to implement TEP's current integrated resource plan. TEP expects to file an updated plan later this year. Next turning to Slide 10, we increased our dividends paid per common share to $2.17 in 2022, up approximately 6% from 2021, marking 49 consecutive years of dividend increases. Looking ahead, we remain committed to building on our track record through the execution of our organic growth strategy that supports our 4% to 6% (ph) dividend growth guidance through 2027. Thank you, David, and good morning, everyone. Before I get into the annual results, I want to briefly touch on our fourth quarter performance. Reported earnings were $370 million or $0.77 per common share, $0.08 higher than the fourth quarter of 2021. Adjusted earnings were $347 million or $0.72 per common share, $0.09 higher than the fourth quarter of 2021. The key drivers of growth include strong regulated rate base growth across our utilities as well as higher sales and transmission revenue in Arizona, higher hydroelectric production in Belize, which was up significantly from historically low levels in the fourth quarter of 2021 and higher gas margins at Aitken Creek also contributed to earnings growth. And finally, foreign exchange favorably impacted the translation of our U.S. denominated earnings during the quarter. Corporate cost for the quarter reflect higher finance costs and taxes. On an annual basis, reported earnings were $1.3 billion or $2.78 per common share, $0.17 higher than 2021. Adjusted earnings for 2022 were also $1.3 billion or $2.78 per common share. As the adjustments to reported earnings offset one another in 2022. Adjusted earnings per common share of $2.78 represents 7% growth or approximately 6% absent foreign exchange impacts. The waterfall chart on Slide 14 provides the annual EPS drivers by segment. And while there were several market factors impacting our 2022 results, underlying growth from our regulated utilities was the primary driver of year-over-year growth. Our largest utility ITC increased EPS by $0.07, again reflective of strong rate base growth. Lower stock-based compensation costs at ITC in 2022 were substantially offset by losses on investments that support retirement benefits, higher non-recoverable finance costs and gains recognized on interest rate swaps in 2021. The $0.07 EPS increase for Western and Canadian utilities was driven by rate base growth. The increase in EPS of $0.06 for our U.S. electric and gas utilities was mainly driven by UNS. In Arizona, higher sales and transmission revenue more than offset higher costs associated with rate base growth, not yet included in customer rates, higher operating expenses, and losses on investments, including certain retirement benefits. Our Energy Infrastructure segment contributed to a $0.05 EPS increase, mainly driven by higher gas margins at Aitken Creek. Rate base growth and higher electricity sales in Eastern Canada and the Caribbean contributed a $0.03 increase in EPS compared to 2021. Foreign exchange favorably impacted the translation of our U.S. denominated earnings, which increased annual EPS by approximately $0.06. The EPS change in corporate of $0.11 was mainly driven by mark-to-market losses on both total return swaps and foreign exchange contracts, as well as higher finance costs. The remaining decrease was largely related to increased corporate costs and taxes. And as a note, the mark-to-market losses in the corporate segment was more than offset by the favorable foreign exchange impact just discussed and lower stock-based compensation recognized across the utilities in 2022. And lastly, with our dividend reinvestment program, EPS decreased $0.04 due to higher weighted average shares outstanding. As you can see on Slide 15, we were active in the capital markets again in 2022, issuing over $3 billion in long term debt. Debt issued at Fortis, Inc. and ITC Holdings, mainly refinance maturing debt, while our regulated utilities issued debt in support of their capital programs. Debt maturing at Fortis and ITC Holdings averages approximately US$400 million, annually through 2025. With our recent debt issuances coupled with almost $4 billion available on our credit facilities, we continue to maintain a strong liquidity position supporting our $22.3 billion capital plan as David mentioned earlier. And despite several macro headwinds, in 2022, we saw an improvement in our credit metrics and achieved a cash flow to debt ratio of 11.7%. And when we consider the import of foreign exchange, the ratio is actually 12%. Our credit metrics coupled with Fortis' low business risk profile continue to support our investment grade credit ratings. Turning to some of our ongoing regulatory proceedings since we last updated the market. At ITC, FERC issued an order in November denying the complaint filed by the Iowa Coalition for Affordable Transmission, which sought to lower ITC Midwest equity ratio. We also await next steps from FERC on the MISO based ROE and supplemental NOPR on transmission incentives. The timing and outcome of both proceedings remain unknown. In Arizona, TEP's rate case is ongoing. In its application, TEP requested rate base of US3.6 billion and allowed ROE of 10.25% and equity layer of 54%. Arizona Corporation Commission staff have recommended a 9.6 allowed ROE with rate base and equity layer largely consistent with TEP's request. Rebuttal (ph) testimony is expected to be filed over the next month with hearings scheduled to commence in late March. Last month, Central Hudson filed a response to the New York Public Service Commission Show Cause order regarding the deployment of the utilities new customer information system. Central Hudson has devoted significant resources to rectify matters with the system and are making strong progress in resolving any remaining billing issues. The timing and outcome of this proceeding remains unknown. At Fortis DC (ph), the generic cost of capital proceeding remains ongoing with the decision expected in the second quarter. And lastly, the Alberta Utilities Commission issued a final decision in December approving Fortis Alberta's 2023 revenue requirement reflecting a 5% increase in distribution rates. The decision is expected to form the basis for going in rates for the third PBR term starting in 2024. Thank you, Jocelyn. To recap, in 2022, we invested $4 billion in capital delivered strong EPS and rate base growth, further reduced our carbon emissions, managed operating costs, and were recognized as a leader in Canada for our governance practices. These accomplishments wouldn't be possible without the continued commitment of our 9,200 people. Moving forward, we are focused on executing our $22.3 billion capital plan, which will drive rate base growth of 6% and support our dividend growth guidance of 4% to 6% through 2027. Thank you, David. This concludes the presentation. At this time, we'd like to open the call to address questions from the investment community. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Maurice Choy from RBC Capital Markets. Please go ahead. Thank you, and good morning. My first question, Dave, you mentioned in your prepared remarks that there is an incremental spending of $2 billion to $4 billion through 2035 to implement the current TEP IRP, although, there is a new plan due late this year. How would you characterize impact of the IRA on this spending? Is that a case where the amount is likely not change or go up, or is it a case where mixes or projects will change? And also on timing, is there a way that you can accelerate the decarbonization projects? Yeah. Thanks, Maurice for that question. Actually, it might be a little of everything and that's what we're doing in the Integrated Resource Plan, update now is to figure out exactly what that means from a timing perspective, investment opportunity perspective as well as cost associated with the renewable energy investments that we have to make to keep on that transition path that we have there. I'll have to say that probably one of the biggest benefits of the Inflation Reduction Act is that those tax credits, not just that there are those tax credits, but that those tax credits are transferable. I think that really levels the playing field between utility investments and PPAs. So you don't have to find some fancy way of and in the tax equity et cetera. So all things being equal, I think that's another notch in the column for doing more utility owned and utility constructed renewals. And maybe just to follow on to that, you obviously have a new chairperson within the commission there. Any thoughts about changes in how the commission or chair looks at things in terms of affordability, in terms of decarbonization? Not right out of the gate. I'll maybe turn that over to Susan to see if she has any opinions after her initial conversations with the new commissioners there at Arizona Corporation Commission. It is obviously after the election, we've got two new commissioners and we're looking forward to getting our cases adjudicated before them. But I'll turn it over to Susan to answer that in a little more detail. Okay. Thanks, Dave, and thanks, Maurice for the question. Yeah. I do think it's early to tell how our new composite of commissioners will affect policy this year, but we do have a new Chair, Commissioner O'Connor. We do have two new commissioners. We've actually met with the new commissioners. They came down to Tucson last month, which I think is a really good sign that they're interested in understanding our operations. They wanted to see our generation fleet. They wanted to see our control room where we participate in the energy and balance market. I think there is a greater understanding of our business. We’ll always lead to better outcomes. We really pride ourselves in having strong relationships with our commission and that trend is continuing with these new commissioners. But I do think in terms of policy, it's pretty early to tell how the new chair and the new commissioners will impact policy. Great. Thanks for that. And maybe I'll just finish off with FERC matters. There are obviously a number of regulatory items that remain outstanding. How do you see these skinning resolve with the four member FERC makeup being what is it right now? And maybe as a quick follow-up thoughts on the MISO base ROE? What are you booking in right now? And then if there's a possibility of proactively requesting and justifying for a higher rate? Yes. Thanks, Maurice. I think we've talked about this in the past. It's really tough to see where some of these policy decisions are going to land and how it's going to be executed with the two commission, two Republican and two Democrats. And seeing how that -- how the commission functions under the new Interim Chair, Chair Phillip’s. We do think that based on Chair Phillip’s comments that he's really going to be pushing down the same path to get some of these policy issues that are in the NOPR’s, the transmission planning and cost allocation, NOPR’s, as well as the interconnection in queue NOPR, it seems like he's really going to continue to progress those. Has a big strong focus on reliability as you might imagine from his history working for NERC, but also on making sure that there's energy equity and energy justice involved in some of these decisions as well. So we're looking forward to seeing him move forward on those dockets. On the ROE, I'm actually going to turn that over to Linda Apsey, our CEO of ITC because she can explain exactly her thoughts on that. Great. Yes. Thanks, Dave. Thank you, Maurice, for the question. Yeah. We continue to book basically and assume that 10.77% all in ROE. It's obviously it's premature, it's speculative to know or understand what FERC might do as a result of the court remand of the base ROE case. So we are continuing forward with the current ROE projections. With regards to possibility for, sort of a new tool by filing to file for a new ROE, that's certainly something that we continue to track and monitor, as we continue to track sort of the mark-to-market rates. Obviously, we are providing FERC with the appropriate sort of time, if you will, to respond to the court remands, but we are continually in discussions and assessing our options with respect to whether we would move forward with a new updated 205 filing. At this time that decision has not been made by MISO transmission owners. Thanks, Linda. I'd just add to that directionally obviously with the data that would be updated and any new ROE filing, the current data and higher interest rate would be supportive of a higher ROE than the data that was used to set these prior ROEs back that data is six, seven, eight years old. Good morning, everyone. I appreciate the thoughts on the Tucson rate filing, but I was hoping you could maybe dive a little bit deeper when you take a look at the staff testimony for the staff recommendation, aside from the ROE, is there anything that gives you a pause for concern and how have conversations gone with other stakeholders? And so that may be a little bit early just given when the evidence is due? Yes. I'm going to kick that over to Susan Gray, who I didn't properly introduced. I just introduced her as Susan. But you all likely know Susan Gray is the CEO of UNS Energy. So I'll kick it over to her to give you some insight on where we see that rate case going. Sure. Yeah. Thank you for the question, Rob. So I think your question was, do we have any concerns based on what staff filed? And I think that, we think that with a file was largely in line with our initial filing. And so we think that there's pretty small gap between their testimony and ours. We're still in the rebuttal phase, so the rebuttal testimony is due next week. And we're optimistic that we can reach some stipulations through this process and go into the hearings, which start March 29 in a pretty good position in terms of agreements with staff and other major interveners. We have not had significant conversations with the other interveners at this time. So I think there was a precedent set with the stipulations that were agreed to by staff and Southwest Gas, in the Southwest Gas rate case that recently was settled. So we're hopeful that we can also work with staff to get to some stipulations prior to the hearing. All right. Appreciate the color. Moving north, can you give us some updated thoughts on the build out of LNG at Tilbury, you were able to get some First Nations agreements there recently. However, the regulatory framework is still, slow and ongoing? Yeah, Rob. That's great. I'm going to -- actually, I'm going to kick this right over to Roger Dall’Antonia. He's been working on some of these agreements as recent as last week, so he's got the most recent updates. Roger? Thanks, Dave. Good morning, Rob. So on Tilbury, there's two primary regulatory processes. One is the environmental assessment on the jetty, which is the infrastructure to allow for filling a bunkering barges to fuel marine vessels. The second is the environmental assessment for the build out of the Tilbury site, including a storage tank and additional liquefaction. In both instances, the environmental assessment office, there's obviously significant focus on indigenous support for those projects. The deals that we've been announcing recently primarily focus on the jetty process. That's currently now with both the provincial and federal environmental assessment offices for referral. We're hoping to see a decision on the jetty sometime in the next few months. And the environmental assessment process for the Tilbury build out tank and the further liquefaction is in the stage of preparing the detailed application, working with environmental assessment process in scoping out the application as well as considering how to engage indigenous communities to have indigenous environmental estimates as part of the process. Thank you. I'm wondering, if you could give us a sense of how you view the relative attractiveness of different financing options with the filing of your short-form based shelf prospectus, wondering where prep (ph) shares sit in terms of your levers to finance either your current capital plan or if you choose to maybe accelerate some of the decarbonization initiatives and add to the current plan? Can you talk about also your capacity to add new projects to the current plan before considering other levers like discrete common equity? Thank you, Linda. This is Jocelyn. Yeah. So with press, yeah, it's certainly a part of our toolkit today. And so we're always watching that market. When we laid out the five year capital plan in the fall, right? It was a pretty simple funding plan that we had for that $22.3 billion capital, no discrete equity, just a DRIP. And most of the debt is at the regulated entity at Fortis Inc. press (ph) certainly will be a part of the equation and we're looking at all sources, right, of funding. But very, very simple and we expect to keep our balance sheet where it is from a capacity perspective. I actually, clearly, it depends on DRIP participation, which remains quite healthy, thus far. It really going to depend on the timing of any additional capital, right? I mean, if for some chance that we advanced more of the LRTP projects. I'm just using those as an example or the investments in Arizona. It's possible that we'll go back to the drawing board. But I actually feel there's certainly a bit of capacity in our plan today. So it's not no immediately that if we see some variances from our annual plan right now that we'll be able to handle it. But if in fact we see a material change, then as I always say, I guess we go right back to the drawing table and everything goes back on the table. But we do have a bit of capacity in our funding plan today. And I think a more green [indiscernible] Linda, I do expect more green financings coming out of our subsidiaries. We're seeing more and more green financings because we're getting more and more involved in cleaner energy investments. So I do expect to see that trend to continue as well. Thank you. Appreciate the context. And maybe just on the flip side of the equation, recognizing that affordability is at the forefront in many jurisdictions. What are the thoughts on potentially deferring other discretionary capital to the extent that Fortis and its subsidiaries choose to accelerate green initiatives. And what sort of forbearance is there at the rating agencies to continue to kind of defer recovery of those expenses as kind of the customer bill pressures, one of the levers as well to consider. So I'll start that answer, Linda. I think on deferring capital, we don't see that as necessary on a going forward basis. You have to remember that not all capital immediately either contributes to rate increases or even shows up in rate increase. We always like to prioritize our capital based on doing that capital first that saves our customers money, the old OpEx for OpEx (ph) kind of trade. Even the resource transition that we're doing down in Arizona as we shut down a coal plant and remove the fuel and O&M and replace it with investments in infrastructure. It's a good story for customers, investors and the planet. So those are the things that we're really focused on and we can't slow down the necessary investments that we need to make in reliability and resiliency. And in fact, those are ones that we probably need to step up more on a going forward basis to make sure that our systems are ready to handle more severe weather events going forward. So that's kind of on the capital side. On cost control side, that's something that we're always focused on. So we know that every dollar that goes in there, we want to figure how much that -- how much of that we can offset with other costs and that's really things that we can do across the board. So we start with obviously managing our capital, managing our expenses, looking at innovation and efficiencies as best we can. We look at the entirety of the bill, what our customers use, focus on energy efficiency conservation programs, we focus on, in our vertically integrated utilities on how we dispatch that energy to maximize the benefits of being in the market for our customers. And at the end of the day, as you alluded to, we have to find a couple of things for assistance for our customers. One [indiscernible] assistance to help them pay their bills if they're struggling, which is something that we always do and obviously step up even more so in hard economics times like we're focused or like we're in today. But we also look at ways that we can -- in essence use our balance sheet when we need to use our balance sheet to spread out some of these cost recoveries and smooth the bill impacts for our customers. And those are things that we have done in the past and will likely do going forward just to help manage that affordability and impacts on our customers. And just to clarify the debt rating agencies have they communicated kind of any sort of notional limit to how the balance sheet can be used to smooth out bill impacts or is that de minimis in the grander scheme of things with them? Linda, this is Jocelyn. No, they have not, specified them to the – to that detail. We have conversations with them, of course, about how we plan to fund the capital program and how we see recovery. And affordability is clearly proud of that discussion, but they've not defined any boundaries by which, we can execute and fund the capital program. Thanks. Good morning, everyone. I just wanted to talk about sort of longer term or interim growth prospects at ITC. Right now in the five year plan, you're looking around 6% rate base growth. As you look into sort of long term planning prospects there 2A talked about David, expectations around maybe seeing a higher growth in the back half of the decade. We've seen some other transmission companies in MISO growing north of 8%, is that something you guys think you can achieve as you move through these planning processes? Mark, that's a great question and its early days for that right now. I think, as we put out our five year capital plan. I just want to press last fall, right? So we immediately then start on the next one. And we try to see how far out we can look on these investment opportunities. And the long range transmission planning process is a long process and it's obviously early days in Tranche 2. We like what we see in the early days, but we have no idea where that's all going to land and we won't for a bit longer. We don't expect those final projects to really be approved by the MISO Board until the middle of next year. But we'll have more information in each quarter as we go along and as that process proceeds. But it's really hard to see how much and where those will fill in the out years, even in the Tranche 1 that we have, we have less than half of our estimate in the next four years with the remaining part really in the following three years. So we can kind of see how that's stacking up. But beyond that, it's just this layering effect of additional transmission projects where they go in, how they can be supported, the timing for permitting and sighting, et cetera. So it's too early to really give you anything other than directionally we think that there's going to be a fair bit more transmission. Well, I'll say not just in MISO. Directionally in the United States and I will say in North America, we will see a much more robust investment thesis on transmission. We see the Inflation Reduction Act and how that is driving the ends of this conversation, the generation transits and the renewable energy, clean energy of any kind. And then of course, on the demand side looking at electrification, manufacturing, et cetera. We have to make sure that we're focused on the middle part, which is transmission and distribution that's between those two. And that's the investment that we think is really going to be taken off here going forward. We just can't put numbers on it, but we do know directionally it should be up. Okay. And then, maybe coming out from a bit of a different direction. Are there any elements of ITC's footprint, age of the assets, capacity availability right now that were constrained. I guess, the upside case relative to other transmission operators in the region or whether it's more challenging permitting or citing in terms of where you operate right now? No, there's, I don't see any reason that ITC would be challenged any more than anyone else's to build transmission. In fact, I might say at that team on the back say that they're probably the best transmission plan and development team out there. So if there's ways to do it, and they've got a great footprint, too, right? I mean they're in MISO and MISO is basically wind alley, and even solar alley to some extent. So the ability -- the number of projects, particularly as you look at the planning process that's going on in MISO and our expertise in my view, should put us ahead of the curve. Okay. That's good to hear. And then just turning to Central Hudson in terms of the customer information system. Are you guys able to, at all give any color in terms of potential range of outcomes? And if it's just sort of one-time penalties you might be faced or if there's other sort of more, I guess, recurring pressure in terms of earnings profile at Central Hudson may come out of these proceedings? No, it's hard to say what's going to come out of the proceeding. We're obviously -- we answered the Show Cause order there, and now we'll have conversations with our regulators and try to figure out where this is going. Most of the O&M impacts that we have seen in '21 and '22 were to get the system to where it needs to be, and we continue to make the additional changes in investments and tweaks to that system as we go to make sure that it's -- we got to get to the point where it's ultimately operating as design, which we think we're getting close on. But we won't see the ongoing O&M drag that we saw the last couple of years. But as far as penalties, that's hard to figure out now. I think we have got a good response to that Show Cause order and we just need to explain the situation and get ahead of it. Okay. Great. I was wondering on your electric versus gas mix, how do you think that mix changes or will it change over the next five years? And then, do you have an internal target of where you want to be in what the CapEx program is to this current CapEx program is complete? Yeah. No, we don't have like an ongoing mix other than what you can see clearly in our five year capital plan and the level of investments that we see there. In fact, FortisBC is still a very growing utility. And I think for all the right reasons, there's not just the natural gas service territory that they have there, but some of the LNG investments they're making to help produce greenhouse gases and other people's neighborhood. So that's a great asset for us to have and still has very strong growth. We don't have any designs of changing on purposely changing that mix on a going forward basis. Okay. Great. And then can you share for 2022 on the realized returns, was there any utilities that's earning below the allowed [indiscernible]? Yeah, I don't know. I don't have that at my fingertips. And -- but yeah, I don't need -- that handy. Obviously, when you look at regulatory lag cycles, just I'll just philosophically, what you would see like in Arizona is that you probably wouldn't be quite earning your return right as you're getting into the volume rate case because after a few years of lag, you'd see a dip. But I actually don't have those numbers in my fingertips. Okay. And maybe lastly on your -- you have -- your maturity schedule on the debt and you break up between non-reg and regulated, that's quite useful. Do you expect to recover the interest rate change in the -- sorry, in the regulated maturing debt in the rates? Yes, Ben. It will be a part of our [indiscernible] proceedings or oil utilities. Some of our utilities have mechanisms that track it, but it's will be part of the rate case, and we've not had any issue in front of the regular recovery these types of costs. So we're not anticipating any problems going forward. Hi. Good morning and thank you for the time today. I wanted to circle back to MISO in this future 2A. Can you speak a little bit to what this refreshed scenario considers versus the old future to and how that's translating to the early stages of the Tranche 2 process versus, I guess, what you were witnessing at this point in time for Tranche 1? Yeah. I don't mind the exact tweaks between what they did to Future 2 to make it Future 2A. So they -- just to be clear though, I mean, the first tranche, Tranche 1 was based off of future 1, which was the kind of lowest level of electrification and probably lowest level of resource transit and renewable integration. So Future 2, which was in the middle, obviously, Future 3 was the one that was the fastest on both of those. And if you remember, historically, and this is data that was -- is now a couple of years old, they put kind of price tags on those different futures of $30 billion for Future 1 and up to $80 billion for Future 2. Future 2 in the middle, I never had a number on exactly what that future investment portfolio would look like. But I don't know, if it's quite halfway there or not, but I don't know if it's the exact adjustments that were made. Yeah, Dave. They have not yet released specifically their updated assumptions in 2A. However, we do know directionally, it's being updated to assume a greater level of renewables penetration to update for utilities carbon reduction goals, as well as increased load projections based on electrification. So I would say, from a directional perspective, it's all pointing in the direction of a more probably ultimately a more realistic scenario of what the future looks like, which ultimately, I think from a transmission perspective, I think, would directionally result in the need for more transmission to interconnect more renewable generation resources. Got it. That's very helpful color. And just one follow-up on the MISO front. Again around the Tranche 2 process, you hearing anything from MISO on how they might tackle kind of the greenfield versus brownfield split or how they're baking that into their analysis. Obviously, spent a lot of attention over the past few years on that some of the headwinds on greenfield transmission development. So just curious if you hearing anything from MISO on this front for the latest tranche. Dave, yeah, thanks. I wouldn't say in any great specificity. I think there is recognition that, yes, I mean certainly, as we drive to build out more and more transmission investment, the siting becomes certainly more challenging to get the necessary land. So I would say, at a high level, directionally, certainly, there's a lot of encouragement to the extent that you can kind of upgrade existing infrastructure or upgrade the infrastructure on existing rights, ways that can certainly help to facilitate the realization of those projects. But in terms of MISO being sort of, I would say, directive or assuming those things in their planning process, it does not really emerge. I think they leave that more to the specific transmission owners to identify and determine kind of the specific routing, citing and ultimately, the necessary siting requirements. But I would say, just thematically, just given the transmission is getting more difficult to build and land is getting more difficult to acquire yeah. I mean I think solutions that would look at utilizing existing rights-of-way structures, towers would be certainly beneficial in realizing the investment. Thank you. Good morning, everyone. Just back to BC on the wood fiber gas pipeline. I know it's relatively small in the grand scheme of things, but just with respect to the 20% increase and the total cost up to $420 million, I believe. Is the expectation that you'll be able to earn on the full final price tag whatever that ends up being by 2027 or it just the original $350 million and then you have to absorb any excess costs above that on the balance sheet? No, we wouldn't absorb any excess costs. There's a bit of a complicated formula in the course and contribution in native construction that the wood fiber would pay for and the remaining part, all of our investment would go into rates. Okay. Perfect. Thanks for that. And then in Alberta, just given how high power prices have been here, I know you've received approval for a 5% increase in distribution rates for 2023. But just wanted to check in on how you're thinking about managing or perhaps smoothing out future rate increases? And for getting any pushback from the regulator on the pace of rate base growth, at least until power prices settle back down? Yeah. That's a great question. It's the same thing that we're seeing in every one of our jurisdictions. And in Alberta, we're just the distribution system operator there. So our rates are varies, kind of slow and steady increasing part of the bill. It's not a very volatile, it's not volatile at all. So this is the rate increase that we got going this year, pales in comparison to the increases that they're seeing in the actual power part of their bill, the energy part. So we're obviously watching that. We are investing as we need to invest in the system and the needed reliability upgrades that we need to do to connect new customers. Obviously, the Alberta economy is a bit cyclical. So we see the boom and bust on growth, and we're seeing good growth there now and hopefully, for a long period of time. So we're cognizant of that cost focus, but it's really not our part of the build that's causing the angst. We do know though that it's a total bill perspective that the regulators look at, in that province, but we're doing what we can to control the costs that we can control. But we still have to make those investments we need to make in the system. Thank you. There are no further questions on the phone line at this time. Ms. Stephanie Amaimo, please continue for any closing remarks. Thank you, Laura. We have nothing further at this time. Thank you, everyone, for participating in our fourth quarter and annual 2022 results conference call. Please contact Investor Relations should you need anything further. Thank you for your time and have a great day. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

EarningCall_75

Ladies and gentlemen, good afternoon. I'm Julia Chao, AUO's IR Officer. On behalf of the company, I would like to welcome you to participate in our 2022 fourth quarter results conference. We have 4 executives present here: Paul Peng, Chairman and CEO; Frank Ko, President and COO; James Chen, Senior VP of the Display Strategy Business; and Ben Tseng, CFO. The agenda of today is this. First of all, Ben, our CFO, will go over fourth quarter results and provide you with the first quarter outlook. Our Chairman, Paul, will then have an opening remark. Later on, we will proceed with questions and answers. We have collected questions from analysts. In the first part of the Q&A session, we will address these questions. Afterwards, we will open the floor for you to post questions. Now before I turn over to Ben, I would like to remind you that all forward-looking statements contain risks and uncertainties. Please spend some time to read the safe harbor notice on Slide #2. Ladies and gentlemen, good afternoon. In Q4 2022, net sales was TWD 52.6 billion, up by 5.9% Q-o-Q, mainly thanks to increased energy sales including PV module and EPC engineering sales. Display ASP was weaker in Q4 as customers purchase more lower-priced products such as TV and notebook panels. However, on the back of rush orders, AUO increased our loading rates and effectively lowered inventory of finished products. Leading to area shipment increased by 12% Q-o-Q, which help us to narrow loss. In Q4, gross loss narrowed to TWD 4.6 billion. OP loss narrowed to TWD 10.9 billion. Net loss attributable to owners of the company was TWD 10.2 billion. EBITDA loss also improved with margin improving to negative 6%. Next slide, full year results. Unlike 2021, which benefited from pandemic induced demand, 2022 was negatively impacted by inflation, conservative consumption and excess inventory digested by customers, causing panel purchasing to weaken area shipment and ASP, both went down significantly Y-o-Y. Net sales was TWD 246.8 billion, down by nearly 1/3 Y-o-Y. Gross profit TWD 16 billion. OP loss TWD 24 billion. Net loss attributable to owners of company was TWD 21.1 billion. EPS was negative TWD 2.39. EBITDA was TWD 7.5 billion, margin, 3%. Next slide, balance sheet. Cash was TWD 80.6 billion, flattish Q-o-Q. Debt, long-term and short-term combined was TWD 86.9 billion, up by TWD 19.2 billion Q-o-Q. Gearing ratio was very low at 3.3%. Inventory amount was TWD 30.3 billion, while absolute number-wise, amounts stay flattish Q-on-Q due to the increased shipment, turnover days was lower to 48 days. Cash flow. We generated from operating activities TWD 8.9 billion. CapEx was nearly TWD 8 billion. Net change in debt, TWD 19.5 billion. Revenue breakdown. In Q4, on the back of stable TV ASP and demand recovery, TV share increased by 2 percentage points to 13%. Mobile PC and device lost 4 percentage points to 24% due to higher end demand for lower-priced notebook panels causing ASP to drop. On the lower right bottom, others share increased to 21%, thanks to increased solar module shipments and engineering revenue. Moving on to revenue breakdown by size. Changes on this slide echo those in the previous slide. 39-inch and above increased by 2 percentage points due to an increase in TV panel area shipment. 20- to 39-inch increased by 1 percentage point due to the increased volume of new automotive displays. 10- to 20-inch lost 3 percentage points due to weaker notebook panel demand, product mix changes and ASP slides. Next slide, shipments and ASP by area. Area shipment increased by 12% Q-o-Q. Display ASP dropped by 14%, which echoed what we have already said about the shipment -- of the increase shipment due to rush orders and market demand. For our Q1 guidance, based on our current business outlook, we expect that area shipment to be down by mid-single-digit percentage points Q-o-Q. Blended ASP denominated in the dollar, is projected to be up by low- to mid-single-digit percentage points Q-o-Q. Loading rates in Q1 will be dynamically adjusted based on market conditions. Dear, investors, analysts and journalists, good afternoon. First of all, I would like to wish a belated Happy Lunar New Year, we should prosperity and success in the Year of the Rabbit. 2022 was a very challenging year with the pandemic, the war, inflation, shortages in raw materials, causing the macro economy to take a hit. Central banks around the world rose rates to curb inflation. Therefore, the consumer market was negatively affected. In the previous 2 years, due to the pandemic, demand was higher, causing consumers to spend ahead of time. However, recently, demand weakened. While inventory levels rose, the majority of brands focused on lowering inventory levels in the second half of last year causing the demand for panels to plummet and prices also fell to a historic low. AUO's revenue and profit were significantly affected negatively in Q3. The UT rate dropped to 50%. In the fourth quarter, it rose slightly to -- slightly more than 60%. Recently due to the -- it was mainly because of the rush orders and promotional activities by brands. Area shipment increased. However, ASP continued to lower with most customers prioritizing clearing out excess inventory. In Q4, our energy business recorded a higher revenue aided by a lower NTD, our Q4 revenue rose slightly by 6%. For the entire year, ASP lowered. Area shipment also dropped significantly Y-o-Y. In 2021, we recorded a record high profit. But in 2022, we went into loss. So this was a very drastic fluctuation. However, our financial structure remains very robust and healthy. The gearing ratio was very low. In the second half of 2022, especially in Q4, the traditional peak season, our brands and the entire industry prioritize lowering inventory levels. At AUO, we have been very prudently and very aggressively controlling inventory. Our principle is to have no excess inventory at all. Since Q2 2022, we started adjusting the UT rates. Our inventory level is the most -- the healthiest of all the industry -- all the panel makers. Inventory amount went from TWD 34.5 billion in the end of 2021 to TWD 30.3 billion, while the loading rates were lower, we took the opportunity to conduct annual maintenance, develop new technologies and new products in hopes of capturing new business opportunity as the market recovers. After the adjustments for 4 or 5 quarters, some -- the applications are seen their inventory levels recovering to a healthier state. TV was the first to see weaker purchasing. It was also the first to see demand recovering earlier than other applications. As for IT, we hope that demand will resume seasonal patterns in the second half, however, there are still many uncertainties this year, including macroeconomic conditions, the war, the inflation and a lower demand despite there's an ease in the pandemic. First, tech job cuts also play into the uncertainties. So there are many uncertainties this year. Most research institutes project that this year will be a year of high inflation and low growth. So AUO will aggressively control our inventory levels and seek to lower our cost of goods sold and CapEx. At the same time, we will accelerate by active transformation in hopes of capturing business opportunity as the market recovers and to become more immune to the boom-and-bust cycle of the panel industry. Here, we are meeting for the first quarter results conference, and we're meeting face to face because we hope that we can take this opportunity to provide you with more detailed information of our strategy. We have been focusing on by asset transformation for many years, which includes go premium and go vertical strategy. Here, I have a few slides to go over the achievements that we have been seen in the transformation implementation. In terms of smart mobility at CES this year, we demonstrated smart cockpits with our ecosystem partners. This solution covers panels to fully integrated display module FIDM. FIDM includes not just display modules but also integrate sensors and other necessary technologies in 1 module. Going forward, AUO will work with carmakers by providing not just displays, but also systems and solutions. And this module, the smart cockpits solution has been gaining encouraging recognition from customers and won't accolade at CES this year. This photo here is a very innovative forward-looking smart cockpit. Moreover, we are still producing displays. However, we are working also very aggressively on next-generation technologies, such as LED display, which we're seeing good progress being made. For example, we engage renovation pictures. Together, we leverage advanced technology, display technology to deliver one-stop production services. TV show and movie filming today no longer requires the entire crew to go out in the field. Instead, the filming can be carried out in virtual studios, along with cost reduction, resulting in big cost reduction and making the unimaginable possible. Moreover, we also work with a partner to build metaverse experienced gallery. If you have time, please visit the gallery, the museum [indiscernible] to experience the beauty of the metaverse. Now about micro LED, which we used to produce car displays. I have just introduced the smart cockpit solution, which we leverage in Mini LED. With micro LED, we are also building bigger lineup for [indiscernible], including transparent, stretchable and rollable displays. A big advantage of micro LED is that it enables transparent displays. For example, at Asia Bay in Kaohsiung, we are developing space AR application. These are the actual cases using LED. Besides these technologies, we also have many more enterprise use and education use applications. For example, we built a smart classroom at National Taiwan University, LED display business at AUO has exceeded TWD 100 million and is expected to past motor fold growth every year. When LED is supplied to indoors, the applications can be very pervasive, and the technology can be applied in making ultra large size and immersive fields and immersive applications. Moreover, in vertical fields such as 3D medical imaging, we can also leverage LED technology. In December last year at the Taiwan Medical Technology Show, we engaged many partners to demonstrate medical solutions. In addition, in smart manufacturing, our smart manufacturing services have already been deployed to more than 100 customers. Our subsidiary AUO Envirotech is able to make technology transfer in the areas of water management and zero emission solutions. In education, we are working with subsidiaries to set up future classrooms at National Taiwan University, and we have many more ongoing projects for the establishment of future classrooms and enterprise solutions. So these vertical applications and energy-related investments accounted for more than 10% of our revenue in 2022. These are non-pure display business. Together, they accounted for more than 10% of our revenue. Absolute number wise, these businesses grew more than 20%. Going forward, we will join hands with our ecosystem partners to accelerate the growth in services and system delivery. We aim to make these products accelerate growth so as to become more immune to the cyclical patterns of the panel industry. We also hope that the non-panel business could account for 20% plus revenue -- of our revenue in the next 2 to 3 years. In 2022, the panel industry was downbeat, and we are seeing some recovery in the beginning of 2023. We hope that the market would resume its cyclical pattern this year. Of course, we will continue to accelerate transformation so as to deliver robust performance, we hope that we can deliver stronger results as well. As ESG is getting more attention from enterprises and industry, AUO continues to implement our ESG strategy. For the 13th year in a row, we were included in DJSI, which was a rare feat because in Taiwan, only 23 companies can be included in a year, and we have done that for 13 years in a row. So we are ahead of many companies here in Taiwan. So this was a review, a quick update of our performance last year, and a recap of our by asset transformation results. In the future, we will exhibit our solutions to demonstrate more of our results and our solutions. I would like to welcome you to visit our booths in the future in those exhibitions. For example, in April this year, we will be demonstrating many new panel and non-panel technologies at Touch Taiwan. I hope that we can have more opportunity to go into more detail with you. Thank you, Paul. We will now proceed with questions and answers. For the first part of the Q&A session, we will address the questions that we have collected. The first group of questions are about market updates and outlook. What are our views on 2022 panel supply and demand? And what is our view about 2023? Secondly, could we give some color around Q4 TV sell-through and what is the demand outlook for the year ahead 2023? Frank, would you please. Ladies and gentlemen, good afternoon. I will answer these two -- these first two questions. About 2022 supply/demand. As Ben and Paul said earlier, in 2022, demand weakened post the pandemic. The industry adjusted capacity allocation causing loading rates to lower significantly. There were some capacity transition, but only at a few panel makers. So on the supply side, the industry adjusted capacity allocation in the face of demand fluctuations in an orderly manner. From the demand side, the past 3 quarters were characterized by reductions of inventory levels, which was boiled by stay at on the economy and poor congestion. So inventory levels were very high from channels to end products as the demand weakened inventory turnover days surged. On the back of inventory adjustments for the past 2 quarters and promotional activities in Q4, inventory levels have been improving. Some specific applications have been receiving rush orders. So demand overall is improving. For this year, several applications, including high-end medical displays, will likely fare better. Industrial panels would also enjoy more stable demand. As for car displays, chip and material shortages have capped car sales for the past 2 years. This year, with chip shortage easing, car sales will likely pick up, which could help boost car display demand. So this was an update on supply and demand. As for TV sell-through in Q4 last year, the U.S. has posted growth for several months in a row. During the peak buying season, growth was even as high as nearly 9%. Mainland China was capped by the lockdown measures, causing the Double 11 Festival sales to drop with large-sized models dominating the sales, average size reached nearly 63 inch. In Q4 last year, with sports events, specifically the World Cup, the emerging markets got a boost with sell-through growing by nearly 20% Y-o-Y, which helped lower TV inventory levels. Currently, of all the applications, TV's inventory level is at the healthiest level. Thank you, Frank, for giving us more information on TV sell-through. The next question would also be posed to Frank. Could you please talk about IT sales results and give us an outlook for Q1? And could you also talk about the circumstances with inventory adjustments? IT faced particularly strong headwinds. The inventory level was very high due to poor construction. In Q4, channels and brands aggressively clear out their excess inventories. In the end of Q4 -- in the end of 2022, however, growth was in the negative range Y-o-Y. Notebook sell-through was down by 40% Y-o-Y. Currently, channels and brands are relatively conservative about IT product sales. In Q1, IT inventory level has improved. However, it may still need a while for the industry to digest excess inventory in the pipeline. In Q4, our loading rates improved to nearly 65%. In Q1, we will adjust the loading rates based on market conditions and product mix. Depreciation and amortization in Q4 was TWD 7.7 billion. 2022 full year was -- the number was TWD 31.5 billion. In 2023, as we will have new capacity ramp and AmLED will increase to TWD 34 billion. For CapEx. In Q4, CapEx was TWD 8 billion. For the full year of 2022, CapEx was nearly TWD 36 billion. For 2023, we budgeted TWD 35 billion for CapEx. About currency's impact on our margins. In Q4, New Taiwan dollar depreciated about more than 4% against the dollar and weakened by 0.04% against the Japanese yen. Overall, currency fluctuations had a positive 1.4% impact on our margin. The next group of questions revolve around AUO's major technologies and products. There are also more interest in car displays. Could James please share with our participants of our gross profits and the strategy that we have against these trends that we envision. Ladies and gentlemen, good afternoon. I would like to briefly share with you our progress made in products and applications as with technologies. Last year, consumer electronics demand was negatively affected by the macro conditions. The industry prioritized adjusting excess inventory. We think that in another 1 to 2 quarters, inventory levels will become healthier. Demand is still here, but momentum will gradually recover. On the other hand, automotive demand is very strong. Under the trend of smart driving and electric vehicles the demand for smart cockpit has picked up. Carmakers increasingly regard smart cockpit as key differentiator of their products. With car displays sensors and human machine interface playing a bigger role, which helped to boost the demand for large-size free form design and smart displays. New energy vehicles have been posted more than 60% annually. In the future, and very soon, we will probably see new energy cars accounting for more than half of all cars. More than 50% to 60% of our car displays are applied in new energy cars. So the growth prospects are very promising. As Paul and Frank mentioned earlier at the CES this year, we partner with our partners to launch FIDM-plus solutions. With this new product, we are extending into barebone systems compared with traditional automotive LCD panels. This solution delivers multi-premium, and it is in line with the trend of electric vehicle and smart vehicles. This year's CES, we also demonstrated micro LED technologies. Micro LED enables transparent displays and flexible displays, allowing for many more smart cockpit scenario designs. So we expect that with AmLED and along with micro LED, we will be able to capture more opportunities to start design -- co-design with our customers. As we are starting more projects with our customers for AmLED and FIDN, and with these projects, entry into meaningful volumes, we are expecting that in the next 2 to 3 years, they would together account for more than 50% of our car display revenue. Thank you. Thank you, executives for your answers. We will now open the floor for you to post questions. To ensure equal opportunity for each participant, please be reminded to limit the number of your questions to 3 per person, and please say them all in 1 go. Before you start to ask your questions, please be reminded to state your name and your affiliation. I'm Brad Lin from Merrill Lynch. I have 2 questions regarding micro LED and non-panel business. You mentioned that non-panel business accounted for more than 10% of our revenue. This business relatively delivers stable ASP. But do they still -- will they still be affected by the panel SP fluctuations and price pressure? I understand that there are many processes involved in micro LED manufacturing. You mentioned that you have mass transfer technology. What sets you apart with your competitors? You also mentioned new applications that you have developed such as Virtual Studio. I wonder if you are developing new technologies for smartphones or wearable? Thank you, Brad, for your questions. Earlier, we mentioned that our non-panel business stood for more than 10% of revenue. Non-panel business includes not just panels, it is a non-pure panel business and includes systems and power plant construction, power plant investment, AUO crystals business and services, such as smart manufacturing. The combined revenue reached hundreds of millions of NT dollars. Things like water management, we have AUO Envirotech to provide such services. With the revenue reaching TWD 4-plus billion, AUO Envirotech helps our customers to manage their water circulation and also recover materials that can be reused from the wastewater. So I'm not able to specify the ASP for this business because it is not a panel business anymore. It has go beyond panel ASP concept. Although some businesses haven't reached a certain scale and are not fully profitable, but we can expect high growth potential, and we are able to capture the business opportunity. Our hope is to expand non-panel business portion to become less susceptible to the boom-and-bust cycle of the panel industry. For pure panel business, when the market goes up and down, we cannot resist being affected or we cannot turn around the trend just by ourselves. But for non-panel business, we are able to do that. For micro LED, to perform mass transfer, we need to leverage upstream and downstream partners. And mass transfer costs for a lot of expertise, including LED and back play design. We have our own ecosystem, we have our own value chain, ranging from LED chip and back played design. We are able to perform these activities on our own. So with mass transfer, we have the technologies in our own hand, and we are able to provide the most advanced and mature technology. Currently, for this year, we will have wearable solutions reaching commercialization and mass production. As for smartphones, we haven't seen good business opportunity arising for applying micro LED. So for micro LED, we will first apply it in wearables and secondly in TV, and we'll also use it more pervasively in car displays. For example, at Asia Bay in Kaohsiung, we deployed micro LED panels as windows on cruise ships, which echoes with the Space AR concept and can be deployed in autonomous driving vehicles. And when these solutions are deployed in cars, demand could be very big, and it has been applied to many vertical applications. I would like to add to what was said about the revenue. Long display business as we have disclosed, revenue was TWD 20.9 billion in 2022 compared with TWD 12.3 billion in 2021. The OP margin for the past 2 years range between 6% to 9%. I'm Derrick from Morgan Stanley. For the past 2 years, Mini LED has attracted the attention of many people. Recently, there are rumors that some IT customers are transitioning towards a different kind of display technology. Could you provide us with some outlook for the opportunity on using Mini LED in other applications, including consumer electronics? Mini LED has been consistently combined with LCD backlight display technology to deliver high contrast ratio, dynamic dimming, HDR to deliver ultra-high definition. It has been progressively used on TV. It has become a standard configuration of high-end TV sets. As for IT, from gaming creator to productivity notebook panels and monitors, Mini LED has been applied in many high-end models. It has been adopted by many brands. And these -- at the CES in the past 2 years, AUO has been conducting co-promotion with customers and implementing new products. As for other applications such as industrial panels and medical panels as well car displays, Mini LED can also be used versatile. For example, in the high-end medical display sector, we are working with major customers to perform design in to deliver more precise color and enable more precision imageries for medical applications. As for automotive solutions, as James said, the demand for electric vehicle is rising. For EVs, power efficiency and power savings are critical. Image quality is not the key point here. However, the travel mileage per charge is crucial. Mini LED combined with car displays are able to deliver the performance required by electric vehicles. For car displays for automotive solutions, displays have to be high brightness under the sunlight. And in a day -- in a nighttime, it also needs to be able to perform dynamic dimming and brightness adjustments, so as not to distract drivers. So Mini LED technology is able to meet the requirements for image quality and power consumption profile. So we think Mini LED is the best technology for automotive solutions. I'm Jerry from Credit Suisse. Last year, you announced a dividend plan. With the sharp loss in 2022, would you sustain the dividend plan? What is your plan at the moment? Also, you announced to suspend the construction in Taichung. You mentioned that IT and PC products, we still need some time to clear out excess inventory. When would we see a visible recovery for IT products? Also, after the pandemic, what is your view about the PC market? Volume-wise, what do you expect to see IT accounts for 40% to 50% of our revenue, Derrick said that, some IT customers are shifting towards OLED. You have stopped making investments in the OLED field for several years. Under this trend, if high-end notebooks and monitors start to adopt OLED, how would this affect your business in the long term? They are Chinese panel makers constructing Gen 8.6 oxide and LTPS fabs focused on IT application manufacturing. How do you attempt to tackle the competition in the high-end and mid-end products? Thank you, Jerry, for your questions. Yes, last year, we announced a 3-year dividend plan. Last year, we distributed dividend of TWD 1 according to the plan. However, market conditions went beyond our expectations last year. However, due to our healthy financial structure and sufficient cash flow in hand, we are able to provide sufficient cash for our operating needs. So this year, we would take into account our development needs and investor return requirements to distribute our dividends. And this decision will be made at the Board of Director meeting. As for the Gen 8.5 fab in whole in Taichung, currently, we don't have a timeline set for the resumption of construction. Given the low loading rates at the moment, we will prioritize improving our loading rates. And using the limited capacity to create more value for our products, meaning that we would provide more barebone systems, systems like integrated products. For example, car displays account for half of the -- more than half of the RFQs that we have received. For the products to be mastered and produced in the next 2 to 3 years, half of them are orders for barebone systems. As James mentioned earlier, these systems have the potential to help us boost our revenues by multi-folds, whereas having a limited increase for our area demand. Therefore, we are not in any urgency to increase the capacity from amorphous to low-10 capacity. What we have is sufficient for us to meet our business operation needs and premium model development needs in the next few years. There are 2 questions about IT products. The first is about IT product demand post-pandemic. This is a question that's calling for the attention of many people starting from last year. We have been doing a lot of research and consumer surveys in this regard. In pre-pandemic days, PC and notebook were developing stably. However, with the pandemic user habits have changed significantly. Today post-pandemic, hybrid working and flexible working have become the norms. IT, especially, notebook has become the main productivity tool. We are using notebook products for a longer period of time, and we're using a wider variety of devices. Some customers told us that end users are using different kinds of devices at home, in the office. So they are using more than 2 devices a day. And all these devices are important productivity tools. From this perspective, IT, especially, notebook will see stronger growth pre-pandemic -- compared to pre-pandemic days. As for inventory, that was we expect to see inventory level to resume normal seasonal changes starting from the second half. Looking further down the road, what about the demand? What the demand will look like? What kinds of specifications or technologies would trigger replacement demand or repurchasing demand? Based on our observation, we believe that most critical feature will be power efficiency because these IT products are used most frequently and there are important productivity tools. So super power saving notebook will be very helpful. You don't have to charge over and over again just to use for a day. And with 1 charge, you can use the notebook for any time daily without having to carry an adopter with you. So LTPS, superpower saving panel technology will be a key focus. We will start making notebook products on Gen 8.5 and Gen 6 lines to improve the power efficiency profile of our products and to use more circular and recover materials as well as reduce the power consumption of our production lines. So from the power consumption conservation at our production line to the power saving profile of our end products, we are working very hard. Our monitor and notebook products have gained the credit certification of the industry and have been adopted by IT products and brands in the industry. For entertainment use devices such as for gaming, we have been in the leading position as well, and we continue to work with ecosystem partners, such as graphic card providers and CPU makers, and we are using Mini LED and deploying [hyper-threading] technology to improve the quality of our products. Also, we are leveraging antireflection technology, eye care products to provide better IT products to help enable better power efficiency profile. As IT products become the main productivity tools, and are being used in wider and more diverse settings, we are going to meet consumers' demand and focus on meeting the diverse needs of the market. Thank you. When it comes to OLED, it seems to be very pervasically adopted. But actually, when you look at the numbers, OLED notebook only accounted for 3% of the market last year, and only 0.1% of monitors. So its application in IT segment has been very limited and it's not as pervasive as people imagine. As Frank said, power saving feature remains to be the top priority for mobile products such as notebook computers. High-end products still are using low-10 poly panels predominantly. Last year or 2 years ago, due to the shortage in low-10 panels, many OLED products were stuck at inventories at warehouses.

EarningCall_76

Good morning, everybody, and welcome to Odfjell's Presentation of our Fourth Quarter Results and our Preliminary Result for 2022. Today's agenda follows traditional pattern. I will present the highlights. My colleague, Terje Iversen, CFO, will present the financials, and then I will take over and give you an operational review, and I will conclude this presentation with a market update and prospects going forward. If we look at the highlights for the fourth quarter, we are happy to inform that the firming chemical tanker market that we saw in the third quarter continued through the fourth quarter and concluded a very strong year for Odfjell. Our time charter earnings increased to US$187 million, up from US$171 million in the previous quarter. We delivered an EBIT of US$73 million compared to US$71 million in the third quarter. The net result was US$50 million, same as previous quarter, but if we adjust for one-offs, then the US$50 million compares to US$46 million in the third quarter. We also saw contract rates increasing by 26% through the quarter and the net result contribution from Odfjell Terminals was US$0.2 million. This compares to US$8 million in the third quarter, but then we have to remember that the third quarter was heavily impacted by insurance proceeds in that quarter. We refinanced five vessels during fourth quarter and this refinancing reduced the cash breakeven for those vessels with approximately $3,100 per day. And finally, I'm very happy to inform that the Board approved a dividend of $0.61 per share based on the adjusted second half of 2022 results. If we look at the 2022 in full, then we delivered a net result of US$142 million. And I'm also very happy to inform that despite the significant increase in the commercial activity, we still delivered safety, environmental and operational performance well within our set targets. We also see that our strong focus on cost efficiency and quality has positioned us to fully utilize the firming markets that we now see. The total dividend for the full year of 2022 was US$66 million. Thank you, Harald, and good morning to all of you. I will, as normal, start with the income statement for the group for this quarter. And as Harald just mentioned, we saw an increase in the time charter earnings this quarter from US$171 million to US$187 million. That was despite of actually a decrease in the gross revenue because we had fewer pool vessels in this quarter compared to the third quarter. And we also had less bunker surcharges in the fourth quarter due to lower bunker expenses. So seeing that the time charter earnings increased US$50 million is down primarily due to the improved spot market, but also due to the improved contract of affreightment during the year so far. Looking at the expense side, we see that we had an increase in the operating expenses from $45.9 million to $49.6 million this quarter, main reason being that we had extraordinary year-end bonus to all seafarers with around US$2 million in the fourth quarter, and we also had some inventories that were adjusted towards the year-end that impacted the operating expenses. On the G&A side, we also saw an increase from $16.6 million to $19.7 million. Also there, we had extraordinary year-end bonus to onshore employees. Adding to that G&A, were around US$2 million, and we also had quite high activity level in the fourth quarter, also leading to increased G&A. Depreciation, very much the same level as in the third quarter. And then we're left with an EBIT of $73.4 million compared to $71.1 million in the third quarter. Net interest expenses increased in this quarter, reason being increase in LIBOR. As you have all noticed, that increased interest expenses were around US$2 million. In addition, we also had amortization of some financing costs in relation to the refinancing of the five vessels that we just mentioned on the highlights. So that took our net interest expenses from $18.8 million to $22.4 million in this quarter. After other financial items and taxes, we are then left with $50.4 million in net result, leading to earnings per share of $0.64 this quarter. If you adjust for nonrecurring events, we have the same results, US$50 million compared to adjusted results for the third quarter of US$46 million. Also mentioning that for the terminal side, we had revenue this time according to the equity method, included here with US$0.2 million compared to US$7.6 million in the third quarter, reason being that we had these insurance proceeds that impacted results in the third quarter with around US$5.6 million and positively. And also this quarter, we had some challenges in the U.S. due to the freeze and that led to a decrease in the earnings and also some extraordinary cost items were related to repair and maintenance in the third quarter – in the fourth quarter, leading to a slightly reduced results adjusting also for the insurance proceed in the third quarter. If we go on to the time charter earnings, we saw that that increased this quarter from around $29,600 in the third quarter to $31,700 in this quarter. And as you can see, that is well above our annual cash breakeven, which now is around $22,600 per day, which also is the expected level going forward into 2023. Cash breakeven this quarter was around $23,800 compared to $22,700 in the third quarter. And the main reason for the increase was mainly related to the increase in the interest rates and also the year-end bonus payments for seafarers and onshore employees, which I just mentioned. Looking at the balance sheet, we see that ships in our balance sheet is now just above US$1.3 billion. We saw that right-of-use assets increased slightly this quarter compared to the third quarter, reason being delivery of one time charter vessels end of third quarter and also one into the fourth quarter, which is increasing then the right-of-use of assets to US$208.7 million. Investments in associates and JVs being mainly our terminal assets, increased from around $160 million to $167.8 million in this quarter. Despite the low result, the increase then is due to the currency effects from our terminal assets that are valued in euros and also in Korean won, giving a positive effect on the balance sheet for the asset. Looking at the cash position that increased from around US$100 million to US$117.7 million this quarter. And if we include undrawn loan facilities, we have a cash position of around US$186 million available and that should be more than sufficient to cover the dividend that we just mentioned of around US$48 million to be paid in the next week or the week thereafter. The equity increased to around close to $700 million now, up from $630 million. That is, of course, due to the strong results this quarter, but we also had other comprehensive income that also improved our equity position year-end compared to the end of the third quarter. On the debt side, we have been active. We have done some refinancing, as mentioned. We had scheduled installments of around US$20 million. We had done extraordinary debt repayments of US$50 million, and we are now below – we're just below US$1 billion in interest-bearing debt, which is actually the lowest level that we have seen in many years now. On the balance sheet also worth noticing that the bond, which is maturing in September 2023, is now classified as a short-term debt on our balance sheet, around US$950 million, which is due then, as I said, in September this year. Looking at the cash flow, we saw a slight decrease in operational cash flow this quarter despite the improved earnings, main reason being an increase in working capital, where we had a very positive development in the third quarter. I would say we are more at normalized levels end of fourth quarter. In addition, we have some unrealized exchange differences that is also impacting the operational cash flow and also the increase in interest rate this quarter also impacted the operational cash flow. Even though we are at a quite strong levels when we look at the operational cash flow. Looking at the investments, we had close to negative US$10 million, mainly being investment in our vessels, dry dockings and also some energy saving devices that we continue to invest in our fleet. On the debt side, I said we have been quite active. We had done US$35 million in debt installments and extraordinary debt reductions. And we also, when we did the refinancing of the five vessels that we just mentioned, reduced the leverage on those vessels with around US$10 million. So then net cash flow from financing activities of around $58.7 million, and we saw an increase in cash this quarter of US$18 million. If you look a bit longer term on the free cash flow, looking here at 12 months rolling basis per quarter, we saw that the free cash flow this quarter ended at US$77 million. And if you adjust for debt repayments related to right-of-use of assets, it reached $62 million, which is up from $49 million in the preceding quarter. We used the free cash flow this quarter to reduce our debt and strengthen our balance sheet and also, of course, to prepare for the dividend to be paid in February this year. As I mentioned, we saw an increase in working capital in the quarter, but we have seen quite a good improvement even though in working capital on a longer-term basis. Going forward, as we have indicated earlier, we have limited CapEx plans, meaning that if we continue to deliver good and solid operational cash flow, there are expectations that also then the free cash flow should be quite strong going forward based on the fact that we have very limited investments and CapEx for the coming quarters. Here’s a slide showing how our debt has developed actually the last two years. We have reduced our debt by around US$257 million in the last eight quarters. And we have, out of that, US$174 million is scheduled installments. And we have done extraordinary debt repayments due to a strong cash flow of US$83 million during the same period. And we used a lot of debt cash also to reduce our kind of the volume that we have launched through the revolving credit facility that we have available today. Over the same period, if you include the dividend to be paid in February next year – this year, the total dividend is $74 million compared to the $257 million that we have reduced our debt with. Also worth noticing that all our new debt since December 2020 is sustainability linked and is based on the sustainability linked framework that we established early 2020 with a new bond issue we did at that stage. As I said, we are close to just shy of US$1 billion in interest-bearing debt. If you analyze and look at the EBITDA, we are then at 3.2 times EBITDA and debt levels. And if you look at the debt compared to the value of our vessels using indicative market values from brokers, we have a long-term value for our total balance sheet of around 63%. Going forward, we have not that much of debt maturing in the coming quarters. I would say, into third quarter 2024, we have a large balloon maturing. Except for that, we have the bond that is maturing in September. As I mentioned, we have a very strong free cash flow this time around. And going forward, we will have to evaluate whether we are going to do a new issue or we are just going to redeem the loan at maturity without issuing a new bond or doing a debt. But that is something that we are considering. And of course, we will follow the market and try to time that in case we should do a new issue. We have done a lot in the last few quarters to reduce the cash breakeven. And as I mentioned, the refinancing we did, that took down our leverage with around US$10 million and also reduced the cash breakeven for those five vessels with around $3,100 per day. And at the bottom of this page, you see what is the expected debt going forward. And as we have flagged early, we have an ambition to be around in the interval of US$750 million to US$900 million in interest-bearing debt end of 2023. And I think we are on a good track to do that based on the scheduled installments going forward and also based on a situation where we just redeem the bond that is maturing in September. Thank you very much, Terje. Then I will continue with the operational review. If we look at the Clarksons spot tanker – tanker spot rate, then that index is up 12% during the quarter. The ODFIX, which is an expression for Odfjell’s time charter earnings, was in the same period up 5.8%. If we look at the four main product groups that we carry, we have seen healthy renewals on specialty contracts, and those contracts are the backbone of many of our trades. Easy Chemicals also saw steady volumes. We saw renewals between 10% and up to 100% on the contract rates. And as I said, the volumes were stable. We only do vegoils on spot basis and the typical vegoils that we carry are palm oil distillates, soybean oil and UCO or used cooking oil. CPP is a marginal cargo group within our segment that we occasionally carry CPP on our backhaul trades. Our largest vessels are adapted to amount size packages and the typical cargoes that we carry on the CPP side are unleaded gasoline, diesel and ultra-low sulfur diesel. If we look at the contract renewals, then, as I said, our rates were up 26% during the quarter. We saw stable volumes and our contract coverage was slightly below 50%, 46%. We also see that demand from our charters continue to be high, and we see that the available space for contracts in the market continues to be limited. And on that basis, we say that the fundamental outlook for the tanker market on the contract side remains solid. We have no further vessels scheduled for redelivery in the near future. There has been a strong focus on contract renewals during the past two quarters. And for that reason, we decided to include some additional information on our contracts. We have a portfolio of approximately 100 contracts, and fully utilized those 100 contracts will include approximately 9 million tonnes. It’s also important to observe that these 100 contracts include more than 2,000 contract obligations. If we look at the contracts themselves, there are two types of contracts. We have the contracts where there are renewal options, and we have the contracts where there are no renewal options. The contracts typically include customers’ obligations. They include the owner’s obligations and there are plenty of details related to volumes, to ports, to types of products and so on. If a contract that has no contract options is renewed, then all terms in the contracts are subject for renegotiation. This is a very thorough and time-consuming process where we go through all the obligations, both on the customer and on the owner side obligation by obligation. It’s also important to notice that when we change the obligations, then we have to make sure that these new obligations are in line with obligations that we have for other customers in the same trade line. Once we have agreed on the contract terms, then these contract terms are subject for approval by our insurers and they are subject for legal review. There has been high interest in contract renewals this quarter. And due to these circumstances, we have seen that the contract negotiations have taken significantly longer time than what we have seen in previous quarter. To avoid doing this process over and over again, we occasionally, when the renewal process is completed, then we include options for the following year. By that, we are not going through the obligations in detail. We are only adjusting the freight rates, the volumes and occasionally, the loading or discharge ports. This implies that when we are referring to the average contract renewal rate, which this quarter was 26%, then that figure only includes those contracts where the terms are comparable to the previous quarter. If there are significant changes when it comes to volumes or when it comes to ports or when it comes to products, then that contract cannot be included in the average contract renewal rate simply because the terms are no longer comparable. When it comes to Odfjell’s energy efficiency, then I’m also very happy to once again confirm that we have an all-time low when it comes to our AER. The AER – the average AER in 2022 was 7.59, and that is the lowest AER in Odfjell’s history, and it’s 49.5% below the 2008 baseline for Odfjell. We have initiated several novel technology projects that are now ongoing, and we expect to see full effect of – full implementation of those projects from 2024 and onwards. And none of those projects will imply extensive dry docking or substantial CapEx. And this implies that we have a clear ambition to further reduce our AER going forward. On the terminal side, when we compare the fourth quarter to the previous quarter, then the EBITDA declined by approximately US$5.7 million. This is mainly due to insurance proceeds received in the third quarter. Adjusted for corporate non-recurring items, then the net income of the underlying business was marginally weaker in the fourth quarter. If we compare 2022 to 2021, then the EBITDA increased by approximately US$6.9 million and the performance of the underlying business in 2022 adjusted for corporate and nonrecurring items came out $2.6 million higher than 2021. We saw good activity levels at our terminals. But in December, the activity at our U.S. terminals was negatively impacted by the December freeze in the U.S. All in all, 2022 was a strong year with continued occupancy – higher occupancy and robust activity levels, particularly in the first three quarters of the year. The average commercial occupancy reached 96.7%, this is up from 95.2% in 2021. We have two ongoing expansion projects. The funding is done locally in the joint ventures. At our Antwerp Terminal, we are building a new tank pit that consists of six tanks, 36,000 cubic meters. And at the terminal in Houston, then we are building Bay 13, which is six carbon steel tanks and three stainless steel tanks and the total capacity is around 32,000 cubic meters. Both these expansions are funded locally. They are on schedule, and we expect them to be operational in the fourth quarter of 2023. We see some uncertainties when it comes to macroeconomics and political instability. And for that reason, we – this – and those factors may impact the activity levels at our terminals. When it comes to the expected commercial occupancy, then we expect this occupancy to be high also in 2023. And then I will continue with a market update and the prospects going forward. As we have said, we saw firming spot rates in – also in the fourth quarter and in all trades. East of Suez, we saw rates – sorry, West of Suez, we saw rates going up with approximately 17%. And despite some initial challenges in Europe, we now see that also the Europe to U.S. trade, which is normally a backhaul trade for us, is also picking up pace. So, we have a positive outlook for the trades West of Suez. East of Suez, we saw that at the end of the last quarter, there was some excess tonnage being built up, and that put some pressure on the rates. We nevertheless saw an average increase East of Suez of approximately 3% through the quarter. If we look at the total fleet trading in chemicals, then over the past year, we have seen a reduction of approximately 10%. And the trend that we reported last quarter that was less capacity available for the transportation of chemicals seem to have continued also through the fourth quarter. If we look at the outlook, then there are some bullish and then some bearish factors that will impact trade flows within chemicals. We see that the fear of higher inflation and interest rates has eased and now seem to be flattening. We have been ferrying slow economic growth, but we also noticed that IMF have adjusted their prospects up during the last months. And on the positive side, we will see an effect of the relaxation of the COVID restrictions in China. We saw signals of – there was a tight energy supply in Europe. But this also seems to be easing up partly thanks to Walmart and then average winter in Europe. The political instability remains high, and we do believe that the import – the EU import and of Russian products will have an effect. So the effects that this will have on the chemical tanker market after the third quarter, we reported that we saw some reduction when it comes to the production of chemical products. We are not that pessimistic now. We see signs that the production is picking up partly due to reduced energy prices. And we see that the trend that we reported in the third quarter – after the third quarter with longer trade hauls that trend is continuing. So we believe that on the demand side, that will be sufficient production, and we believe that the trend of increased distances will continue. On the supply side, we also see a positive picture. There are no new orders of chemical tankers and we see a continued stagnation of the fleet. We do see that swing tonnage is remaining outside chemicals and in CPP. We continue to see a trend that older chemical tankers are being sold to for regional trade, particularly in the far East. And we do see that – we do not see that the average fleet speed is increasing. So all in all, we believe particularly on the supply side that there are – that we will see a positive trend in 2023. To summarize this presentation, we saw that the good trend in the third quarter continued into the fourth quarter, and that concluded a strong year for Odfjell. These strong market conditions support us during contract renegotiations, and we have a positive view on the contract renewals ahead of us. If we adjust for non-recurring items on the terminal side, the net income was slightly weaker in the fourth quarter compared to third quarter. We have a positive outlook when it comes to the supply and demand situation. And partly due to a somewhat slow start in the spot market in January then we believe that our first quarter results will be similar or maybe slightly lower than the fourth quarter. Yes. We have a few questions from our listeners. So the first one comes from Lars Bastian Østereng. How are COA renewals going so far in the first quarter? Is 26% on rates realistic for the next quarters as well? Well, I think that, that question has been partly covered by the presentation, but yes, 26% increase is clearly realistic for that part of the contract portfolio that has not yet been renewed after we saw the increase in rates, which started in March last year. So I think we will continue to see increases in the first quarter. And then, of course, we are on to renewing contracts that have already been through a significant increase. So I'm more uncertain about the second half of the third quarter – of 2023. The first half, yes, we will see similar increases. Thank you. And perhaps you can answer this one, Terje, also from Lars Bastian. Is it possible to provide a rough split between spot rates and COA rates in the fourth quarter? That's a good question, and it's not that easy to be precise on that, often do you have different products that you are transporting under the contracts and you are transporting from the spot market. But of course, spot rates are substantially – still substantially above contract rates, whether it's 100% more or plus-minus that, I don't know, but substantially above, I would expect. Well, I noticed that the analysts, they have a very positive view on the IMO [ph] market in – after the 5 February ban. If we take that into consideration, my anticipation is that the swing tonnage will remain in CPP and that the chemical tech market will continue to be stretched on tonnage. I think, all in all, our contract coverage will more or less remain the same. We've seen that pattern over maybe the past 10 years that we've been swinging around contract coverage of 50%. And I think that trend will continue also in the years to come. Thank you. Next question was from Paul Haldadal [ph]. And then we have one from Evan Carlsgal [ph]. Order book for chemical tankers remain low. How do you see fleet renewal and the pricing of new build these days? Well, it's correct that the order book is historically low these days. It's also a fact that there are hardly any yards available to build stainless steel chemical tankers. The third fact is that there are – the price of tankers today is high. So it’s a challenge to justify that investment. So my anticipation is that it will take time before new chemical tankers are being built. Thank you. There are a lot of interest about COA. So another question on the 26% increase. How much of the COA volumes were renewed in the fourth quarter? Yes. We had a full and final renewal of approximately 15% of our total portfolio. And well, then we have another 15% that – where we are agreed on the terms, but we are still waiting for insurance and legal reviews for subjects to be lifted. So we are trading on our new conditions, but the contract is not yet signed. So we have renegotiated approximately 30% of the total volumes during the fourth quarter and 50% are fully signed off, and we expect to sign off the remaining 50% within weeks, I believe. Thank you. And then the second part of the question is, if we could share some comments on how much of the COA volumes that are for renewal in the first quarter 2023 and in 2023 as a whole? I didn’t bring that figure. So I think I have to be careful when answering it. And it’s – you also have to distinguish between a number of contracts and volumes. So I don’t think that I should go into any speculations. And how long is the time lag from COA renewals until earnings? When should we start to see the effect of the 26%? I think when it comes to the 26%, most of those contracts were renewed from 1st of January. So those contracts are already enforce. That is a subject that we are discussing from time-to-time. But I can say that at the time being, we are not planning to propose that for the General Meeting in May. That’s not on the agenda, so far, but things can change of course. Perfect. Thank you. That was the final question that came in. So I’ll leave it to you for some final remarks, Harald. Yes. Thank you very much. And to all of you listening in, thank you all so much for attending and see you next time in approximately three months. Thank you.

EarningCall_77

Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited year end and fourth quarter earnings conference call and webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Murray K. Mullen, Chair, Senior Executive Officer, and President. Please go ahead. Thank you, and welcome, everyone, to Mullen Group’s quarterly conference call. Before I commence today’s review, I’ll remind everyone that our presentation contains forward-looking statements that are based on our current expectations and are subject to a number of risks and uncertainties. And as such, actual results may differ materially. For further information that is identifying these risks, uncertainties, and assumptions, take a look at the disclosure documents which are filed on SEDAR and at www.mullen-group.com. So, with me this morning, I have our executive team of Richard Maloney, Senior Operating Officer, Joanna Scott, Senior Corporate Officer, and Carson Urlacher, who’ll be speaking shortly, Senior Accounting Officer. So, what happened in Q4 and in 2022? Well, with today's release and our 2022 annual financial review and this call today, we will be officially putting closure to 2022. Today, what we'll do is, we'll focus on the fourth quarter results and highlight the factors that influence these results. And since we telegraph most of what we will be talking about today, just three weeks ago during our ‘23 business plan call, we'll keep this presentation short and focus on the key points. And truthfully, because nothing has really changed since our last call, we will not be holding a Q&A session. We will not waste your time repeating what we've already discussed. Besides, a complete and full disclosure of the fourth quarter and full year results can be found in the annual financial review. And this document, once again, can be found on SEDAR and on our website at www.mullen-group.com. Carson Urlacher and his team, I’ve got to give them a lot of credit. They did a great job preparing this detailed report. I encourage anybody that wants to get all the details to take a look at it. So, in 2022, our business was running, I would suggest, on all cylinders. We grew consolidated revenues by 35.3%, reaching $2 billion in annual sales. And I would have to classify these as pretty impressive growth statistics. Just as importantly, profitability was enhanced. I would also suggest to you primarily by pricing increases and a very nice gain in the fourth quarter on the sale of some non-core assets. As a result, net income was a record $158 million or $1.70 a share. We increased the dividend mid-year to an annual rate of $0.72 per common share. We bought back over 1.8 million shares at an average price of $12.30. And when you compare the MTL stock performance to other leading industrial companies on the TSX, we were one of the top performers last year. But 2022 will also be remembered as the year we did not engage in any significant or meaningful M&A activity, and for one fundamental reason, we did not like the asking prices. So, we passed. We used the free cash to strengthen the balance sheet. And as I told the team, patience would ultimately be rewarded. Besides, last year, we didn't really have to do anything corporate office. Our 38 business units did an outstanding job managing the freight demand surge that occurred and the inflationary cost brushes. All you’ve got to do is look at the results and it's evident that they did a great job. So, now I'm going to pass the call over to Carson Urlacher, and he's going to provide additional detail on our fourth quarter results. Carson, you're up. Great. Thank you, Murray, and welcome, everyone. I'll provide a bit more detail. However, our annual financial review fully explains our financial performance. As such, I'll provide you with some of the highlights. Overall, the fourth quarter can be characterized in two ways. We strengthened the balance sheet and we set several new financial records that finished off one of the most successful years we've had since going public 30 years ago. Most of our growth this quarter came from our existing business units versus acquisition. In the fourth quarter, we generated $502.7 million in revenue, a record compared to any previous fourth quarter. Revenue increased by approximately $61 million or 13.8% compared to the prior year, and was primarily due to three reasons. First, general rate increases negotiated earlier in the year, along with steady demand, resulted in a $23.6 million increase in revenue. Secondly, our fuel surcharge revenue increased by $28.2 million to $65 million, due to the 65% year-over-year increase in the price of diesel fuel. And lastly, we recognized $9 million of incremental revenue from acquisitions. In terms of our adjusted OIBDA, we generated $77.6 million, being the highest amount we’ve generated in any fourth quarter in over a decade. Adjusted OIBDA increased by $17 million or 28% compared to the fourth quarter of 2021, with all three of our asset-based segments contributing to the increase. In terms of margin, our adjusted operating margin improved by 1.7% to 15.4% in 2022, compared to 13.7% in 2021, and was mainly due to rate increases implemented in 2022, which more than offset inflationary costs. All three of the asset-based segments contributed to this margin improvement. So, let's take a look at how they performed by segment. Starting with the largest asset-based segment, the LTL segment grew revenues by $22 million to $190.8 million. $17.2 million of the increase was due to higher fuel surcharge, while acquisitions accounted for $5.5 million of incremental revenue. Segment revenue was negatively impacted in the fourth quarter, as increment revenue - or sorry, increment weather and the timing of holidays, reduced the number of days available for us to work, particularly in the month of December. Adjusted OIBDA increased by $6.1 million to $31.8 million in the quarter, which was largely due to steady demand and general rate increases implemented earlier in the year, while acquisitions accounted for just under $1 million of the increase. Adjusted operating margin increased by 1.5% to 16.7% as compared to 15.2% in 2021. Our second largest asset-based segment being our L&W segment, grew revenues by $22 million or 16.7% to $153.8 million. Of the $22 million increase in revenue, $14 million was due to general rate increases and strong demand for freight services at virtually all of our business units, while fuel surcharge accounted for the remaining $8 million increase in segment revenue. Adjusted OIBDA increased by $7.1 million to $30.4 million in the quarter, and was mainly due to rate increases that led to the strong performance at virtually all of our business units. Adjusted operating margin increased to 19.8% in 2022 from 17.7% in 2021, as freight rates remained elevated and more than offset inflationary costs. Moving to our S&I segment, revenues were up by $26 million to $108 million in the quarter, which is mainly due to rate increases and strong demand for specialized services, including pipeline hauling and stringing services, construction projects in northern Manitoba, and from greater activity levels in the energy sector, leading to improved results for our drilling-related services business units, and from those involved in the transportation of fluids and servicing of wells. Adjusted OIBDA increased by $6.8 million to - or 55% in the quarter, compared to the prior year. Our adjusted operating margin increased by 2.7% to 17.7%, compared to the prior year, due to rate increases, the strong performance of Premay Pipeline and Smook Contractors, and from greater activity levels in the energy sector. Our non-asset-based US 3PL segment revenues were down slightly to $52.6 million, as freight demand in the United States for full truckload shipments continued to soften in the fourth quarter of 2022 compared to the prior year. Adjusted OIBDA decreased by $1.1 million to just under $1 million. Adjusted operating margins were 1.7% on a gross basis, while operating margins on our net revenue basis were 19.6%. Margins were negatively impacted by the combined effect of lower revenues and a slight increase in S&A costs as we added talented IT staff to build out our proprietary SilverExpress technology platform. Our net income of $61.5 million, and our earnings per share of $0.66 per common share, were both records compared to any previous fourth quarter. Net income increased by $41 million, and was mainly due to a $30 million increase, and the gain on sale of property, plant, and equipment, which was mainly due to the sale of a noncore property located in Surrey, British Columbia. Other increases to net income include $11.8 million increase in OIBDA, a $2.9 million positive variance in net foreign exchange, and a $2.8 million gain on the fair value of equity investments. Somewhat offsetting these increases was a $7.8 million increase in income tax expense. We continued to buy back our own stock, repurchasing and canceling just over 150,000 common shares at an average price of $13.67 in the quarter. As a result of our strong performance, our return on equity improved to 25.9% in the quarter, and 17% on a year-to-date basis. Looking at some other notables, we continue to generate cash in excess of our operating needs, as net cash from operating activities in the fourth quarter was over $100 million compared to $65.8 million in 2021. This increase of $34.7 million or 52% is mainly due to two things, one being the $11.8 million increase in OIBDA, and the other due to a $23 million variance in changes in non-cash working capital items. This strong cash flow generation and the sale of the non-core asset and business, enabled us to reduce the amount being borrowed on our credit facilities by $76 million in the fourth quarter alone. Our balance sheet remains strong. Our debt to operating cash flow covenant under our private debt agreement, is down to 1.67:1, which is the lowest we've seen since 2014. We have also a total of $250 million of bank credit facilities available to us, which we had $22.8 million drawn at the end of the fourth quarter, leaving us with over $225 million of room available. Our private debt has an average annual fixed rate of 3.93%, and matures in two tranches, with principal repayments net cross currency swaps of $217 million and $208 million, due in October of 2024, and October of 2026, respectively. We’ve entered 2023 with ample financial flexibility on our private debt covenants and on our credit facilities, allowing us to be opportunistic on the acquisition front. Now, to really put this into perspective, if we chose to leverage up to 2.5 times on our debt to operating cash flow covenant, we could effectively borrow up to $750 million of total net debt, meaning we could add approximately $200 million of debt to pursue acquisitions, and still have one full term of debt to operating cash flow on our covenant. So, with that, Murray, I’ll pass the conference call back to you. Once again, good summary, Carson. And just to kind of put an explanation point on Q4. December was kind of a tough month, but part of that was just the way the holidays fell Saturday, Sunday, and then you have Monday, Tuesday off. So, you kind of - we kind of lose really 10 days, and then the weather hit kind of bad. So, it's tough to really use December as a barometer, but it was a difficult month, there's no doubt about it. And that that hurt our numbers in the fourth quarter, a little lower than what we anticipated for sure. So, some closing remarks before we call it a day. On January 16th, we provided a full analysis of our expectations for ’23, along with the business plan that we believed reflected reality. And our early January numbers are confirming our forecast, with revenues trending - I would say trending a little stronger than what we'd expected, and showing a very nice recovery over December, which, as I just said, it was a short month due to holidays and a virtual shutdown due to weather impacting a lot of our business. So, just to summarize our overall view for 2023, we believe that the combination of rising interest rates, stubbornly high inflation, and fewer supply chain bottlenecks, will impact the overall freight demand-supply situation. So, on the consumer side, spending is - which is generally by the way speaking, a derivative of the job market, we still think that should remain reasonably constant provided employment levels stay at or near current levels. Now, that's a positive for our business, but to be clear, we don't see any overall demand growth. Where we do see some weaknesses, there'll be some pricing erosion as the supply chain bottlenecks normalize, but this also creates the opportunity for our business units to focus more on cost and on productivity, initiatives that will minimize the impact of the lower freight rates. And since we're a diversified company, and we operate in multiple verticals of the economy, we believe that we will see some growth in our specialized industrial services segment. Lastly, last year you heard me comment earlier, I said we were - ‘22 was the year in which we didn't do a lot of a acquisitions and M&A activity, but the consolidation thesis that we've talked about on so many equations, that's still going to provide Mullen Group with a lot of growth opportunities in ‘23. All we need is the right fit at the right price point. And I would reiterate, the tuck-ins are our preferred acquisition target because we can realize synergies relatively quickly. And in our view, that's the purest way of adding value to our existing shareholders. I think all of you know by now, we don't do acquisitions to grow - just to grow. We do it because we can add value to our business and to our shareholders. So, this brings our call to a close today. We want to thank you for participating this morning. We look forward to updating our expectations for ‘23 in April on the - it's not going to be that far away, in conjunction with the release of our Q1 results. And I would close with this. ‘23 is going to be a year full of challenges, but there's going to be opportunities, and I will say this, we are prepared. Thanks folks. Have a great day. Talk to you again.

EarningCall_78

Good morning, everyone, and welcome to the presentation of Kongsberg's Fourth Quarter and Preliminary Annual Accounts 2022. Today's presentation is a webcast-only and you are able to ask question through the webcast. The results today will be presented by our President and CEO, Geir Haoy; as well as our Executive Vice President and Chief Financial Officer, Gyrid Skalleberg Ingero. Good morning, everyone, to this fourth quarter presentation and webcast. Let me start by saying that I'm very proud of what all my colleagues in Kongsberg have achieved and how we have performed in 2022. We delivered on our strategic priorities and met the targets that we laid out for the group back in 2019 on our Capital Markets Day. We have continued to grow our topline and earnings despite challenging conditions. And we entered 2023 with an order backlog higher and stronger than ever before, both in our civilian as well as our defense business. Our positioning in all business areas are strong. We are in the middle of the major trends affecting our businesses in a world where sustainability and security are at the top of the agenda. I strongly believe that Kongsberg is uniquely positioned to prosper further. We are an ocean expert with solutions for a more sustainable shipping and utilization of the ocean as a sustainable resource. We have solutions that enables a green shift. We have the most modern and sophisticated defense and security portfolio within our niches. And our digital portfolio is getting a solid traction and is an enabler for both the heavy asset industry as well as the general shipping to run the operation, both more efficient and more sustainable, which are adding up to a world-leading portfolio of industrial scale and world-class sustainable and secure solution for our customers with the aim of generating superior value for our shareholders and for all our stakeholders. And I must say that the pipeline is stronger than ever. But there are concerns. In short time, the world has gone from peace and a happy global village to a world filled with global tension, economic challenges, warfare and fight for resources. Nobody could foresee the corona crisis and few did foresee the challenges with logistics and components. Russia's large-scale and brutal attack on Ukraine seemed unthinkable and the extreme price increase in the energy market came as a surprise. Inflation retrenchment measure and interest hike were faster and more heavy than most of us believe was possible. And in parallel, we have a climate crisis, which escalates as cyberthreat that continue to increase. The sum of all these events creates challenges for us, and it makes it harder to predict and adjust to the future. At the same time, we have solutions that could make a difference to these issues and these challenges are also opportunities for us. Kongsberg is agile. We are determined, and we will never give in. And we will continue to deliver strong performance in a world where sustainability and security are at the top of the agenda. Based on the solid 2022 financial performance that Gyrid is about to give you more details on. The Board will propose to payout a total of NOK2.1 billion or NOK 12 per share in dividends. Thank you Geir, and good morning, everyone. Thanks for attending the presentation of our Q4 and preliminary annual accounts for 2022. Geir has already touched on the big 2022 picture, how the environment surrounding us has changed significantly and also made our portfolio of products more relevant than ever. Nevertheless, our performance in 2022 on defense is a result of sales prior to the ongoing war and clear result of long-term commitment and dedication. On the civilian side, our positions are stronger than ever and not only in single maritime segment, but basically throughout the entire maritime value chain. In 2022, we delivered NOK4.4 billion growth corresponding to 16%. We achieved 15% growth in maritime, 18% growth in defense and 17% growth in digital. At the same time, we secured more than NOK45 billion in new orders corresponding to a book-to-bill of 1.42. This is a clear indication that we will continue growing Kongsberg. A lot of the orders signed are, of course, for delivery over a long period of time, both in defense as well in maritime, but we now have a solid confidence in growth, both – margin. Our group target for the year laid out at the Capital Markets Day back in 2019 was at 14% that we met. Maritime ended the year at NOK2.39 billion EBITDA and a margin at 12.6%, slightly below the 13% target, but still a solid level. Keep in mind that with the sanction against Russia, we had to make loss provision in the beginning of this year. Without this, we would deliver approximately 13%. Defense over-delivered on EBITDA compared to the long-term target and ended with 2.5 billion EBITDA and a 21.2% margin for the year. The strong margin is, first of all, a result of efficient project execution, combined with favorable project mix and achieved milestones. But we also had challenges in defense, especially with the remote weapon stations, where we have seen delays in deliveries due to challenging component situation affecting more or less whole 2022. For digital, the focus has been on growing the business area and rolling out systems and new users. Digital showed a solid growth on all our most important KPIs and recurring revenue grew by 38%. And I will come back to the Q4 details after Geir has given you a more thorough update of the business areas. Thank you, Gyrid. Then to the business updates of the businesses. Kongsberg Maritime has delivered yet another impressive quarter with revenue growth in all divisions and a record high order backlog of NOK18.6 billion. The solid order intake in Q4 is due to good activity and especially within the offshore wind, seaborne and PAX and also the aftermarket. That said, looking at the distribution of the order intake, I'm very satisfied with the diversification across segments. The past couple of years, we have benefited from a strong growth in ordering from areas such as LNG carriers and also the offshore wind. In 2022, there were contracted more than 180 LNG carriers. This was up 90 vessels from 2021. Our order intake in these LNG vessels were close to NOK1.2 billion in 2022, which is close to doubling from previous year. From offshore wind, we signed contracts worth more than NOK1.7 billion in 2022, which is up from NOK1.4 billion a year earlier, showing that our solutions for this still relatively new and sustainable segment are well received by the vessel owners and operators. Looking at the market, we have seen a slowdown in the number of contracted vessels from 2021 to 2022. The most important segment for KM, though have shown a positive trend. It is yet to be seen how the expected economic slowdown will impact maritime contracting. But it seems likely that we will not see a major improvement in 2023. Another factor supporting this view is the yard capacity that currently are stretched. When ordering a new vessel today, delivery times could easily be in three, four years out in time. On the other hand, with regulations kicking in, both from IMO, EU as well as other more geographical specific regulators – it generates a pull for renewable of existing fleet, either by ordering new vessels or upgrading existing vessels. The regulation implying taxation on different fuels requirements to file reports on emission and minimum standard to enter ports and more sustainable shipping in general. This puts pressure on the industry to make changes and introduce new solutions. This is a major driver to our aftermarket business, and we put a lot of efforts supporting and partnering with our customers to enable them to comply with these regulations. We have also seen a major change during the past years with a move from – push from both the regulators and the providers of solutions like ourselves to a pull from the customer to improve. This has created a major increase in demand for our solutions. This applies both to the merchant fleet as well as to the more traditional offshore fleet, where we have seen stricter and stricter demands from majors like Equinor and others when they're selecting their suppliers. We have achieved a 22.4% growth in sustainable offerings order intake in 2022 or NOK710 million, which represents approximately 18% of our project orders intake in the aftermarket. One example here is a contract secured in 2022 with Allseas for hybridization of three of their vessels. Allseas is a world-leading contractor in the offshore energy market with a long history with Kongsberg. They are now investing in a 10 megawatt hour of Kongsberg Maritime's own battery technology. And this is to make their fleet more efficient and less polluting. This is the largest as far as I know, the aftermarket battery delivered to one single vessel globally. This is a trend that we expect to continue, both as a result of current implemented regulation, but also when future taxation regimes are decided. All in all, we see a mixed overall demand picture. But that said, with the current phase, KM will continue to deliver. Then to KDA. KDA continues to grow in 2022. The growth was especially driven by the air defense and the missiles. Over more than NOK12 billion in order intake in Q4, NOK9 billion comes from the missile. This indicates that the growth is set to continue, and I'm extremely satisfied with the financial performance. But I'll let Gyrid come back with the details in a few moments. The interest and demand for our naval strike missile is increasing. NSM is an anti-ship and land attack missile recognized as the most advanced precision strike vessels in its class. In the quarter, we signed several new contracts for NSM, including a contract with the Australian Navy for more than NOK5.5 billion for replacement of their existing missiles. In total, 11 user nations have now either ordered or selected NSM from Kongsberg. We see a huge need for replacement of the world existing anti-ship capability, that in general, are starting to become obsolete. NSM is a solid proof of the long-term determination we have in Kongsberg. The development started back in the mid-90s and now more than 25 years later, we have the most modern capability in the world in this field and have signed orders worth more than NOK20 billion over the past – two past years. And there is more to come. As I mentioned on our Q3 presentation, we expected orders for more than NOK50 billion from NSM and/or JSM over the next 12 to 18 months. And in Q4 last year, we have already secured more than half of this. We managed to speed up remote weapon station deliveries somewhat in Q4, but we still experienced some delays, and it is of high priority to solve this case in close collaboration with our customers and partners. A solid proof that our customers believe in us is the new US$1.5 billion framework agreement we signed for CROWS V in Q4. This ensures that we will continue to be the supplier into this program. So far, we have delivered more than 14,000 systems since we won the first contract with the U.S. Army back in 2007. Going forward, with the current situation, where we experienced increased defense spending and budgets, we expect the demand for our product lines to remain strong, and KDI will continue to grow. Then to Kongsberg Digital. Kongsberg Digital was also showing good progress in Q4. We are continuing the rollout of our digital twin, Kognitwin and have close to double the number of new users during the quarter to more than 8,000 individual users using the twin. In Q4, we also signed a solid contract under an existing framework agreement, securing future growth for the system. By the end of 2022, we have signed contracts with approximately 80 shipowners for more than 2,000 vessels on the Vessel Insight. In total, these ship owners control more than 3,000 vessels, showcasing the significant potential for KDI going forward. Also in the number of connected and paying vessels has increased substantially during the quarter. The established business in KDI is also showing good progress, both with a significant contract that we signed on the Maritime Simulation and on the work transferring existing customer on our wealth solution from traditional lease to the SaaS business model. While there is no secret that we have high expectation for KDI as digitalization of the maritime market and heavy asset industry are a significant contributor to optimize these industries. The market is still somewhat immature. This is particularly true in certain maritime segments. That said, we see a movement and a positive signs. Further, the energy transition to new and sustainable energy source is an important driver for our digital solution. Therefore, we expect increased demand for the business area solutions going forward, and our growth ambition for KDI remain unchanged. Thank you, Geir. And even if we have a fantastic 2022, we ended on a high note for the fourth quarter. So let me start. We signed orders worth a record-breaking NOK19.2 billion during Q4. All business areas delivered strong order intake, but the major driver that I will come back to when I'm discussing the defense figures with our missile division. The order intake corresponded to a book-to-bill of 1.42 and increased our backlog to more than NOK63 billion, the highest ever for Kongsberg. This also means that we already have secured some NOK25 billion for delivery this year, and that is before the majority of the aftermarket is included. NOK9.4 billion revenues are the third record shown on this slide. We increased revenue with 16% compared to Q4 last year and are entering 2023 with a solid pace. The records do not stop there. Looking at our EBITDA on the right-hand graph, it shows a NOK1.4 billion EBITDA with 14.8% margin. The improvement comes from both defense and maritime. After three consecutive quarters with continuous increase in net working capital, I'm pleased to see that we managed to turn the curve in Q4. The first three quarters of the year was characterized by both growth-related increases as well as effect from the delays on the remote weapon stations. In addition, we made substantial progress on projects where the customers have made large payments upfront. In Q4, we received several large milestone-related payments in defense that you see moves the net working capital to sales down from negative 1% at Q3 to negative 13% at year-end. In maritime, we kept the net working capital at the same nominal level. That said, we have a somewhat more favorable composition with lower trade receivables and somewhat higher inventory related to specific customer projects. Looking at the development for the full-year, the main expectations are a combination of the delivery challenges in Land Systems, inventory buildup in the missile division and relatively few milestone payments expected from the Q4. We are always targeting a more efficient working capital, both with the continued expectations of growth in Q4. This implies year-end net working capital to sales around the same range. Looking at the cash flow. I touched on the working capital development in maritime and defense on the past slide. As you can see, the net working capital, in addition to our strong EBITDA were the main drivers for the positive cash flow this quarter. With regards to the capitalized R&D, the majority related to – is related to our digital business and a little bit on the starting of building a new missile factory. We have also spent NOK123 million in Q4, buying back shares under the share buyback program. This program was completed on January 13 this year, and we bought back a total of 695, 555 shares from the market. The dilution of these shares and the corresponding number of shares that we will bought back from our largest owner will be voted for on our AGM in May. At the end of the year, we had some NOK3.9 billion cash. A solid balance sheet with investment-grade approach. At year-end, we had net debt of negative NOK1.5 billion. Despite the level of cash lowering during 2022, we still have a very solid balance sheet when entering 2023 with limited debt. That said, a certain level of cash is required to finance the day-to-day operation in Kongsberg. We currently have NOK2.45 billion outstanding bonds. And at the right, you can see the healthy maturity profile on this and with cash, comps dividend. For the fiscal year 2022, the Board will propose to return a total of NOK2.130 billion to the shareholders as dividends. That corresponds to NOK12 per share. Out of this, NOK3.6 billion is considered under the ordinary dividend policy and will be considered payback of previously paid capital. The remaining NOK8.4 billion will be taxed as normal dividends. So looking at Kongsberg Maritime, I just have to share this with you. Over the last five years, we acquired Commercial Marine back in 2018 and closed the transaction in 2019. It has been a quite healthy development since then. So at the quarter, maritime continued to deliver strong order intake and the NOK6.1 billion in Q4 corresponds to a book-to-bill of 1.16. Also in Q4, we saw good orders intake, both from the newbuilding market as well as the aftermarket to mention some. We signed orders for equipment to offshore wind vessels worth more than NOK650 million only in Q4. The aftermarket continues to perform strongly and deliver close to half of our maritime orders intake in Q4. This is driven by several hybridization and upgrade contracts, but also a continuation of what we have seen during the first three quarters in 2022 that we have expected a shift in the aftermarket from a need to have, like we have experienced during COVID, too nice to have and would like to have. This means that instead of doing only the minimum of what is needed, we now see a lot of customers investing a little extra to become even better prepared for a greener future. As you see from the right-hand chart, we continue to build order backlog in maritime has some NOK18.6 billion for delivery going forward. Both the short and medium-term coverage is good, but it's important to remember that yard capacity is stretched, meaning that lead time delivery, new orders signed today are longer than what it has been over the previous years. This again means that the level of new contracts signed impacting the short-term revenue, most likely will be somewhat lower than what we have been used to in the past years. Maritime delivered 9% year-on-year growth in Q4 and 15% growth up to almost NOK19 billion for the year. This continues the solid trend we have seen during 2022. The Q4 growth was driven by the aftermarket as well as the division sensor and robotics that will be reported as a separate business area from Q1 2023. These are still lots of uncertainties out there, but the pace in the organization as well as solid track and long-term, the previous slide, give comfort on our 2023 levels as well. I would also like to share that we had one area in the aftermarket with extraordinary growth last year. The aftermarket in propulsion had alone a growth in order intake of 36% and a revenue increase of 23% with strong profits. Maritime delivered NOK662 million EBITDA, corresponding to 12.6% EBITDA margin compared to NOK537 million and 11% in Q4 last year. The improved EBITDA is mainly a result of profitable growth and increased efficiency. Currency fluctuation in general and exchange rate between Norwegian krones and U.S. dollar is something that we will follow closely. The majority of maritime revenues comes from customers outside Norway. However, it's important to notice that we typically hedge most delivery prospects. This means that eventual currency effect is typically spread over the contract period. A portion of the revenue, though, are nevertheless, exposed to the spot market. And we have calculated approximately the same positive EBITDA effect in Q4 as the last quarter, around NOK50 million, mainly from sensor and robotics and the spot side on the aftermarket. The ongoing inflation, of course, also hits the whole maritime value chain. To a large extent, we have been able to offset cost by actually taking part of the price increases as well. The situation around components and logistics could, of course, still impact profitability. That said, we had the current trend, both when it comes to the green shift needs for renewals. And last but not least, KM's strong market position. I continue to be very positive going forward. Then looking at the defense, and also had to share with you the last five years under development in defense that has been amazing. The order intake in Q4 came in at huge NOK12.5 billion. The major driver here was missile orders where we announced a total of NOK7 billion orders intake from Australia, Romania and Norway. In addition, we signed a contract with the Netherlands where the value is undisclosed. UK also announced their intention to purchase NSM missiles in Q4. Another pleasing moment was when we signed the CROWS V US$1.5 billion framework agreement. We have, as you know, faced challenges on delivering remote weapon stations during 2022. But it gives solid comfort that we have strong trust from our customer when they award us a new major deal like this. Last quarter, I said that we expected missile orders worth more than NOK15 billion over the next 12 to 18 months. We have already signed more than half of this, but it shows that there is more to come, with the danger of repeating myself from previous quarters. The current backlog secures growth also for 2023. From the chart to the right, you can see that we already have secured more than NOK13 billion for delivery in 2023. The total order backlog is now at NOK43.5 billion, which is close to doubling just over the two past years. Our main focus now are deliveries. So order backlog can convert into revenue and profit. Defense came in at NOK3.9 billion revenue in Q4 and NOK11.9 billion revenue total for 2022, corresponding to a 29% quarter-on-quarter growth and an annual growth of almost 18%. Both the quarter isolated and the year – for the year as a whole, the growth is driven by the major air defense deliveries. We have to Qatar, Australia and Hungary at the moment. In addition, our missile division has started delivering solid growth and with orders worth more than NOK20 billion over the two last years. I can assure you that this is just the beginning. Also in Q4, we had positive contribution of some NOK300 million to our revenue from extraordinary high progress in air defense projects. In Q4, defense delivered a very strong margin of 22.7%, giving an EBITDA for the quarter of NOK885 million and NOK2.5 billion for the full-year. We see that the extraordinary high volume in the quarter proves our scalability. As I keep on reminding you on the margins, we will trend somewhat down due to change projects as we have seen geographical mix on our deliveries. As mentioned earlier, we have started to see a mix change when it comes to orders, both regards to products as well as geography. The deliveries the last couple of years have been and still are boost with high-margin international sales. These programs will still be an important part of our revenue going forward. But remember that 50% on our order backlog now or missiles that normally have a lower margin. And then Kongsberg Digital. The revenue growth in Kongsberg Digital continues and KDI increased the revenue from NOK229 million in Q4 2021 to NOK285 million this quarter. For the full-year, the business area delivered 17% growth and ended the year close to the NOK1 billion mark. For digital, focusing on software-as-a-service, recurring revenue is an important KPI to follow. Recurring revenue grew 38% from Q4 2021 to Q4 2022 and covered now 47% of the total revenues. This is both the proof of the success with the emerging portfolio around Kognitwin and Vessel Insight as well as a confirmation that we are able to transfer existing customers over to the SaaS business model. In 2023, we will continue our journey building KDI secure growth and scaling our market position. The financial result will continue to be affected by high investing related to this. Our ambition for KDI is to deliver a positive EBITDA in 2024. And last but not least, we also have some associated companies. And with regards to our associated companies, the two largest ones are Patria and Kongsberg Satellite Services. Patria delivered a 14% growth compared to the previous year to €627 million. 1.27 book-to-bill and order backlog worth €1.75 billion gives comfort going forward. Last year, Patria, among others, signed contracts with Finland for the 6x6 vehicles and the 8x8 vehicles was selected both by Japan as well as Slovakia. Kongsberg Satellite Service continued the positive path from previous years and entered the year with a 19% revenue growth to NOK1.5 billion with NOK562 million EBITDA. KSAT has an order backlog of more than NOK4 billion. This order backlog stretches over several years, but KSAT has already secured the same level of revenue in 2023, so continued growth is definitely within reach. The backlog from our associated companies is not recognized in Kongsberg's reported backlog. The contribution to Kongsberg from these two companies was NOK318 million in total for 2022 and is recognized as income from associates. Thank you, Gyrid. I think we have covered most of the outlook for the different business areas already. So I will not repeat this. But just to repeat what Gyrid just mentioned, when reporting our Q1 2020 figures, we will report a new business area, sensor and robotics. That until now has been a division in Kongsberg Maritime. Sensor and Robotics is a growing business area, and we are in Kongsberg continuously looking for a new opportunity to grow our business. So by establishing Sensor and Robotics as a new business area in Kongsberg, we aim to accelerate the growth further in a market for underwater technology through a more focused investment in research and in development as well as other growth initiatives. We will come back with restated historical figures for both Kongsberg Maritime as well as Sensor and Robotics prior to our Q1 reporting. All in all, we are operating in an unpredictable world, but unpredictability also comes with opportunities. And with our current portfolio and other ongoing initiatives, I'm firmly confident that we will continue our sustainable growth path also in 2023. We do have a few questions from the webcast. First a series of questions from Kenneth Sivertsen, Pareto Securities. First, congratulations with an impressive year. And first question, to what extent have the Russia, Ukraine war impacted the defense order intake, if any? There are minor order intake on our – related to the Ukraine for time being. But what we see is that the request for our products and solutions are increasing. And we also see that the budgets are increasing around for products like Kongsberg have. So we will expect that the demand will continue to be high in the future in terms of defense. Thank you. Second question from Mr. Sivertsen. Could you give some more color to the lead time for new orders within defense, the orders you sign now as well as given the demand for missiles, shouldn't – or how does that impact the margins going forward? On delivery time, I can – this is a huge value chain for our products. Just on the missile side, we have around 1,000 sub-suppliers and then a lot of components. So I think the delivery time is not – is basically the same as we have seen before. But as Gyrid mentioned in her presentation, we are investing in increasing our capacity as we speak. So within a relatively short time, we will increase our capacity on both the missiles and then also we have earlier invested in facilities to produce our air defense systems. So that capacity is up and running today. And in terms of the margins and the effect on the missiles, I will bring your attention back to the Capital Markets Day in June last year, where we say that we have a goal of 17% in 2025 on defense. But the missiles will blend in during the years, but we also have others with lower margin like MRO, more orders from the Norwegian defense and so on. Thank you. And a question regarding the new business area, Sensor and Robotics. Can you elaborate a little bit around the rationale to report this and operate this as a separate business area? Yes. We will come back to more details on that on the Q1, but I can say that Sensor and Robotics and their business area is related to underwater and high-end sensors. And I think that Kongsberg Maritime have grown the portfolio and Kongsberg Maritime have grown tremendously last few years. And I think it's looking at the market focus that Kongsberg Maritime core has today is somewhat different from what Sensor and Robotics is. So I think this is going to strengthen both Kongsberg Maritime focusing on their core markets in the shipping maritime market. And then Sensor and Robotics will have their management focusing on the underwater, high-end sensor area. So it's going to be – I think it's going to accelerate the growth path that we have already seen in Sensor and Robotics as well as Kongsberg Maritime. Thank you. Final question from Mr. Sivertsen and then a few from some others. The final question from Sivertsen goes on our current financial ambitions for 2025. With regards to that, you have some NOK63 billion backlog as well as a lot of framework agreements to deliver on forward. Were there any reasons why you wouldn’t lift that ambition today? I think it has to do with the delivery time as the other question was also, we need to ramp up, and that takes time. At the moment, as Geir mentioned, we are putting up a new missile factory. Last year, we put up a new production line for space and the year before for air defense. So we are continuously ramping up our productions, but at the moment, we will still stand on those – the guiding from the Capital Markets Day last year. Yes. And I think we will have another Capital Markets Day. If we find right to lift our ambitions, then we will come back to that on Capital Markets Day. But I think, for sure, if we had that missile factory today, we would obviously have been able to deliver a lot more than we do today. Okay. One question from Mr. [George Livaditis]. Can you comment a little bit on the expected timing of the remote weapon station delays being resolved as well as how the earnings or margins are on the remote weapon stations compared to the rest of your portfolio? We're not commenting directly on the margin on the remote weapon station. But as Geir mentioned, we are delivering each month and each quarter, but we don't have the speed as we wanted because we still have lack of components. So we're working very hard to solve those issues. And we think that we will still continue to ramp up and deliver during 2023 and so on, but we don't believe that we will have a huge delivery in one quarter or another. It will come gradually during this year and probably also next year. Thank you. Then a few questions from [Lucas Dahl, Arctic Securities]. While you're not providing any specific revenue guidance for 2023, your contract coverage implies approximately a 25% revenue growth using the 2022 dynamics as a proxy. Is that a level that you're comfortable with? And also with regards to CapEx, how do you see this develop in 2023? To take the last question first, in terms of CapEx, we have said that we will invest between NOK1 billion and NOK1.5 billion in the missile factory and the surroundings around that. In the park in Kongsberg, we don't see any huge other investments at the moment. So it's still the same as we have said before. And in terms of specific guidance only for 2023, Kongsberg doesn't have a history for guiding specific on 12 months cycles. That's a Board discussion actually. So it's a combination that we have a dividend policy. And then on top of that, we see that if we don't have any investments specific that we will spend the money on, then we will pay out some extra. And yesterday, the proposal will be then NOK12 per share. Thank you. Final question from Lucas Dahl. KDI claims that they will hire a lot of people over next periods. What sort of OpEx impact or inflation could this give? In total, for Kongsberg, we will hire 3,000 is 304 in net people or not in net, but we also have a lot of people retiring, some need to be replaced. But of course, when we calculate new contracts, we need new people. So the OpEx in nominal will, of course, increase. But in terms of margin, it won't affect any other guidance that we need more people because you always have the scalability in the operation. When you have the industrialization, like we had seen for air defense, you will have the same for missile when you have a more efficient factory, then you will be able to take out efficient gains. We are scaling up, and we are looking for more resources in addition to retiring. We have, of course, also a turnover of people. So we constantly look for new people, and that is not only in Kongsberg Defence & Aerospace, is also in other business areas. And the reason why we are hiring are because we are growing. So we're not hiring to solve a flat topline. Thank you. Question from Hans-Erik Jacobsen, Nordea. Margins in KDI continue to exceed expectations while you continue to guide down. Can you give us some guidance on the margin level in KDI going forward? No. It still is the same as Kenneth asked about. We still stand on the long-term target of 17% in 2025 because of the mix. What happens now the last half year actually of 2022 was that we have a huge volume in air defense that normally comes with good margins and, of course, affected the result on the defense side. So the blend on the mix between the different product areas was very favorable this time. Thank you. And then there are a lot of increases in budgets around Europe and other places. For example, Norway says that they were going to buy 54 new leper tags, will that give any sort of offset effects to Kongsberg? On the Leopard? Now for Kongsberg is no direct revenue or industrial participation in that program as far as I know. But obviously, for other Norwegian industry players, I think it's going to be a business for Norwegian partners in that program. I think we see a slightly improvement in the component situation. And I think – looking back on the last couple of years, I think Kongsberg has been quite good at handling this situation. We have not experienced any major delays in our shipment, except for the remote weapon stations as we have talked about many times. But I think in general, we see a slightly improvement and I think that will continue also in 2023. So I'm quite optimistic that we have the worst behind us. And we also started to work a bit different, not only with single source. We see how we can have different supply chain. So we are more secure and prepared for different situations. Thank you. And then the final question from the webcast. With regards to the business outlook for 2023, where do you see most potentials for order intake or major order intake throughout Kongsberg? A little bit depending on what the question means. But I think in general, I think that the order intake for Kongsberg as a whole will continue to grow. We are well positioned both in the existing core markets in maritime. But as I said, we expect that the number of contracted vessels will go down. But we see also that on the other hand that there are segments that we think are going to have a positive development is vessel segments that is on the high end where Kongsberg has a strong position. So I think Kongsberg Maritime will continue to be in a good position on that side. Kongsberg Defense, obviously, we have already talked about the missile expectation going forward. We see the interest in our air defense systems is increasing. And then also, we have reason to believe that also the underwater segment and also the space segment will continue to be in a positive development going forward on the order intake. So in general, I think we will see, well, of course, the largest areas, the largest orders will be on the defense side, obviously.

EarningCall_79

Good morning. Thank you for standing by and welcome to the Madison Square Garden Entertainment Corp. Fiscal 2023 Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Ari Danes, Senior Vice President Investor Relations, Financial Communications and Treasury. Please go ahead. Thank you. Good morning, and welcome to MSG Entertainment's fiscal 2023 second quarter earnings conference call. Dave Byrnes, our EVP and Chief Financial Officer will begin today's call with an update on the company's proposed spin-off, as well as a discussion of our entertainment and TAO Group segments. This will be followed by an update from Andrea Greenberg, President and CEO of MSG Networks. Dave will then conclude with a review of our financial results for the period. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website. Please take note of the following. Today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to the company's filings with the SEC for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On pages 5 and 6 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI, a non-GAAP financial measure. Thank you, Ari, and good morning, everyone. I'd like to begin today's call with an update on the progress we have made toward our proposed spin-off. As you know in December we announced a revised plan for the separation of our businesses and are now pursuing a spin-off of our traditional live entertainment business from our MSG Sphere, MSG Networks and TAO Group businesses. We believe this revised structure is optimal for maximizing shareholder value as it creates two distinct companies each with enhanced strategic and financial flexibility to drive long-term growth. One would be a pure-play live entertainment company with a portfolio of assets that includes the Madison Square Garden Arena and the Christmas Spectacular production. The other would pursue global growth opportunities around MSG Sphere, state-of-the-art venues that will deliver the next generation of entertainment experiences. Last month, we confidentially submitted an amended Form 10 statement with the SEC for the revised spin structure and expect to file our first publicly available Form 10 later this month. We also plan to issue an investor presentation on the new live entertainment company, which will include certain financial projections that illustrate the profitability of our core entertainment business. We are moving swiftly and anticipate completing the spin-off by the end of March subject to various conditions including final Board approval. We are also continuing to make significant progress around MSG Sphere and expect to open the venue in September. In terms of construction, we are currently on track to finish installing LED on the Exosphere by the end of this month marking a significant project milestone. In total, the Exosphere will be 580,000 square feet of fully programmable LED lighting, creating the world's largest LED screen, that to be seen not only by the millions visiting Las Vegas, but also become an iconic global landmark, photographed and shared on social. We have already started testing these screens and when illuminated believe this will be an unparalleled canvas on the Las Vegas skyline, for artists and brands to showcase original and impactful content. Inside the venue, we have begun installation of the 160,000 square foot interior LED display plane, which will wrap up over and around the audience creating a fully immersive visual environment, and will be the highest resolution LED screen in the world. We are also continuing the build-out of the venues interior spaces including, the suites and hospitality areas that will elevate hospitality to an entirely new level. Attending an event at MSG Sphere, will be unlike anything, anywhere in the world and we expect it will become a must-visit destination for the global audience that visits Las Vegas. Our content plans for MSG Sphere include, a wide range of events from original immersive attractions, to music residencies, to marquee sporting and corporate events. All of which, will take full advantage of the venue's state-of-the-art technologies. We are in active discussions with a number of iconic artists for residencies at MSG Sphere and are targeting between four and six headliners annually. We also plan to showcase our original immersive attractions, multiple times a day year-round, a key reason why we believe MSG Sphere at the Venetian will become the most highly utilized venue in our portfolio. As you've heard us discuss before, we've been incredibly energized by the interest we're seeing from prominent filmmakers to create content specifically for Sphere, and in the coming weeks we plan to share details on our debut original attraction, from a leading Hollywood director. We remain as confident as ever in the opportunity with MSG Sphere, and we look forward to sharing more details in the coming months. Now, let's review our second quarter operational highlights, starting with the Entertainment segment, where we continued our strong momentum from the start of the year. In total, we hosted over 380 events and more than 2.3 million guests across our performance venues this quarter. That included another busy schedule of concerts, as demand from both artists and fans alike remains robust. In fact, once again the majority of concerts held at our venues were sold out. We were also pleased to welcome back the Knicks and Rangers to the Garden, this past quarter for the start of their 2022 2023 regular seasons. As we look ahead to the second half of fiscal 2023, our calendar continues to fill up, as we head towards completing our first full year of bookings since before the pandemic. Turning to productions. Last month, the Christmas Spectacular, successfully completed its 89th season and the show's first full run in three years and the results clearly, demonstrate the enduring popularity of this beloved holiday tradition. This season, we sold over 930,000 tickets across 181 performances and achieved revenues of more than $130 million. Average per show revenue was up double-digit percentages versus both fiscal 2022 and fiscal 2020, which was the last holiday season unaffected by the pandemic and total revenue exceeded fiscal 2020 levels despite 18 fewer performances. These results also benefited from improving tourism, as New York City continues to make its way back following the pandemic. We were pleased to see the number of individual tickets sold to tourists, as well as group sales, a heavily tourist-driven category, both increased over 50% on a per show basis, year-over-year. We have also seen corporate demand remain strong across our business. Following a slate of successful renewals and new partnership announcements earlier this year, our marketing partnerships business remains on a path to exceed results for fiscal 2019, our last full year before the pandemic. The same is true for premium hospitality, where we have now exceeded our annual goals on renewals and new sales across not only suite licenses but also our two other key premium products the Caesars Sportsbook Lounges and HUB Loft. Turning to Tao Group. Our second quarter results reflected strong performance across Tao's slate of restaurants. As a reminder, during the year ago second quarter, Tao's business faced the impact of the Omicron variant, which disrupted operations and dampened demand for corporate events during the holiday season. This year, we were pleased to see the return of the high-margin banquet business, particularly in Las Vegas and New York, another sign of the returning demand for corporate entertaining in our key markets. In addition, this quarter's results reflected the impact of a number of new venues including LAVO restaurant in Los Angeles, which opened last March and LAVO in San Diego, which opened in June. Tao also opened four new branded locations at the Moxy Hotel, on New York City's Lower East side during the quarter, another great example of Tao building on its HUB strategy within a market. As we look ahead, Tao continues to make progress on its pipeline of new projects. By the end of the third fiscal quarter, Tao is expected to have opened another three new locations including one in Las Vegas, expanding the company's foothold in that market to 15 total branded locations. These openings will be followed by a new waterfront restaurant in Miami before the end of the fiscal year, growing Tao's presence there as well, along with a slate of other projects around the world as we start looking to fiscal 2024 and beyond. With over 70 branded locations in more than 20 markets across four continents and growing, Tao Group has truly transformed into a global entertainment, dining and nightlife powerhouse, since we acquired a majority interest in 2017. As you know, we regularly evaluate ways to maximize shareholder value and believe that now is the appropriate time to explore a potential sale of our interest in Tao. While there is no assurance this process will result in a transaction, Tao's recent success and future growth opportunities have generated significant interest from potential buyers. We will keep you updated as we have additional information to share. In summary, we are pleased with our positive momentum and look forward to the second half of the fiscal year, as we continue to pursue strategic opportunities including our planned spin-off and our MSG Sphere initiative that we are confident will position us well to drive long-term shareholder value. Thank you, Dave and good morning. At the halfway point of the NBA and NHL regular seasons, we are once again delivering a full slate of live games across our five professional sports teams along with comprehensive pre- and post-game coverage, behind-the-scenes footage and a host of other unique programming for our audiences. We have also recently completed renewals with several distributors including a multiyear agreement with one of our largest affiliates. As to our financial results, while we again experienced a decline in subscribers this quarter, we continue to build on our success in advertising delivering year-over-year growth in advertising and sponsorship revenue. This increase reflected both the timing of live game telecasts, as compared to the prior year, as well as continued growth in advertising revenue on a per game basis. We are benefiting from our strong core of returning advertisers including the full run rate impact of our five sports betting partners and increased demand from categories such as auto and insurance. We are also pleased to see increasing advertiser demand for our non-ratings-based initiatives with significant year-over-year increases in branded content and our MSG Go product, as our partners continue to recognize the platform's benefits in reaching additional viewers. And we have been executing on several new content and distribution opportunities. In December, we aired our first ever NHL bet cast presented by DraftKings one of 12 bet casts we have planned across Knicks and Rangers games over the course of the '22, '23 seasons. In addition, we recently launched nationally MSG Sports zone, a new free ad-supported streaming TV channel, which features a mix of original programming from our content library. MSG Sports zone is currently available on Flex with other distributors expected to launch shortly. The introduction of this fast channel provides us incremental opportunities to monetize our current and archived non-game content and increases the exposure for our original sports gaming and other programming to a new national audience. At the same time, we've been progressing in the development of our direct-to-consumer offering including product type, pricing and technical requirements. We remain in ongoing discussions with potential distribution content and advertising partners. Through all of this, we've gained valuable insight into what an optimal product would look like. For example, how we can best integrate this new D2C platform with our current authenticated product MSG Go to create a streamlined experience for our users which integration we have decided to implement at launch. We plan to offer annual, monthly and per game subscriptions and look forward to sharing more details including preliminary pricing in the very near future. So as we take these factors into consideration, we now expect to launch our D2C product MSG+ over the summer and prior to the start of next season, which we believe best positions us to realize the full potential of this overall opportunity. I'd also like to take a moment to acknowledge the recent cost reduction program we've implemented in our business. After a thorough strategic review, we identified certain operating efficiencies, which will result in meaningful cost savings going forward. We remain mindful of the evolving ecosystem in which we operate and believe the activities we've outlined have certainly put our business on stronger ground. Thank you, Andrea. Now let's review our fiscal 2023 2nd quarter financial results. On a total company basis, we generated revenues of $642.2 million and adjusted operating income of $124.1 million, an increase of 24% and 63% respectively as compared to the fiscal 2022 second quarter. As a reminder, the prior year quarter was impacted by the Omicron variant which resulted in a shortened run of the Christmas Spectacular, a number of canceled and postponed events in our bookings business and a temporary impact to both demand and operations at Tao. Starting with the Entertainment segment, we generated revenues of $356.5 million and AOI of $66.3 million, both up significantly on a year-over-year basis. These increases were primarily driven by a full run of the Christmas Spectacular, the start of the Knicks and Rangers seasons, and continued strength in our bookings calendar. AOI also reflected the impact of expenses related to MSG Sphere as well as costs related to the company's planned spin-off. We anticipate Sphere costs continuing to increase over the remainder of the fiscal year as we prepare for the planned opening. Turning to MSG Networks, the segment generated $158.9 million in revenue and $39.3 million in AOI decreases of 1% and 10% respectively as compared to the prior year period. The decrease in AOI primarily reflected lower affiliate revenue and higher rights fees expense as well as higher other programming and production costs. These were partially offset by growth in advertising revenue. Finally, Tao Group generated $136 million of revenue and $18.7 million of AOI, up 16% and 7% respectively as compared to the prior year period. The increase in revenues was driven by higher comparable venue revenues as well as the impact of new openings. AOI results also reflect higher venue level and corporate labor costs as well as higher entertainment costs. Turning to our balance sheet. As of December 31st, we had approximately $554 million of cash on hand and restricted cash and our debt balance was approximately $2.01 billion reflecting our recent MSG Sphere financing completed at the end of the quarter. Our construction cost estimate for MSG Sphere remains $2.175 billion, while project to-date construction costs through December 31st were approximately $2 billion which includes approximately $236 million of accrued costs that were not paid as of December 31st and is net of the $65 million received from the Venetian. And lastly, with respect to the cost reduction program, which we announced last quarter and Andrea touched on earlier, we have now completed a strategic review of our businesses and have identified a number of efficiencies across our entertainment and MSG Networks segments. This includes targeted headcount reductions, which have now been implemented and resulted in a restructuring charge of $13.7 million in the fiscal second quarter as well as other non-labor-related cost savings initiatives. Hey good morning. Thanks for taking the questions. I wanted to start with Sphere and I think all of us and investors are certainly looking forward to the building opening in September. But what can you say to give them confidence that, the building will generate immediate and substantial revenue, when the door is open after this CapEx cycle? Sure, Brandon. Thanks. Let me start by saying that, we're confident that MSG Sphere in Las Vegas will generate substantial revenues, and adjusted operating income once we open. We're making good progress on our plans and expect to have quite a bit of news to share with you as we make our way towards the opening. Look, we feel we have the best relationships and partners in the industry, whether it's with artists, promoters, sponsors and others, and are working to extend those relationships to Sphere, where it's appropriate. So we're not starting from square one in that regard. Let's touch on where we are with content plans. We're in active discussions regarding a wide variety of event types, including music residencies, and expect to have our first residency help us open the venue in September. I'd also add that, we're targeting between four and six residency headliners every year that could obviously vary depending on the length of the residency. We also see, the opportunity with major market events like Formula One, which is doing a multi-day takeover in November for their inaugural Las Vegas Grand Prix. We've talked about original attractions as being another key component of our plans to really drive the high utilization at the Sphere. And we continue to expect to run these originals multiple times a day year-round. And we believe, Vegas is the perfect market for these attractions given that the 40-plus million tourists that visit Vegas annually. And I briefly mentioned it earlier in the coming weeks, we will be announcing our first original attraction from a leading Hollywood director, which we expect to debut also around the time that we opened the venue. In terms of advertising, sponsorship and premium hospitality, the Sphere will have a variety of sponsorship tiers, ranging from lucrative founding partnerships, to official partners, all the way to transactional campaigns that tend to be shorter in duration. We'll also have 23 VIP suites and additional premium hospitality areas throughout the venue. Just in terms of the progress we're making on that front in November, we hosted 150 potential Las Vegas suites, and VIP partners for a first-look event. During CES in January, we hosted site tours on each of the days during CES for representatives from some of the world's leading brands. And we're now speaking with potential corporate partners across really every major industry and we feel very good about the opportunity we have to translate those conversations into partnerships. Las Vegas is the number one destination for entertainment and the Sphere will be the number one immersive experience that the city offers. And companies and brands are going to want to be associated with that experience. So with all of that, we remain confident about the opportunity we have in Las Vegas, and we look forward to sharing more positive news on all of this with you. Great. I know, what residency I'm hoping for. But on Tao, can you maybe help us think out the valuation and what you expect get in return for that asset? I know, you don't know the exact sale price at this point, but maybe if you could just kind of frame-up in broad strokes what you're thinking on valuation and how much interest there has been so far? Sure. I'll try to help the best I can with the valuation question. Just as a reminder, we originally paid $181 million for a 62.5% majority interest in TAO in 2017. And at that time that equated to an enterprise value of approximately $400 million. Our interest is now approximately 67% and that's for a combined TAO Pakistan business and since 2017 TAO has transformed into the global powerhouse that it is today. The business has grown over 70 branded locations across four continents, and this scale is reflected in its financial results. In fiscal 2022, TAO had revenue of $485 million and AOI of nearly $70 million. It's TAO's phenomenal employees. We believe their management team is the best in the business. And they have just have an enviable portfolio of brands and venues. The business also has a long way to continue to grow its venue portfolio both domestically and internationally. And as a result of all of this, the bidding process is extremely robust with significant interest from multiple bidders. And at this point, we're moving forward through the process and we'll keep you updated as we have additional news. Hi. Thanks. Andrea, on the D2C product, can you remind us if you have rights to package the games anyway you want. So for instance, could you sell half or a quarter of again? And then how should investors think about the financial model for this product? Would it be EBITDA accretive in Season One, or does this need to reach a certain scale? Hi, David. Well, as we said in our prepared remarks at the outset at launch, we'll be offering per game monthly and annual subscriptions. Will certainly evaluate other types of consumer offerings if they make sense, but likely after launch. Yes, we've talked about the rights before. As to rights, we've reviewed our plans and depth with the leagues and they're entirely supportive of what we're doing. As to your second question in terms of opportunities for MSG+, we certainly believe it will be value accretive. And without getting into the specifics, we do know that there are millions of homes in the region that don't today receive our networks. We've conducted extensive consumer research. It's shown that among fans that don't today receive us in the bundle there's definitely interest in subscribing to a D2C offering. We also believe that we'll benefit from the combination of MSG GO with MSG+ into a single offering that will allow for greater utilization by our authenticated subscribers on additional platforms because we'll be fulsome in the number of platforms on which MSG+ will be available, that provides us with increased potential combined monetization opportunities. We also have many efficiencies in place today with our existing business with our programming, our staffing, our technology and our learnings from MSG GO. So in short without getting into specifics we certainly believe that MSG+ will be value accretive. And then separately, David, just wanted to see if you could update on the live events pipeline, concert, residency demand generally. And I'm curious, just given economic headwinds, do you see any difference in demand for, sort of, mega acts that we know were selling really well at places like the Garden versus smaller acts that you service at Radio City or the theater. Sure, David. Thanks. Let me just start by saying we're really pleased to say that the demand from artists and fans remains robust. A majority of concerts held at our venues during the quarter were sold out. And that was the case at both the Garden and across all of our theaters. Average show attendance at each of our venues, through the second quarter, has been in line with last year, which, obviously, benefited from pent-up demand coming out of the pandemic. So we haven't seen anything other than that enthusiasm being sustained. As we look ahead to the second half of this calendar year or this fiscal year 2023, our calendar continues to fill up. And our theaters continue to attract a wide range of genres, repeat act, new acts and multi-night shows. We've also continued to see strong on-sale activity over the last few months, including some of the recent multi-night sellouts from certain on-sales like Madonna, Janet Jackson, RBD at the arena, Bono at the Beacon and several others. So we feel really good about the remainder of the year and beyond at this point. Thanks for the question. Could you talk a bit more about the decision to explore sale of Tao Group. Why is now the right time to undergo this process? Is part of the rationale to use proceeds to fund construction of the Sphere or other Sphere initiatives? And if not, what are your capital allocation plans with proceeds assuming a sale is completed? Sure. Thanks, Devin. As I just mentioned, since we bought the majority interest in Tao in 2017, it's transformed into the global powerhouse that it is today and it's clearly reflected in its financial results. And as you know, this company, our Board, our management team, have a track record of regularly exploring ways to maximize shareholder value. We believe that now is the appropriate time to explore a potential sale of our interest in Tao. And in terms of the use of the proceeds from the potential sale, let me start by saying that we are comfortable with the fact that we have the appropriate liquidity to complete construction of MSG Sphere in Las Vegas. We have substantial cash on the balance sheet. Our business is generating positive operating cash flow and we have revolver capacity, if needed. And with the recent cost reduction program that we just completed, including at MSG Networks, our business is even on stronger ground today. So, typically, we move forward with the sale. The sale would provide -- the sale of Tao would provide SphereCo with enhanced financial flexibility, period. We can see those proceeds benefiting all businesses at SphereCo, as that entity, really, after the spin-off evaluates opportunities to appropriately allocate capital. Thanks. And I have a second question on MSG Networks. As you move closer to a D2C launch, how are your discussions with linear distributors progressing? Will the D2C launch cannibalize affiliate rates at all, or is there a way to protect linear streams, while also reaching incremental consumers outside the bundle? Thanks for the question. Well, as to our current distribution partners and we've indicated before, that we have the flexibility in our existing agreements to offer this D2C product in the way we contemplate. However, we remain very, very mindful of our traditional linear business, and those important partnerships, including the value that we derive from those very important partnerships. We've indicated that we'll have more to say about the product including the pricing of the product in the very near future. That said, we believe there remains continued value in the bundle. And our D2C offering, including our pricing for that offering, we'll most certainly take that into consideration. Thanks, so much. I wanted to ask first off, if we could get a little more color on the cost reduction program, the headcount reductions? I know you mentioned it's across entertainment and networks. I guess, where did you see the opportunity to cut costs? And in each of those, maybe more specifically on what drove that? And then a follow-up around the spin. More or less, what kind of sort of background could you give on the SpinCo capital allocation strategy going forward, post spin, we'll have the legacy entertainment business. But -- just trying to understand, where you go from capital allocation from there. Thanks. Sure, Paul. First on your cost reduction question, while we're not providing specifics, I'll say that we identified a number of efficiencies across, both entertainment and MSG Networks. That included targeted headcount reductions, which resulted in the $13.7 million of restructuring charges that you see in the second quarter. We also identified and implemented a number of nonlabor-related cost reductions. And as Andrea has mentioned that we expect these initiatives will result in meaningful cost savings going forward, particularly at MSG Networks. On your capital allocation question for SpinCo. Yes, as we think about our capital allocation priorities for that business the first is always to maintain adequate liquidity to fund operations. Second is to ensure that we have a strong balance sheet. And as you know the live entertainment business took on debt during the pandemic. There's currently a little less than $680 million outstanding under that facility. So in the nearer term, we expect our priority would be debt pay down for SpinCo. And then third over time, we would certainly explore other uses of cash flow including return of capital. Just a note on that. We expect SpinCo will be well-positioned to generate cash, which will allow for rapid deleveraging and this starts with our expectation for strong AOI on an annual basis for SpinCo. And just on that point, again, note that we plan to issue an investor presentation on SpinCo with certain financial projections that will illustrate this profitability. So again, we think this will position SpinCo well to quickly delever, which will then open the door for other potential uses of cash flow for SpinCo. Well, thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

EarningCall_80

Good morning, ladies and gentlemen. My name is Serge, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited Third Quarter Fiscal 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Instructions will be given at that time. Thank you, and good morning, everyone. Before we begin, let me remind you that during this conference call, we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. Please refer to our earnings release, MD&A and other securities filings for additional information about these assumptions, risks and uncertainties. Thanks, David. Good morning, everyone. Good to be with you following our Board Meeting yesterday, we published our results and we're pleased to be with you this morning. As we highlighted, we were encouraged by our growth and improved profitability through the first nine months of our fiscal year. I've maintained a narrative around COVID being this three-year event in which year one, our revenue spiked up a bit as people did a significant amount of pantry loading. In the second year of COVID, our sales dropped 5%. And as a result of business closures, our estate wineries and stores were closed; restaurants were closed as well. And our EBITDA dropped as a result of those closures. In the third -- this third year, the revenue is returning to its normal level, so we are managing the challenges of inflation and supply chain disruption. I can tell you now that we're very confident that the worst of the disruption is behind us. We've hit rock bottom in the last few months and already our gross margins are trending upward, and we expect to have a recovery of our EBITDA back to our normalized levels in the low 60s over the next two years just to maintain a high-level view of our category wine in both Canada and in North America, if you take the average of the three years, wine is growing at 1%. Some of the volume has been down a little bit in some years, but the pricing has been up overall net revenue has trended up 1% over the three-year period. And I think it's an important comment, because we've always maintained our confidence in the strength of our category's resilience. I don't know of a more recession prove category than wine. If you look at what happened to most businesses through the last three years. Their revenues have been up and down significantly. Similarly, not just hotels and airlines and restaurants, but retail segments as well. Our segment just motors through. This is consistent with what happened in 2008 in the financial recession and the tech bubble and 9/11 issue in the early part of the 2001. We've never gone through one of these events without our category staying strong and demonstrating its resilience. So our sales were up year-to-date at 3.2%. Now that everything is fully open, we were the beneficiary of some price increases. Our sales would have been up 5%, if we had been able to fully meet the demand, but we had significant supply disruption particularly in our western courts in terms of receiving bulk wine in. And while we were able to expedite and offset some of that supply disruption, we did not -- we weren't able to manage all of it, and we have some significant out of stocks throughout the year, so that to the extent that we're up 3.2%, it did demonstrate both the strength of our brands and our sales capabilities through this disruptive period. You know, supply chain issues have -- will continue. But clearly, the forecast has changed and things are looking more positive, and we'll talk more about that throughout the call. Our gross margins year-to-date are stable to last year, which underlines the fact that there was a lot going on there, we had significant increases in freight, container and shipping costs. We had significant increases in glass costs. We've been able to offset a great deal of that through price increases and other cost savings programs. So there's been an enormous amount of activity in place to offset some of these challenges. You'll have seen that we received our agricultural Canada support program in the third quarter. This is the continuation of support that we have received for many, many years, at least 15, 20 years. We previously received the support in the form of an excise tax exemption. And this excise exemption was challenged by the Australians, which on its face was somewhat bazar, because they have and continue to maintain the exact same program in Australia that they felt ours was illegal, but our government decided rather than to fight with them legally. They would change our support into a trade legal program through agriculture. That is what the wine sector support program is a program that we always enjoyed and will continue to enjoy going forward. And I'm happy to talk about that if you need more details. And then in any event, we are feeling that the worst is behind us. We're confident that we're going to continue to grow over the next few years. I think it's fair to say that the market is a little still soft. I mean people aren't traveling and spending at their highest levels, because there's still some concern with the recession as well. But the commentary around the lowering of the inflation rate and the improvement in the economy seems to be accelerating and becoming increasingly positive, and that should provide us some nice tailwind as well. So generally, our brands and our trade channels are performing strong. Our balance sheet continues to be very strong, and we have a very confident view of our future. Turning to our results. We continue to be encouraged by our sales growth so far this year. Sales in the third quarter of fiscal 2023 increased 1.4% to $104.9 million. And in the first nine months of fiscal 2023 increased 3.2% to $304.4 million. The increases were driven by growth across the majority of our trade channels, including restaurant hospitality, retail, export and our estate wineries, A number of positive factors supported this growth, including price increases implemented at the start of fiscal 2023 to help offset the ongoing inflation and supply chain pressures, increased sales of our premium higher margin VQA products through our Ontario retail network at our estate wineries and to our direct-to-consumer wine clubs. Additionally, our personal line banking business continues to underperform the prior year when we experienced higher sales during the midst of the pandemic. As John mentioned, sales growth was impacted by ongoing supply chain issues. We continue to closely manage the timely delivery of wines from international producers in the sourcing of glass bottles and other input components from our suppliers. To help us meet this demand, we have had to source liquid and other components from domestic and international suppliers at higher costs. In terms of our margins, we were pleased to see margins continue to stabilize landing at $42.3 million, up $6 million or 16.5% to the prior year for the quarter and at $119.8 million up $3.9 million or 3.3% to the prior year for the nine months ended December 31. Margin as a percentage of sales for the first nine months of fiscal 2023 increased to 39.4% compared to 39.3% in the prior year. Margin in the quarter and year-to-date was supported by the company's recognition of the wine sector support program benefit as described in our disclosures. Consistent with the first-half of fiscal 2023 and the second-half of fiscal 2022, we continue to experience higher-than-normal costs of raw materials, particularly glass bottles and packaging and international freight shipping charges and fuel surcharges remained above historical levels. In response to these margin pressures, the company has implemented price increases throughout fiscal 2023 and is focusing on increasing sales of higher-margin BTA products. In addition, the company is executing numerous production efficiency and cost-saving programs aimed at enhancing operating margins, including rationalizing stock keeping units, evaluating alternative sourcing for imported wine and glass bottles and optimizing our logistics and freight. As John mentioned in his remarks, we are confident that our cost savings initiatives will drive further recovery of our margin in fiscal 2024 with full recovery back to normal levels within two years as it will take time for cost reductions to work their way through our system. Sales and admin expenses landed at $26.7 million for the quarter, up $2.5 million or 10.1% to the prior year and at $80.6 million, up $4.4 million or 5.8% to the prior year for the nine months ended December 31. Sales and admin expenses have increased this year as the Ontario minimum wage increase took effect and as we return to full operations at our states post pandemic. EBITDA ended at $15.6 million and $39.3 million for the three and nine months ended December 31, compared to $12.1 million and $39.8 million, respectively, last year. For the third quarter of fiscal 2023, we had net earnings of $3.9 million or $0.09 per Class A share. For the nine months ended December 31, 2022, net earnings were $6.7 million or $0.16 per share. This compares to earnings of $3.1 million or $0.07 per Class A share in last year's third quarter and $19.5 million or $0.46 per share for the first nine months of fiscal 2022. In last year's second quarter, we recognized a gain of $7.5 million or $0.21 per share on the sale of our Port Coquitlam BC property and assets. Turning to our balance sheet. Total debt increased to $194.9 million from $192.1 million at the end of fiscal 2022, and -- at quarter end, we had capacity on our revolving credit facility of approximately $138 million with shareholders' equity standing at $6.16 per Class A share. Thanks, Paul. Just a couple of quick comments in terms of our sales and marketing efforts. We continue to participate in a broad spectrum of segments across a lot of trade channels, and our performance has been strong in all those areas, perhaps some softness in our [Indiscernible] business that we expect to bounce back this year. But our premium VQA products have had a very solid year. We've gained market share. We were boosted by the significant increase in traffic to our estate wineries and the growing clubs. Our export portfolio, which is focused on our ice wine sales around the world has come back to almost 50%, 60% of what it was prior to the pandemic. It was up significantly this year. And we're pleased that, that travel is starting to open up everywhere. You can see the Chinese are planning there, return to normal levels of travel, and that will help us. And our Spirit portfolio had a very, very strong year, as did our participation in the ready-to-drink RTD segment and our Noble cider brand also performed very, very well. So we feel confident about these efforts continuing to be successful in the short and medium term. That being all said, we are laser-focused as an executive and management team on our cost efforts to restore our margins, including all the management of cash and CapEx and the costs associated with our capital. We have many projects active and on reducing glass, corrugate, transportation, freight, to [Indiscernible] and we will be, as a senior team all leaning into all these projects. We're confident in our ability to restore these margins, as Paul said, over the next two years. I've always tried to reinforce that our company has a very strong balance sheet. We have built our balance sheet over two or three decades now. We're built for the long-term. We have a very, very strong portfolio of assets that reflect our increased investment in the premium wine category. We're up to like nine state wineries and 1,000 acres of property and our recent person purchase of the Riverbend den. These assets are going to generate great returns for our business going forward. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Nick Corcoran from Acumen. Please go ahead. Good morning, guys. I have a few questions. The first is revenue was up 1.4% in the quarter. Can you give any indication of what you're seeing in terms of volume versus value? I think quickly on that, Nick, that if you take, kind of, average volume fluctuations across Canada and for that, matter, I can say pretty consistently in North America. The volumes are down, maybe 3%. And -- but that all net revenue on the volumes were up in previous year, which is why I kind of referenced, Nick the three-year outage of a 1% growth in the category. And it's considered a little soft right now, but it's strengthening. The markets are off to a good start this year. So that's the most clear indications of the strength of the market I can give you. That's fair. And then maybe just thinking about how consumers are being impacted by inflation. Are you seeing any trade down in your portfolio? There's definitely greater movement to value pricing as the concerns of clear consumers are reacting to higher interest rates and their concerns for a recessionary economy. There's definitely more interest in value these days. There's a little bit of softness in the kind of travel restaurant premium-priced area, but it looks transitory at our line clubs were very strong, and that's all, ultra-premium wine. So I would definitely say that there's a bit of an adjustment down to value pricing in the retail systems, but still strong indication that the premium segments are going to do well. Great. And then you mentioned that ice line is up, I think, 60% or is -- sorry, 50% to 60% of historical levels, what do you think the path is to get back to 100% at historical levels or grow above that? I think it's just a return to normal travel. I mean don't forget, it went from 100 to zero, so that it's land border opened up first. People started traveling again summer, but there's nowhere near normal travel levels right now. And I expect them to be significantly open by the end of this year, and I expect travel retail and export retail to grow in the following year towards its higher levels. That's helpful. And last question for me. What are your capital allocation priorities? -- over the next kind of 12 to 18 months? I think that our balance sheet is strong, and we have a lot of potential with capital. And that being said, our real focus is to see ourselves through the challenge of getting the supply chain back into its greatest position of strength and improving on our cash position. In other words, we didn't want to feel confident any statements last year, because we wanted to make sure that we have seen the bottom, if you will, of all of this, and we're confident that happens now and we're bouncing up, so that I think that we're looking to invest into our brands and our marketing going forward. But we're going to hold off on CapEx a little and ensure that we deliver on our short-term focus to prove margins before we get more aggressive with our investment. Good morning. I'm wondering about the -- your interest expense. It's not quite as high as it was last quarter, but it's quite elevated. And I'm wondering to what extent is that due to rates? And what percentage is due to rate to interest rates? And what percentage is due just to a larger balance? Yes. Our loan balance has not increased over the year. It's all the increase in interest rates that have occurred throughout the year-end. We're confident that those rates will start to work their way back down, and we'll measure and focus on that carefully. Thank you, everyone. We definitely are anxious to get out and meet with our investors. A lot of people have been calling us recently. We fully are putting all our plans in place to get out and be active in the community, communicating with not just our existing investors, but a lot of people, who are interested to get in front of us. So please don't hesitate to reach out to either Paul or I to make sure that we connect with you as soon as we can, and we're looking forward to your feedback. And a successful year for the remainder of the year. Thanks for all your support and your attention today. Have a great day. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

EarningCall_81

Good morning. Welcome to DNO's 2022 Fourth Quarter and Full Year Earnings Call. My name is Jostein Løvås. I am the Communication Manager of DNO, and I will share some practical information. All participants in this meeting are muted by the organizer and will not be able to unmute themselves chat or share their screens. Present at the call are Executive Chairman, Bijan Mossavar-Rahmani; and CFO, Haakon Sandborg. We will start off with a brief results presentation by Haakon, after which we will open up for questions from shareholders and analysts. The Executive Chairman will also be available to provide answers in the Q&A session. If you want to pose a question, please raise the tiny virtual hand on top of your screen. When chosen by the organizer, you will be notified on your screen that you are allowed to unmute, after which you will have to remember to unmute yourself, too. Very good. Thank you, Jostein Hello, everyone, and again, thanks for attending this earnings call. Just to start out with, we are clearly very pleased with the solid operational and financial results that we achieved in 2023 with a strong progress on many fronts, and I will now be reviewing these developments, starting with the highlights for the year. That's followed up by operations and finance. So 2022 was another year with high activity for DNO. And among the many highlights full year, we show record revenues of close to $1.4 billion. And we also have an operating profit of €431 million, driven by our solid operational performance and by higher oil and gas paces. And with this revenue growth, we also had an all-time high free cash flow at $619 million. Now we further maintained a high and stable net production in Kurdistan and also in the North Sea. And we were pleased to add 3,300 BOE per day called the new production in West Africa. This new production follows from our acquisition last year of a 9% stake in a key gas license offshore Côte d'Ivoire. This license has 4 gas fields. And between them, they supply over 200 million cubic feet of gas per day, covering around 3/4 of the country's gas needs. For our shareholders, we also significantly increased the quarterly dividend and initiated a share buyback program last year. In our active North Sea exploration and development campaign, we saw that we had 2 new commercial discoveries. And we also submitted 2 field development plans, and we're awarded interest in 10 new equation licenses. So I would say quite a lot going on here, and we'll now go over to look at the operations in more detail. For Kurdistan, we kept the gross production at the Tawke license stable again to just over 107,000 barrels of oil per day that was supported both by an active drilling campaign then by enhanced recovery from our gas injection. These efforts also provided the first quarterly production increase at the -- take field since 2015 . Further, we have now completed the second phase expansion of the Peshkabir to Turkey gas capture and the injection project that had additional cost of $25 million. Since the startup in 2020, this successful project has captured 1.2 million tons of CO2 through weighted flaring. So it has a major positive climate impact. And it's still the only project of was kind in Kurdistan. In addition, we started the fast-track development of the Pascal license last year with the initial production from the first discovery wells, averaging around 1,000 barrels of oil per day, 10 million to 12 million cubic feet per day of gas. Moving over to the North Sea. We had net reduction around 13,300 BOE per day last year, and we also reached actually 15,000 BOE per day in the fourth quarter. We saw that gas accounted for 36% of the North Sea production last year, and that was contributing an important 20% of the total group revenues in 2022 . We submitted the field development clients or PDOs, if you want, for the ExxonMobil and Brage projects at year-end. Both projects will benefit under the favorable temporary tax program on the NCS. I also like to note that we increased our stake in the valley to 13% in Q4 . Well, we did not submit a PDO invested on year-end, as previously planned. We are now reviewing a potential tieback of this discovery to the Brage platform together with the Brage operator. Again, in January this year, DNO was awarded 11 new licenses in the latest A license round in Norway, including one operatorship and we were thereby again among the top 5 recipients of licenses. Our exploration commitment in Norway is also creating significant value through participation in 4 recent discoveries in the Troll area, including a new discovery on the [indiscernible] [indiscernible] that was announced only this morning. And moving on, we aim to build further on our North Sea exploration success and add further to our reserves and resources through participation in 9 new exploration and appraisal wells this year. We'll show this on the slide. These exploration wells provide a significant 110 million barrels net unrisked resource potential to DNO. And you can see the details here on the redrill volume ranges, and they show a moderate to high chance of success on these prospects. So we are clearly excited about this drilling program and its new resorts potential for 2023 . Well, we're moving now to finance. Let's start with these key annual figures. And as I mentioned, we have a big increase in revenues last year to a record level of just under $1.4 billion. This revenue and stable cost of goods sold in turn, increased the operating profit by 34% to $431 million. And this is despite the significant North Sea impairments last year. The stronger operating profit and lower finance costs and higher tax income following North Sea impairments, all led to a near doubling of our net income last year to a strong level of $385 million. So as noted, 2022 was there by another good year for us in DNO despite the impairments and weaker results in Q4. Now to comment further on the Q4 P&L results if you see here on this detailed table. We show stable revenue from the third quarter as lower revenues in Kurdistan from lower oil prices primarily in the quarter in Q4, was offset by higher sales in the North Sea from the Alveand Brage fields. Q4 production costs increased on higher production costs on Baeshiqa and also on the Brage and Oda areas. As you can see on this slide, there is some increase from movement in North Sea overlift in Q4 . But obviously, the big item for this quarter was the full impairment that we took on Brasse and on the Oda area. As there was no video submitted on Brasse by year-end, while Oda was impaired based on updated production and cost profiles. On the positive side, there was, however, a reversal of prior impairments on Bali and the net impairment charge came in at SEK 244 million pretax. And this then leads to an operating loss of $76 million for the quarter. Going further down on the table here with the P&L deferred tax and tax income effects from the impairments tax income of €129 million. And after that, we show a net income of SEK 42.6 million for Q4. Moving on and then returning to our full year financials. As discussed a few times before, cash flow generation is a key strength in DNO, building on our substantial low-cost production and operational efficiency. You see this again clearly for 2022 with operational cash flow near doubling to an impressive, in my mind, a level of $1,123 million from SEK 625 million in 2021 . For the cash outflows, we paid $21 million in NCS taxes last year. I'd just like to note that the 3 final NCS tax installments for 2022 are due in the first half of this year, the way it works and a little Norwegian we see. And we currently expect that these 3 installments will amount to $126 million due to the significant taxable profits last year. We increased the investments to $415 million last year and this split between exploration and CapEx at SEK 375 million and North Sea come at €17 million. These investment numbers are shown net of $30 million in cash inflow owing from the acquisition of our new assets in Cote d'Ivoire. And looking a bit forward, we are pleased that these new assets will provide a new source of long-term cash flow to the company. We also had finance outflows of $469 million, and these were mainly for debt repayment at SEK 324 million as we bought back $264 million in the DNO03 bond. And we also repaid the SEK 6 million in RBL Bank debt. Further, we upped our shareholder distributions to $84 million through increased dividend payments and also by starting the share buyback program in December. So all in, we remain in a strong position with cash flow funding these significant investments, debt repayment and shareholder distributions, but at the same time, also adding to our cash balances by $270 million last year. Thereby end of the year, as you see here, with SEK 954 million in cash. And I mentioned already, we had a free cash flow that strengthened substantially last year to the strong level of $619 million. Here you are. And I must say that now in addition to discussing cash flow, I'm also increasingly enjoying presenting our capital structure, where we backed by free cash flow and debt repayments have strengthened our balance sheet significantly from a net debt position of €473 million at the year-end 2020 to a net cash position now at €388 million 2 years later at the end of 2022. And with the support from retained earnings and debt reduction, our equity ratio has also strengthened substantially to a solid level of 49% at the year-end. So the key takeaway here is that we have built a robust and strong balance sheet, and we now have high financial flexibility on new investments and on capital allocation. We also see that our debt service charges have been significantly reduced primarily because of bond buybacks and the RBL debt reduction. But we also enjoy some reduction from the lower reduced coupon on our 2021 bond. Through the active treasury management and we are further benefiting from increasing interest on our higher cash deposits so that we see that interest earnings are becoming much more significant for DNO. As we have a fixed rate bonds for interest expense, but earn more on deposits. You also see here that net interest charges per quarter are dropping from $19.2 million in Q1 2021 to only $2.6 million in Q4 last year. So the lower net interest charges, thereby free up cash flow and add further to our dividend and share buyback capacity we now are using to increase the dividends and to run the current 5% buyback program. With the 2.5% treasury shares that we held prior to starting the buyback program, we will reach a 7.5% company shareholding that we plan to cancel later this year. And for our operational spend, we increased the total spend last year to $741 million, which was pretty close to the revised guidance from Q3 last year at SEK 725 million. As you can see here, the main increase last year was in higher CapEx due to drilling and high activity on the Tawke license development of Baeshiqa as well as development and capitalized exploration on several North Sea licenses. We look ahead, we have a solid work program for 2023 also with a spend level of €640 million and with CapEx now at SEK 220 million, focused mainly on continuing the drilling program in Kurdistan on the Tawke and Baeshiqa licenses and further on early work on the burning development and on infill drilling in the Brage area in the North Sea. But we are, however, reducing planned CapEx in Kurdistan in 2023, but we are prepared to quickly adjust investments upward then depending on the timing that they will see on the government payments for our oil sales from Kurdistan. Our planned North Sea CapEx this year is also down from 2022 . Spending on the recently sanctioned development projects will be fairly moderate in this year. But this will be gradually ramped up as we move closer to the project execution phases. As mentioned already in the building on our successes over the last years, we continue our broad exploration program offshore Norway. The total expects amounting to $150 million this year. It's always good to note that we are completing our current DCOM program as planned and our valent expenditures, thereby dropped significantly this year to $25 million. For 2023, we guide on production from the Tawke license at around 100,000 barrels of oil per day, a 6.5% reduction from last year, reflecting the lower planned CapEx. North Sea production is projected to come in around 12,000 to 13,000 BOE per day, and we expect that natural decline will be offset mostly by production startup of the Fenja field later in this quarter, Q1 2023 . For our dividend program, we are pleased to announce today another dividend payment in February of INR 125 crores per share, amounting to around $25 million in total this time. So fine, in summary, we aim to maintain high production in Kurdistan and stable volumes in the North Sea. We have a broad work program ahead of us on drilling and development. And we have absolutely an exciting North Sea equation schedule. And I'd like to note that, like we said a year ago for 2022 with the current tight market balances and a positive outlook for oil and gas prices, we have a very good starting point also for this year for 2023 . That, I think the presentation today, and then we will move on to our Q&A session. Thank you, Haakon. I'll start here by taking a question from Teodor Sveen-Nilsen, Sparebank 1 Markets. I will unmute you and you will be allowed to meet yourself, Teodor. Thanks for the presentation. I have 3 questions. First, on cash balance, of course, you have very solid cash balance now. I think that's the all-time high. Should we expect it to stay at that level? That's the first question on the cash balance. And secondly, just to remind us of your capital allocation framework. Second question on KRG payments, at least some of your peers are reporting of some delays from KRG now more than before? Are you experiencing the same? And are you taking any actions to solve this issue? Third question on the top production of 100,000 barrels per day guided for 2023, what would that have been if you had invested the same as you did in 2022 in Tawke? Thanks. Great. If I maybe start on the cash side and then the next question is on the payments. Yes. I'll tell thanks. We -- on the cash side, we're seeing very high balances at the moment. We expect, as I said, we have a good outlook for the year so that we will have a good cash coming in, assuming regular payments on export sales from Kurdistan. But we have another quarterly likely dividend payment in Q2 . Then we'll go back to our AGM in May this year and discuss what the dividend program should be for the coming 12 months from the AGM until the next AGM. That's a bit too early to say what that will be, but there will be some likely proposal on the new dividends, of course, at that AGM. Otherwise, we continue to look for new opportunities, especially to add more on the North Sea production side. And we have a good operational spend program for this year. So I don't know, depending on what goes out on new transactions or potential new ideas. So we think that the big some effect on the cash level going through this year, but it depends on the success of the new business. Wanted maybe to add to that, Bjorn? No, I think it covers it. I'm happy to take all the questions to on Kurdistan payments. As I think Parker mentioned in one of the slides we've -- since the end of the reporting period, we received another, I think, $63 million in payments for both Tawke and Baeshiqa license production as have, I believe, now all the other companies. As you know, we don't report payments as they come in. We do it at partly accounts party presentations. But the payments have come in to DNO and our partner, Gandalf the Tawke license and similarly in the Baeshiqa for Tawke and for our partners TEC. And I believe all the other companies have also reported the receipt of the August payments. There have been delays in payments, and those delays have grown a bit in the last several months. I think for us, the readers in the sense that like pain is probably cumulative cumulated just over $200 million, give or take, I think we're about 3 months behind the previous more from schedule. We expect that those payments will come. The reason for the delays are several, and I'm sure you and others who follow Kurdistan and follow the companies that know some of the reasons for its an important one, of course, has been the disruption in the Mediterranean markets as a result of the sanctions against Russia and the deep discount a competing crude, the euros crude has faced in the eMarket that crude has now moved to our belief to China and India and other markets, but the discount still has applied to Kurdistan blend as well, which has reduced the government stake, and that's created some financial difficulty for them and the resulting in delays. But as you know, this is not the first one has happened there have been -- previously there's been, in some respects, a bumpy ride. But at the end of the day, these issues get resolved and payments get made. So we have received now the August payment in line with the other companies. We expect the September payments probably on the coming several weeks. So that's I think that, that should explain our Kurdistan story. I think the question you asked was that if we keep up the spend we have in 2022 in Kurdistan and copy license in 2023, what would that do to our production. Is that basically the question, Teodor? Had we -- interestingly, the more wells we drill, the better the production, interestingly because I think their expectations earlier that Turkey was in permanent decline and it hasn't been and it's a mature field and basically if you drill the development wells, you have the production. With sufficient spending on wells, we probably would have maintained the 2022 production level of about 10,000 barrels a day across the license. The -- that we now expect to drop to about 100,000 barrels a day in this year with some drilling, but also some surface plumbing. I mean they're ways to add production or maintain production other than that through drilling of new wells. There's a limit to how much you can do. But there are some things we can do, but I think trying to have maintained spending discipline, and with some delays on these delays in payments, I think it leads us to scale back the spending until we have assurances of the timing of -- not the certainty but the timing of payments. We have said for many, many years that in Kurdistan at Turkey because it is an onshore field or we can manage spending. And as a result of production very quickly. And we've said in the past that we have talking one or all the accelerated one for all the brake the next part of the promise on the brake, but the means that if we have the go ahead to spend more, we'll get more production if we own the production will come down, but that can reverse in our direction pretty quickly. I expect we'll see some of that braking and accelerating in 2023. I have one question on the cash flow. So even though you faced a delay on the payment for August, that's led into Q1, your cash flow this quarter appears to be very, very good. And I was just wondering if you could take us through the different elements that resulted in a very strong cash flow this quarter? And also, how we should think about these elements going forward, to what extent they are one-offs in this quarter? And what we should put into our models also for the rest of the year and into the future here. Yes. Thanks, Evjen. I'm sure you have seen both, of course, our presentation this morning, but also our cash flow statement. Is your question on Q4 by itself or for the year? It's mainly on Q4 . And it's -- some of it, we understand fairly well, but especially the dividend from Mondol would be interesting to understand whether that's an annual dividend that we should expect or if it's a quarterly figure? Or how should we think about that one? Yes. Okay. Well, I'm just kind of referring to our quarterly report for Q4 and the cash flow statements. You will see there the normal noncash being added back, and there's limited movement on working capital net this time. So we had a tax refund paying $1 million received for the U.K. in the quarter. But I think you see the other parts are mainly the investments that I discussed and the financing activities that we least touched on for the year. For Mondol that we acquired the Côte d'Ivoire transaction that we discussed. It was, as you may remember, paid for with the issuance of new shares in DNO. So it wasn't any cash transactions. But through that acquisition of a company, we acquired a cash balance, what, a couple of $20 million since we acquired control of that asset back in October last year, we have had a good cash inflow on top of that. So that gives us that number of $30 million or so that I discuss becoming from transaction in West Africa. No, I don't think I can promise you $30 million per quarter going forward. That would be great. But I think we can -- I don't know, we have sort of guided that based on the long-term government contract on the gas sales with a fixed index price on the gas that we will have a good steady cash flow for many years going forward. Exactly what that will be, I don't know, what can we say on that? I'd say, around $20 million or so led to the net cash flow per year. That's what I referred to when I said we look forward to new long-term cash flow because this has a long profile on the production and long contract and with the government by government entity. So that's also been coming into play for many years going forward. So I think $30 million for Q4 was more of a transaction one-off, if you want. But the long-term view is steady, good cash flow from our new assets. And we are certainly looking to do more in the West Africa as we have talked about on prior occasions. So I don't know if you had a more follow-up on that, Evjen? No, that's very clear, Haakon. And then if I may, just one more question on the cash balance that you have now and the bonds outstanding. Can you provide any guidance on how you're thinking about your current outstanding bonds? Yes, we have the long term as we're thinking about it, the D4 that we raised back in 2021 . That has a merger in 2026 . You see that as well as one of the main back bonds of our debt funding structure. So really short-term planning to do much on that unless there is a pricing we now of opportunity that we could look at to buy back some of that. The discussion, I think, Evjen, would be on the shorter dated DNO03 bond that matures in May next year. That has the balance of €131 million remaining in the [indiscernible] the majority of that bond. So we will be looking at that as well, what to do with that. Should we do something this year or maybe wait. We haven't really communicated on that yet, and we will leave that open for now. But on the banking side, as we've seen, we reduced our bank debt to limited amount compared to what it has been of $35 million. So we may do something on the bank side, but it sort of depends on, obviously, our borrowing base capacity will be going forward. So I think I'm not going to tell you exactly what we plan to do with the DNO03, but that's the one that would be especially, I think, to do something on that for this year. Just to add on the carrying cost of our debt now is quite attractive because with higher interest rates, I think our net effect the coupon rate is about 4%, give or take. So it's pretty cheap money where since the end of the reporting period, I think we're now seeing over $1 billion any cash that's available to consider other transactions if they come along. As Haakon mentioned, our financing costs and is used to do something in order of $70 million or $80 million a year. It's not up to $10 million a year. So this is pretty cheap money and a lot of it's certainly for a company of our size. We have a lot of very dry powder that we can use if the right opportunities come up. And as we've said, we're doing more of a pivot towards our shareholders. DNO has been terrific to its bondholders over many, many several decades and often has been importantly a driver of that, but -- and that will continue, but we now want to take care of our shareholders as our other companies in our industry, there's been a prior shareholders more money back to them, and that's important to us, and we're able to do that down the -- with our overall financial picture. I'm pleased about that, too. I believe we have 2 more people wanting to ask questions. So we are getting closer to you to the end. And the first one is Tom Erik Kristiansen at Pareto. Please. You provide an update on the political situation, your views there when it comes to KRG and the federal government. There's been some noise over the last year or 2 . Has there been any fundamental changes you think on the relationship there? And also second question on Baeshiqa, what are the next steps there? What can we expect is obviously at least back in time and asset with a lot of potential. Is it gas handling that is the main issue with increasing volume today? That is my 2 questions. The political question, I think it's fair to say you probably know as much more about it than I do. It's a work in progress. It changes and these tensions is tooling and flowing has been going on for decades or centuries for millennia. So it's nothing new and to predict which was to go at any given time is very difficult. And if it's not impossible that there are times of the tension is high and it typically has been high and sort lifetime. They expect potentials will continue and how the different parties within Rockport the other is a challenge for all and it's not just about curds versus the Rockies, but in the rake Rock itself, the rest of the other also, of course, different political and religious fractions. Our role is to produce oil and to do it safely and to do it profitably, both for Kurdistan, which is our host and also for us for the company for DNO. We managed multiple crises as I mean at ICS, store or a matter of things and somehow things go on as they should. I think for a while, looking ahead, what will dominate the discussion and the thinking there is going to be a disastrous and tragic earthquake that is Turkey so hard and a series of hard like that will take a lot attention some time. It's just been unfortunate, but at one is about cost. With respect to Baeshiqa, we plan another well this year. We are -- I think it's fair to say that Baeshiqa is very prospective and very promising from our point of view. We haven't quite unlocked it yet. We're trying to like it. We'd like to be quality of approved. We like our contractual arrangements. It has some challenges, but we had -- we drilled some wells, but we haven't quite unlocked it yet from a service point of view, gas is an issue. There is a aspethereis gas that we're coproducing. We don't want to reduce and flare gas for any longer than we need to. So we have to find a way either to bypass the gas or to find a way to put that gas to some other use and really the opportunities and options, but we're going back into trying to unlock the oil with the next well and so we should have a better idea once that well is to is also. So figures cost on our side, but we're still very committed the spending and the Baeshiqalicense will go on in Turkey where taking the pop accelerator a bit of Baeshiqa foot is on the accelerator that may give you an indication of how we think about it. First, thank you. Good morning, gentlemen. Thank you for the presentation. My name is Erik Otas, I'm representing Millennium Capital. I have 2 or 3 questions, please. And apologies, but they will be on Kurdistan again. You mentioned in your update that you may adjust upwards or downwards your CapEx and production in Kurdistan. And I just wanted to ask you what are the milestones for you to do that? Would you wait until the government pays you the current receivables that they own to you because the delay in the past that you guided for was about 2 months now, the payment delays widened to about 6 months. And situation actually changed quite a lot last year. And the big change was, of course, the flood of the Russian oil and the hugely discounted Russian oil on the market. And so my first question is what are the markets that we should think of which you will be considering when you adjust your CapEx upwards and downwards because this is a pretty aggressive move, I think, from the company, especially if you continue to negotiate the payments from the Kurdistan regional government and by reducing production at Tawke, you're also reducing revenue to the budget. So I'm wondering where your negotiations are standing now. So that's my big first question. And the second question, very short on the discounts. Can you confirm that -- that your discounts or realized discounts from selling corrode has widened or remained the same since the introduction of a price cap and ban on the Russian oil. First part of your question with respect to markers, I don't think we have some specific markers as such. We know this relief when we see it, so we know the issues that impact our ability to put fresh funds in and spend when we see that. So I don't think we have on the fold markers as such. Again, this is not the first time we've been in the situation. We were talking about this many years ago about the Foroohar. And I guess all understood in Kurdistan, I would -- I'm going to characterize it as aggressive because we've done it before and encourage to understand the issues, and we understand their challenges what is the single most important source of foreign exchange revenue, matters usually to the economy. But in 2021, they had something in excess of $10 billion in revenues from oil produced by and the other companies, and that's a record. So balance then. And if they're not able to pay and pay in a private fashion, they're under a lower amount of pressure, too, including, as you said, for the market and the push back. And it's not just about the discounted euros, of course, given all that's going on, as alluded to before politically and the challenges the Supreme Court ruling and so on makes buyers a bit more cautious and weary even, but also allows quire to negotiate that much farther to get bigger discounts. We know Curtis blend is discounted and it's discounted heavily relative to where it was before the sanctions against Russian Urals sales in that region. How much of that is justifiable. So expect as a market matter, I don't know, but I think someone is making a lot of money in between the sellers and the ultimate buyers refineries. And I think that large rule will close or probably have started to close already. We don't have a lot of visibility as a company, as an industry on those margins because, as you know, the Kurdistan government essentially purchase the oil from us and sells it onward. We're not privy to the sales arrangements and pricing. In the past, we had a formula and seem to work for the government work for us and some months of formula was more advantageous to the government and sometimes less that than they just. But over time, it worked. That formula has not been the challenge. We continue to build an invoice on the basis of that formula because we don't know what the alternative is quite yet. And my expectation has been that there'll be a rough few months when we come out of it and the market realities would take over. So the issue of pricing is something that the government has raised that we have not agreed to change formula because we have visibility and transparency on the pricing. And until we understand how that works, whether it persists and what it means for us, we continue to invoice based on the previously agreed formula that's the only pricing arrangement. We agreed to in the past and we continue to invoice on that basis. And we'll see how the market is going to sort out. Before we close this off, I think it will give Tom a chance for a quick follow-up question. And that will be the last for today, I think. So can I just clarify, have you already cut production in Turkey or this is just the guidance for the year and the actual production CapEx cut hasn't happened yet? I don't think we've gone in and made the decision or start to a on the cut back production. Now there are some routine work that gets done. We face pumps, we do other workovers. So when the time fluent because of the earthquake and some uncertainty as to how long the pipeline will be shut in on what that meant for us in terms of our production because there's a limit to how much we can produce into storage, if the pipe is running, we made, I think, a decision operational decision, let's take the time to deal with some maintenance work and some other surface but also will work during this time when there's some uncertainty as to the working in the pipeline. And that's not over these after shops. I don't know what we can predict exactly what nature brings next. So I think in the first quarter, when we see some reduction, not a lot but some reduction in the production rates as we get we deal with some delayed maintenance work. But that should pick up the issue as how much are we going to spend drilling additional wells without funds coming in from the sale of that oil to pay those wells. We'll continue to do the easy plumbing and cheaper planning work that will help keep action up. But I think it's reasonable to expect that our productional average for the year will drop off, but we're able to, again, hit the accelerator necessary and get back up to the 2022 levels. If they come in, and we have funds with us to do so. I do want to make one point. As in other countries that are strangers, this is a partnership between us and Kurdistan. We share a lot of common interest. We try to work with each other. They understand we have certain prerogatives and certain needs as a public listed company, and we have such shareholders. We understand that they have their own challenges and things that drive what the governments do and they do whether that be again, their own system. We try to accommodate each other because their success is our success. Our success is theirs. So it's a partnership that but there are times when things are a little shaky for whatever reason on our side, on their side, we try to work it through. We've done so now successfully since 20 -- the last 15 years. DNO created deal in the modern oil industry in Kurdistan and Kurdistan has been -- created the modern DNO. It was a very different company with both gross financials. So it's a partnership. Thank you. Okay. So with that, I think we'll wrap up today's presentation and Q&A. And thanks for participating, and we look forward to see you again on the next occasion. Bye.

EarningCall_82

Good morning, my name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Essent Group Fourth Quarter and Year-End Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] Thank you, Rob. Good morning, everyone, and welcome to our call. Joining me today are Mark Casale, Chairman and CEO; and David Weinstock, Interim Chief Financial Officer. Also on hand for the Q&A portion of the call is Chris Curran, President of Essent Guaranty. Our press release, which contains Essent's financial results for the fourth quarter and full year 2022 was issued earlier today and is available on our website at essentgroup.com. Prior to getting started, I would like to remind participants that today's discussions are being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, the risk factors included in our Form10-K filed with the SEC on February 16, 2022, and any other reports and registration statements filed with the SEC, which are also available on our website. Thanks, Phil, and good morning, everyone. Earlier today, we released our fourth quarter and full year 2022 financial results. Our strong performance, which reflects the earnings power of our business benefited from better-than-expected credit performance, along with increased persistency and investment income as a result of higher rates. These results demonstrate the strength of our economic engine in generating high-quality earnings. Heading into 2023, we remain confident in our buy, manage and distribute operating model despite some economic uncertainty. While our franchise is levered to the economy in housing, we continue to manage the business considering a range of scenarios. As for the economy, the consumer has shown resilience and unemployment has been relatively stable. With regards to housing, we remain constructive over the longer term as we continue to believe that low inventory and demographic-driven demand should support home prices. And now for our results. For the fourth quarter of 2022, we reported net income of $147, million as compared to $181 million a year ago. On a diluted per share basis, we earned $1.37 for the fourth quarter, compared to$1.64 a year ago. For the full year, we earned $831 million or $7.72 per diluted share, while our return on average equity was 19%. At December 31, our insurance in force was $227 billion, a 10% increase compared to a year ago. Our 12-month persistency on December 31 was 82% and the weighted average note rate of our book is approximately 3.8%. While there has been some relief to affordability pressure since rates peaked last November, recent mortgage rates should continue to translate to an elevated level of persistency. At the same time, the credit quality of our insurance in force remains strong with a weighted average FICO of 746 and a weighted average of original LTV of 92%. On the business front, we activated 150 new customers in 2022 as we continue to drive lender penetration and growing the Essent franchise. In addition, based on expected credit normalization, we increased rates during the year. Our pricing engine, EssentEdge, enables us to efficiently raise rates in targeting adequate risk-adjusted returns and pricing long-tail mortgage credit risk and we believe that Edge is mutually beneficial, delivering our best price to borrowers while helping to optimize our unit economics. Our Bermuda-based reinsurance entity, Essent Re had another strong year of performance, writing high-quality and probable GSE risk share business and continuing to provide fee-based MGA services to our reinsurer clients. As mentioned last quarter, the current environment is providing Essent Re with improved pricing and opportunities to move up in the structure to optimize returns. Essent Re ended the year with third-party annual revenues of approximately $69 million and third-party risk in force of approximately $2 billion. Since 2014, Essent Re has earned over $275 million of net income from its third-party business. Essent Ventures, our strategic investment unit was formed to enhance financial returns while gaining insights to improve our core business. Ever to date, these investments have created $85 million of value, of which $64 million have been returned as realized proceeds. As of December 31, the carrying value of other invested assets is $258 million. It was through these efforts in Essent Ventures that we identified our planned title transaction. Title Insurance is a natural complement to our mortgage insurance business with relatively stable underwriting performance and efficient capital requirements. This acquisition adds a team of seasoned title professionals to Essent and provides a platform to leverage our capital position, lender network and operational expertise in a well-established adjacent sector. Cash and investments as of December 31 were over $5 billion and the annualized investment yield for the fourth quarter was 3%. For the full year 2022, our investment yield was 2.6%, compared to 2% in 2021. As a reminder, for every one point increase in the investment yield, there is a roughly one point increase in ROE. As of December 31, we are in a position of strength with $4.5 billion in GAAP equity, access to $2.5 billion in excess of loss reinsurance and over $1 billion of available holding company liquidity. With a full year 2022 operating cash flow of $589 million, our franchise remains well-positioned from an earnings, cash flow and balance sheet perspective. At year-end 2022, approximately 98% of our portfolio is reinsured. In the fourth quarter, we closed a quota share transaction with a panel of highly rated reinsurers to provide forward protection for our 2023 business. We will look to continue executing upon our diversified and programmatic reinsurance strategy that mitigates earnings volatility from economic cycles and provides capital relief. In 2022, we returned nearly 1/4 of our earnings to shareholders in the form of dividends and share repurchases. We remain committed to a balanced approach between capital distribution and capital deployment, including investing $100 million for our planned title acquisition that I previously mentioned. Further, given our strong financial performance during the year, I am pleased to announce that our Board has approved a $0.02 per share increase in our common dividend to $0.25. Moving forward, we will review our common dividend annually as we continue to believe that maintaining and steadily increasing dividends is a meaningful demonstration of the confidence we have in the stability of our cash flows, and the strength of our operating model. Thanks, Mark, and good morning, everyone. Let me review our results for the quarter in a little more detail. For the fourth quarter, we earned $1.37 per diluted share, compared to $1.66 last quarter and $1.64 in the fourth quarter a year ago. We ended 2022 with insurance in force of $227.1 billion, an increase of $4.5 billion from September 30, and an increase of $19.9 billion or 10%, compared to $207.2 billion at December 31, 2021. Persistency at December 31, 2022 increased to 82.1%, compared to 77.9% at the end of the third quarter. Net premium earned for the fourth quarter of 2022 was $207 million and included $14.6 million of premiums earned by Essent Re on our third-party business. For full year 2022, our net earned premium rate for the U.S. mortgage insurance business was 37 basis points. The average net premium rate in the fourth quarter was34 basis points, a decrease of one basis point from the third quarter. We expect that the net earned premium rate for the full year 2023 will be largely unchanged from the fourth quarter rate of 34 basis points. Net investment income increased $5.2 million or 16% in the fourth quarter of 2022, compared to last quarter due primarily to yields on new investments and floating rate securities resetting the higher rates. Other income in the fourth quarter includes a $6.5 million loss due to a decrease in the fair value of embedded derivatives and certain of our third-party reinsurance agreements, which compares to a $5.2 million gain on the valuation of embedded derivatives last quarter. The provision for loss and loss adjustment expenses was $4.1 million in the fourth quarter of 2022, compared to 3. - excuse me $4.3 million in the third quarter and a benefit of $3.4 million in the fourth quarter a year ago. At December31, the default rate was 1.66%, up 11 basis points from 1.55% at September 30, largely due to traditional default seasonality. For the full year 2022, we recorded a net benefit of approximately $175 million, due largely to cure activity on defaults reported in the second and third quarters of 2020. Other underwriting and operating expenses in the fourth quarter were $46.9 million, up $4.8 million from the third quarter, largely due to an increase in professional fees. The expense ratio was 20% for the full year 2022, and compares to 19% in 2021. We estimate that the other underwriting and operating expenses will be approximately $175 million for the full year 2023, excluding any expenses associated with the announced title business acquisition and related transaction costs. The effective tax rate for full year 2022, including discrete items was 15.9%. For 2023, we estimate that the annual effective tax rate will be approximately 15.5%, excluding the impact of any discrete items. During the fourth quarter, Essent Group paid a cash dividend totaling $24.6 million to shareholders. Also in the quarter, Essent Guaranty paid a dividend of $55 million and Essent Guaranty of PA paid a dividend of $5 million to the U.S. holding company. As of January 1, 2023, the U.S. mortgage insurance companies can pay ordinary dividends of $318 million in 2023. As of quarter end, the combined U.S. mortgage insurance business statutory capital was $3.2 billion with a risk to capital ratio of 10.2:1. Note that statutory capital includes $2.1 billion of contingency reserves as of December 31, 2022. Over the last 12 months, the U.S. mortgage insurance business has grown statutory capital by $226 million, while at the same time paying $320 million of dividend to our U.S. holding company. As a reminder, Essent has a credit facility with committed capacity of $825 million. Borrowings under the credit facility accrued interest and a floating rate tied to a short-term index. As of December 31, we had $425 million of term loan outstanding with a weighted average interest rate of 6.02%, up from 4.39% at September 30. Our credit facility also has $400 million of undrawn revolver capacity that provides an additional source of liquidity for the company. At December 31, our debt to capital ratio was 8.7%. Also at December 31, Essent Guaranty's PMIERs sufficiency ratio was strong at 174% with $1.4 billion in excess available assets. Excluding the 0.3 COVID factor, the PMIER’s efficiency ratio remained strong at 165% with $1.3 billion in excess available assets. Thanks, Dave. In closing, we are pleased with our fourth quarter and full year 2022 financial results, which reflect our focus on optimizing unit economics to generate high-quality earnings and strong returns. Looking through the one-time tailwind of COVID reserve development on earnings, the underlying results for 2022 are solid. The high credit quality of our portfolio and strong employment drove credit performance and higher interest rates benefited the persistency of our in-force book and investment income. Our strong operating performance continues to generate excess capital, which we will deploy in a balanced manner between investment and growing our franchise and distribution to our shareholders. We believe this measured approach is in the best long-term interest of Essent and our stakeholders. Yeah, thanks. I was hoping to get some color, if you can provide any, on the title acquisition kind of what your expectations are for earnings contribution? And how you think about investing in that business and growing it from here? Yes, Mark, I would take a step back. I think our – I would say shorter term, I am not going to project any kind of earnings around this over a period of time and we'll obviously update everyone every quarter. I would – we look at this very similar to the platform we bought off of Triad back in 2009 it really, it was like our ticket into the mortgage insurance business and we see similar parallels with the acquisition of both BNC and Ante. They are good platforms, really strong talented people, relatively small, obviously, in terms of the industry. And we look at – first off, we're going to invest – continue to invest in the infrastructure in both, put more capital into the underwriter, try to improve the ratings, invest in people and then look for ways where we can provide some synergies. Clearly, a lot of synergies just in terms of back office, right, in terms of finance and legal and some of those things, which were – we have a pretty good handle on, And then over time, in terms of our technology platform and digging in on the operational side to look for ways to grow. So it's settled, Walter Wisden is saying control profitability growth. So we're going to look at it over – this is like a 3, 5, 10 year plan, Mark. It's not something we're going to come out of the gate with earnings. It's a new industry for us. It's an industry we understand well because it's an adjacent sector, but we're going to take our time. We're going to continue to apply kind of that hard work and operational expertise to it. And I think over time, we'll be able to grow it. But it's definitely, from our standpoint, big picture, it's complementary to the MI business. So the MI business has credit risk, regulatory risk, operational risk, titles more operational risk, regulatory risk and kind of capital and credit are on the lower end. So longer term, we think it's very complementary. There is clearly some overlap with lenders, but it's – you are looking at – as we look to grow Essent, right, you heard say over the years, we want to grow Essent. We love the mortgage insurance business and we've grown it, and we think we can continue to grow it as housing grows, but the pond is only so deep. So when you look at Title with annualized revenues in the $20 billion to $25 billion kind of range, it's a big market and our view is it's something for us to – as we look at that next phase of Essent and building other operating engines, we thought this was a good pond to go into. Okay. That's helpful. And I know – I think in the past, Mark, you've also expressed interest you thought about diversification in consumer credit-related businesses. Is that something that's still kind of on the table? Are you going to be really focused on those continuing to execute within the MI business and building out this new title venture? Yes, I would say for the foreseeable future, we're going to be digging into title a lot. So, not that that's off the table. Remember, we really have – when you think about the core business, we have Essent Re, which continues to grow. Title is kind of our third kind of area. I would say around the consumer credit and analytics, most likely, if we were to make an investment there would be via the Ventures group, right? So that's kind of teed up to do direct investments, but I would say, for the foreseeable future, we are going to be pretty focused on that title. Thanks for taking my question. Just really one thing. You recently completed the negotiation of your 2023 quota share agreement, I am curious in your conversations with the panel of reinsurers, how investors in the space are looking at the outlook for '23. Do you think that it is coherent with your views or connect – in line with your views? And how do you feel about pricing? Yes. I mean it's – I think in speaking with the reinsurers, we actually had one of the large brokers in the office, I think in the last three or four weeks to kind of give us a deep dive just on that market or at least an update on that. We feel pretty good about the market and I would say I thought the sustainability of reinsurance, Rick, both with reinsurers and with the capital markets. The pricing is going to ebb and flow, right? So we paid a little bit higher pricing on both over the past 12 months, but if you think of us three or four years before that, we've had excellent pricing. So it's really the sustainability in those markets are going to remain open. I think we feel pretty confident on both. The reinsurer market is really now, even though they've had hardening on different parts of the business, they clearly look at mortgage is kind of countercyclical to that and good diversification and what happens with these reinsurers, they continue to invest in teams. It becomes like another business line. So we believe it's pretty sustainable. And again, the pricing is going to go up and down depending on the market or their views on credit, just like we have our views on the front end. So, again, I think the pricing is adequate, sustainability is very good and just to throw in there, on the Essent Re side, we've been kind of – we've been fortunate to – we've been able to capitalize on that increased pricing. So we wrote the most business that we've had ever in 2022 and we're able to move up the capital structure. So we're able to get more premium for less risk, which is always a nice trade-off to get. And then just finally, just in terms of reinsurance, Rick, I just think if you think – we're five years into this programmatic reinsurance and it's still around. It caused a little bit during COVID, but it came back. Last year, tons of uncertainty around where rates were in the economy. There is still uncertainty, but I would say it's not as heightened as it was in that October and November time frame when inflation was kind of running rampant. We still got reinsurance done. So let's work backwards. So I said we're here five years from now and now we're 10 years in the programmatic reinsurance. I think it sends a strong signal and I've been saying this for a while that reinsurance has fundamentally changed the mortgage insurance business. It was always a buy and hold kind of model where Essent and others, we had an uncapped liability on our balance sheet and that is no more. 98% of the book is reinsured. Sure, we pay for it, but we've taken that capital volatility away from the business. And I know we're viewed in the market more like a specialty finance company, kind of boom and bust. But I think over time, I think that's going to change. I think we're going to be viewed more like a specialty insurance company where specialty just happens to be mortgage and housing and not having that. And of course, those specialty insurance businesses have ebbs and flows, but they were valued a lot higher than specialty finance companies because of the sustainability of their cash flow. So again, we have to prove it out. We're five years into it. We're not going anywhere. We'll continue to do it. We'll continue to grow the business and we'll let the chips fall with MA. But we feel pretty good around how that's kind of starting to shape up. Got it. Well, it's a specialty finance analyst who's enjoyed covering your company, so Mark can do what it wants, but I'm going to still continue to look at you as a specialty finance company. There obviously is a real-time feedback loop with pricing in that market and it's not just Essent who is participating, and you have alluded to a harder market. Again, I am assuming that you are seeing that that is weaving its way through into the competitive environment in terms of pricing for you and that there is continued pricing power. Yeah, I mean I guess if you look at just the reinsurance side, just to put it in context, right? In general, we pay 4 to 5 basis points of our premium for reinsurance. So in the last year, it's gone up 1 point, maybe a little bit more, right? We've raised pricing on the front end more than that. So, again, if you think about, again, just the sustainability of the reinsurance and put it in context of the premium we charge, we still think it's a pretty good value. Good morning and thank you for taking my questions. I wanted to start on the insurance side, first, right? Just, I understand your net premium rate guidance is flat. But I did want to ask about the in-force yield or the base premium rates that you report on Slide 16. This needs to be a real stabilization there. Some of your competitors have talked about increasing premiums on new business. So should we expect that base premium rate to maybe start blending higher and then it's like really insurance costs that are driving the net premium rate to be flat? I think that – I don't know that I wouldn't necessarily say they are going to turn up. But in terms of have they bottomed, we feel like they are getting pretty close to the bottom, if they haven't already bottomed. So yes, that base premium rate of around 40, when you think about the business on the new insurance written, we're getting pretty close. So there is – there is - and then obviously, then it does have the chance to go up from there. But I think Mihir, the other point of this is, it’s just the value of the pricing engines, right and in terms of our ability and the industry's ability to kind of price adequately for the risk. So we saw in COVID where things were unclear and the industry was able to kind of pivot and change the pricing. And then clearly, the pricing, in our view, kind of bottomed out last year and that probably first quarter, maybe near the end of it and that was reflected in our share as we talked about this on the call. We started increasing pricing. Others have increased pricing and that continues today. And in short, there's a couple of reasons for that. There I was a few reasons for that, a little bit of there insurance cost that we alluded to in my answer to Rick. Second, clearly is kind of some of the clouds forming around the economy. I will say most importantly, though, Mihir, it's the normalization of credit, right? So this is below 1% default rate, our view is all the time, it's been more like 2% to 3% and if you're going to have adequate returns at a 2% to 3% claim rate, the pricing needs to come up. And we are obviously not the only ones to see that. So it's come up. We think it could continue to rise, we'll raise pricing. We're expecting to raise pricing again in the first quarter of '23. And if it keeps going up, you're going to see new premium levels that you haven't seen since 2018. I mean – so it's really moving in the right direction. But in the context of the borrower, it's still very efficient, right? I mean you're talking about – we charge almost less than half of where the GSEs charge. So I think from a pricing to the borrower, it's very efficient and actually helps our counterparties and our stakeholders because you have to adequately price for this long tail risk. And our view is we're doing it. Clearly, our competitors are doing it. And I think that's probably one of the more important points for investors to grasp out of this quarter is kind of not just a stabilization of pricing, but kind of where pricing has the potential to go but also just the ease of using the engines and the way it's able to kind of help us target adequate returns. It's something we said five years ago, four years ago, when we started the engine that it was more of a risk tool than a market share tool and I really think that's starting to play out across the industry. Right. Got it. That makes sense and thank you for that. We would agree about that. The premium conversations have certainly been quite encouraging this quarter. Maybe just turning to the deal, and I understand you don't want to talk about short term, like one, two years, what you're seeing in terms of financial benefits or targets or anything at this early stage. But maybe like you mentioned, this is a long-term play for you three years, five years down the line. How are you going to be judging success of the deal from a financial standpoint? Do you think it's like 20%, 30%, 40% of total profits for the combined Essent Group? Or is it a much slower longer tail than that where there's like –it takes a while to just build up that kind of momentum? Like how are you thinking about like – give us at least a long term something about how you're thinking about judging the success of this acquisition ? Yeah, I mean it's a fair question, right? I would say, again, I would go to -- and we're going to be disclosing separately, right? I mean just given the revenues of the title business relative to the revenues of the MI business, it would most likely be a separate segment. So this is going to play out for everyone. As you know, we're going to be pretty transparent. I would say, we really look at returns at the end of the day. So we have these core return targets of 12% to15% in a core business. We have it within Essent Re. And I would remind you, when – Essent Re, we break it out, I think folks are going to be pleasantly surprised as to kind of the returns of the business. And just you saw – it's in the script. I mean you're looking at almost $70 million of revenues, and there's expenses assigned to that for sure, but there's also investment income. So there's -- it's a good business. It has. It's right within that 12% to 15% return profile. The ventures, which is – it's not really a business, but it certainly is a unit that we manage separately. That also has return targets. So we've had – we've returned – we've had pretty good return on that initial investment. I believe the IRR since inception is 17%. So it's right again within that 12% to 15% target. And I think with title it's going to be the same thing. It's a little bit capital-light, so the returns should be higher. In terms of the growth, I mean, Mihir, we're going to have – it's going to be – business is an iterative process. So we're going to get in there. We have two, and these are really two businesses, right? You have the antique business, which is almost like a wholesale. It's an underwriter, but it attracts title agents. It's relatively small. 200 title agents that they have. So we're going to – as we look at antique, it's going to be how can we grow their base of title agents? How can we activate new agents, right? How can we build out a larger salesforce? How can we scale some of those things? How can we use our capital to make -- from a ratings perspective to make it more attractive for salespeople to come work for us and for agents that want to use us, right? What offerings can we invest in to make that attractive? On the B&T side, I mean, they're really – they are a top 10 player on – with lenders really around centralized refinancings, which has clearly been down. But again, can we sign up new lenders leveraging our lender network? We'll see. We believe we can and can we help strengthen their operations so they can take on more business, right? I mean it's not just signing lenders up. We didn't -- we really took a step back building the MI business and make sure the operations were very crisp, so we could take on business. So when -- in MI, we were competing with very large and established competitors. So when we first signed up lenders, we had to make sure they had a really good experience or they want to come back. And this is all before you guys saw us in the public market. This will play out a little bit publicly, but it's the same game plan. So we're going to go in and take this kind of a step at a time and build it brick by brick. And we're fortunate here that the platforms are a little bit more established, right? We didn't have any sales people. And I think when we first started, we had approximately zero lenders signed up. So they're obviously further ahead and we believe that with – it's almost like a partnership. We love kind of the experience and the talent that we're getting in both organizations and combining that with Essent, can we help scale that. So longer term, we never thought Essent would be this big. When we first started the business and wrote the business plan, we thought if we could get to 10% share, we would do really well, and that was in a much smaller market. So some of it is going to depend on the size of the market, the size of house prices. So as house prices go up, title insurance premiums go up. We know we're – I think antique is the 15th largest. So we're far maybe 0.5 point of share. So we're – it's timing. So we're going to get in there. And again, it's 3, 5, 10 years. And so I don't want to put a number on it, but we certainly would expect supplemental income. We don't do things not to make money. So whether – where that ends up over the long term, we'll find out. We're just trying to caution people in the short term that we are not trying to come out of the gate to show you earnings. We'll always sacrifice early on investment. Certainly, don't want to lose money, but I think longer – the prize is longer term in growing the business. Got it. Great. I think we look forward to hearing more as you finally close the acquisition and start providing more detail. Thank you. Yes, good morning. Actually, just one more on the title. When you think about sort of the long-term growth trajectory, do you think it's more driven by M&A or organic or just how is the combination there? Yes, it's too early to tell. I think we're always going to favor organic growth, Bose. That's how we build Essent. The title industry has different dynamics, however. So we're well aware of both. There is an opportunity to use our balance sheet. I would say from a – we have a pretty large capital position but we're not going to be in the business of just buying title agents left and right. I think we're going to -- we could eventually get to the point where we're acquisitive, but we really want to understand the operations of both and the potential to grow them organically. And there is going to be a limit to that. But it's kind of baby steps. So first, get close on the transaction, right? And that's probably not going to be to the third quarter and then really think through how do we strengthen the infrastructure of both businesses and then look for ways to grow organically and my guess is we'll end up doing both. You'll grow organically and you'll complement that with acquisitions, but that's down the road. Okay. Great. Thanks. And then just in terms of financing it, can you give cash at the insurance company for buying title insurers? Like, is it’s funded with HoldCo cash? Or I mean, is it possible to buy title insurers at the insurance company itself? Good question. This will be – the acquisition will be at Essent U.S. Holdings. So, just to remind everyone, Essent U.S. Holdings, is a sub of Essent Group. And Essent Guaranty is under Essent U.S. Holdings. So this will be a sister company to Essent Guaranty. So, different pots of capital, for sure. Okay. Great. Thanks and then just one last one. On the expenses for next year, I didn't know if you said that, but did you give guidance for what we should expect for OpEx for next year? We're right around $175 million, but that does not include title. So it's just the MI business and obviously, we'll include title upon the close and we'll add that. But – so it's pretty much business as usual in terms of expenses. Little noise in the fourth quarter due to the deal and there will be a little noise with some of the transaction costs, but in terms of the core business, we feel pretty good about that number. Wanted to look at the credit this quarter a little bit in terms of the current period provision, so ex the development. The average provision there is up a bit. So I was just curious, did you change your claim rate at all? Is that a seasoning of the early-stage delinquencies? Can you provide a little bit more detail? Yes, Jeff, it's Dave Weinstock. On the whole, we haven't really made any significant changes. We have a model – an actuarial model that we feel really good about. I think we've talked about in the past that our expectations on early claims is somewhere in that 8% to 9% range. And if you look at where our reserves are at December 31, we are at 8% for those early delinquencies. So really nothing significant there as it relates to what came in, in the fourth quarter. Okay. And then, Mark, you brought up the cash flow for '22 in your prepared remarks. And obviously one of the things that's helping that is, the industry doesn't really have any paid claims. I was expecting out of COVID once forbearance plan started ending you have a jump in paid claims as you could proceed with those. But it seems like that hasn't been happening. So is that something that we're just waiting for the spike to happen? Or has the embedded equity really taken that spike out of the recovery? And if it's just going to gradually phase up as the notice inventory continues to build out? Yeah, I think that's actually a good assessment of it, Jeff. I mean, this is one, most of the guys in forbearance originally in COVID cured. A lot of times, they cured because they sold the house. I mean – and we can see that now. I mean with the technology, you can see when we want your defaulted loans is listening and we could see like where was that – where we have it, marked at and where they're selling it at. So in that market, they were able to kind of get out of that, which we'd assume was going to be part of it. And I think it's the same thing here, just the embedded equity in the mark-to-market that we have on the book has really helped that. And then in terms of just I'm not sure – and this is longer term, but the forbearance and the tool as it is with the GSEs, I actually think that's going to be a common occurrence around events. Clearly, it happened with –it happens with hurricanes. It happened with COVID. So other significant recessions, I would not be surprised. It's a very effective tool of keeping borrowers in their homes and allowing to work it out, right? And in the post crisis, we had [Indiscernible] HARP, but there the milk kind of already spilled on the floor, and it was a way to help mitigate that with COVID right out of the gate. GSEs were extremely responsive. This is - it was really a smart move. I mean it hurt us, right, because we had to post reserves for it and in terms of people were defaulting because they were allowed to. But long term, keeping borrowers in their home is really good for everyone, except maybe for those who live in a default type world and things like that. So, I think it's a common tool and I think it's going to – I think it's a real benefit to the industry that is maybe a little bit underappreciated. And there are no further questions at this time. I will turn the call back over to management for some final closing remarks.

EarningCall_83

Good morning. Welcome to Sensient's earnings call for the fourth quarter and full year of 2022. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I am joined today by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. Earlier today, we released our 2022 fourth quarter and full year financial results. A copy of the release and our investor presentation is available on our website at sensient.com. During our call today, we will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2022 remove income related to an earn-out payment received in connection with the divestiture of our yogurt fruit preparation business. The adjusted results for 2021 remove the impact of the divestiture-related costs, the results of the operations divested, and the cost and income related to our operational improvement plan. We believe the removal of these items provides investors with additional information to evaluate the company's performance and improves the comparability of results between reporting periods. This also reflects how management reviews and evaluates the company's operations and performance. These non-GAAP financial results should not be considered in isolation from or as a substitute for financial information calculated in accordance with GAAP. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our press release. We encourage investors to review these reconciliations in connection with the comments we make today. I would also like to remind everyone that comments made during this call, including responses to your questions, may include forward-looking statements. Our actual results may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in our SEC filings. We urge you to read Sensient's previous SEC filings and our forthcoming 10-K for a description of additional factors that could potentially impact our financial results. Please bear these factors in mind when you analyze our comments today. Thanks, Steve. Good morning and good afternoon. Earlier today, we reported our fourth quarter and full year 2022 results. I'm very pleased to report for the full year of 2022 that we delivered 10% adjusted local currency revenue growth and 13% adjusted local currency EBITDA growth. Each of our groups had outstanding adjusted local currency revenue and adjusted local currency operating profit growth in 2022. We exceeded the guidance we communicated at the start of 2022 for adjusted local currency revenue, adjusted local currency EBITDA and adjusted local currency EPS. Our strong operating and financial performance in 2022 follows the very strong results we had in 2021 and 2020. Our performance is a direct result of our focus on sales execution and customer service as well as our broad product portfolio. We have proven to be a reliable supplier to our customers, and we continue to achieve new sales wins at customers across each of our groups. Our portfolio of natural flavors and colors and our wide variety of product technologies continue to position us for future growth. Input costs grew throughout 2022, including the fourth quarter. Overall, we continue to see higher costs in a number of categories, particularly in agricultural and natural raw materials, which impacted our margins in the fourth quarter. We elected to wait to implement additional pricing until the first quarter of this year. We anticipate these costs to remain at elevated levels at least for the first half of 2023 and we plan to continue with disciplined pricing actions as needed. Because of the dramatic inflationary environment over the last 2 years and the timing of our pricing actions, margin comparisons and other year-to-year comparisons will at times be distorted. As a result, we believe it is best to judge our performance over the full year. During the fourth quarter of 2022, we announced the acquisition of Endemix, a natural color and extract company based in Turkey. This acquisition is now included in the Color Group's results and strengthens our existing natural color portfolio and improves our vertical integration for several key raw materials. We consider this to be a bolt-on acquisition consistent with our natural color strategy. Endemix represents approximately 1% of the Color Group's fourth quarter revenue. We continue to look at other reasonable acquisition opportunities that support our strategic initiatives within our core product lines. Now turning to the groups. The Color Group had an outstanding 2022 reporting 15% adjusted local currency revenue growth and 15% adjusted local currency operating profit growth. The Food and Pharmaceutical and Personal Care product lines each delivered excellent results in 2022 with strong adjusted local currency revenue and operating profit growth. Overall, the group's annual revenue growth was driven by high single-digit volume growth and high single-digit pricing. Within the Color Group, Food and Pharmaceutical colors achieved 17% adjusted local currency revenue growth. We delivered a high level of new sales wins in 2022, stemming from the company's strong customer service levels and innovative natural color portfolio. The acquisition of Endemix strengthens our natural color supply chain and supports our new natural color wins. I anticipate our food and pharmaceutical product line will have another good year in 2023. The Personal Care product line also had an excellent 2022, achieving 10% adjusted local currency revenue growth. The product line has rebounded nicely from the impacts of COVID. Personal Care's focus on product line diversification, customer service and innovative technologies are fueling our current growth. The Color Group also had a strong finish to 2022, reporting fourth quarter adjusted local currency revenue growth of 12% and adjusted local currency operating income growth of 8%. The group's revenue increase was driven by a high single-digit price increase and low single-digit volume growth. Food & Pharmaceutical colors continued its strong performance in the fourth quarter, achieving 15% adjusted local currency revenue growth. Personal Care slowed to a mid-single-digit growth rate in the fourth quarter, primarily due to customer destocking. Color Group is well-positioned for growth in 2023 and beyond. I expect the group will deliver mid-single-digit local currency revenue growth and mid- to high single-digit local currency operating profit growth in 2023. We believe food and pharmaceutical colors will have solid growth throughout 2023. We believe personal care will improve throughout 2023 as customer destocking declines. The Flavors & Extracts Group had another solid year in 2022, reporting 6% adjusted local currency revenue growth and 10% adjusted local currency operating profit growth. We also achieved an 80 basis point improvement to our operating profit margin for the year. For the year, flavors, extracts and flavor ingredients reported double-digit adjusted local currency revenue and operating profit growth. These product lines benefited from high single-digit pricing and mid-single-digit volume growth in 2022. Revenue in the Natural Ingredients product line was down in 2022, primarily due to lower volumes related to customer destocking and lower production volumes from the 2022 crop, which we had previously discussed. In the fourth quarter of 2022, the Flavors & Extracts Group delivered 3% adjusted local currency revenue growth. Adjusted local currency operating profit was down 4% due to higher input costs and volume declines, primarily due to customer destocking in the Natural Ingredients product lines. The Flavor Group has implemented pricing actions that will begin to offset these increases, but we anticipate customer destocking to continue in the first quarter. Despite these first quarter headwinds in the Flavors & Extracts Group, we expect sequential improvement throughout 2023. For the year, I expect the Flavors & Extracts Group to deliver mid-single-digit revenue growth and mid- to high single-digit operating profit growth in 2023. The Asia Pacific Group delivered an impressive 14% adjusted local currency revenue growth and 23% adjusted local currency operating profit growth in 2022. The group benefited from strong revenue growth in almost all regions. Overall, during 2022, the Asia Pacific group achieved mid-single-digit pricing and high single-digit volume growth. In the fourth quarter of 2022, the Asia Pacific Group reported 6% adjusted local currency revenue growth and 4% adjusted local currency operating profit growth. The group continues to benefit from solid revenue growth in almost all regions. Revenue growth benefited from a mid-single-digit price increase and modest volume growth in the fourth quarter. As input costs continue to increase, the group has implemented pricing increases that will benefit the business during the start of the first quarter. For the year, I expect the Asia Pacific Group to deliver mid- to high single-digit revenue growth and mid- to high single-digit operating profit growth in 2023. I'm very pleased with our performance in 2022 and over the last few years. Our focus on sales execution, customer service and innovative technologies are fueling the growth in each of our groups. Our product portfolio is strong, and we remain focused on our key customer markets of food, pharmaceutical and personal care. We continue to evaluate sensible acquisition opportunities. We spent approximately $80 million in capital expenditures in 2022. We have very good internal investment opportunities that should drive future growth. And as a result, I expect our capital expenditures to be between $85 million and $95 million in 2023. Our inventory levels have peaked and I would expect a reduction in our inventory throughout 2023. Absent an acquisition, our capital allocation plan will be focused on paying down debt. I'm very happy with our financial performance in 2022. We finished at the top end of our guidance for adjusted local currency revenue, adjusted local currency EBITDA and adjusted local currency EPS for 2022. I am optimistic about 2023 and the future of our business. Steve will now provide you with additional details on the fourth quarter results. Thank you, Paul. Sensient's fourth quarter GAAP diluted earnings per share was $0.69, included in these results are $0.04 per share of income related to an earn-out payment received in connection with the divestiture of our yogurt fruit preparations business. Last year's fourth quarter GAAP results included divestiture and operational improvement plan costs, which decreased last year's fourth quarter results by approximately $0.07 per share. Our GAAP earnings per share in the fourth quarter of 2021 include an immaterial amount of revenue and operating expenses related to the results of the divested operations. Excluding these items, our consolidated adjusted revenue in the fourth quarter of 2022 grew by 5.9% in local currency to $348.7 million. Our adjusted local currency EBITDA was up just under 1% for the quarter, and our adjusted local currency EPS was down 6.8% for the quarter, primarily the result of higher interest expense. Foreign currency exchange rates decreased adjusted earnings per share by approximately $0.04 in the fourth quarter. As we have stated throughout this year, we made strategic investments in our inventory position, which is the main reason for our lower cash flow from operations this year. We have invested in our inventory position to support the high demand we are experiencing and to ensure we have appropriate safety stock positions as supply chain and energy challenges continue. We believe our inventory levels have peaked and as Paul mentioned, I would expect a reduction in our inventory levels throughout 2023. Capital expenditures were $79 million for 2022, and our net debt-to-credit adjusted EBITDA is now 2.4 as of December 31, 2022. Our balance sheet remains well positioned to support our capital expenditures, sensible M&A and our long-standing dividend and any excess cash will be used to pay down debt. Regarding our 2023 guidance, we expect our 2023 local currency revenue to be up mid-single digits compared to our 2022 revenue, and we expect our local currency adjusted EBITDA to grow at a mid- to high single-digit rate in 2023. We expect our 2023 local currency EPS to be flat, to up low single digits compared to our 2022 adjusted EPS of $3.29. In 2023, our EPS will be impacted by higher interest expense and a higher tax rate. Based on current interest rates, we expect our interest expense to increase by approximately $11 million or approximately $0.20 per share in 2023 compared to 2022 full year interest expense of $14.5 million. Also, we expect our 2023 tax rate to be around 25% for the full year. On a quarter-to-quarter basis, our tax rate will fluctuate, and therefore, we continue to believe our local currency adjusted EBITDA growth is an important measure of our performance. Based on current exchange rates, we expect currency to be a headwind for the beginning of the year and modestly favorable for the full year. Yes. Congrats on all the progress. So first off, on the destocking paradigm that you called out, obviously, not unique to you, but rather the whole supply chain. But can you just give us more color on how exactly that dynamic played out throughout the fourth quarter? And then also what customers are specifically sharing with you as it relates to channel inventory and the likelihood that it basically fades by the first quarter? Yes. I was just asking about channel. What customers are sharing with you in terms of inventory levels in the channels and your confidence, I guess, as it relates to maybe that stops in terms of destocking in the first quarter. Okay. Got it. Yes. So I would say, certainly, destocking, you could see that throughout our product lines. mostly in Europe and the U.S., less of that type of dynamic underway in Asia Pacific. But the destocking we're seeing is not unlike what you read in the newspapers. Consumers, and consumers are effectively responding to price increases by buying a little bit less, but then you have the added factor of many of our customers taking down inventory levels because there's no longer such a strong need to compensate for supply chain disruptions. So what we saw in Q4, it hit hardest in the S&I business. And I would say second to that would be Personal Care. I think, again, while we face that in every one of our businesses, the new wins we generated in Flavors & Extracts, in Food Colors and Pharma, we're so much larger than the destocking impact that we were able to come out on dry ground there from a revenue standpoint and then of course from a profit standpoint and color in Asia. In some cases, the destocking by our customers has been rather dramatic. In other words, we've heard testimony from some customers to the extent that we're going to take down our inventory 20% or 30%, and we're going to do it very dramatically. And so much of what we see is or our belief, my belief is that there was a big impact in Q4 bigger than at any other point during 2022. As we look at our business, our customers and our product lines, I believe Q1 is the peak of the destocking. So you're going to see that continue again in S&I. You're going to see that impact again in Cosmetics or Personal Care. But -- so there will be a little bit of a drag on the Flavors & Extracts Group in Q1, but I think that's going to largely subside come Q2. As you look at Color and you look at Asia, I think we will effectively weather through those destocking actions by our customers in Q1. But I think that will also improve sequentially as we get into Q2 and Q3. And I can speak to very specific instances where customers have already declared, hey, we're not going to buy this in Q1, and we see their orders for Q2. So again, I think we have enough wins trailing in from 2022. We have enough wins that we're already generating in '23. We've been very effective with our pricing once again here in Q1. So all those things come together that I think we're going to -- we'll be off for another good year, but we'll start off with a little bit of slowdown again in SNI, and that's going to have an impact in Flavors & Extracts on the top and bottom line, but I think we'll largely overcome those factors in Color and Asia even in Q1 and then, of course continuing through the year. Okay. And I guess on that, maybe you can just touch on your specific inventory levels as well, just given what you just said in terms of what customers are doing. And then also, is that starting to impact your cost basket as well, just given previous inflation, et cetera? Yes. So inventory was up right around $150 million in 2022. About 1/3 of that was just inflation related to the cost side of that. But these are very specific directed actions to ensure that we were well positioned. We've been able to win business on account of having product and being able to deliver it consistently and reliably. So in my estimation, it was a very good investment. Now we have a much higher proportion of raw materials than we ordinarily have historically, right? So if you look back at the company, we had a much higher percentage of finished goods inventory versus raw materials. But this time around, we were very, very specific about the types of inventory we wanted to invest in. And again, it was largely much disproportionately raw material based. So the positive about that is I think we can manage the absorption, the balance sheet activity as the market settles in as maybe we have destocking in certain areas, I don't think there's going to be an economic impact, financial impact of Sensient as we start taking down our inventory. But I would say this is more of a dimmer switch for us than an actual on or off switch, so we will manage that down. There's still a lot of opportunity in the market where there's bad service and there's that availability of raw materials. So this idea that companies can just kind of drop their inventory back to normal levels. I'm not quite there yet. You know we've had some crop yield issues over the years of S&I. And quite frankly, I'm a little bit tired of talking about that. And I know you folks are tired of hearing about that. And so to remediate that once and for all and forever ideally, we have made a big investment in our inventory in SNI. And so I think having inventory in that business is a really good thing. It's a good investment. We have very limited risk of obsolescence and I think that's going to play out in our favor. So I feel good about our ability to bring inventory down, but I would not expect for you to be hearing about 20% reductions and 25% reductions. It will be more of a slow, steady progress consistent with maintaining good supply to our customers. Good morning, everyone. I've got 3 questions. I'll go one by one. First question, I wondered what you're assuming for pricing and inflation this year? And are you assuming any deflation in your guidance, please? Okay. So I think it's interesting. I think there is -- yes, there's still inflation. And yes, they're more than likely could be a need to take additional pricing. I think versus 2022, you could probably expect that the pricing in 2023 will be a bit more surgical, a bit more directed at certain raw materials. I think factors like sea freight and energy, we see some stabilizing in those costs. And in some cases, again, on something like sea freight or air freight, those costs have actually come down. We do have some commodities that are moving in the right direction from our standpoint, from a price or cost inflation. But there are still pockets of inflation that continue. I wouldn't say unabated, but they are continuing, and we need to be very cognizant of the need to price that accordingly throughout the year. But I do think inflation seems to have stabilized overall in the business for at least the collection of raw materials and energy inputs that we use. So pricing less impactful than it was in -- or sorry, less necessary than it was in 2022 would probably be the short answer I would have for that one. Okay. And then maybe if we move to Natural Ingredients. So I think last year, you had talked about supply challenges. The idea was that would use over time. I know that there's the short-term destocking issues. What are you seeing in terms of supply of raw materials? So SNI, you're right. I mean it was -- we sort of discussed that throughout 2022. I think as we look ahead to 2023, we'll know more definitively as the year progresses as to what the crop bears. But I think we've taken some steps, as I referenced to the earlier question, to make sure that we are well supplied as we go throughout 2023 and into 2024. So nothing dramatic to report at this point. Again, I did note the destocking phenomenon. In each of our businesses, in each of our product lines, we're servicing different types of customers. And so certain businesses may have higher exposure to certain types of customers. And I think it's safe to say that SNI, the composition of its customers is a bit different from the rest of Flavors & Extracts. And so that's, to some degree, why we felt the destocking impact more profoundly with them than we did with the balance of that portfolio. But I think that as the year goes on in 2023, we will do fine there. And as you look back at 2022, yes, we did have these issues in SNI, but Flavors was still able to deliver our mid-single-digit revenue and our double-digit profit growth. So we've done a very nice job of managing despite some of those points of friction in the portfolio. And so -- and I think we did that in 2021 and 2020 as well. So I think we've done -- we've got a good program in place, but again, I'd like -- I think we can still make some improvements there so that this business, this product line could be more additive to the overall Flavors & Extracts Group. And then a final one is on innovation. Could you talk about innovation rates among your customers? Has anything changed given the challenging environment? And additionally, what are some Sensient innovations that you're excited about? Okay. So first on the innovation, I'll describe that in terms of the launches that we see. So our profile Europe and the U.S. and according to our data and our experience, or our observations. In Europe, in the first half of 2022, launches were down double did, like 14%, 15%. In the second half, that moderated to like about a flat like a minus 1% reduction in launches. So that's a nice improvement. And I think that bodes really well for 2023. Similarly, in the U.S., for the whole year, launches were down about 5% to 6%, which is an improvement from 2021 when they were down like more like about 10%. But just like Europe, in Q4, launch activity in the U.S. is actually up slightly. So those really, I think, are important factors to consider. So when you think about our guidance, why do I feel confident about our revenue and our profit and the leverage we will get there. To some degree, this launch inflection point, as I'd call it, bodes really, really well for us. Now the nature of the launches has changed a little bit. If you -- here, again, I'll profile one of our regions to give you a little sense of things. So if you look at Europe, of the launches that we measured last year in the food and beverage world, 40% of those launches were line extensions that 1/3, about 30% were actual new product and then maybe about 25% was really just kind of a modification of packaging. So not necessarily a new launch in the way we would traditionally think about it. So how that would compare to years past, it's certainly much higher weighted towards new packaging, a little bit more towards line extensions. But nevertheless, the launch is a launch at some level and those are super positive and impactful for Sensient. Now with respect to products that we have been launching and that we're very excited about, we've got several in our Natural Color portfolio that are really quite exciting and the idea there being how do we continue to improve the performance and the economics of natural colors to make it more enticing for customers to take an interest in converting products and launching products with those. So that will be an ongoing program that I think we'll be very happy with. You heard me talk about the food color, really strong results. A lot of that is coming from our innovations there. We have a number of innovations in our Personal Care business. As I always like to say, this is a business where technology matters and performance matters even more. So we have a number of different launches with respect to natural color and natural ingredient-based makeup products. So these are very, very exciting. And I think we're going to -- we'll see a lot of growth long term in that segment. We have a number of new launches within the Flavors & Extracts part of our portfolio, not only extracts, new and sort of novel extracts that we have sourced and are able to manufacture internally. These provide a more complex enhanced taste profile in a lot of product applications. So those are very exciting. And then, of course, in our Bionutrients business, not one that we talk about that much. We have a number of interesting launches in our plant nutrition part of our portfolio to potentially enhance crop growth rates and yields in a way that could be super compelling to any number of growers around the world. So that's just sort of a high level of a few of the more recent launches, but yes, we track very closely what percentage of our revenue is being driven by new launches. And so that's an important factor, I think, in our future growth and certainly for the growth we expect in 2023. Just a couple for me. Paul, I guess, in terms of the guidance for 2023 and the volume growth you're expecting, how should we think about it, as it relates to just continue to expand your services to the existing customers versus maybe new customer wins? Yes, I'll start with this. The guidance, the mid-single-digit guidance would be to Steve's earlier answer, inclusive of price and volume. I'd like to think that, that mid-single-digit growth expectation is a number that you folks can take to the bank. Could there be some upside? Sure, there could be some upside. If you look at 2022, there was a lot of questions. There was questions about destocking and price givebacks. And so I think we were able to successfully navigate through that year and that culminated in a 10% growth for the company. And you heard some of the volume metrics that I read off. So we had really, really nice volume growth in many of our businesses and product lines. So the guidance, I think, maybe it's a bit conservative. But again, I wanted you to have a very reliable set of top line expectations that you can think about throughout the year. And again, maybe there could be some upside on either volume -- well, volume and/or price. To the question about, are these really the revenues that are going to come from essentially expanding an existing company customers or new customers? I think in as much as we focus a lot of our attention on these local and regional customers, the B and C, as I may call them. We do that a lot in Flavors & Extracts, so I think that's going to be a continued part of the Flavors & Extracts success, is going to be coming from a lot of new customers. But what's also interesting is in our Color Group, where we have very strong access to a wide range of customers, we still generate a lot of new customer-related revenue in that group. So I don't have a percentage breakdown for you. You could certainly look by region and by product line and conclude that it's more efficient and you may be commercially more successful by simply selling more to existing customers. But in other cases, you may have some customers who maybe have more modest growth and more modest launch expectations, in which case, you're turning more to a new customer revenue-generating model. So it's a mixed bag. And again, I don't have a percentage for you, but it's certainly within our thinking across each of our businesses would be probably the best answer I could give you there. No, that's very helpful. And then switching gears a little, obviously, interest expense is going to be significant headwind in terms of EPS for this year. Just curious if it's causing you to maybe revisit your capital allocation priorities, maybe looking to be more aggressive in terms of debt reduction or still focusing on M&A and dividend share repurchase, if maybe we can get a sense how you're thinking about that? Yes, Mitra, I would say our leverage is still at a very reasonable rate. So 2.4 debt-to-EBITDA. We have plenty of flexibility to do what we need to do. We have a lot of good investment opportunities in the business. So we are going to continue to step up our capital expenditures, and we're going to continue to look at small bolt-on acquisitions. So I think from that point of view, there's not really any change, but anything we do have remaining after those priorities, we will look to pay down debt. I think that's accurate. Okay. And then just following up with it on the CapEx, I know if you look at '22 versus maybe a couple of years ago, obviously, significant increases, and you mentioned step-ups. Just curious in terms of any major investments you feel you need to do at this point? And should we expect the elevated CapEx to continue for the foreseeable future? So I would say we've got a lot of ROI projects that we've invested in over the last couple of years, we got a lot projected for 2023. And so I really like our chances in a lot of those. They're very much related to the core product lines that we have. So as you think kind of longer term to the question about, well, is this $80 million to $90 million or $95 million, is that here to stay? I would say the baseline would be what is our existing depreciation and amortization. And that runs right around I want to say it's about $50 million. So how much we are above, I can't imagine us being below that. What would render us substantially higher than that would really be how many ROI projects can we meaningfully complete in the course of the year. So you look at our business, the size of our business, the number of locations, you do have some structural limitations to how much capital you can reasonably expect to implement in the course of a year, right? These things can be potentially disruptive when you're shutting down parts of a plant to add something or take something out. So yes, historically, $80 million is somewhat elevated. But I think we're going to be very, very happy as we move forward with the types of -- our ability to maintain and even accelerate some of our growth in a lot of our businesses, it's going to come on the heels of these CapEx implementation. So I think this year, $85 million to $95 million, I think there's a lot of really good stuff in there. And I think as I -- or even as I think ahead to 2024, there's still a lot of really good projects. So that's the super positive thing. here for the company. Those are the highest earning opportunities as I see it when it comes to capital allocation. So we'll continue to -- we're guiding in this realm in 2023. I would expect us to probably be close to this in 2024. But as we get to 2025, we'll see, we want to probably harvest some of the investments we've been making. And -- but again, use that $50 million is kind of your minimal, hey, we got to maintain these places too type metric. Okay. No, that's great. And then finally, just maybe circle back on the Personal Care business, a little in terms of what you're seeing, your expectations, obviously, things have sort of settled down in terms of remote and back to office. I don't know if you still expect further bounce back or that has sort of played out a little for you? Well, I think Personal Care had a nice rebound in '23 or sorry, in 2022, as we discussed in the call. We had, as I also mentioned, a little bit of a slowdown in Q4 and Q1, principally, I think destocking was part of the culprit there. But as we get into '23, yes, I mean, I think these are great markets, makeup, hair care, skin care, they're very resilient, certainly. One of the super positives coming into '23 is the reopening of China. I mean, China is a nice market for us for personal care and that's only going to help matters for us. Europe and North America, we've got some kind of Q1 destocking continuing. But I think our prospects for the business for the year are good, probably not as strong as, say, Food Colors and Pharma or Flavors & Extracts for that matter. So -- but it's an ongoing -- it's a great business, a very technically driven business. Our program around diversifying into these segments continues, and we've made some super nice progress there, very happy about that. But there's a lot of NPD activity there, and I think a lot of opportunities for us to continue to generate some good growth out of personal care. And yes, having folks out and about not wearing masks anymore, that's super helpful as well. A couple of questions following up on some of the previous ones. In terms of the price and taking price this year, I appreciate it's very early on in the year. But have you had any sort of color or do you have any thoughts on the risk of pushback from customers, especially given the levels of inventory that they might have and the consumer demand backdrop? Yes. Well, I would tell you that probably one of the least favorite conversations a salesperson has is going to a customer with a price increase. So I don't think there's anything new on that front. Maybe they're a little bit more unhappy now than they were a year ago about price increases. But listen, nobody likes a price increase, and that's never easy. And so you have to be very, very thoughtful about the timing of that and the magnitude of that. And you have to be sensitive to the customers' ability to build that into his economic model and still make money. So you got to find win-wins here in the market. And so I'd like to think that inflation, as I mentioned earlier, has largely stabilized in some of the key markets and on the key inputs like energy, for example. But as we get into 2023, I don't think there's some like magic button that July 1, inflation stops and everything is back to normal. I think this will be a process whereby there is some deflation in some of these key raw materials and other inputs. But when and how big is anybody's guess. In fact, that's what everybody is doing, is guessing about this. So my guess would be inflation should kind of stabilize on average, we'll still have pockets up. We may -- I think we're going to continue to have pockets downward. And we work very, very closely with our customers to -- we need to cover our costs, but they need to sell stuff. They stop selling stuff, then you covering your cost wasn't much good. So you do need to find a win-win, but we were very effective in 2022, largely across the board. I have no reason to believe we will not be effective in 2023, at least in covering our costs. Yes. And whether or not you can give any granularity on this, given it's a moving goal post at the moment. I think cost inflation for this year was probably running at 9% to 10%. I'm just sort of thinking forward to this year, you touched on a few things in terms of some specific commodity prices have come down. You've got sea freight coming down. One thing you called out historically has been energy costs in Europe, which have also gone down as well. So I guess, more broadly speaking, what would be an expectation for cost inflation for '23? Or is it just too much of a guess at this point? Well, my short answer is I don't know. But whatever it is, I think we'll be able to cover that with pricing. Again, if you want me to guess, I don't think it's going to be as bad as 2022, is my guess, which I guess is no different from anybody else's guess, right? Just sort of hard to -- I guess you find out if you're right, as the year goes on. But maybe stepping back here for a second, I think the thing for everybody to keep in mind is inflation as it drives our costs up and necessitates pricing actions on our part, our products typically do not constitute a significant input cost to our customers, right? So our customers may have substantially high cost, but ordinarily, it's not coming in a substantial way from food colors and flavors and things like that, which is a very -- the wonderful thing about our businesses is that we can pass along pricing, we can still help our customers to be successful, owing to good products that we can sell them. But generally, we're not -- I would say that we're not bringing customers to their knees on account of our inflation. I think it's going to be coming in other forms to our customers. So that's kind of the big picture here, which is to then say, tactically speaking, I think we can get the pricing that we need to get to cover our costs. and retain the business. Okay. No, that's great. I don't think you're going to like me very much because I've got a quick question on SNI, which you didn't want to talk about that anyway. I think you may have spoken about SNI being, give or take, a 5% drag on F&E for 2022. And on that basis, we'd expect a rebound to come through this year. I just wanted to maybe try and get a feel for how much of that might unwind this year and what kind of tailwind it could generate? Yes. So yes, SNI was a drag in 2022. I think SNI will rebound in 2023 for some of the reasons that I've already discussed. So yes, I think it's fundamentally a terrific business and it's a tremendous benefit to have that business in Flavors & Extracts as it does broaden our portfolio at many of these related customers. So yes, I would tell you that the rebound is not going to be in Q1. But I would tell you that the rebound will take place in 2023. And I think that's only going to add to the success of the Flavors and Extracts group. Great. Just one final quick question. Just touching on the question earlier on product launches. And obviously, you talked about a higher mix of line extensions versus new products in 2022. Just wondering on for 2023, if that sort of mix changes more towards new products. Is there a big difference in terms of revenue or profit contribution when you are dealing with a new product versus a line extension? Well, so the first part of your question, I would anticipate, just as I think about and look at our pipeline that there would be more kind of new-to-the-world style products this year. as opposed to a line extension. I wouldn't necessarily say there's a significant difference in the profit stemming from a line extension versus a new launch. The difference tends to be the magnitude. So the magnitude of a new launch may be significantly greater than a line extension, but a new launch is a heck of a lot riskier than a line extension. Think of a line extension of like a sequel, like Jaws 4. Not much of a risk, right? Jaws 1, 2 and 3 were pretty good. It kind of lends itself to a pretty good idea to extend that line. But a new product on the other hand, you're launching a whole different category of movie potentially there to go along with this cinematic thriller metaphor I've got here. So bigger impact potentially, but it can be a lot more risky. So the thing that launches in 6 months later goes away, that doesn't feel real good versus, say, a line extension, which you could have for several years. And it's the very nature of that risk profile that is why you see fewer launches when tightening starts or recessionary environment start. So what gives me optimism about '23 was that comment I made earlier about how there's been an inflection point in new launches, regardless of their type that's a super positive. That demonstrates to me a customer's eagerness to really engage very thoroughly in the market and potentially even take some risks. Ladies and gentlemen, there are no further questions at this time. I will turn the conference back to the company for any closing remarks. Okay. Thank you. Since we are starting the new year in our prepared comments, we made some comments to help with modeling for 2023, just to reiterate that. I indicated, we did expect interest expense to be up about $11 million over the level in 2022. I indicated our tax rate would be slightly higher. We're expecting a 25% tax rate. One other comment on our corporate expense, our unallocated corporate expense that's a line item that has increased significantly the last couple of years because we've had to reset our performance-based compensation. I would say that, that has now normalized. And I would expect a more normal inflationary increase of about 3% in our corporate expense. So I would look at that at about the level of $57 million for 2023. And then the last comment I made was after a year of FX headwinds, we do expect one more quarter where FX will be a headwind. But then in the second half of 2023, based on where rates are today, it should be a moderate tailwind for us.

EarningCall_84

Good morning. My name is Bailey, and I'll be your conference operator today. At this time, I would like to welcome everybody to the Diebold Nixdorf Fourth Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session [Operator Instructions]. Thank you. Hello, everyone. And welcome to our fourth quarter and full year 2022 earnings call. I'm Christine Marchuska, Vice President of Investor Relations for Diebold Nixdorf. To accompany our prepared remarks, we have posted our press release and presentation to the Investor Relations section of our corporate Web site. Later this morning, a replay of this webcast will also be available on the Investor Relations section of our Web site. Before we begin, I will remind all participants that during this call, you will hear forward-looking statements. These statements reflect the expectations and beliefs of our management team at the time of this call, but they are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company's periodic and annual filings with the SEC. Participants should be mindful that subsequent events may render this information to be out of date. We will also be discussing certain non-GAAP financial measures on today's call. A reconciliation between GAAP and non-GAAP measures can be found in the tables of today's earnings release. Thank you, Christine, and thank you all for joining us today. Before I start, as we announced this morning, I want to thank my colleague and friend, Jeff Rutherford, for his leadership over the past four years and his significant contributions to our company. I look forward to working with him over the next few weeks as he transitions his CFO role to Jim Barna, our Head of Treasury and Tax, who has been part of our succession planning for the CFO role, has been instrumental in refinancing our debt and improving our operating model. I am excited about working with Jim during this new chapter for our company. Thank you, Octavio. Over the last four years, we have accomplished a lot here at Diebold Nixdorf, and I'm confident in the path you are taking the company to success. I would like to thank the investment community for your continued support and I wish Octavio and the company the best. Thanks, Jeff. We also want to say thanks to Gary Greenfield, who stepped down as Board Chair after five years' role for his service to the company. We are grateful for the contributions of these leaders and for bringing us to this point in our transformation journey. As communicated earlier this week, we intend to announce a smaller board in our upcoming annual proxy statement. Our refreshed Board and leadership team are excited and unified about our priorities as a company, which include operational execution and now that our refinancing is behind us, a strong focus on deleveraging. With that, let's now discuss our quarterly results. From key customer wins to important milestones that are improving our operational rigor, the steps we took in 2022 to position our company for a stronger future will be a springboard for our success. As I reflect on the past 11 months as CEO of Diebold Nixdorf, I couldn't be prouder of our employees for helping me navigate an ever changing environment and to our customers for the support they provided and their continued trust on DN solutions. Last year, a significant amount of effort and time were spent on improving operations and completing our refinancing transactions. I am happy to say we ended 2022 on a positive note, both with the closing of our Transaction Support Agreement and finishing the year with a record high backlog. Closing the TSA was an important milestone that provides us with the capital we need to normalize our operations, meet supplier commitments and fully execute on our value generating model. It also allows us to put our focus solely back on meeting customer demand. Converting our record high $1.4 billion backlog into revenue. Banking composes $1.1 billion of the backlog with retail composing the remainder $305 million. We now have scheduling and confirmation of 75% of our ATM unit count and 60% and 35% of our SCO and EPOS unit count respectively for 2023. As we continue to shift our customers and installed base to the new DN Series recycling ATMs and rolled out our self checkout family, including our new retail EASY ONE solution. Closing out 2022 with backlog and financial stability has allowed us to enter 2023 focused on clear priorities for our customers, employees and shareholders. Our focus is straightforward, deleveraging, free cash flow generation and evaluating all strategic opportunities, based on the following three goals. First and foremost, we plan to deliver our products to our customers and maintain operational excellence. Let me be clear. In the operational plan we presented in our last call, we are committed to delivering 60,000 ATMs, 35,000 SCOs and 134 EPOS in 20 23. Delivering these products is our first and primary focus as it translates directly into revenue and financial stability. Next, we will stabilize and grow our recurring revenue, protecting and selectively growing our contract base. And importantly for the leadership team and I, we will reinvigorate our culture after a year of so much change. These priorities plus starting the deleveraging process are the foundation for our 2023 model, and we are committed to building and delivering our core solutions with a strong focus on unit conversion and unit economics. We started talking about this last quarter and we believe it is the most simple and effective way to evaluate our performance from an operational standpoint. As I mentioned previously, in 2023, we plan to recognize revenue for 60,000 ATMs, 35,000 self checkout solutions and 134 point of sale devices. We have clear line of sight to our ability to manufacture and deliver these units. Stabilizing our business around our core expertise to drive growth and execute around our contract base will also expand our recurring revenue opportunity, creating longer term value. And finally, we continue to optimize our pricing strategy and we will see the benefit of these actions throughout the year. As the multiple pieces of our global supply chain continue to stabilize, we will see some variability quarter-over-quarter through 2023. However, with the significant work done in 2022, such as getting our Ohio manufacturing facility fully operational and setting up contract manufacturing for the India market, we are building resiliency in our operations. As we implement our plan, we will be diligent in managing our working capital and liquidity. And make sure that costs don't creep back into our business as we continue to look for additional efficiencies. Demand for our banking and retail solutions in the market is high and we will deliver. I look forward to sharing more information with you on these company wide priorities in future quarters. Thank you, Octavio. My prepared remarks will include references to certain non-GAAP metrics, such as adjusted EBITDA, Today, I will spend my time discussing the fourth quarter results relative to the full year 2022 operating model, included in our last earnings report on November 8th. For a discussion of our fourth quarter and full year performance relative to prior periods, please see the financial summary included in our earnings release. Total revenue of approximately $969 million was largely in line with our Q4 risk adjusted operating model. We revenue the following units in Q4; 17,000 ATMs, approximately 6,000 SCOs and approximately 33,000 EPOS. Adjusted EBITDA of approximately $104 million was also in line with our Q4 operating model and represents a sequential improvement of approximately $28 million or approximately 37% over the third quarter. The sequential improvement was driven by higher conversion of units to revenue along with continued execution on our cost savings plan and marks the return of exceeding $100 million of quarterly adjusted EBITDA. For the full year we revenue total revenue for the full year total revenue of approximately $3.461 billion. We recognize revenue on the following units and full year 2022; approximately 49,000 ATMs, approximately '21,000 SCOs and approximately 126,000 EPOS. Adjusted EBITDA of approximately $265 million was in line with our model considering the risk previously communicated in Q3. Turning to 2023 for a moment. With respect to liquidity, we are modeling to have adequate liquidity throughout 2023 to run our business and execute on our plan, and we’ll vigilantly manage liquidity through increased operational rigor. We ended 2022 with approximately $345 million in liquidity and as for our model are targeting to end 2023 with greater than $375 million of liquidity. The increase is modeled to be the result of positive free cash flow generation net of anticipated debt paydowns in Q4 of 2023. We had a strong number of customer wins during the quarter. In banking, the shift from legacy ATM devices continued as our new DN Series cash recyclers comprised approximately 80% of total new banking orders in North America in the fourth quarter. In terms of financial performance, banking revenue came in at $689 million and segment operating profit was $102 million. Both metrics were up sequentially due largely to increased unit delivery and continued focus and driving efficiencies in the business. In retail, we saw contract based growth in self service solutions, including self checkout as the vast majority of SCO shipments represent new placements in the market and have generally a strong service attachment rate. Coming up -- of strong National Retail Federation show better known as NRF in New York City in January, our retail solutions remained in high demand and our self checkout business continues to grow faster than the market, especially as we have started the rollout at a major grocer in the US. Increasingly, more US based retailers are seeing the difference of the DN SCO experience in these stores. In addition, we are also very excited about our new DN Series EASY ONE product, which received great feedback from over 160 customers who attended the launch during the NRF show. We believe this product is the game changer, because it allows retailer to easily and economically move from a traditional checkout to a self checkout to stay ahead of consumer preferences. Retail revenue was approximately $276 million in the fourth quarter, while segment operating profit was $44 million. Sequentially, revenue growth was largely product driven, which was a function of improved self checkout volumes and a rebound in third party solution business. Operating profit improvement was largely the result of gross margin improvement due to higher volume and mix. Despite significant supply chain challenges, retail managed to grow low single digits, excluding currency and divestitures in fiscal year 2022. Now, I would like to provide you an update on the cost savings plan we implemented last year. We entered 2023 with $175 million of executed run rate cost savings and expect to close the year with a run rate of $190 million. We continue to target the midpoint of 2023 for completion of the restructuring and expect to see some cost savings benefits in the first half of the year, offset by the reinstatement of our annual incentive compensation and merit pay increases. In closing, as we look ahead in 2023, we are well positioned for success with a strong order pipeline and a straightforward focus, converting our backlog into revenue. I'd like to recognize our incredible employees for their hard work and dedication, especially during a year of considerable change, their hard work, discipline and unwavering commitment to our customers are making a real difference in our efforts to strengthen our business and our competitive position. We look forward to continuing to make important strides to deliver world class products and services that meet the demands of our banking and retail customers, while sustaining our market competitiveness. We are building momentum and we'll leverage our leadership position to capitalize on opportunities and transforming -- in a transforming industry. I am excited to move forward in 2023 with a clear plan to success and a strong committed global team. Couple of questions, maybe first let's talk about pricing versus input costs. What was your total price capture in ‘22 and how much incremental price do you intend to capture in ‘23? And with that, what will your price cost ratio look like? So Matt, thanks for the question and one with multiple ways to answer this for you. So let me start with the pricing question. Clearly, as inflationary pressures, you know, accelerated through 2022, we needed to take pricing action. And with extended supply chain lead times, we were always a little bit behind the curve and our cost to price ratio. We made significant changes to improve supply chain velocity, which we will start seeing. And I am confident that we've worked through most of the backlogs that was, I would say, incorrectly priced or priced not considering some of the inflationary pressures. So as we stated in our operating plan, you can see the walkthrough and we expect to get to go to our historical margins by the end of the year. So that's -- I would tell you that's the work that we're doing in that aspect. It is important to note we've changed many things around pricing. The frequency, the monitoring of input costs that in this changing environment needs to be done almost on a daily basis is one of the changes. We've changed sales compensation so that our sales teams are more heavily compensate or compensated based on the profitability of the deal set they bring. So I am very confident -- and we can probably walk you through in a different call through all the pricing elements that are at play. But we feel confident that all these actions will help us get back to our historical margins. The other part of your question, Matt, around input costs. We do see that input costs have started to -- have stabilized and are actually starting to trend in the positive direction. I would give you the clearer examples. One of the biggest headwinds that we had was around microelectronic components, both in availability and cost. We see the cost starting to normalize and availability improves -- has improved significantly. Another big input cost has been global logistics, where we now see container pricing trending favorably. It started trending favorably at the beginning of the quarter, and we continue to see that trending favorably. So I would say that both the new pricing discipline, the new pricing actions that we've taken, plus a step stabilization on the component input, I think it's still too early to call that it's a significant reduction. But at least we see that it has stabilized and now starting to trend in the right direction, will clearly be beneficial as we go through the year. And then just as a follow-up, Octavio, now taking on the role as Chairman, I'm wondering if this maybe allows the company to think differently strategically about the business. And as Chairman, CEO, do you think it makes sense for the company to formally look at a strategic process as a means to drive accelerated deleveraging? So Matt, the first thing I'm very excited about the way the company has structured itself, I think it's part of a broader plan that the Board of Directors has. We are refreshing our Board, creating a smaller Board. The decision to combine the CEO and Chairman positions is very clear. For the time being, we have to be very, very aligned on the priorities for the company. One of them is deleveraging, that I want to be very clear about. So we will clearly evaluate all options and that is something that we asked, the Board is very conscious about, and we will look at all possibilities. There is operational things that we can do to deleverage. We will use every tool at our disposal to really look at how we change the trajectory of the debt that the company has, the debt burden that the company has. So I would tell you that we will look at all alternatives and this is one of the priorities of our board. So just on ATM shipments, you recognized I think 49 for the year. I think the 3Q guide was around 52. So what drove the shortfall there? And on the confirmed 45k orders for '23. Is this higher than normal confirmed orders this early in the year given some of the component shortages kind of hitting last year? How confident is the firm on kind of delivering on those units this year? And then I have a follow-up. Let me start with the one around where do we stand today with our backlog and confirm manufacturing and deliveries to customer. As you saw, we have north of 70% plus in ATM, 60% in SCOs. These are orders that are now scheduled in our manufacturing, are clear to build based on the customer schedule. And clear to build to us means that, we either have all the components we needed or we have commitment from our suppliers to deliver those components in the time that we need those components to complete those units. So I would tell you that our view is we are extremely confident about delivering on those units. So as far as how does that compare to history, and again, I'm always a little reluctant to talk about history because the world has changed so much over the past year, at least over the past two years. But if we look historically, we have never started the year with more than 30% of our backlog in this position. So we are clearly in a much better position right now to deliver on our operational plan than we have ever been before. So I'm confident about that. And the other side is we continue to receive significant orders from our clients. Our backlog, even though, our revenue group didn't reduce as much as we were expecting to be, because we had strong order entry, that, again, that surpassed our expectations. So that helped us continue building on that backlog. So to make a long story short, Paul, we feel very confident on delivering on those units. And we feel very confident that with the demand and rescheduling backlog, we will get to the stated goals that align to our plan. And then on the plan revenue unit of 60k, that would suggest 20% increase in units. So how does that 60k unit projection translate to overall banking revenue results for ‘23, can you talk about the ASP mix, FX that you're seeing, services attached rate and software? So Paul, we will start disclosing as we go into Q1, the revenue -- the units we manufacture. And remember, we don't manufacture neither ATM nor a SCO or EPOS device without a firm customer order. So we'll start disclosing how many devices we manufactured and how many of those turned into revenue during the quarter. Let me give you a hypothetical example of what you will see. In the ideal world, we plan to deliver 60,000 ATMs for cash flow reasons and linearity, it would be great if we could manufacture 15,000 ATMs every quarter and then revenue 15,000 ATMs every quarter. What you will see us doing is probably Q1 and a portion of Q2, our manufacturing will exceed our revenue as we're shipping ATMs across the globe. But starting the second half of Q2 and forward, you'll start seeing our manufacturing be lower than the units that we start revenue. So you'll start seeing that flow and we will share that with you. As far as the ASPs and that, we will keep it consolidated. Remember, depending on the type of unit, whether it's a recycler or a cash dispenser, whether it's being sold to a large national bank in the US or a small credit union or a global bank or Asian customer, the ASPs have rate variations, but we will start giving you more color around that into the future. For now -- because in any given quarter, there can be some variation based on geographic mix and product mix. But overall the year it should be a fairly straightforward calculation. And lastly, on free cash flow. Have you provided an initial outlook for ‘23? I didn't see it. But how do we think about kind of working cap dynamics, cash interest expense, CapEx and your expectations for how cash builds through the year? So I'll turn it over to my colleague Jim, so he can answer his first question as incoming CFO, Paul, so he will always have a special place in his heart as the first question comes from you… Paul, we kind of couched it there in the context of liquidity, right? I mean, we've talked about where we ended ‘22 and then where we expect to end ‘23. And so you can appreciate that within there is positive free cash flow generation, and the improvement absent all of the one time items that we have in 2022, to your point, is going to come from a fair amount of working capital efficiency. And as it relates to how we see that sequencing throughout the year, to Octavia's point, I mean, that's something that we continue to work through as we layer in where those efficiencies kind of mark themselves throughout the year. Octavio, as the company has refinanced its debt, seems like it's in a better liquidity position. But has everything that's happened resulted in any kind of competitive issues where maybe customers might have backed off because of the situation Diebold was in? And if so, has that changed at all? So Kartik, and I think it's in our presentation slides and I probably should have touched on that, because it's a very promising statistic for the future and the proof of the relationships we have with customers. Clearly, delivery delays and little bit of uncertainty around the financial situation was always in customers’ minds. But we conducted our annual banking customer survey during the year and I will tell you that 92% of our customers plan to maintain or expand their relationship with Diebold Nixdorf. That is for a business to business company, is an extremely high amount. So as I started my remarks, when I say I thank our customers for their support, I mean that wholeheartedly, because we continue to receive orders for both our recyclers, for our self checkout devices. And again, I think that the demand is there, the quality of the solutions is there, and our customers remain very committed to continuing doing business with us. We really didn't see any significant -- or we didn't see any cancellations based on delivery times, and we don't expect to see any. So we're -- I think we enter the year with better operational rigor, better financial position and enviable customer base, both in banking and retail that is rooting for us to be successful. And then I know you talked a little bit about free cash flow. But would you think that -- I think you previously gave some thoughts on 2023 free cash flow. Are those still valid or has anything changed maybe to change your thoughts on that? Yes, I would say that we're generally in line. I think when we talked at the third quarter and we put this out in unlevered terms, I would say that we're materially in line with that as we think about where we expect ‘23 to ultimately land or how we're modeling it now. There are some things, as I mentioned previously, that we're working through in terms of working capital and related efficiencies. And obviously you've got the EBITDA growth in there as well year over year. But I would say that the value that we put out there in our model that we talked about at the third quarter is still largely intact for how we currently think about ‘23. The model that we put forward that's predicated on the unit conversion and unit economics that we put forward, that is our guiding post. That's why we're so focused on talking about these units, because these units support the model that we put forward and that's the model that we're driving for. So as Jim said, there's always still a year there will be little movements, but we are committed to our model and are executing to that end. With the shortfall in unit shipments on the ATM side versus your prior 2022 guide, and Octavio, I think, you've talked a bit about orders being better than expected in Q4, driving revenue backlog higher. Just wondering shouldn’t both of those give you some conviction or somewhat buffer in terms of how you are thinking about your 2023 stream of guide? So Matt, what I would say is we feel very comfortable with the numbers that we have. We still -- I would say that my first priority is deliver what we committed to delivering, that's the first priority. So we have -- we’re in the middle of our first quarter, we’re working hard to deliver our first quarter, then we’ll work hard to deliver our second, third and fourth quarters. And yes, if demand remains strong, if -- we clearly would, if the markets change, I think we know there is possibility. But right now, our focus is let's deliver what we promised and not over rotate on what we can do. So we have a solid plan and that's what we are aiming for right now. And I guess my follow-up is given the high backlog levels, does that shift how we should think about revenue linearity all throughout the year in a sense that, I know from a manufacturing perspective you are trying to even out your manufacturing, so you produce a bit more in the first half, a bit more in the second half. But it would seem to be the normal year. Your order flow would also tend to be more second half oriented where now you are just coming into the year with a whole lot more in terms of orders in hand. So I guess should linearity be different or is there something on the manufacturing side where you get more of a ramp through the year, so it looks more like normal Q1 through Q4 revenue ramp? Our plan, Matt -- and remember, we don't discuss guidance based on quarters. But you are looking at things the right way. In the perfect world, we would manufacture, as I said, 15,000 ATMs. I can't do the math on the SCO, because we are divided by 8,000, so 9,000 -- whatever the math that we ends up being, that would be the perfect. We build it and we invoice it within that balance. Clearly, based on where our manufacturing is, based on those shipment times, I would encourage you to think that we will be very stable in manufacturing throughout the year, trying to build as much as we can in the first half of the year. And that revenue will probably be lower than the ship, we will revenue less units than we ship in Q1 and as we move into Q2 and you will start seeing that kind of start to match up. And then as we move through latter half of the year, where you will see that revenue starts exceeding manufacturing capacity, as we close the year. So we -- and you will see us, as I said, you will see us disclosing that and it'll be very clear you will be able to very clearly track how much we manufacture, how much became revenue that quarter, how much is carrying over to the next quarter, how much is being manufactured, how much is being revenued. And it becomes -- that's why I'm so passionate about our unit economics model, because every unit that we manufacture, and I think Paul asked this question earlier and I didn't answer, but I'll. Every unit that we manufacture both in ATM and SCO carries a very, very high service attach rate. I would say in ATMs it's almost 95% plus, same as with SCO. And then it also carries significant software attach revenue in the banking side. And so again, you will be able to start modeling those things very clearly as we move forward. Could you talk about some of the tailwinds you're seeing on the impact on the guidance? I'm assuming, currency and then also transportation costs have come down. Could you maybe quantify some impact in 2023? So as I mentioned earlier, we see component pricing stabilizing. We still don't see significant reductions in component pricing. What we do see is that we will be able to avoid some of the headwinds like spot buys that were very critical for us. That means, suppliers that couldn't deliver to us for any reason and us having to go up into the open market at usually higher prices. So we feel that that type of dynamic with increased spot buys that affected our cost will be largely behind us. Transportation costs are clearly trending downward, that is true. We see that in container routes both from Europe or from Asia. So those factors are looking better throughout the year. And again, as I said, currency, also the -- we have a basket of currencies that we try to monitor from the euro, the pound, the Brazilian real, the Mexican peso. So there's always puts and takes there. Right now, I would tell you the plan we put forward as a company, that's what we're aiming for. Can there be tailwind for currency? Probably. If that happens, we will adjust accordingly. Can there be headwinds? The same thing. That's why we're so focused on talking about the units, because the units get us to our plans and then currencies might fluctuate a little bit, but we will just deal with that as it happens. And speaking of your plan, usually EBITDA is specified during these calls. Is there any read through for a lack of a sort of like reaffirming, I believe [470] goal for this year? So what I would tell you, there is nothing to read into it. And remember, we're in a strange situation where I wouldn't call 470 -- 470 is our operating plan. As we went through refinancing in Q3 and Q4, we didn't put out guidance. We put out our operating plan, that is the plan that we're operating against, that is the plan that our team is committed on hitting. So you should read anything into it. We feel that that is our plan. If we were to provide guidance, we could put higher and lower than that number. But since we've already shared our operating plan, that is our operating plan, that is what we're driving to, and the units are key to that. So if we hit those units, we will be hitting our operating plan and that's how you should think about our business. Lastly, some other companies publicly traded have looked to the equity market to reduce leverage. Is that something that you're currently evaluating? So Peter, we are evaluating all. Deleveraging the company is clearly an area of focus, and all options to deleverage the company are options that we will evaluate. That is something that myself, the Board of Directors take very seriously, and we're evaluating all options. And we look forward to communicating some of those actions as we kind of crystallize that plan and talk about that during our -- during future quarters. But that -- we're looking at all tools at our disposal we're looking at. Octavio, I was wondering, just with the ATM business. If you could sort of talk a little bit more specifically about the demand environment as we look ahead? And to the extent you can add regional color, maybe touch on North America, LATAM, EMEA and Asia-Pacific in terms of what you're seeing there. So I'll try to be very brief to kind of quote, Matt. But I would say North America, as you know, it’s a market that is embracing recycling technology as a good way to improve the cash efficiency in the branches and change the branch footprint service and the customers better. So we continue to see a strong refresh cycle happening in North America. As you know this is a multi year cycle but we see that new recycling technology plus the age of the fleet in North America will allow us to have -- and our technology will allow us to continue having success in that market. Latin America, that has a very special place in my heart, but it continues being a cash world. So we still see strong demand from almost every market in Latin America. We have a very strong leadership position in some of those markets, and I would say all those markets with plus 60% share in some cases. So we continue to work hard to maintain that leadership in Latin America, and demand there continues to be strong. They’re recycling is well accepted but they're clearly more of a cash dispenser market still with just access points being the key point for that market. Asia Pacific to us is very important. As you recall, we had exited the Indian market, which is one of the largest ATM markets in the world. Through contract manufacturing, we are entering the -- reentering the Indian market. And we feel optimistic that that will once again create some additional volume for us in India as we perfect this contract manufacturing model. And lastly, Europe, I would say that Europe looks like a stable market. We continue to see the consolidation and the pooling of ATMs across countries and across banking institutions. But again, as that pooling happens, it does allow the opportunity to refresh those older machines. And so it's a good opportunity, but we see that more as a stable market going forward. And importantly, as I described with different dynamics in the market, we are also working very hard to align our cost structure to those markets. So our cost structure needs to reflect the opportunity where the opportunities are and that's something that the team is working very diligently on. And just lastly [Technical Difficulty] been talking on a quarterly basis and sort of providing updates on the progress you were sort of seeing [Technical Difficulty] your infrastructure initiative. I'm curious as to where you ended 2022 in terms of number of ports or chargers under contract, and what your goal may be for 2023 and longer term in that business? So Matt, we met all the goals that we had for units under contract for AV charging initiative. Our goal -- we have integrated that more tightly, that was kind of a separate growth initiative, run separately. We integrated that into our retail portfolio as we see tremendous synergies. Remember in our retail portfolio, we serve some of the largest fuel and convenience operators in the world that are also going to be large charge point deployers. We sell some of the large charge point operators. So we have integrated that into retail, because we see a lot of synergies and it's a service that -- and we have a large organization that can help us to position that in different verticals. So we are very optimistic. So we exceeded the target of 30,000. We ended close to 50,000. And again, it continues to be an interesting opportunity. As you know, you follow that industry, those vertical very closely, there is still a lot of conforming and defining what the models need to look like. And as I said before, this is a longer term opportunity where we want to be on the starting point, and really adapt as that market continues to evolve. And then just lastly, can you put a little bit of a finer point on where you are at exactly with the ramp of Ohio manufacturing, and with respect to whether you are fully up and running with your Indian contract manufacturing partner? So Ohio is fully operational, Matt. You and me being now Ohio resi -- long time me is Ohio resident, I am happy to walk you through our manufacturing facility anytime you want. And as far as India, we started setting that up early last year and we shipped the first couple of hundred units in December. So in both cases, we now feel we are fully operational and have met and have plans on what each of these factories will deliver for us throughout the year. No one have additional questions waiting at this time, so I'll turn the call back over to Octavio Marquez, CEO of Diebold Nixdorf. Please go ahead, your line is now open. Thank you, operator. And thank everyone who listened and participated in today's call. We look forward to seeing you at upcoming investor conferences and during our next earnings call. Thank you again.

EarningCall_85

Good morning, and welcome to the Victory Capital Fourth Quarter and Full Year 2022 Earnings Conference Call. All callers are in a listen-only mode. Following the company's prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Matthew Dennis, Chief of Staff and Director of Investor Relations. Please go ahead, Mr. Dennis. Thank you. Before I turn the call over to David Brown, I would like to remind you that during today's conference call, we may make a number of forward-looking statements. Please note that Victory Capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some of the risk factors that could cause actual results to differ materially from those expressed on today's call. Victory Capital assumes no duty and does not undertake any obligation to update any forward-looking statements. Our press release that was issued after the market closed yesterday disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance. Reconciliations between these non-GAAP measures and the most comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call, both of which are available on the Investor Relations portion of our website at ir.vcm.com. Thanks, Matt. Good morning, and welcome to Victory Capital's third quarter 2022 earnings conference call. I'm joined today by Michael Policarpo, our President, Chief Financial and Administrative Officer; as well as Matt Dennis, our Chief of Staff and Director of Investor Relations. I'll start today by providing an overview of the quarter and the full year period. Then I will cover our investment performance, which continues to be very strong. Then I will turn the call over to Mike to review the financial results in greater detail. Following our prepared remarks, Mike, Matt and I, will be available to take your questions. The quarterly business overview begins on Slide 5. 2022 was a history year for the asset management industry. The disruptions in both the equity and fixed income markets drove assets levels significantly lower across most asset classes with industry wide declines in year-over-year revenue and operating margins. While we are not immune to the market backdrop, I am very pleased with the results we reported last night. At the end of each year, I like to step back and take a long range view of our company and review our progress against our long-term strategy and goals. At the start of the year, we laid out several key strategic objectives and we have achieved tangible and measurable progress in each area. As part of that, we continue to make strategic investments in hiring, technology, data, and marketing and distribution during the year and we are seeing that these investments are beginning to pay us back. A good example of this gross long-term flows in 2022 were $33.3 billion which is 20% higher than the gross long-term flows of $27.9 billion generated in 2021 and 44% higher than gross long-term flows in 2020. The $6.5 billion in gross long-term flows achieved in the fourth quarter of 2022 is a record high for any fourth quarter period in our history. These results reinforce our strategy of investing in areas where we can make a meaningful impact on our business. Our long-term net flows were negative $2.5 billion during the year which equates to only 1.4% of the beginning of the year assets under management and pales in comparison to the more than $26 billion of negative market action we experienced since the beginning of the year. Specific to the fourth quarter, net long-term outflows were elevated. We experienced clients selling assets at an accelerated pace for a number of reasons including tax loss, harvesting, capital gain, distribution avoidance, and pivoting to risk off positions to name a few. To-date in 2023 our net long-term flows have improved materially across our business from the fourth quarter. Operating income rose 7% from $374 million in 2021 to $399 million in 2022. Full year adjusted EBITDA margin was 49.6% in 2022 which exceeded our long-term guidance of 49% and is a good representation of our margin defensibility during a very volatile year. Adjusted net income or tax benefit was $1.05 per dilute share in the quarter and $4.58 per diluted share for all of 2022. We continue to return capital to our shareholders in 2022. We were opportunistic in our share repurchases which accelerated in the second half of the year. In total we returned more than $200 million of capital to shareholders, which was more than three times the $62 million in capital returned in 2021. At the same time, we continued to reduce debt to increase our balance sheet flexibility. Based on our positive outlook of excess cash flow generation, the Board declared an increase of 28% in our quarterly cash dividend this quarter. Additionally, we have continued to make investments in our business in areas that can have the greatest impacts. These included expanding the use of data in all aspects of our business, enhancing our technology capabilities, investing in distribution, marketing, continuing to hire new talent, as well as expanding the products and service offerings available for our direct investors. While many in the industry are cutting their capital allocated to invest in their platform and people, we are not. We are continuing to invest and hire at the same steady pace we have maintained over the last few years, and we'll do the same thing in 2023 while also maintaining our long-term adjusted EBITDA margin guidance of 49%. Turning to Slide 7, you can see the strong investment performance we deliver on behalf of our clients has continued throughout the year and its final quarter. We had 44 mutual funds and ETFs with four or five star overall ratings from Morningstar. These products with four or five stars account for 62% of our AUM in mutual funds and ETFs. Additionally, approximately 80% of our total AUM outperformed benchmarks for the three, five, and 10-year measurement periods as of yearend. During the year, our WestEnd Advisors franchise secured new platform placements with seven firms. In addition, we experienced more than a 25% increase of new advisors opening their first account with WestEnd during New Year. This sets the foundation for solid organic growth as these new advisors expand the number of underlying clients utilizing WestEnd's models. 2023 is also off to a strong start with three of WestEnd's products being added to LPL's Model Wealth Portfolios platform, which is the flagship platform for many LPL advisors. We are also very well positioned from an investment performance and distribution standpoint to benefit from rotation back into fixed income. The increased shelf space we have secured for our USAA investments franchise outperforming fixed income products over the last few years, has us very well positioned to capture more market share as investors reallocate back to fixed income. Keep in mind, from a product offering perspective, we have mutual funds, separate accounts, and the ETFs available for this franchise. Turning to Slide 8. Cash flow generation remained strong during the fourth quarter and full year. Share repurchases totaled 4.6 million shares during the year, which was significantly higher than in prior years. We pivoted to allocating more of our excess free cash flow to share repurchases given equity market conditions, and specifically due to the price of VCTR. Additionally, we did continue to reduce debt and we maintained our growing ancillary cash dividend. The chart on the right of this slide illustrates respective full year 2022 capital allocations. Our strategy included deploying capital support, earnings growth, capital appreciation, and balance sheet flexibility, while at the same time rewarding shareholders with capital returns. We intend to maintain flexibility and strategically allocate excess capital to maximize long-term shareholder value creation. As we continue to conduct diligence on acquisition opportunities, we remain patient and selective. This approach has served us well over time. We are continuing to evaluate a number of opportunities and believe our patience and hard work will yield a positive outcome for our business and for our shareholders. Lastly, subsequent to year end, we announce a new addition to our corporate board. We welcomed Vice Admiral Mary Jackson as a new independent director of the company. Vice Admiral Jackson retired after serving the United States Navy for more than three decades. We look forward to her leadership and contributions to the Board. Thanks Dave and good morning everyone. The financial results review begins on Slide 10. Total AUM increased $5.7 billion or 4% in the quarter to $153 billion at the end of December. This was driven by more than $10 billion of positive market actions as the markets rebounded during the quarter. Revenue of $201 million in the fourth quarter was up 3% in the third quarter, which was consistent with the 3% decline in average AUM in the year's final quarter despite the higher point-to-point AUM. Full year 2022 revenue was $855 million. On a GAAP basis our operating income was $79.6 million in the fourth quarter and $399 million for the full year period. This compares with $89.8 million in the same quarter last year, and $374 million for all of 2021. The increase in year-over-year operating income is attributable to non-cash items, namely the change in value of contingent consideration for recent acquisitions. Adjusted EBITDA was $100 million in the fourth quarter and $424 million for the year. Our margins have held up better than most all companies in our sector. Adjusted EBITDA margin was 49.7% in the quarter and 49.6% in the full year. Adjusted net income with tax benefit was $74.5 million or $1.05 per diluted share in the fourth quarter and $331.2 million or $4.58 per diluted share for the full year. Looking at capital allocation, we returned a record amount of capital to shareholders during the year. In the fourth quarter, we returned $59 million to shareholders with $42 million of that through share repurchases and $17 million in dividends. Lastly, we increased our quarterly cash dividend by 28% to $0.32 per share, and that will be payable on March 27th to shareholders of record on March 10th. On Slide 11, you can see total AUM of $153 billion at the end of the year remains well diversified from a distribution channel and client perspective. This diversification has served us well in the current volatile market environment. Turning to Slide 12, long-term gross flows were $6.5 billion in the fourth quarter, which was the highest we've ever reported for a fourth quarter period. Full year gross long-term flows of $33.3 billion, also marked a new record. WestEnd Advisors, Sycamore, Sophus, and RS Global, each had positive net flows for 2022 and the fourth quarter represented the ninth consecutive quarter of positive net flows for our Victory Shares ETF business. We also earned a number of product recommendations and model allocations during 2022 that will support future sales activity. For example, Fidelity Strategic Advisors and Edward Jones made model allocations to trivalent and RS growth respectively and Schwab added the Victory shares USAA core intermediate term bond ETF to one of its models. In addition, our market neutral income fund was added to the recommended lists at Morgan Stanley, Merrill Lynch, Saterra [ph], Fifth Third Bank and LPL. And this was added to models at both Fidelity and LPL. Slide 13 illustrates our revenue by quarter. One note to make on this slide is our fee rate held up nicely and was 51.7 basis points in the quarter. On Slide 14, we break out our expenses which increased $10.5 million due primarily to an increase in non-cash expense related to the change in value of contingent consideration from recent acquisitions recorded in acquisition, restructuring and integration expenses. On a cash basis, compensation as a percentage of revenue held steady as designed at 24.5% and our variable operating expenses calibrated with our AUM and revenue. Moving on to our non-GAAP results on Slide 15, adjusted net income was $65 million in the fourth quarter. The tax benefit in the quarter increased to $9.5 million, reflecting the incremental tax benefit associated with the payment of the third USAA earnout payment of $37.5 million made in Q4. ANI with tax benefit was $74.5 million or $1.05 per diluted share. Our adjusted EBITDA margin came in very strong at 49.7% in the quarter. We're making no changes in maintaining our long-term guidance of 49% for 2023, which is inclusive of our continued investments in numerous areas to support our growth initiatives that Dave highlighted in his opening remarks. Lastly, turning to Slide 16, our net leverage ratio at year end was 2.4 times. We reduced debt by $150 million during the year through repayments and purchases in the open market. As a reminder, we are reducing the floating portion of our debt and not the $450 million of debt that we have hedged at 3.15% interest rate. In addition, our $100 million revolver remains undrawn. GAAP operating cash flow from operations was $67.1 million in the fourth quarter. So we were really pleased to see the robust levels of capital returns last year, especially the almost 5 million share buyback. Given the stock has rebounded nicely, how should we think about the process or buyback, especially in the first half of 2023 given any visibility you might have with the 10b5 programs? Good morning. So I would think of it this way. We're opportunistic in our share buyback and really it depends on the market conditions. We talked about in our script the last six months we leaned into buying shares because of the market. When we look at the market going forward we're going to take it week by week. That's part of an overall capital allocation strategy, which really the primary purpose of our capital allocation strategy is to really have a flexible balance sheet so we can go ahead and pursue acquisitions and the buyback and the dividend is ancillary to that. So we'll take it really week by week from the way the market behaves and the way our stock behaves. I'd reiterate what I said in our script that we think that the levels we're at today, there's really good value in our stock. But we'll see how the market does over this quarter and next quarter. And Dave, my followup is also on capital return. You know, with the dividend hike, I think your yield is now around 4%. You know, is the purpose there really to attract more of a long-term income focused shareholder based? Because I'm just thinking about where your stock valuation is today given your desire for M&A, and I know it's not a ton of capital, but why not focus more on buyback M&A versus the dividend hike going forward? Yes, it's a good question. I think we're taking a balanced approach. The dividend increase was not done to attract a certain type of shareholder. I think it was done for the purpose of rewarding shareholders that we have grown. We're secure enough in our financial position. We have a really positive outlook to the future and we think that the balance we have between debt pay down, buyback and dividend is the right balance. For 2022, if you go ahead and look at how we allocated capital, the majority of our capital allocation did go down to debt pay down. We also have a lot of different tools on M&A. We have an undrawn revolver. We have our structuring. We generate a lot of cash and we have a portion of our debt that as you know, that is hedged out at about 3% plus. So I think all-in-all, we look at the dividend as a component. The increase is a reward. It's not really being done to attract any certain type of investor. Hi, good morning, and thanks for taking my question. Wondering if you could just further expand upon your prepared remarks about being well positioned to potentially capture fixed income net flows. If the industry trends inflect, wonder if you just talk about product offerings any gaps and also your current distribution reach as well? Thanks. Yes, good morning. A great question and very timely. You know, so just to expand on what we said in the prepared remarks, we have 16 products under the USAA franchise. 15 of them I think are four or five star, which is about, it's really remarkable that we have this franchise with this excellent investment performance. We offer these products in ETF, a mutual fund, and also separate accounts. And we have intermediate, an intermediate term bond fund, a short-term bond fund, government securities fund and income fund, and then intermediate tax exempt. So we really do cover a lot of real estate from the fixed income and investors' perspective. Since the acquisition, we've spent a lot of time building out the distribution on the retail and intermediary side and also on the institutional side. We're starting to make some progress and we think as investors come back into fixed income, we hope that as we progress through the year and the Fed, what the Fed is going to do becomes much more clear, we think we're really well positioned with the investment performance. And then also this is a franchise that manages about $25 billion in assets, so it's a sizeable franchise that is deep in resources and has been doing this quite a long period of time. Great, very helpful there. And then perhaps on a more broader level, as you look out further this year, which strategies or areas do you see as key growth opportunities in terms of net flows, potentially? Thanks. So yeah, I'd start off not in any priority order, but I'd start off with WestEnd. You know, WestEnd Advisors was net flow positive in 2022 when a lot of their competitors weren't. They've got really solid investment performance. We like the model space. We have excellent distribution there, and it's expanding, so we're really excited about that opportunity. Mike mentioned our ETF platform Victory Shares, the consistency of flows there has been really impressive, and we're seeing that moving into 2023 and we don't see that changing, so we're excited about that part of our business. And then if you went into obviously the fixed income side which I just discussed, and then some of our other areas around Sycamore, RS Global, Sophus, Trivalent, those asset classes and those franchises really have had excellent investment performance and really good following and good distribution behind them. And then lastly, we also with our New Energy Capital acquisition we expect that to make progress as well and that's around private funds, and we're excited about that opportunity. So, you know, I guess I wanted to just maybe start on the fee rate here. It's remained relatively stable here and you've had a lot of kind of mix shift in your AUM here with the kind of some of the recent acquisitions. As we think about the fee rate here as you think about your growth profile for 2023? Good morning, Mike. Yes, I think as you mentioned, our fee rate has remained very stable. And I think as we look out in some of the areas that Dave just highlighted, we would expect that the fee rate will continue to be driven by both beta impact as well as asset mix, channel mix, product mix. As we think about opportunities for expansion of fee rate, we've talked a little bit about the fulcrum fees we have on some of our products that gives some upside. Those fulcrum fees were positive in the fourth quarter, about 0.1 basis points, and there is opportunity for upside on that. But as we think about the guidance going forward, I would say we'll be in the 52 basis point range. That will vary as we see changes in different products that have organic growth going forward. But that's kind of the level that we're looking at going forward. And the last thing I would obviously say this quite often, we're very focused on margins. So fee rates will continue to move slightly in different directions, but I think the power of our operating platform really allows us to focus on margins. Okay, great. And Michael, you talked a lot about the platform additions for a number of your various different affiliates. When you look back historically, how did those additions start to contribute to flows? Could you give some thought on maybe the magnitude of pickups that you’ve seen in the past and then maybe speak to how quickly some of those flow benefits start to come through? Yes, it’s Dave. I’d start with WestEnd. You look at WestEnd Advisors, we own that business for all of 2022, and that was net flow positive. So that’s a very fast addition. They had a really great existing distribution platform and we’re expanding that. You could go back to one that we did pre-IPO, which was our ETF platform. That was done in 2015, and that has been a consistent grower that took a little bit of time, but that has been a consistent grower. We also look at the opportunity that we have with the USAA fixed income investments and that as we see fixed income accelerate, we think that will be a grower. Today it's not, but we think that one will be a grower. The point is each one really has its own unique situation. The concept is to take really excellent investment franchises and really plug that into our distribution network and expand out their opportunity set to gain more clients. And that has lots of different perspectives on that, and that’s what ranges in the different time and the different examples. Good morning. Thanks for taking my questions. I’d like to start on the capital return side of things, buybacks robust again and you guys spoke to that a bit in a prior question. But one of the things that’s interesting when we speak to investors about Victory and the discount, as many point to the large private equity ownership and concern either, concern about when that ownership might end up winding down versus, or maybe that is a reason for the discount. So I’m curious about whether or not you have had any discussions with your owners. I appreciate that they probably don’t consider the current valuation levels as attractive to sell. And so it’s almost like a chicken and egg situation. What I’m trying to get at is, have you considered maybe a program with them that would allow you to allocate your buyback to chip away at their ownership, so that there could be a clear indication to the market that that ownership will grind down over time, which could allow for the private equity owners to see a path to exiting the position at an improving valuation and you could end up with a win-win situation? Yes, great question. I think first our private equity owners have liquidated and actually reduced their position quite significantly over the last few years and the ownership has come down quite significantly through a couple programs and so we’re happy with that. We also on the other hand, have done very well with the ownership of private equity. So having them as owners has not been a hindrance on the performance of the business. The board evaluates every time, every quarter, all different kinds of programs around what we do with our buyback, how we interact with our private equity shareholders. And so all of the things that you’ve mentioned we continue to evaluate. As we look forward, what we’re focused on is really performing from a business perspective. And we think the ownership structure will take care of itself over a period of time. And we think, as you have pointed out the discount, we think that’s a tremendous opportunity, entrance point for investors. Because those challenges are not business related, they’re really more ownership related. But I would really just sum it up saying that we’re focused on the business. We’re focused on growing the business, doing smart acquisitions, taking care of our clients and we’ll evaluate every quarter what we do with our buybacks and how we interact with the private equity sponsors. Yes. That’s all really fair. And that’s absolutely the right focus. So I really appreciate that. You spoke to getting added to some of your products added to models at LPL and many of us see the momentum behind those centralized models at that firm. Can you speak to -- do you know if there’s any typical lag or timing around when you start to see the benefits from getting added to those models and how we should think about the outlook for maybe even that lineup in those models getting expanded in the future? Sure. There’s definitely a lag. Every platform is different. Unless you’re getting a direct allocation from a CIO office or a home office, there will be a lag in time to educate the advisors to go out and do marketing material and to have meetings, so there is a lag. I couldn’t give you a timeframe, but we do know from history that getting onto platforms, getting into models is the first step in a process of getting more clients and getting positive flows. So we know it’s the beginning. And I think it’s a really, really important first step to an end point of really seeing nice, a nice impact on flows. Hi, good morning. Thanks for taking the questions. Maybe to follow-up on the model portfolio questions that we’ve heard throughout the call, were there an unusual number of additions this quarter or is this sort of, is there always sort of this level of additions, maybe there’s other subtractions and it’s just a normal course of business, and if there were an unusual number of additions this quarter why now? What has changed to sort of drive the interest in your products? Hi Ken. I would say that there’s probably a little bit more than usual this quarter. I don’t know if I have a reason. I could guess that some of it has to do with, maybe the market calming down a little bit and people focusing on thinking about the future as opposed to digesting what’s happening, given the market volatility. That would be my guess, but I would say just a little bit more than normal. But I don’t have a specific trend or two other than I think it’s just market conditions. Okay. And then for symmetry, any unusual eliminations of your products on platforms? Were there any offsets to the additions or were there largely gains this quarter? We had one large relationship that was ended, that was a relationship with a large amount of assets which impacted our total net flows for the fourth quarter. But I would make note that that was a very low fee and extremely low margin relationship. So it was a lot of assets, but not a lot of earnings. That’s with one kind of institutional type client, but other than that, nothing of note. Okay. And then I guess also flushing out some of the comments on New Energy and alternatives. How did things evolve throughout 2022? And you mentioned I think with regard to New Energy, a focus on privates, what is your outlook for the coming year? Again, just sort of flushing out some of your prior comments. So for 2022 and for New Energy, I think it was a platform setting, so it was that business working in within our environment and getting themselves ready for a growth phase. We’re positive from a private market perspective and especially what they do, and especially with a team that does it, given their long track record and the space that they operate in. And when I look out, in the future in 2023 and beyond, I think for Victory New Energy was the first alternatives acquisition we’ve done. That’s a potential area of interest for us. And I think that that’s a really positive part of our business that is really just beginning and something that we’re very interested in and we’re spending a lot of time on. Hey, good morning. Thanks for taking the question. Maybe just on M&A, you guys have been quite active over the years. Markets have been quite volatile, though financing costs have gotten a bit higher and bit that spreads have widen out. So just hoping you could maybe help update us on how you see the M&A backdrop today for Victory, how your conversations are evolving? Any color on what that pipeline looks like, size, magnitude, types of deals, and how those conversations have evolved in the past 12 months? Hi, Mike. So as I said in the script, we are very patient and selective as we’ve always been. As a public company, we’ve done four acquisitions in five years, so we’ve been really active. I think in those four acquisitions, I think we’ve done about $1.5 billion in capital. So we have, we’ve done very sizable deals in comparison to our size. And the way we see the market today is there’s a lot of discussions. There’s a lot of things happening and -- but doesn’t mean that there are a lot of good companies that are for sale. It doesn’t mean there are a lot of companies that fit with us. So we’re just continuing to move forward. It is part of our strategy. It’s not the only part of our strategy. And as I look at the environment with pricing, with cost of, with financing costs, we’re well positioned if we find something that works to execute on it with our balance sheet, with our history of the debt that we’ve used and then also with our structure, we feel really good, but if we find something we’ll do it. Great. And just on some of the more recent acquisitions that you’ve done with WestEnd, THB, NEC, can you maybe just help quantify how much of flows each of those three individually contributed in 2022? And could you elaborate on some of the distribution synergies you’ve been able to realize so far? So with WestEnd, I know part of the ambition was about selling to more advisors. How many more advisors are you guys selling to today? How many new platforms have you added that they’re selling onto? Thank you. Yes, so we don’t give specific flows for each franchise as you know, but I will tell you the three that you mentioned, if you accumulated their flow profile accumulated, all three of them are net flow positive. So if you look at, combined all of their flows that group will be net flow positive, so they’ve been additive to our net flow profile. As far as WestEnd specifically, I think we had some numbers in the script. We have added advisors, we’ve added multiple platforms and we’ve had that. We’ve also launched an ETF MODL [ph] as well. So we’re really, really pleased there. THB has been added to a couple large platforms, the SMA product. And then NEC as I said this year in 2022 and 2023, we are preparing for growth there as we go out and think about how you grow and raise private funds. So we’re really pleased with them. And if I think about the numbers, as I said, you put all three of them together, it’s net flow positive for 2022. There are no further questions at this time. I'll now turn the call back over to Mr. David Brown for closing remarks. Thank you for your interest in Victory Capital. Next week we will be in New York attending the BofA Securities Financial Services Conference. And in March we’ll be back in New York at the RBC Capital Markets Financial Institution’s Conference. We hope to see you there and look forward to keeping you updated on our progress as the year unfolds. Thank you for your interest in Victory.

EarningCall_86

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Sherritt International Fourth Quarter 2022 Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. I would like to remind everyone that this conference call is being recorded today, Thursday, February 9th at 10 o'clock Eastern Standard Time. Before we begin, I just want to make mention of a couple of items. As you know, we released our Q4 results last night. And all our disclosure materials, including the presentation, MD&A and financial statements are available on our website, as well as on SEDAR. As is customary, during today's call and webcast, we will be using a presentation that is available on our website and on the Investor Relations section. In addition, we will be making forward-looking statements and references to certain non-GAAP financial measures. Forward-looking statements can be found on slides three and non-GAAP measures discussion and reconciliations to the most directly comparable IFRS measures are included in the appendix to this presentation. With me today are Sherritt’s Chief Executive Officer, Leon Binedell; and Chief Financial Officer, Yasmin Gabriel, who will be reviewing our results in detail. Following this discussion, we will open the call up to questions. Thank you, Lucy, and good morning, everyone, and thank you for joining us today. 2022 was a very exciting year for us at Sherritt. On the strength of higher nickel and fertilizer prices we achieved strong operating and financial results, while at the same time delivering on each of our 2022 strategic priorities, as outlined on slide four. We are happy with our strong operating results, including significantly higher adjusted EBITDA, net earnings and are equally encouraged by the progress we were able to make on our strategic priorities, providing the building blocks for continued long-term success for Sherritt. Some of the key highlights that we will be touching on in more detail during this presentation include the advancement on our expansion program that we’ll see approximately 6,500 tonnes of new nickel and cobalt contained metals annually by 2024, the program that remains on time and budget. Advancing our new life-of-mine, which will conclude in a 43-101 technical report by the end of Q1 that we expect will confirm the extension of the life-of-mine at Moa to beyond 2040. Our buyback of almost $150 million in second lien secured and junior notes all at a discount, which strengthens our balance sheet and reduces our annual interest expense by about $13 million. Our transformative cobalt swap agreement with our Cuban partners to recover $368 million of legacy receivables. And in January, we received our first distribution under this agreement which Yasmin will touch on later. In our power business, the extension of our Moa Swap, as we call it, facilitates access to foreign currency to provide certainty to the business, enable to fund its foreign currency denominated operating, maintenance and capital expenses, but equally important pave the way for future dividends to be repatriated to Sherritt. Also in our power business, the extension of the Energas joint venture contract by 20 years to March 2043. And we entered an agreement with Open Mineral, our first collaboration agreement towards the application of one of our promising proprietary technologies in the precious metal sector. And we also see continued advancement on our very important sustainability initiatives. I'll provide an overview of operations and the status of our expansion program and ESG scores and Yasmin will provide commentary on our financial highlights. I will then conclude with an update on our 2020 outlook, looking at our guidance before we address any questions. Starting with the Moa joint venture, Q4 operating results outlined on slide six. Sherritt share of finished nickel and cobalt production was 4,112 tonnes and 423 tonnes of cobalt, 4% an 11% lower, respectively, than Q4 2021. Lower finished nickel and cobalt production during the quarter was the result of lower mixed sulfide availability at the refinery. The refinery utilized some of its available mixed sulfide feet inventory. However, this was tempered by lower-than-planned mixed sulfide production at the mine due to lower ore grades as a result of heavier than expected rainfall limiting access to some mining areas, coupled with some unplanned maintenance at the Leach plant, as well as lower availability of third-party feed for the refinery. Copper production was lower alongside nickel production and higher nickel to cobalt ratios in the mixed sulfide feet from Moa and a lack of historically profitable high cobalt bearing third-party feeds. Regarding NDCC or our net direct cash cost. As with much of 2022 when compared to 2021 the driving cost disruptor for our industry was input commodity prices. This quarter, again, we saw sulfur, diesel and fuel oil significantly higher than the prior year quarter. Details are included in the footnote. On a positive note for Sherritt, higher fertilizer prices resulted in significantly higher byproduct credits to offset some of the higher input commodity costs. However, due to lower cobalt sales in the quarter our NDCC was elevated above expected levels. On an annual basis, as outlined on slide seven. Sherritt share of finished vehicle production at the Moa JV was 16,134 tonnes, 3% higher than the 15,592 tonnes produced in 2021. This is primarily due to improved equipment reliability during the year and the drawdown of some feedstock inventory at the refinery. Cobalt production, however, was down 4% to 1,684 tonnes from 1,763 tonnes in 2021, primarily due to lower availability of historically profitable cobalt rich third-party feeds. 2022 finish nickel production was in-line with guidance, while finished cobalt productions was materially within guidance. On NDC, it was similarly impacted on a full-year basis by high input commodity prices, partly offset by higher net fertilizer byproduct credits. We were not able to fully benefit from our cobalt byproduct credits in 2022 due to slower than anticipated cobalt sales in the back half of 2022, due to significant market softening for cobalt. The Moa joint venture both inventory over 2022, which will benefit this year as the situation unwinds. In the near term market softness is likely to remain a challenge for cobalt. However, we see that stabilized over the course of 2023. Had we sold normalized volumes of cobalt in the second-half of the year, we would have been well within our cost guidance for the full-year. On slide eight, we summarize some of the key points of Moa JV expansion. As was mentioned in our last call, Sherritt approved an additional $50 million on 100% basis for the second phase of our joint-venture expansion plan, bringing the total expansion program to US$77 million on 100% basis. The expansion program has been developed to achieve a 20% increase in metal production at a low capital intensity of only US$13,200 per annual tonne of nickel added. With the market focus on EV batteries, we do see an opportunity to focus our strategy on increasing production of intermediary products that will enable us to fully utilize existing capacity at the refinery, but also consider direct sales of intermediate products into the EV battery supply-chain. We estimate that two-thirds of the increased Moa feed will be processed into finished nickel and cobalt using the remaining -- the refinery capacity and the remaining component will be sold into the EV battery supply-chain. We always retain the option to make improvements to the refinery to process all of the MSP for Moa. However, we do not believe at this time that any expansion capital may be required at the refinery. The program will be completed in two phases as outlined, the Slurry preparation plant and the Moa processing plant improvements. In Phase 1 of the program, the Slurry preparation plant or SPP is expected to be completed in early 2024 and is anticipated to deliver several benefits, including reduced ore haulage distances and lower carbon intensity from mining. Upon completion, it will increase MSP production from Moa by approximately 1,700 tonnes of contained nickel and cobalt annually. Completion of the second phase of the program, the Moa processing plant improvements planned for the end of 2024 is expected to increase annual MSD production by approximately additional 4,800 tonnes of contained metals annually and will also reduce our NDCC by approximately US$0.20 per pound. As a reminder, the expansion costs are expected to be funded by the joint-venture itself, not directly by Sherritt. We anticipate spending on growth capital to spread evenly over the remaining period. The joint-venture is expected to fund the capital primarily from operating cash flows, but may also seek to fund select components for the expansion program. Just to give everyone an idea of the progress to date. With regards to the SPP, 100% of the civil construction has been completed. 100% of materials and service contracts have been awarded and 65% of the steel pre-fabrication has been erected. For the Moa processing plant, the final feasibility study encompassing the full project scope has been submitted for approval to Cuban authorities and we expect that approval in Q1. That's for long-lead items for the six Leach train has been evaluated and will be expect to be awarded in Q1. Both of these phases remain on-budget and on-schedule. Turning to our power division on slide nine. Power production in Q4 was 159 gigawatt hours of electricity, up 2022 -- sorry, up 23% from Q4 2021. And on an annual basis, power production was 568 gigawatt hours or 26% higher than the prior year. Year-over-year, we have seen increased production as a result of better equipment reliability as much of the maintenance work was completed in 2021 and had a positive impact in 2022. In addition, the power division has been working on increasing additional gas to drive increased electricity production. And this was certainly a factor in Q4 in enabling us to meet our updated guidance for the year. As mentioned in our Q3 call. During the quarter, we signed an extension to our Moa Swap agreement alongside the cobalt swap, which provides power operations certainty on access to foreign currency through the Moa joint venture, thereby funding the foreign currency denominated operating, maintenance and capital cost of Energas, as well as covering future payments that would be able to share it, including dividends. With this agreement in place, we are excited that we also received approval for the extension of the Energas joint-venture contract through to 2043. The extension is economically beneficial as that is and always has been a consistent operating earnings generator for us and supports Sherritt’s ongoing investment in Cuba. For 2023, we continue to work with our Cuban partners to access additional gas supply for the Boca facility from two new gas wells to be drilled in Puerto Escondido, that are scheduled to be both be in production by Q4 of 2023. In Q4, Sherritt issued its 2021 sustainability, climate and tailings management reports, as well as its sustainability scorecard outlining our performance on ESG matters. The successes seen in 2021 carried out in 2022 as outlines on slide 10. We further improved our safety performance with the total recordable incident frequency rate and lost-time incident frequency rate decreasing 59% and 50%, respectively, between 2021 and 2022. We continue to meet safety and production targets at all our sites, prioritizing the health and safety of our employees, contractors and the communities in which we operate. Once again, in 2022 across all of our sites we had zero work-related fatalities, zero significant environmental incidents, zero security incidents involving any allegation of human rights abuses and no tailings related incidents. Additionally, in Q4 we received confirmation of conformity with the London Metals Exchange Track B responsible sourcing requirements. Sherritt received independent verification that its minerals are not associated with conflict. Risks such as human rights abuses, forced labor or corruption. We continue to progress our commitments to achieving net zero greenhouse gas emissions by 2050 with near term objectives of obtaining 15% of overall energy from renewable sources by 2030 and reducing nitrogen oxide emissions intensity by 10% next year. Further, we have initiated a greenhouse gas emissions baseline study in the Energas business and are advancing project planning for carbon capture opportunities at the Fort Site and solar power at Moa. Thanks, Leon. I'll start today with our key financial metrics on slide 12, adjusted EBITDA and net earnings. As you can see on this slide, our adjusted EBITDA in 2022 was almost $218 million or 94% higher than the previous year. Our net earnings from continuing operations was almost $64 million compared to a loss in the previous year of $30 million. These results were driven primarily by higher nickel and fertilizer sales volumes and realized prices, partly offset by higher input commodity prices and the $17.5 million, share-based compensation expense resulting from a full-year of additional units vesting and the appreciation in our share price. Also impacting EBITDA was $15 million noncash [indiscernible] loss relating to legacy oil and gas Sherritt assets. 2022 net earnings from continuing operations was also impacted by the recognition of a $49 million noncash loss on the revaluation of allowances for expected credit losses on the Energas receivable related to the implementation of the cobalt swap agreement and almost $21 million gain on the repurchase notes. On an adjusted basis, removing the impact of these non-cash items, we had adjusted net earnings from continuing operations of $88 million compared to an adjusted net loss of $14 million in 2021. These strong market fundamentals drove our 2022 earnings and allowed us to take advantage of opportunities to strengthen our balance sheet, which I'll cover next. Moving on to slide 13, at the beginning of December with oversubscribed offers we maximized through debt repurchase, with an aggregate repurchase of almost $90 million in principal of our second-lien secured and junior notes at a discounted value of $80 million. Including the repurchase in Q2, we repurchased an aggregate of almost $150 million in principal of these notes in 2022 at 16% discount, reducing our principal debt by 35% from the beginning of year and reducing our annual interest expense by approximately $13 million. These note repurchases reinforce our positive outlook on our operations and together with our cobalt swap, which I'll speak to next, strengthened our balance sheet and will generate value for stakeholders. Turning now to slide 14, as we disclosed on our last call, in Q4 we finalized a transformative agreement with our Cuban partners to recover $368 million of total outstanding Cudam receivables over five years putting an end to the long-standing uncertainty related to these receivables. Under this agreement, which became effective on January first of this year the Moa joint-venture prioritizes distribution in the form of finished cobalt to each partner, up to an annual maximum volume of cobalt, with any additional distributions in a given year to be paid-in cash. All of our Cuban partners who share these cobalt distributions will be redirected to Sherritt as payments against these receivable. If the total value of cobalt distributed by the Moa joint venture is lower than the US$114 million minimum all-cash distributions will be redirected to Sherritt until this dollar threshold is met. And as you can see here on slide 13, under the agreement, we expect to receive over $700 million in cobalt and cash distributions over the next five years and this amount excludes any potential distributions over and above the cobalt swap agreement. Further, we expect to receive the majority of these payments prior to the majority – maturity of the second-lien notes in November 2025. In January, the first month in which the agreement was effective, we received our first distribution of 760 tonnes of cobalt, representing 37% to be annual Cobalt volume under the agreement. That have an in-kind value of $36 million. Half of this amount was received as a distribution to Sherritt from the Moa joint venture and the other half, which represents Cuban partners share has been used for the settlement of the outstanding receivable. All of this, cobalt is insurance possession and is being sold into existing customer contracts and on the open-market. Finally, in exchange for these benefits, we agreed to forego interest over the repayment period on the condition that full amount is received within the five year timeframe as an incentive. This adjustment resulted in a noncash loss, we recorded this year that I noted earlier. Further detail on the mechanics of the cobalt swap agreement can be found in both our press release and MD&A. Finally, turning to our liquidity position on slide 15. At the end of Q4 our total liquidity was $178 million, down from [$220] (ph) million at the start of the year. The decrease in our available liquidity reflects the almost $150 million repurchase of our second-lien junior notes for $125 million of cash. As well as the $29 million of cash interest paid on the second-lien notes and $28 million of capital spending. This was offset by strong distribution from Moa joint venture of approximately $100 million and $31 million of net fertilizer received. In addition, I'll note that with the cobalt swap distribution in January, Sherritt now has available finished cobalt inventory with an in-kind value of $36 million, which is expected to be converted into cash in the coming months. Thank you, Jasmine. Looking ahead at 2023 outlined on slide 17. We view this as a transitionary year for the Moa joint venture as we continue to deliver plant capacity expansion and implement our updated life-of-mine plan utilizing an economic cut-off grade methodology. The updated life-of-mine plan will be reflected in the revised 43-101 report expected in the first quarter and is expected to extend the current operation to beyond 2040. The Moa joint venture production guidance is slightly lower for 2023 compared to guidance figures provided in previous years, as we prepared to execute on our expansion plan for 2024 and transition to the new life-of-mine plan. We also anticipate reduced reliance on low-margin third-party feeds. Transitioning to the new optimized mine plan, we'll see the joint-venture access new mining areas and built blending stockpiles, both impacting Moa production capacity in 2023. This will set us up for growth in 2024. As a result, finished nickel production is forecast to be in the range of 30,000 tonnes to 32,000 tonnes on 100% basis, while finished cobalt production is forecast to be between 3,100 tonnes, 3,4 00 tonnes on 100% basis. NDCC at the Moa joint venture is forecast to be in the range of US$5 to US$5.50 per pound of finished nickel sold, primarily as a result of lower forecast cobalt and net fertilizer byproduct credits, offset by moderating input prices. At our Power business, production is expected to be higher than in 2022 as we continue to work with our Cuban partners to increase access to additional gas supply, particularly from developing two new gas wells on an existing field in 2023. Unit operating costs are expected to be higher in 2022 due to the planned gas and steam turbine maintenance in preparation for the additional gas supply later this year. Finally, I just want to spend a minute on our strategic priorities for 2023 as outlined on slide 18. As I said at the beginning, the success we had in meeting our priorities in 2020 built the foundation for future successes. We will continue to execute our expansion program and we expect to adopt and implement the new optimized life-of-mine plan. We'll leverage collections on our cobalt swap. And we'll look to further opportunities to strengthen the balance sheet this year. We’ll continue to advance our technologies and anticipate further collaboration agreements to advance the commercialization of our proprietary technologies. And as I said earlier, we continue to work with our Cuban partners to access additional gas to provide much needed electricity to the Cuban power grid. On the ESG front, we remain focused on keeping our employees and communities safe each day as we make progress on our long-term ESG targets. Just to sum up 2022, on slide 19, it was a pivotal year for Sherritt in that we put in-place a number of key elements that deal with legacy challenges and position the business going forward. In a market driven by higher nickel prices, we began a low capital intensity expansion program and reduced our long-term debt substantially. We also strengthened cash flows with the implementation of cobalt and Moa swaps. I'd like to thank everyone for their time today. And operator, I'd like to now turn the call over for questions. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Gordon Lawson at Paradigm. Please go ahead. Hey, good morning, everyone. So with cash cost in the current range, you mentioned a $0.20 reduction based on NSP, but can you talk about your expectations beyond 2023 as it relates to other components and Phase 2. So what we've outlined today and also when we announced the expansion is that, we expect that the expansion volumes will drive our NDCC down by around $0.20 per pound from 2025 when those volumes come into play. But in terms of our guidance for 2023, we see a range of $5 to $5.50 based on current cobalt pricing environment as well as fertilizer pricing environment which are lower than 2022. But those are offset by moderate input commodity prices that we've seen migrating closer towards 2021 levels. Okay, thank you. And you're talking about nickel sulfate. Can you provide further guidance as to what shipping costs and pricing you're expecting in various geographical region? At this stage what we anticipate, given current market dynamics is that, they are fairly high pay abilities for intermediate products. And we'll see how the market shapes up. We have not provided any guidance as to what we expect those pay abilities to be at this stage as we are in early stage conversations with potential customers. However, we do hold the option should pay abilities not play out to justify the margin loss on refining metal we would convert back into full refining of all of Moa MSP and take advantage of producing refined nickel product to capture the full margin if you will. Currently, the capacity is sufficient to be able to process two-thirds of the additional volume. The other remaining third, we anticipate we could through operating improvements and some other smaller debottlenecking activities, able to capture some of that, but we still hold the option to do some additional capital at the refinery to capture the full volume. Okay, okay. And just one more if I may, seeing the impact on EBITDA could you talk about expenses related to both the oil and gas as well the technology division and what to expect going forward? So currently we are not producing any well, in the oil business as we've outlined, but while providing some services to a third-party in drilling services, while we are in process in seeking earning partners or alternatives for our oil business for the long-term. In terms of the drilling services we also providing some of those services to access the additional gas wells for the power business. So there is services revenue anticipated in 2023. In terms of the technologies business, it is premature for us to engage in discussions around what EBITDA contribution those may be. The nature of those endeavors in commercializing the technologies business it's more akin to M&A, transaction based or participating in developing of new opportunities. So it will be premature until those opportunities are fully fleshed to be able to comment on what those EBITDA contributors might be, but we are very encouraged by the first agreement that we signed with open minerals to explore using those technologies in the precious metal space. Thanks, operator. So few questions around the cobalt, obviously, prices have fallen off a bit. If I understand the swap agreement correctly, you are to receive 50% of the distributions redirected to an aggregate of US$57 million and if you look at what the 2027 and assuming half of that is what's been redirected from JV to cover the receivable, you kind of on pace for the year, you have $36.5 million, which is about $20 million shy of that number. So, does that just come out of the JV in terms of redirected cash flow towards yourselves and does that concern you at all, given obviously the CapEx plans that the JV has ongoing. Thanks for the question. I did want to clarify in terms of the total value of the cobalt we're expecting it is US$114 annually, and that is 50:50 split, so 50% of that would be towards the receivable, the settlement of the receivable. Based on our forecast and the capital spending and our outlook, we're confident that Moa joint venture can support both the expected capital expenditures, as well as be able to distribute at least US$114 required for the cobalt swap. Yeah. And I think, just on your comment around if the cobalt prices below the reference price when we struck the volume of cobalt. That deficit if that exists will be made-up in cash dividends. And right now with the nickel market being as robust as it is, there is no concern that we will not be able to reach that minimum level of at least US$57 million cash. Whether it's Cobalt [indiscernible] Right. And so, does that -- I guess it's technically a cash distribution from the JV, but it cover these shortfalls. But you will receive a dividend that's payable in Q4 on an annual basis or is there like a quarterly run-rate, that would be topped up. So we -- the distributions are made from the joint-venture monthly. First, in the form of cobalt and then if that US$114 million threshold is not met, then it through cash distributions. Okay, and then has there been any consideration of alternative ways to monetize the swap. I mean, is your partner centralized maybe just selling all that cobalt now putting the cash drag down the receivables are third-parties that are interested in, obviously, cobalt [indiscernible] but is there any alternative ways to monetize that swap? So as I mentioned where we do receive title to that product once it's distributed. And we're currently selling that to existing customer contracts and on the open-market. We will consider alternatives to monetize any of the excess, but that will be dependent on-market conditions or contractual terms. But that is something that would be a possibility, it and it's something that we would looking to. And then just one last one, just on kind of sticking with the cobalt. We're obviously lower than the budgeted amount in your guidance. But any indication of how the sulfur is trending. We've seen asset prices elsewhere come down just wondering how domestically that looks for you in Cuba, and if that's enough to offset kind of what we've seen in terms of the weakness to cobalt market. Yes, it's a good question and a good observation. In terms of sulfur, as I mentioned, we are trending closer towards where sulfur pricing on a landed basis was in 2021, we've guided around $230 per tonne delivered at Moa. Last year was around $450 in 2022, so substantially lower than that on sulfur front. And so that is a significant offset to the lower cobalt prices that we've seen. So we've seen that moderation on input commodity prices, as you mentioned. And that's countering some of the moderation in cobalt prices in 2023 and so that's why we've guided NDCC broadly in-line with where we landed on NDCC for 2022. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.

EarningCall_87

Good morning. And welcome to Construction Partners, Incorporated First Quarter 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. Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review the first quarter results for fiscal 2023. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the Investor Relations section of constructionpartners.net. Information recorded on this call speaks only as of today, February 10, 2023. So please be advised that any time sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance, are forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that, that by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to yesterday's earnings press release for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings press release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. Thank you, Rick, and good morning, everyone. With me on the call today are Alan Palmer, our Chief Financial Officer; and Ned Fleming, our Executive Chairman, as well as other members of our senior management team. I'd like to start by thanking our approximately 4,000 dedicated employees throughout our now six states in the Southeast for their focus on safety and taking care of their teammates each day at our job sites and plant sites. I believe our talented workforce is our most valuable asset and will continue to create a competitive advantage for our company. CPI had a good first quarter to begin our fiscal year 2023, with revenue growth of 20% year-over-year, a positive sign that our efforts to capture inflation in new bids is working, and will continue throughout the year to positively impact the results. This quarter, throughout our footprint, we experienced inclement weather for two thirds of the quarter with above average precipitation in November and December, resulting in a reduced number of productive work days. These weather impacts show up mainly in fixed cost recovery at our plants and fleet and create extra project costs. We approximate an abnormal weather impact in Q1 of approximately $4 million. However, weather impacts can go both ways, such as last year's first quarter which have below average precipitation that allowed us to over recover our fixed assets. In our line of work, usually over the course of a full year, the weather tends to even out. Another factor this quarter that we did plan for was the completion of the majority of our remaining low gross margin projects from our pre-inflationary backlog that was bid prior to October 1, 2021. Our customers typically need their projects to complete the final paving before winter. So as expected, most of these older projects wrapped up construction in our first quarter and then represented approximately $50 million of revenue with little or no gross profit. In our annual financial plan for FY23, the combination of completing these older projects in the first half of the year and then moving almost exclusively to higher margin backlog during the work season creates a margin profile more heavily weighted towards the second half than normal. Over the past five years, CPI's average split of EBITDA has been 33% in the first half of the year and 67% in the second half of the year. In FY23, we anticipate this being close to 27% in the first half and 73% in the second half. We are right on track with our plan for the year and our external environment is slowly but surely returning to normal. Both of these factors give us confidence today to revise our annual guidance and raise the midpoints for revenue, EBITDA and net income. We are pleased to report another record backlog this quarter of $1.47 billion, demonstrating that the demand environment remains strong in both the public and private sectors. Public infrastructure lettings are beginning to deploy the IIJA funding impacting each of our six states for their highway and bridge projects, airport renovations and expansions and other types of infrastructure. Over the last two years, CPI has focused on preparing our organization and workforce and we're now ready to capitalize on this generational investment in infrastructure over the next six to eight years. We continue to see a steady amount of commercial bid opportunities on both nonresidential and residential projects. We believe the private markets will continue to be bolstered in our Southeast footprint by the strong migration of new residents and businesses into these states. This month, a National Association of REALTORS study measured the top states in 2022 for net migration gains, and five of the top six were CPI states. This strong demand for our services not only continues to keep revenue backlog high, but also has allowed pricing in the new backlog to remain at the higher margins in line with backlog added the previous three quarters. We will continue to leverage this demand environment in our Southeastern footprint to add future work at attractive margins. During the first quarter, we also integrated two strategic acquisitions: a bolt-on company in Nashville, Tennessee, our first interest into that state; and a new platform company in North Carolina. Both of these expansions represent excellent new markets for CPI, adding six asphalt plants, while expanding our workforce. We welcome Ferebee Corporation and a 150 new teammates to the CPI family as the platform company in the Charlotte metro area and Western North Carolina. The Ferebee team is an impressive group of construction professionals and the company will continue to be led by Chris and David Ferebee. Throughout CPI's history, a platform company once established, has served as a catalyst for dynamic growth throughout a state or region, as demonstrated last year with the addition of King asphalt in South Carolina. We're excited that with Ferebee Corporation, we now have a well run platform company with a great reputation in one of the fastest growing regions in the country. Right before Thanksgiving in our last earnings call, CPI entered the Nashville metro area with a purchase of three HMA plants and the construction operation from Blue Water Industries. I'm pleased to report that the initial integration led by our Wiregrass Construction team and nearby Huntsville has grown very well. The construction operation is staffed with experienced and talented personnel, and we will be entering the first heavy work season in Tennessee with a full backlog of good work. And as you would expect in the fast growing Nashville suburbs, we are pleased with the amount of bidding opportunities and potential for future organic growth. Turning now to growth initiatives. We continue to evaluate attractive investment opportunities in all three of our levers for growth. First, organic growth in our existing markets, such as last year's 24% organic growth and 8.7% in our first quarter. Secondly, greenfield investments in new asphalt plants and vertical integration facilities, such as the new asphalt terminal in Alabama we announced last quarter. And finally, strategic acquisitions in new markets such as our recent entry into Charlotte, Nashville. CPI will continue to carefully evaluate each opportunity and to use all three of these types of growth in making smart long term investments that continue to grow the company. To fund these growth investments, we will continue to generate strong cash flow from ongoing operations. CPI, throughout its history, has generated strong free cash flow with a typical free cash flow conversion rate in the range of 50% to 60% of adjusted EBITDA. Over the last two years, CPI has invested this cash flow into numerous attractive long term investments, which have generated 22% adjusted EBITDA growth last fiscal year despite a challenging macro environment, and this year is on track to generate 35% to 40% growth in adjusted EBITDA. As CPI expands its footprint and continues to consolidate markets, margins will increase, growth will continue and shareholder value will compound. As CPI grows, we benefit from scale in our fixed costs. After significant investments in our organization to prepare for growth over the last two years, we now anticipate in our revised outlook that general and administrative expense will be in the range of 8% to 8.2% or 20 to 30 basis points lower than last year. As a growth company, we must stay ahead of the curve in preparing and investing for future growth as we did in FY21 and FY22. This will allow us to capitalize on efficiencies of scale at CPI over time and expand bottom line margins. Finally, this fiscal year should have our typical seasonality, revenue being realized approximately 40% in the first half of the year and 60% in the second half and our fixed asset recovery, having our normal under recovery in the first half of the year and over recovery in the second half of the year during our busy work season. We are excited for the year ahead and we expect to achieve significant top line and bottom line growth, supported by strong customer demand and project funding. I'd now like to turn the call over to Alan. Thank you, Jule, and good morning, everyone. I will begin with a review of our key performance metrics in the first quarter of fiscal 2023 before discussing our revised 2023 outlook. Revenue was $341.8 million, up 20% compared to the prior year quarter. The mix of our total revenue growth for the quarter was approximately 8.7% organic revenue and approximately 11.3% from recent acquisitions. Gross profit was $30.5 million in the first quarter compared to $33 million in the same quarter last year due to the factors that Jule discussed during his remarks. General and administrative expense as a percentage of total revenue in the quarter was 8.7% compared to 8.8% in the same quarter last year. Net income was $1.9 million in the first quarter compared to $5.5 million in the same quarter last year. Adjusted EBITDA in the first quarter was $27.6 million, an increase of 4.7% compared to the same quarter last year. You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today's press release. Turning now to the balance sheet. At December 31, 2022, we had $43.5 million of cash, $269 million of principal outstanding under the term loan and $158 of principle outstanding under the revolving credit facility. We have availability of $182 million under the credit facility, net of a reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 2.96. This liquidity provides financial flexibility and capital capacity for potential near term acquisitions allowing us to respond to growth opportunities when they arise. During three months ended December 31, 2022, cash used in investing activities was $70.7 million, of which $77.2 million related to acquisitions completed in the period and $31.6 million was invested in property, plant and equipment, partially offset by $1.6 million of proceeds from the sale of the property, plant and equipment and $36.4 million of net proceeds from the facility exchange. The company's interest rate swap contract is at a SOFR rate of 1.85%, which expects the company's interest rate during the quarter at 3.7% on $300 million of our debt. The maturity date of this swap is June 30, 2027. During the three months ended December 31, 2022, cash provided by financing activities was $49.7 million. We received $53 million of proceeds from our revolving credit facility, primarily used for acquisitions completed in the period. This cash flow was offset by $3.1 million of principal payments on long term debt. Cash provided by operating activities, net of acquisitions, was $28.9 million for the three months ended December 31, 2022 compared to a use of $0.6 million for the same period last year. Capital expenditures were $31.6 million. We expect capital expenditures for fiscal 2023 to be in the range of $85 million to $90 million. This includes maintenance CapEx of approximately 3.25% of revenue. So the remaining cash invested is funding growth initiatives. Today, we are revising our fiscal year 2023 outlook by raising the lower ends of our estimates. We expect revenue in the range of $1.47 billion to $1.55 billion, net income in the range of $30 million to $40 million and adjusted EBITDA in the range of $145 million to $160 million. And finally as Jule mentioned, we’re reporting a record project backlog of $1.47 billion at December 31, 2022. Can you talk about -- and I apologize if you mentioned upfront, I've had a bunch of things juggling this morning. Some of the material shortages that the industry has seen kind of last year, does that seem like that that's going to be another headwind for you guys in the coming year, or any sort of update on that would be great? Stanley, I did mention that our external environment is normalizing, and that's part of it. We see that slowly, but surely, a lot of supply chain issues that kinks are starting to get worked out. It's nowhere near normal yet, but it's getting better. We've mentioned in the past, cement in South Carolina and rock in Georgia and Florida and pipe, all of those -- these suppliers want to sell their products. So the market forces that you would expect to solve those, they're working. It just takes time. But I would say we see things getting better and we don't anticipate those being a headwind this year. And then in terms of like bidding activity, I mean, you still see pretty normal bidding activity across the market. I was just curious if maybe some of the softness in the headline numbers we see in the residential market is causing increased bidding activity in some of your core like highway and some of the commercial work? Stanley, no, bidding is still very busy, let's take the public markets. The Infrastructure Act is in full swing now. And so we're seeing very healthy public lettings at the DOT level and with airports, just a lot of infrastructure on the public side. And that's good and we've been expecting that, and it's now hitting. On the private side, you're seeing a lot of industrial and retail bids as as we have. I've been watching the residential market and thinking, okay, is it going to fall off? And we just haven't really seen a big fall off. We've seen maybe where two years ago, a developer would say, we want to build this whole subdivision and bring on hundreds of lots upfront. What we're seeing now is they say, we want to start and build Phase 1 and bring on 50 lots and just take it in more bite sized pieces. But I think I mentioned the migration to the south. I think that that's helping the residential market, maybe just go from white hot to good and steady. But we really haven't seen a big drop off in residential in our markets yet. I guess just a point of clarification. When you mentioned that weather was a $4 million impact, I'm guessing that's EBITDA, not revenue. Is that right? Do you know -- can you estimate what the revenue hit was from that as well, or maybe any more detail on that? Andy, I mean, you can see on the revenue, we'd be -- I think where weather hurt us is our internal production of like asphalt tons and our own equipment use. So if we had, had those weather days that were impacted, we probably would have seen $10 million to $15 million more of actual top line revenue. But the bigger impact was on the number of tonnes we ran through our asphalt plants and the equipment usage utilization that we got. So that $4 million we're talking about is under absorption of fixed costs at our asphalt plants and our own equipment use. So it's not as much revenue as it is that utilization of those hot mix asphalt plants and that fixed cost recovery. I just thought maybe I'd ask about some of the other external factors, Jule, that you'd cited previously and kind of get your updated thoughts on these, and specifically regarding labor, its availability. Are you able to keep the man hours that you need and the rate per hour as expected? And maybe some of the other things like some of the trucking costs, I know we're -- for a while there were getting kind of tight. So I thought maybe have you address those. On the labor markets, I would say it's gotten a lot better since the summer of 2021 when that really was some of the ankle weights we talked about. I think part of it getting better is the housing market as it does slow down a little bit, it eats a lot of labor up. Part of it is more people are coming back to work after COVID. And part of it is, I told you, we would adjust to make sure that we had the labor we did. So we put a lot of programs in place that are working. We offer great benefits, a great pay, and then we try to create a career path for all these employees. And so I think all of that's working together. So I really don't hear a lot about labor now. I think we're doing a good job staffing our crews, that's really not an impact. Old trucking costs, part of the labor thing is I think truck drivers are not quite as hard to get as they were back when you just -- a year ago, it was very difficult to get truck drivers, and so that's helpful. But I do think -- you asked about trucking costs. I think it's important. We don't anticipate construction inflation moderating to normal quickly. You read in the newspapers about inflation moderating, but construction inflation, I think, is at a different scale and on different timing. And I think with the amount of money flowing through for infrastructure, we are certainly not letting our guard down on getting inflation in our bids and making sure we pass that along. And I think it will be elevated more than the top line CPI number. So that's the color I would have around inflation. And then, I guess, just kind of my final question dovetails on that last one a little bit, which was on these acquisitions, and one of them is one in North Carolina, obviously, a larger platform. I guess I was hoping maybe, Alan, first, if you could comment on how much backlog was acquired or maybe guidepost you want to give us on how much revenue you expect? But maybe as important or maybe more important, with the dynamic inflationary environments and the challenges about getting margin, can you talk about how well you're able to scrub that backlog and the confidence that you have, and if the newly acquired backlog and its ability to deliver product margins in line or above kind of what CPI would have done on its own? I mean, as far as the backlog, I think Jule in his comments stated that it was a very strong backlog, both in North Carolina with platform acquisition and in Tennessee. So we were very pleased with that. And then the bid opportunities in both of those markets, as you can imagine, are extremely good, even post acquisition. So the total backlog from both of them was in the range of about $70 million. And we're in there evaluating that backlog. But what we're seeing is it's a good healthy backlog. We don't see it having -- of course, just a dollar amount, it's not going to have a significant impact on our overall margin. But we don't see it being anything -- a lot of problems that we've got to work through. Fortunately, they were kind of in the same place that we were in bidding that work. They -- like we do, these are shorter duration contracts. So they've got costs built into them, we're seeing that. They've not bid on that pre-inflation cost, they've got acclerators in them just like we putting in. So that was very pleasing. So we think it's going to be a good strong healthy backlog. And again, it's part of just they were at the same place in the cycle and have the same sequence of completing jobs quickly that we do. Lots of good stuff in the preamble, but I do kind of want to go back to margins. So I appreciate you guys reported, call it, $28 million of EBITDA, but that does include a gain on sale. And I know there are gains time to time, but maybe not to the magnitude of this. So clearly, there's a lot of moving parts in EBITDA. But Alan, I don't know if you've done this, but if you were to normalize the gains, normalize the weather and the $50 million of no gross profit revenue. Do you have any idea of what that cleaned up Q1 margin might have been? I mean my simple math would maybe indicate that margins were more flat year-over-year, but just any color there would be super helpful. As far as the gross profit margins, you're exactly right. I mean the $50 million of revenue, if you just say on the low side, that would have been about 10% gross profit that would have added about another 1.5%. So that gets you to about 10.5%. And then compared to last year, the $4 million that Jule mentioned about, the weather impact on cost recovery, that's about another 1.2%. So you get -- that will get you right about or at the same margin we had last year for that. And as Jule said, that was a very positive first quarter for us, because of weather and other things with cost recovery. So you would be pretty comfortable to that same margin at the gross profit and then that takes out the gain and that would get you to the probably slightly higher on the EBITDA margin, but the gross profit margin, it would get you higher. And then, of course, we said the G&A is about 20 basis points lower than last year. And so just big picture though, if we think about and specifically EBITDA margins, you would kind of expect those to start trending up year-over-year starting here in Q2, Q3, Q4. Is that right? Yes, more Q3 and Q4. Q2, I think we've kind of given you some idea that the back end of this year is going to be more loaded as far as kind of the change in the margin profile from the first half to the second half, but that's certainly what we expect. And as said we've got about $35 million more of this no margin backlog that will be spread out over the -- more over the full year than it was in this first quarter, but real strong margin improvement. So our second half of the year compared to those same periods last year should be where we start to see a pretty big difference in the margin. And then a couple of other quick modeling. So I think asphalt was still up about 30% year-over-year in Q1. Do you have what the asphalt index adjustment revenue was in the quarter? We had $4.7 million in this quarter. And a lot of that is related to those older projects. So we expect that to drop off pretty significantly, because we bid projects that we're beginning to do with that. So is that really old pre-September 30th, '21 backlog goes away, those indexes will go the other way and they'll stop and they could possibly, even if liquid asphalt stays down, they could start taking some revenue away from us. One of the things that we did in our prepared remarks is we gave sort of the first half and back half spread of EBITDA, which we really haven't done before, but it's really hard to look at this business quarterly. We look at it annually, we give annual guidance. But we do look at the first half and the second half. And we saw that this year was weighted more toward the second half and we wanted to communicate that clearly to you. So it's a little different this year. And overall, we're right on track with annual plan, it's just weighted a little differently. And so just that's the reason we gave that color. It's extremely helpful, believe me. Very helpful on the modeling side. So one other question, though, just kind of a final question is around cash flow. And you guys kind of addressed it up in the front. So I think you said 50% to 60% conversion, is that right? Is that free cash flow? I may have missed that… Well, no, I was going to say -- so that's from a free cash flow basis, which has CapEx obviously in it. But when we think about cash from operations, because I've gotten this question a lot about the working capital consumption in the business. Is there something around acquisitions that require some of that working capital consumption? Just trying to understand how to think about particularly the cash from operations whether it's as a percentage of EBITDA or just some kind of construct to think about going forward. Tyler, we wanted to share, from a big picture standpoint, and then I'll let Alan give more of the details. But CPI throughout its history has generated strong cash from operations. And in past years where we haven't done a lot of acquisitions or growth initiatives, cash builds up very quickly. And we thought it was important to communicate that, because if we have this cash building up and we have these growth opportunities that we think are good for the shareholders, we think it's smart to invest in that, and we've done a lot of that in the last two years. But when you take -- and you just say, what does it take to maintain the business. You take the EBITDA and you pay your taxes and interest. And then you just maintenance -- you have maintenance CapEx, that creates about 50% to 60% of your cash flow from operations is free. And we just, within the amount of opportunities we've had, we feel like it's the smart thing to do to invest that for long term compounding of shareholder value. I'll let Alan give more of the details, but that's something we thought was important to start communicating. I'd just point out, and I think this quarter of this year compared to the same quarter of last year, is a real good example of something that I've been saying before that the timing of when we get our revenue in the quarter, the first month and second month of the quarter versus the last month of the quarter, has a big impact on that because we bill 100% of our revenue after the end of the month. But if you look last year, we had better margins, as we've talked about. We had real strong revenue last year in December, less in October and real strong in November. This year, as we've said, the weather impacted us more in November and December. So what you look at is the cash flow from operations this year because December and even November are slower months in the quarter, it was $29 million. Last year, it was a negative cash flow from operations because we did so much revenue in December, which was the last month of the quarter. But back on a bigger scale and you pointed something out there, when we acquired Ferebee, it was at the very end of the quarter, it was in the first of December. But because it was an acquisition that included their working capital, we did not have to fund that working capital, which would have been $9 million or $10 million roughly out of our cash flow from operating activities, it was part of down in the purchase price, where other periods, if we buy a company and we're not buying the working capital, then it shows up as working capital. We have to fund out of that first month and that ends up in that first quarter that we report. So that's a, say, $10 million difference that would have come out of operating cash flow if it had not been a platform company where we acquire the working capital. So those are things, nuances, that can make a difference. But again, last year, the organic revenue was higher in the quarter. And again, if it happens at the end of the quarter, that working capital cash flow doesn't show up until the next following quarter. Yes. No, I appreciate all the detail. I'm still kind of figuring it all out here, but just very helpful. It's a cash generative model, and I was just trying to understand that better. Can you just help us understand with where liquid asphalt is today? It rolled over pretty hard. I realize, Alan, it might take a bite out of your revenue in the back half, but does it help your margin? Maybe you can just remind us how do think about that lag between your price and liquid asphalt and how that rolls through? It has to do with when we bid the job. Like this quarter, we got $4.7 million worth of revenue related to them paying us for the higher cost liquid compared to when we bid the job. So it adds revenue, but zero profit on that. So when it's adding revenue, it has a slight impact on your margin. $4.7 million, if there's no margin and your average margin is 10%, then that's $500,000. It's not that huge, but it has a tiny impact. If that is going down, again, you take away the revenue, but you still have the margin on that, because the margin -- you're just offsetting cost dollar for dollar. Unfortunately, you have to run it through as revenue because of the way the contract works. So it has a slight improvement in your margin. It really is a bigger impact on how much your revenue is and what your overall margin is because it's $5 million or $4.7 million out of $341 million. But it goes both ways. It's what we refer to as a slight tailwind when the costs are going down. And we have cost on non-index jobs and FOB sales that when it's going up, that is a headwind in margin and when it's going down, it's a tailwind in margin. And I mean, just on that, Alan, I realize there's been a lot of moving parts, a lot of moving parts impacting the gross margin over the years. If we look pre-pandemic, so before COVID, surge in cost inflation, your gross margin was 15% to 16%. Is there anything structurally challenging the business preventing you from getting back there over time? There's nothing structurally preventing us from getting back there. And as I've said for a while now, we're on the road back to there. And the best indicator of our future is our backlog and our backlog margin. And so we had another good quarter of adding backlog at healthy margins. And so that blend is continuing to move in the right direction. So that's a good indicator of it. And then we continue to vertically integrate. The terminal in Panama City continues to add really good margin and we're looking forward to getting the new terminal in Northern Alabama online in late spring. So when you take the backlog margin, the vertical integration that adds to it and you get a normal external environment where our guys have a fair shot at every job to grow margin, you're going to see those margins return. Something I saw that was very positive in the first quarter is more jobs finished higher margin than lower than I've seen in a while. They finished at a higher than bid margin. And that's throughout CPI's history, more jobs have finished better than bid margin than lower. But as you could expect in the last two years with inflation hitting, it's like asking a football team to score a touch down, but every drive you've got to start first in 20. And so now as this newer backlog gets worked on, we're starting to see it revert to normal where we can actually execute in the field, find ways to gain margin. Those are the things -- all those things add up to where those margins could get back to that range. And I'd say one thing structurally, because you asked, is there anything structurally. One thing that we believe structurally that helps us to respond much quicker to things even as abnormal as what this cost inflation was, is our shorter duration projects that turnover quicker. So we're not sitting here talking about we've got $1 billion worth of projects that were being -- the faster turnover allows us to respond quicker to positive things, but even more important to negative things, because we're rebidding jobs. We're bidding jobs on a continuous basis and burning off backlog and replacing it with backlog that's got those factors built into it. So that's the structural thing that we feel like distinguishes us from companies that do significant number of four, five year long term design build type projects, which we just found is not the way we do our business. Just one question or two. What is the M&A environment like? You did two acquisitions in early December, you're at about 2.9 times leverage up from 2.79 times last quarter. What are your thoughts as you move through the year? Are you -- should we expect more active level of acquisitions relative to the last couple of years, maybe the type of profile now that you're in six different states? Brian, I'll give the answer for the short term, and then I'm going to let Ned give sort of a bigger picture outlook. We continue to have really good conversations, as we always have had throughout our footprint in some adjacent states. We're continuing to build relationships and talk to potential sellers, and we're looking at opportunities. We feel like our leverage ratio is going to moderate down through the course of the year as we execute and deliver on the year that we've put forward in our annual guidance. I look more to making sure our organization can handle the acquisitions, and they fit well strategically. So Ned? Well, I think the big thing is this continues to be a very large growing market. And with Washington on what they have done with the Infrastructure Act, it's even larger, but it also continues to be highly fragmented with a lot of family businesses, that has not changed. So we have lots of opportunities inside our footprint and just directly beside our footprint. I think the other piece that I would not get confused by is one of the things that's happening is as we vertically integrate and we participate in more of the value chain from rock to road, it creates more acquisition opportunities. Some of the best what we would think of as greenfields or acquisition opportunities are things like new liquid asphalt terminals, businesses that we buy, it may only be in the grading business and we bring them into the asphalt business and we get another crew. So the vertical integration throughout the value chain has given us opportunities that really are very -- not just revenue enhancing, but some of them are just margin enhancing, quite frankly. So I think as these families get older and you move from the first to the second to the third and many times, we're talking to families in the fourth and fifth generation, we see more opportunities and a longer runway ahead of us than we've seen before, quite frankly. So I think the big picture opportunity, particularly with the demand rising like it is in pretty much every state. I don't know about you but I don't go anywhere that the roads are really good and that's going to continue to create demand and opportunity for us. And then just real quickly, any quick comments on the weather you've seen January to date with the understanding of the seasonality in the business? Just trying to get a better feel for kind of where you are and under recovery of costs, fixed costs, et cetera. Brian, I saw an analysis this morning that I thought was pretty accurate that said, January has been what you would expect in the winter. It's been wet in some places, dryer and others in our footprint. So it's about what we expected in January, nothing out of the ordinary. Alan, the guidance for the full year includes an interest expense component to it that would imply kind of a higher quarterly run rate that we saw in the first fiscal quarter. I'm just wondering if that's based on an assumption for higher rates or do you expect to tap the credit facility and add more debt just to fund the growth you're seeing? Or maybe it's both? I mean, obviously, we indicated we borrowed a little over $50 million in this quarter, and that was at the very end of this quarter. So that will be debt that we're paying interest on the rest of the year. It has anticipated increases for the portion of our debt that is not covered by the swap. But we've got $300 million that fixes the rate on that much of our debt, but any incremental debt that we have borrowed, which is what we borrowed in the fourth quarter. But the guidance does not anticipate any future borrowings for internal purposes or for acquisitions. It does -- we've talked about the liquid asphalt terminal, there is a small amount of borrowing that we're likely to do as we finish it up. But our normal CapEx, we pay that out of our internally generated cash. So pretty much the debt that we've got on the books now will carry. But again, it is higher in the last three quarters because of the borrowing that we did for the Ferebee acquisition. And just the 2.96 leverage ratio, that's factoring in contributions from the deals you've done into that trailing 12 EBITDA. Is that right? That is correct. We get credit for that in that calculation with our bank, that will roll off each quarter, so we have to replace it with a real EBITDA. And then just directionally, where would you like to see that leverage ratio? I know EBITDA and margins are compressed and that's going to change. Where would you like to take it? We'd like to get it down in the low 2s. We feel like the projection we've got will get down into the 2.1 to 2.2 range by the end of the year. And then just, Jule, this might be for you, but there's a lot of infrastructure work getting released around the country, maybe the best market, I mean, clearly in your areas, but elsewhere, too, maybe the best market we've seen in a long, long time. And I guess going through what you've had to go through the last couple of years with supply chain, I was curious on the liquid asphalt market. Is there any concern about availability or future availability, just given this kind of national pull in demand, and then maybe what you're doing to ensure you get what you need? Brent, we haven't heard of any supply chain or supply issues with liquid asphalt. But one of the things that we've done that I think helps hedge against that potential risk is, we have one terminal now and we'll have two terminals here in the next few months. And so we're able to store a lot of liquid asphalt and manage our own supply, at a wholesale environment, not retail. So that helps us if there is a potential supply issue there, but I haven't heard of any concern there. And last one, just on the M&A pipeline, which obviously continues kind of here and there, issues in availability and just cost of new equipment. Is that coming up in your conversations with folks that may potentially be wanting to partner up with you? Obviously, when I'm building relationships with potential sellers, we talk about the last two years and everyone's lived that together. And so as you can imagine, there's a lot of small talk about supply chain, and every contract has experienced it. But I would tell you, our potential sellers, the people that we're talking to, they're really making their decisions more based on what's best for their family and long term planning, and that hasn't changed. They're getting -- some of them have been running the business a long time, they're getting ready for retirement. They've got a new generation that may not want to be in the asphalt business or the construction business. And so it's really what's best for their families driving their decisions, they've lived through macro challenges before. So I would say that's still driving our M&A discussions. It's Kevin on for Adam. I wanted to know if you can maybe provide some more detail on maybe the Ferebee acquisition. Did it have -- is there any kind of vertical integration there already? Well, we're very excited for the Ferebee’s to join the CPI family of companies. I have really enjoyed getting to know them. Their organization is very impressive. They're from Charlotte, their business has grown up there and so they really know that market well. And it's a -- I've been very impressed just also with the market. From a vertical integration standpoint, one of the things that's really impressive about them is they do a lot of crush concrete and making aggregate base that really helps them. And so that's just been something that they're really good at. And so we're looking and I'm sure, throughout the CPI footprint, their sister companies will be talking to them and trying to learn from that expertise. So we consider that a vertical integration they do and do very well. And they do on the services side, the same things we do, the grading and different things like that. So very common to what we have. Of course, we've said they've got their own asphalt plants, which is very helpful. So not a lot of difference there as far as the vertical integration of things, but they do all the types of construction services that we typically do in our companies. I think you mentioned too, Alan, that they do -- both of them do -- combined it was $70 million in revs. Is there a split that you can provide for between the Blue Water and the Ferebee? I think the $70 million was in response to how much backlog they had at the date of acquisition. We've not really given a revenue number that I recall on them. But typically, to answer the question, a platform acquisition for us is always a larger acquisition than a bolt-on. And the Tennessee, their size was such that they were bolt on to our Alabama operations, Wiregrass and so they're integrated into that. But that backlog overall would represent -- typically, we've got about nine months' worth of revenue on backlog in our companies at any one time, slightly higher for most of our companies right now. So you could kind of back into that and say that the total revenue would probably be about that backlog divided by, say, 75% to 80%. We've reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments. Yes. I'd just like to thank everybody for joining us today. We are right on track and looking forward to a great year. Hope everyone has a good weekend. Thank you. Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

EarningCall_88

Good afternoon, and welcome to Ladder Capital Corp.'s Earnings Call for the Fourth Quarter of 2022. As a reminder, today's call is being recorded. This afternoon, Ladder released its financial results for the quarter and year-ended December 31, 2022. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our supplemental presentation, which is available in the Investor Relations section of our website. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today's call. Good evening. We are pleased to report that Ladder generated distributable earnings of $38.9 million or $0.31 per share, reflecting an after-tax return on equity of 10.2% for the fourth quarter of 2022. Undepreciated book value grew to $13.66 per share. And as of December 31, our same-day liquidity from cash, cash equivalents and our undrawn unsecured revolver was over $900 million. As of December 31, our adjusted leverage ratio was 1.9x and 1.1x net of cash and securities. For the full year 2022, Ladder generated distributable earnings of $148.4 million or $1.16 per share, representing a 9.7% after-tax return on equity. We are further pleased to report that after raising our quarterly dividend by a cumulative 15% over the course of 2022, our dividend remains well covered with carry from net interest margin and net rental income. In 2022, we originated $1.2 billion of balance sheet loans, two-thirds of which were either multifamily or manufactured housing, with our multifamily originations focused on newly-constructed properties. As of December 31, our total balance sheet loan portfolio had a weighted average spread of 4.25% on floating rate loans and a weighted average coupon of 8.25%. While loan originations slowed due to a lack of a transaction activity, we have strong liquidity to deploy into this product as activity returns. As of December 31, 40% of our loan portfolio was comprised of loans on multi-family or manufactured housing and 82% of the portfolio was comprised of post-COVID loans that reflect conservatively reset valuations with newly-capitalized business plans and substantial reserves in place. Only approximately 6% of our loans have a final maturity in 2023 and all of our floating rate loans have interest rate caps in place. We continue to focus on dollars per foot or basis lending on smaller middle-market loans and we continue to see enhanced liquidity for these loans with payoffs from the various lending options available to refinance loans of this size. 86% of our balance sheet loans are lightly transitional as evidenced by our modest future funding commitments, which are limited to $322 million in total, with approximately half of this commitment being contingent upon accretive good news leasing. A topic on everyone's mind has been office. We've continued to see stable performance in our office loan portfolio, which comprises 25% of our total loan portfolio. If you exclude our two largest office loans, both of which Brian will address when he discusses our office investments in more detail shortly, that percentage drops to just 18% with a $25 million average loan size, consistent with the rest of our portfolio. Further, our average last dollar loan exposure is $112 per square foot, a testament to our focus on basis. 65% of our office loans are acquisition loans, 69% are on Class A properties, 58% are located in the Sunbelt and 72% of our office loans are post-COVID loans. We've seen similar liquidity for our office loans with full and partial loan repayments, including over $200 million in 2022 and an additional $28 million thus far in Q1of 2023. We expect our credit discipline and unwavering focus on basis and the middle market to continue to distinguish Ladder with sustained credit performance. Turning to our other investments. Our real estate portfolio continued to contribute to distributable earnings by generating net rental income of $67.9 million in 2022. In addition, this portfolio has continued to generate attractive gains on sale at premiums to undepreciated book value. In 2022, we realized $35.8 million of gains in distributable earnings from the sale of real estate. In the fourth quarter, Ladder realized $3.8 million of gains on sale of real estate, including the sale of our largest office asset for gross proceeds of $118 million, as securities portfolio ended the year with a balance of $588 million. Turning to our capital structure. A combination of our internal management, high insider ownership, strong credit performance and differentiated liability structure have earned Ladder the highest credit ratings in the sector. Of significant note, as of December 31, equity unsecured bonds and non-recourse non mark-to-market debt made up 82% of our capital structure. 50% or $3 billion of our assets were unencumbered, with 76% of those assets comprised of cash and senior secured first mortgage loans. In addition, and thanks to our large base of fixed rate unsecured debt, we ended the fourth quarter with a competitive total cost of debt capital equal to 5.34%. In conclusion, 2022 was a good year for Ladder. We delivered a 9.7% return on equity, selectively augmented our balance sheet loan portfolio and grew carry income to comfortably cover our higher quarterly dividend. Lastly, the deployment of our significant liquidity into this higher rate environment will help Ladder grow earnings in 2023 and beyond. Thank you, Pamela. As discussed in the fourth quarter, Ladder generated distributable earnings of $38.9million or $0.31 per share; and for 2022, Ladder generated $148.4 million, or $1.16 per share. Our three segments performed well during the fourth quarter and in 2022. Our net interest margin rose steadily as benchmark interest rates increased and we benefited from our liability structure, of which approximately 50% is fixed rate. The $1.6 billion of unsecured corporate bonds that anchor our capital structure at an overall weighted average maturity of approximately 4.7 years, with the nearest maturity in October 2025 and provide an attractive fixed rate cost of capital at a 4.7% average coupon. Our $3.9 billion balance sheet loan portfolio was primarily floating rate, diverse in terms of collateral and geography with our primary asset class focused on multi-family assets. As Pamela discussed, 82% of the portfolio is made up of 2021 and 2022 vintage loans. During the fourth quarter, balance sheet loan origination was $38 million related to one multifamily loan. We received loan payoff proceeds of $180 million and acquired one office property in Houston, Texas via foreclosure with a carrying value of $10 million or a basis of approximately $50 per square foot. Additionally, as Pamela mentioned, subsequent to year-end, we received $28 million of proceeds from two office loans that paid off at par. During the fourth quarter, we increased the general portion of our CECL reserve by $2.4 million or 15% driven by the current market outlook. Overall, we believe that the granularity and the diversity of our positions with limited exposure to any single sponsor, market, or asset serves as a credit enhancement to our portfolio. Our $900 million real estate segment also continues to perform well and in 2022 market year in which we demonstrated the embedded value of the assets in the portfolio. This portfolio continues to provide stable net operating income and includes 156 net lease properties, representing over 70% of the segment. Our net lease tenants are strong credits, primarily investment-grade rated and committed to long-term leases with an average remaining lease of 10 years. During the fourth quarter, we sold one office complex, one net lease property and one residential holding, which together generated a $39 million GAAP gain to shareholders and produced $3.8 million of gains for distributable earnings. In 2022, overall, we sold eight properties generating a GAAP gain of $93.5 million to shareholders and $35.8 million of gains for distributable earnings. Our 2022 real estate sales overall generated IRRs ranging from 14% to 58% during the respective holding period of each asset. As of December 31, the carrying value of our securities portfolio was $588 million. The portfolio is 86% AAA-rated, 99.5% investment grade-rated and in 2022, we received $185 million of paydowns on these positions. Given the seniority and short-dated maturity of this portfolio, we expect the mark-to-market associated with these positions to reverse as the portfolio continues to pay off at par. As of December 31, we had over $900 million of same day liquidity, and our adjusted leverage ratio stood at1.9x. This liquidity includes our undrawn corporate revolver capacity, which as previously reported in 2022 it was increased to $324 million and extended to 2027. Further, as Pamela discussed, as of December 31, our unencumbered asset pool stood at $3 billion and was 76% comprised of cash and cash equivalents and first mortgage loss. We believe our liquidity position and large pool of high-quality unencumbered assets provide Ladder with strong financial flexibility and substantial dry powder heading into 2023 with a corporate credit rating, one not from investment grade, from two of the three rating agencies. During the fourth quarter, we repurchased $639,000of our common stock at a weighted average price of $10.27 and overall, in 2022, we repurchased $7.9million of stock at a weighted average price of $10.11. As previously reported, in 2022, our Board of Directors increased the authorization level for our share buyback program to $50 million with $46.7 million of remaining capacity as of December 31, 2022. Our undepreciated book value per share was $13.66 at quarter end based on 126.5 million shares outstanding as of December 31. Finally, in the fourth quarter, we declared a $0.23 per share dividend, which was paid on January 17, 2023, capping off a year in which Ladder raised its quarterly dividend by 15%, which remains well covered. For more details on our fourth quarter and full year 2022 operating results. Please refer to our earnings supplement, which is available on our website as well as our 10-K. Thanks, Paul. I'll start with a few highlights from 2022 that show how our preparation for higher short-term rates enabled us to execute our business plan throughout the year. We expected the Fed to aggressively raise short-term rates, and in less than 12 months, they raised the Fed funds rate by 450 basis points. Since we had over $2 billion of fixed rate liabilities, including $1.6 billion of unsecured corporate bonds, the increase in our interest income outpaced increases in our interest expense. In the fourth quarter of 2022, our net interest income was $37.3 million. That's 3.5x our net interest income in the fourth quarter of 2021. We believe the Fed will continue raising rates in the first half of this year and we will benefit further from those actions. If they then hold peak funds rate where it is, as they say they will, we should benefit from higher net interest income throughout the rest of this year and into 2024. Because our weighted average maturity on our fixed-rate corporate bonds is about 4.7 years, we should be able to enjoy strong net interest income for several years as long as the Fed doesn't completely reverse their recent rate increases. Since we ended 2022 with $609 million in cash and undrawn $324 million revolver and an adjusted debt-to-equity ratio below 2x, we have plenty of earnings power as we make new investments in the quarters ahead in market conditions exhibiting the highest mortgage interest rates in many years. As mentioned earlier, many investors are trying to sort out what is going on in the office sector in the United States today. Clearly, certain cities are having more trouble than others and I'm happy to discuss those macro issues in Q&A, but I'd like to briefly address how Ladder is fairing with our investments in the space. As we started the fourth quarter, our top five office investments by size across our loan and equity portfolios had a combined carrying value of approximately $640 million. There were two equity investments that combined for a total carrying value of $242 million, both were financed years ago with non-recourse fixed rate CMBS debt that still had time before maturity. The first of these was a net lease investment with a carrying value of $124 million made in 2017 when we acquired five office buildings along with a newly-constructed parking garage in Jacksonville, Florida. The tenant is Bank of America, and they have about nine years left on their initial lease term with five-year extensions at below-market rents. Last year, as reported in the press, Bank of America began to upgrade their office space at their own cost estimated to be approximately $150 million. They are also planning to construct an additional garage with 2,300 parking spaces also at their own cost of $20 million. We feel good about this investment, so I'm going to move on. The next equity investment was comprised of 11 multi-tenanted suburban office buildings in Virginia that we acquired with a JV partner in 2013 with a carrying value of $118 million. In December of 2022, we sold all 11buildings for $118 million. The IRR on this investment was 14.4% over the life of the JV. The next three investments are all first mortgage bridge loans that we have on our balance sheet. The combined loan amounts for these loans is $397 million. The largest loan is a $220 million loan secured by a downtown Miami office building that was acquired in mid-2021 by our borrower. Miami is one of the few strong office markets in the country, and this asset is over 65% leased with an average lease term of about six years. Our sponsor invested $98 million of equity when the property was acquired and we feel comfortable here as well. The next item I'll discuss is also a Florida office loan located in Aventura, Florida, just steps away from the Aventura Mall and several large medical facilities. We made a $111 million first mortgage bridge loan on this property when it was purchased in the summer of 2021 for $140 million. This asset is well-leased and is achieving higher rents than we underwrote for. It was also recently zoned for additional development with some developers thinking it might have a better use than what it is used for today. After 1.5 years, all seems to be going well here also. The third office loan and last of our five assets for today is a Class A office building in Birmingham, Alabama. The loan was originated in 2018 and has a current outstanding principal balance of $66 million or $108 per square foot after a series of extensions that included the sponsor contributing over $14 million of additional equity to reload reserves and reduce the outstanding principal balance by over $11 million. The loan has strong in-place cash flow and recent leasing has picked up again with the sponsor recently signing a 16-yearlease with a leading law firm. These five assets with a combined maximum exposure of $640 million going into the fourth quarter of 2022 was reduced to approximately $521 million following the $118 million sale in December. I decided to provide a lot of specific data around the five largest office investments we had going into the fourth quarter because for one, these five line items make up a large part of our exposure to the office sector; and two, investors and analysts have been asking very specifically about this product type in recent calls. This quick download also demonstrates how we have invested across the various types of investments in the office sector before, during and after the pandemic. In theory, equity investments should contain the most risk to the company, and we navigated this risk for our two largest equity investments by investing in both cases at reasonable dollars per square foot. We selected the two equity investments specifically outside of major cities and secured 10-year fixed rate non-recourse CMBS financing also in both cases. We further mitigated risk at the property level in one case with a strong tenant paying below-market triple net rent for a long initial lease term and on the other by owning 11 separate assets that could all be sold separately over time, adding diversity and liquidity by allowing sales at smaller dollar amounts if it was necessary. There is a more nuance point to this discussion though around office and lending at Ladder generally. After the initial shock of the government-mandated shutdown of the U.S. economy when the Fed drove interest rates to near zero and liquidity was seemingly everywhere, we actively encouraged our sponsors to pay off our mortgages that were originated in 2018 and 2019 in a strong economy with low unemployment. Because our portfolio, a floating rate bridge loans, had an average floor of 6.46% going into the pandemic, our borrowers were very successful in refinancing our loans and we wound up with an awful lot of cash. As the U.S. money supply dramatically increased from $15.4 trillion in January of 2020 to $20.4 trillion in June of 2021, we felt that inflation would probably start to show up in the U.S. economy and it did. While we began to invest the cash that we accumulated during the worst part of the pandemic, we avoided fixed rate loans with a preference for floating rate assets, expecting the Fed to lift short rates to quell the onset of inflation. We also issued an additional $650 million of unsecured fixed-rate corporate notes, hoping to create positive earnings correlation as rates rose. This also turned out to be a good strategy. These precious moves put us into a position today where over 80% of our current loan inventory was originated after March 2021. Because of our macro views of the economy, these loans were underwritten against an economic backdrop of high unemployment rates with inflation building in the good sector and arising cost of labor as the citizenry of the U.S. went back to work. Throw in rising rates and you've got the formula for a possible economic slowdown that would show up quickly in both residential and commercial real estate. We did not select these loans to try to prove that we don't see any problems in all kinds of real estate valuations. The Fed infused the economy with liquidity and asset values increased. Of course, when they begin to drain the economy of liquidity, this should have the opposite impact and asset prices should fall. We show you these loans because it illustrates how we manage risk. Most of our inventory of loans were underwritten under the assumption that a mild recession would soon arise. We tried to stick to acquisition financing and if we did refi loans, we tried to see additional capital contributions from the sponsor to close the loans with us. For our two post-pandemic loans in the discussion, both were acquisitions, both had substantial equity cushions in front of our mortgages, both were in Florida and both were underwritten well after the pandemic shock to the economy. In our one loan from 2018, of course, the lack of economic activity impacted leasing. So we were only too happy to work with the sponsors we knew well and who knew that more time would be needed to execute their business plans. If the sponsor would add further capital to carry the asset, we would work with them to extend their loans and give them more time. The modifications on our largest pre-pandemic office loan saw the principal balance of the loan paid down by $6.3 million in 2021 and another $5.2 million in 2022. Those paydowns demonstrated the long-term commitment to the asset by the sponsor and brought the loan side into the neighborhood of where we were originating loans after March of 2021. I'll end here hoping to have conveyed a sense of strong risk management. Yes, having a low fixed rate component to our interest cost is quite apparent and we're very happy to have it, but our risk management and its primary goal to preserve capital is a constant effort that we take quite seriously. It's not perfect, but we sure do think it's better than most. Wrapping up, I'd like to thank our employees for their tireless effort in making Ladder a great place to work with a strong credit culture and for their countless hours researching data to allow us to make better credit decisions even if that meant granting extensions. I'd also like to thank our investors for trusting us with your investment dollars. We've raised our dividend a few times in 2022 and because of strong loan performance and effective asset liability management, we should continue to easily cover our quarterly cash dividends for the foreseeable future. As we make new investments, it should get even easier. Thanks. Good evening, everyone, and congrats on a great close to 2022. Boy, that was very thorough. I had a few questions jotted down, but I just heard – I already heard the answer. One thing you didn't talk about, Brian, we're seeing some signs and just early green shoots, I guess, of better activity or interest in the CMBS CLO market and I know your investment portfolio is not huge, and it's also short duration. But can you comment on whether you feel your CRE securities portfolio has seen any improvement in value thus far in 2023? Thanks. Sure, Steve, and thank you. Yes, it has - the markets, as I said, at the end of really '21 or through '22, credit spreads blew out really, I think, in the mortgage sector because of the Fed just being a constant seller of mortgage-backed securities and that shocked the market a bit and drove spreads wider. So even the short duration book that we own would have – if we had sold, it would have been down a few points. So we did have some paper mark-to-market losses there and they have recovered largely and I'll also add, too. While I wouldn't say they're quite at par at this point, but they're probably near 98.5%, 99%. And in addition to that, regardless of what happened with prices, we got $185 million in payoffs, which was about 25% of that book in the year 2022. So that's one of the reasons to that. We're pretty comfortable we're not ever going to take that loss on a mark-to-market basis because those assets are just so well secured. The biggest problem with them if we wanted to create liquidity today, which we certainly don't need to, is that their spread to LIBOR is not competitive with the spread to LIBOR of new origination loans today. However, most of them have like 80% subordination, which also doesn't – compares very favorably to anything today. I don't think you could buy a book of 2018 and 2019 CLO AAAs like we have today. So we may have to wait a little bit longer but if we ever did need to come up with liquidity, we could and again, they're only one year loan, so there's a limit to just how bad it can get and even if the Fed continues to sell. But there is – I think that the lack of supply for a very long period of time there. It's really starting to show up, and that's why bids are coming in. The Fed is still a seller, but at the end of the year, most of the portfolio managers rebalance their portfolio. And I think the fixed income guys got a lot of allocations going into January and January always is a strong month for whatever reason. I think that there's new allocations and things just optically look very cheap. So I think people are jumping on them now. And you are also seeing that in the government market. The 10-year is a very easy sale. You saw the auction yesterday, it was great. The 30-year auction today was very messy. So it's sort of that duration. It's not too far out on the curve, but it's far enough that people feel like it's going to be an acceptable return. Clearly, the market thinks rates are going to be low over the next 10 years. Thank you very much. What do you make of the current stock valuation for Ladder, in particular, given the lower-than-peer leverage and the strong outlook based on rates? Also, do you think you would consider stepping up your pace of stock buyback and how are you feeling about the dividend relative to the strong level of earnings you posted? Okay. I'll try to keep those in order. And if I don't, please remind me at the end. First of all, the stock price, a little bit discouraging at times because when I sat down and I began to write the year-end review, I basically said, “Okay what did we do in 2022?” We absolutely nailed the Fed correctly. We have the lowest – we went from the highest cost of funds because of our corporate debt at the lowest cost of funds in the space. We have it for years to come, whereas you're seeing a lot of other ways of raising money taking place in the space. And I think it's a real differentiator for us this year. Our income – our top line income went through the roof because, again, our interest income was going up, but our interest expense was not really going up very quickly at all. So the whole plan worked, and our credit acumen did well. We didn't have too much difficulty there. And for all of that, getting it right, the stock dropped from, I think it was, $11.90 something at the end of last year to a high 10 number or $10.99 this year. So, you really can't fight to tape it is what it is. It was a tough year for all investors last year. And some parts of the stock market, I think the S&P was down 18%. Then of course, it was up 20%. So you try not to look at that too much. But we're doing what we can do and controlling what we can control and sometimes, you get caught up in a little bit of narrative where you just get caught up in the whole market swings. So we're not put off by it. We wanted to – we pretty much told people we're going to keep raising our dividend, which we did. And each time we raise our dividend, the stock fell. So now we're covering it very easily, and there's always some version of the quality of earnings. You've covered your dividend because you sold some retail centers or we sold an office building. And we are now covering out a straight carry and rents. And it looks like, I personally defend, it's going to keep raising rates here. If they do, we make more. Too much of a good thing obviously can be a problem. But at the end of the day, it's a lot easier as a lender when rates are higher than when rates are lower. So we are very comfortable here. We think our income is with our leverage point below 2.0. We have a full turn we can put on to the company, and that those earnings would just go to the bottom line if we use no leverage at all. Even our cash, we've been buying two-week treasuries, which I think today, we were buying at 4.6%. So even cash sitting around is doing better. So earnings look very good. We are a little countercyclical at times. And so I suspect that we'll have no trouble with our dividend. I imagine we will be in frank discussions with our investors as well as our Board of Directors about what to do with the dividend going forward. And as long as credit is holding up, I don't see really anywhere around not raising it. And I think – what was the last part? Oh, stock buybacks. We buy those periodically. Our ROE is very good right now. And while we didn't pull off a lot of transactions in the fourth quarter, I think that had more to do with the rate shock that took place in the market and you're seeing it everywhere. It's not just here. There is just not a lot of transactions going on. We are still seeing people trying to get financing to buy an apartment complex at a two cap, thinking they're going to double the rents. So that story is just not taking hold of us. So we're going to have to wait until the market absorbs the reality that rates are just going to be higher. I am of the opinion that you've seen the lowest rates in your life and I don't think rates are going to go straight up to like Jimmy Carter days, but I also don't think they're going to be returning to 0 either. My opinion is that 10-year is too low at 360, but I don't trade government bonds. So I would say if the stock takes any kind of a softening, which it does periodically, we're happy to step right in and buy it as long as it looks like a pretty good investment for us and don't overlook the bonds also. Occasionally, if interest rates go up quite a bit or the high-yield market gets wider in spread, those also present unique opportunities, too. So we keep our eyes open. We watch it every day. We don't check it on Fridays. And if it looks cheap, we step right in as long as the compliance window is open. Thank you very much. On the originations post-COVID, it seems like the bulk occurred in 2021 through mid-2022, arguably before the valuation correction really ensued. So, some of those deals may have been done at the peak of the market, especially in multifamily, the lowest cap rate sector. How do you feel about the risk there? It doesn't seem like there will be credit issues in multifamily this year. Certainly, that could unfold in 2024 and there is also huge supply coming in multifamily. So curious for your thoughts on that sector. Well, we – and I am going to get too deep in the weeds. But at the end of 2021, every CLO lender in the space was originating any multifamily they could find at LIBOR plus 300 and we thought that was crazy. There was no differentiation between quality. Were you entering the crime problem out in the garden-style apartment in a rough city or were you making a loan a brand-new property in Jersey City? And so what we did, and we talked about this, I am not sure you remember it, but we stopped chasing multi-family loans, and we did other types of loans that were less favored but they were much wider in spread. We really got into the multifamily side of things after 2021 when those – at the end of 2021, everybody thought spreads were widening just because it was year-end. We didn't believe that. We thought it was the Fed starting to sell mortgages and they were going to keep going wider. So at that point, they – most of the lenders had abandoned the multifamily sector because they had done CLOs, where the effective rate of return on their equity piece with 85% leverage was 6% whereas the AAAs, were trading well with yields well north of that. So, we began – I remember the day it happened. We were funding a transaction, and the borrower was buying an interest rate cap and the cap cost six points. And I said, wow, we're charging one point and they are paying $6 per cap. So we introduced in an attempt -- it's been my experience that when things get a little out of joint, you're always going with higher quality. So we knew that sponsors were hating the interest rate cap because the cost was so excessive because the Fed was saying they're going to raise rates. So we introduced a two-year fixed rate product that pretty much geared itself towards brand-new properties coming off construction and during the due diligence period after they were under at, we were watching the properties lease-up. So these were not really the buy two cap and hope you double the rent and rates stay low. These were assets that were brand new. They were clearly in markets that people thought it was attractive to build in. But what's most attractive is that they like that they didn't have to buy the cap. What we like was, you couldn't have a construction overrun because they were finished, and they were all brand new. So we have quite a sleeve of those in the inventory right now. So – but I am not overly worried because we were always cautious about dollars per unit and when we saw a property in Phoenix, Arizona that had run up in value, I always remember the credit meetings when an originator would say, oh the prior manager doesn't know what he is doing and he's selling it for twice what he paid for it four years ago. And so he would say, I'd like to back him. So we were always cautious about run-up in price, what was the dollars per unit. Never mind where people thought it was going and if rents look like they had to double, we were not going to get involved in that. But we also understood where there might be some rents going higher, where there were major construction projects going on and assets being added facilities to the city and we focused in growing neighborhoods. We really did try to avoid the larger cities, and not just because we didn't like them in particular one. It's a very expensive dollars per door. And secondly, they suffer from a lot of government intervention when things get a little bit rough. So, most of our ownership of multi-family loans is outside of the major cities. This is Sarah Barcomb on for Eric. Thanks for taking the call. So, in the fourth quarter, you had slightly lower origination volumes with that one multi-family loan. I was hoping you could contextualize that a bit and talk about how you approached underwriting that loan, as well as any other deals that you might have taken a look at that didn't cross the finish line That loan was a multi-family in the Southeast. It was brand new and it had been under app for a while. And I think for whatever reason, documentation-wise, it took a while to get printed and when we closed on that loan, that building was fully leased. I was a little surprised the sponsor wanted to even take a floating rate loan. So that property is a brand-new property. It's in Georgia, and it is fully leased already. So that was – there was no special approach there. That's kind of where you're hoping to exit when you write a bridge loan. A lot of other assets we had under application, as rates were rising, we were requiring higher debt yields at exit and it gets tougher. So, where a 6% debt yield used to be the exit cap year and a half years, two years ago, we were moving them up to 7.5% and 8%. So simply, I think what happened isn't so much that people didn't want to fund new loans. They were just so used to aggressive underwriting, which might have been appropriate at certain times, but it didn't look like it was going to continue. So we actually did see some assets where rents were falling while we were underwriting. One of the things we do keep an eye on during the underwriting process is we literally watch some leased properties at units one by one and we're very sensitive if all of a sudden, they signed 5 leases at lower rents than they've been in the last 12 months. So we saw some of that also. Okay. Great. And so you talked about in terms of the equity investment sales, I believe there were three during the quarter and you talked about how one of them was one of your largest office assets. Can you talk – I might have missed it, but can you talk about the other two sales during the quarter and maybe give some color around cap rates there or any details you can share there? Well, yes, I am going to talk to the math of my head, but I know them. One that we sold was in Virginia. It was11 office buildings, suburban office buildings for $118 million and that obviously was the price we had paid for them, although there was a large GAAP gain associated with them there. I think we sold that at a 6.8% cap. And so, then, so that's the one you knew about. The other two, one was we had owned a residential new development on the lower east side of Manhattan and we had one penthouse left to go, and we sold that for $8 million. I don't know what the cap rate is, I apologize. That's just residential condos. So that was just one, and the only thing we own in that building now is one retail condo at dollars per foot that are far lower than we've been selling out the residential properties at. So we're pretty comfortable there. Although retail in New York City is a little tough right now because for various reasons, but we think that will get straightened out eventually there. And the other property we sold was a wholesale club, and we sold it to another REIT, who likes that credit. It's a BJ's Wholesale Club. And I think we made about 35% versus our basis on that, which is consistent with where we've been selling BJs. We owned about 11 of them at one point. I think we have five left now. So those were the three asset sales. We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments. I just want to wrap up. This is always an interesting year-end call because we'll be back on the phone in another month, I think, or 1.5 months. But just want to say thanks. Ladder really came full circle after the pandemic, and we're off to a great start this year. We are in the right position with very low cost of funds, and we are really looking forward to a very differentiated and successful year. So, thank you for those who stayed with us, and thanks for always asking the right questions on these calls. Good night. Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

EarningCall_89

Good afternoon. Thank you for attending today's BARK's Third Quarter Fiscal 2023 Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Mike Mougias, Vice President of Investor Relations. Michael, please go ahead. Good afternoon, everyone, and welcome to BARK's third quarter fiscal 2023 earnings call. Joining me today are Matt Meeker, Co-Founder and CEO; Zahir Ibrahim, Chief Financial Officer; and Howard Yeaton, who served as Interim Chief Financial Officer during the period we are reporting on today. Today's conference call is being webcast in its entirety on our website and a replay of the webcast will be made available shortly after the call. Additionally, a press release covering the company's financial results was issued this afternoon and can be found on our Investor Relations website. Before I pass it over to Matt, I would like to remind you of the following information regarding forward-looking statements. The statements made on today's call are based on management's current expectations and are subject to risks and uncertainties that could cause actual future results and outcomes to differ. Please refer to our SEC filings for more information on some of the factors that could affect our future results and outcomes. Also during today's call, we will discuss certain non-GAAP financial measures. Reconciliations to our non-GAAP financial measures is contained in this afternoon's press release. Thanks Mike and good afternoon, everyone. Our results last quarter illustrate the significant progress we continue to make across each of our strategic initiatives we laid out at the beginning of the year, namely accelerating our path to profitability; making meaningful progress in our food and consumables business; and transforming our customer base by acquiring more premium customers. Last quarter, we grew our average order value by $2 year-over-year, improved our gross margin by 4 points to 60%, reduced our inventory by $15 million and ended the quarter with $164 million of cash on the balance sheet, essentially unchanged from fiscal Q2. And for the first quarter since going public, we generated positive free cash flow. These are important milestones and a direct result of actions we took to diversify our product mix, improve our long-term unit economics and meaningfully reduce our cash burn. And while the progress we have made across these initiatives is encouraging, we expect these trends to continue further in the quarters ahead. In addition, we announced the cost reduction initiative today to enable more leverage across the business, adding significantly more to our bottom line. I will discuss this initiative more in a moment. First, let me highlight some of the key results for the most recent quarter. Total revenue was $134.3 million, $300,000 ahead of our guidance for the quarter. Our direct-to-consumer segment contributed $120 million. Within that segment, total revenue from cross-selling was $12 million, up 15%, compared to last year. And as we know, not all revenue is created equal, and we saw the strongest growth in our new categories, dental and food. Our dental product, BARK Bright delivered $2.7 million of revenue in the quarter, up 70%, compared to last year. I'm also excited to announce that we recently expanded our dental catalog with the launch of Bright Durable, which has the name suggests is targeted at tougher chewers. We also removed the chicken ingredient from this formula, which is one of the more common dog allergies, thereby growing the population of dogs we can serve. And while Bright Durable has only been available for a month, the initial reception has been fantastic. In our first month, we added nearly 6,000 new subscribers for this product. This is a great example of how we are able to leverage customer data to inform product development and expand our portfolio with products that we are confident will resonate with customers. Our food product is also doing very well and accelerating across all the key operating metrics we use to evaluate and manage the business. Since adding more brief, happy formulas and other variations last fall, the growth is picking up even faster. With each passing month, we are seeing notable improvements in customer engagement, conversion rates and the number of orders we are fulfilling. Over the next 12-months, we will continue to add more [Indiscernible], which will expand our addressable market and help us engage an even greater subset of our customer base. And virtually all of our progress to-date has been achieved by reaching out to current and former BARK customers or through Word-of-mouth. Food is a huge market to serve and we're thrilled with how well this breed strategy is resonating with our over 2 million BARK customers. The related and large consumables market we serve, but haven't discussed much this year is treats. And BARK does more than just serve this market with roughly one-third of our revenue coming from treats. We are a top treat seller in the U.S. today, and we achieve this without selling a single treat in retail [Indiscernible] partners, which are channels we expect to tap into over the next year. Speaking of retail, let's turn to our commerce segment. We delivered $14 million of commerce revenue in the quarter roughly 11% of total revenue. This is a segment I'm very bullish on and see a significant opportunity to grow this business long-term. Today, we are partnering with virtually every major retailer in the U.S. Our footprint spans 40,000 plus stores across the country, which enables us to reach new demographics and introduce millions of prospective customers to BARK. That said, today, we are primarily selling toys through our retail network. However, there is an exciting opportunity for us to broaden our offering and grow our commerce business in a substantial way by introducing our full product line to retailers, including toys, treats, toppers, dental and food. Moving on, our total gross margin improved by 400 basis points year-over-year to 59.7% and our direct-to-consumer gross margin came in at 61.8%. We have made significant progress this year getting our margin back to fiscal 2021 levels. And as I've discussed for the past year, this was essential to the foundation on which we can grow now more profitably. We also have great visibility on our margin drivers and we expect ongoing gains for several more quarters due to the following developments. First, we renegotiated more favorable contracts with our manufacturing partners. Rather than splitting our business across a dozen different vendors, we streamlined the number of partners we work with, which enabled us to negotiate more favorable terms. We also successfully renegotiated better terms with our freight partners as the spot rate for containers has declined significantly from their pandemic highs. Looking below the gross profit line, we recently signed a long-term agreement with one of our strategic shipping partners, which will reduce transportation costs and limit surcharges. Collectively, these efforts have improved our unit economics, lifted our margins in a meaningful way, and we look forward to enjoying the benefits of these new arrangements in the quarters and years ahead. If you recall in discussing our path to profitability one year ago, I mentioned from fiscal 2021 to fiscal 2022 we lost 4 points of gross margin, another 6 points on shipping and fulfillment and added 6 points of revenue on the G&A line. As I just mentioned, we've made great gains this year in those first two areas and will gain more in future periods. The final area for improvement is on the G&A line. And today, we announced an initiative that will save us around $12 million annually starting this quarter, while also streamlining our work and helping us get more done faster. This is all a great progress in a short period of time and I'm very proud of our team for making it happen this year. Finally, that all rolled to an adjusted EBITDA loss for the quarter of $12.8 million, slightly ahead of our guidance and a 30% improvement, compared to the third quarter of fiscal 2022. For the quarter ahead, we are guiding to a $3 million adjusted EBITDA loss. And given all of the actions we've taken over the past year, I'm more confident than ever that we are in the doorstep of sustainable and growing profitability. Furthermore, we are also beginning to convert our inventory to free cash flow. As I mentioned on our last earnings call, we typically order products eight to 10 months in advance, so our ability to reduce our inventory levels in the short-term was limited. With that said, we have reached a point where we can expect to see more consistent inventory conversion. We demonstrated this in the fiscal third quarter and we estimate that we can make similar progress in inventory reduction in the year ahead. Now let me touch on the cost reduction initiative that we announced this afternoon. The pandemic served a significant, and in many respects lasting tailwind to the pet space and we benefited tremendously as our top line grew at a dramatic pace. In an effort to meet growing demand, we quickly scaled our infrastructure, headcount and other resources. In hindsight, we scaled our cost structure too quickly, which led to operational inefficiencies and unfortunately redundancies. This reality became even more evident as the broader macro backdrop became increasingly volatile. In light of this, we conducted a comprehensive review of the business with a goal of streamlining our cost structure, improving our operations and further accelerating our path to profitability. As a result, we made the decision to reduce our headcount by 12% and eliminate certain contracts with third-party vendors and consultants. Decisions like this are never easy, because they impact people. Our colleagues and friends, who have worked hard to support BARK and its customers, to all the employees that were affected, I'm truly grateful for your contributions and dedication. In reality, however, we believe that this is the right direction for the business and it better aligns our cost structure with the current economic environment and allows us to better focus on our highest priorities. Let me now turn to guidance for the remainder of the year. While we saw strong revenue acceleration in our food and dental product lines last quarter, we did see some softness in our toy product line as new additions came in lighter. For our fiscal fourth quarter, we expect revenue to be approximately $121 million and full-year revenue to come in at roughly $530 million. Our full-year guidance implies year-over-year growth of approximately 5%, as compared to our previous guidance of roughly 10%. In our view, this is a reflection of the broader macro backdrop as many consumers remain cautious and are currently favoring less discretionary spend. We believe that this is in part why our food and dental categories are accelerating, which is healthy for our business in the long run. However, it does taper our near-term revenue expectations given the relatively small base of our food and dental categories today. Notwithstanding the lower revenue guidance, we are maintaining our full-year adjusted EBITDA guidance of negative $31 million, which is where our focus has been and continues to be. For the fiscal fourth quarter, we currently expect an adjusted EBITDA loss of roughly $3 million an 87% improvement, compared to the fourth quarter of fiscal 2022. Overall, the improvements we have realized across cost of goods sold and G&A are significant and our ability to maintain our EBITDA guidance is a reflection of the significant progress we've made in improving our long-term profitability profile. This progress also highlights our long-term LTV to CAC opportunity. The growing AOV on top of a healthier margin profile both benefits to our LTV to CAC ratio. This coupled with a leaner G&A structure provides us with a lot of flexibility to increase our investment in marketing, if we are seeing stronger returns, particularly if we continue to cross-sell customers in the food successfully as we have recently. To summarize, it has been a successful year back in the [CEFC] and we are executing the plan that we laid out a year ago. We've consistently improved our customer quality as reflected in our increased average order value; we've improved our margin profile in a material way. We are beginning to convert our inventory to cash and we were free cash flow positive for the first quarter since going public. Looking ahead, we expect to continue to deliver healthy year-over-year improvements in adjusted EBITDA and free cash flow as a result of the important actions we took over the course of fiscal 2023, which are beginning to translate to our financials in a more meaningful way. If the market was betting on us running out of cash, because we were spec, then hopefully our steady progress and performance this quarter should prove that thesis is wrong. I continue to believe that our best days are ahead of us and with $164 million of cash on the balance sheet, we have a lot of exciting opportunities ahead. And before I turn it over to Zahir to walk through our financials in more detail, I'd like to thank Howard for his thoughtful leadership and contributions over the past year. He's been a valuable partner and helped me execute many of the improvements we've made to the business during his time here. I'd also like to welcome Zahir to his first earnings call at BARK. Zahir brings nearly three decades of senior financial leadership experience at public and private companies and a proven track record scaling, high growth direct-to-consumer brands and we're thrilled to have him on board. Thanks Matt, and good afternoon, everyone. It's a pleasure to participate in my first earnings call at BARK. Before I dive into our strong Q3 results, I thought it would be helpful to share what attracted me to BARK, some of my early observations and my initial areas of focus. First off, I love the pet space, as an avid dog fan and the parents of a 10-year-old golden named Oscar, I fully appreciate how much joy a dog can bring into our lives. So from the outset, our mission to make dog lives happier, totally resonated with me. Second, I believe that BARK offers a really unique value proposition as a brand for dogs. We are one of the only companies in the space with proprietary branded products spanning toys, treats, food and dental. And finally, Matt and the team have built an impressive business with millions of loyal customers, a business with a valuable and growing data set and with early success expanding into new high term categories, which are all resonating well with customers. We have great critical mass and a major runway for growth ahead of us. I saw a lot of parallels between BARK and where [Indiscernible] was when I joined them back in 2015. During my six plus years there, I helped design and execute our long-term strategy, building capabilities are enabled our revenue to scale 2 times, while we optimize our cost structure. In the near-term, my top priority is helping Matt and the team build an infrastructure that enables BARK to scale profitably. A lot of important work has already been done. However, we still have work to do and I look forward to partnering with Matt and the team to help improve our operations even further. With that, let me take you through our financial results in more detail. And while I was not here for the quarter we are reporting on today, the drivers are fairly straightforward and I believe our results will largely speak for themselves. Total revenue was $134.3 million, roughly $300,000 ahead of our guidance for the quarter. Compared to the same period last year, our total revenue was down slightly, which is a function of the pull forward of commerce revenue that we experienced in fiscal Q2, as several retail partners ordered their holiday product ahead of schedule. If you recall, this effectively swapped our commerce revenue between fiscal Q2 and Q3 this year, making the year-over-year comps in this segment for this quarter less meaningful. For our D2C segment, revenue was $120.1 million in the quarter, up roughly 2% year-over-year. The driving force behind the increase was $3.6 million subscription shipments at an average order value of $33.10, $2 more than the year ago period and nearly $1 more versus the previous quarter. Our Bright product line has been performing exceptionally well, delivering $2.7 million of revenue in the quarter and roughly $8 million through the first nine months of fiscal 2023, up over 100% on the corresponding period for 2022. Furthermore, our new food business, which launched in August is growing at a strong pace and that's without us investing in marketing. We also achieved healthy margin expansion in D2C for the third quarter in a row. D2C gross margin was 61.8%, up 230 basis points, compared to Q3 last year and up 160 basis points versus Q1 this year. These improvements were driven by strong growth in our average order value and improved ongoing pricing with our manufacturing and freight partners. Moving on to our commerce business, revenue came in at $14.2 million down from $22.7 million in the same period last year. As mentioned earlier, this was largely timing related. The commerce gross margin was 42%, up from 36% in the year ago period as a result of our holiday promotions hitting fiscal Q2 this year. Turning to operating expenses. Our total G&A expense was $80.2 million, up roughly $2 million, compared to the same period last year. The increase was primarily driven by $2.2 million of impairment costs related to our previous New York head office. As Matt discussed, we announced the cost reduction exercise this afternoon in an effort to better align our cost structure with the current macro environment and further improve our operational efficiency. To quantify the magnitude of this exercise, we expect to achieve approximately $12 million of annual cost savings starting this quarter with around $10 million to $11 million flowing into fiscal year 2024. This initiative coupled with the improvements we have already realized will significantly improve our profitability profile. These are always difficult decisions to make. However, we believe this initiative better aligns our cost base with our scale will make our organization more effective and better enable us to capitalize on the tremendous opportunity ahead. Moving to advertising and marketing, expenses were $21.7 million, down approximately $5 million, compared to last year. We will continue to manage our marketing budget in a disciplined fashion to ensure we are continuing to improve the returns on our investment. Nevertheless, we are very happy with the quality of customers that we have been acquiring throughout fiscal 2023 and with growing average order value and a healthier cost structure, we increasingly have the flexibility to lean into our effort, if we continue to see our lifetime value increase. That said, sustainable profitability remains the foremost priority. And lastly, adjusted EBITDA was negative $12.8 million, $200,000 ahead of our guidance for the quarter and a 30% improvement, compared to the negative $18.3 million we generated last year. Overall, our results last quarter underscore our significant progress in improving unit economics and driving towards sustainable profitability. Turning to the balance sheet. We ended the period with $164 million of cash broadly in line with the prior quarter, notably we reduced our inventory balance by over $15 million in the quarter, which is a step change improvement. And lastly, we achieved positive free cash flow in the quarter for the first time since going public, which is a major milestone. When looking ahead, we anticipate positive free cash flow tailwinds in two areas. The first is balance sheet driven as we continue to focus on reducing our inventory levels and the second is P&L driven as we expect to see an improved margin profile coupled with the cost reduction exercise we implemented today, all of which should boost our profitability and free cash flow generation. Overall, we had a very strong quarter. We continue to add higher value customers. Our gross margin continues to rise, we're improving our operating expense profile and we're beginning to generate positive free cash flow. And while the near-term macro environment remains volatile, we have a tremendous runway ahead and I look forward to building on our positive traction. Thank you. [Operator Instructions] The first question is from the line of Maria Ripps with Canaccord. Your line is now open. Great. Thanks so much for taking my questions. First, so it looks like you reported very healthy Q3, but it sounds like Q4 is trending much softer-than-expected. Can you maybe just talk about at, sort of, at what point did you start the deterioration in discretionary spend? And I guess what are your thoughts around reengaging those consumers as you move throughout fiscal 2024? Yes. Thanks, Maria. We did and as you know, fiscal Q3 is typically our biggest quarter from a net adds perspective and from an AOV growth standpoint. And it was difficult to expect in this environment how the consumer is going to respond. It's cut pretty much across everything in a proportional way, the way you would expect. So if you look at commerce, there's certainly the headwinds that we're feeling where our retail partners have their inventory built up and we saw some of that pull forward last quarter and they're just built up. So there's a lot to move through there and I'd expect that continues through at least this quarter that we're in here and maybe the next. And then on the direct-to-consumer side, there are a few different stories, but there's the net adds overall came in lighter than we would have hoped. Most of that happened in our biggest business, which is BarkBox, and then as you move to Super Chewer, better performance and then really, really strong performance in food and dental, but obviously growing on a smaller base. So what we're seeing there is that really healthy rotation we've been after for the better part of the year or longer. Rotating from toys into food and dental now. The nice thing is especially in food, we're picking up all that momentum from the toy customer base and it's going very, very well, which suggests we're probably in the past quarter and we've probably been a bit too conservative in what we're willing to spend to acquire a customer. Their value is growing more and more as the quarters go on, you see that in AOV. And then the margin is increasing. The retention is hanging in there or even a little bit better. So I think we just needed some time to adjust to this dynamic at food and get some confidence in it. And As we push through next year, I think you'll see more and more of that acceleration. Got it. That's very helpful, Matt. And then it seems like your Eats business is seeing strong momentum, sort of, how are you thinking about investments in the product over the next couple of quarters, especially given your cost savings initiatives here? And then are there any sort of specific milestones like certain level of scale or certain number of markets that you have in mind that sort of need to be achieved before you start marketing it externally to people, who are not already existing subscribers? Yes. In terms of the investment and the team, there's a very good narrowly focused type team on it, that's doing a fantastic job. So we've got the right group of people around it and they're expanding it nicely. So we don't need -- I'll say, we don't need big G&A investments in it to make it go faster, that's happening all on its own. The question about marketing is a good one, because as I said, most of this momentum has been driven off of cross-selling into the toy customer base and there's a whole lot more we can still do there and we’ll do there. But to your point, we should be starting to spend some external marketing dollars to acquire direct food customers, but even more so now that we have this internal engine running where we can take a toy customer and more effectively turn them into a food or dental customer, we should be increasing our cost of acquisition on that side as well. So the marketing spend will start to move up to reflect that higher LTV and the strength that we're seeing in the cross-selling. Thank you for your question. The next question is from the line of Cory Grady with Jefferies. Your line is now open. Hey, thanks for taking my questions. I want to follow-up on cash generation, so you made a lot of progress on converting inventories this quarter and it sounds like there's still more room there? And if you can talk about how much more room is there left, so how much more inventories are there left to work down? And what you're targeting is kind of like a normal level? Hi, Cory. How are you doing? This is Zahir. In terms of just maybe a better context around supply chain, so we have a sizable amount of lead time in supply chain from ordering products to it landing in our warehouse and ultimately flowing through to customers. So typically that's anywhere between eight to 10 months. So that's really important context as you think about how much reduction or how much you can influence inventory change in the near-term. So as we think about what happened in Q3, that $15 million reduction was as a result of us making decisions back in March, April. From a purchases perspective where we decided we wanted to take a step change reduction in our inventory. And so you're seeing that now flow through in our December financials. And as I said, it was a sizable reduction, and what it does is it rebases us back down from the 160 level and now around 145 as we enter 2024 and calendar 2024 that is. And so we use that as our new baseline as we plan for future reductions. I'd say in the near-term, inventory is going to move up or down depending on consumer demand relative to purchases that we place with suppliers some months ago. But looking forward for fiscal 2024, I’d expect inventory levels to come down by a similar, sort of, amount that we saw in Q3 with a greater impact likely in the second half of 2024, due to the supply chain lead times. Does that help? Got it. Yes, that's really helpful. Thank you. And then just on profitability, so kind of following up on cash generation. So you reported a pretty solid gross margin expansion this quarter and then obviously the 12% workforce reduction, and you can talk about any updates on timing on getting to adjusted EBITDA profitability? And what the remaining steps are to get there? Thanks. Yes. I think you're seeing it. And as we're guiding to a loss of $3 million in this current quarter. But as I said in the call, the building blocks are there and you're pointing it out, the gross margin leap forward to roughly 60%, the best we've posted as a public company to-date. And we still feel there's a lot of room for growth in that or we know there is, we see it through a lot of those contracts that we've put in place with our vendors. And as Zahir said, we're just working through the inventory that would be on old contracts. So we've got some visibility to ongoing improvement there in addition to the AOV improvement. That makes the gross margin go up, improvement on the shipping and fulfillment line and as you mentioned, the cost reduction. It's a long way of seeing we're right there and we're guiding to being right there. When it comes to the when we're getting our arms wrapped around the full-year plan for fiscal ‘24 and here has been on board with us now for five weeks. So we're getting our arms around it and I think we'll have visibility to that very soon. Thank you for your question. The next question is from the line of Ryan Meyers with Lake Street Capital Markets. Your line is now open. Hey, guys. Thanks for taking my question. First one for me, just wondering if you can unpack the AOVs during the quarter a little bit more? And then kind of maybe what percentage of revenue came from cross selling? Yes, this quarter $15 million of revenue came from cross-selling out of the total $134 million or $120 million of direct-to-consumer. So well over 10% of consolidated and certainly over 10% on the direct-to-consumer side. So that continues to be a core strength of ours. And as I mentioned, and I've talked about it for a lot in the past year that we had become very good at in our past couple of years was addressing a toy customer and selling them more toys. We became really great at that. What's changed in the past quarter or two really since we updated the format and went to the breed-based format of food is we've really unlocked how to take a toy customer and turn them into a food customer. And that's been the unlock we've been looking for. So that's the game changer for us, and what we've been going for. In this past quarter, if I go back to the question Cory just asked, we've done a couple of things. I mean, we've certainly expanded the gross margin overall in that 60% neighborhood. We've improved our shipping and fulfillment percent of revenue that we spend there. We have our cost reduction at exercise and before that we turn in a free cash flow positive quarter, and then you take all that forward. So one priority was to get profitable, another was to have real momentum in food. We've got that too. So we're pretty happy with where all that is. Got it. And then kind of the integration of the one BARK brand, how is that progressing? And do you guys have any sort of timeline as to when that might be complete? Yes. Not a specific timeline, but if you will see it. It's not -- we don't feel the best way to bring this out is to work on it under the covers for a long period of time, and then just debut a whole new platform. And so we're bringing this out day by day, little by little and learning how to sell in new ways and learning how to introduce new products in new ways. So if you look at the food platform right now, food.bark.co, what you have there is we're selling the core kibble and the food on that breed-based approach. But we introduced new products there as well, like food toppers, so still in the food family, treats, and soon you'll see our dental products start to appear there. And now we're starting to move more and more into having all the products on that platform. And the platform is really where we're getting the leverage, because it is -- it's far more flexible, much easier for us to optimize and improve on. And we're seeing those day-to-day gains in our conversion rate and our cross-selling ability. And so we're taking it one step at a time moving those products over, but it's going rapidly. And then we'll have the, I'd say, the window dressing of, there's going to be a date where we changed the URL from food.bark.co to bark.co, create some new navigation. But you'll see in the coming weeks, changes start to be made there, especially new products being introduced. Thank you for your question. The final question is from the line of Ygal Arounian with Citigroup. Your line is now open. Hey, good afternoon, guys. And apologies if I address this, but jumping around a few calls, but I just want to kind of come back to the demand environment, I think some of the credit card data we've -- you've been following this in surveys that we've seen suggest that the pet category remains resilient in this kind of environment and obviously there's a little bit of a step down here? Are you seeing something different or do you think this is more broad-based? Is the subscription component of the business? And I know people can turn on and off. Is that a factor? Just how should we think about that? And how do we get back to a rebound? Is it just the macro environment improving? Are there other things that you can kind of put in place to drive some improvements in the demand environment? And then second, it's very related. Your LTV to CAC is still -- it’s strong, it’s improving as your [AOV] (ph) goes up and your cross-selling on these products. But how do you think about marketing spend in a softer environment? Do you slow down marketing? Are you a little bit more cautious on it? Do you step into marketing to keep demand higher? How do you think about that LTV to CAC in that environment? Thanks. Yes, thanks. So really good questions, and I'll start with the first on the demand environment. It's again not all revenues created equal, and so we're seeing that softness and acceleration. I think, it's similar to what we're hearing from others in terms of what they're seeing. So the more discretionary products and for us. The most discretionary would be subscription BarkBox, and those are the ones that are facing the headwinds. Those that are holding up and very resilient and even surging are less discretionary food and health products like our dental product. And we're seeing that too. We're seeing it just really, really take on. And for us, that's really healthy. The great thing about it is the toy and treat businesses offer to us really strong unit economics. They bring in good cash flow and they also bring in a relatively inexpensive way to acquire customers for the food and dental categories. A toy customer costs a whole lot less out in the market than a food customer. So I think what you're seeing in the demand environment is the same as us. We're just growing from a smaller base on those other categories. And then to your -- and that dovetails into your LTV to CAC question and the marketing spend. It's exactly that the strength we're seeing in those categories and the market opportunity that's available there, we probably have been too conservative on the cost of acquisition side. And everything is just starting to come together. The cross-selling into that the big pickup quarter-over-quarter in the gross margin, the retention holding up the AOV gain all that came together this quarter. And we're probably too conservative about the cost of acquisition. So it's in the pursuit of positive EBITDA. It's not going to be a case of us, reigning in the marketing spend. It'll probably go the other way where we push on it harder and try to grow it faster, because we feel so confident about taking those toy customers and making them food customers. Thank you for your question. That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

EarningCall_90

Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2022 Fourth Quarter and Year-End Results Conference Call. Thank you, operator. Welcome everyone to Precision Drilling's Fourth Quarter and Year-End Earnings Conference Call and Webcast. Today, I'm joined by Kevin Neveu, our President and CEO; and Carey Ford, our CFO. Earlier this morning, Precision reported strong fourth quarter results, capping off a very successful year. Carey will review these results with you, followed by an operational update and outlook commentary from Kevin. Once we have finished our prepared comments, we will open the call to questions. Please note that some of our comments today will refer to non-IFRS financial measures, and will include forward-looking statements, which are subject to a number of risks and uncertainties. For more information on financial measures, forward-looking statements and risk factors, please refer to our news releases and other regulatory filings. As a reminder, we expressed our financial results in Canadian dollars unless otherwise indicated. Thanks, Lavonne, and good afternoon. Precision's annual financial results showed significant improvement from 2021 to reflect the focus of the 2022 strategic priorities that Kevin will review in his commentary. A few of those highlights include: revenue of $1.6 billion, a 64% annual increase; adjusted EBITDA of $312 million, increasing 62%; funds from operations of $283 million, increasing 86%; cash from operations of $237 million, increasing 70%; debt reduction of $106 million, exceeding our $75 million debt reduction target; and $10 million in share repurchases. Moving on to our fourth quarter results. Our fourth quarter adjusted EBITDA of $91 million increased 43% from the fourth quarter 2021 and was supported by higher North American activity and day rates. Also included in adjusted EBITDA during the quarter is share-based compensation expense of $75 million. And absent this accrual, adjusted EBITDA would have been $166 million. More on the share-based compensation accrual in a moment. The margin performance of the business started to accelerate in the second half of 2020 and with Q4 adjusted EBITDA before share-based compensation percentage -- as a percentage of revenue of 33% compared to 24% in Q4 2021. As we focus on revenue efficiency in 2023, growing these margins will -- further will be a priority. In the U.S., drilling activity for Precision averaged 60 rigs in Q4, an increase of 3 rigs from Q3. Daily operating margins in the quarter after impacts of turnkey and IBC were US$11,849, an increase of US$2,187 from Q3 and exceeding our previous guidance. For Q1, we expect normalized margins to increase another US$2,000 per day from Q4 levels. In Canada, drilling activity for Precision averaged 66 rigs, an increase of 14 rigs or 27% from Q4 2021. Daily operating margins in the quarter were $12,348, an increase of $2,314 from Q3 2022, and ahead of our prior guidance. For Q1, we expect margins to be relatively flat due to a higher percentage of shallower rigs active, lower expected boiler revenue at the end of the quarter and seasonal timing of pricing renewals. Internationally, drilling activity for Precision in the quarter averaged 6 rigs and average day rates were US$49,918, down approximately 4% from the prior year due to active rig mix. We expect to add 2 additional rigs in Kuwait when the new contracts begin this summer. Because certain of these rigs will be off-line and undergoing certification in the first half of the year, we expect 2023 activity to be only slightly higher than 2022 on an annual basis, despite having 8 rigs running by the end of the summer. 2024 activity should increase by 30-plus percent over 2023. In our C&P segment, adjusted EBITDA this quarter was $12 million, up over 91% compared to the prior year quarter. Adjusted EBITDA was positively impacted by a 49% increase in well service hours reflecting the impact of the High Arctic acquisition and higher industry activity in the quarter. We expect results will further strengthen in Q1 with increased rates and activity and full realization of our transaction synergies. Capital expenditures for the quarter were $57 million and $184 million for the year. Our capital expenditures were slightly higher than our guidance of $165 million due to timing of equipment deliveries. Our 2023 plan is $235 million and is comprised of $163 million for sustaining and infrastructure and $72 million for upgrade and expansion. The upgrade and expansion portion relates to anticipated investments supporting Alpha technologies' EverGreen environmental solutions and contracted customer upgrades, which includes a Super Triple conversion for the Canadian market on a 3-year contract that requires approximately $17 million of capital from Precision. Kevin will discuss this project in more detail later in the call. Of the $163 million in maintenance, approximately $30 million relates to the Kuwait rig certifications associated with 4 rigs contracted for a 5-year term and approximately $20 million related to international drill pipe deliveries. Our capital spending plan is generally flat year-over-year before adding the capital for four multiyear contracts in Kuwait and the one multiyear contract in Canada. As of February 8, we had an average of 58 contracts in hand for the first quarter and an average of 49 contracts for the full year 2023. We now have 17 rigs on contract in Canada for 2023, reflecting an increasing number of customers seeking to lock up rigs ahead of LNG project starts. Moving to the balance sheet. We continue to reduce both absolute and net debt levels, primarily through free cash flow generation and succeeded in reducing debt by $106 million in 2022. As of December 31, our long-term debt position, net of cash, was approximately $1.1 billion, and our total liquidity position was approximately $600 million, excluding letters of credit. As a reminder, all our outstanding debt is denominated in U.S. dollars and reported values within our financial statements will vary based on changes in the USD, Canadian dollar exchange rate. Our net debt to trailing 12-month EBITDA ratio is approximately 3.4x and average cost of debt is 7.1%. With continued debt reduction and activity expectations, we believe we will end 2023 with a net debt-to-EBITDA ratio of between 1.25x and 1.5x, moving Precision closer to our updated goal of below 1x. For 2023, we expect to generate strong free cash flow for the year, with Q1 cash flow impacted by front-end loaded CapEx, working capital build, our semi-annual interest payments and year-end payments. Our year-end target for debt reduction is at least $150 million, and we will target our revolver balance and 2026 notes that are callable at par in the fourth quarter. Additionally, we plan to allocate 10% to 20% of free cash flow before debt principal payments to share repurchases. Now I would like to cover some details on the share-based compensation plan Precision has in place. Our plan is similar to other corporate plans, but the cash settled accounting creates quarter-to-quarter volatility in the accruals that can be challenging to follow. We accrued $75 million in share-based compensation charges for the quarter and $134 million for the year, where approximately $74 million relates to potential payments in Q1 2023 and $60 million relates to potential payments in 2024 and 2025. Our long-term incentive awards are granted at the beginning of each year to motivate executives and key employees over a 3-year vesting period and are -- and to align Precision's long-term goals and shareholders' interest. Our share-based portion of compensation have averaged approximately $25 million at the grant date for each of the past five years. The awards vest over time and are impacted positively or negatively by changes in Precision's share price and a performance multiplier between 0x and 2x, which is calculated based on relative share performance and certain long-term strategic initiatives. For the 2020 grants, which remain early in Q1 2020 before the impacts of COVID-19 and despite the uncertainty and challenging macroeconomic events caused by COVID-19, no adjustments were made to award amounts, total shareholder return requirements or long-term strategic initiatives over the 3-year period. Precision's business and share price performance have performed exceptionally well since the grant date. At the end of 2022, the performance multiple changed from 1x to 1.49x for the accrual. This was based on Precision's 3-year total shareholder return performance of 186%, the second highest within Precision's defined peer group of 16 companies and indices, which accrued a performance multiplier of 1x. Additionally, Precision nearly achieved a long-term debt reduction target, which accrued a multiplier of 0.49x and failed to achieve a leverage ratio target, which accrued a multiplier of 0x. The multiplier change impacted the accrual for a portion of share-based compensation to be paid out in Q1 2023. So now we're moving on to the share price. In addition to Precision's exceptionally strong share price performance in the quarter, which increased 48% from the end of Q3, the increase in share price required a change in accrual for the plans to be paid out in the first quarters of '22 -- 2023, 2024 and 2025. This is a mark-to-market exercise that has performed every quarter. I'll take a breath. Thank you for your patience with that explanation. Now let's move on to guidance for 2023, where we expect to have depreciation of approximately $285 million; cash interest expense of approximately $80 million; cash taxes to remain low; and our effective tax rate to be approximately 25% as we continue to return to profitability in 2023; SG&A to be approximately $95 million before share-based compensation expense; and share-based compensation expense accruals of approximately $30 million to $40 million for the year, with a Canadian dollar share price in the $80 to $100 range. For 2023, we expect the share-based compensation accrual to move approximately $600,000 per $1 change in share price in either direction within this general range. Thank you, Carey. I'm very pleased with the performance of our business during the fourth quarter and for the full year of 2022. And as Kerry mentioned, we achieved success on all last year's strategic objectives and this positions us very well for a running start into 2023. Revenue growth was strong. Margin growth was stronger and capital discipline remains a key element of our financial strategy. Last quarter, we achieved and are sustaining of 100% or sold out utilization with our Super Triple rigs in the Canadian market. We reactivated and are sustaining approximately 90% utilization on our U.S. Super Triple fleet. We re-contracted six of our natural rigs for a 5-year period with over $800 million of contracted international backlog. AlphaAutomation is now viewed as an industry standard for rig automation and is designed -- customer desires add-on to virtually all of our operating Super Triple rigs. During 2022, we leveraged our successful Alpha business model to introduce the EverGreen product line, where we exceeded our first year market penetration expectations with this exciting new GHG reduction initiative. There's no question that our success is from the efforts, the energy and the intense focus of Precision's team apply to our strategy and then delivering strong results. Looking back not too long ago, there was a period in 2020 early in the pandemic that many questions the survivability of our industry and Precision. The pandemic collapse came just after we launched the commercialization of our AlphaAutomation platform. Despite those challenging times, our people stay focused. We've doubled down their efforts on our strategy, our technology, free cash flow and they reinforced our products culture. The momentum we created during that period has served Precision well as the industry rebounded in 2021, 2022, and as the rebound continues in 2023. For 2023, Precision's strategic objectives are: one, elevating our high-performance, high-value strategy, which encompasses safety, rig efficiency, Alpha and EverGreen and most importantly, our value proposition to our customers; two, maximize free cash flow, including driving field margins towards 50% in the North American drilling business, among other internal financial targets; and three, as Carey covered earlier, accelerating our capital structure plans by increasing our short-term and long-term debt reduction target, tightening leverage target and continuing to prioritize 10%, 20% of free cash flow for share repurchases. Now turning to our operations. I'll start with the Lower 48. Natural gas price weakness likely will have some influence on customer planning despite the strong gas hedge positions across the gas producers. Since the beginning of this year, we've actually re-contracted 12 gas rigs with the same clients, and three other gas rigs have been re-contracted to new clients. So we've seen minimal turnover so far. Currently, we have 85% utilization of our Super Triple rigs and those active or hot rigs remain highly desired by customers, whether they're in gas or oil. It's our expectation that nat gas customer demand will likely be taken up by customers looking closely at Precision's Super Tripe rigs, especially with our AlphaAutomation capabilities. Day rates remain firm with leading edge rates in the [43] range. We expect to continue repricing our currently contracted rigs with existing price environment as our contracts renew over the course of 2023. The themes of many, if not most, E&P capital spending programs were based on conservative price decks and they've covered with hedges to mitigate the risk to the volatile commodity prices. We did not see rig demand boom like in prior cycles in response to the high commodity prices of early last year, and we expect customer demand to remain moderate and disciplined and somewhat insulated from the commodity volatility we experienced recently. Of course, we all understand the potential risks of the global recession or a meaningful slowdown and the potential impact on commodity prices and customer demand. Today, we have 61 rigs running and expect to be in this range plus or minus for the first quarter. We expect our EverGreen solutions will gain wider customer penetration in Lower 48 during 2023 and the compelling economics of the diesel fuel savings and for some regions, the GHG reduction these products offer make good sense for our customers. Turning to Canada. The Canadian market looks very good indeed. Notably, the recent agreement reached between certain First Nation's groups and the Province of British Columbia has clarified the licensing process for oil and gas activity in Northeastern B.C. We see several operators looking to deploy capital for drilling programs, which are likely targeting future LNG exports, and we have already experienced multiple inbound inquiries seeking additional Super Triple rigs. Several current customers are now requiring about long-term take-or-pay contracts to lock in with for multiyear programs, breaking away from the traditional Canadian no obligation pricing agreements to all contracts in the past. Currently, we are 100% utilized with 28 Super Triples running. This is the first time this has happened for Precision in any rig class in our history. In response to this demand, we have previously announced one additional Super Triple rigs expected to go to work in March. This rig was redeployed last year. Additionally, we have recently signed a contract for a substantial upgrade to create another Super Triple class rig, which will be deployed in January 2024. This new class upgrade is backed by a 3-year term contract and mid-40,000 day rate or the base rate. By early next year, and actually clarify a mid-40,000s dollar day rate for the base rate. By early next year, we will have 30 Super Triple rigs in the Canadian market. We have a couple of more redeployment candidates in the U.S. and several other possible upgrade candidates, but we'll remain highly disappointed in how we proceed ensuring we meet our expected returns and sustained market supply potential. Now moving to Clearwater play for a moment, I thought it would be beneficial to spend a little time explaining this story to our investors. First of all, the Clearwater formation is a high permeability conventional heavy oil play that doesn't require speed and doesn't require hydraulic simulation. These are relatively inexpensive and low cost curve oil wells, typically costing $1.2 million to $1.7 million per well. The operators are reporting that these wells are 1/2 cycle breakeven at around US$20 per barrel of oil equivalent, which on that basis, these are lowest cost oil wells in North America. The Clearwater wells are actually fairly complex. The vertical legs are 600 to 900 meters and the horizontal section is a multilateral with a working two to eight separate horizontal legs built from one vertical wellbore. The horizontal legs can be from 1,000 to 2,500 meters or longer for wellbore horizontal sections of 10,000 meters or more per vertical wellbore. From a drilling perspective, the Clearwater play has legs, both metaphorically and physically. These wells are drilled on pads and the pad prices range from two to eight wells per pad. As we said in prior calls, this drilling is ideally Precision’s Super Single style rig. With this rig, we typically drill these complex multilateral wells from 12 to 14 days each. Precision enjoys a 45% market share in the Clearwater where we have similar market shares for all heavy oil and sand drilling in Canada. Today, we have 43 Super Singles running with about 85% utilization, again, the highest since 2014. We're operating 78 rigs total in Canada and expect to peak at 79 or 80 later this month, with spring breakup linked to weather not customer budgets. Customer demand looks strong for the balance of 2023 and beyond. The second quarter, our breakup of shaft activity level looks to be around 40 rigs compared to 19 last year. This higher level was driven largely by sustained pad activity in the Montney and Clearwater. We're projecting our average activity for the quarter to be in the 45 to 46 rig range, up approximately 25% last year. In our Canadian well service business, as Carey mentioned, the integration of the High Arctic business is effectively behind us, and we're on track to achieve the expected synergies. Activity and customer demand remains strong, industry service rig requirements and labor constraints continue to support strong pricing tension. Precision's well service team continues to manage strong customer demand and labor recruiting challenges, cost inflation, all while increasing margins and returns for investors. Today, we're operating 68 service rigs, and we see additional customer demand where we are up to 10 rigs in a given day. Last year, we combined the management of our oilfield rentals business with our camps and catering business to reduce overhead and streamline the operation. These changes, along with strong customer demand and improved equipment utilization, transform this business becoming a meaningful contributor to our Completion and Production Services unit. Turning to our International segment. We mentioned earlier, we previously announced contract awards in Kuwait and Saudi Arabia, and we remain on schedule to be running at least 8 rigs for that reason later this year. Currently, we're bidding for multiple opportunities to activate several of our idle rigs also in the region. And we're also looking at other Arabian Gulf regional opportunities for both our Super Singles and our Super Triples. International demand is certainly in the rise with the tender to contract to rig activation cycle is usually measured in months and quarters. We hope to have more news in our financial report later this year. I'll now turn the call back to the operator for questions. But before I do, I'd like to thank the employees of Precision Drilling for their hard work, dedication and the results they have put to deliver last quarter and last year. Thank you. And now back to the operator for questions. So while we're waiting on the operator, certainly is a technical issue with the feed right now. But certainly we do expect questions and prepare to have many questions. We are still waiting the operator to interject here and take questions. There seems to be an issue right now with the conference provider. I'll just comment that on the feed that we have right now, we can see that we have at least seven questions from the analysts that we're trying to insert. But we are still waiting on the operator to join the call. Kevin, I didn't hear you clearly. For this rig upgrade, the super spec in Canada, did you say that the day rate was mid $40,000 a day. What was the day rate at which it was contracted? Waqar, yes, thanks for the question. And I understand there may have been some muffling on the call. So I'll clarify that. What I was saying was the day rate is in the mid-40,000s. So I think that would be in the range of $44,000 to $46,000 per day. Certainly, it is. It's going to be a Super Triple ST-1500 rig with remote sport generators and -- we expect to have some additional add-ons above that rate that will include our technology, the technology and expect also there'll be some EverGreen products on top of that rig. So the all-in rate for that rig could easily move into the low 50s. This is simply a rig upgrade. We're seeking economics that meet our thresholds, hence, the day rate being in the mid-40s for the base rig but it's an ST-1500 winterized with cold weather gear. Otherwise, conversion ST-1500 three-pump rig in West Texas. In the past, we talked about those upgrades being $10 million to $12 million, but this would be a Canadian style inflated heated boilers. So that's why the cost would be a little higher than… And then my second question relates to the Haynesville. You have a number of rigs working for one particular private customer -- could you talk about the contract status there for that rig for those rigs? And maybe any color that you can provide for your Haynesville exposure? Well, I can't. But what I can tell you is I did have a comment on, I think it was 12 rigs that repriced and removed during the first month of the year, and most of those were Haynesville rigs. Maybe just to start off, Kevin, in your comment in the press release, you talked about moving margins to 50%. Can you just talk a little bit more about what's required to get there? Do you need to increase the rig count from where it currently is? Or with the 60 rig number, can you actually get to the 50%? And then just what time frame do you think there is on that? Do you see getting cash gross margins in the U.S. by the end of this year? Or if you could just kind of help us frame that up, that would be good. Sure, Keith. So we have an internal target, which I'm not going to publish at this point. But tell you we're trying to move in the direction to 50% over the longer term. I do think that if the rig count stays flat for the rest of the year, maybe a little more of a challenge. But we have a number of rigs that are still rolling over and repricing. We expect to see wider deployment both Alpha and EverGreen on the rigs, which are both high-margin product lines. So I think we've got a number of pieces in place between repricing existing contracts in the U.S. and adding on additional services to the rig and additional analytics where we'll have good traction to move in that direction. I'd rather not give the exact target for this year. Some of our customers are not too supportive of. Yes. Makes sense, makes sense. Just on the Canadian 1,500-horsepower conversion. Was this -- what was the genesis or the reasoning, I guess, behind why this -- why was this rig the rig that was upgraded. The customer specifically want a 1,500-horsepower rig for this application in this play? Or was it a matter of -- it was the rig available in Canada and it was the most expedient to convert. Just curious if we should expect to see more of that migration to the 1,500 horsepower rig level in Canada? Or was this a unique situation? So we actually have two other 1,500 horsepower rigs running in the country right now. And these are just going to be the deeper longer-reaching rigs. I don't expect a wide-scale migration, but I think that, that market could grow by maybe one or two more rigs over time. So we'll end up, I think this rig going to work next year. This particular customer, I don't think will do another rig this size in the near future. And we've said in the past that we have around 10, 12 or 14 DC SCR rigs. They are good candidates for upgrades. I think that fits in into the equation. We still have a small handful of 1,500-horsepower rigs in the U.S. are available. So there's an economic mix between either redeploying a rig in West Texas winterizing it or upgrading a DC SCR rig and to an AC rig, and between the -- what the customer is looking for, the spec, the size, the timing, both our customers and customers’ customer. I wanted to start on maintenance CapEx. So Q4 spending was well above the prior budget. 2023 is also fairly high. I mean, I assume activity expectations haven't changed that much. So did something else change from a cost perspective there? Cole, this is Carey. So we're not quite sure how clear the communication was on the front end of the conference call because it sounds like there was a technical difficulty with a provider. But we did give some guidance on the 2023 capital plan. So it’s $235 million, but that includes about $30 million to recertifications for the Kuwait rig contracts. It also includes about $16 million or $17 million for the Canadian rig that we're discussing as an upgrade. And if you take out those two, it's pretty flat year-over-year, the capital spend, if you look at going from '22 to 2023 and then the slight increase in 2022 was just a function of taking some early deliveries of capital late in the year, yes. So we're not seeing a ramp-up in maintenance capital spend per day. Okay. Got it. I just wanted to come back to Kevin's comments. So did you say that you had natural gas rigs re-contract so far this year? I assume those were at higher rates and anything you can say on the term. We had 12 rigs led contracts already in the month of January. So this year-to-date, -- most of those are Haynesville type rigs. There are a couple up in the Northeast. The 12 existing rigs re-contracted with the same customers into current rates. Okay. Got it. And on the share-based comp side, I mean, I kind of appreciate the plan is formulaic, but how do you kind of square the materiality for the perspective of shareholders? I mean realized cash share-based comp was 3/4 of your total debt reduction and share buybacks. Yes. So we haven't disclosed the total cash share-based comp. We've accrued for it, and we've accrued out of the $134 million, there's $60 million of that share-based comp is accrued for 2024 and 2025 payments. The rest of it is for Q1, and that's going to be a mix of settlement and shares and settlement and cash. When we look at the alignment of the plan with shareholders, particularly the absolute return of almost 200% over the 3-year period and the performance versus the peer group of being the second highest out of 16 companies. And then the strategic objectives of achieving long-term debt reduction, we thought that it is aligned with shareholder interest, and I think that's reflected in the share price performance. Just curious about the -- on the cost item in the U.S., the U.S. costs bumped up a bit sequentially. I saw it in your discussion that it was attributed to extra crews and slightly higher R&D. But so are we setting a new level here going forward? Should we be thinking about daily cost in the $18,000 plus range? Yes. So just to clarify, it would be -- our NIM would be -- repair and maintenance would be a driver to that. The driver of cost, primarily well over half of the cost increase over the past year has been wage increases in both Canada and the U.S. And so the cost bumped up a little bit more because of wage increases. And I do think that we might see fluctuations of $500, maybe $750 plus or minus where we came out in Q4 going forward. But I do think that the baseline has moved up a bit. On labor, it's a pass-through, so no difficulty there. And then it's our job to keep getting higher, there is to protect our margins and grow our margins, which is one of our goals for 2023. Okay. Okay. And then -- so -- with respect to the gas rigs rolling over, that's a good accomplishment year-to-date with the toll rigs that renewed within the role in the context of the current market price. I'm just wondering as we look down through the year here, Kevin alluded to the idea that we might see even a flat rig count market. But let's just for argument's sake suggest that maybe we even draw a few rigs through the year through 2023. If somebody had that view, I appreciate that most of the rigs coming off would probably be the SCR or even mechanical rig variants. But I wonder if you could explain what sort of happens to the margin or what you think would happen at the margin to leading-edge rates in that set of site experiences. Yes, a little hard to predict. Certainly, we've seen an unusual level of discipline among the U.S. drilling contractor industry. And it's mainly five of us that are all public companies all focused on returns, also in targets around margins and day rates. It's pretty constant theme. So we don't expect that discipline to dissolve in a flattish market or even in the softer market. Don't expect it to dissolve. Certainly, there are -- there's nobody in that group right now that is facing growing concern risk or trying to put themselves up for a transaction. So we expect to see, let's say, pretty firm discipline. And we've seen really good discipline over the last few months. We've got around limiting the number of potential rigs for upgrades and setting high return thresholds. So it just feels like that discipline is going to stay in place, and we're watching it closely. And as I made in my comments through, if something variable happens, if we get into that material slowdown. But I think in a modest slowdown, maybe the renewals aren't at 42,000, maybe they're at 38,000. Right. Perfect. I appreciate that. And one of the prior questions related to the term that was on those contract rollovers, did you say a number? Or did you give a range on that? Or am I just inherent... Yes. Those will be updated in the press release. But those -- the contracts that Kevin referenced are anywhere from six months to two years. Okay. And then last question for me, just related to the to the CapEx guidance, Carey. $30 million for recertifications. I think $17 million for the Canadian rig, I think you said $20 million per pipe. Is that all -- that adds up to about $67 million. And is that all sort of the upgrade/expansion capital? So the two buckets we have are maintenance, and then we have upgrade and expansion in the other bucket. The Canadian rig would go in the upgrade bucket. And the rest of the capital that you identified, so the recertifications and the drill pipe would go into maintenance. But the way that international maintenance works is since we have fewer rigs running, we will typically buy both drill pipe at the beginning of a contract when the contracts roll over, we'll buy new drill pipe. So it's really front-end loaded. . And that's why on this explanation of the conference call, we separated out that international drill pipe purchase the recertifications and then the Canadian upgrade has been contracted capital spend opportunities that were different from 2022. If you take those out, it's pretty much flat year-over-year. Okay. And sorry, I lied, I have one more question then. Of the expansion capital that you outlined in the budget for 2023, what portion of that would be committed capital today? I don't know if I can give you a percentage. It's a lot smaller dollar items. It's AlphaAutomation systems. It's EverGreen products. It could be walk-in systems and mud pumps and those types of things. Some are committed, some are expected. So they're probably -- over half of it would be committed. So Kevin, I'm kind of curious, looks like you got 19 rigs on contract as of -- through September 14 as of December. So I guess, simple math would suggest you've got about 40 rigs in the U.S. market that could reprice during the second half of the year? Is that about ballpark? Okay. And the -- so Carey, you mentioned that the kind of incremental cash margin in the U.S. has increased by about $2,000 per day. So it seems like that could be a pretty good cadence for the rest of the year? Would that be kind of a good assumption on our part? I think per day, flat to slightly growing rig count then that's a little bit more fuel to the fire for pushing day rates and margins. Right. I think what we've been hearing so far is got leading-edge rates are, I don't know, 35,000 to 40,000 a day, sort of kind of average rates in the fourth quarter were around 32. So that leaves a lot of headroom for this repricing without even rate count going higher. Is that fair? Yes. Got you. All right. And then second question. So Kevin, you mentioned a pretty decent rig count for kind of second quarter seasonality what kind of visibility do you have on third quarter activity in Canada? It looks pretty good. And just that I know it, Canada's been quite sensitive to a lot of macro issues. But certainly, our AC triple count will get back to that 30 range of 30 rigs, go down during Q2 but back up in Q3 for sure. And the activity we tend to have lined up has us in that mid- to upper 60s range very early in July. And it depends on how quickly our customers keep on whether it moves back into the 70s or not in Q3, we'll have to see how that goes. I'm not showing any further questions at this time. I'd like to turn the call back over to Lavonne for any closing remarks. Thank you, operator, and thank you for everyone who participated on today's call. If you have any further questions, you can reach out to the Investor Relations team. Thank you, and have a good day.

EarningCall_91

Good morning. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Phibro Animal Health Corporation Q2 Fiscal Year 2023 Conference Call. [Operator Instructions] Thank you. Thank you, Jeannie. Good morning, and welcome to the Phibro Animal Health Corporation Earnings Call for our Fiscal year 2023 Second Quarter ended December 31, 2022. My name is Damian Finio, and I am the Chief Financial Officer of Phibro Animal Health Corporation. I'm joined on today's call by Jack Bendheim, Phibro's Chairman, President and Chief Executive Officer; and Daniel Benham, Director and Executive Vice President of Corporate Strategy. Today, we will cover financial performance for our second quarter and share our current thinking on financial guidance for the fiscal year ending June 30, 2023. At the conclusion of our opening remarks, we will open the lines for questions. I'd like to remind you that we are providing a simultaneous webcast of this call on our website, www.pahc.com. Also on the Investors section of our website, you will find links to the earnings press release and second quarter Form 10-Q filed with the SEC yesterday as well as the transcript and slides discussed and presented on this morning's call. Our remarks today will include forward-looking statements, and actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the disclosure notice marked forward-looking statements in our earnings press release. Our remarks include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. I refer you to the non-GAAP financial information section in our earnings press release for a discussion of these measures. Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures are included in the financial tables that accompany the earnings press release. We present our results on a GAAP basis and on an adjusted basis. Our adjusted results exclude acquisition-related items, unusual, nonoperational or nonrecurring items, other income expense is separately reported in the consolidated statements of operations including foreign currency gains and losses net. And lastly, income tax effects related to pre-tax adjustments and unusual or nonrecurring income tax items. Now let me introduce our Chairman, President and Chief Executive Officer, Jack Bendheim, to share his perspective on Phibro's second quarter financial performance and guidance for our fiscal year 2023. Jack? Thank you, Damian, and good morning, everyone. SP3 Our top line continues to grow. Second quarter net sales of $245 million reflects growth of 5% over the same quarter last year. This improvement was driven by 9% and 27% sales growth of our Animal Health and Performance Products segments, respectively, offset by an 8% decline in Mineral Nutrition. In our core business segment, Animal Health, we reported our seventh consecutive quarter of year-over-year sales growth in each of our three major product categories. On a calendar year basis, this translates into sales growth of more than 20% in 2022 over 2020, which relative to some industry ports puts us in the top tier of animal health companies. Our Mineral Nutrition business was down year-over-year primarily reflected the lower value of the underlying commodity minerals such as copper that drives this business. Our Mineral Nutrition business is also the 1 area where we have exposure to the U.S. speed-line industry, where we are seeing fewer counter placements as compared to the same quarter last year. In terms of sales by region, we realized 12% growth in Latin America and Canada and 7% growth here in the United States. Our markets in Europe, the Middle East, Africa and Asia Pacific declined due primarily to the lingering effect of COVID-19 and persistent economic challenges. Overall, we posted a strong financial performance for the first half of our fiscal year with an even stronger projected second half. I also want to share that we add companion animal experience to our Board of Directors. On Monday we announced Alejandro Burnaud [ph], the newly appointed President and CEO of PCDX, joined our Board. I'll hand over the former executive and Mars Veterinary Health and worked with senior positions at Zoetis. We welcome his insights and believe they will be particularly impactful with respect to our companion animal business, which we seek to meaningfully grow over the coming years as we continue to focus on progressing our pipeline of projects in development and on growing with genset. Looking beyond Phibro, the global economy is showing signs of improvement, but there are still challenges. The improving trend of the consumer price index is encouraging, but of course, for margins to improve, input costs will need to decline, and we will need to work through higher price inventory on hand. We are focused on maintaining continuity of supply, which has resulted in us adding about 1 month of inventory in order to mitigate the risk of supply chain disruptions impacting our ability to get products to our customers on time. In the months to come, as we rebuild our confidence in the supply chain, we will look to bring inventory levels down, which in turn should help to improve our operating cash flows. And we continue to focus on raising prices where market conditions allow. I remain bullish on our business and our ability to grow sales given the strong demand for our current portfolio of products and the projected demand for the pipeline of future nutritional specialty, vaccine and companion animal products we have in development. Finally, we are reiterating our full fiscal year 2023 net sales guidance of $950 million to $1 billion and adjusted EBITDA guidance of $113 million to $118 million. However, to reflect the unfavourable impact of the tax-adjusted nonoperational environmental remediation costs charged to the P&L in the second quarter, we lowered guidance for GAAP net income and GAAP diluted EPS. Damian will explain these charges in more detail, but I also encourage you to read our updated disclosures included in our latest Form 10-Q. Overall, I am pleased with our second quarter and first half performance. Our full year guidance implies an even stronger second half of fiscal year 2023. But these projections are achievable and consistent with how our financial performance played out last fiscal year. Like you, we are hopeful that the global economy will continue to improve. But irrespective of the global backdrop, I remain bullish on Phibro and our opportunities to drive growth. Now, I'll hand it over to Damian to review our second quarter financial performance and fiscal year 2023 guidance in more detail before opening the line for questions. Damian? Thanks, Jack. Let me start with consolidated financial performance on Slide 4. Then cover segment level financial performance, key capitalization metrics and conclude with a review of our financial guidance for the full fiscal year 2023. Consolidated net sales for the quarter ended December 31, 2022, were $244.6 million, reflecting an $11.9 million or 5% increase over the same quarter one year ago. This increase was driven by improvement in both the Animal Health and Performance Products segments, offset by a decline in Mineral Nutrition. GAAP-based net income and diluted EPS decreased 59% driven by higher SG&A and interest expense, offset partially by lower income tax expense, but primarily due to a $6.6 million charge pre-tax were closer to $4 million after tax charge to the P&L in the second quarter. Most but not all of these charges relate to a tentative settlement of a lawsuit filed in 2014 seeking contribution from Phibrotech and one of our other subsidiaries which are included in our Performance Products segment and several other parties towards past and future costs associated with the investigation and remediation of a regional groundwater plume affected by the Omega chemical site, which is upgrading of our Phibrotech facility in Santa Fe Springs, California. In January 2023, the plaintiffs and the lawsuit, Environmental Protection Agency and certain defendants, including Phibrotech, reached a tentative settlement that would provide for a cash out settlement with contribution protection, which we released Phibrotech and its affiliates from liability for contamination of the groundwater plum affected by the Omega chemical site with certain exceptions. The tentative settlement would also resolve claims asserted by the EPA in August 2022 for its unrecovered past and future response costs related to the Omega groundwater Plume as well as claims for indemnification and contribution between Phibrotech and the successor to the prior owner of the Phibrotech site. You can find further details on our second quarter Form 10-Q and Footnote 7 commitments and contingencies under the subheading, environmental. And in addition to the increase in the environmental reserve related to the ground water plume affected by the Omega Chemical site, we adjusted the reserve for other nonoperational environmental remediation costs relating to contamination of the Phibrotech site that also predated our ownership. After results for one-offs on nonrecurring and/or nonoperational costs, including the environmental costs I just discussed, acquisition-related items and foreign currency movements. Consolidated adjusted EBITDA increased $1.8 million or 6% in comparison to the prior year's quarter driven by higher adjusted EBITDA in both the Animal House and Performance Products segments, offset by lower mineral attrition and adjusted EBITDA, an increase in corporate expenses. Adjusted net income and adjusted diluted EPS decreased 9%, respectively, driven by higher SG&A expenses and taxes, offset by higher gross profit. Moving on to Slide 5, segment level financial performance, I'll start with second quarter financial performance for our largest segment, Animal Health, which includes 3 product lines, namely NSDs and others, nutritional specialties and vaccines. The Animal Health segment posted $163.8 million of net sales for the quarter, which represents an increase of $12.9 million or 9% versus the same quarter prior year. Within the Animal Health segment, we reported a $5.5 million or 6% increase in MFAs and other versus the same quarter prior year. driven by increased demand for MFAs in Latin America and processing aids used in the ethanol fermentation industry. $6.5 million or very strong 17% growth in nutritional specialties driven by higher domestic demand and selling prices for dairy products, along with growth in Rejensa. And lastly, a $0.9 million or 4% improvement in vaccine net sales, driven by increased demand. In terms of profitability for the segment, Animal Health adjusted EBITDA was $37.1 million, a 10% improvement over the same quarter prior year due to higher gross profit on higher sales and margin improvement, partially offset by an increase in SG&A. And adjusted EBITDA margin for the segment improved 30 basis points to 22.6%. Moving on to second quarter financial performance for our other business segments on Slide 6, let's start with Mineral Nutrition. Net sales for the third quarter were $61.6 million, $2 million more than the prior quarter, but a $5 million or 8% decline versus the same quarter prior year, driven by a decrease in demand for trace minerals. A consequence of some customers lowering post-COVID inventory levels to adjust for the impact of heat and drought in the U.S. Midwest on feed intake as well as other economic challenges. Partially offset by higher average selling prices, which are correlated with the movement of the underlying raw material costs. Mineral Nutrition adjusted EBITDA was $4.4 million, reflecting a decline of $1.1 million or 20%, driven by lower gross profit. Adjusted EBITDA margin for the segment was 7.1%, a 120 basis point decline versus the same quarter prior year. Looking at our Performance Products segment, net sales of $19.2 million reflects a $4.1 million or healthy 27% improvement driven primarily by increased demand for copper-based products and higher average selling prices for copper-based products and ingredients for personal care products. Adjusted EBITDA was $2.3 million, a 73% increase and reflective of a 310 basis point improvement in adjusted EBITDA margin. Lastly, corporate adjusted EBITDA declined 12% or differently, corporate expenses increased 12%, driven by increased costs related to employees and strategic investments. Turning to key capitalization-related metrics on Slide 7, free cash flow for the 12-month period ending December 31, 2022, was a negative $45 million and was comprised of trailing 12 months of negative operating cash flow of $5 million that's $40 million of capital expenditures. It's important to note that the $40 million of capital expenditures excluded a first quarter $15 million purchase of property, Although for GAAP reporting, this purchase is categorized as capital expenditures on the consolidated balance sheet and statement of cash flows. It was financed with the 2022 term loan referred to in the other long-term debt footnotes included in our second quarter Form 10-Q and therefore, excluded here. The negative $45 million in free cash flow for the 12 months ended December 31, 2022, was driven primarily by a $58 million increase in inventory over the same period representing approximately 1 month of additional inventory on hand, which is intended to mitigate the risk of supply chain disruptions, which impact the company's ability to fulfil customer orders on a timely basis. Consistent with the projections we communicated on our last call, operating cash flow for the second quarter reflected a $9 million improvement over the first quarter. Although on a trailing 12-month basis, free cash flow declined $24 million versus the last quarter end. This delta relates to the difference between free cash flow for the quarter ending December 31, 2022, that's included in this quarter end calculation versus the same quarter prior year that is now excluded. Moving on to liquidity, we had $202 million of liquidity available at quarter end. This includes cash and short-term investments of $78 million, plus $124 million of unused and available revolving credit, subject to the same leverage ratio limitations as defined in the 2021 loan agreement. In terms of our dividend, consistent with the past several quarters, we paid a quarterly dividend of $0.12 per share or $4.9 million in aggregate. Turning to leverage, our gross leverage ratio at quarter end was 4.2x, consistent with last quarter end. This is calculated by dividing total debt of $477 million by trailing 12-month adjusted EBITDA of $113 million. It's worth noting that this is not the leverage ratio used to determine financial covenant compliance. For covenant compliance, we calculated a net leverage ratio as defined in the 2021 loan agreement. And lastly, I wanted to highlight that $300 million of our $477 million of gross debt is not exposed to current market interest rates. We have an interest rate swap in place, which has now been fully converted from LIBOR to SOFR, the secured overnight financing rate, at a fixed SOFR rate of 0.61%. The variable interest expense paid on the remaining $177 million of total debt is subject to rising interest rates, but is partially offset by interest income earned on short-term investments. Now let's turn to Slide 8, which lays out the revisions we made to our GAAP guidance for fiscal year ending June 30, 2023. As Jack mentioned, in addition to reiterating guidance for net sales of $960 million to $1 billion and adjusted EBITDA guidance of $113 million to $118 million, we are iterating guidance for adjusted net income, adjusted diluted EPS and our adjusted effective tax. However, we are lowering guidance for GAAP net income and GAAP diluted EPS to reflect the unfavourable impact, net of tax, of the nonoperational environmental tentative litigation settlement and remediation costs charged to the P&L in the second quarter. That said, let me summarize where we now stand for our full year guidance. We are projecting net sales of $960 million to $1 billion, no change. Net income of $34 million to $38 million, which is a reduction from the $39 million to $43 million range previously communicated and reflective of the after-tax effect of the $6.6 million of environmental cost charges to the P&L in the second quarter. Because of the reduction in net income guidance, diluted EPS guidance now stands at $0.84 to $0.94, which is a reduction from the $0.96 to $1.06 range previously communicated. Adjusted EBITDA of $113 million to $118 million, again, no change, adjusted net income of $49 million to $53 million, which is unchanged. Adjusted diluted EPS of $1.21 to $1.31 also unchanged. And lastly, an estimated adjusted effective tax rate of 33%, again, no change. Guidance for full year GAAP metrics assumes actual foreign exchange losses for the 6 months ending December 31, 2022, and the Company's projected currency exchange rates for the next 6 months for the 6 months ending June 30, 2023. In closing, we're pleased to report that our second quarter and first half adjusted financial performance was in line with our expectations. And as our full year guidance implies, we are projecting and looking forward to an even stronger second half. I have one and a follow-up, if possible. Just -- and I apologize if I missed this, but could you provide a little quantification between the higher SG&A between employee costs and strategic investments? Or any color around that? Yes. I could take that question. So on the employee cost, we had more vacancies last year that we were able to fill this year given the free up in the labor market. So that's what's driving the higher employee costs. So it's a combination of the number of people as well as the cost per labor hour. On the strategic investments, as I think we mentioned in our guidance earlier in the year, our intent was to spend about an additional $10 million. A good portion of that is allocated to our companion animal development pipeline, but also our development projects for vaccines and nutritional specialists. And think about that kind of ratably over the new year. Is that kind of the way to think about that? In terms of growth, second half over first half, we expect a slight increase in the second half of the year, but that's baked into our guidance. Great. And then on the follow-up. With the additional Board member on Alejandro is, I understand getting strategic device on competing in the companion animal business. But are there also potential? It seems like there might be synergistic business opportunities between the 2 organizations. I mean, we just started, I don't believe so. I think we're obviously more concerned about comfort of interest than we are about synergies. As a matter the more synergies, the more complex. This is Wolf [ph] for Mike. So I wanted to start with a high-level one. Phibro's Animal Health business continues to press fairly impressive results relative to the livestock divisions of some of your peers. Can you talk to what's allowing your Animal Health business to do so well in the current environment? Is it a function of portfolio in species mix? Or are there other factors that we should be considering here? Yes. But I think it's literally where we're positioned in the market and the products that we've developed; especially concentrating on the changes that happened in the history when antibiotics came out. I said often that animatic came in, but no until that the bacteria. So bacteria is still there, and we've done a great job. Our team has done a great job in developing non-antibiotic mostly national specialties and vaccines that help control that bacteria and help the farm is raise the animals in a healthy way. Got it. And just as a follow-up, you noted seeing some weaker feedlot placements. Can you talk to what you're seeing more generally in the market? And are you expecting this to kind of persist for as long as we see the drought persist? Or are there other things going on there? Well, there's -- as we mentioned earlier, we don't do a lot of is on the feedlot, but what we are seeing where it has affected us. The drought has forced all the farmers to take animals off the pasture because there wasn't an ability to feed them the pasture and move them [indiscernible] the feedlot. So that has been -- in the early first part of the year, sort of an increase. Now when those animals have been processed, there are pure animals following it, and that will have, I would say, more of an effect next year than even has this year. So it'll have more effect in calendar year 2023 than it had in calendar 2022. Much appreciated. And then just a last one here. There have been a floor of recent articles on the impact of the bird flu to the global layer slot. I know that you're not super exposed there, but can you talk to your outlook for the poultry market in general? And has this gotten any worse over recent months given how long it's been going on? I think the shock in the industry is how long it's persisted. I mean, normally, we've seen being influenza in the past, but by the summer time, it's gone. And this year, it's not gone in the summertime and it continues to persist. So we will see the effect it's had on the price of eggs given that, that might be -- there might be a consumer pullback and that those prices might start dropping. It's so far, it hasn't really hit the broiler industry, which is the biggest part of our business, the biggest part of the chicken business. But it's out there, and it's scary. Hi, good morning. This is Bishal for Balaji. We see that one of the important contributing factor for your growth in the MFA business in the growth in Latin America. Do you expect this trend to continue? Or what is your outlook for your MFA and animal health business in Latin America? Thanks. Thank you for that question. We've been investing a while in Latin America and expanding our presence there. And yes, I think we will continue to see growth in those markets. relative to what we've done in the past. Is there any more in the queue that we can respond to? You may be on mute. We cannot hear your line. So we will assume there's no more questions for today. So we appreciate your time. Thank you for your interest in Phibro Animal Health, and have a great rest of your day.

EarningCall_92

Good morning, and welcome to the Newell Brands' Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. A live webcast for this call is available at ir.newellbrands.com. Thank you. Good morning, everyone. Welcome to Newell Brands' Fourth Quarter and Full Year Earnings Call. On the call with me today are Ravi Saligram, our CEO; Chris Peterson, our President; and the newest member of the executive team, Mark Erceg, our CFO. Before we begin, I'd like to inform you that during the course of today's call, we will be making forward-looking statements, which involve risks and uncertainties. Actual results and outcomes may differ materially, and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q and other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures are available -- and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as other materials on Newell’s Investor Relations website. Thank you. Thank you, Sofya. Good morning, everyone, and thank you for joining us on our year-end call. Fourth quarter results were in line with our expectations and brought to a close a difficult second half. The business continued to be impacted by a tough operating environment, including slowing consumer demand for general merchandise categories as well as inventory reductions at retail. Our team remains focused on executing our strategic priorities with excellence while navigating these challenges. They did a great job in reducing inventories in the fourth quarter and drove sequentially stronger cash flow performance. For the year, Core sales declined 3.4% against a very demanding year ago comparison of 12.5% growth and soft volumes more than offset favorable pricing. 2-year stacked growth exceeded 9%. The Writing and Commercial businesses delivered core sales growth in 2022, while core sales for the other businesses declined. The company's core sales and domestic consumption exceeded 2019 levels even as Home and Outdoor categories are continuing to normalize from peak pandemic levels. Many of our major brands such as Rubbermaid, Sharpie, Paper Mate, Rubbermaid Commercial Products, Ball, EXPO, Elmer's and Campingaz showed strength. Despite a much tougher than anticipated operating in macro environment in 2022, which weighed heavily on the company's results we made tangible progress across a number of focus areas. First, many of our iconic brands were recognized for their innovations. For example, Ball stack and store innovation earned Good Housekeeping Cleaning and Organization award. Graco won the JPMA Innovation Award for Child Restraint Systems with Graco Turn2Me car seat. Coleman RoadTrip 285 Stand-Up Propane Grill was recently ranked by Outdoor Gear Lab as the Best Portable Grill in 2022. In the U.S., new innovation under Mr. Coffee, Latte 4in1 received a Good Housekeeping, Best Gear and Best Coffee Award. Our latest innovation in Writing, Elmer's Squishies, launched exclusively in Q4 at a major retailer with very strong results. In 3 months, it became Newell's top activity item outpacing slime sales over 3:1. National launch of Squishies across U.S. retail will begin in late March 2023. In April of '22, we launched new creative kitchen, a unique, efficient social media vehicle that allows us to take prandial approach to connect our brands across consumer life moments and occasions and bring curated content to target consumers, allowing them to repost to their own followers. We have seen a fourfold increase in engagement through our live presentations and a 90% higher click-through rate to our branded website since creating Newell Creative Kitchen. Second, we continue to build operational excellence across the organization by transforming our supply chain to Project Ovid and automation. And earlier this year, we announced the next major step in this journey as we are unifying our global supply chain and centralizing manufacturing, which we expect to drive meaningful margin improvement in the long term. Third, we made significant progress on complexity reduction, ending 2022 with about 28,000 SKUs as compared to approximately 36,000 in 2021 and over 100,000 in 2018. Our revenue per SKU has more than tripled versus 2018. We will continue reducing SKUs and accelerate SKU productivity. Fourth, we drove another year of strong productivity savings at around 3% of COGS which in combination with pricing actions helped to mitigate the high single-digit headwind from inflation. We will further accelerate our productivity efforts in 2023. And last, but certainly not least, we advanced our corporate citizenship agenda, as we continue to galvanize our employees to be a force for good. We strengthened our people first One Newell culture, maintain strong employee engagement at world-class norms and committed to carbon neutrality by 2040 for all Scope 1 and 2 emissions across our global portfolio. I'm also pleased to share that for the second consecutive year, Newell brands has been named one of Fortune's 2023 World's Most Admired Companies. While we are proud of the operational achievements and believe we are a much more agile company today, we also recognize that the macros have put considerable pressure on our business. We've been taking proactive and decisive actions to effectively navigate the current environment, while positioning the organization for long-term success. In late January, we announced Project Phoenix, a major evolution in our operating model and a restructuring program that is expected to drive significant savings. Phoenix will further simplify and strengthen our company by leveraging the scale and power of One Newell to optimize our cost structure and operate more efficiently. Let me shed more light on Project Phoenix. There are 5 key tenets. First, we will combine business units into 3 operating segments based on consumer dynamics and customer commonalities. Second, we will centralize our sales efforts for our top 4 customers. Third, we'll go to One Newell go-to-market approach in key international geographies. Fourth, we will centralize and unify manufacturing globally. And fifth, we'll strengthen key capabilities, reduce duplication, enhanced role clarity and drive standardization of processes, tools and measurements. We're bringing the Food, Home Fragrance, Home Appliances and Commercial businesses under one umbrella, Home and Commercial Solutions led by Mike McDermott, the segment CEO. Lisa McCarthy has assumed a new role as Chief Operating Officer of the Home business reporting to Mike. Learning and Development, which includes Writing and Baby is led by Kris Malkoski. Jim Pisani will continue to lead our Outdoor and Recreation business. Through this evolution, we will honor the differences and nuances among our businesses and unify our own commonalities related to the consumer and customer while leveraging our scale and enabling better opportunities for internal mobility. Our iconic brands play a key role in the lives of nearly every U.S. household. We expect the new operating model to unlock additional growth opportunities for the business over time. We will leverage the power of our brands to meet consumers' daily needs in and out of their homes through their major life moments occasions. Our international business remains an important priority for Newell. In 2023, core sales for International increased 0.4%, significantly outpacing North America despite macro and geopolitical pressures. As part of Project Phoenix, we are continuing to reduce international fragmentation by moving to a One Newell go-to-market approach in key geographies such as Australia and New Zealand, LatAm, Japan and as announced last fall, Canada. We're also evaluating the structure in consultation with employee Works Councils in Europe. This should dramatically reduce fragmentation, accelerate growth and profit trajectory for our international businesses over time and increase depth and breadth of franchise outside of the U.S. As part of Project Phoenix in the U.S., we're also moving to One Newell sales model for several of our top customers. Centralizing these teams will simplify our customer interaction, significantly improve the customer experience and strengthen our position as a best-in-class partner. I'm proud that we've built high, wide, deep and enduring relationships with key customers and are increasingly perceived as a valuable strategic partner. Based on the success of Project Ovid and in the spirit of One Newell, we are moving to a unified global supply chain organization, which Chris will elaborate on later. As we focus on optimizing our cost structure, we are taking decisive action on our real estate. In a hybrid work environment, we have the opportunity to close or consolidate offices and adopt new ways of working. We just announced closure of our corporate offices in Boca Raton and South Deerfield in earlier this year, the consolidation of our Huntsville campus. We're in the process of discussing other actions. In turn, Project Phoenix is expected to result in elimination of approximately 13% of office positions. While this was a very difficult decision and one, we as a leadership team did not take likely, we made every effort to treat our departing colleagues with respect and dignity. And we are doing all we can to help with their transitions. The actions we are undertaking are a continuation of the simplification agenda that we've driven over the last 4 years and in response to the difficult macro environment. We expect Phoenix to yield annualized pretax savings in the $220 million to $250 million range when fully implemented. At its core, Phoenix is not just about restructuring. It is about leveraging our scale. It is about significantly evolving our operating model to strengthen the company and prepare for the future. As macro conditions remain unfavorable to top line growth, our prime focus in the near term is cash flow and gross margin improvement. I know Chris is working hard to get his nickname back as the $1 billion man. Speaking about the future. This morning, we also shared that I'll be retiring on May 16. This is a very bittersweet moment for me. While we look forward to pursue new interest and spending more time with my family, including my first granddaughter [Lux], who was born just a few weeks ago, I'll certainly miss everyone at Newell brands. It's been a distinct honor and privilege to lead the company over the last several years, and I've loved every day at work. I remain inspired by our talented employees, so passionate resilience and courageous. I'm very proud of our strong world-class executive leadership team who made significant progress in strengthening the company by reducing complexity are on the journey to rejuvenate our iconic brands to be more modern and relevant, launching successful innovations that leverage pandemic trends, building e-commerce and omnichannel is a competitive advantage and transforming our supply chain. The team is working diligently to implement Project Phoenix and make our new segment-based operating model, a major success. I want to congratulate Chris on his well-deserved elevation to the new CEO, Newell. He's been a true partner to me in the turnaround, and I believe he is the right person with the right skill set and right temperament to take Newell to the next level. I know our leadership team respects Chris and will strongly support him to deliver our key priorities. I'll be [partnering] closely with Chris to ensure a smooth and seamless transition and will focus my efforts on ensuring the successful execution of Project Phoenix, accelerate momentum on international and rallying the organization to overcome macro challenges with speed and dexterity. I'm also pleased to welcome Mark to Newell's leadership team and its first earnings call with us. I believe his multiple experience as a CFO will add significant value to Newell brands, and I'm confident that he and Chris will be a powerful combination to more forward. Despite the macro headwinds the company faces, I am optimistic about the future of Newell. We have great brands that consumers love. We have built e-comm and omnichannel prowess. We have excellent customer relationships and are reigniting the processes and passion to drive meaningful innovation. We believe we will return to driving sustainable, profitable growth once the economy turns in our favor. Our best days are ahead of us. Thank you, Ravi, and good morning, everyone. Over the last 4 weeks, I've immersed myself in the business and the organization. And during that time, in many ways, I felt like I was getting reacquainted with an old friend. I say that because after spending the first 18 years of my career at Procter & Gamble, I spent the next 13 years learning the ins and outs of building products, transportation, luxury goods and health care information technology. Those unique experiences, I believe, prepared me well as I now come full circle and returned to my first true business love, which is consumer products, where deep consumer insights, differentiated innovation, creative 360-degree marketing, operational excellence and the first moment of truth all range to [crane]. I undoubtedly still have a great deal more to learn, but in my brief time at Newell Brands, I've already made some high-level observations, which I'd like to share with you. First, it is clear to me that over the last couple of years, Newell Brands under Ravi and Chris' leadership has built a great team within a strong mission-driven culture that guides the behavior of 28,000 dedicated professionals who strive each day to bring value to the business and the organization. Second, dramatic steps have been taken to simplify and streamline the business, which were necessary prerequisites for us to improve our speed, agility and financial performance going forward. Third, the bold actions recently announced as part of Project Phoenix to reduce overhead costs and create scale across manufacturing, distribution and transportation and customer service are our key business and organizational enablers which I believe will serve us very well in the years ahead. Finally, and perhaps most importantly, there is broad recognition across the entire company that while these past and current actions are all steps in the right direction, there's much more work that needs to be done. My interactions have led me to the conclusion that the organization is eager and excited about the future because Newell has a robust portfolio of leading brands with strong market share positions which when coupled with the right capabilities should allow us to continue on our journey towards becoming a world-class innovation-led consumer-driven company that can consistently grow sales and expand margins year after year and in doing so, generate meaningful levels of total shareholder return. Personally, I'm excited, honored and humbled to be part of that journey. Thank you, Mark, and good morning, everyone. I'd like to echo Ravi's sentiment by welcoming Mark to the team. Mark and I have known each other for a long time, having worked together at P&G. Although Mark has only been here for a short time, I can already see what a great fit he is for the organization and look forward to partnering with him and the rest of the leadership team to unlock the full potential of the business. I would also like to thank Ravi for his leadership and partnership over the past several years. I've admired his passion, commitment and people-first mindset, which are infectious and have reinvigorated the company's culture. I'm honored and excited to become the next CEO of Newell Brands. In my new capacity, I look forward to working with our leadership team, the Board and all of Newell's dedicated and talented professionals around the world to drive shareholder value creation through diligent and thoughtful execution of our strategic agenda. Before jumping into results, I'd like to take a few minutes to talk about some of the key business and organizational initiatives we have recently taken to strengthen the company's operational foundation. As we've mentioned before, a key component of our aspiration to become a TSR leader in our industry, is predicated on creating a scaled world-class supply chain that positions Newell as the retailer partner of choice from a service, reliability and capability standpoint, and leads to breakthrough value creation in terms of margins, cash and reduced complexity. Consistent with that, on February 1, we seamlessly implemented the second go-live wave of Project Ovid across the remaining Food categories as well as the Writing, Outdoor and Rec and Commercial businesses. Having reached this major milestone in Newell's supply chain transformation journey, we are now at a point where we can begin to fully leverage the new go-to-market model to operationalize distribution and transportation benefits, improve customer service better enable omnichannel solutions and drive broad-based operational excellence across the organization. Project Ovid was an integral step in demonstrating the organization's readiness and willingness to undertake a significant change agenda and commit to a One Newell culture. So we are building on this momentum as part of Project Phoenix to further optimize the company's operations by centralizing manufacturing into a supply chain center of excellence. This will, for the first time, allow us to create and leverage manufacturing scale and turn it into a competitive advantage. While this will not materialize overnight, we do believe that a unified global supply chain organization will drive significant efficiencies and improve our supply chain resiliency, further enhance the company's technical capabilities, strengthen our culture of customer connection and collaboration and position us to become a best-in-class scaled general merchandise supplier to our retail partners. Now let's move on to fourth quarter results, which were largely consistent with the outlook we provided in October, and our focus on optimizing cash flow yielded strong results. Net sales for the fourth quarter declined 18.5% year-over-year to $2.3 billion due to a 9.4% decrease in core sales as well as the impact of the divestiture of the CH&S business at the end of Q1, unfavorable foreign exchange and certain category and retail store exits. Top line trends remain challenged due to inventory reductions at retail as well as softer consumer demand for general merchandise categories. We expect these dynamics to persist in the near term. Normalized gross margin contracted 360 basis points versus last year to 26.6% as the impact of reduced fixed cost absorption, unfavorable foreign exchange and inflation more than offset the tailwind from pricing and fuel productivity savings. Before moving off of gross margin, I should mention that during the fourth quarter, we elected to change Newell's method of accounting for certain inventory in the U.S. from LIFO to FIFO and to conform the company's entire inventory to a single method and simplify the company's inventory accounting. Therefore, the financial statements in today's release and the numbers we are referencing reflect the impact of this accounting change to FIFO and both in the current and prior year periods, which have been retroactively adjusted. For Q4 specifically, there was a $4 million increase to cost of goods sold relative to what it would have been under the prior method. Normalized operating margin declined 510 basis points versus last year to 4.9%, reflecting gross margin pressure and the impact of top line deleveraging on SG&A costs. Net interest expense increased to $64 million from $59 million in the year ago period. The normalized tax benefit was $5 million as compared to a $38 million expense last year with the difference largely driven by an increase in discrete tax benefits. For the quarter, normalized diluted earnings per share were $0.16 as compared to $0.42 last year. During the fourth quarter, Newell's cash flow performance improved considerably and it began to reflect the actions we took in 2022 to rightsize our supply and demand plans. The business generated operating cash flow of $295 million in Q4 as inventory declined by more than $400 million relative to Q3. Working capital was a source of cash in Q4 despite a meaningful drag from payables, which have been negatively impacted by the timing of our pullback on the supply plan. Although the company ended 2022 with an elevated level of working capital and operating cash outflow of $272 million, Q4 cash results in combination with our proactive pullback in the supply plan give us confidence that operating cash flow will bounce back significantly in 2023. Despite the strong snapback in cash flow, we ended 2022 with a leverage ratio of 4.5x as we took on short-term debt to navigate through this tough environment. While we expect the leverage ratio to be pressured in the near term, we remain laser-focused on strengthening the company's balance sheet in the years ahead. Note that effective Q1, we are implementing a new operating model and consolidating our previous 5 operating segments into 3. Therefore, and in the interest of time, I'm going to dispense with the usual high-level segment sales commentary for 2 reasons: first, you can easily find these numbers in the tables attached to our press release; and second, I'm sure everyone is interested to hear our comments about fiscal 2023. Taking a step back, 2022 was clearly a challenging year for Newell, but we acted quickly and decisively to mitigate the impact of the external headwinds and ensure we are strategically investing in core capabilities that position Newell for success over the long term. In 2023, we've identified 5 major priorities to stabilize Newell's financial performance while driving foundational improvement so we can return the company to sustainable and profitable growth as macros improve. First, strength in cash flow and balance sheet by continuing to rightsize inventories, carefully managing the forecasting process and staying close to the evolving consumer and customer trends so we can remain agile in planning. Second, drive gross margin improvement by accelerating fuel productivity savings, further advancing our automation initiatives, operationalizing Project Ovid distribution and transportation benefits, pricing internationally for currency and instilling greater financial discipline surrounding new product innovation. Third, drive overhead savings through Project Phoenix and tight spending controls to offset the impact of incentive compensation reset to normal levels and wage inflation. Fourth, continued SKU count reduction progress and initiate a bottom-up white sheet SKU approach to enable the next phase of reduction. new company structure to enable faster transformation progress. Despite taking these proactive and decisive actions strengthening the company's performance, we expect the external landscape to remain challenging in 2023. The high level of uncertainty on the macro front has influenced our modeling assumptions as follows: we are assuming consumers' disposable spending power will be under pressure due to inflation in food, housing and energy with consumers in Europe feeling greater stress than in the U.S. We also expect consumer demand for general merchandise categories to remain soft due both to macroeconomic environment and normalization of home and outdoor categories from peak pandemic demand levels. Retailers are likely to continue reducing open-to-buy dollars in general merchandise categories. Foreign exchange is expected to remain a headwind for the year. We expect the supply chain pressures to continue to ease and for inflationary pressure to moderate to low single digits of COGS, down from high single digits in 2022 as commodity and transportation prices continue to move off their peak levels. Since we expect many of the headwinds the company experienced in the second half of '22 to persist in 2023, we are maintaining a prudent bias when setting our demand and supply plans to ensure a heightened focus on cash flow generation, working capital improvement and optimization of Newell's cost structure. Within this context, our 2023 financial outlook contemplates net sales of $8.4 billion to $8.6 billion with core sales declining 6% to 8%. We're assuming nearly a 3% headwind from foreign exchange, certain category and Yankee [Campbell] store exits and the sale of the CH&S business, which closed at the end of Q1 last year. Normalized operating margin is expected to be flat to down 50 basis points versus last year to 9.6% to 10.1% as stronger gross margins are offset by overheads. We expect to drive above-average productivity savings, which in combination with carryover pricing and new pricing outside the U.S. should more than offset the impact from inflation. We're planning to maintain tight spending controls and are assuming that Project Phoenix unlocks about $140 million to $160 million of pretax savings this year. However, we expect these benefits to be fully offset in dollar terms by incentive compensation reset, wage inflation and select capability investments. We are forecasting normalized earnings per share of $0.95 to $1.08 as we expect a significant year-over-year increase in the interest expense and tax rate. We are assuming a return to a more normalized tax rate in the high teens range as compared to 2.5% in 2022. At the midpoint of the range, we are assuming that normalized earnings per share declined low double digits on a constant tax and currency basis. We expect a significant bounce back on cash flow in 2023 from timing of inventory purchases and payables with free cash flow productivity well ahead of 100% at the midpoint of our guidance range. We're forecasting operating cash flow in the $700 million to $900 million range, including about $95 million to $120 million in cash expenditures from Project Phoenix. Our first quarter outlook assumes the following: net sales of $1.79 billion to $1.84 billion, including a core sales decline of 16% to 18% and a 7% headwind from the sale of the CH&S business on March 31, 2022, foreign exchange and certain category Yankee Candle store exits. We are forecasting normalized operating margin of 3.0% to 3.5% significantly below 10.6% last year due to fixed cost deleveraging inflation and foreign exchange pressure. We expect a normalized loss per share of $0.03 to $0.06. The depressed earnings per share in the company's smallest quarter of the year from a seasonality perspective reflects significant margin pressure, a step-up in interest expense and a modest tax benefit. We clearly expect a much tougher first half of the year relative to the back half as the business cycles more challenging top line comparisons with headwinds from currency and inflation carryover being more front-half weighted, whereas benefits from Project Phoenix are expected to be more back half loaded. We're also assuming that retailer inventory reductions and constrained spending on discretionary products will persist through the first half of the year. As such, we expect core sales growth to be stronger in the second half of the year versus the first half. We are taking decisive actions across all areas that are within our control to successfully navigate through this difficult macro backdrop while building and investing in core capabilities which we believe will position the company for a return to sustainable and profitable growth. Thanks. Good morning. And congratulations to everyone. First part of question on Project Phoenix. Obviously, over the years, even before your 2 tenures, there have been a lot of projects, a lot of consolidation of divisions from 5 to 3 and 3 to 5 and what have you. How is this different? I mean what do you see that in cost savings that you haven't already gotten from the prior projects that really gets you confident about how this makes a big change? Like I said, it's been done, it seems attempted multiple times before in the past decade. So Bill, I think let me kick that off. Look, first is, it was really the idea germinated when we were looking at the Food business and Appliance business. And the customers and the merchants are the same, and we were not approaching it on an integrated basis. The consumer is the same because they reside in the kitchen. And as we started thinking about it and this whole notion of consumer life moments and occasions and really was driven from a consumer and customer standpoint, saying, "Hey, where do these reside and how do you group the businesses?" So as you know, Newell sort of veered a bit from centralization to decentralization over times. But for us, we have taken in the last 3 years, a more holistic approach of having the businesses for front facing, and we were unifying the back to leverage scale. This is just the next evolution of that. And so we said, hey, it really makes sense, candles in the home. COVID also taught us that Home is the hub. So that made sense then to bring those businesses. The commercial piece was really -- it shares the Rubbermaid brand. And so we said, let's bring that together. The key was this has helped us because we had different CFOs and HR for each of the businesses. This has helped us reduce it, create bigger jobs for people improve the span of control, et cetera. Second, I think this is very historic about doing international as integrated one Newell as a whole because there's been a lot of fragmentation. So there's One Newell market approach, go-to-market approach, I think, is going to be quite amazing. I don't think we've ever unified supply chain globally. And I think that we just feel that will allow for better decisions on near shoring up, hey, do you source, do you manufacture, taking leverage of our total footprint globally, which we think long term will help the gross margins. So when you look at those fronts, and then there's a lot of, I think, as a company -- because these were all separate companies in the past. One of the keys to standardizing processes, which we did in Ovid, and we've learned a lot from that and then getting to common measurement systems. So I just think it would create a more efficient company and so this was not just a, hey, let's take cost out for the sake of cost out. It was very strategic in how we went about it. Okay. I'll follow up on that. The second question is just in terms of consumer demand, trying to understand if there are areas where you're seeing meaningful pullback from consumers due to recessionary environment or if you're just expecting that to happen as we move through the year? And if the former, then where are you seeing the biggest pressure points? I think well, 2 points. One, I'll just reiterate. One, we are about 2019 from the pandemic levels overall. So that's encouraging. The stack growth 2 years is 9%. But having said that, clearly, there are a couple of phenomena. One is due to the stimulus that occurred as well as the pandemic on several businesses and categories that was forward acceleration from a consumer standpoint. For instance, appliances is probably the prime candidate. Then you had the phenomenon of like candles during COVID where people were burning a lot. And you brought we brought in a lot of low-income consumers, that now without the stimulus have left the fold. So you are seeing even before the recession, there are a couple of impacts, which are the retailers destocking, consumer former acceleration that are [cut] (ph) in different categories. So I think when you take a look into that, those are the things that we are seeing those trends persisting in the first half. I wanted to talk about your sales expectations and what’s embedded in your core revenue outlook for this fiscal year because we assume that Q2 is going to see similar pressure as Q1? And it would imply sort of a low single-digit core sales growth in the second half at the midpoint. So can you provide some color on your views on trends as you begin to lap the destocking in the second half of the year? And what your full year outlook reflects in terms of your view on shelf space or retailer losses and what you think the underline category growth is as you exit this period of destocking? Yes. Thanks, Olivia. I'll take that. So I think our -- as I mentioned in the prepared remarks on our revenue outlook, there's really 3 or 4 trends that are going on that inform our outlook. One is normalization of categories from peak COVID levels, and that's particularly impacting the Home and the Outdoor businesses, where we're continuing to see sort of a return to pre-pandemic category levels. Second is consumer pressure on discretionary categories because of inflation in food and housing, which is taking a greater share of consumer wallets. Third is the retailer destocking impact and then finally, we've seen over the last 2 years, almost 20% input cost inflation, and we've largely priced for that as we've talked but that also is putting pressure on categories from a volume standpoint. If you look at the trend during the year, we're guiding for core sales growth of minus 16% to 18% in Q1. We're not going to give quarterly guidance, but I don't think it's a fair assumption to say that we expect that to continue in Q2. I do think that, that Q1 is uniquely negative because of the comparison. If you look at the 2-year stack on Q1, it's almost 27% or 28% that we're comping. So it is the toughest comp. As we mentioned in the remarks, we do expect the back half to be better than the front half, but I don't think it's the right assumption to think that Q2 is going to be down as much as Q1. Got it. And then Chris, congrats first. I wanted to get your view in terms of potential for a strategic review as you move into the CEO position, whether you think there is another look at the categories you're in, the brands you have, how you think about that for the longer term? Sure. Yes, I think the way I'm thinking about that is I think that we put the turnaround plan in place about 3 or 4 years ago. And I think, as we've talked, we've made significant progress on that. But the macro environment is different today than it was then. And because of the progress that we've made I think that now is an opportune time to relook at the company's strategy going forward. And so I intend to do that with the leadership team. I don't expect that we're going to have a revolution in the strategy, but I think it's likely that we will evolve the strategy. But I want to take the time to confer with the leadership team and also understand sort of the current environment. I expect that will take us several months to get through, and we'll be ready to share something as soon as we get through that process. Ravi, Chris, Mark, congrats to you all. Maybe just one quick housekeeping item. Does the top line impact embed any -- the top line outlook and then any potential impact from what's going on at one of your largest retail partners that's been in the news quite a bit recently? And then, I guess, just maybe a bigger picture, taking a step back, the business has changed a bit over the past few years. But kind of taking the guidance into consideration, sales are really retrenching here. And Chris, you mentioned normalization and kind of consumer pressures. But just kind of bringing it back to the long-term core sales target of low single digits. I mean is there something you've learned over the past year or 18 months or so, that kind of changes your confidence in your ability to deliver on that target kind of longer term as we kind of get through this period of disruption? I'll just do the first one very quickly. The answer is no. And in terms of any particular retailers issues affecting us. So Chris? Yes. Maybe just to build on Ravi's answer on the first one. I think the retailer you're talking about is likely Bed Bath & Beyond. They represent less than 2% of the company's revenue. And we are working very collaboratively with them in terms of kind of a win-win go-forward partnership. I'll leave it at there, but it is not a significant part of the company's business. On the long-term algorithm, I don't think there's anything that causes us to change the goal in the evergreen model of getting to long -- or getting to low single digit, consistent, sustainable core sales growth. And so we are still committed to that as our evergreen top line target. Obviously, we've been impacted by a lot of the trends that we've talked about, which has us off of that for this year, but we very much are working hard to get back there as quickly as we possibly can. I think the one thing I'd add just sort of when you look back. Look, these last 3.5 years, we've had so many things, right? We've had the pandemic then supply constraints, inflation, foreign exchange, war of Ukraine, et cetera. So to me, the Holy Grail is 2019 as the base here. And the fact that in 2022, we were still up versus '19 and the stack growth was 9%. Should really -- our brands remains strong. I know Chris and the team are really going to take it to the next level. So I think once the economy turns, I do feel that they have a green model that Chris and I espoused is still intact. Great. And then just this might be a hard question to answer, just given the uncertainty of the current environment. But Chris, we've kind of seen -- when new CEOs come in, the initial outlook tends to be somewhat conservative to set the team up for success. And so I guess how would you characterize your confidence in this guidance today? Do you feel like you've embedded enough flex should things deteriorate from further from here, either from a consumer demand perspective or inflation or FX? Just kind of the confidence that this is kind of the worst it can kind of get and things could get better, there could be upside to the earnings as we move through the balance of the year? Yes. I think I'll just give you sort of a high-level conceptual answer to that, which is we tried to reflect in the guidance. Everything we knew about the current environment. We tried to be realistic in what we know based on the go-forward tailwinds and headwinds for the business this year. And we did want to take a prudent bias on the core sales because our focus this year is to get cash flow back. And the best way to get cash flow back is not to overbuild inventory, and we wanted to manage our supply and demand plan in a way that ensured that we had an above average cash flow year. We are, as we mentioned in the prepared remarks, seeing significant headwinds in terms of the tax rate, which is going from 2.5% to a high teens rate, which is our kind of long-term normalized operating rate. We are seeing interest expense probably is going to be up about $45 million this year versus last year. And we've got the headwinds, as we mentioned, of incentive comp reset and foreign exchange in addition to the core sales deleveraging. On the flip side, we feel very good about Ovid and the benefits that Ovid is going to generate. We've built our productivity, our gross productivity assumptions are well above 4% of cost for this cost of goods sold for this year. So it's a step up in gross productivity that's embedded in our guidance because of Ovid, because of the fuel productivity program and automation. And we've embedded in, as we talked, the Phoenix overhead savings and international pricing along with carryover pricing. Great. And just to echo my congratulations as well. In a difficult environment like this, it may not seem that way, but I think a lot of folks on this call that have followed the company for a while, it's certainly in a better place than it was post the yard merger, so congrats on that. Question on Project Phoenix to start, if we could. It seems like another step along with Ovid to drive efficiencies and reduce complexities in the organization, which was inherently more complex and in many cases, perhaps to decentralized coming out of Jarden merger. But at the same time, it's a lot of change in what's a very dynamic and challenging environment. Can you just comment on how the organization is handling all this change and why we should not be worried about a potential risk to result at least in the near term? And then I have a follow-up. Yes, Kevin, thank you so much. Look, that's a great question. And I would say we absolutely could not have done this 3 years ago. And you may recall when Chris and I started here, our engagement scores for about 37 to 45. We went up to 75 world-class norms -- much consultants told us to take us 10 years we got there in 2 years, and we have maintained that last year when we did it in November. So the organizations culture is a competitive advantage and very strong, but they could absorb it and this whole idea of what One Newell is imbued in their employees. And the way we handle it, there was meticulous planning. We started the Phoenix idea and process. So we started working on it through July and brought in layers of people systematically over time to give them ownership. Our communication has truly been outstanding to make sure people understood why we were doing it. And finally, the people that we had to exit, we treated them with enormous dignity and respect. And so much so if you go back to LinkedIn and take a look, even though who exited our sharing for Newell and what be able to succeed. So I think that culture has been very strong, people understand why we need to do this. And I think it's a journey. Look, Ovid was the great test to see whether we could centralize distribution and that was very successful. That gave us the courage to centralize manufacturing to put sales all under our Chief Customer Officer. So I think so far, the reaction of the organization has been actually very positive. We've been as concerned about the people left behind to make sure they're embracing this. The other part of it has been because of our previous history, we've also made sure there is role clarity, reduce duplication. So I think people are feeling even more empowered. So I'd say the chances of this succeeding are very high. Excellent. Ravi. Chris, probably for you just on margins, just to kind of step back and make sure that we're not missing the floors for the trees here. Currently, in dealing with a lot in terms of volume deleverage, FX cost, et cetera. But longer term, sort of thinking with margins versus your original benchmarks. But since then, you have Project FUEL, we have Ovid, now you have Project Phoenix, I think the commentary has been that there's no reason this cannot be a 17% to 18% EBITDA margin business longer term as we sort of look past this volume deleverage and so forth as we come out of the cycle. Is that still the view? Is that where investors should sort of anchor longer-term expectations? Or is it potentially even superior to that now just given some of the programs that you've announced? And then I'll pass it on. Yes. I think that there's no question that we are shooting for a much higher margin profile in this business. And I think we have the opportunity to drive that over time versus where we are today. So -- I think that sort of a mid- to high teens EBITDA or EBIT margin is very much in our long-term sites as we've talked. When we did the original benchmarking, we thought that gross margin, we ought to be targeting to get the company's gross margin up to 37% to 38%. We've taken a series of backward steps for a variety of reasons associated with fixed cost deleveraging inflation, et cetera. But I think our guidance this year is for gross margin to turn and start to move positive. And I think that trend, we are very focused on driving that. And then we continue to believe that although we may have some deleveraging effect this year, we believe that getting our overhead down towards that 16% -- 15%, 16% level is the right thing as well. So I think that, that can yield margins that are much stronger than where we are today. And I think a lot of that continues to be in our control. Although we are subject as we've seen in the short term to the macro trends, which means it's not going to be a straight line, as I've said many times before. Thank you, operator. Good morning, everyone, and congrats to all. I think I can speak to most of the ones on this call that I think you sounded -- you did not sound as negative about the [PEF] ahead when you announced the 3Q earnings and later with Project Phoenix. Can you help us bridge a little bit of what's gone worse since November and December, perhaps the consumer or the retailers that took a more conservative step on our views on the inventory levels? And also on a clarification on the commentary about the higher management compensation in 2023. I guess with results materially lower in the year, how can compensation normalized area this year? I think you're adjusting -- probably adjusting out some of the external factors within the compensation metrics. So I just want to see if we can bridge that to the commentary that you gave, despite those savings in the Project Phoenix, you pretty much will offset everything with labor inflation and management company. If you can bridge those -- those components that will be super helpful. Let me answer your final -- the last question first, very quickly. Essentially, this year, look, our compensation is performance-driven and variable to the great part. And there's an LTI component as well. So we really -- because we didn't make our numbers, obviously, the STI component was very low for 2022, and it also affected our LTI. So when we look at '23, we start with the assumption that it will be normalized and you assume the target numbers. So that is a big, big jump, plus the [indiscernible] inflation. And that is why we said the Phoenix was offsetting that. Okay. Relative to the change perhaps in what we're seeing from November. I don't think we've -- I think this is the first time we've given guidance for this year. And the reason why we gave guidance for the first time on this call is because we want to give guidance when we have clearer visibility on the macros. And there are -- it is a -- a difficult macro environment from a forecasting standpoint because there's a lot of uncertainty and a lot of variability in the range. I think as we've seen the macro trends continuing over the last few months as we saw where Q4 came in, as we saw how we started off in January and as we got more visibility to the forecasting, we felt like that helped inform our top line guidance on core sales growth for this year. I think many of the comments that we made are still applicable. We do expect this year to be a significantly above-average gross productivity year as a result of benefits from the Ovid program, fuel productivity, automation, and as a result, we're expecting gross margin to be up this year. I think the piece that's offsetting that from a margin rate standpoint is really the overhead rate and that's really because of the top line deleverage more than anything else. Our overhead costs in total are relatively flat in dollar terms as we mentioned, because of the wage inflation, the incentive comp and select capability investments that we're making which are offsetting the Phoenix savings. So -- and then obviously, the interest expense has moved with -- as the Fed has raised rates and rates on short-term borrowing has gone up. And from a tax rate standpoint, we're planning for sort of a full operational tax rate, as I mentioned before. Can I just add something? Look, we've had the full year of '22 to look at what happened. And really, they're being a bit repetitive, but the forces of [indiscernible] retailer destocking, consumer forward acceleration, all that and then an impending or imminent recession. When you look at all of that, I think it's really a consumer environment, which has softened. So I think we're just being prudent about that. Our brands inherently are -- we're continuing to strengthen our brands. So I would just look at that and very important, Chris has really been very clear that the major focus of 2023 is to get that cash flow back. Great. Thanks. Mark, hi again, in years. Just wanted to ask one quick question was when you’re just looking at the outlook for this year. How you’re thinking about still like lingering destocking activity versus consumption? If you talked about it earlier in the call, apologize I missed it, but clarity on that would be great, if possible. Yes. It’s good question, Lauren. And I would say that we do expect some lingering retailer destocking, largely, we expect that to be complete in the first half of the year. And so clearly, if you look at the Q1 guidance, where we’re guiding core sales down 16% to 18%, we are not seeing our underlying POS trends down that much. And part of the difference there is retailer destocking. I would say that the retailers made significant progress on destocking from our view and what we’re hearing in the back half of last year, but we don’t believe that it’s fully over yet. We do expect, from what we’re hearing that the retailer destocking will largely be complete by the first half of the year, although hard to predict entirely, but that’s what we’re – that’s what we’re planning for, and that’s what we’re hearing from the major retailers that we interact with today. This concludes today's conference call. Thank you for your participation. A replay of today's call will be available later today on the company's website at ir.newellbrands.com. You may now disconnect. Have a great day.

EarningCall_93

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. Good morning, and thank you for joining Ralph Lauren's Third Quarter Fiscal 2023 Conference Call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Operating Officer and Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller. During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website. Thank you, Corinna. Good morning, everyone, and thank you for joining today's call. We were pleased to deliver another quarter of better-than-expected performance, including through the important holiday season. All three regions contributed positively to revenue growth. And at the same time, we made strong progress on the strategic priorities we outlined last September in our Next Great Chapter: Accelerate plan. We have multiple levers of growth and a broad lifestyle portfolio of products. Combined with the agility muscle our teams have built over the last several years, this puts us in a position of strength to become the world's leading luxury lifestyle company even amid macro uncertainty. A key element of this strategy is our commitment to brand and product elevation as we have demonstrated over the past five years, and we're doing all this while maintaining flexibility to respond to consumer demand and market dynamics. This translated to another quarter of double-digit AUR growth even as the broader marketplace became more promotional, as anticipated. We also continue to drive a culture of operating and cost discipline, which enabled us to meet our operating margin targets in the period. As our guidance reflected from the start of this fiscal year, the global environment has been choppy. We are encouraged that our core consumer has remained generally resilient, which reflects the growing desirability of our brand. At the same time, we continue to watch our more value-oriented customers and channels carefully. In this environment, we are taking a pragmatic approach to merchandising, pricing and inventory planning. As we navigate ongoing macro uncertainties, we remain steadfast in driving our three strategic pillars of long-term growth and value creation. These are: first, elevate and energize our lifestyle brand; second, drive the core and expand for more; and third, win in key cities with our consumer ecosystem. Let me take you through a few of our third quarter highlights across each of these strategic pillars. First, on our efforts to elevate and energize our lifestyle brand. We continue to invest in our most powerful asset, our timeless luxury brand and way of life to inspire and engage our consumers and ultimately, drive lifetime value. We continue to build our brand desirability with consumers while also growing their value perception of our brand. This is enabling us to grow both market share and AUR. In the third quarter, we drove a diverse range of both global and localized brand activations, showcasing the Ralph Lauren lifestyle. We kicked off the quarter with our California Dreaming Fashion Show at the Huntington Library in L.A. This represented our first ever show on the West Coast, where we have historically been underdeveloped and have an opportunity to scale our presence. From there, we launched into holiday with our Gift of Togetherness campaign, featuring friends of the brand like Shalom Harlow and Tyson Beckford. Our local flagship events range from a family-friendly pop-up skating rink in Ginza to live musical performances at Bond Street in London. These campaigns leverage our authentic brand values around family and togetherness combined with unique localized engagement to excite and delight our consumers around the world. For Polo lovers, we offered our 7 Days 7 Drops on our Polo 67 fan app with a limited edition collection of custom-made skis, vintage ski jackets and collectible posters from the RL archive. In Asia, we drove another successful Singles Day event, ranking #2 for men's apparel and #4 for women's apparel on Tmall. The campaign included our first-ever Tmall cat-faced logo collaboration, generating billions of impressions across online and offline channels in China's key cities. And as we continue to lead in gaming and the metaverse, we launched an innovative collaboration with Fortnite, targeted to next-gen consumers with additional exciting partnerships to come for spring and fall '23. In our DTC businesses, we added 1.6 million new consumers this quarter consistent with recent trends. We exceeded 51 million social media followers globally, a high single-digit increase to last year, led by double-digit growth on Instagram. And our online search trends continue to significantly outpace our peers across our top markets globally, driven by our core categories. Moving to our second key initiative, drive the core and expand for more. Across our organization, we are committed to becoming the leading luxury lifestyle company globally. This starts with the work Ralph and our creative teams are doing every day to offer sophisticated, timeless products that meet the needs of our consumers across their modern lifestyles. Ralph Lauren has a unique positioning in the marketplace that has enabled our brands to thrive over 50 years. Our brand stands for much more than a single product or category. It invites our customers to step into their dream of a better life. At the heart of our business is our collection of iconic core products, which represent 70% of sales and remain a consistent driver of our business season after season. Our core products grew high single digits in the third quarter, led by sweaters, seasonal core knits, sweatshirts and suit separates. Our core also establishes the foundation and credibility to grow our high-potential categories. These include women's, outerwear and our emerging home business. Together, these high potential categories increased low teens in the quarter. Women's represents our single largest long-term opportunity for market share gains and category growth as a company. We are trading her into the brand across categories to drive lifetime value and up to more elevated style with women's AUR up 12% in the third quarter. Highlights from the period included our dedicated head to toe holiday campaigns for both Polo Women's and Lauren, including the expansion of our Polo ID bags in new seasonal fabrications. Other product highlights and special releases this quarter included the official launch of our Polo Originals line, elevating the upper tier of our core brand with high-quality AUR enhancing styles that pay homage to Polo's roots, our exclusive Navy and gold logo collection capsule with influential Japanese retailer BEAMS, and our Fortnite collaboration with core icons featuring the new Llama player logo and our Polo Stadium collection of digital and physical products. Through these dynamic times, we continue to leverage the breadth of our brand and assortments to give consumers what they want as their lifestyles evolve. This enables us to flex from stay-at-home sweatshirts to return to work outfits, to wedding dresses and eveningwear. Switching to our third key initiative, win in key cities with our consumer ecosystem. We continue to invest in our long-term strategy to develop our key city ecosystems around the world in the third quarter with a focus on elevating and connecting all our consumer touch points across every channel. Starting with digital. Third quarter sales for our total Ralph Lauren digital ecosystem, including our directly operated sites, department store dotcom, pure players and social commerce increased high single digits in constant currency. Our Asia digital ecosystem once again delivered the fastest growth globally. This included another strong Singles Day with double-digit new customer acquisition and sales, significantly outperforming our peers even as we grew AUR by 28%. Within our own digital sites, sales grew low double digits globally in the third quarter. As part of our fully connected ecosystems, we also continue to open new physical stores that enable consumers to engage directly with our brands around the world. We opened 55 new stores in concessions, focused on our top cities globally this quarter, with the majority again in Asia, particularly the Chinese Mainland. Our brand momentum and opportunities in China remain strong. We reported third quarter Mainland sales up high single digits in constant currency. This was an encouraging result in light of widespread COVID disruptions following the relaxation of zero COVID policies in the period with over 90% of our stores impacted by foreclosures, reduced trading hours and staffing levels. As our dedicated teams on the ground continue to manage near-term disruptions with agility, we expect the countries reopening to be a net positive as we continue to strengthen our growing presence in this key market. Elsewhere in the region, we continued to drive double-digit constant currency growth across Japan, Korea, Australia and Southeast Asia, where we opened our first Ralph's Coffee experience in Kuala Lumpur this quarter. In addition to our sustained momentum across Asia, we remain bullish on our long-term growth opportunities and ability to strategically drive lifetime value across North America and Europe. In Q3, we opened our largest children's store in the world on Via della Spiga in Milan. Located across from our flagship, we are now able to showcase the full breadth of our luxury lifestyle proposition in this important market. We also launched our first full-price emblematic store in Barcelona, another influential fashion market as we continue to build our connected ecosystems across the region. And finally, touching briefly on our enablers. In addition to our strategic priorities, our business continued to be supported by our five key enablers. In the third quarter, we were proud to be recognized on Fast Company's 2022 Brands That Matter list for our collaboration with Morehouse and Spelman Colleges launched last March. This ground-breaking partnership was just one example of our commitment to evolve how we portray the American Dream in the stories we tell and the faces and creators we champion. We were also recognized as one of Fortune's World's Most Admired Companies, moving from #6 last year to #2 this year for our sector. And on the sustainability front, we highlighted our first cradle-to-cradle certified product just a few weeks ago with our luxury gold Cashmere sweater. A first-of-its-kind luxury product to achieve this global standard, this is just one part of our commitment to enable our past and future products to live on responsibly. This sweater is the first of five iconic products that we plan to make C2C certified by 2025. In closing, our strong performance through the first three quarters of the year underscores our consistency and strong execution. This is underpinned by the power of our brand and Ralph Lauren's multiple drivers of long-term sustainable growth and value creation. Ralph and I are proud of our team's continued agility, execution and productivity as we effectively navigate a dynamic global operating environment. Our focus on offense, agility and pragmatism continues to inspire our approach moving forward. And I just want to take a moment to welcome our newest Board member, Wei Zhang, former President of Alibaba Pictures and SVP of Alibaba Group, who joined us this quarter. Her leadership experience across international business development, focusing on China, entertainment, media and corporate social responsibility make her a unique addition to our Board. With that, I'll hand it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions. Thank you, Patrice, and good morning, everyone. We are encouraged by our strong early progress on our Next Great Chapter: Accelerate plan. We leveraged our multiple strategic drivers and superior operational capabilities to deliver third quarter results ahead of our expectations. We drove another quarter of solid top line growth, with Q3 revenues up 1% on a reported basis and 7% in constant currency, above our outlook. All three regions delivered positive revenue growth on both a reported and constant currency basis as well as positive retail comp growth. Operating margin was at the high end of our guidance with strong expense discipline more than offsetting lower-than-expected gross margin. Operating with discipline has been and will continue to be a cornerstone of our long-term strategic plan with productivity helping to fuel our investments in sustainable long-term growth. Exiting the quarter, we continue to leverage the strength of our balance sheet, which has served us well through times of uncertainty. We believe our elevated brand, clear strategy and targeted investments combined with our culture of operating discipline and fortress foundation enablers, put us in a position of strength to continue to drive long-term value creation. Let me take you through our third quarter financial highlights. Total company revenues increased 7% in constant currency, above our low to mid-single-digit outlook, led by double-digit growth in Asia and Europe. Guidance and results included a timing shift with the week between Christmas and New Year's moving back into the third quarter from the fourth quarter last year due to the 53rd week in fiscal '22. This benefited this year's Q3 sales by about 130 basis points, which should negatively impact our smaller fourth quarter by an estimated 170 basis points. Ralph Lauren digital ecosystem sales grew high single digits in constant currency and more than 40% on a two-year stack. With our owned Ralph Lauren digital sites, sales grew 10% on top of more than 30% growth last year. We continue to elevate and expand the breadth of our offering online while enhancing the user experience with a rich digital content. We are also driving further improvements in quality of sales with an increase in full price sales penetration and digital margins strongly accretive to our overall profitability in the quarter. Note that the fiscal quarter shift benefited our own digital sales by about 2 points in Q3 and should negatively impact Q4 by about 3 points. We continue to deliver gross margin expansion in constant currency this quarter, consistent with our long-term guidance. Total company adjusted gross margin was 65.2%, down 80 basis points to last year on a reported basis, but up 80 basis points in constant currency. The increase was driven by product mix elevation with AUR up 10% on top of 19% growth last year and lower air freight reliance following last year's supply chain disruptions. While we continue to drive our long-term brand elevation strategy, gross margins were below our expectations this holiday driven by: first, targeted outlet promotions in North America to drive conversion with our value-oriented consumers; second, stronger-than-expected post-Christmas sale days, which shifted into the third quarter from Q4 last year; and finally, higher duty costs in Europe. Compared to fiscal '20 pre-pandemic levels, adjusted gross margin was still 300 basis points higher in the third quarter. Our better-than-expected revenues and operating expense discipline in the third quarter also enabled us to deliver operating margins at the top of our guidance range. Adjusted operating margin was 16% on a reported basis and 17.8% in constant currency, representing a 190 basis point constant currency increase to last year. Adjusted operating expenses declined 1%, including a marketing expense decline of 8% over last year's disproportionately back half-weighted spend. Marketing was 7.3% of sales compared to 8.1% in the prior year period. As Patrice mentioned, operational excellence remains a key element of our fortress foundation, and we remain sharply focused on operating expense discipline even as we continue to invest behind our brands and targeted global expansion to drive long-term sustainable growth. Moving to segment performance, starting with North America. Third quarter revenues grew 1% as stronger direct-to-consumer performance more than offset a slight decline in wholesale, as anticipated. The shift of post-Christmas days benefited our performance by about 190 basis points in the quarter. This shift should negatively impact our fourth quarter sales by about 270 basis points. In addition, the absence of last year's 53rd week is expected to negatively impact North America by another 460 basis points in Q4. In North America retail, third quarter comps grew 2% on top of a strong 38% COVID reopening compare last year. While we were encouraged by another quarter of positive comp growth in our full-price stores, this was offset by softer performance in our outlets as anticipated in our guidance. Our outlet AUR was up high single digits, reflecting our ongoing brand and product elevation in the channel. However, we continued to see softness in our value-oriented consumers. We are focused on driving a strong value proposition to the consumer, which includes expanded category assortments, enhanced selling environments and targeted communications. Our fiscal '23 outlook still assumes caution in this channel through the rest of the year. Comps in our owned ralphlauren.com site increased 9% and more than 40% on a two-year stack, driven by strong performance in core product, tailored styles and footwear. Digital AUR increased on continued product mix elevation. In North America wholesale, revenues declined 2% to last year. As we discussed in November, the decline was entirely driven by a customs delay, which resulted in missed Q3 shipment windows, representing about 3 points of negative impact. As expected, we also saw a slowdown in replenishment trends as our partners focus on keeping inventories clean heading into the new year. Outside of this, our positioning in the wholesale channel remains competitively strong. We gained market share across men's, women's and kids in key partners, and our AUR and wholesale grew 10% on continued product elevation. Promotions on our brands at wholesale were largely aligned with our expectations going into the season. Inventories at wholesale are now normalized following last year's supply chain disruption, and we have experienced minimal cancellations to date for spring '23. We still expect wholesale to be up in the fourth quarter of fiscal '23, despite our more cautious view on replenishment and our spring '23 inventory buys. Moving on to Europe. Third quarter revenue increased 1% on a reported basis and 13% in constant currency. This 13% growth included about 450 basis points of benefit from the post-Christmas timing shift as well as a wholesale allowance benefit recognized in the quarter. We estimate the timing shift will negatively impact the smaller fourth quarter by about 120 basis points in Europe. Q3 European retail comps increased 11% on top of a 55% compare last year. Brick-and-mortar comps also up 11%, benefited from lapping the start of last year's Omicron variant as well as the post-Christmas sales shift into Q3. AUR increased 12% with gains in both brick-and-mortar and digital AUR. Total digital ecosystem grew mid-single digits in the quarter, with low double-digit growth in owned digital commerce and wholesale dotcom more than offsetting softer pure-play results as anticipated. Europe wholesale declined 1% on a reported basis, but grew 11% in constant currency. This was ahead of our expectations, driven by roughly 8 points benefit related to lower-than-anticipated wholesale allowances as well as stronger spring '23 shipments and fill rates, more than offsetting softer reorder trends. Note that our wholesale outlook continues to embed a notable deceleration through Q4 based on challenging compares and macro headwinds. Overall, while our Europe business has performed better than expected through the first 3 quarters of the year, we remain cautious on the remainder of fiscal '23 into fiscal '24, given dynamic macro conditions across the region. Turning to Asia. Revenue increased 1% on a reported basis and 16% in constant currency, a strong result given significant COVID outbreaks in the Chinese Mainland as well as higher infection rates in Japan. Asia retail comps were up 8% with balanced growth across digital commerce and brick-and-mortar stores. By market, third quarter sales in Japan and Korea each increased mid-teens in constant currency. Australia, New Zealand and Southeast Asia were up more than 25% and 50%, respectively. The Chinese Mainland was up 7%, despite the significant COVID impacts Patrice mentioned, while Hong Kong, Macau and Taiwan grew low teens in the quarter. We returned to full operations in the Mainland by mid-January. And while our teams are prepared to manage through further disruptions, we are encouraged by the continued resilience and strength of our consumer and brand momentum in China along with the rest of Asia. Moving on to the balance. Our balance sheet continues to be an important element of our Fortress Foundation, enabling us to balance strategic investments in our brand and business with returning cash to shareholders even through dynamic times. Through the third quarter, we returned approximately $560 million in the form of our dividend and share repurchases year-to-date. We ended the period with $1.7 billion in cash and short-term investments and $1.1 billion in total debt. Net inventory increased 33%, moderating from first half trends as we reduced goods in transit and significantly improved our lead times from last year's global supply chain delays. Inventory growth still reflects earlier timing of receipts, higher product costs and our strategy of product mix elevation. Nevertheless, we still expect to end fiscal '23 with inventory more closely aligned to sales growth. We continue to manage our inventory position fund with the majority still weighted to core and seasonless product. This gives us greater flexibility to adjust future production levels and allocate product to the channels and geographies with the strongest demand. We also continue to make meaningful improvements in transit times as we move through this year. Looking ahead, our outlook is based on the evolving macro environment, including inflationary pressures, disruptions in the global supply chain, COVID-19, foreign currency volatility and the war in the Ukraine. We continue to plan across a range of scenarios, and our guidance represents our best assessment of market conditions and resulting consumer impacts. For fiscal '23, we are maintaining our full year outlook in constant currency with revenues expected to increase high single digits or about 8% on a 52-week comparable basis. Our outlook continues to assume a challenging consumer backdrop in Europe and North America. We now expect foreign currency to negatively impact revenues by approximately 600 basis points. We expect operating margin of approximately 13.5% to 14% in constant currency compared to our prior outlook of about 14%. This is based on a more modest level of gross margin expansion in the second half of the year as we keep inventories current and align to demand. Foreign currency is now expected to negatively impact operating margin by about 180 basis points. This compares to operating margin of 13.1% on a 52-week basis and 13.4% on a 53-week basis last year, both on a reported basis. Gross margin is now expected to be flattish to last year on a constant currency basis. We plan to continue driving stronger AUR and favorable product mix to offset increased product costs. Foreign currency is now expected to negatively impact gross margins by about 150 basis points in fiscal '23. For the fourth quarter, on a 13-week comparable basis, we expect constant currency revenue growth of about mid- to high single digits. On a reported basis, which includes the impact of last year's 53rd week, we expect revenues to be up 1% and 2% in constant currency. Foreign currency is expected to negatively impact revenue growth by approximately 500 basis points. Our outlook also includes about 170 basis points of negative impact from the week after Christmas shifting into fiscal Q3 from Q4 last year. We expect fourth quarter operating margin of about 5.5% in constant currency. This represents a roughly 190 basis point increase to last year, driven primarily by operating expense leverage as we normalize our cadence of marketing spend versus last year. Foreign currency is expected to negatively impact operating margin by about 160 basis points in the quarter. We expect constant currency gross margins to be about flat in Q4. This implies roughly 50 basis points of expansion on a 13-week comparable basis. Foreign currency is expected to negatively impact gross margin in the quarter by about 140 basis points. We now expect our tax rate in the range of 24% to 25% for the full year and estimate a roughly 29% tax rate for the fourth quarter. Though this could vary widely as Q4 is our smallest quarter and highly dependent on mix and discrete items. And lastly, we now expect capital expenditures in the range of $240 million to $250 million based on the timing of build-out. In closing, our teams around the world are operating with agility and executing strongly, driving continued progress on our Next Great Chapter: Accelerate plan. This is a testament to the power of our iconic brand that Ralph created over 50 years ago, and the strength of our Fortress Foundation coupled with diversified engines of growth across product categories, geographies and channels. Good morning, everyone, and nice to see the progress. Certainly seems that there's still a lot of moving pieces on the macro side and you beat again on top line this quarter while continuing to grow AUR, as the environment has become more promotional. Just bigger picture, can you talk about what gives you the confidence that your elevation strategy can continue to work in a less favorable macro or pricing backdrop? And along those lines, any expansion on your thoughts on the health of the consumer in the wholesale channel in different regions, and what you're seeing in your own retail DTC business with the health of the consumer? Good morning, Dana. Thanks for your question. Listen, Ralph, Jane and I are really proud of our company's outperformance this year to date. As you mentioned, the macro environment certainly continues to be quite choppy, but I think we're used to that by now. Our teams have built this incredible agility muscle over the past few years, if you kind of reflect on what we've worked through COVID, inflation and now a relatively promotional environment. So this agility gives us confidence looking ahead, but it's that agility plus other three things that I would really call out. The first one, and it touches on your second question is, our core consumer remains quite resilient. And that's true around the world, and that's true across channels. And as you know, we've done a lot of work over the past few years to evolve our customer base to bring in a higher value, younger customer that played out again this past quarter, 1.6 million new consumers, higher value, less price-sensitive, younger consumer. The second point is our diverse growth strategy that has multiple growth levers, and we constantly challenge ourselves to make sure they're still relevant in the environment that we are operating in and looking ahead, and we believe they are as relevant as ever, even in a tougher environment. What do I mean by that? Well, you can look at our opportunities to grow across regions, right? We have significant growth opportunities, of course, across Asia, including in China, in particular, but also in key cities across North America and in Europe. On the product front, we have a very wide lifestyle portfolio, and so that enables us to drive our core. You saw our core did quite well this past quarter, up high single digits, but also go after high potential categories like women's up mid-teens this quarter and outerwear up high single digits. And then the third point is really around flexibility, right? And two things I would call out here. One is because of this breadth of product portfolio, we can really flex up and down. You've seen us do that over the past few years based on where the consumer desires, wants, needs are. And I'm sure we'll have the opportunity today to talk a little bit more about products and what we're seeing. But this ability to flex, I think, is quite unique, and it's a real strength for our company. The other thing is our elevation journey, means our pricing structure has built in flexibility, right? If you look back since the start of this elevation phase, our AUR is up close to 70%, which means we can still react to the competitive environment, including when it gets more promotional without walking back our overall brand elevation strategy. I was really encouraged to see our AUR performance again this quarter, up 10%, bringing in more consumers, driving strong topline growth in what is pretty clearly a more aggressive promotional environment. And then underlying our diverse and flexible growth drivers are two critical things: one is our ongoing productivity work, which is as relevant as ever; and the second is our fortress balance sheet. So while the environment remains choppy and we expect it to remain choppy around the world, we believe we are well positioned to continue to attract higher-value consumers and drive growth and value creation. If I double-click on your question regarding consumers and at the risk of repeating myself, a few things to call out. First of all, our core consumer is resilient and in good shape. And so we're seeing him and her respond nicely to the work we're doing on brand elevation, product elevation, shopping experience elevation. I'm very encouraged by the fact that the teams are able to continue to bring in large numbers of new consumers, 1.6 million, I think, is the highest we've done in several quarters now. We've been around 1.3 million, 1.4 million. And again, the makeup of that customer group is higher value, less price sensitive. So we feel good about that. We did mention last quarter that our more value-oriented consumer, which is a much smaller part of our business today, is obviously feeling the inflationary pressures and is having to be more discerning in terms of how they spend, but they're still buying clothes. And here, we're encouraged by our share progress because we're growing share particularly on the wholesale channel that you touched on, Dana. We're growing share in men's. We're growing share in women's. We're growing share in kids. So we're staying very focused on making sure our value perception continues to strengthen, and it did again this quarter such that across all channels, across all consumer groups, we win the consumer level. And we had that win in North America specifically with AURs up 10%. So that elevation journey continued on a promotional day base that was about equal to last year. Really happy with that quality. So Patrice, could you speak to demand relative to plan that you're seeing for the Polo brand? And maybe just outline market share gains that you're seeing in the women's category? And then, Jane, just in relation to your larger picture comments, how best to think about North America next year relative to your mid-single-digit multiyear target? And just any change in the path to mid-teens constant currency operating margins by FY '25 that we should consider based on anything that you're seeing today? Sure. So sorry, on demand on the Polo brands, particularly in the Polo brand, as you know, is the heart of this company. We are seeing progress on men's consistently. And what I'm excited about, we touched on it in our prepared remarks, is the introduction of the Polo Originals line that kind of pays homage to the Polo roots, which is just a view the full line of products that our teams have being around to allow us with really a communication that's really resonating with the customers. So continuing to drive that elevation and tapping into the breadth of the portfolio so that if you want athleisure, we have that available with exciting products. But we also have investments in the more tailored proposition, which is where we're seeing the consumer gravitate more and more to this more elevated casual proposition. So Polo Men is really nice momentum with a number of engines of growth that were very promising for the future. Outerwear is obviously an area of strength on the Polo Men. On the women's side, across all the key categories actually, we're seeing Polo Women's get significant traction. And as we're seeing the consumer gravitate to this more elevated casual dimension, then we're able to leverage the breadth of the portfolio and that ranges from sweaters to dresses to acceleration in outerwear, and we expect that to continue. Obviously, we see significant growth opportunities ahead on Polo Women. And then on Polo Kids, we're also continuing to see nice traction and share growth, we’ve seen share growth for quite a while on that business as well and expect that to continue as we throw a relatively wide net when it comes to attracting new consumers and leveraging the presence we have across multiple categories. So the range of product offerings we have on the Polo brand and the skew to our sweet spot, which is this elevated casual, I think, sets up to run nicely, not just for outperformance now, but for the future. Yes. On some larger-picture perspective now, we feel that this year's performance is consistent with our FY '25 guidance of getting to a mid-teens OI margin. And we feel that because our -- despite some macro choppiness, our strategy is working. Again, this quarter, we were able to offset inflation, putting up a 10% AUR growth. And what undergirds that gives us confidence is that our consumer value perception rating again this quarter improved and is obviously improved from the pre-pandemic level. So the consumer is giving us confidence in our ability to navigate with gross margin -- holding and expanding our gross margin over the next several years. We also have a robust productivity plan that we outlined. We're still committed to delivering this $400 million over the life of the plan in productivity savings. We're investing in that, and we're seeing the benefits of that in our supply chain, in our buying groups and in just our cost management. And you saw that flow through this quarter in our expense management and beating our OI margin guidance. So those are things that are giving us confidence encourage, also the resiliency of Asia; multiple countries delivering strongly and the resiliency that we see in our China business and Europe continuing in a difficult environment to outperform. All those things are confidence builders that 15% is the right margin. On North America next year, I think that we've outlined as called out for the last couple of quarters, the pressure on the value consumer, I think we're responding appropriately and well within the guardrails of our strategy. So we're still confident in our outlook for growth in North America next year and are pleased with the progress we've made since the reset putting it on a healthier base. So absolutely, yes. Congrats on a really nice holiday. How much of the AUR increase going forward is North America driven? And within that, how much should we think about from here is from SKU mix or channel compared to a like-for-like pricing opportunities? And then Jane, it feels like the right time to ask, North America margin crossed above pre-COVID levels this quarter for the first time in a while. It was nice to see. Could you outline bridge for North America operating margin to get back to the 21%, 22% zone that it was in prior to COVID. You've given us some of the components like digital being accretive, those kinds of things. You know our bigger businesses today. I'm curious what your thoughts are there. Yes, sure. Let me take the first part of your question, which is AUR base. So as we move forward in this pricing journey, you've seen us continuously put up AUR increases across all three regions. Again, this quarter, we saw Asia, which is furthest along in the journey put a very strong AUR delivery, but more modest than the rest of the regions because they're further along in their journey. So fully offsetting inflation and expanding gross margin. Europe, which is in the middle of the journey also put up nice AUR expansion as did North America. I do believe that because North America is earlier on in his earnings that they will be slightly outpaced in progression through this long term -- through the length of our plan, and they're certainly positioned to offset inflation through the length of this plan. So it's not a disproportionate amount, but I do think there's more opportunities. We've just started this journey in wholesale. We're early on there. And we've continued to make progress across full price our outlets and our digital. So we're encouraged by the breadth of AUR progression that we see in North America. And again, we have a multi-pronged strategy. Because of inflation, like-for-like pricing is a part of that, but we're getting continued benefits from geographic, and because we're shifting to DTC, we'll see DTC also be a positive tailwind for us and also including the elevation of our assortments, which will continue as we elevate the brand. As I look at North America operating margin, overall, we're very pleased with the reset of North America and putting North America on a more profitable base. Year-to-date, our margins have been pressured really by two primary things. One is, rate impacts were disproportionate in North America, and we do expect that to start to abate a bit in the latter fourth quarter, but certainly into FY '24. The other factor was wage actions that we took last year that were overlapping this year. Those were primarily in our distribution centers and in our retail staff. We think it was the right thing to do, and as we elevate the brand, that continuity is important in our retail. So clearly, as we come out of that and start to get a free benefit into '24 and we'll be out of the overlap of wages, it will be a positive benefit as we move it into North America. And as I said before, we have made some meaningful investments in digital. We have a home app. We now have a full content RL app. Those have been good investments that are now made, and we can start to leverage in the future. Jane, I was wondering, can you help unpack the foreign currency into next year based on current rates? How much of the transaction impact has already hedged or locked in for the year? And what are some of the ways to recapture the 180 basis points of margin impact that you now expect from this year? So the primary way that we will address gross margin expansion on both a constant currency and reported basis is going to be our pricing strategy. It's a proven muscle for us, and we expect to deliver over the next several years. Now foreign currency, given the tailwinds that we've seen this quarter, which we called out and the impact of ForEx will have lessened since the start of the year in our guidance, we're encouraged, but I don't have a crystal ball. But I do know that I think we've been relatively wise about the hedges we placed going into next year. And as currency continues to strengthen, we should have over translational and transactional benefit, but we do hedge dramatically in layers and again, just optimizing around being relatively smart and placing those layers. So I'm feeling good, but again, I don't have a crystal ball. And it is our practice, we'll give guidance in our fourth quarter results, but we will call out the impacts based on the spot at that time. Jane, I want to ask about China. I think you mentioned -- I know you usually don't mention quarter-to-date trends, but you mentioned that your China operations are back to full operations mid-January. I know it's only three weeks, but just for the audience, if you can kind of unpack what you're seeing? Is it just -- is it traffic just coming back? Or are you also seeing conversion? And then just one quick question on the 4Q gross margin. If you can give us some puts and takes, great to hear that the 4Q gross margin should be up 50 bps. If you can parse that out a little bit, that would be very helpful. Laurent, we'll tag team on this one. A few things on China. First of all, I have to say, I am really proud of our team's execution, actually not just in China, but across the entire APAC region. And as we talked in prior forums, we see significant near and long-term growth opportunities in China on strong brand building, on relevant product offering and a connected ecosystem expansion in key markets. In Q3, we were up 7% constant currency in China, despite 94% of our stores impacted either by closures or reduced hours or staffing shortages. So it gives you a sense of the team's agility that I referred to earlier and the ability to kind of navigate that still connect with the consumer while the access is a little constrained. You are right that we don't generally comment on in-quarter performance, and it's only been 3 weeks, but we've been very encouraged by the reopening. We are now up and running everywhere, and we're seeing consumers reengage strongly. So far, I think, double-digit rebound across Mainland China. And we're seeing a combination of, of course, the return of traffic both on -- in our brick-and-mortar and also online and then strong conversion. And why strong conversion? Because the work that the teams are doing on brand desirability in China is really resonating with the consumer, and they're leaving the brand into the local fabric of the Chinese culture in a way that really sets us apart. If you think about what the Ralph Lauren brand is about, right, it's understated luxury grounded in heritage and icons. And that's a pretty unique proposition. And based on where the Chinese consumers' mindset is right now, which is maybe a little less focused on short-term fashion and more focused on brands that have a history to have a heritage and have a set of clear values, that positions us very well. Team is doing a really nice job creating our product line up there, and as we've mentioned in prior calls, we're continuing to see consumers there gravitate towards our highest price items actually around the world. And then we're super excited about the way the ecosystems are playing out in the top six cities that we've called out. Those of you who plan to visit Mainland China in the near term, you can visit our new store in Shenzhen, which we opened a few days ago and is off to a wonderful start. In a store we opened recently flagship in Chengdu, which is also doing quite well. And then this is only about domestic consumption, right? So the other thing that's going to happen is, we're going to see Chinese travelers wanting to shop our brand around the world, and we're in a much better position in terms of brand perception than we were 3 years ago. So I think we'll be able to benefit from that, and we're starting to see some of that in Southeast Asia and parts of Northeast Asia for our business. So promising start, excited about the long-term perspective, and we have a very intentional game plan to win with the Chinese consumer. Yes. A few things to this -- giving us confidence in our Q4 guide on gross margins, Laurent. But one is that what Patrice just said, which is we expect China to come back resiliently in the quarter. It's our highest gross margin country within one of our highest gross margin countries within Asia. So we expect that to be a mix benefit as we move forward in gross margin. We're also starting to see some of the freight benefits, both the reduction in air freight and some reductions starting in ocean freight. So we're encouraged by that as a tailwind. But underlying it all is our confidence in the pricing strategy that we have and the mix benefits that we have in our assortment moving forward into the fourth quarter, and that is really the strength along with the consumer perception strength that we see that gives us confidence in the fourth quarter. So Jane, that's actually what I wanted to ask about. So understanding the pricing strategies are working in the margins themselves in absolute terms are still very healthy, can you just explain, versus three months ago looking into Q4, the gross margin differential? Because you're lowering the gross margin for the year. I think The Street was looking at like flattish gross margin. Now you're guiding down 140. I know that that's FX-driven, but just directionally, something is a little bit worse ex currency. So I don't know if that has to do with wholesale being weaker, but can you just kind of explain exactly what’s kind of taking place in Q4 versus maybe the prior plan? So I think that when we guided in May, we gave guidance based on our best estimate of consumer response and pressures. I think the consumer -- the value consumer that we've called out is more pressured than when we gave our original guidance. And we've also looked at the fourth quarter and want to ensure that we are in good shape as we start fiscal year '24 from an inventory perspective. As we've committed, we're going to have inventories more closely aligned to sales, and that's been responding to the desires of our value consumers to have a really compelling value. Total value for us has made us a little more responsive to that and as well that we want to make sure that we're healthy on inventories as we move out of the fourth quarter. Okay. Well, listen, thank you, everyone, for joining us today. We look forward to sharing our fourth quarter and full year fiscal '23 results with you in late May. And until then, stay safe, and have a great day.

EarningCall_94

Ladies and gentlemen, welcome to the Insight Enterprises, Inc. Fourth Quarter Full Year 2022 Earnings Conference Call. My name is Glenn, and I will be the moderator for today's call. [Operator Instructions]. I will now hand you over to your host, James Morgado, SVP Finance and CFO in North America, to begin. James, please go ahead. Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today, we will be discussing the company's operating results for the quarter and full year ended December 31, 2022. I'm James Morgado, Senior Vice President of Finance and CFO of Insight North America. Joining me is Joyce Mullen, President and Chief Executive Officer; and Glynis Bryan, Chief Financial Officer. If you do not have a copy of the earnings release or the accompanying slide presentation, that was posted this morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under the Investor Relations section. Today's call, including the question-and-answer period, is being webcast live and can also be accessed via the Investor Relations page of our website at insight.com. An archived copy of the conference call will be available approximately 2 hours after completion of the call, and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information, that is accurate only as of today, February 9, 2023. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will be referring to non-GAAP financial measures, as we discuss the fourth quarter and full year 2022 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You'll find a reconciliation of these adjusted measures to our actual GAAP results, included in both the press release and the accompanying slide presentation, issued earlier today. Also, please note that unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. As a reminder, all forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today's press release and in greater detail in our most recently filed periodic reports and subsequent filings with the SEC. All forward-looking statements are made as of the date of this call, and except as required by law, we undertake no obligation to update any forward-looking statements made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce. And if you're following along with the slide presentation, we will begin on Slide 4. Joyce? Thank you very much, James. Good morning, everyone, and thank you so much for joining us today. It is my pleasure, to report that we ended 2022 with an outstanding fourth quarter that topped off a record-setting year. For 2022, we delivered record net sales, gross profit, gross margin, adjusted EFO and adjusted diluted EPS, and we ended the year with positive cash flow from operations of $98 million. These are stellar results, in a volatile macro environment. For the past year, we have articulated our focus on delivering differentiated value for our clients. Improving and scaling our solutions offerings and enhancing our technical expertise in the areas where we know we excel. And while there is no finish line in this race, I feel great, about the progress we've made so far. Our clients choose us because we help them improve and transform their businesses and achieve the outcomes they need. This is evident from our record-setting results this year, and in fact, we outpaced the global IT market across all categories: Software, including cloud; services; and hardware. The foundation of our services business is based upon long-standing relationships, and understanding of the outcomes our clients need and what is required to make them successful. We deliver this through our deep technical expertise, which has led to record performance in Insight core services with gross profit growth of 14% for the year. We are still in the early stages of executing against our long-term strategy, but the progress we made in 2022 propels us forward, in pursuit of becoming the leading solutions integrator. We outlined the strategy at our Investor Day last fall. And as a reminder, there are 4 key pillars underpinning that strategy. First, captivate clients. This is a people- and outcome-focused business. We plan to drive continued improvement in Net Promoter Scores, by delivering exceptional results. We pride ourselves in earning the right to do more by delivering high-quality and outcome-based solutions. And our investments in e-commerce and automation will allow our clients to transact with us even more efficiently via self-service. This creates a seamless customer experience for our clients and frees up our sales teammates to focus on our second pillar, which is selling solutions. We are transforming our sales capabilities and aligning our incentives to focus on our solutions portfolio. We continue to streamline our account coverage to match skills with our clients' need and propensity to buy services. The theme here is really about focus, that is, doing a finite number of things and doing them really well. Our third pillar is deliver differentiation. This is all about providing innovative, scalable solutions through reusable IP, exceptional technical talent and our very compelling solutions portfolio. Again, we are focusing on our strengths that align with the fastest-growing areas of the market and the areas where our clients need the most help. Cloud, data, AI, cybersecurity and edge. And the fourth pillar is to champion our culture. This has been a strategic advantage for us, and we will continue to leverage our values of hunger, heart and harmony to evolve our high-performance culture. This is critical to attracting and retaining, such incredible talent. First, we are pleased to welcome Adrian Gregory, as our new President of Europe, Middle East and Africa, EMEA. Adrian held various leadership positions at both Atos and HPE, Adrian brings over 27 years of experience in the technology sector. He will lead our EMEA team as we continue to build our services and solutions capabilities in that region. Additionally, Kate Savage joined as an SVP in our Solutions segment, where she is focused on all operational aspects of our services business. Kate joins us from Capgemini, where she was Executive Vice President, driving operations and people strategies. M&A is also an important part of our strategy and supports the 4 pillars I outlined above. As we enter 2023, we have nearly $1.5 billion in financing capacity to fuel this strategy. We will be deliberate, in our acquisitions to support our solutions business in key growth areas such as cloud, data, AI and cyber. One such example is our acquisition of Hanu last year. As a reminder, Hanu is a Gartner Magic Quadrant Azure migration company, that allows us to scale our cloud business. Hanu also has a robust recruiting and development academy to build more technical expertise in EMEA. And to support these changes I outlined above, we stood up a global transformation office to manage the initiatives across the company. As I mentioned earlier, we had a record-setting 2022. Glynis will walk you through our Q4 performance, and I will highlight some of our full year results now. Net sales of $10.4 billion, up 11% year-on-year. Cloud gross profit of $340 million, growth of 29% year-on-year. Insight core services gross profit of $253 million, an increase of 14%. Gross profit grew 13% and gross margin expanded 40 basis points to 15.7%. Adjusted EPS was $9.11 per share and grew by 28%. Adjusted EBITDA margin expanded by 60 basis points to 4.7%. And we generated operating cash flows of $304 million in Q4, taking the full year to $98 million. These results demonstrate our team's ability to execute in a challenging environment, and the resilience of our business model. We've talked a lot about our ambition to become the leading solutions integrator by combining our strengths in hardware, software and services, to offer comprehensive solutions that drive business outcomes for our clients. And I want to share a recent example of this. Vivli, is a non-profit organization whose mission is to facilitate the sharing of clinical research data, and to enable their partners to develop treatments for diseases, such as Alzheimer's, diabetes and many others. To do this effectively, they needed an intuitive platform that would provide researchers around the globe with secure access to a vast array of clinical trial data. We worked with Vivli to define this new platform and determined 3 critical requirements for success. Those were ensure the solution was secure, patient privacy is clearly critical, create a smooth user experience with an intuitive front end and ensure the platform was scalable and manageable. Our highly experienced technical team developed a solution using the full complement of Azure services, which ultimately drove business efficiency, eliminated manual and redundant processes and meet a significant impact, on the research community. For Vivli, success is all about adoption. After delivering this project, Vivli has been pleased with the clinical data growth of 42% year-over-year and more researchers are using this platform than ever, with user growth of 20% per year. This is a great example of our purpose, accelerating transformation by unlocking the power of people and technology. We love the human aspect of this example and how the solution has not only helped Vivli, but has helped potentially thousands of patients at critical moments in their lives. Customer success stories like this, reinforce confidence in our strategy. As I mentioned, we see cybersecurity as a major focus for us, and I want to talk through a really meaningful example of our capability in this space as well. When a Fortune 100 insurance and financial services provider needed to modernize security, they turn to Insight. They needed to address a challenge called secret sprawl or more plainly, a situation that many organizations face when passwords, encryption keys and other sensitive authentication information is stored in many different locations. Secret sprawl leads to mismatch credentials and creates a risk of security breach. To address this challenge, we implemented HashiCorp's Vault software to consolidate user credentials. We also developed customizable self-service API templates, to direct authentication between multiple applications and developed automation to monitor expiration of web security certificates. The solution we deployed is a seamless credential management system with automated compliance. We're really proud of the work done on this project and the value we provided. I think it's a testament to the deep technical talent we have at Insight, and we see that as an important differentiator in the industry. We also earned some tremendous industry recognitions in 2022. You can see the details in the accompanying presentation. So, I'll just highlight a few recent recognitions now. We earned 3 Cisco Partner of the Year recognitions, achieved all of Microsoft Solutions partner designations, earned Microsoft's 2022 Partner of the Year for manufacturing, as well as the 2022 Canadian Partner of the Year Award. Additionally, as champions of people, leadership and culture, we strive to be a company where all teammates have the opportunity to reach their full potential. And I'm proud that Insight was recognized by Forbes, as one of the world's top female-friendly companies. Before handing the call over to Glynis, who will share our 2023 outlook, let me briefly touch on the year ahead. As we head into 2023, we expect continued economic uncertainty. And now more than ever, it is critical that we support our clients, as we navigate these uncertain times together. We are uniquely positioned, with our combination of deep expertise in hardware and software, and our portfolio of digital transformation services focused on cloud, data, AI and cyber, to deliver cost-effective technology solutions and business outcomes for our clients. The $4 trillion IT market is growing in the low single digits. However, cloud, data and AI, cybersecurity and the edge, are expected to grow in double digits, which plays to the strength of our portfolio and our technical talent. We remain focused on our ambition to become the leading solutions integrator, and I look forward to discussing our progress as we continue our journey. With that, I'll turn the call over to Glynis to walk you through the important details of our financial and operating performance in Q4 2022, as well as our outlook for 2023. Glynis? Thank you, Joyce. As Joyce mentioned, we delivered record results for the year as we continued our journey to become the leading solutions integrator, despite the challenging macro environment. I'd like to start with some comments on our 2022 performance. Every year does not play out like this one, but 2022 was a year of 2 halves. The first half had very strong net sales growth of 22%, fueled by exceptionally strong devices growth in the high 30% range against a weaker first half of 2021. In the second half, net sales were essentially flat across better second half 2021 performance, but we achieved higher gross margin and positive cash flow from operations. In the second half of 2022, our operations generated cash flow of $540 million, leading to positive cash flow from operations of $98 million for 2022. As we have discussed previously, when hardware sales decelerate, we spin off significant cash flow. Our performance in the second half of 2022 is an excellent illustration of this. Our net sales performance in 2022 reflect our execution, volatile market conditions and the easing of supply chain issues that began in 2021. Although we have essentially flushed our device backlog, we still have significant backlog in networking and infrastructure, going into 2023. As we have previously discussed, we're on a multiyear journey, and we're in the early stages. In 2022, we started assembling the building blocks around sales transformation, portfolio optimization, our differentiated value proposition related to offerings and our technical talent, and our profitability initiatives to accelerate gross margin and EBITDA margin expansion. We are not finished with our efforts in these areas, but our performance to date is meeting our expectations. The slide presentation today includes details on our Q4 and full year 2022 performance for the 3 geographic regions, as well as our consolidated results. I will focus on our consolidated results and on the key highlights from our Q4 performance on this call. You will also find the GAAP equivalents for our adjusted results in our investor slides and a reconciliation to the GAAP amounts, in the appendix to the investor slides. In Q4, gross margin was a record 16.8%, an increase of 180 basis points compared to prior year and reflects the higher mix of cloud, Insight core services and infrastructure products, all of which transacted at higher margins. Our strong performance was driven by 44% cloud gross profit growth and 11% Insight core services gross profit growth. Combined with our operating expense leverage, this resulted in a record adjusted EBITDA margin of 5.4%, up 120 basis points over 2021. For the fourth quarter, adjusted diluted earnings per share was $2.53, up 28% in constant currency and 25% in U.S. dollar terms, year-over-year. For the year, adjusted diluted earnings per share was $9.11, a record for us. Up 31% in constant currency and 28% in U.S. dollar terms year-over-year. This performance illustrates the resilience of our business model in a declining device market and gives us confidence as we make progress on our solutions integrator strategy. As we previously discussed, with the slower growth in hardware in the fourth quarter, we generated $304 million in cash flow from operations in the quarter. In 2023, we expect our business to generate cash flow from operations in the range of $180 million to $220 million. And to update you on our share repurchase program, in Q4, we repurchased 839,000 shares of our stock, at an average price of $98.88 per share for a total cost of $83 million. In full year 2022, we repurchased a total of 1.1 million shares, at an average price of $97.35 per share for a total cost of $108 million. As of the end of January, we have $196 million remaining under our $300 million share repurchase authorization, and we anticipate executing $96 million in our planned share repurchase, pending market conditions. In the fourth quarter, our convertible notes exceeded the market price trigger of $88.82, and so were convertible at the option of the holders. As a result, the principal amount was reclassified to current liabilities. The $350 million principal amount of the convertible notes will always be settled in cash. In future reporting periods, as our average stock price in any quarter exceeds the warrant price of $103.12, we will include shares in our diluted and adjusted diluted earnings per share calculation, for the amount in excess of the warrant price and the average share price throughout the quarter. You will find an illustration of this in the appendix to the investor presentation. We continue to evaluate our alternatives relative to the convertible notes, as well as, the impact of the convertible notes and dilution on our share repurchase strategy. Our current share forecast for 2023 includes the net impact of share repurchases and anticipated dilution assuming our share price increases throughout 2023. We exited Q4 with approximately $1.5 billion of our $1.8 billion capacity available, under our ABL facility. And we have ample capacity to fund our business and capital deployment priorities. Our presentation shows our 2022 performance relative to the metrics that we laid out at our Investor Day in October. 2022 is our baseline year. Moving on to 2023. As we communicated last quarter, we anticipate a modest growth year, as the macroeconomic environment remains challenging across the globe, given elevated inflation and interest rates. Consistent with the market consensus, we anticipate higher borrowing cost under our ABL, and we also anticipate that foreign exchange rates could create added volatility. In the face of this uncertainty, we are focused on improving cash flow and preserving capital for critical initiatives. We will continue to fund the 4 critical initiatives Joyce outlined, including the outfitting of a new Texas advanced integration and client fulfillment center, as well as critical initiatives related to sales transformation, digital commerce and our differentiated value proposition. In addition, the most recent forecast for the IT market is projecting low single-digit growth for 2023, with hardware down and software and select services up in the mid- to high single-digit range. The areas of cloud, data and AI, cyber and modern infrastructure are all forecasted to continue to grow at a double-digit pace. This plays to our strength, and we believe our performance in Q4 confirms, the strength of our business model and our ambition to be the leading solutions integrator. As we think about our guidance for the full year of 2023, our expectations remain modest. We expect to deliver gross profit growth, in the high single-digit range. We expect adjusted diluted earnings per share for the full year of 2023 to be between $9.90 and $10.10. This outlook assumes interest expense between $48 million and $52 million and effective tax rate of 25% to 26% for the full year, capital expenditures of $55 million to $60 million and an average share count for the full year of 34.3 million shares, after an estimated completion of our current share repurchase program and net of estimated dilution. This outlook excludes acquisition-related intangible amortization expense of approximately $32 million, assumes no acquisition-related or severance and restructuring and transformation expenses, and assumes no significant change in our debt instruments or the macroeconomic outlook. Thank you, Glynis. 2022 was a record-setting year and we are thrilled with our results. And Q4 showed encouraging progress toward our goal. There are significant headwinds driven by the macroeconomic environment, but we believe our broad portfolio of solutions provide us with the resiliency to navigate any economic cycle. We are well positioned in the fastest-growing areas of the market. We are laser focused on execution and building momentum towards our ambition to become the leading solutions integrator. We are passionately focused on delivering against our strategic pillars of captivating clients, selling solutions, delivering differentiation and championing our culture. Our plan is to supplement this strategy, with our intentional M&A approach. Our strong results in 2022 position us well to progress toward our long-term growth and profitability targets, and all of this propels us towards our ambition to become the leading solutions integrator, defining a new category in our industry. In closing, I want to thank our teammates for their commitment to our clients, partners and each other. Our clients, for trusting insight to help them with their transformational journeys. Our partners, for their continued collaboration and support and delivering innovative solutions to our clients. My first question, Joyce, is just on your outlook for hardware in general and specifically client devices. It sounds like it's been down year-over-year for the last couple of quarters. Any sense of when that bottoms? What are your customers telling you? Thanks, Matt. So, we just had a pretty great quarter and a pretty awesome year, and it was a pretty great quarter in a period when devices were down. So I think, first of all, I just want to say that our combination of services, software, cloud and hardware, of course, give us confidence that our outlook is pretty solid. So, as I outlined the numbers. We're pretty -- we're confident in that. We see a reasonably good start to the year in that regard. In terms of hardware, we have pretty significant backlog still, near-record high backlog on infrastructure. So -- and that's going to probably not dissipate, until the back half of the year or through the summer. And then from a device point of view, yes, we're, like the rest of the industry, expecting devices to be down in the first half with some recovery in the back half of the year, primarily driven by much softer compares. Okay. And then I wanted to talk about the fourth quarter, where you had basically your revenue down, your gross profit was up, roughly $21 million, and you're operating -- and basically, your SG&A was flat quarter-to-quarter, which seems surprising. So could you explain the relationship between the gross profit dollars, particularly in those netted down revenues and the corresponding OpEx? Because, if we look at your guidance for next year, you're looking at really, really significant gross profit growth on, I guess, low single-digit revenue. So I'm trying to figure out what that OpEx looks like underneath that model. Sure. Okay, Matt. You're exactly correct. So in Q4, software, cloud and software in particular were strong, and you saw that reflected in the gross margin numbers that we posted in Q4. Going into 2022, you're also correct. We do anticipate gross profit dollar growth in the high single-digit range, and revenue growth is going to be lower than that. That's based on a couple of things, still. One, devices are a smaller contributor to the overall hardware in 2023. We're going to get more from infrastructure, more growth from the infrastructure side of the hardware market, that transacts at higher margin. And software and the cloud are also going to be strong going into 2023. And we have core services which are also going to be strong going into 2023. And in addition, we talked a little bit -- maybe in the -- in our Investor Day about our profitability initiatives with regard to expanding gross margin. So when you look at our numbers, gross margin is a huge driver of what we anticipate will be our success in 2023. And we have controlled SG&A in the second half of 2022. That is continuing, as we go into 2023. We will continue to fund sales and technical resources, as we have done in 2022. And we will continue to control our back office and admin resources, and leverage low-cost locations in terms of how we expand to meet the needs of the business. Okay. But just back to the last quarter, where your SG&A didn't grow sequentially, and your gross profits grew $21 million. Was that because there were cost cutting or variable expenses that went away with the lower hardware sales? And going forward, if let's say, gross profit margin is up 30 or 60 basis points year-on-year, would SG&A grow at a slower pace than that? So if you look at Q4, I'll answer that question first. In Q4, we saw the value and the benefit that we had from the sales transformation and initiatives that we put in place, one, two, from just the cost control that we had around overall GP. So you're right, we grew gross margin, but SG&A didn't expand as much. But we did actually have the expansion that we normally would see on sales comp associated with the higher gross profit that was generated. That is correct. When you go into 2023, we would anticipate a similar dynamic. We're going to see gross profit dollars, that would generate gross margin expansion. That would generate higher commissions, and we're controlling SG&A around that with regard to getting to the answers that we -- the results that we showed you for 2023. And just to supplement that. I mean we do expect continued leverage on SG&A. As we grow, we get more leverage out of our SG&A spend. Okay. I just wanted to start on 2023 gross profit dollar guidance. Joyce, you mentioned you're obviously finishing a very strong year in 2022, and I think, gross profit dollars grew 13% during 2022 after a very, very strong year. As we think about 2023, you're talking about high single-digit gross profit dollar growth and called that guidance modest. And so as I kind of try to square those 2, a very strong year at 13%, but then we're expecting high single digits next year and calling that modest, there's a little bit of a disconnect. And I'm wondering if maybe, you could help bridge that, whether it's maybe some sort of backlog expectation that gives you confidence to grow at that level on a difficult comparison. Yes. So first of all, I think -- so the top line will grow more slowly in 2023 than it grew in 2022. That's been consistently what Glynis has been talking about now, since the Investor Day, for sure. And obviously, there's some translation into gross profit dollar growth there. And we do certainly expect to see -- to get some help on our gross profit mix, due to flushing and the infrastructure backlog in the first half of the year. But as Glynis mentioned, I mean, it's really around the mix of software, cloud and services, overall in the business that are driving the gross margin expansion versus sort of our historical rate of gross margin. Adam, if I could just add on to that. What I would say is that, if you look in the presentation deck, not right now, but at your leisure, you will see that we gave you a couple of stats about first half of 2022 versus second half of 2022. And part of what drove the gross profit dollar growth was high hardware sales in the first quarter of 2022. Which had lower gross margin associated with it. So in 2022, on that high gross profit growth, that we had in the first half, we -- actually margin declined by 70 basis points in the first half. We made that up in the second half, plus some, primarily because devices were not as strong in the second half of the year as they were in the first half of the year. When you look at the growth that we're seeing in 2023, it is less devices in that growth number, which helps us overall -- from a overall gross margin perspective, and gives us the confidence with regard to what's happening with infrastructure, our backlog around infrastructure, in particular, as well as the performance that we have shown in cloud, software and Insight core services that leads to that gross margin expansion number. Yes. I realize that. Is there a way for us to think about seasonality in 2023, given kind of these different comparisons on a year-over-year basis and kind of an odd year last year that we're going off of how to think about seasonality in 2023? Yes. I think as Glynis mentioned, I think it's kind of going to be the inverse of last year. So I think the first half of this year is going to be a little the growth will be slower than the second half of the year, and last year was the inverse. Last one for me, and I'll pass it on. But I do want to ask Joyce, on the sales transformation initiatives. If you could maybe just a recap a little bit of more specifics. I understand, there's been investments in systems, et cetera. But have you been moving around accounts or geographies? What's been going on with that? And what do you think is left to do with the sales transformation? Sure. So yes, so we have spent a lot of time, as we talked about at Investor Day, really trying to think about how to focus on going deeper in our top accounts. So we have made changes in coverage to do just that. And that means, for our top accounts, we have -- and top sellers in those accounts, we've reduced the size of their account base, or their books. And that is in order to make sure that we're putting our highest-propensity sellers -- or sellers who sell them out services, and who have the most services skills, aligned with the customers who are most likely to buy our services. And to -- what the plan is to go deeper in those accounts so we can increase our understanding of their businesses in a very dramatic way and propose solutions that are going to be most relevant to them to help them deliver the success in their business that they're looking for. So we've done all of that. You're never done, of course, but we've done that, as of the end of the year. And so that's a pretty big push for us. We've also made some minor changes around how we think about account planning, how we're training our sales execs and things like that, and that will continue. That will be an ongoing process. So we have now moved from talking about sales transformation to actually growing the business. So we believe we're done with the planning phase, and we're now into execution. At the Investor Day, you provided a long-term revenue outlook to outperform the underlying market by 200 basis points. How should we think about that level of outperformance relative to 2023? Is that still the benchmark, we should align to our models? Or are there other factors we should consider this year that might put pressure on that? I think, we've always said that we will perform 200 to 300 basis points ahead of the market. That hasn't changed. It's just that we really want to focus on gross profit dollars because the composition of our revenue, specifically the composition of cloud in our revenue and the netting that occurs with that, makes our revenue metric a little hard to follow, especially when you're following it each quarter. Q2 and Q4 are big cloud quarters. So that's why we gave you some -- the guidance around gross profit, but we still anticipate we will grow ahead of the market, yes, on the revenue line. Got it. Got it. Appreciate it. And then just relative to cash generation, which is set to improve heading into 2023 based on kind of the commentary you made in your prepared remarks. I guess, just can you just remind us what the priorities are? And particularly, just given your comments around M&A, like are you seeing -- is that more attractive going into this year? Are you seeing valuations coming down? And then are you just more inclined to do some kind of transaction to bolster your portfolio? Just kind of given what we're seeing in the macro backdrop, and simultaneously with cash generation likely to improve. I appreciate it. So first call on capital, we'll be continuing to invest in our organic business, as we have been doing over the past year. Then it would be M&A. Then it would be share buybacks, and then paying down debt. Paying down debt is at the bottom primarily because we're in an environment now where our debt is 1.2x. -- we're 1.2x levered, which is low. What I would say is that, we continue to look at M&A. We continue to look for tuck-ins of -- maybe small to medium sizes, if you want to think about it that way, that we can tuck into the existing business to fill certain capability gaps. That hasn't changed. I think, that valuations on the smaller end of the market, the nonpublic ends of the market, are finally starting to come down a little bit. As companies are out there and they haven't seen the high prices, maybe, that they were getting in 2021 and early into 2022. So we will continue to be opportunistic in terms of adding to the overall portfolio around the pieces that we talk about, data, AI, cloud, et cetera. A nice job in the quarter. So just looking at your services gross profit dollars grew 15% in the quarter. Just wondering, was that mostly volume driven? Or were there any pricing benefits? And I guess, given the choppiness in the economy, are you -- I guess, based on your guidance, you're probably not seeing much in terms of pricing pressures. But I mean if -- just wondering if you could just address that topic. So I would start by saying we did see some improvement in services gross profit, and that is a combination of a mix of services and -- but some of it was volume-driven, obviously because profit outperforms the top line by a bit. And, I would not attribute it to pricing. I would say we haven't actually driven a whole bunch of pricing initiatives. Some of it a little bit potentially because the cost of labor certainly did increase during the last year. But I would say that it's primarily driven by improved execution and focus on making sure that our utilization is improving. Got you. Okay. And then we've heard a lot of tech companies do a lot of layoffs. And, I just wonder about your own hiring plans. How are you guys thinking about managing that? Yes. So we've been, since the middle of last year, working really, really hard to tighten our hiring processes and make sure that we're hiring, as I said earlier, for specific sales opportunities and technical expertise opportunities. This is a market where you can acquire terrific talent, so we will continue to do that. And we don't have any plans to do any mass -- at this point, we have no plans to do any major layoffs. We will continue to ensure we're aligning our utilization rates, with the demand in the market. And of course, we continue to manage performance. But other than that, we don't have any significant plans. Okay. That's good to hear. And then I think, Glynis, you mentioned that you're planning a new Texas fulfillment center. Can you go over the timing of that? And how should we think about as far as CapEx spending for that? Sure, Anthony. So our Texas fulfillment center will be built out this year. I would say primarily, we're not going to see any benefit from that build-out in 2023. It will be operational very late in the fourth quarter, maybe in December, if not in January of 2024. So we would anticipate going into January 2024, we'll start to see the benefit of that. It is not a net addition to our portfolio, it is going to be a consolidation. So once that facility is up and running, we're going to be closing some of our other facilities. So net-net, we will end up with 2 major facilities at the end of this period. I think, the other thing that, I would say, is that this facility allows us to do more advanced configurations around data center very specifically. As opposed to lab and integration work, et cetera. So that's one of the reasons for driving this. It also allows us to service the country, North America -- the U.S., with 2-day delivery from almost anywhere between the 2 facilities that we don't have at the end, with regard to how we go through there. And it's probably just under $30 million associated with that, in our capital expenditure guidance that we gave you of the $25 million to $30 million -- sorry, in $55 million to $60 million. Our normal run rate CapEx is in the $25 million to $30 million range. One more thing, Anthony, it's also -- we are also investing in some automation. We're really excited about the improvements that we're going to deliver to our clients in terms of speed and accuracy. . Yes. Joyce, what are you seeing in terms of overall sales cycles? And if you can give some color on any particular areas where there's any changes sequentially. Yes. We saw this starting in Q4, and so it really does continue. So for services projects, we are definitely seeing longer sales cycles, more approvals are required, our clients are asking us to figure out how to change the scope of projects to make them smaller, deliver results fast. That actually plays to our strengths. I think, we're particularly good at that. So deliver an ROI and then earn the right to do the next project, but we are definitely seeing those services projects take a bit longer, and they're slightly, say, are a bit smaller. And one more. Could you comment on the trends you're seeing in your client set, the enterprises, public sector and SMB? Yes. So, I think, we're seeing pretty solid growth across all of those. Obviously, public sector is, for us, it's a smaller piece of our business, but it's really -- we're not as focused on the K-12 space there. But we're seeing some pretty solid growth there, due to the infrastructure bills and the investments in the country, so that's good. But our commercial and enterprise businesses are holding up really, really well, too. So, we're seeing strength across the board. I just had a follow-up question on your software businesses in North America and Europe, which had a lot of sort of different results here. You had double-digit growth in software in North America, up 18% year-on-year. Whereas, your business in Europe was up just 4%, but I know you also grew gross profit dollars in Europe. So is there a difference in terms of revenue recognition or the types of software or cloud services that you offer? There isn't any difference in revenue recognition across the regions. We use the same methodology in terms of revenue recognition in all of our regions. I think, the business mix in EMEA is a little bit different, with regard to the services that they can attach to the software. So we have maybe a more sophisticated software and -- sorry, cloud-attached digital transformation process here or methodology here and offerings here that we can give to our clients. Whereas in EMEA, they don't have that. So that actually influences part of the success that we have here in North America with our cloud growth versus EMEA. That would be one of the areas for an M&A opportunity for us as we go forward. Yes. I think the demand -- yes, the demand environment is a bit slower there, a bit more cautious, for sure. And we've seen that for sure. Inflation rates are higher, costs are higher. Thank you. We have no further questions on the line. I will now thank you for joining today's call. Have a lovely day.

EarningCall_95

Greetings and welcome to StepStone Fiscal Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Seth Weiss, Head of Investor Relations. Thank you, sir. You may begin. Thank you. Joining me on the call today are Scott Hart, Chief Executive Officer; Jason Ment, President and Co-Chief Operating Officer; Mike McCabe, Head of Strategy; and Johnny Randel, Chief Financial Officer. During our prepared remarks, we will be referring to a presentation which is available on our Investor Relations website at shareholders.stepstonegroup.com. Before we begin, I’d like to remind everyone that this conference call as well as the presentation contains certain forward-looking statements regarding the company’s expected operating and financial performance for future periods and our plans for future dividends. Forward-looking statements reflect management’s current plans, estimates and expectations and are inherently uncertain and are subject to various risks, uncertainties and assumptions. Actual results for future periods and actual dividends declared may differ materially from those expressed or implied by these forward-looking statements due to changes in circumstances or a number of risks or other factors that are described in the Risk Factors section of StepStone’s most recent 10-K. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. In addition, today’s presentation contains references to non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release, our presentation and our filings with the SEC. Turning to our financial results for the third quarter of fiscal 2023, we reported a GAAP net loss of $13.6 million. The GAAP net loss attributable to StepStone Group, Inc. was $6.9 million. We generated fee-related earnings of $39.0 million, adjusted net income of $31.2 million, and adjusted net income per share of $0.27. The quarter had no impact from retroactive fees. This compares to retroactive fees in the third quarter of fiscal 2022 that contributed $1.2 million to revenue and $1.1 million to fee-related earnings and pre-tax adjusted net income. Before turning to Scott, I am excited to announce that we will hold our first Investor Day on Tuesday, June 6 in New York. We have grown and evolved since our initial public offering 2.5 years ago and we look forward to covering our progress and introducing several of our key business leaders who are instrumental in driving our growth. We will share further details as the event approaches. Thank you, Seth and good afternoon everyone. We delivered strong performance in the calendar year 2022 that is true whether you look at the investment performance we generated for clients, which continue to outperform the public market equivalents or the solid financial results we delivered to our shareholders. Turning to those financial results on Slide 5, we earned $31 million in adjusted net income for the quarter or $0.27 per share. This is down from $49 million or $0.42 per share in the third quarter of last year driven entirely by lower performance fees for which realizations are dependent on capital market activity. Importantly, our fee-related earnings continue to grow at a strong and steady pace, reflecting the durability of our core business, while our balances have accrued carried investments remain strong. For the quarter, we generated $43 million of fee-related earnings, up 16% versus the prior year’s quarter. This earnings growth is driven by strong capital formation and continued deployment across asset classes, geographies and commercial structures. We finished the quarter with $134 billion of assets under management and $83 billion of fee-earning assets. The diversification of our platform and the specialized nature of our offerings give us the critical edge, particularly in today’s environment. Given our position as one of the largest investors in the private markets, I would like to take a moment to speak to the market environment and how we are positioned. As we are all aware, 2022 was a challenging year for capital markets. While private assets are not immune to broader market pressures, they have generally fared significantly better than their public equivalents. Examining major events that spurred past cycles, including dotcom bubble, the global financial crisis and COVID, private markets experienced only a fraction of the peak to trough public market drawdown. Yet in each of these cases, private markets captured 100% or more of the subsequent recovery. Its asymmetric risk capture is a key feature that drives private assets outperformance and StepStone is well positioned to take advantage of opportunities in any market environment. Specifically, our extensive toolbox across primaries, co-investments and secondaries enables us to play offense or defense by partnering with the best managers in the highest quality investments. Pivoting back to the current environment, we are observing softer fundraising compared to the elevated activity over the last several years. However, demand for secondaries as a means to capture discounts and co-investments as a cost effective access point remains robust. In secondaries, industry-wide deal activity topped $100 billion in 2022 trailing only at the record volumes from 2021. We anticipate the coming year’s volumes to remain strong. As a reminder, StepStone is a leader in secondaries with active comingled funds and managed accounts in private equity, venture capital, infrastructure, private debt and real estate. Our capabilities and secondaries are critical in delivering strong returns, particularly in challenging markets and have been key to our ability to launch private wealth products. Secondary volume naturally lags primary capital raises and is also a function of investments currently in the ground. Private market fundraising has averaged well over $1 trillion a year since 2016, which compares to an average of just over $500 billion in the 6 years prior, while unrealized private asset value stands at approximately $10 trillion or roughly double the value from just 3 years ago. With more assets available to trade, the backdrop for secondaries is very promising. On LP-led deals, the accelerated fundraising cycle from the last several years, combined with a slower pace of distributions and declines in public market valuations have resulted in some being overallocated to private markets. We expect this will lead investors to utilize the secondary market to rebalance their portfolios. On GP-led deals, secondaries are no longer just a mechanism for managers to restructure legacy funds. Top quartile managers are increasingly looking at the secondary market and continuation vehicles to capture future value from high conviction assets. Moving to co-investments, this remains one of the few ways to mitigate fees in the private markets without sacrificing quality. As a result, LP demand continues to be very high. The key to success is a strong, high-quality sourcing funnel to allow for discriminating asset selection combined with our superior data, due diligence insights and underwriting capabilities to drive better investment decisions. Shifting to trends by asset class, in private equity, we expect to see a growing divergence between those who have maintained discipline and those that have simply been riding the market tailwinds. Tougher capital market conditions have led to a moderation in deployment and a less favorable exit environment. We are starting to see a valuation correction across certain sectors, coupled with slowing buyout transaction activity in response to market uncertainty and wide bid-ask spreads. Given the historical relative outperformance of down-market vintages, we believe private equity investments made in the coming years will prove to reward those with available capital. Furthermore, we expect that the denominator effect may catalyze a pickup in LP secondary buying opportunities with favorable discounts while general partners may look to generate liquidity in a challenging exit environment through GP-led secondary transactions. In Venture Capital, performance of public technology stocks has been among the worst in the market and headlines of tech layoffs appear to be a daily occurrence. Despite the day-to-day volatility of the public tech sector, Venture Capital has proven to be a durable sector given its ability to capitalize on long-term structural growth trends. Great companies are created in all market cycles. The best vintages of Venture Capital performance came during the aftermath of the global financial crisis in the early 2010s and after the recession of the 1990s. We believe the next few years will provide a highly attractive entry point. Furthermore, the venture capital secondaries market is becoming much more active. There are well over $1 trillion of unrealized venture assets and vintages from 2018 and earlier, which we anticipate will spur an acceleration in BC secondary deal flow. We have the largest venture secondaries fund in the market today and we believe we are well positioned to continue to benefit with future funds. This interest in venture and growth equity is shared by our clients. Last week, we hosted our Venture Capital Annual Meeting, where we had nearly 400 clients attend. While venture portfolios have been impacted, there is growing optimism about the go-forward investment opportunity. Moving to private debt, we generated positive returns in 2022 and the environment remains favorable. The defensive characteristics such as cash income, senior positioning the capital structure and conservative underwriting makes the asset class an all-weather investment strategy. Further, given primarily floating rate payments, our private debt offering provides protection against rising interest rates. We expect industry-wide deployment opportunities may moderate as less M&A volume and a slower pace of refinancing impact volumes, but our ability to dynamically pivot allocations among sponsors allows for consistent deployment, thereby reducing the cash drag and improving total returns. Real assets have proven to be resilient through market cycles. Many infrastructure and real estate cash flows are linked to inflation, providing a hedge against one of the biggest market risks today. We have products in both asset classes that are purpose built for the current environment. Infrastructure has been our fastest growing asset class in the last 12 months and that growth has come without the benefit of a flagship comingled product. We are now in market with our first infrastructure comingled co-investment fund for which demand has been very healthy. In real estate, manager-led secondaries present a unique opportunity in today’s environment. As debt matures, equity gaps are likely to catalyze recapitalizations of high-quality assets. This is an area in which we thrive. We are currently in market with our flagship real estate product, which is a special situation manager-led secondaries fund. We expect attractive opportunities to deploy capital from this fund in the current environment. I will now turn the call over to Mike McCabe to speak about StepStone’s fundraising and fee-earning asset growth in more detail. Thanks, Scott. Turning to Slide 7, we generated $18 billion of gross AUM inflows during the last 12 months, with $6 billion coming from our comingled funds and $12 million from managed accounts. Slide 8 shows our fee-earning AUM by structure and asset class. For the quarter, we grew fee-earning assets by $3 billion, largely driven by healthy deployment across several SMAs, activations of our PE secondaries fund and our multi-strategy Global Venture Capital Fund as well as incremental closings in comingled funds and evergreen private wealth offerings. Offsetting these additions were over $2 billion in the distributions line from separately managed accounts. As a reminder, distributions include exit activities, expiring mandates and step-downs in fee base. The third fiscal quarter was an exciting period for our private wealth platform. SPRIM, our evergreen private markets fund for our credited investors continues to generate strong monthly subscriptions with de minimis redemptions of just over 1% for the quarter. Additionally, we launched offshore parallel and feeder funds in Europe and Australia and we executed our first close of SPRING, our private venture and growth fund for qualified clients. Aggregate subscriptions across these products were over $300 million during the quarter, bringing total AUM to over $1.3 billion on our private wealth platform. Our investment performance continues to be very strong with SPRIM generating a 30% annualized return since inception and SPRING off to a very strong start since its launch in November. As Scott referenced, our leading secondaries platform is a key differentiator for these products, allowing us to efficiently deploying capital in a diversified manner with strong returns. Looking over the last 12 months, we have grown fee-earning assets by $12 billion or 16%. We are very pleased with this result given the current market environment, which impacted the timing of fundraising for all industry participants, particularly in the second half of last year. Going forward, we have not changed our expectations around the target size on current funds in the market nor do we anticipate a delay in launches of subsequent funds. The determining factor on launching a new fund is not the closing of a prior fund, but rather the deployment of a prior fund. We pride ourselves on our discipline of steady deployment over a multiyear horizon. We have sufficient committed capital in our funds in market and expect a healthy pipeline of deal flow to continue deploying at attractive opportunities. This means our timeline for future comingled fund raises and separately managed account re-ups are largely unchanged. To this point, undeployed fee-earning capital stands at $14 billion, down from the previous quarter, driven by activations of our PE secondaries and multi-strategy global venture capital funds, plus deployment of committed capital in separately managed accounts. We have spoken in the past about the benefit of built-in and highly visible growth that comes from undeployed capital. Even more important is the opportunity that dry powder presents to drive returns. Selective and disciplined investments in down markets have historically delivered the best performing vintages. Our dry powder, including this $14 billion, positions us extremely well to capitalize on today’s environment for our clients. Slide 9 shows the evolution of our management and advisory fees. We generated a blended management fee rate of 54 basis points, which is higher than prior years due to a mix shift toward comingled funds from the contribution of our expanded venture capital platform. We generated well over $4 per share in management and advisory fees over the last 12 months, representing an annual growth rate of 25% since 2018. We have produced this growth in an extremely capital-efficient manner, which should allow us to distribute the vast majority of our adjusted net income to shareholders. As we discussed on our last earnings call, we are aligning our capital distribution approach to our business model. Our payouts will include a quarterly dividend that is generally tied to our fee-related earnings, augmented by an annual recurring supplemental dividend tied to realized performance-based earnings subject to Board approval. For our first three quarters of fiscal 2023, we have declared an aggregate of $0.60 per share in dividends, which represents nearly 100% of our fee-related earnings available to common shareholders. We plan to communicate and pay our supplemental dividend at the conclusion of our fiscal year. Thank you, Mike. I’d like to turn your attention to Slide 11 to speak to a few of our financial highlights. For the quarter, we earned management and advisory fees of $129 million, up 21% from the prior year. The strength in revenue was driven by continued growth in fee-earning assets, including the activations of comingled funds in the quarter. We now have a full year of Greenspring in our results, so the year-over-year quarterly comparisons are on the same basis. Profitability remains very strong as we maintained an FRE margin of 33%, consistent with the last quarter, but down from the year ago quarter’s margin of 35%. We did not receive any retroactive fees in the current quarter, whereas retroactive fees in the year ago quarter benefited margins by approximately 1 percentage point. Shifting to expenses, compensation was up $3 million sequentially driven by increased headcount, incentive payments related to the activation of comingled funds and the timing of year-end bonus accruals. G&A also increased sequentially, driven partially by expenses associated with our StepStone 360 conference, our annual Private Markets Investor Conference, which we held in person this year after holding the previous two conferences virtually. With compensation changes effective January 1, we expect a step up in the expense base next quarter. Gross realized performance and incentive fees were $19 million for the quarter, down versus prior periods as realizations have moderated, consistent with the expectations that we previously communicated. We anticipate realized performance fee levels to remain modest in the near-term. Moving to Slide 12. Adjusted revenue per share is flat for the first three quarters of the year. We had a 24% growth in per share management and advisory fees, offset by a 37% decrease in per share performance fees. Speaking to the longer term, adjusted revenue per share has grown by 27% compounded annual rate since fiscal 2018. Shifting to our profitability on Slide 13, fee-related earnings per share has grown by 26% in our first three quarters. The increase was driven by growth in management and advisory fees and by margin expansion. Looking over the longer term, we have generated an annual growth rate of 44% and fee-related earnings per share since fiscal 2018. Our year-to-date ANI per share is down relative to last year but has increased at an annual rate of 33% over the long-term period, driven by robust growth in both fee-related earnings and realized net performance fees. Moving to the balance sheet on Slide 14, gross accrued carry finished the quarter at approximately $1.1 billion, which is roughly $60 million lower than the previous quarter. The decrease is primarily driven by the reduction of underlying valuations during the September 30 period. As a reminder, our accrued carry balance is reported on a one quarter lag. Our own investment portfolio ended the quarter at $139 million, with the increase from the prior quarter driven by a seed investment into SPRING. Unfunded commitments to our investment programs were $87 million as of quarter end. Our pool of performance fee eligible capital has grown to $60 billion, and this capital is widely diversified across multiple vintage years and 175 programs. 62% of our unrealized carry is tied to programs with vintages of 2017 or earlier, which means that these programs are largely out of their investment periods and are in harvest mode. 56% of this unrealized carry is sourced from vehicles with deal-by-deal waterfalls, meaning realized carry may be payable at the time of investment exit. This concludes our prepared remarks. I’ll now turn it back over to the operator to open the line for any questions. Hi, good afternoon. Thanks for taking the question. Maybe first on distributions, they were elevated as you mentioned, for the quarter, and you mentioned that a lot goes into SMA distribution. So can you talk a little bit about what was driving the elevated distributions this quarter? And as we think about the outlook for expirations and other things that you have visibility on for 2023 – calendar 2023, anything that sticks up that we should be aware of? Thank you. Sure. Thanks, Ken, for the question. So as you heard Mike say in the prepared remarks, we did have about $2 billion running through the distribution line there, and he mentioned what some of those drivers might be between realization, step-down in fee rates as well as expirations of existing accounts. We had a pretty normal level of activity across most of those different – most of those different drivers. The exception that drove the higher number this quarter was the expiration of an account, specifically in our infrastructure business with a client that we continue to work with in a variety of different ways. And I would just highlight that from a fee standpoint would have been something that had a well below average fee rate associated with it. So that is something that’s going to happen from time to time, particularly with accounts that may pay, for example, on committed capital throughout the life of the vehicle there. Great. Thank you. And then just sentiment by your clients, your scale across multiple asset classes, you’ve got a lot of diversity by client, by geography. So we’d love to hear your insights, particularly in terms of how you see investors altering their asset allocation between private equity, real estate, infra and credit. So I think credit has – we’ve heard universally we’re seeing increased allocations, but there is definitely concern about allocations to real estate. So any color that you might have? Thank you. Yes, sure. I’ll start and others may want to jump in here as well. But I think you’re right. I think we’ve got an interesting perspective, not only because of our activities across the different asset classes within the private market. But frankly, because of the position where we act as both in LP working with our clients as well as GP out there, fundraising amongst LPs on a day in and day out basis. Look, I would say sentiment continues to be pretty balanced, hard to generalize in some cases because for every client that we have today that may be slightly decreasing their allocations coming into 2023, there are a similar number that are maintaining flat or slightly increasing allocations. I think that the sentiment is or the understanding amongst LPs is that these are vintage years that they don’t want to miss out on. And there is an understanding that commitments that are made today are not going to be drawn down immediately and therefore, will ultimately impact your allocations over the coming years here. And so I still see a fair amount of activity. I expect that some of that activity will be more balanced throughout the course of the year, whereas over the last few years, much of it has been concentrated in the first half of the year. I think today, there is probably less of a sense of urgency or rushing into final close of funds that may drive some of that first half activity. And look, I think you’re right to highlight the interest in areas like credit, but I would say across the other asset classes where we operate, it’s not so much that we see a lack of interest in the asset class at large, you may be seeing a shift in where the interest is within that asset class. And so we obviously spent quite a bit of time talking about secondaries in our prepared remarks, that, for example, is an area that I think we’re seeing interest across each of the four asset classes. Thank you, and good afternoon. Scott, I appreciate all the detail around the different sectors. I wanted to kind of hone in a little bit on venture capital and just kind of what you’re seeing there, both in terms of – I mean, you mentioned some secondary type vintages that might be out there and available at a discount. But just in terms of sort of primary capital formation, is there an acknowledgment, I guess, out in the world of smaller private firms and others that, okay, this – as you say, great companies may well be being formed at this time? And is there available capital kind of at the ready, especially in a time where debt may cost more? Thank you. Sure. I mean, I think there is probably a few parts to the question there. But within Venture, yes, I think there is that recognition that you just reference. And whether you’re looking at the portfolio company level where you’ve clearly seen a shift from this growth at all cost mentality towards a more sustainable and a need to be able to grow profitably. So you’re seeing at the portfolio company level, you’ve also seen it in the fundraising market. And while – if you look at the 2022 figures, they actually stack up fairly well against 2021. But when you look at it quarterly, you can see the trend. And clearly, there has been a slowdown in venture fundraising throughout the course of the year. But I think with that slowdown, one comes opportunities. So the venture asset class over the last several years has grown to be a much larger one. There is a tremendous amount of NAV in the ground today. There is clearly going to be an extended runway before either the IPO market reopens or some of those companies can be exited. And therefore, we think the secondary market is going to be a likely path for investors to drive liquidity there. So I think that’s certainly one of the opportunities we point to. I think the other one is you see a tremendous number of funds and new managers created over the last number of years. I think there is going to be a bit of a concentration in some of your top managers and really, it’s something you’ve seen in prior dislocations, and we talk about the differential between the haves and have not. I think this is going to be a market where you really focus in on those top managers. Excellent. That’s really great. Thank you for all the details, Scott. And I just want to ask about – I mean, I think Mike mentioned kind of a mix shift among – between the different kind of major vehicle types. But as I look at the commingled funds, it looks like there may have been a tick up in the fee rate just within that. And I don’t know if there was something about different asset classes or other aspects of the mix that what might be driving that? Thank you. Yes, this is Johnny. I’ll take that. It is a combination of those new commingled funds getting activated with higher rates than the existing portfolio. But just a combination of new funds coming on that are at the full rate. So it is just a mix among asset classes and between commingled and SMAs for the total fee rate. That’s correct. I mean as we mentioned in the prepared remarks, we did activate a couple of funds during the quarter. So that has an impact. And then no retro fees, so a very clean quarter in terms of fee level, right. Hi, everyone. Thanks so much for taking the question. I wanted to ask about the retail piece. It sounds like a lot of optimism around kind of strong continued growth there. I was wondering, I guess, maybe a two-part question. If one, you tend to go to market a little bit more through RIAs versus wires and that market is a little bit more fragmented. So could you talk a little bit about your sort of approach to adviser engagement and education, just given it’s not as easier – not quite as easy as walking into a very large bank speaking to a large group. And then kind of along the same lines, you haven’t seen any redemptions or meaningful increase in redemptions, which has been great. Can you kind of remind us like how is the fund structured to handle liquidity? I think we’ve all gotten a real education in non-traded REITs over the past several months. But just curious how SPRIM in particular, is set up to handle potential liquidity requirements? Hi, Ben, this is Jason. Thanks for the questions. In terms of the go-to-market and sales support, with the RIAs, you’re right that it is much more fragmented. And if you think about our network of distribution partners, we’ve got 150 different platforms allocating with SPRIM, and we’ve got about 40 allocating with SPRING, and there is a vendiagram there with some overlap. But the education component, that’s really why you see the CapEx that we’ve made in building out the private wealth team over the last couple of years, you need to be out in the field with those groups in their offices, conducting education with the financial advisers, potentially with the clients assisting with that as well. We take a lot of time in preparing collateral that’s able to be shared by them directly with their clients as well as conducting events. We conduct diligence sessions in a couple of different locations around the country periodically and invite advisers to come in and do a half or a full day teach-in as well. So it’s a multipronged approach for sure. But the reality is, a lot of folks have been educating this channel for a long time, and it’s going to continue well on into the future. It’s not a one-time event. In terms of the second question on the redemptions, with SPRIM, that’s a quarterly tender. There is a 5% per quarter cap on that tender, we kind of always elect to do less, but we’ve tendered for the full amount each quarter. We structured the portfolio from an asset perspective to generate sufficient liquidity. We have a credit facility as well that we can tap in order to assist with liquidity if necessary. And with SPRIM as the only fund that we’ve got – SPRIM is U.S. fund that the only one that’s actually in the active tendering now. The other thing I would remind you is that the majority of that capital is still in the soft lock period. So there is some – still some kind of structural protection against tendering right now. As it relates to SPRING, the one difference I would cite is that it’s a 2.5% per quarter tender as opposed to 5% per quarter tender, given the different focus from an asset perspective. Okay, great. Thanks so much. If I could maybe get one more and for Johnny perhaps, you mentioned in your prepared remarks that you were expecting a step up in G&A expense next quarter. I was wondering if you could perhaps quantify that a bit more and give us a little bit more color on where that’s coming from? Yes. Just to clarify, it’s more on the comp line than the G&A line, just given the – our comp cycle is on a calendar year. So it’s January 1, new base, new bonus accruals begins. It will be in the comp accrual line. So, I guess in terms of – I guess if you look back at the change a year ago between the fourth quarter and the first quarter, that percentage increase is about the same. I don’t know we have a guidance percentage, but something beyond the normal quarterly increase driven by staff. It would be quarterly increase driven by new hires plus some adjustment on the base. Great. Thank you. Good afternoon. So, you guys have been quite active over the years building out a global diversified platform. So, I guess as you look at the business today, what strategies, geographies, channels, would you like to see added to the platform as you look out over the next 5 years to 10 years, that could make sense or ones that you think could be more meaningfully scaled? And you have also been quite active on M&A over the years. I guess how much time are you spending on that today versus on recent years? Yes. So, maybe I will start and then hand it to Mike to touch briefly on M&A. But in terms of some of the white space or some of the areas that we expect to grow over the coming years, I won’t kind of rehash our focus on the private wealth channel. I think we spent quite a bit of time on that in prior quarters. But clearly, as we not only make progress with SPRIM, but now launch SPRING and think about how that channel may prove helpful and successful to us in other parts of our business. That will clearly continue to be an area of focus. I think the other opportunity that we see probably fall within any of the given asset classes. And so not to come back to secondaries again, but I think it’s a pretty good example where today, when you look at how fundraising has evolved over the last several years and the resulting net asset value that is in the ground across each of the asset classes where we operate, something like 30% of the current private market NAV falls in the infrastructure, real estate and private credit asset classes today relative to private equity, yet when you look at the secondaries market within any of those asset classes, it’s probably closer to depending on what sources you look at, probably under 15%. So, I think there is room as those asset classes mature, for the secondaries market to follow suit. And again, it’s sort of one example. But I think in a lot of other ways, as we look at how the non-private equity asset class have been evolving, there are similarities. It might be in terms of the specialization amongst managers where initially you had a number of generalist funds operating across the entirety of the infrastructure space, for example. But over time, you see more funds specializing in whether it’s energy transition or even within energy transition in a number of different specialty areas. And I think as you see the number of funds grow, it presents opportunities for us to develop more specialized mandates, which we have already started to do today. So, I think that’s where we see some of the biggest opportunities is probably within each of our asset classes. But why don’t I turn it to Mike just to comment on your question about M&A as well. Thanks Scott. And to that point, we don’t really see ourselves adding anything we are currently doing, rather I think strategically, we are looking to either augment something we are doing or accelerate perhaps something we are currently doing. And we have a track record, as you know, for acquiring and integrating large senior teams around the world. And the most recent acquisition of Greenspring, I think it was a good case study and a working example of how we augmented our existing venture capital base and accelerated our growth to $22 billion of AUM with that transaction with a deep team that had a 20-year track record. So, we got to look at Greenspring, has a pretty good case study that would point to as to what we are looking for. I think strategically, we remain opportunistic. It’s not like we have a stated goal of rolling up the industry or any asset classes. But if we see something that’s interesting that would fit in well culturally, would drive synergies or growth in some form, we remain active and we remain engaged. I would say in terms of the current market environment, and ‘20 and ‘21 were pretty busy years, as you know, ‘22 saw a pretty significant slowdown across the board. ‘23, we are starting to see some early activity that might be going on, but it’s still pretty soft, and we don’t expect to see much M&A activity this year. But perhaps as you move into ‘24 and ‘25, opportunities could present themselves and will remain open and engaged. And I think we have a pretty good reputation out there for being able to bring on large senior experienced teams. Great. Thanks for that. And just a follow-up question on the FRE margin, continues to take a little bit higher here, at least sequentially 33%. So, I guess what’s the scope for that margin expanding into the mid-30s that you have spoken about previously? What would be the timeframe? What would it take to hit that? How are you thinking about margin expansion opportunity? Yes. Thanks Mike. It’s been great. When we took the company public a couple of years ago, we were in the mid-20s FRE margin. And really, it was through a combination of scale economies, either through organic growth or inorganic growth through M&A, we have been – you have been able to expand our margins by 600 basis points while growing the top line and bottom line. So, we feel very good about the combination of both our growth and our ability to expand margins. I think at the time when we took the company public, we had guided you and everyone that we felt that medium to long-term, we would see ourselves comfortably in the mid-30s. And as far as we are concerned, we are on track. And we feel good about finishing up this year in the low-30s, and we would hope that scale economies continue to build as we grow our business globally, and we will continue to see some margin expansion over the medium to longer term. We don’t have a stated target over a stated timeline. Scott, Jason and I continue to make a strategic balance between managing the firm for growth and profitability and doing it simultaneously. And we remain focused on investing for growth in the medium and long-term. So, but we appreciate the question, and we are thrilled with the way things have grown as we had hoped. And if I could just follow-up there just on that point, if you were to look out longer term, I don’t know, maybe 5 years or 10 years, I guess where could that margin be longer term for your business? What’s appropriate? If we look at some peers out there seem to be meaningfully higher. So, I guess maybe you could help remind us what’s different in terms of your business profile relative to peers that results in a little bit of a different lower margin profile? But at the same time, as you continue to scale and grow the retail business, I imagine that has pretty high incremental margins. So, maybe you could kind of help to flesh that out. Thank you. Sure. I think our outlook remains unchanged there in terms of what our guidance has been. But you are right, I think the opportunities are there, and we continue to see our margins improve. But I don’t think we have a specific target or an outlook on any timeframe. And I think it just comes back to the comment, Mike, you made earlier about the balance between growth and profitability. And you touched on it, Mike, in terms of the private wealth business and how we have built out that team, even in advance of the fundraises and the growth that we are now benefiting from. But that’s a sort of tried and true approach that we have taken, when you look at the size and the seniority of the teams that we have built across each of the infrastructure, real estate, private debt asset classes. And again, have benefited from the growth that we are seeing in those areas as well. So, I think it does come down to sizable investments in our team to drive what we think the future growth opportunities will be. Hi. Good afternoon everybody. Thanks for taking the question. Scott, I was hoping we could build a little bit on your discussion around secondaries and appreciate we talked quite a bit about it already, but the supply side of the equation makes kind of sense, both on the LP side and the GP side. I was hoping you could comment on the demand side of the equation and why wouldn’t the same sort of denominator effects that are plugging in a way some of the primary allocations impact the secondary ones as well, right, or do people carve it out, do people think of that as sort of part of their private equity allocation and therefore, fundraising might be a little bit more challenging there despite the fact that the opportunity set clearly seems to be growing? Yes. So, look, it’s a fair question. I think that’s why as I have made the comments earlier about our time, both as an LP, but also the GP out there fundraising. We – as we talked about our in market with our secondaries fund, I think there is a tremendous amount of interest in the strategy and have an established traffic or in practice there, but the denominator effect is real. And in some cases, that has led to things just taking longer than you might have otherwise expected. But the other thing is, again, I made the comments about, we have been working with our clients late last year and early this year in terms of setting their new allocations for the year ahead. Obviously, rolling into a New Year doesn’t do anything to the denominator effect, but it tends to be the time when LPs reset their budgets. I mentioned earlier that I think there have certainly been some who have reduced budgets, but just as many that are holding them steady because they want to make sure to maintain exposure to these vintage years. And what you may see them doing is within that allocation, shifting where they are focused and perhaps shifting away from a more vanilla buyout strategy to secondaries with the view that this is an attractive time to invest. So, it’s a fair question in terms of the fact that those that are looking to allocate to secondaries funds may have denominator effect issues. But I think it’s clearly an opportunity, and I think we are probably seeing some allocation shipped around within budgets this year. Yes. Interesting. Thanks. My second question for you guys was around data. That’s something you have been highlighting since really the time you went public across both the extensive set of data you have on the portfolio company side as well as the GP side of things. At a time of sort of increased market volatility, and I am sure all pieces struggling to kind of really think about their allocations, who they are allocating to, more holistically. Is there an opportunity for you to monetize the data better? I know you usually just kind of provide it as part of the overall bundle overall service, but is there an opportunity to not so much white label it, but think about it more extensively? Thanks. Yes, Alex. So, I think where we have been able to monetize the data and overlaying the in-house technology team input has been around creating asset management solutions that don’t exist but for that wealth of data and the data science team input and the technology solutions we have built on it. So, I have kind of given the example before of SPRIM and SPRING as great examples where it’s the wealth of data, coupled with the technology, coupled with the data science team being able to help us manage those products much more efficiently. And that shows up in the return for the investors. We are doing the same thing with semi-liquid permanent capital-type vehicles for institutional investors. We are doing – we are utilizing that data in other ways where we are helping to forecast for insurance investors and helping with asset liability matching and the like. So, I think that’s where we have seen the easiest path to monetizing at scale today. Hi guys. I have a question about the different geographies. Are you seeing any differentiation between overall demand in the different geographies? And within that, any differences in preferences regionally? I think the biggest differences that we are seeing by geography are in many ways, a function of sort of maturity of portfolios where, again, it’s been well documented and referenced in terms of U.S. public pensions versus some of the international pools of capital that may just be either coming online or still building into their targeted allocation. So, I think that’s probably the biggest difference we see. But again, I think I have been quick to point out on prior calls that even amongst our U.S. public pension fund clients, there are some that are quite active today and looking at new opportunities. So, that’s why I struggle to generalize at times with the question. But certainly, over the last 12 months, 18 months as the world has reopened, we have been spending quite a bit of time on the road around the world and seeing various different pockets of interest whether in Asia, Middle East, Latin America, etcetera. In terms of where the interest lies, no, I wouldn’t point to any major difference in terms of differences by region in terms of where the areas of interest are today. Got it. And then just a quick one on the expansion of the retail platform you talked about Asia and Australia. Any difference in expectations there and any differences in how those work has operated versus your experience in the U.S.? Yes, sure. Expanding the retail platform in Europe and Australia, what are your expectations there? And do you expect any differences in the way those markets work versus what you have seen in the U.S.? Thank you. So, the markets are structured slightly differently, right, market-to-market in terms of who the major players are and how they function. Europe doesn’t really have the IBD kind of platforms. It tends to be private bank driven, although there are a couple of bold bracket versions of that, that look a bit more like the wires as well. Asia, larger institutions, not a lot of the independent RIA type market and then Australia, a little bit of a mix. In terms of how we prosecute that from a go-to-market perspective, we can probably get by with a little bit less density on the private wealth team to cover those markets just due to a smaller number of players that are active in the private markets or expect to be active in the private markets. That would probably be the biggest difference, I would say. There are no further questions at this time. I would now like to turn the floor back over to Scott Hart for closing comments. I just want to thank everyone for taking the time to join our call today. We appreciate the continued interest and look forward to speaking with you again next quarter. Thank you.

EarningCall_96

Good afternoon. And welcome everyone to the Beyond Air Financial Results Call for the Third Fiscal Quarter ended December 31, 2022. At this time, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. And now, I would like to turn the conference over to Edward Barger, Head of Investor Relations at Beyond Air. Please go ahead. Thank you, Operator. Good afternoon, everyone, and thank you for joining us. Today, after market close, we issued a press release announcing the third quarter of fiscal year 2023 operational highlights and financial results. A copy of this press release can be found on our website under the News and Events section. Before we begin, I would like to remind everyone that we will be making comments and various remarks about future expectations, plans and prospects, which constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Beyond Air cautions that these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated. We encourage everyone to review the company’s filings with the Securities and Exchange Commission including, without limitation, the company’s most recent Form 10-K and Form 10-Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 9, 2023. Beyond Air undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. Joining me on today’s call are Steve Lisi, Chairman and Chief Executive Officer; Duncan Fatkin, Chief Commercial Officer; and Douglas Larson, Chief Financial Officer. Thanks, Ed, and good afternoon to everyone joining us. Today, I will be providing an update across our portfolio, including Beyond Cancer. This will be followed by an overview of our financial results for the quarter by our Chief Financial Officer, Doug Larson, and then as usual, we will open the call up for questions. Before discussing our pipeline of financials, I would like to turn it over to our Chief Commercial Officer, Duncan Fatkin, for an update on the LungFit PH commercial launch. Duncan? Thanks, Steve, and good afternoon to our investors. During the last quarter, we have continued to make tremendous progress with the initial phase of our commercial launch of LungFit PH. As a reminder, our go-to-market strategy is a multiphase commercial approach. The initial phase represents a measured release of LungFit PH to a select group of hospitals that have Level 3 or Level 4 NICUs and staff experienced with inhaled nitric oxide. I am very pleased to report that our team has completed evaluations of LungFit PH at a variety of different hospitals in line with our strategy to gain feedback on our logistics, customer service, and of course, the clinical performance of the device. The feedback has been in line with our expectations and we have moved into the contracting phase with a number of hospitals as a result of their experience and awareness of our technology. In addition, our team has demonstrated the LungFit PH system in person at over 150 hospitals and at state and national conferences in our target regions, a tremendous achievement given continued restrictions in hospitals as a result of the triple threat of COVID, RSV and flu during the winter period so far. As anticipated, respiratory therapists and neonatologists are highly motivated to eliminate cylinders and are impressed with how simple and easy the LungFit PH system is to use. Hospital administrators are reacting very positively to the flexible and transparent business models presented, and we believe, in some cases, they will revisit some of the restrictions placed on the use of nitric oxide due to cost and logistical challenges. We have been able to test our logistics infrastructure, as well as our clinical and sales operations support through our 24x7 LungFlex service. Based on the feedback received in the first seven months since launch, we are planning to move into an accelerated phase of promotion in the spring. We will use the experience from this first phase of our launch to refine our business model, geographical focus and clinical training to make sure that we optimize the next phase of our launch. As I have previously mentioned, during the second phase, we will be expanding our commercial team, both field sales and clinical specialists and building a network of reference hospitals and key opinion leaders. We are very excited about the progress made over the last quarter and look forward to building a coalition of hospitals, supporting this amazing new technology and accelerating awareness of a new way of delivering nitric oxide across the U.S. and Beyond. Thanks, Duncan. I will start with LungFit PH, where we have faced regulatory delays. Our quest for CE Mark is going well, but we must postpone our anticipated approval until the first half of our fiscal year 2024. In the U.S., we have faced similar issues of delays beyond our control, and thus, we have not yet submitted our PMA supplement for cardiac label expansion, but expect to do so before the end of the first half of this calendar year. We remain confident in achieving both of these goals. With respect to our VCAP program, we continue to work closely with the FDA to agree upon the protocol for our study, which we intend to start in the fourth quarter of calendar year 2023. We began this discussion over the summer and we believe that FDA should allow this study to be conducted given our efficacy and safety profile in an adult pneumonia study, three bronchiolitis studies, two NTM studies, along with several other studies. These studies have resulted in excess of 5,000 NO administrations at 150 parts per million to 250 parts per million nitric oxide in over 170 patients. Not to mention the Squeaky Clean safety data in animals that we have mentioned many times in the past. As a reminder, this proposed study is extremely similar in design to what we reported from our Israeli viral pneumonia study. We expect to treat patients hospitalized with pneumonia who test virus positive for any virus, including any and all variants of SARS-CoV-2. We have seen no SAEs related to 150 parts per million to 160 parts per million NO in three bronchiolitis studies and one adult pneumonia study. Plus, we filed the infants long-term, some out more than five years and saw no long-term effects from the acute NO treatment. Our studies and long-term data reflect our continuing ability to manage concerns of methemoglobinemia and nitrogen dioxide exposure associated with high concentration no treatment. We are confident that we will be able to build on these results. Moving to 250 parts per million NO, which was delivered in our study multiple times per day at home by patients with no medical professional present for more than 11 weeks. You can see these data as they were presented at the 2022 Chest Annual Meeting by visiting our website. Just a reminder, no methemoglobinemia and no nitrogen dioxide issues were reported. We believe that these data support moving forward with a pivotal study for NTM patients and we will move as fast as possible. At this time, we do not see the study beginning until the second half of our fiscal year 2025. We look forward to working with FDA to meet or shorten this time line. Our pilot study in patients with underlying COPD will not be conducted this coming winter. We will look to begin to start in the fourth quarter of calendar 2024. LungFit PH and VCAP are our immediate priorities and we will continue to work with FDA in addressing the varied applications of no. Moving on to Beyond Cancer. Progress over the last 15 months since the money raised has been very strong. The Phase 1a human clinical study is ongoing with our current belief that we will be releasing topline data later this calendar year. Our first publication is out with another expected later this year. Our preclinical team is quite active with data expected at several medical conferences this year and we have already shown a doubling of survival in animals when we added our UNO therapy to anti-PD-1 therapy compared to anti-PD-1 alone. The team has also been expanded with the recent hiring of Gavin Choy as COO and the additions of Dr. Fred Dirbas and Dr. Mark Pegram, both world renowned oncologists at Stanford to our Beyond Cancer SAB. In addition, the first patent for our technology was issued. Please visit beyondcanter.com for detail on all of these accomplishments and stay tuned for more later this year. I will now turn the call over to Doug Larson, our Chief Financial Officer, to provide an overview of our financial results for the fiscal quarter ended December 31, 2022. Doug? Thanks, Steve, and good afternoon, everyone. Our financial results for the third quarter of fiscal year 2023, which ended on December 31, 2022, are as follows. On a GAAP basis, research and development expenses for the fiscal quarter ended December 31, 2022, were $5 million, compared with $2.5 million for the fiscal quarter ended December 31, 2021. This increase was driven mainly by compensation costs from scaling up operations in Beyond Cancer, as well as from increased investments in preclinical work being done across the group in our targeted therapeutic areas. General and administrative expenses for the fiscal quarter ended December 31, 2022, increased to $8.9 million, compared with $4.9 million for the fiscal quarter ended December 31, 2021. $3 million of the increase was due to the planned structural investments in Beyond Cancer, with the remaining $1 million attributed -- attributable to continued investments in people and systems necessary to support the commercial launch of LungFit PH in the U.S. Other income and expense for the fiscal quarter ended December 31, 2022, was a $0.2 million gain, compared with a $0.5 million loss for the fiscal quarter ended December 31, 2021. The two main drivers in this year-over-year improvement were the gains we made from our investments in marketable securities, as well as favorable foreign exchange movements. For the fiscal quarter ended December 31, 2022, the company had a GAAP net loss of $13.8 million, of which $12.7 million or $0.43 per share was attributable to the shareholders of Beyond Air, Inc. compared with a net loss of $7.7 million or $0.29 per share for the fiscal quarter ended December 31, 2021. Net cash used by the company, including Beyond Cancer, was $9.3 million for the quarter ended December 31, 2022. Through the first nine months of this fiscal year, net cash burn has been $27 million. As of December 31, 2022, the company reported cash and cash equivalents, marketable securities and restricted cash of $63.2 million. We still forecast that our average quarterly cash burn for fiscal 2023 to be within a range of $8 million to $10 million per quarter. Thanks, Doug. Hope everyone is as pleased as I am with the execution and progress at Beyond Air. Operator, let’s go to Q&A. Hi. Good afternoon and thanks for taking the question. Just wanted to follow up on how the LungFit PH launch initial early launches going Phase 1. I guess, is there anything that you learned about, I guess, the competitive marketplace in the hospital, which is new or unexpected, which could potentially help to expedite the launch or would potentially slow it down in terms of marketplace penetration? Thanks, Matt. And I will turn this over to Duncan to answer this question. But the one thing I will say before that is man the hospitals move very slowly. I think COVID just made things a little bit more difficult to get things through in the hospital space, lots of new things in terms of getting new teams into the hospital to get work done. But that’s just from my bird’s eye view, but I will let Duncan comment on this further. Yeah. Thanks for the question, Mat. No. We are really pleased with the way it’s going. Essentially, there’s no change to the plan. We are executing as per our previous conversations, our first six months to nine months up to a dozen hospitals and that’s all we have been doing. We have had really excellent feedback during that period. And as we have said before, we have been focusing on the logistics, the service. And from a clinical point of view, things have gone as absolutely well as we could expect. We are very pleased with the feedback that we have been getting. We have trained hundreds of respiratory therapists in a number of different hospitals and now we are in the contracting process. And as I mentioned in my remarks, I am very impressed with the access we have got considering the triple threat that we are all familiar with and now we go through the contract process with these various hospitals and the ones that we are now moving forward with in the early phase of that broader expansion. And each hospital is different, there are different stages and they have different processes and some of those have become more onerous, some of them haven’t changed. So it depends from hospital-to-hospital. So nothing that we have learned that has surprised us and we are pleased with the progress. Great. And then, specifically, how should we think about the Phase 2 as you are moving into this accelerated sales in the spring? Yeah. I think that we said that the first six months to nine months would be that sort of Phase 1. So we are coming to the end of that. So in the next fiscal year is when we start to ramp up, and as I said, it depends on the mix of hospitals that we end up with from a contractual point of view, we can’t know for sure exactly when they are all going to hit, partly for the reasons that Steve commented on and partly just the luck of the draw in terms of where they are in their contracting process. So, unfortunately, we can’t control that to a significant extent, as we get more scale, we will obviously have more confidence in that. Good afternoon, folks. Thanks for taking the questions. So the hospitals that have done an eval and decided to not move forward with contract discussions, have there been any common reasons why? So, I mean, the initial -- I think the all comes down to contracting. If they are in a phase where we have done an evaluation and they are looking at, for example, dual source. In some cases, they can do that. In some cases, it takes a little bit longer. So that’s part of the reason is around contracting. And the other might be to do with the scale of the hospital in terms of it might be part of a group, and that group might have, in some cases, we have done work with a hospital that was acquired by a group and that slows things down. So typically it’s around the timing of the contracting process. That’s the most common. But we have been selective and we are still working with most of those hospitals. And Greg, just to follow-up on that. This is -- I guess you are getting at the question of, is there something consistently wrong that is seen with our system that people are signing up with us. And I think that’s way off base in terms of what’s actually going on. The process moves slowly. You can look back at all the conference call transcripts that we have had in the past two years, and I have said that this is a six-month to nine-month process to get the ball moving and we have just completed 6 months at the end of December, including July and August, launching in the summer and this industry knows is usually a no-no. So those are rough months, obviously. So we knew it was going to take a long time to get the ball rolling and this is not just fill the channel with some pills and get going. This is a process that takes time to education and so forth, and training with the hospitals. So we haven’t seen anything about our system that concerns us or concerns any of the hospitals that have seen our system and played around with it. Are there little tweaks here and there? Of course. These are things that are normal in the beginning of a launch and we will probably be tweaking our system for the next 10 years, just like our competitors have. I mean, if you look at the INOmax DSIR, go look when it was first approved and what it looked like then and what looks like now and they are still coming out with new versions of their system. So there’s always room for improvement. But we have seen nothing with our system that stops hospitals from using our system. That has nothing to do with where we are at this moment in time. In fact, we are pretty much right where we thought we would be at this moment in time. Would I like it to go faster. Of course, everybody wants seems to go faster, but the reality is six months to nine months is what we estimated and it’s going to take that time. It’s going to take the full nine months for us to get the ball rolling in place that we would like to be. So I think that’s what you are getting at with your question. But if it wasn’t, please follow up. Yeah. No. That’s what I was asking. That’s a very helpful answer. Thank you. On the contracting discussions, I believe your objective is to supply NO at a price similar to what the hospitals are already paying. Are hospitals receptive to that or some looking for discounts, any color there would be helpful? Yeah. Look, again, it varies once you have seen one hospital, you have seen one hospital is kind of the same. We have looked at various business models as we have evolved and learned. We have adjusted to what different hospitals are looking for and it very much depends on the circumstances, the clinical setting. In some cases, we expect that the winning formula is going to be in line with the current expectation. In some cases, we might be actually at a premium. It just very much depends on the benefits of eliminating cylinders in that hospital and the value of the logistical hassle that we are removing. So, again, I am not giving you a blanket answer, because it is so varied. But we haven’t -- we certainly haven’t had any general difficulty in that area, but we are going to continue to be very flexible and responsive to their needs. Got it. That’s very helpful. And then can you just comment a bit more about the CE Mark process and what contributed to the later timing fraction versus your prior expectation? They changed things in the EU a few years ago, the new MDR, I guess, they call it, and that resulted in a significant decline in the number of notified bodies in Europe, plus a lot of the capacity of these remaining notified bodies was being used up by companies with products that were already on the market. A lot of these things, these products were subject to the new rules and could have been pulled off the market. So there wasn’t a lot of capacity. We were in. We had a time line with our notified body. We communicated guidance to you based on that time line communicated to us. they just couldn’t get it done. They are overworked, overwhelmed and these things happen. We are working with them. They are doing a good job. We don’t see any reason why we won’t be getting CE Mark, but we still have to work through the process with them. And things are just taking longer than expected. And we went through these things with them and got time lines and thought we all could hit them. I send them together, thought they could hit these time lines. It just didn’t happen. There seems to be delays with regulatory stuff in the U.S. and Europe. I think the regulatory agencies are recovering from what happened during COVID and what happened in Europe anyway from the change in regulations. But some companies are getting lucky than others in their time lines. But it’s really been nothing of concern for us in terms of we are insufficient to get approval. That’s not the issue. The issue is just working through it and trying to meet the time line. So it’s unfortunate, but it is what it is and we will just get it in a couple of months. That’s all we can do. Got it. Okay. I will ask one more and then I will hop back in the queue. On the cardiac filing. I think you had a meeting with the FDA. Did anything come up in that meeting that was unexpected to potentially be a hurdle to approval? Thanks so much. Yeah. Our meeting on the cardiac label expansion was pushed back by FDA, so it was scheduling conflicts. So that meeting has not yet occurred, which is why we haven’t submitted the PMA supplement. So I really can’t comment. I am sorry. Good afternoon and thanks for taking the questions and congrats on all the progress. In terms of LungFit PH, you mentioned that in the second phase, you are going to expand the sales force. Could you give us a little bit of color how that pace might be and how that size might be? And then I have a follow-up. Yeah. So, yeah, thanks. The pace at which we expand the commercial team is going to be dictated by what we see coming in the next six months to 12 months in terms of expected contracts. So, Duncan is going to be building up that team starting very soon and we are going to be focusing on our clinical team build up first. Those are the guys who educate, train the hospital employees and that’s really the hurdle in the beginning as you get rolling since it is relatively new for these hospitals. And then we will focus more on the actual sales reps once we have gotten our clinical people up to the number that we need. So this will be ongoing. The expansion of the team will be ongoing probably for the next 18 months to 24 months. We don’t just snap our fingers and bring everybody in, right? So they will come in waves. So that’s the Phase 2 of our launch. Like I said, mostly get going in the next few months and last probably 18 months to 24 months of us building that team. I hope that answers the question, if it didn’t, please let me know. That’s very helpful. I appreciate that. Maybe one more question in the FDA meetings for the LungFit PRO on VCAP. Any color of the that meetings you can talk about? Yeah. I mean we don’t like to talk about what we said between us and the FDA. Our communications are private with them. But again… … what I will say is that, we are certainly enthusiastic about getting this study started up in the fourth quarter of this calendar year. So we are looking forward to it. That’s for sure. Okay. Great. And maybe just talking one more, which is that, we noticed that the LungFit PRO, the trials, both in the MTN as well as in COPD has been pushed out quite a bit compared to your earlier guidance, including your recent slide deck, was there any strategic reason you will take that move? Thanks. So COPD is not strategic. That’s just again FDA time lines have been pushed out. And we need time to set that study up properly, because even though it -- you don’t see it as a seasonal study, it really is, because we are looking for exacerbations in these patients and seeing those exacerbations result in hospitalization. So that’s going to be a lot -- there will be a much more volume in the winter months than in the summer months. So we don’t want to do this outside of a winter season and there’s no way we can get it done in the upcoming winter based on the time lines that have been given to us by FDA. So that’s just the reality of where we are today. With respect to NTM, yeah, I think, we said, we were shooting for late 2024 calendar. I think we just made our guidance to back half of our fiscal year. So it’s kind of semantics, it is not really a delay, but we will try to get this done as quickly as possible. I think that maybe we are being a little conservative because FDA has kind of overloaded with things a little bit and we don’t want to -- we would like to give ourselves a little bit of a cushion in case there’s some push out there as well. But things run smoothly, maybe we can pull that back in a little bit, yeah, but we will have to see how that goes. This is more of a -- this is not just a protocol discussion with FDA, but it’s also a discussion of our final home system that’s being built. We need to obviously get the device approved by them, as well as the study, whereas for pneumonia, it’s just about the study, not about the device. Good afternoon, everyone. So two questions. Duncan, one for you and one for Steve. Let me start out with you, Duncan. So, Duncan, you all have been consistent in terms of the phase launch of PH. I was wondering if I could push you a little bit in terms of quantifying the sites that have gone through evaluations and are now in the contracting phase. And specifically, when you see a site has finished evaluation, what does the typical NICU that may or may not already be contracted with Alancarta [ph]. What would -- have they done from an evaluation perspective into -- to push it to the next stage? Yeah. So from an evaluation point of view, again, it varies from hospital-to-hospital, depending on the protocol and the quality assurance process they have in place. In some cases, in fact, they do what they call a bench test. So the -- that requires them to go through a protocol without actually connecting it to a patient. But in a typical evaluation where they do have clinical experience, they will go through that process in a matter of somewhere between a week and three to four weeks and it’s usually lined up with a period before their contract is due. And again, some hospitals begin their contracting process six months, nine months, in some cases, 12 months ahead based on the protocol and the various stakeholders in a value access committee or something of that nature that they need to go through. So, unfortunately, there’s no one size fits all again. But from our perspective, it’s a pretty straightforward process, because our system is so fast and simple. They just have to use our system instead of the system that are currently using as per their protocol. I hope I have answered your question. Fair enough, Duncan. Steve, one question for you, and I know you guys at this stage are somewhat diverse to giving specifics on numbers. But picking up with the commentary in terms of some of the things getting delayed, the process is taking longer. Maybe if I could just position it this way, Steve. Fiscal fourth quarter numbers are about $3 million in revs. Fiscal 2024, if I am looking at it correctly, it’s almost $40 million. So maybe you can help thread the needle here in terms of what you are seeing in terms of the phase launch and how would you guide us based on what the consensus numbers are out there? Gentlemen, thank you for taking my questions. Thanks, Suraj. And let’s be clear, those numbers are from you and the other analysts that’s consensus. We have given no guidance whatsoever, so that’s just your interpretation and we are not going to be giving guidance at this point. I think I have been very clear about that and we are going to wait and see how things play out and get more -- gather more information before doing that and that will probably happen when we announce our fiscal year, which obviously ends March 31st. So you can look forward to us discussing in more detail what kind of guidance we would be giving at that time. I think it’s still a little bit too early to discuss those things. At this time, we are showing no further questions in the queue and this concludes our question-and-answer session. I would now like to turn the conference over to Steve Lisi for any closing remarks. Thanks. Thank everyone for joining us today. Very much appreciate the interest. Look forward to speaking to you very shortly in a couple of upcoming industry conferences. Thanks very much.

EarningCall_97

Good day, and thank you for standing by. Welcome to Axcelis Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions]. I would now like to hand the conference over to Mary Puma, President and CEO of Axcelis Technologies. Please go ahead. Thank you, . With me today is Kevin Brewer, Executive Vice President and CFO; and Doug Lawson, Executive Vice President of Corporate Marketing and Strategy. We are all participating in this call remotely, so I would like to apologize in advance for any technical difficulties. If you have not seen a copy of our press release issued yesterday, it is available on our website. Playback service will also be available on our website as described in our press release. Please note that comments made today about our expectations for future revenues, profits and other results are forward-looking statements under the SEC safe harbor provision. These forward-looking statements are based on management's current expectations and are subject to the risks inherent in our business. These risks are described in detail in our Form 10-K annual report and other SEC filings, which we urge you to review. Our actual results may differ materially from our current expectations, we do not assume any obligation to update these forward-looking statements. Good morning, and thank you for joining us for our fourth quarter and year-end 2022 earnings call. As a result of strong execution by the Axcelis team and robust demand for the Purion product family, we are pleased to announce record quarterly and annual revenues. Revenue for the fourth quarter was $266.1 million, with earnings per share of $1.71. Revenue for the full year 2022 was $920 million with record annual earnings per share of $5.46. As a result of a record backlog of over $1.1 billion, continued solid bookings and strong customer demand in the power device market, we expect both revenue and earnings to grow in 2023. For the first quarter of 2023, we expect revenue of approximately $240 million, gross margin of roughly 41.5% and operating profit of around $48 million and earnings per share of approximately $1.25. For the full year 2023, Axcelis revenues are expected to exceed $1 billion. This represents revenue growth of over 8% in a year in which overall wafer fab equipment is expected to decrease by over 20%. Additionally, we are introducing a new long-term implant-only model with revenue of $1.3 billion that we believe is achievable within the next 2 to 3 years. The mature process technology market continues to be an area of strength for Axcelis, with 76% of fourth quarter system shipments going to mature foundry logic customers, 4% to advanced logic customers and the customers comprised of 15% DRAM and 5% NAND. For the full year 2022, 82% of system shipments went to mature foundry logic customers, 1% to advanced logic customers and 17% to memory customers comprised of 8% DRAM and 9% NAND. The geographic mix of our system shipments is becoming more globally distributed. In the fourth quarter, China represented 35%; Korea, 29%; the U.S. 19%; Europe, 8%; Taiwan, 6%; and the rest of the world, 3%. For the full year 2022, China was 41%, Korea, 20%; the U.S., 15%; Europe, 9%; Taiwan, 6%; Japan, 2% and the rest of the world, 7%. The power device market is anticipated to be Axcelis' demand driver through this industry downturn due to the rapid growth rate of the market and the high implant intensity of power devices. We expect over 55% of our system revenue in 2023 to come from this segment with greater than 50% of the overall power device system revenue coming from silicon carbide applications. Silicon carbide provides many performance advantages over silicon for electric vehicle applications and is expected to grow significantly over the next several years. Currently, we estimate that silicon carbide wafer starts will double every 3 years, driven by a 30% annual growth rate in this device market, which is dominated by automotive. Purion power series products for silicon carbide have been designed to support the technical challenges facing our customers as they ramp to high volume in support of their automotive customers. Axcelis is the only ion implant company that can deliver complete recipe coverage for all power device applications. The full Purion power series family of products allows customers to optimize their fabs for high-volume manufacturing and to continuously improve their power device performance. The Purion H200 and Purion EXE family, in particular, provide high levels of productivity and lower cost of ownership to our customers as their recipe mixes shift to high dose and high energy implants. Since 2021, we have seen increasing adoption of Purion H200 silicon carbide and Purion XE silicon carbide systems in addition to our Purion M silicon carbide tool. In 2023, we expect revenue from silicon carbide customers to be spread relatively evenly across these 3 types of Purion power series implanters. This complete product offering provides a significant competitive advantage for Axcelis in this market. The power device customer base is large and growing, and we are actively engaged with all customers in this high-growth market segment. Axcelis is considered by power device customers to be the technology leader and the supplier of choice, providing the best product family and manufacturing capabilities. This means that using Axcelis tools provides the lowest risk path to high-volume manufacturing required to support aggressive fab ramp plans. Axcelis placed a significant value on enabling our customers to succeed in this exciting market by providing differentiated product performance and a high level of customer satisfaction. Now I'd like to turn it over to Kevin to discuss our financials and operational capabilities and to introduce our new $1.3 billion model. Thank you, Mary, and good morning. We are extremely pleased with our fourth quarter and full year 2022 financial results and are very excited about our projected growth to greater than $1 billion of revenue in 2023. We are also happy to have the opportunity to share with you today our new implant only $1.3 billion revenue model that we believe is achievable over the next 2 to 3 years. Financial details around our expectations for 2023 and the $1.3 billion model can be found on Page 8 of our investor presentation. Looking at our fourth quarter, revenue finished well above guidance due to strong execution in the pull-in of additional systems and CS&I business from Q1 2023. This drove Q4 systems revenue to $203.8 million and CSI to $62.3 million combined for record quarterly annual revenues of $266.1 million and $920 million, respectively. In 2023, we expect total revenue to be greater than $1 billion, driven by continued strength in the power device market. CS&I revenue will vary quarter-to-quarter, but should be modeled at approximately 25% of total revenue for both 2023 in our $1.3 billion revenue model. Looking at gross margin, we finished 2022 at 43.7% or 50 basis points higher than in 2021. Despite a very challenging year, with higher supply chain costs. Q4 gross margin finished at 41.2% as expected, pressured by higher material costs and a less favorable product mix. We expect margins will begin to recover in Q1 to approximately 41.5%. We still remain under pressure by higher material costs related to prior inventory purchases in a continuing less favorable product mix. In the second half of the year, we expect meaningful improvements in supply chain costs and a return to a more favorable product mix. This should allow us to achieve full year gross margins of 44% as shown in a $1 billion revenue model. We remain laser-focused on gross margin improvement through supply chain initiatives that include a number of value engineering and strategic sourcing projects. This, combined with sales of higher-value Purion product extensions allows us to target gross margin at greater than 45% in a $1.3 billion model. Turning to operating expenses. They were well controlled in 2022 at 20.6% of revenue and 3.4% lower than in 2021, highlighting the leverage of our business model. Operating expenses should be slightly down as a percent of revenue in 2023 at approximately 20.5% and further reduced around 19% of revenue in a $1.3 billion model. R&D is expected to account for approximately half of our spending to further solidify our technology advantage in the specialty markets and support penetration into markets like advanced logic. Additionally, we will continue to invest in infrastructure and our workforce to support growth and financial models. One example of infrastructure investment is our new state-of-the-art logistics center in Beverley, Mass located just a short walk from Axcelis' headquarters. This facility is scheduled to open this summer and provide centralized logistics and flex manufacturing capacity. We also plan to further ramp our manufacturing operation is our needs to grow. We ended 2022 with $433 million of cash, cash equivalents and short-term investments and generated $215.6 million of cash from operations during the year. During 2022, we repurchased $57.5 million of stock and have returned over $132 million of cash to shareholders since 2019 through our share repurchase program. As a result of the success of Purion, higher gross margins and tight cost control, Axcelis' profitability has improved significantly. In 2022, we finished with operating profit of 23.1% of revenue and delivered $5.46 of earnings per share with 22.3% free cash flow. Before I close, I'd like to summarize our new $1.3 billion implant-only business model targeted for achievement in the next 2 to 3 years. We are modeling our revenue at approximately $1.3 billion, gross margin at greater than 45%. OpEx at approximately 19%, operating profit around 26% and free cash flow at approximately 25%. We are excited about the significant growth opportunity in the ion implant market over the next several years. Axcelis also has a rare opportunity to grow revenue and profitability during significant industry downturns. This is a result of strong product positioning in a power device market and continued execution in a challenging environment. Once again, I want to thank the entire Axcelis team for their continuing outstanding performance. I also want to thank our supply chain partners for their hard work supporting Axcelis and our customers for their confidence in our ability to deliver. Thank you, Kevin. The Axcelis business thesis, which supports over $1 billion in revenues in 2023 and $1.3 billion over the next few years is based on the following 5 key points: First, the implant TAM has more than doubled in the last few years with the mature market segments representing greater than 60% of the total TAM. Second, power devices and image sensors are highly implant intensive and the general mature nodes have increasing implant intensity peaking at 28-nanometer. Third, high-value Purion product extensions were designed to optimize power and image sensor device manufacturing, uniquely positioning Axcelis to benefit from high growth in the mature process technology market. Fourth, Purion product differentiation has propelled Axcelis to implant leadership in these high-growth specialty device market segments; and fifth, we have strong long-term customer relationships and a fundamental cultural desire to win by making our customers successful. As a result, we are well positioned to grow through the current down cycle, and we'll continue to evolve our business to leverage the trend and capture the opportunities that lie ahead. Congratulations on the nice results and pulling the $1 billion model into this year. I guess maybe for Mary or Kevin, just as we think about reaching the $1 billion TAM, can you give us any sense on your expectations just sort of linearity through the 4 quarters of '23. It sounds like you pulled in due to strong execution, some revenue from the first quarter into the very strong fourth quarter and so you're guiding for a sequential step down in Q1 versus Q4, but would you expect sort of sequential growth through the rest of the year? Yes. Quinn, this is Kevin, as you point out, Q4 is down a little bit as a result of the pull-ins. What I would expect is we've obviously got to come above the Q1 run rate to hit greater than $1 billion this year. The way I'm looking at the year now, I think it steps back up in Q2, and it's probably mostly flat throughout the year. So I feel it comes back up in Q2 and kind of stays flattish throughout the year based on what I'm looking at right now. Okay. And then, Kevin, on the margins, obviously, starting the year 41.5% getting to 44% for the year sort of implies that margins must be at 45% or higher in the back half, just to get the numbers to work. What are the key drivers of that margin improvement? Is it really just product mix to more high energy and capturing some of the lower material costs as the premium costs flow through the income statement? Yes, it's exactly that. We have -- as I mentioned, I mean, we do have a lot of pre-bought material at some higher prices. The supply chain team, along with our supply partners have done a really good job working some of the costs back out, which really starts to hit in the second half of the year. So as those lower costs start to come through our efforts with our suppliers and some strategic sourcing projects. We actually have qualified a lot of new parts at lower cost, which is going to help as well as the value engineering, I think 1 of the issues, Quinn, that a lot of us had throughout the pandemic is there's a lot of chip shortages and most of those chips are older type of chips. So our value engineering team has worked with our suppliers that come up with designs they're using newer chips, so we don't get back into that same situation. So that helps. There's going to be some factory efficiency too. I'm not going to say that the supply chain delivery issues are all going to be behind us in the second half, but there's definitely pockets of improvement and as that starts to flow through, that will help the factory efficiency a bit as well. And then as you pointed out, the biggest -- the other biggest lever is that shift back towards a higher mix of high energy it's no secret. I think it's Page 23, an investor presentation. We have the relative standard margins of the 3 products, the high current, medium current and high energy and you can see what happens if that mix moves around a little bit. So I feel good about the full year at this point at 44% based on the assumptions that we're making for mix and things I know from a supply chain point of view, that will start to impact us more in the second half with cost out. Quinn, one other thing just to add on the product side. The other thing that goes on is we're starting, as Mary mentioned in the script, to see a much bigger swing to high current and high energy in the silicon carbide market, and that will continue to ramp through the year. as customers are starting to ramp their fabs to high volume. And that's a positive on the margin side as well. Yes. I think anywhere where we have the product extension Quinn that we talk about are related to silicon carbide and other things. The product extensions definitely carry better margins than the base tools. So moving as Doug says, has been more high current silicon carbide is better than the base -- systems are we after right now. Great. And then just finally for Mary. The $1.3 billion model looks like it gets you to almost $9 of earnings per share, which obviously is very strong earnings, but in the presentation, it seems like you're talking about the opportunity to pursue M&A outside of implant to continue the company's growth prospects longer term. Can you just give us your sense, your M&A strategy, would you consider dilutive transactions? How strategic are you looking at? Just any sort of comments around your M&A philosophy and particularly, thoughts around would you pursue a dilutive deal, I think, would be helpful. Yes. Quinn, we're really at the beginning of this journey. As you know, we hired a VP of Corporate Development to focus on strategy and M&A to grow beyond the $1.3 billion model. And we just did that mid last year. So there's a lot of analysis going on right now to understand what potential opportunities lie ahead of us. There's really nothing at this point in time that we can share. I will say that anything potentially we would do in the near term would probably be something along the lines of helping us grow our implant business. But in terms of moving beyond implant, it's going to take us some time to really develop that strategy and go any further with it in terms of having anything else to share with you and other investors. Congratulations on the quarterly execution, very strong in real tough environment. Mary, I wanted to start just by understanding what's changing as the company looks at the new model at $1.3 billion, a really nice increase from the $1 billion. So can you just help us understand how much of that is due to a larger TAM, how much might be share gain geographically in Japan, et cetera, and how much might be due to things like progress with advanced logic, et cetera? Okay. I think, Craig, as we continue to execute over the next 2 to 3 years, you're really not going to see any significant changes in our strategy. I mean, we've made major investments in Purion products, particularly in the specialty markets, and we've made great progress because now obviously, we're the leader in those specialty markets, particularly in silicon carbide right now and which is driving -- power devices and silicon carbide, which is driving our growth. So we're going to continue to focus on all the things that we've been focused on. If you look at our investor presentation over the next 2- to 3-year time frame, the TAM really isn't going to make any significant jumps. It will fluctuate based on things that are going on in the industry and in the economy. So there aren't going to be any significant changes in the TAM. However, we've talked a lot about how because of the electrification of the automotive industry, there will be continuing growth in the power device market, for example, and in silicon carbide. So that, as we said in the script, is really going to be the major driver for our growth. That said, we're going to continue to invest in our product line extensions. We're going to continue to focus on things like China and Japan. We're going to continue to work to improve or increase our penetration into the advanced logic markets. There's a lot of work we can continue to do with existing customers to actually expand our share within those accounts. We're doing a lot of work with our customers in terms of JDPs. We've got partners that we were trying to explore sort of novel ways to use ion implant. So all those things will continue. We've said all along, and I think it's going to be true in the $1.3 billion model, there will be increasing contributions from Japan and from advanced logic, but that's not really going to be where the significant growth is going to come from. It's going to continue to be the mature process technology markets, the power devices, the image sensors, memory will come back and we're very well positioned to capture that business when that segment does recover. So a number of things, but all things that we've talked about, we will continue to execute against. And Craig, if I can add to that a little bit. Again, I want to emphasize, Purion H200 and Purion XE for silicon carbide over the course of that next 2 to 3 years, many of the silicon carbide customers will be ramping to much higher volumes and optimizing their devices. And those 2 tools will become very, very important to their strategy. And then the second thing relative to the product extensions is the image sensor market as the economy improves and phones pick up speed again, we'll start to see more XEmax and more VXE type sales into image sensors that will contribute more in the $1.3 billion than our plan for this year. So. Got it. Those points both make sense, Mary. So I wanted to follow-up just on the $1.3 billion target and understand how the company is looking at really the linearity of getting there. So one, if demand were there for that to be achieved in 2024 are there anything -- is there anything in the supply chain materials, company capacity, et cetera, that would preclude being able to ramp that aggressively? And then if the target model would be attained in a 3-year time frame, that would imply about 9% average annual growth. And how do we think about the different puts and takes if the model were to be achieved over a longer period than 2024 achievement with different end market areas contributing or different geographic areas contributing? So let me start with that, and then Mary and Doug can add. And so as we said, Craig, we do expect it's a 2- to 3-year time frame that we get to the $1.3 billion in terms of the business, where we're making investment, both in the R&D side of the business or in the SG&A side of the business. I don't -- I have no concerns that we are going to have problems getting to this $1.3 billion model due to a lack of resources or infrastructure also on the supply chain side and factory capacity side. We have done a lot of work with the supply chain over the last couple of years, both out of the necessity and then really just to improve things and add additional capacity. So there's still supply chain constraints that are -- I don't think there is related to ramping as they are just all the other stuff that's been going on. So as the supply chain recovers and taking a look at everything we've done to add capacity with our supply chain partners as well as that capacity of the factory. I think we're going to be -- and we're well positioned. I'm not worried about capacity. The one thing I would say is that, for some reason, things dragged out longer. That would probably be even better for gross margins. So when you're working on value engineering projects, when you're bringing on new low-cost partners and things, time is always your friend. So my only input to what would happen if things delayed is you probably get a positive impact to margins, which would flow through to all models right to the bottom line. No, just to say the second part of your question, Craig, relative to the contribution of the segments and the timing and so forth. I think we're going to see a pretty steady growth in the power market. It's going to be shifting more to silicon carbide, going to be shifting, as I said, more to the full family of products and that's going to be a big driver. I think the timing is probably a little more -- of getting to $1.3 billion is probably a little more dependent on how quickly consumer recovers and what the impact that has on general mature and image sensors that will have some bearing on how much advanced logic is included in our objectives there. And then more -- probably most importantly, will be the memory recovery as this inventory is digested and people start spending, the timing of that, obviously, will have significant impact on the achievement of the $1.3 billion model. Yes, that makes sense. It would be nice to get some more Purion Dragon in the mix. Mary, if I could just follow up on the earlier question on M&A. So your comments sounded very consistent with what we've been hearing over the last couple of quarters in terms of intent and timings. I get that but I'm wondering as you do further work with business development and with the Board explore opportunities, are there particular areas outside of ion implantation that are starting to rise to the top of the interest level for the company? And if so, can you give us some color on what the attributes of those areas might be? Yes. So again, we're sort of at the begin -- what I'll call the beginning of this journey. As I said before, there's a lot of research going on. we share an update with the Board quarterly. So everyone is in the loop in terms of what's going on. But again, it's just too soon to share anything. Internally, there are some things that seem to be of interest to us. But very early stages. So there's more work that we need to do before we'll share it with -- externally. Congratulations on a fantastic year and outlook is also very positive. In terms of -- you had a number -- I think 5 evals, I was just wondering if you can give us an update on these evals and what's the potential from the evals? Yes. So Mark, we actually have 6 in the field now. There's always -- there are always the ones that end up closing successfully and then new ones going out. But Recently, we just closed 2 evaluations. One was a Purion XEmax at a leading image sensor company where they're using it to develop their next generation of image sensors. And then the second one was a Purion H evaluation of the DRAM manufacturer. So those were in Q4. In terms of where we are today, we actually have, as I mentioned, 6, one is a Purion M at a DRAM customer, and this customer has other Purion products. One is the Purion XEmax, which is an image sensor customer, and this would be a new high energy penetration for us. And then there are 3 in the general mature process technology segment. There's 1 Purion XE that would be a new high energy penetration. And 2 Purion Hs. One is a new customer and then the second 1 is a new high current customer for Axcelis and then the sixth 1 is a Purion Dragon at advanced logic, and that's being used at an R&D lab to develop some next-generation devices. So that's where we are now. And as I said, things will go in and out in terms of closure and putting new systems in the field. You've been adding new customers. And I'm just wondering if you could estimate the percent of sales on customers you've added within the last year or 18 months from these new customers? I don't have an exact number for you. I will tell you that, yes, you're right. There are a lot of customers. We have a very broad and diverse base of customers. I think it's safe to say that the majority of these new customers are in the mature process technology segment and many of them are actually manufacturing power devices so that's the area where we've had significant growth. Mary, I think in your prepared remarks, I think you were mentioning that power would be 55% of revenue, and then you said something about silicon carbide could you just repeat that commentary? I didn't hear it. Yes. I said our ship systems revenue in 2023 is expected to be about 50% of our total revenue. And that half of that 55% would actually be for silicon carbide or shipping silicon carbide tools. Okay. And then you've mentioned several times that capital intensity, I think, of silicon carbide and power devices and CMOS image sensors. I know it's typical, but could you help us understand how much more implant intensive do you think these devices are versus standard silicon devices? Yes. Dave, the power devices, image sensor devices. They have a lot of implants they are -- when you look at Moore's Law, the number of implants increase in a large standard logic process when peak at around the 28-nanometer node. Power and image sensors have at least the same number, probably more, but they have a lot more high energy and high-dose implants, which are longer implants. And so hence, add to the overall intensity of the implant needs for those devices. And we see that increasing. The general trend is for higher doses and higher energies as customers optimize the overall device performances for the higher voltages and for the better efficiencies, especially on the silicon carbide side. So that's where that comes on power. On image sensors, it's very high energy intensive, and that's what brought us to introduce the Purion XEmax, which allows for very, very high energy levels as well as very low metals contamination. So again, these are a lot of implants and long implants, and that's what contributes to the implant intensity. Okay. And then somewhere in the prepared remarks, I think you said that silicon carbide wafer starts were going to double every 2 or 3 years. Could you just give us a base number on that? Or do you think the wafer starts per month are, year or whatever that whatever number you're referring to, if you could just kind of understand what the size of that wafer start number is now. So Slide 13 in the investor presentation has a chart. But again, it's based on some outside research as well as some internal estimates. And basically, we're looking at last year, probably around 500,000 wafer starts of silicon carbide per year and that doubling essentially every 3 years. And so we're watching this and monitoring it. There's a lot of different estimates out there, and there's a lot of new entrants and players that are adding capacity. And so this is a number that it's probably best to look at 2 or 3 external estimates to get it. But our best guess right now is it's doubling about every 3 years. Okay. Final question from me. is, Mary, I think you mentioned that over the next 2 or 3 years, the implant TAM would be relatively flat at the current level, I guess, $2.5 billion. So that kind of suggests that your growth from $1 billion to $1.3 billion is going to be all share gains. Is that the way we should look at it? I think it's 2 things. One is that we are growing in the markets that are growing I just explained the whole power device, silicon carbide area, which is an area that is growing as part of that TAM. And so we're growing with it. And secondly, yes, we are continuing to gain share really across all segments of the market. So both things are true, Dave. I think just adding to that, Dave. The -- it's really important, memory plays a big role here in the overall TAM or [indiscernible] a lot of spend there. And if we look at our estimates for the TAM, it shows 2023 being down, yet Axcelis is growing, and that's because the power market is up within that. And as memory starts to recover in 2024, the implant TAM will grow with that. And so it's almost -- it's very important to look at the segment growth beyond just the overall TAM number right now. Great quarter, guys. So Doug, I just want to make sure, and Mary, the last comment about memory recovery in '24. Is that kind of the current expectation on your '23 guidance is that memory recovers in '24, not the back half of '23 currently? Well, our -- everybody's guess is as good as anybody else's guess as exactly when it happens. But the -- we're anticipating 10% to 15% of our revenue is coming from memory, more related to DRAM than NAND at this point for 2023. And so that would definitely indicate that at this point, we think 24% is probably when things start to come back more robustly, I guess. Yes, I think that's fair. And then just on the $1.3 billion opportunity, I think it was kind of answered a couple of different ways. But from like a labor tools and facility standpoint, we could do $1.3 billion earlier, Kevin, if the sales came or the orders came did I hear that correctly? Yes. Yes. We're -- we -- from a capacity point of view, we always try to keep our plans ahead of our -- what we think is the real need . So yes, if it came earlier, I wouldn't anticipate any issues from that, Christian. Okay. Perfect. And then are we ready to maybe at least give some directional number of how many distinct silicon carbide customers we have currently and how many we think we could potentially be selling to 2 to 3 years from now, or at least like a broad range of -- in a number? I think no, we're not ready to give an exact number. It's a large moving target, I guess, would probably be something to say. There's a lot of new entrants. We are absolutely engaged with pretty much everybody in the industry either selling them tools in the process of evaluation discussions or demoing tools with them. And so it's -- but it is a very broad customer base at this point and growing. I'm showing no further questions in the queue. At this time, I'd like to turn the conference back over to Mary Puma, President and CEO, for closing remarks. Thank you, . I'd like to thank everyone for joining us today. In March, we will be participating in the SIG 12th Annual Tech Conference and the Loop Capital Markets 2023 Investor Conference, both in New York City. We hope to see you at 1 of these events, and thank you for your continued support.

EarningCall_98

Good evening Ladies and Gentlemen. Thank you for attending today’s Bloom Energy Q4 2022 Earnings Conference Call. My name is Pierre and I will be your moderator for today’s call. 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 would now like to pass the conference over to your host, Ed Vallejo, Vice President of Investor Relations. Please proceed. Thank you and good afternoon everybody. Thank you for joining us for Bloom Energy’s fourth quarter 2022 earnings conference call. To supplement this conference call, we furnished our fourth quarter 2022 earnings press release with the SEC on Form 8-K and have posted it along with supplemental financial information that we will reference throughout this call to our Investor Relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events and our future financial performance. These include statements about the company’s business results, products, new markets, strategy, financial position, liquidity and full-year outlook for 2023. These statements are predictions based upon our expectations, estimates and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties as discussed in detail in our documents filed with the SEC, including our most recently filed Forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today’s call. During this call and in our fourth quarter 2022 earnings press release, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with US Generally Accepted Accounting Principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in our fourth quarter 2022 earnings press release available in our Investor Relations Web site. Joining me on the call today are K.R. Sridhar, Founder, Chairman and Chief Executive Officer; and Greg Cameron, our Chief Financial Officer. K.R. will begin with an overview of our business, then Greg will review the operating and financial highlights of the quarter as well as the output for 2023. And after our prepared remarks, we will have time to take your questions. Thank you Ed. Good day everyone. Bloom Energy finished 2022 in a very strong position as our resilient and sustainable energy solutions experienced wider adoption, and we were aided by good tailwinds. We expect this trend to continue in 2023 and beyond our revenues and gross margins, the records for the fourth quarter and for the full year. And we closed 2022 with a $10 billion backlog, the strongest order book in Bloom's history. We continue to innovate at a rapid pace to further strengthen our technology leadership and competitive advantage. In 2022, we demonstrated record-breaking efficiencies for hydrogen production using our electrolyzers and successfully lab tested our highly promising carbon capture technology. We released a combined heat and power offering that we're very excited about. This offering has wide ranging applications, including in the European markets we are now entering and for industries that can use the heat. We successfully deployed our marine product on schedule. Bloom has also invested in operations and doubled our manufacturing capacity. I'm proud of our team for all we have accomplished in 2022. We are excited about 2023 and are looking forward to building on the momentum we have generated. Here establishing ourselves as the energy company that offers our customers practical and purposeful solutions. We call it the power of end. When it comes to energy, we need security and sustainability, reliability, and resiliency, affordability and availability. Simply put, when it comes to energy, a resource that is foundational to our wellbeing or should not be an option. The Bloom Energy Technology Platform delivers on the power of end. The future looks very bright for growing our electricity and hydrogen solutions both domestically and internationally. We are very pleased with the quality and composition of our $10 billion order book. It offers predictability and visibility. We have talked to you in the past about the issue of time to power. Utilities are not able to meet the growing need of commercial and industrial customers for additional power. Let me elaborate on this. Businesses are expanding and many are reshoring their operations. Digital transformation is driving steep growth in data center loads, vehicles and appliances are being electrified. All these trends are causing a surge in energy demand. At the same time, geopolitics, climate concerns and nimbyism are making a very difficult global energy transition even harder. There is long-term policy uncertainty, permitting chaos, erroneous political decisions to shut down or not allow infrastructure growth based on unrealistic transition timelines, all of which have significant stunted growth of energy supply. Many jurisdictions have turned to dirty and unreliable sources of energy to cope with the situation. California has spent billions of dollars on dirty diesel generators and antiquated power plants to keep the lights on during the summer. The Northeast is heating homes this winter with carbon intensive heavy oil due to the lack of cleaner gas, and Europe has been forced to reopen coal power plants. We see this acute supply demand mismatch globally. This imbalance has seriously threatened energy availability, security and affordability. It has also compromised the health of people and businesses around the world. Furthermore, it has set the world back on its sustainability goals. The biannual EPA e-grid numbers came out last week, and they show that marginal and average CO2 emissions have gone up in the last couple of years in many geographies. Additionally, the prolonged power outages experienced repeatedly in places like the U.S. Gulf States speak to the fragility of the grid. Commercial and industrial consumers of energy are alarmed by the lack of secure, affordable and reliable energy options from their utilities. They are increasingly wanting to take control of their own energy destiny. Many of them are turning to Bloom for behind the meter solutions in these situations. It should be no surprise to you then, that we have booked over 100 megawatts of orders from customers in the U.S. to solve their time to power issue. Also, as Greg will cover in his remarks, we have made great progress operationally. We will leverage our technology advances, increased manufacturing scale, and other efficiencies to drive improvements in our margin profile. The cost down program is a cornerstone value for Bloom and as part of our DNA. Lowering our cost of goods should enable us to enjoy both growth and profitability. Bloom is now a predictable growth company. We offer the world a unique, mature and proven platform solution at scale, a solution that can be deployed today with a clear pathway to a net zero future. Thanks K.R. This past year we achieved strong commercial, operational and financial results that position us to be a leader in the global energy transition. Let me begin with a few highlights. We had record revenues. For the fourth quarter, product and service revenue was up over 41%. In total, revenue increased more than 35% versus a robust fourth quarter 2021. For the year product and service revenue was over $1 billion and total revenue was $1.2 billion. Our margins improved. Fourth quarter non-GAAP gross margin surpassed 30% resulting in 23% for the year, up 130 basis points versus prior year. Our backlogs for systems and service has reached $10 billion, the largest in Bloom history. We completed the first phase of our Fremont factory, adding 300 megawatts of stack manufacturing capacity, which doubled our capacity from the beginning of the year. And we built two gigawatts of electrolyzer assembly capacity in Delaware. We are providing a 2023 framework consistent with our long-term guidance built on strong growth and margin expansion. With those as highlights, let me provide some additional context to our performance. The value proposition for energy servers in electrolyzers is robust. Our customers need resilient power that reduces their carbon intensity while providing optionality to move to on site net zero solutions like hydrogen in the future. Our time to power value proposition is particularly meaningful for manufacturers and data centers, especially when the local utility is unable to provide the additional power to support their growth. For our electrolyzer, we are engaged with large scale developers of hydrogen and green ammonia projects. They clearly value the efficiency advantages of our solid oxide technology and our manufacturing readiness. We are also partnering with developers for significant opportunities in waste energy. In some instances we are providing power solutions to enable low carbon intensity renewable fuels. And in other cases, we're providing solutions to use biogas for resilient power across dairies, landfills, and wastewater treatment facilities. Opportunities are progressing with a sense of urgency, aided by the United States Inflation Reduction Act, and similar incentives in Canada and Europe. The system backlog for our 24/7 always on energy server is 2.8 billion up 16% versus prior year. When combined with the revenue that should be earned on service contracts, we have a total backlog of $10 million up 17% versus year end 2021. When comparing year-over-year growth and backlog, it's important to remember that in 2022, it was a first year of a three year take or pay contract with SK ecoplant that was included in our 2021 backlog. When adjusting comparisons to reflect SK ecoplants 2022 deliveries, our system contract value backlog has increased 41% versus prior year. Our fourth quarter non-GAAP gross margins of 30% improved 9.2 points, versus the fourth quarter 2021. The margin increase was driven by improved pricing mix on our fourth quarter acceptances, unit cost reductions, ITC benefits, PPA for repowering and Product Revenue being a larger percentage of the total revenue. We benefited by a convergence of these events in the past quarter, and we would not expect this margin rate to be our new baseline. The PPA for repowering was similar to the PPA 3A repowering in the second quarter. We executed the sale of a previously consolidated PPA entity. And by doing so, we eliminated 70.8 million of nonrecourse debt, enhanced current margins on higher ASPs and simplified our financial reporting. As part of this transaction, we recorded 73 million of charges through our electricity segment, operating expenses and other expense that were removed as pro forma adjustments from our non-GAAP reporting. We have one remaining consolidated entity, PPA 5 that we may repower in late 2023 or early 2024 with a similar approach. Our supply chain and manufacturing teams are successfully navigating the current environment. We completed the first phase of our Fremont facility expansion, which doubled our stack manufacturing capacity from the beginning of the year from 300 megawatts to 600 megawatts. As a number of builds increased, we saw a decrease in our unit costs quarter-over-quarter. To reduce costs in 2023, we are increasing the power density of our energy server, identifying material savings, securing supply chain deflation, automating manufacturing processes and benefiting from operating leverage. We fully expect to return to our annual product cost reductions of 10% to 15%. We ended the year with more than $500 million in cash balances. These balances do not yet include the $310 million from the SK ecoplant equity investment, which is expected to close in the first quarter subjected to remaining regulatory approvals. Last quarter, given the rising interest rates, we elected not to factor over 160 million in eligible receivables. Had we factored these receivables, cash flow from operations usage in 2022 would have been only 31.7 million, roughly half of our 2021 usage of 60.7 million. In 2023 we expect strong revenue growth and expanding margins consistent with our long-term guidance provided last February. As we do less installations and reduce our electricity segment the more meaningful measure of our growth, product and service revenue is expected to grow 20% to 30% to $1.25 billion to $1.35 billion. We expect total revenues to reach $1.4 billion to $1.5 billion, up 17% to 25% for the year. This year, we plan to reduce our product costs over 10% and expect our non-GAAP gross margins to improve 200 basis points to roughly 25% for the year. With these revenues and margins, we would expect non-GAAP operating income and cash flow from operations to be positive in 2023. Our business is delivering. For the first quarter 2023, based on likely acceptances I would expect product and service revenue growth to be in line with the total year growth targets. Non-GAAP gross margins should be up 200 basis points to 300 basis points versus the first quarter last year as three [ph] months start-up costs do not repeat. As in previous years, we expect 40% of our revenue in the first half and 60% in the second half of the year, driven by the seasonality of acceptances. As such, our second half margins tend to be higher as accretive product margin is a greater percentage of the total. In summary, we had a strong operational year in our building momentum with the demand for abundant, clean and resilient energy. We believe the company can build upon our mature solid oxide platform, solid record of accomplishments and robust growth roadmap. We are extremely excited about our future. And I look forward to showcasing the team at our investor conference on May 23 at the New York Stock Exchange. Hey, guys, congrats on a strong quarter. My question here is I was just listening to the [Indiscernible] presentation from the World Bank. And he was saying that if the world has to decarbonize, we need 200 gigawatts of electrolyser capacity every year between now and 2050. And so when we look at Bloom, you have shown immense capital discipline. But if some of these growth numbers by these World agencies are right, is there a point that Bloom takes a look and says, maybe we can be a little more aggressive and press harder on the gas where one gigawatt of capacity every two years is just not enough, and I'll leave it there. Thank you. Manav, thank you so much for covering this SCAR [ph]. And here's what I would say. We are super excited about hydrogen, because that is the abundant, clean power the world is craving for. We are not in the business of guessing when that hockey stick is going to take off. But we are extremely prepared. What I mean by that is we don't need to do a gigawatt a year, we can do copy exact lines in gigawatt lines across the world wherever we need to do it. And what we have shown you with the doubling of our capacity, is within a year we can recoup that capital, there is not too many factories that I know of that can do that and technologies that can do that. We intentionally did that. So when this hockey stick happens, we are there to meet the moment and not say why we can grow. So we are prepared ready gearing to go. The world needs to step up and actually make it happen. We have the plugs. Somebody needs to now start digging those goals. Good afternoon. Congrats on the results team. Hey, so just coming back to the hydrogen conversation. I'll start there just what's included in 2023 guidance. What I understand what's in without and specifically as it relates to hydrogen. How many projects or what can you discuss with regards to what's assumed at 2023 as well as hydrogen in the incremental backlog that's being disclosed here if you can? Yes. Hey, Julien, it's Greg. So one of the reasons I highlighted our backlog being around the natural gas server or 24/7 Energy servers, that's the vast vast majority of what is in our backlog today. The team is very excited about the opportunity. We've got a number of projects that Rick and the team are working through. And we're really excited about the commercial momentum and the sense of urgency, that that that the team has. So as you look at the backlog and is predominantly the, the server with no electrolyzer in there. If you look at the 2023 framework, so we talked about as we get orders for the electrolyzers deliveries in those are likely to be late 24, 25 before you see any commercial momentum out of them. So as you think about the 2023 guidance that we put out for revenue, it's really around our core product today that we're selling on the energy server in the U.S. in Korea in other parts, where Tim has made a lot of progress on the international side. So really excited about that market, but it's not yet contributing to the overall framework or or backlog at this point. Thank you. Good afternoon, everybody. Wanted to stay on the backlog for a second. It's top obviously up quite a bit, which is pretty encouraging. Why don't you just speak to the profile of the customers who are behind that backlog? And maybe give us a flavor for geography? And then how many out how many years out is that backlog representing now? Yes, so our backlog, right, in order for a contract or a project to make it in our backlog, it's fairly stringent on the approach that we use here. So it has to be a firm contract, there has to be skin in the game for both of us. And it has to be affirmed delivery on it. So in order for that project to be in our backlog, it's got to have those things. As you look at the projects that we have our U.S. C&I business is really had a strong 2022. And if you look at the types of projects that they are seeing, they are in the larger sky scale than they were seeing pre pandemic, meaning of size and the 25 megawatts and above type size. You're seeing them in the time to power area and resiliency both together, either separately or together, meaning and it is a large project that's meaningful for that customer around their ability to perform their operations today, or to bring additional operations online so they can meet their growth prospects. So those are, I'd say is what we're seeing in the U.S. Korea tends to be what we're seeing is still very much the take or pay contract. And the comment I was trying to make was we had three years of take or pay last year, we now have just two years. And that's that why I did that adjustment math for you. And then broadly, you saw the announcements that team has been able to do in Italy and in Taiwan, on good sized projects, and the 10 megawatt is starting on the relationship side. So we're getting some good scale, and making sure that where we plant flags, we can support not only our core originations, but our service business once we land those units. So I feel like we've got some really strong diversity that we're building into our backlog and in the markets we're in. We're gaining both number of deals in size of deals, which is really encouraging. Good afternoon. Thank you for taking my question. Wanted to ask about EV infrastructure? And if you're seeing demand for the energy servers in conjunction with building out commercial size EV infrastructure? That's a great question, Martin. And yes, we are. What we are hearing from our corporate customers is when they talk to us about their loads. They are not just talking about their factory industry loads or their data center loads or their corporate loads. But they're simultaneously saying if we have a fleet of vehicles, and they are going to be EVs for the last month. How do we how do we power them? How do we keep them going? We are also hearing from utilities that are beginning to talk to us about the EV load being in the middle of congested cities where the last mile problem is going to be a big nightmare for them unless they have some generation right on site. So these are the two places where we are beginning to see traction. And I would imagine in the next few months, this is only going to get even better given that the IRA has given such a strong incentive for chargers and fleets to get charged and more and more vehicles are showing up in the market as EVs. Afternoon all and thanks for taking my question. Just wanted to hit quickly on the new application, you all put a press release out on the combined heat and power and maybe just talk a little more detail on that? Yes, so look, the new look at -- so sorry, sorry, repeat the question one more time so it's fully clear to me before answering? Sure yes see if we can get more details on the combined heat and power application that you will discuss to capture. Absolutely, so look as, as the world is marching forward the molecule of fuel, whether it's hydrogen, whether it is natural gas, renewable natural gas, that molecule becomes more and more precious decarbonisation is going to happen a lot more quickly, then that molecule can be used to its utmost efficiency. And the end use customers are beginning to understand that. And more and more customers are saying, how can you give us more juice out of the same molecule that's coming in. And way to extract more juice out of that molecule as useful energy is not only our very high electrical efficiency, one of the best in the business. But on top of that, to be able to extract some heat and provide that heat. And especially in the European market, with the incentives being set the way they are, it is very, very attractive for customers to do that. And they will align their incentives with decarbonisation, and efficiency. Industries, more and more are now looking at the cost of energy and wanting to extract as much as they can. And so this offering of combined heat and power is going to be extremely valuable. The difference between legacy combined heat and power, and us is that the legacy gives you a lot less of electricity, which is the higher value commodity, and lot more of a heat. With Bloom, you get the exact opposite. More of electricity, which is a high value commodity and needed more and less of the heat, nevertheless, a very valuable resource. And that combination should get us knocking at the doors of 90% efficiency with our roadmap. And that is very, very attractive. Thanks so much, guys. Greg, with the costs that you're talking about this year, can you give us a sense of where those things are coming from? And then with the margin guidance suggests that prices are going to come down a little bit, can you talk a little bit about if that's coming on, next, next basis, internationally versus domestic, or what the real drivers are around that price down as well? Yes, so on the cost down Colin, whether it was the pandemic itself, and where our engineers were working via zoom and not together, or the supply chain issues that we were having globally. And the inflation that it caused, there are just quite frankly, doubling our capacity last year in the ramp that we were going through in the inefficiencies of running a factory not at full output. Our costs, frankly, were not where they wanted to be. When we got to the end of the year, this is I think, the first time in Bloom history, our costs were up small, but still up year-over-year, which is not something that is normal for us. So as we looked in the middle part later part of the year and said, okay, what is our path going forward? There was a number of areas that we've been identifying. One is just the power density of our machine, it is one of the things that we've levered over the years to increase the output and reduce at the same build cost and reducing our cost per kilowatt. So we had some increases that we've been able to get out of our current design, and there's more to come there. The second thing we've been able to do is really help to work with our supply base, look at our key components, look at their manufacturing processes, and ultimately improve on what their operational efficiencies are. And we're seeing some good material price deflation that's coming down. At the same time, we've engaged our engineering team to really go in and look at the core of our product, and look at for how we design it, the parts that we source, in elimination of pieces and simplification of the product that they're able to do and that's really contributing to the cost out. And then lastly, not only on the components that we buy them, once we bring them in house and how we build the machines, we're seeing some nice operating leverage as Fremont is getting up to its full line capacity. And at the same time, we're seeing a lot of improvements in the process that we're able to make around automation. For us automation is all about our ability to scale in this market. It is not something that we're looking to reduce our headcount on, it's really making sure that for our direct labor output, we're able to direct labor, we're able to get a lot more output out of. So when we look at the plan going into this year in the framework is about 10% that we've built in for cost down into our margin guidance for the year and I will tell you our internal targets are more aggressive around that and we're going to push the team's hard to deliver on that 10%. And if it gets better than that, that would be a good thing. On price going forward year-over-year, when I strip out some of the unusual, so if I strip out the repowering, and I strip out some of the other things and look at core on the product, prices remained relatively flat, over the last three years, both on a mix adjusted basis and a non-mix basis. We don't have a lot of mix on our pricing, meaning that when we make decisions around where we want to put our units, whether it is here, or in Asia or in Europe, the decisions we're making is really where can we get the most amount of growth in the best return on margins, that tends to solve us to having very similar selling prices across across the globe. So as we look into 2023, the couple 100 basis, margin improvement that we're expecting, is really going to come from us holding our ASPs flat on after eliminating some of one time or for this year on a core basis and then taking our product cost down. And we think we got a pretty robust plan to get back to get back to that cost down and get continue to expand on our margins. Hey, good afternoon, guys wanted to hit on the backlog once more from a slightly different angle, and obviously, very impressive growth. And then the color you've given us so far is very helpful. But the footnote on it, saying that it reflects anticipated ITC and other tax incentives as applicable. Just curious for a little bit more color on that. Is that as simple as the ITC being effectively renewed, and that was a boon for customer orders? Or is it actually embedded in the backlog number in a different way. And then – I just one more thing on the ITC. As I understand it, it's due to convert to the new clean energy investment credit after 2024. So as things stand now, do you foresee that changing any dynamics between you and your customers? Yes. So Sam, the way it naturally works within the business is most of our sales are through PPA structure where we're selling to the customer, a cost of electricity over a period of time. And then with that with our financier, we then take the cash flows associated with that. And we calculate what we believe to what our selling price of the machine is going to be what the service costs are going to be what the install costs are going to be. So as you calculate your selling price, whether it's in the U.S. and in an ITC, or in another country, another jurisdiction, jurisdiction that has some other type of incentive, we incorporate that incentive into the overall cash flows as we calculate what we will be selling the product to the end customer through the SPV. So we just wanted to make sure we're very clear that each year depending upon what the incentives are for our backlog, we use that as part of our analysis to calculate what we perceive to be what we assumed to be will be the selling price of the of that contract. Listen on the sunsetting of the ITC, not something that is new for us, right? Every two years or so we've been through this process before. Generally what happens is we get an extension for about this period of time we move forward on it. And then depending upon where we were, we're sitting as an global economy on decarbonisation, and resiliency, that incentive gets renewed. If you take it from a practical standpoint, it may be only two years, but there through Safe Harbor and other parts of parts of the contract, we're able to get about three years benefit out of it. So feels like we're only about six months into the current one, which is, which is early days, but we've obviously taken that in the forecast to us. As at the end of the day, our goal here is to continue to drive down the cost of our product, and make sure that we're prepared for able to compete at some point where these incentives don't exist. But I would say there's a high probability in our view, that there will be an extension in the future, and that we wouldn't be dependent upon it, but it would be a part of it. I don't care if I don’t…. And if you just add to that, right, it's a fraction of our business. And as we grow internationally is shrinking fraction of our business will depend on ITC and ITC even 30%. If we are doing double digit cost reductions every year, two years from now, we should be able to offer our customers what we need to offer. So we focus more on what's in our control and push that hard and we are confident that we can run a business with or without subsidies. Hi, thanks for taking my question. Want to touch on the services margin, can you give us some additional color there? When do you expect to get to break even there? And also, can you touch on sort of the, the time or the length now for Module life when you do the change out? Sure. So Biju the service margin is, right? Their business is impacted by the same costs that we've had on the product side, right. 60% to 70% of our service costs is around that replacement module. That happens generally in the four or five or six years. And we've seen an extension of that each time. So as we look at our service margins, for this year, they're not where we wanted them to be, there's more work that we need to do on that portfolio. But I would tell you that the that the most significant contributor of being off where we expect it to be, is really around the first product cost, translating over into the replacement power module. As we do the work on the cost down and I was talking to Colin earlier for the product that's going to translate into the service margins, and get us and get us back to where we need to be going forward. Our expectation is still that we're pricing our new deals all at 20%. And we expected in the middle part of this decade around 2025, we shouldn't be at that 20% product margin, or sorry, service margin, that's still our expectation for that business going forward. And particular, on the replacement of the power modules. Remember, we're replacing power modules, not when they're at end of life, we're replacing the power module within the service contract when it's economically make sense in order to do that. So we've seen an extension of that every year. And what we're shipping today has a much longer life than what we would have shipped four or five years ago and as part of overall on our cost down and why we're so confident in this business as being a really good annuity. As we go forward on it's having a sizable growth, as well as a really attractive margin. Good afternoon. Thank you for taking the questions. Apologies if I missed this somewhere in one of the releases, but how many acceptances do you expect during 2023? And how should we think about the geographic mix for your revenues or shipments during 2023? Thank you. Yes, so I don't we didn't get guidance on acceptances. Nor do we really want to -- it's not something I'm going to focus on going forward. And the reason is this, as we introduce different applications on our current platform, the power rating associated with that's going to be different. So where two or three years ago, I could have told you we shipped 188 megawatts of revenue, because we're shipping all natural gas servers globally, as you go forward, and you begin to think about deliveries of electrolyzers marine other things the power ratings with those are going to be different, micro grids, all of those things are going to get out for going forward. So I would say, as you looked at my revenue growth projections for next year, and you look at product and service, you can estimate from that what you think volumes are going to be price is going to be constant over the period. [Indiscernible] Hi, good afternoon. Something that you've talked about in the past is just the time lag between when you win new business and when the profit is actually delivered? Just because of the degree to which you're, you're sold out in advance of your production? And can you give a little insight into sort of with the current backlog and how and with what will translate into revenue recognized this year? What sort of era or horizon of pricing is going to be, you know, being booked being realized this year? Just to kind of clarify me and sort of there, there may still be upside on pricing that you're getting in the marketplace now, that is still going to take a while to make its way into revenue? Yes. So no, I would tell you that even over the course of the three years that I've been here, the timeframe between when we identify an opportunity to when we contract to ultimately when we deliver continues to shrink. I would say our impatience is always that it's too long, too complicated. And from a process capability standpoint, we keep going to continue to lean that out and make that much more predictable. So what we're seeing today and what we’d expect were traditionally almost all of the backlog would be translated to revenue. In the following year, we're seeing opportunities that booked early in the year and may lead to power, especially in the time to power space much sooner contracting that time period that we've seen, we've seen historically. But on the pricing side, we like where we're seeing in the market right now. We're able to provide a value product to our customer at a premium, a lot of places to where, where other types of technologies would be at. And we expect to continue to provide a lot of value for our customers, and continue to look to make sure that our margins are met while they're meeting their economic objectives on it forward, too fancy way for me to say I don't expect a lot of price compression here. As we move forward, people still recognize the value of our product. And we've been holding our price. And we as we take costs down that should expand our margins. Yes. Hi, thanks for taking the question. Just if you could tell us a little bit more about your international versus domestic revenue breakdown going forward? How should we look at that? If you could just give some color like to compare and contrast that to like, what applications are being used? What are the drivers? What the margins? How should we look at the two compare and contrast the two? So, Sinha for the year, right, we went in. I kept saying we were doing a lot of our Korea shipments earlier in the year because we were capacity constrained. We wanted to make sure we met our contractual obligations to get to them to their volume for the year. And I told you, by the end of the year, we'd get it back to our historical levels. We're about where we were a year ago on our international versus our domestic shipments. Listen, going forward, I would expect that as a percentage, the U.S. will be smaller, not that we don't expect to grow very aggressively within the U.S. But we're very, we're very focused on growing and to continue to grow into Korea, and to grow in Europe and other parts of Asia. So my expectation, as we go forward that you'll begin to see more and more of that bar be international versus domestic, while the size of the overall bar increases, and the domestic component continues to increase at a really healthy clip. What we're seeing today for returns is we really work are not interested in entering a country today, that does not provide us both components of an opportunity to grow, meaning they value our product and there is a need for it, and we can sell it and get a healthy return for the shareholder in that growth. So when we compare opportunities back and forth, it's really just that where do we want to put our precious resources? Where do we want to apply our capacity for? And how do we make sure that we're driving the most profitable growth as we go forward? And if a country is not ready for us yet, or territory is not ready for us yet, either because they don't have they don't value the product or they don't have an incentive, or we just not yet met their price point, then that's okay. We'll wait and we'll enter that market in the future. There's more than an -- much opportunity for us to grow. We're not going to reduce our profit margins or expectations on growth and just to simply enter a new territory. Hey, good afternoon, guys. Congratulations on the quarter. And KR in is kind of in his remarks mentioned kind of 100 megawatts of time to power projects. I was wondering like, does that include and does your backlog reflect? I think you guys are working on like 70 megawatts, 75 megawatt project in Oregon with Amazon. Yes, we have we have these times, somewhere close to 75 megawatts contracted with Amazon Web Services. And the details of that in terms of commercial agreements like any other commercial agreements, we will not discuss. But I think it paints a larger picture if you just step back and think about this right. The data center market along with the data transmission network operators put together are somewhere in the neighborhood of 600 terawatt hours of power consumption and growing at a rapid. If the two put together were, as a fraction of the total global power consumption would be somewhere near, nearing 4% of global power consumption, it’s a huge opportunity. And we are engaged with both sectors, data centers as well as data transmission network operators. And these fields [Ph] is an amazing market. Now, if you just look at them growing at that clip, and consuming almost 4% of electricity, there is no industrial sector that is more responsible and cleaner than they are. If you take the entire global PPAs for renewable energy, roughly 30 gigawatts in 2021, 15 gigawatts of that 30 gigawatts, one has came from Amazon, Microsoft, Meta and Google for hyper scalars. These hyper scalars do everything they can to procure every electron of renewable energy that's available. And this is the power of and they need reliable energy right where they need. And they come to us for that reliable 24/7 energy, not only today with the fuel that's available, but for the future, because we can transition them to a greener fuel when they need it. So we're super excited about the opportunity. The 100 megawatts includes that. Hi, thanks for taking my question. Maybe just a question just on evolution of policy, you know, you've had, four or five months and think about the IRA a little bit. Is there been any kind of evolution and thinking of the opportunities that are embedded in there or any kind of fundamental questions that need to be need to be answered? And then then maybe tying it in with the hydrogen hubs that have been, narrowed down, I guess just what sort of role has Bloom kind of envisioned and participating in the ones that you know that at least we know that you're associated with? It's Greg, so let me start. Listen, we're as excited as the first day that the inflation reduction came out on how it applies to a number of parts of our business, whether it’s the ITC we're having conversation we're having before a hydrogen PTC credit, carbon capture on 45Q, on size and scale and in a lot of different biogas and the whole waste energy space. So we're extremely bullish on it in the U.S. And then as you travel the globe and go to different countries, they are very excited that the United States is taking a leadership position on this, and they're anxious to get incentives to help them compete in their economies and globally. So it's definitely bringing the rest of the world along and accelerating their incentives to make sure that happens. So we're, we're as bullish as we were on day one, and we're excited about it, and how it plays through. Really, at this point, it's just making sure that we're driving through all the questions that need to get answered going forward as we take that law and change it into practicality. So the treasury department, the IRS is very busy making laws and rules based on that. So they came out some around with ITC, at the end of the year. We're excited around learning more about the Made in America and the, in the energy economies, disadvantaged economies that move forward areas and get those rules made, there's some rules around transferability of tax benefits and refundability, those types of things. So we're really excited about it and kind of within my world, it is all just making sure that we're able to maximize those benefits as incentives for our customers as we grow. So we're really excited about it remaining. And we think as it translates, it's accelerating like we said, the commercial velocity of the of the funnel. And it is not if right, it is when and how soon, when the hydrogen economy really takes off. We have the double play. We have the best device to convert that hydrogen to electricity. We have the best device to take heat coming from a waste heat to be able to use and provide and generate cheaper hydrogen, and if it's a pure play electricity, we still are a lot more efficient than any other technology out there. So we are super excited, no matter which direction the world decides to go. We are ready to take, take the challenge on. Thank you for taking the question. In the context of other jurisdictions following the U.S. lead and driving CleanTech manufacturing, the European Union is talking about this green industrial plan. Based on that, do you have any appetite to establish a manufacturing footprint in Europe, either for fuel cells or electrolyzers? At this point, what we do and how we think about where we set up our factories, and what we do depends on where the market develops. What we did in Korea, is do the final assembly of our products for that market and any neighboring markets in Korea because they created a huge market for us. We will do something very similar in Europe, when the timing is right. But it has to get to a certain scale. This is not a field of dreams. You don't build it hoping they come. We actually have a factory with which we can supply. And then when the actual market is there, we can put the factory to be able to serve it even better. That's our approach. [Indiscernible] sitting in for Maheep. We have a question. As you guys ship different product types and sizes into different markets. How should we think about capacity utilization at the factories this year? We got two factories today, right. And then we have the joint venture for assembly in Korea. But the vast majority of our stack. manufacturing capacity is here in in California. We had 300 megawatts with our Sunnyvale facility that remains. We've added 300 megawatts in the first phase of our Fremont facility. That brings us to 600 megawatts. And we have the opportunity to add another 600 megawatts in Fremont as part of the initial part of our build out here. We'll decide later on whether or not it's economical to build more in Fremont. But our initial plans was to take it to a gigawatt to start. That gives us a gigawatt or 1.3 gigawatts total of fuel cell capacity. And if you convert that to electrolyzer capacity, you're knocking on the door, three gigawatts at that point. In our assembly operations in Delaware, we have the opportunity to build gigawatts of capacity in our fuel cells. Then last year, we announced that we also have an assembly line there for our electrolyzers on it. So we are ready to go we have about another $40 million to $60 million to invest in Fremont to get us through those levels. And as KR spoke before, the payback on that is less than a year fully utilized. So we have, we have the ability to scale very quickly, in order to meet demand. And then from there, we'll look how we add more capacity going forward. But that should take us through at least for the framework for this year and the next year without needing to add any additional staff capacity. Good afternoon, Greg. Good. Two quick ones. I might have missed this. But I was wondering, could you give us the percent of the 2.8 billion and systems backlog that is from SK as part of the taker pay? And then, the second question is on the gross margin. Could you give us a walk between Q3 and Q4 the strong performance other than price. Was there any other factors that lead to the gross margin result that you just printed? Yes. So Jeff, so last year, we talked about the three year take or pay being 1.5 billion or 500 megawatts of capacity, we shipped one year of that. So out of what we shipped, it gives us about two years left, it's not quite a third, a third a third. So if we shipped 120 megawatts or so this year to eco plant, meaning 22, the remainder of that is in the backlog going forward. Let's have a walk from the third quarter to fourth quarter. There was a lot of opportunity on price and we talked about that coming into the quarter. Not only did we have the opportunity with PPA 4 in the repowering there that were able to do it nice pricing. We also talked about having an opportunity where we're just frankly prioritizing transactions and opportunities that were to the right of the mean. We like the mean on our overall gross margins in our backlog, but we definitely prioritize to make sure that we were able to get to our commitments for the year. And then on top of that it's Fremont coming in. If you look and do a comparison, you could do this based off the supplementals, we provided for third quarter and fourth quarter, you can see that we were able to bring down the cost per kilowatt of our machines up just shy of a couple of $100. So price was obviously a big impact as well as cost coming down, and then you can isolate the other components of it. Hi, I just wanted to follow up to get some additional thoughts for you specifically on biogas. I'm just interested in biogas driven projects. And if you're seeing any trends in, either deal structure your financing or ownership, particularly to those as wondering if, if there are any projects you could talk about, in general terms that come to mind that are that seems sort of novel or innovative in that space. Good. Hey, thanks. Noel, it's Greg. K. R. I'm going to pass this one over to you. This is the last question. So just end with your final comments after waste energy. Thank you, Greg. So Noel, thanks for that question. Here is, let me give you an example. There are two ways to think about waste energy for us. One is the traditional what we have talked about before of generating biogas and being able to use that biogas on site, whether it is using animal waste, whether it is using landfill waste, and/or like water treatment plants. But then the really interesting opportunity that we are seeing, and these are fairly good sized opportunities being developed across the country. And they're all being developed to meet the LCFS standards, and provide a biofuel as well as for SaaS, and for the aviation fuel. And here, they command a premium. And the premium they command increases exponentially as your carbon intensity of the fuel you produce goes down. So it's inversely proportional. In most places there, they find it attractive to make either SaaS or this LCFS fuel, say in the middle of Iowa to be able to ship it to California. They are, they have the choice of a really carbon intensive grid electricity at reasonable prices, or Bloom at a premium to that reasonable price in that state. But the opportunity, they have to put Bloom and capture significant value on the other side for the fuel based on the carbon intensity is very high. So this has become a very attractive value proposition for developers that want to do it. In addition, because they can capture all the carbon dioxide and the heat coming off our systems, and pipe that into their biofuel processing refineries, that becomes a game changer. And so the novel attractive thing is Bloom for that synthetic fuel is a source of almost zero carbon electricity, because they use the carbon capture. It is the use of electricity, which now is zero carbon, and then the use of heat. So that's a huge one. And with that, let me conclude by saying, Look, you're seeing a company that is firing on all cylinders. Our top line growth has been phenomenal this last year. And we are not only happy with the volume that we booked, but the quality and the diversity of that pipeline that we have, from a geography perspective, from an applications perspective, and from the industries we serve, and the growth opportunities we see in each of those markets, and segments and industries and customers. If you look at how the team has performed internally within the company, we're extremely happy with how we navigated a very difficult environment and delivered on the promise of doubling our capacity on time. We couldn't have reached our Q4 revenues if the factory was delayed by a quarter for example. So you're looking at a company that's firing on all cylinders and we really think this is just the beginning of a great journey. And the timing on the market is fabulous. And this didn't happen by accident. This is a company that's been building and waiting for this moment for the last 20 years. Now, the externalities have aligned to both accept and value, the innovation we bring, which is for both success and significance. So thank you for being part of the journey and we really appreciate it.

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Good day, and welcome to the Annaly Capital Management 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 today's event is being recorded. Good morning, and welcome to the fourth quarter 2022 earnings call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our fourth quarter 2022 Investor Presentation and fourth quarter 2022 Financial Supplement, both found under the Presentation section of our website. Please also note this event is being recorded. Participants on this morning’s call include David Finkelstein, Chief Executive Officer and Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Deputy Chief Investment Officer and Head of Residential Credit; and Ken Adler, Head of Mortgage Servicing Rights. Thank you, Sean. Good morning, and thank you all for joining us on our fourth quarter earnings call. Today, I'll provide an update on the market and how it impacted our performance, then discuss the macro landscape, our portfolio activity this past quarter and conclude with our outlook for each business as we begin the new year. Serena will then discuss our financial performance, and we are also joined by our other business leaders to provide additional context during Q&A. Starting with the market backdrop, risk assets ended 2022 on a more constructive note, driven by improved inflation data and a moderation in the size of Federal Reserve rate hikes. Given the cumulative hikes delivered thus far, inflation and wage growth are slowing and the decline in volatility has improved investor sentiment and led to fund flows into fixed income. Mortgage and credit spreads tightened from the peak spreads exhibited in October with November representing the best month of excess returns in the history of the Bloomberg MBS Index. The strong finish to 2022 helped drive our 8.7% economic return for the quarter and our economic leverage decreased from 7.1x to 6.3x quarter-over-quarter, attributable to a modest decline in portfolio size as well as book value appreciation. Turning to the macro environment. Following the 25 basis point hike last week, the Fed expects to hike a couple of more times and hold interest rates at elevated levels, subject to inflation and labor market developments. This scenario should make for a more stable environment for fixed income in 2023, with certain risks out the horizon remain. But one, the failure to result the debt ceiling has the potential to cause disruption in markets. And moreover, although inflation is cooled in recent months, these readings offer little information about the medium-term run rate of inflation once base effects dissipate. But all considered, we are optimistic, but still cautious on the outlook. With respect to the housing market, activity declined meaningfully over the course of 2022 given the upward shock in mortgage rates and the resulting reduced affordability. Existing home sales, for example, are now a third lower than at the end of 2021. However, the slowdown in activity is coincided with a reduction in available inventories. According to Redfin, new home listings have decreased 28% year-over-year as borrowers opt to stay in their homes in the current higher rate environment. And as long as the labor market remains robust, we foresee few core sellers keeping inventories below historical averages. As a result, home prices have been slower to decline than initially expected with the Case-Shiller National Home Price Index falling 3.6% from its peak level in June, though this dynamic may change in the spring selling season. Nevertheless, we feel good about the state of the housing market as long as the labor market remains strong, consumer balance sheet and lending standards are sound and the shortage of supply supports prices, all else equal. Now shifting to our portfolio activity during the quarter. Within Agency, we continued to shift modestly up in coupon to take advantage of wider spreads and improved carry in production coupons. We grew our allocation of 4.5 and higher, which now represent over 50% of our portfolio, up from 40% last quarter. We believe historically wide nominal spreads in these coupons provide more than adequate compensation for taking on the incremental convexity exposure relative to lower coupons. In addition, we reduced our exposure to TBAs as rolled specialists dissipated over the quarter, and we are likely to favor pools over TBAs going forward given their better return profile. Regarding prepayments, the mortgage universe remains firmly out of the money and even with mortgage rates trending lower towards 6%, only 1% of borrowers have an incentive to refinance, meaning our convexity risk near the lowest levels we've seen over the past 5 years. Our portfolio paid 7.5 CPR in the fourth quarter, more than 30% faster than the 30-year universe and our weighted average seasoning of 42 months and our WACC roughly 1% higher than the broader Agency market positions us well for the current discount environment. Our hedge portfolio kept us well insulated as interest rates reached a multi-decade high in the fourth quarter and the notional balance of our hedges remains in excess of our liabilities as seen in our 107% hedge ratio. Within the portfolio, we rotated from treasury futures into SOFR swaps given the contraction in swap spreads. And going forward, we will remain defensively positioned on the rate front until the path of policy becomes clear, although we are encouraged by the lower rate volatility seen year-to-date. Now moving on to residential credit. Our portfolio ended the fourth quarter at $5.0 billion in market value, essentially unchanged quarter-over-quarter, and the strategy currently represents approximately 19% of the firm's capital. Non-Agency credit participated in the broader risk on rally with benchmark below investment grade stacker M2s, 125 basis points tighter and AAA non-QM spreads, 20 basis points tighter. Whole loan spreads did lag the tightening in securities, however, resulting in our transactional activity being predominantly focused on residential loans where we settled $685 million in loans during the quarter. In the current decelerating housing market, our loan business represents our preferred approach to investing in the resi credit market given our ability to control our credit strategy, our partners, the diligence process and pricing. We maintain a focus on preserving the credit quality of our portfolio with our fourth quarter whole loan acquisitions exhibiting characteristics consistent with the quality of our GAAP consolidated residential whole loan portfolio. Of note, our underlying borrowers have seen their mark-to-market LTV improved to roughly 58% on average. Our OBX securitization platform had a record year of issuance, supported by our correspondent channel, acquiring nearly $2 billion in loans during the year. And since the beginning of 2022, we closed 17 securitizations totaling $6.6 billion and generated $760 million of proprietary assets with a low to mid double-digit return profile, utilizing minimal recourse leverage. With credit spreads tightening post quarter end and capital markets execution improving year-to-date, we expect to continue accessing the securitization market to efficiently fund our whole loan portfolio. Now to discuss MSR, as we noted during last quarter's earnings call, we were measured in our approach to further growing our holdings, resulting in unit activity in the fourth quarter. Over the course of 2022, however, we have significant growth in the strategy, increasing our portfolio by nearly 3x to $1.8 billion in market value and ending the year as the third largest buyer of bulk MSR in the market for 2022. We added new originator partners, expanded relationships with sub-servicers, and put in place new dedicated financing as an additional source of liquidity to support future growth. Our focus on very high credit quality, low loan rate MSR has proven to be valuable. The portfolio paid 3 CPR for the quarter and experienced minimal delinquencies, generating stable cash flows while providing a hedge to current dynamics in the housing market. Now shifting to our outlook. We are encouraged by the supportive investing environment for each of our three strategies, but we remain deliberate with respect to our leverage profile and capital allocation strategy considerate in the aforementioned risks to the operating environment. Within our core Agency business, we see a strong setup for the year with historically attractive nominal and risk-adjusted spreads coinciding with declining interest rate volatility, a more predictable prepayment environment and healthy financing conditions. As it relates to the supply and demand picture, higher rates should mitigate Fed runoff in Agency MBS supply, while demand expectations appear more mixed. Buying from banks and overseas investors is likely to be subdued thus further spread tightening will be reliant on inflows from the money manager community. Also to note, should recessionary risks increase, Agency MBS have typically outperformed other fixed income sectors and times of economic weakness. Accordingly, we plan to maintain our overweight positioning and Agency relative to our long-term capital allocation target though we remain committed to expanding our housing finance footprint and are proud of the considerable progress we have made to date. In residential credit as the leading nonbank issuer of Prime Jumbo and Expanded Credit MBS, we anticipate maintaining our market leadership, given our capital and certainty of execution and we believe our portfolio should remain relatively well insulated from a further deterioration in housing fundamentals as a result of our robust credit standards. Furthermore, our securities portfolio provides an additional lever for opportunistic growth when returns are accretive. In an MSR, we expect there to be significant supply in the market, given sustained monetization efforts by originators, while we are comfortable with the scale and quality of our current portfolio, we have capacity to opportunistically add MSR should this elevated supply lead to more attractive returns. Now before handing it off to Serena, I wanted to make one last point as it relates to earnings available for distribution. While we generated EAD that covered our dividend this quarter, we witnessed the moderation discussed in recent quarters, and we anticipate some further pressure on EAD going forward. As a result, subject to determination by our Board, we expect to reduce our quarterly dividend in the first quarter of 2023 to a level closer to Annaly's historical yield on book value of 11% to 12%, which compares to the approximately 16% yield on book we are paying today. We believe this decision allows us to appropriately manage the portfolio within conservative risk parameters while also delivering a more sustainable yield that is competitive with the peer set and broader fixed income benchmarks, which has always been our objective. Overall, we are constructive on each of our businesses, and we are enthusiastic about the multi-pronged platform that we have built out over recent years, but we remain vigilant and careful stewards of our shareholders' capital. Thank you, David. Today, I will provide brief financial highlights for the quarter ended December 31, 2022, and discuss select year-to-date metrics. Consistent with prior quarters, while our earnings release discloses GAAP and non-GAAP earnings metrics, my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. Our book value per share was $20.79 for Q4, which increased by $0.85 per share for the quarter, primarily due to basis timing amidst slower rate volatility. Strong gains on Agency investments of approximately $1.61 per share, contributed significantly to the book value appreciation for the quarter. These gains were partially offset by losses in our derivative positions of roughly $0.60 per share and lower valuations on residential and other investments of approximately $0.14, primarily related to our MSR portfolio. After combining our book value performance with our fourth quarter dividend of $0.88, our quarterly economic return was 8.7% compared to negative 11.7% in Q3. We generated earnings available for distribution of $0.89 per share for the fourth quarter. The $0.17 reduction in AID compared to last quarter is attributable to the continued rise in repo expense and lower TBA dollar roll income due to less specialness. Partially offsetting these factors, however, was the approximately $146 million increase in swap income quarter-over-quarter and a further rotation into higher-yielding Agency MBS. Given the continued increase in financing costs, runoff of swaps and the mismatch between economics and earnings related to futures. All things equal, we currently expect further pressure on EAD in the near-term. Average yields ex PAA were 58 basis points higher than the prior quarter at 2.82% due to the previously mentioned acquisition of high-yielding assets and a further decline in amortization. The factors that impacted EAD are also illustrated in NIM for the quarter with the portfolio generating 190 basis points of NIM ex PAA, an 8 basis point decrease from Q3. Net interest spread does not include dollar income. Therefore, the news was comparable quarter-over-quarter at 1.71% versus 1.7% in Q3. Turning to financing. Despite market volatility throughout 2022 in the rates market, funding markets for our Agency and non-Agency security portfolios remained resilient and ample. With current expectations that the Federal Reserve is in the final innings of the hiking cycle, liquidity in Agency funding markets should extend out the curve in future quarters. However, we currently continue to see liquidity concentrated in overnight and term markets out to the Fed meeting date. With this landscape in our mind, our Q4 reported weighted average repo days were 27 days, down from 57 days in Q3. Our sustained assets and procuring dedicated financing for our growing whole loan and MSR businesses continue to enhance the firm's liquidity profile while generating capacity to softer growth in these respective businesses. As David mentioned previously, we continue to be a programmatic sponsor of OBX securitizations. Pricing and settling an additional 3 transactions from the end of Q3. As of the end of Q4, our disciplined approach has resulted in 90% of our GAAP consolidated whole loan portfolio currently being funded through securitizations and a weighted average cost of funds of 3.38%, approximately 260 basis points below the current non-QM cost of funds. In addition to the below-market financing rate of our securitized debt, 95% of the debt is locked in at a fixed rate. Shortly after quarter end, our team also took advantage of the robust liquidity in the financing markets to upsize one of our existing facilities by approximately $200 million to $400 million in total. We remain well positioned with ample liquidity in our residential whole loan business with $2 billion in financing capacity across several diversified providers. Our warehouse utilization remains low as we finished the quarter with approximately 720 million drawn against our whole loan position. Shifting to MSR financing. With the addition of our newest committed warehouse facility recently closed, we currently have $750 million in dedicated financing for our MSR business amongst diversified counterparties with additional capacity available subject to customary conditions. As reported in Q3, outstanding advances on this business stand at $250 million, leaving us with $500 million of additional capacity at our disposal to draw against our MSR position. The continued rise in repo rates and higher average balances impacted our total cost of funds for the quarter, rising by 57 basis points to 211 basis points in Q4. Meanwhile, our average repo rate for the quarter was 372 basis points compared to 225 basis points in the prior quarter. We ended the quarter with a repo rate of 4.29% compared to 3.13% as of September 30, 2022. And as previously mentioned, swaps positively impacted cost of funds during the quarter by approximately 76 basis points. We ended the year with an OpEx to equity ratio of 1.4%, which is at the low end of the range discussed on previous earning calls, reflecting cost savings from the disposition of our MML and A Creek businesses. Lastly, we modestly increased our liquidity profile with $6.3 billion of unencumbered assets compared to the prior quarter of $6.1 billion, including cash and unencumbered Agency MBS of approximately $4 billion. The increase in unencumbered assets primarily came from a reduction in leverage on resi credit and the settlement of an MSR package in October. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Bose George with KBW. Please go ahead. Sure, Bose. Good morning. So as of weeks in book was up roughly 8% to 9% post payrolls, we've come off just a touch and as of last night up, roughly 7%. And then talk about normalized leverage. Is the current level of leverage kind of where you're comfortable unless or until things change? It is for this capital allocation. It's going to be dependent upon how we allocate our capital, but with 67% agency. The other one-third allocated between resi and MSR. We feel good about the level of leverage. We do have the capacity to take it up given our liquidity, but we're very comfortable with it right here, Bose. Thanks. Just a little bit more about the dividend. Obviously, book value has been incredibly volatile and just how you kind of think about kind of setting and targeting that 11% to 12% yield on book in an environment like this where book is moving around? Sure. Good morning, Doug. And look, it's a function of where asset yields are and the leverage we apply. And just to run through it, in the agency market, current mark-to-market levered returns range between 13% to 15%, depending on what collateral we're buying in residential credit, looking at OBX securitization and retained holdings with very modest leverage. We're talking 12% to 15%. And then in the MSR market, unlevered returns around 10%. And so we get to an average yield in the market today of around, call it, 14%, 13% to 14% across the assets and 135 to 145 basis points to run the business, which we think is incredibly efficient, brings you down to that level of 11% to 12% roughly. And Serena, you want to add something? Yes. And Doug, we've always been really clear that our dividend policy is to set a dividend that is consistent with our historical yields, but also something that we can consistently achieve. And so we do, as David mentioned in his remarks, that we believe that what we've referred to as a very sustainable level, given new money returns that David, just walk through. Great. And then just one follow-up on the returns you just mentioned, David. I guess, are those the returns that you see at your current leverage? And is there flexibility or risk or opportunity to kind of move leverage up or down over time? And obviously, how that impacts returns? Sure. There is. So there is flexibility to move it up or down, but that is using the agency market, roughly 8 turns of leverage which is approximately where we're currently levered in the agency portfolio. And just to break it down a little bit in terms of what we're buying. Generally, we're buying production coupons, and we're somewhat barbelled between really low pay up, but what we think to be good quality pools, for example, new production, retail bank service pools with low WACs coming to pay up of just a few ticks, and that's going to get you on a levered basis, a little over 15%, but we're obviously considerate of the possibility of a rally in the sensitivity of production coupons to prepay in a rally. And so we are kind of barbelling that with higher-quality pools. For example, high loan balance collateral and [indiscernible] coupon comes at a cost of about two points roughly, and the levered return on that is around 13%. So you take the average and you get to 14%. In resi, and Mike's done obviously a number of securitizations over the recent past and the retained bonds with around 1.5 turns of leverage and up to that low to mid-teens type returns. In MSR, we currently apply very, very minimal leverage to the portfolio simply a liquidity source. But the fact of the matter is we do have the capacity to lever that portfolio. And when you look at the composition of our MSR and the loan rate, given how deep out of the money it is, that's very different than production coupon MSR from a variability of cash flow standpoint as rates move. The fact of the matter is if rates can move a meaningful amount, you're not going to change the cash flows on that MSR that much. And so all else equal, you're not going to see a lot of price volatility we expect. And so as a consequence, you do have the ability to apply leverage to that, but we currently don't. Does that help? Hey, thanks. A question on the MSR market. It seems like there's the potential for a fairly large amount of MSRs to maybe come to market over the next few months. Can you talk about like how you think that will impact the MSR market and valuations overall? And if you think there's going to potentially be an opportunity to deploy a significant amount of capital into bulk MSRs? Thanks. Sure. I'll start it off, and good morning, Trevor, and then I'll hand it off to Ken. So yes, there is – as I mentioned in my prepared remarks, we do expect a fair amount of supply to come to market. Last year was obviously quite a heavy year, and we took advantage of it. But the supply will continue in terms of how it can impact the market and pricing. We do think there's a lot of capital that is ready, including ourselves. But if you look at our mark for Q4, we did mark our MSR down modestly, and that was a function of that pending supply. Ken, do you want to elaborate? Yes. I mean just – thank you very much. Last year was record supply for the industry and the flow’s were somewhat balanced, as you can see where much of it went, including ourselves. And 2023 is certainly shaping up to be a higher amount of supply than 2022, and we're evaluating several opportunities, and we're opportunistically going to participate in those. So yes, we're ready. And as Dave mentioned, that was the reason for the mark up. Exactly. And also why we remain relatively quiet last quarter. It's currently 15% of our capital, which is lower than we like, but we're going to remain patient and wait for the opportunities to come to us. Yes. Just one last thing. I mean, this markdown, I mean, it's just a pure technical. The cash flows are higher in quality and certainty than they've ever been because of the [indiscernible] of the collateral. So you're certainly looking as a great opportunity. Hi, good morning. Thanks for taking my question. Just one on the potential dividend change. Is the assumption there that the underlying economic earnings over the near term is not going to change much. In other words, you're assuming that Annaly is not going to get a lot more aggressive in terms of investment or leverage over the near term even if the rate volatility, for example, were to settle down somewhere in the middle of the year? Thanks. Well, we certainly could get more aggressive if the market is cooperative. But the way we look at it, again, is based on our current leverage and what returns are, Ken, and that's where we feel the market is offering returns for this business model. Got you. Very helpful there. One follow-up. You touched upon this in the prepared remarks. Wondering if you just get your thoughts on what you think could be potential implications if the government does not resolve the debt ceiling? Thanks. Yes. So look, it's very difficult to handicap the implications, Ken, it is something that we should pay attention to. On one hand, the market did rally in 2011. But look, it's a different world right now and you only have to look back to what occurred in September with the U.K. situation on the trust tax cuts, and you saw tenured guilds, for example, sell off 120 basis points based on somewhat of a lack of confidence. And it is somewhat of a precarious circumstance. In D.C. right now, I think we've all seen what's going on down there, and it's a little bit disconcerting. Our base case is that this gets resolved and it's not going to lead to certainly passing the X state without a resolution. But look, we have a contingent down in D.C. currently that is larger than it was in 2011 in Freedom Caucus and they're playing for a different outcome. It's more of a base outcome and even mainstream members of both parties are thinking about the broader country. But it's a little bit uncertain. We do think it's going to be resolved. But nevertheless, there's a lot of – there's a lot of outcomes that could occur. And so that's one of the reasons why we're being somewhat conservative. Hi, everybody. Thanks for the question. Just a follow-up on the MSR conversation. So moving forward, would you look to grow that book by allocating more equity or increasing the leverage there? It just sounds like you have some capacity. How are you thinking about that? Yes. We would expect more equity allocated to it, certainly with the option to apply a modest amount of leverage. As Serena talked about in our warehouse financing, we have an upwards of $1 billion worth of capacity. And so that will remain an option. But generally speaking, it's a liquidity arrow for us in the quiver, and we do expect to add more equity to the sector. Okay. And then in terms of capital allocation between Agency MBS and resi credit right now, are you leaning one way or another? Generally, we're a little bit more fond of Agency, our base case, notwithstanding some of the risks out of horizon is that volatility does continue to come down, which would favor Agency. And while housing has outperformed our expectations over the past six months modestly. There is a little bit of risk with the sector, particularly as we do get into the spring selling season, and we'll really see what kind of implications mortgage rates and other factors have on home prices. So we're a little bit cautious, but with Mike's residential securitization business and the acquisition of whole loans. That collateral, we're very comfortable adding particularly given his lending standards and the ability to control all aspects of the acquisition of a loan. So we'll add, but generally, we're marginally favorable towards agency right now. Okay. That's helpful. And just lastly, on the nonsecuritization market, execution has gotten a lot better since Q4. Just any color that you can kind of add there on just what you're expecting? And are these level of spreads that you're seeing there sustainable and just what could move it one way or the other moving forward here? Thanks. Sure, Vilas. This is Mike Fania. I would say, yes, I think a lot of what we saw in 2022 was gross issuance in non-QM. It was at $39 billion, $40 billion. It was a record for the sector. So consistent with risk off plus the technical landscape, it certainly pressured the non-QM market pressured non-QM spreads. I think what you’ve seen to start is that there is a high percentage of the market that seems to be pricing in a soft landing, and you're seeing that in terms of list on from probably late October, November, to where we sit today. And then from a technical landscape, supply will certainly be significantly lower than what it was last year. We think supply in non-QM maybe $25 billion to $30 billion this year. So with that, I think investors have realized that there is a scarcity of the asset class. And we've seen spreads now tighten to probably, call it, 150 over on the AAA, whereas the Ys, we were probably mid-high 200s. So we do think that it can be sustainable to the extent of the macro environment. Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Finkelstein for any closing remarks. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.