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Good morning, ladies and gentlemen, and welcome to the Brighthouse Financial Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Carmen, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the conference call. [Operator Instructions] As a reminder, the conference is being recorded for replay purposes. Thank you, Carmen, and good morning. Welcome to Brighthouse Financial's fourth quarter and full year 2022 earnings call. Materials for today's call were released last night and can be found on the Investor Relations section of our website. We encourage you to review all of these materials. Today, you will hear from Eric Steigerwalt, our President and Chief Executive Officer; and Ed Spehar, our Chief Financial Officer. Following our prepared remarks, we will open the call up for a question-and-answer period. Also here with us today to participate in the discussions are other members of senior management. Before we begin, I'd like to note that our discussion during this call may include forward-looking statements within the meaning of the federal securities laws. Brighthouse Financial's actual results may differ materially from the results anticipated in the forward-looking statements as a result of the risks and uncertainties described from time to time in Brighthouse Financial's filings with the U.S. Securities and Exchange Commission. Information discussed on today's call speaks only as of today, February 10, 2023. The company undertakes no obligation to update any information discussed on today's call. 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 on a historical basis 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. And finally, references to statutory results, including certain statutory-based measures used by management are preliminary due to the timing of the filing of the statutory statement. Thank you, Dana, and good morning, everyone. Brighthouse Financial's fourth quarter results were a strong finish to a successful year in which we maintained a robust capital and liquidity position, exceeded our total annuity sales expectations and continued to return capital to our shareholders through our common stock repurchase program. Before I provide comments on the fourth quarter results, I'd like to take a moment to reflect on the year. 2022 was a difficult year for markets with equity and fixed income indices down significantly amid continued high inflation. While market performance was a negative for separate account returns, our industry benefited from interest rates up over 230 basis points as measured by the 10-year U.S. Treasury. Despite the challenging environments, 2022 marked a year of significant milestones for Brighthouse Financial as we continued to execute on our strategy and remain disciplined in our financial and risk management. As I have said in the past, one of our top priorities is balance sheet strength, which we continue to display in 2022. As we communicated previously, in the rising interest rate environment earlier in 2022, we took the opportunity to add a substantial amount of low interest rate protection. We took additional actions through year-end 2022 to further enhance our interest rate protection and our shift to a more strategic interest rate hedge positioning. These actions reflect our continued focus on protecting our balance sheet, optimizing our distributable earnings and supporting the growth of our franchise through a broad range of market scenarios. We delivered another record year of annuity sales with total annuity sales of $11.5 billion for full year 2022, up 26% compared with 2021. These strong results demonstrate the strength and complementary nature of our product suite. And in August of 2022, we launched a new annuity product, Brighthouse Shield Level Pay Plus expanding our flagship Shield Level annuity suite. This product is specifically designed to help meet an important need in retirement planning, income that lasts for life. We are very pleased with the addition of this product to our suite of Shield annuities and remain focused on offering a portfolio of products that help meet the evolving needs of clients. Another significant milestone that we achieved in 2022 was the completion of all our major system conversions. This marks the full implementation of our future state operations and technology platform and the end of establishment costs. This accomplishment allows us to increase our focus on growth, the evolution of our business mix and supporting our distribution franchise. These strategic and operational milestones have further enhanced the strong franchise that we have built at Brighthouse Financial. Additionally, in 2022, we returned capital to our shareholders through the repurchase of $488 million of common stock, which included $93 million of common stock repurchased in the fourth quarter. As of year-end 2022, we have reduced the number of shares outstanding by 43% since we began our common stock repurchase program just over 4 years ago in August of 2018. I'm incredibly proud of all that we achieved in 2022. I would once again like to thank our employees for their hard work and dedication. And I would also like to thank our distribution partners for the important role that they play in our success. Now moving to fourth quarter results. Our balance sheet and liquidity remained strong in the fourth quarter. We estimate our combined risk-based capital or RBC ratio was approximately 440% at year-end. This is at the high end of our target RBC ratio range of 400% to 450% in normal markets. Additionally, we ended the year with $1 billion of holding company liquid assets. As I mentioned earlier, full year 2022 was a record year for annuity sales and the fourth quarter was a strong contributor with total annuity sales of $3.2 billion, an increase of 36% compared with the fourth quarter of 2021. In the fourth quarter of 2022, we continued to see strong sales of our fixed deferred annuity and Shield annuity products as our complementary annuity product suite continues to meet the needs of our distributors and their clients in different market environments. As we sell the products that we offer today, offer product enhancements and launch new products while continuing to run off our older, less profitable business, we expect our business mix to continue to evolve to a higher cash flow generating and less capital-intensive business. Turning to life insurance. In the fourth quarter, we generated $22 million of life insurance sales. Though life insurance sales were down year-over-year, reflecting the headwinds from the economic backdrop in 2022, we maintained a consistent level of life insurance sales throughout the year. Importantly, we remain confident in our life insurance strategy. In 2023, we plan to introduce a new life insurance product which we expect will further diversify and strengthen our life product suite, and we will continue to focus on maintaining and enhancing our suite of life insurance products as well as expanding our distribution footprint into the future. I am pleased with the results that we delivered in both the full year and the fourth quarter of 2022. We achieved significant strategic and operational milestones, and we believe that we are well positioned to continue to execute our focused strategy in 2023. We continue to prudently manage statutory capital and target a combined RBC ratio, as you know, of between 400% and 450% in normal markets. As I mentioned, in 2022, we took actions to move towards a more strategic position on interest rate risk and we plan to continue to dynamically adjust our hedge portfolio to evolving market conditions. Regarding capital return, year-to-date through February 7, and we repurchased approximately $27 million of our common stock. We remain committed to returning capital to shareholders and intend to maintain an active and opportunistic share repurchase program. However, as we have demonstrated in uncertain market environments, we are focused on protecting our distribution franchise. To that end, while we continue to repurchase our common stock, we have reduced the level of buyback to reflect a cautious view on both the market and economic environment. As I also mentioned, with the completion of our major system conversions in 2022, we can further increase our focus on growth, the evolution of our business mix and supporting our distribution franchise. To wrap up, despite the challenging market environment in 2022, Brighthouse Financial delivered strong results. We maintained a robust capital and liquidity position, and we achieved several major strategic and operational milestones. We are looking forward to 2023 as the Brighthouse Financial franchise continues to grow and evolve to a more diversified company. Thank you, Eric, and good morning, everyone. Protecting and supporting our distribution franchise remains a top priority and our financial and risk management strategy plays a critical role. As you have heard me say repeatedly, it is our goal to maintain a strong balance sheet under a multiyear, multi-scenario framework. As our fourth quarter and full year 2022 results demonstrate, we maintained a robust capital and liquidity position through the difficult market environment of last year. At December 31, our combined total adjusted capital, or TAC, was $8.1 billion compared with $8 billion at September 30. While equity markets were down significantly for the full year, the market performance in the fourth quarter was positive, which contributed to the increase in CAC. We completed the variable annuity actuarial model conversion in the fourth quarter along with the annual variable annuity statutory assumption updates. The combined impact of these two items was relatively modest, reducing CAC by less than $200 million. Our combined risk-based capital or RBC ratio was approximately 440%, which is near the top end of our target range of 400% to 450% in normal markets. This ratio was down from an estimated range of 450% to 470% at September 30. The sequential decline in the RBC ratio is due to the strong variable annuity or VA results, which were more than offset by the impact from the model conversion and actuarial assumption update, nontrendable items, and capital used to fund a high level of annuity sales. The strong new business trends we saw in the third quarter continued through the end of the year and drove another quarter of above normal capital usage to fund growth. Growth is essential to drive our business mix toward lower risk, higher return products and away from legacy variable annuities. Therefore, we decided to retain capital at Brighthouse Life Insurance Company, or BLIC, to support excess new business growth rather than fund an ordinary dividend to the holding company in 2022. We intend to resume dividends from BLIC to the holding company in 2023. Normalized statutory earnings were approximately $500 million in the fourth quarter, which brought full year normalized statutory earnings to approximately $1 billion. We had a conservative position in the hedge portfolio for equities throughout 2022, and we benefited from the significant increase in interest rates last year. Additionally, as Eric mentioned earlier, we took the opportunity in 2022 to add a substantial amount of low interest rate protection and in the fourth quarter, extended the duration of that protection. Moving to the holding company. We ended the year in a strong position with $1 billion of cash and liquid assets. In the fourth quarter, New England Life Insurance Company, or NELICO, paid a $38 million ordinary dividend to the holding company, which was more than offset by $93 million of common stock repurchased in the quarter. As we have said previously, the nondividend flows to the holding company cover most of our fixed charges, and we do not have any debt maturities until 2027. As a life insurance company, we believe it is appropriate to have a conservative position at the holding company. Given the uncertain market and macroeconomic environments, we feel very good about our strong position at both the operating companies and the holding company. Now turning to adjusted earnings results in the fourth quarter. Adjusted earnings, excluding the impact from notable items, were $245 million, which compares with an adjusted loss on the same basis of $3 million in the third quarter of 2022. We and adjusted earnings of $416 million in the fourth quarter of 2021. On a combined basis, the notable items in the quarter had a modest impact on results. reducing earnings by only $3 million after tax. The notable items included: a $39 million unfavorable impact related to actuarial items in the quarter, which included a reinsurance recapture impacting the runoff segment and refinements of certain actuarial assumptions for the life segment; establishment costs of $15 million, as Eric mentioned, the fourth quarter was the last quarter of establishment costs as we have completed all major systems conversions; and a $51 million favorable impact related to the resolution of prior year tax matters. Excluding the impact of these notable items, fourth quarter adjusted earnings compared with our quarterly run rate expectation were primarily driven by negative alternative investment performance, partially offset by positive VA separate account performance in the quarter. The alternative investment performance in the fourth quarter drove lower-than-expected net investment income of $86 million or $1.23 per share. As a reminder, we expect an annual 9% to 11% alternative investment yield over the long term. In the fourth quarter of 2022, the alternative investment yield was negative 0.2%, which was below our quarterly expectation, though higher than the negative yield in the third quarter. As a result, net investment income was higher sequentially driven by the alternative investment returns as well as continued asset growth. The other major driver of adjusted earnings less notable items, when compared with our expected quarterly run rate was the impact of the positive equity market in the fourth quarter, which drove VA separate account returns of 6.8%. This corresponded to actuarial adjustments, which had a favorable impact to earnings of $46 million after tax or $0.66 per share, above our quarterly expectation, and is reflected through lower deferred acquisition costs or DAC amortization and lower reserves in the annuity segment. Keep in mind, the quarter-to-quarter fluctuation we see in DAC amortization related to changes in the market will not continue in 2023 and beyond. Under long-duration targeted improvements, or LDTI, which is the new life insurance industry accounting standard. Turning to adjusted earnings by segment. In the fourth quarter, the Annuities segment reported adjusted earnings of $286 million. Sequentially, Annuity results were driven by the impact of higher VA separate account returns, which resulted in lower reserves and lower DAC amortization. The Annuity segment also benefited from higher net investment income sequentially, which was partially offset by lower fees and higher expenses. The Life segment reported an adjusted loss, excluding notable items of $5 million. On a sequential basis, results were driven by higher DAC amortization and higher expenses partially offset by higher net investment income. The Run-off segment, excluding notable items, reported an adjusted loss of $96 million. Sequentially, results reflect higher net investment income, partially offset by higher expenses. Corporate and Other reported adjusted earnings, excluding notable items, of $60 million. On a sequential basis, results were driven by a higher tax benefit and lower expenses. In closing, despite a tough year for the markets, we maintained our balance sheet strength to protect and support our distribution franchise and the customers they serve. We continue to manage the company using a multiyear, multi-scenario framework. And given what we perceive to be an elevated level of uncertainty in markets and the economy, we have been more conservative on capital return recently. My first question, Ed, you mentioned that you guys would look to resume dividends from BLIC in 2023. Do you have a sense of just the timing and the magnitude of dividends that you guys will look to take this year? Elyse, I think $300 million for dividends this year is a good expectation with most of that coming from BLIC. And in terms of timing, I don't really have anything for you on timing. And then my second question, do you guys have a sense of earnings, emergence thoughts surrounding LDTI and then you guys considering adding any additional non-GAAP measures to your disclosures? And then do you have a sense of just how the impact of the accounting changes would be on your adjusted earnings based on your current disclosures. Sure. At this point, I would say a pretty modest impact on adjusted earnings from the new accounting standard. So in terms of pieces, there's a portion of fee income in under current accounting that will now go below the line with MRB, so that's a negative. But an offset to that will be any death benefit claims and related reserves that are now above the line are also going below the line with MRB. And then the final piece DAC amortization, while all DAC amortization will now be above the line versus some of it below the line today, with the new simplified approach to amortization, we don't see a material change in that number relative to what we would expect in a normal quarter under current GAAP. And remember, there will be no more volatility in the DAC like you saw this quarter from markets. So overall adjusted earnings, I would expect to be pretty close to what we have today. In terms of net income, I would just first start off by saying, as you all know, we manage the company for stat and cash. So we are not managing the company for GAAP. And so I would expect you'll still see volatility associated with the difference between how we manage the company and the GAAP accounting framework. However, I think it has to be an improvement on the net income line versus what we have today because what we have today is really doesn't work. If you look at net income, for example, or net results this quarter, right, the stock market was strong in the fourth quarter. Interest rates were up. So good stuff, and we lost $1 billion on a net basis. So clearly, current accounting does not capture the fundamentals of the business. Can you touch on the reinsurance recapture in the runoff segment? Was that a life product subject to YRT treaty? And if so, which one, I mean, if you could share the net amount of risk or amount in for? Yes. Tracy, Yes. I mean I think we're going to keep it a little bit higher level than that. We had a $39 million unfavorable impact from actuarial items. And the biggest piece of that was a $24 million impact from a reinsurance recapture. And as you said, I believe you said it was in the runoff segment. We've had these from time to time. We get a rate increase from a reinsurer. We evaluate whether it makes sense to accept that or to recapture the business. And in this case, as has often been the case, it made economic sense for us to recapture the business. And part of your playbook to grow fixed annuity sales is utilizing reinsurance flow as there's a penalty on the C4 charge on first year sales. I imagine this year, there will be greater demand for reinsurance flow by a number of cedents. Can you touch on reinsurance capacity to meet this demand if there's any deterioration in reinsurance costs where you may wish to retain more of this risk? . Tracy, this is David. I'll start with that one. So we're not going to get into necessarily the structure of our reinsurance agreement. But 2022 was across the industry a record year for fixed annuities. And we benefited from that as well, and that was partly in conjunction with our reinsurer. We had a competitive offering and strong distribution to sell the products. So we we had adequate reinsurance capacity to meet that demand. As we think forward into 2023, we're not expecting a similar consumer demand to what we saw in 2022, but we will continue to assess that demand with -- in conjunction with our reinsurance partner. Sorry, one comment you made, I think, about the C4 charge. We have the full C4 charge on the fixed annuity premium. I think you said a portion of it, but we booked the full charge. No, I said penalty, not portion. Yes. So that relationship you have, you have that preferred relationship where you would be first in line for capacity in '23? My first question was, can you help us think about the, I guess, the level of new business strain that you would, I guess, that either maybe occurred in the fourth quarter or you'd expect on a run rate basis as we move into 23? Sure. Ryan. For full year, we had a little bit more than 30 points of strain from new business. And in the fourth quarter, it was around 10%. So I would say for the full year, Strain was maybe 50% more than what we would see in a typical year. It's good news because more strain meant more growth. And that was our decision to retain capital in BLIC because of the fact that we had this opportunity to produce more sales in the second half of the year than what we had anticipated on the fixed side. Yes is the short answer. I think timing will be different because as we head into this year, we have a lot of work to do on recasting financial supplement for LDTI, filing an 8-K that will effectively be a recast of our 10-K for LDTI. And in addition, leveraging our new valuation environment, that we completed actuarial transformation in 2022, leveraging that to enhance our DE projections. So all that suggests that timing of DE disclosure this year will be closer to midyear versus historically, we've done it in March. And then if I could sneak in one more. I think the statutory mean reversion rate when -- I believe it went up 25 basis points at the start of this year. If that's -- well, one, is that accurate? And then two, what would be the impact of that on your RBC ratio? Yes. So it did go up. And we have seen $200 million to $300 million impact from that. Last year, the impact was negative $250 to $300 million, so it was on the higher end. So we'll get that benefit in the first quarter. In addition, given where rates are today, you would be looking at another 50 basis points to 75 basis point increase in the mean reversion point if you look out '24 and '25. Can you give us a sense maybe of how your fixed annuity spreads that you wrote on new business in the sort of fourth quarter and the third quarter kind of compared to the in-force? Yes. So Suneet, this is David. I'd say given the rate environment and with the investment achievables and where crediting was. The spreads on the product were strong, and we were very comfortable with the profitability as well as the competitive nature of the product that we wrote in the quarter. And then you made a comment about not expecting, I guess, the same level of fixed annuity sales in 2023. A I guess, where do you see the best growth opportunities in terms of annuities? I mean you mentioned a new Shield product. But just curious kind of where you think the puck is going on that business. Suneet, it's Myles. I'll take that one. So yes, we're highly focused on growing Shield sales, a suite of Shield products this year, and that's where we're going to -- we expect to see most of the growth. I noticed on the investment portfolio, mortgage loan exposure grew from 16% to 20% over the last year. Can you maybe talk about the attractiveness of that asset class where rates are. I get it pairs nicely with spread products, but curious on that growth through third-party investment managers. John, it's John. And yes, the -- our mortgage loan portfolio grew from about 16% of our assets to 20%. So you're pretty nice growth during the year. We like -- well, as a reminder, it's not just commercial mortgage loans. Although they do make up the majority at about $13.5 billion, we have a $5 billion allocation to residential whole loans and a little over $4 billion in agricultural mortgages. We like all three of those asset classes for their relative value as well as a diversifier away from corporate credit, which is our biggest exposure, as you know. So we intended to grow the asset class. And you're right, these loans are a really good fit for our institutional spread margin business. which grew by about $5 billion during the year and accounted for a nice portion of the commercial loan growth. Eric, I just wanted to start on you're getting a little more cautious on capital return. Can you just give some indication about what guidepost you're looking at? Is it really just the passage of time in terms of the Fed tightening cycle ending and seeing what the impact is before you pivot back to kind of going back to a higher level of capital return? Any color on that? Sure, Tom. Look, I think you got it, but I'm happy to talk a little bit about it. We're watching the macroeconomic environment. Obviously, us and everybody else is watching what the Fed is doing. Are we going to have a real credit cycle or not? We want to return capital -- we continue to do so as we speak in the first 5 weeks, we repurchased about 0.7% of our shares. So it's not like we've stopped returning capital, and it's definitely strategically not like we're going to stop returning capital. But we're cautious. We've said this many times. You've seen what we've done over the last four years. We want to protect what we've built here. We've got an outstanding distribution franchise. And I want to make sure that we're in a situation where we can sell. You saw we were able to pivot last year, and I know we've gotten a couple of questions today with respect to what's going to happen? What are you expecting like on fixed annuities. We're not expecting to sell as much fixed annuities in '23, but we're prepared if the opportunity arises. So with respect to stock repurchases, we're watching the Fed. We're watching to see what kind of credit cycle might happen. But nothing has changed strategically. We want to return capital. That does. And my follow-up is can you -- it's really about the competitive conditions in your buffer annuity space and then in the fixed annuity space. From what I've heard, the buffer annuity space has a lot more entrants. But whenever I hear that, I get worried about price competitiveness. And I know you are one of the founders of that business. But just curious, with a lot more competition coming in, are you seeing pricing pressure? Is it affecting margins? Or is that still pretty rational? And then a similar question on the fixed annuity space. You've had two quarters of very strong growth, or should say, strong sales levels. That's considered among the most commoditized products in the industry. And you know the private equity firms with a lot of unique investment strategies are big into that space. So whenever you see sales growth in a space like that, it has to make you wonder from my perspective, what's going on and what the margins look like. But anyway, sorry for the long-winded questions. Yes. I'll start out. I think everybody is going to jump in here, Tom. And you asked a similar question last quarter. Look, I see a reasonable level of discipline. You've heard other companies talk about the fact that they're really happy with the returns that they're getting in the fixed space. And although you're seeing a lot more competition or peer companies entering the Rila space. Generally, I see, we see decent discipline here. I mean we think this is an excellent product for consumers. Our distributors love it, and we love it as a manufacturer. So again, I'm using the word generally, Tom, but generally, across the various sales classes or product classes, I'm seeing reasonable discipline. David, Miles, even Ed looks like he wants to jump in. Tom, you got a live one here. All right. I'll start. So I think in addition to what Eric said on the pricing and the economics, we think that simplicity and transparency do matter. We've continued to enhance our Shield suite of products, and we'll continue to keep the product up to date to compete in a variety of market conditions. We're also thinking about ways to address other consumer needs, and we did that successfully with Shield Level Pay. Tom, just very quickly. So yes, the role space is more competitive as you went from 3 carriers to whatever it is now, 20%, whatever the number is. But I would just point out that the returns initially when there were three carriers were very high. So yes, they are lower today, but still attractive, just not what they were when they were -- when you had basically oligopolistic pricing with three players. If I look at the question you had about competition from alternative asset managers, remember what David said, we have a partnership a reinsurance arrangement with Athene. So we are benefiting from that element of the competitive market with the relationship we have. Yes. So then it's Myles again, I'll kind of wrap this up. But to Eric's point, we all were jumping at this question, and I'm going to focus my comments specifically on the Rila category. And look, I guess, as it relates to competition and sales, yes, it's had an impact on sales. But the way we think about it is it's a really positive development for advisers and consumers with more entrants in the space. We like the competitiveness of our product. We have a very strong distribution footprint. We remain pleased with ourselves, and you're seeing us continue to evolve our portfolio of Shield products with the new level -- with our new Shield Level Pay Plus product, which gets us into the income category as well. I was just hoping you could provide some more color on corporate expenses this quarter, which it looks like it may have had sort of a positive favorable item in there? And then related, now that established costs are done, how should we think about the expense outlook going forward? Erik. So there was favorability in the corporate line in the fourth quarter. We tend to call out the biggest items when we put the numbers out the night before because there are always puts and takes. So I would say that while there was favorability in the corporate line, we also had some elevated corporate expenses that were impacting other segments. So I think if you look at the number that you would calculate from our disclosures of $4.09, I think it was $4.09 of earnings ex those items we identified I would guide you back to the third quarter when we said -- I think I said something like run rate looked like 360 plus or something. Obviously, we had buybacks that would have benefited in the fourth quarter relative to that number. But I would gravitate more toward toward that end as a kind of go-forward number than the north of $4 that you would come up with from what we disclosed last night. I'll take your establishment costs comment, Erik. We're done with establishment costs going forward, so you won't see them anymore. But is there a little holdover into '23? Is that part of what will maybe have our corporate expenses up a little bit in '23, Yes. There's some cleanup stuff as you can imagine. You've heard companies like us talk about this for years when you've got secondary stuff that you got to clean up. But generally, the future state environment for us is done. It's finished, and you won't see any more establishment costs. So we did 70-ish of corporate expenses in 2022. That number will go up a little bit for 2 reasons. One, I already said, just some cleanup stuff that we'll do in 2023 from a technology point of view and inflation certainly, we will be experiencing some inflation, employee costs, vendor contracts, et cetera. But I'm very pleased with where we are with respect to expenses. You're not going to see a large-scale expense initiative here, though we remain laser-focused on expenses every day. And then, Ed, I was just hoping you could maybe provide an update on the expected book value impact for LDTI as of year-end. Well, I can give you -- I guess I would reiterate what I said last quarter because I think it still stands. We gave you the impacts if you look back, and then I said we didn't give you anything as of the third quarter, but I said given where rates were we expected. I can't remember, substantial improvement, significant, whatever word I used. That still applies as of year-end. And just a reminder, remember, we had said that at 12,31,21 that the range was $6 billion to $8 billion to total equity and $3 billion to $4 billion equity ex AOCI. So the application of substantial improvement is relative to those numbers. First one I had is just on the drag on new business. When I look at like overall flows and the organic growth rate. It seems like maybe there's probably a bigger drag that's not being released on the legacy products and when do we get to more of a per state where if you're deploying capital behind new business in a bigger way where it's actually pushing your organic growth up, I mean is that years away? Is it -- does that start to unfold more medium term? How do we think about that? Alex, it's Ed. So let me see if I can help out a little bit. If you look at our TAC and our RBC this year, right, because I think you're getting to -- well, you're using up, it seems a lot of capital to fund growth and where -- when are you releasing capital from other products. I think the numbers this year mask what's going on a bit here, okay? If you look at our TAC, it was down from $9.4 billion to $8.1 billion year-over-year, right? So of that $1.3 billion decline, I would say $1.2 billion of that would be nontrendable items. And I would say that a good portion of those we would expect to reverse over time. So specifically, the DTA write-down was about $400 million. We fully expect to utilize our tax attributes over the long term. Second, the MRP impact was $250 million to $300 million negative in 2022. And not only is that reversing, but as I said, it's going in the other direction as we get 25 basis points up in the first quarter of this year and another 50 basis points to 75 basis points in '24 and '25. And then third, we had some AAT reserves this year that was around $200 million. And in this instance, I consider those reserves to be equity. I don't believe we're going to need them. So I think you're going to see that reverse over time. So you're talking about a very significant amount of tax that I don't deem to be really representative of the economics of what's going on at the company. Putting that into RBC terms, right, RBC ratio for the year went down from $500 to $440 million. Of that 60-point decline, approximately 50 points, I would think, reverses over time. The DTA impact is over a longer period of time. The MRP impact is happening now and the AAT TBD. So when you're trying to get to what actually was going on here at the company, you had 30 points that was used for growth. You had about 75 points that I would say would be nontrendable items and you had about 45 points of core capital generation Second one I had is just on the system conversion. I mean it seems like as it relates to RBC, that was a reasonably good outcome getting through all of that. As we think about the next piece of information that's going to potentially be impacted by the distributable earnings tables. Do you expect to have much of an impact there? I'm just thinking about the [indiscernible] point is obviously a tailwind, but does that system conversion materially change the way you project your cash flows into the future? Yes, Alex. I mean I don't think there's any material change in how we project, but we're doing it with -- we're doing more in-house work with a new projection model. And so it remains to be seen what the impact will be. But whatever the number is, I'm going to have more confidence in the numbers because of the position we're in now from an actuarial system and projection standpoint. And just to -- I think there were some questions on this last night. So just to get it out there. The impact of the systems conversion to VA and the assumption updates was, as I said in my prepared remarks, less than $200 million the pieces would be the assumption update component of that was essentially zero. So you can think about the systems conversion being really what drove the number. Thank you, Carmen, and thank you all for joining us today and for your interest in Brighthouse Financial. Have a great day.

EarningCall_101

Greetings, and welcome to the Proto Labs Fourth Quarter 2022 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Jason Frankman, Vice President and Corporate Controller. Thank you. You may begin. Thank you, Daryl, and welcome, everyone, to Proto Labs Fourth Quarter and Full Year 2022 Earnings Conference Call. I'm joined today by Rob Bodor, Proto Labs' President and Chief Executive Officer; and Dan Schumacher, Chief Financial Officer. This morning, Proto Labs issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 2022. The release is available on the company's website. In addition, a prepared slide presentation is available online at the web address provided in our press release. Our discussion today will include statements relating to future performance and expectations that are or may be considered forward-looking statements and subject to many risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. The results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release and the accompanying slide presentation at the Investor Relations section of our company website for a complete reconciliation of GAAP to non-GAAP results. Thanks, Jason. Good morning, everyone, and thank you for joining our fourth quarter earnings call. I will provide commentary on the overall state of our business, and then Dan will cover our financial performance in depth later in the call. As we begin 2023, the Proto Labs team is focused on accelerating our growth through the execution of our strategy. We are narrowing our focus and investments to drive growth in 2 priority areas: our 2 largest services, Injection Molding and our new integrated comprehensive CNC offer that combines the speed and automation of our digital factory with the broad capabilities of our digital network powered by Hubs. I am confident that a sharper focus on fewer priorities will allow our organization to succeed in 2023 and ultimately drive greater value for our shareholders. Reflecting on 2022, we are not satisfied with our financial results. Our performance was impacted by an uncertain macroeconomic environment and internal challenges we faced at Proto Labs. Looking ahead, I'm optimistic because our investments and priorities for 2023 are focused and designed to address these issues, and we are already seeing positive momentum. In addition to focusing on fewer priority areas, we're also accelerating our innovation pipeline, launching more new offerings at a faster pace. And lastly, for the current year, we have a financial strategy in place through which we will expand our operating margin, focus our investments on areas with the highest potential return and return capital to shareholders at an accelerated rate. A narrower focus on fewer priorities and an enhanced financial strategy will drive Proto Labs' success and increase shareholder value in 2023. The two main areas of underperformance in 2022 were Injection Molding and a decline in our margins. Although last year's performance did not meet our expectations, there are many positives in our business that we will build on in 2023. Our CNC Machining and 3D Printing services both grew double digits year-over-year. Our Hubs business grew over 50% in constant currencies. We also made great progress on the integrated Proto Labs and Hubs offer last year, and our customers began to realize the benefits of the unique integrated offer. We established a very important platform that is proving out the value of our comprehensive offer strategy. In 2022, the number of customers that ordered from both the digital factory and the digital network increased over 2021. Furthermore, revenue from these customers increased even faster, reflecting strong growth in spend per customer. I want to share a few customer examples that illustrate the value that our combined factory and network model has already created for customers. Because our digital factory can deliver value that is not available in any competing digital network, we can deliver value that customers cannot get elsewhere. In our first example, a prominent medical company was looking to accelerate the development of a new product with multiple components. They were looking to procure 12 injection molding tools from a single manufacturing supplier. Single sourcing of the 12 molds was a requirement for the customer. We manufactured 9 of the 12 molds in the digital factory. And the remaining 3 higher-requirement molds, we manufactured outside of our internal capabilities and sourced those through our digital network partners. Not only did our combined model create the comprehensive offering that enabled us to win this entire large injection molding order, more importantly, it enabled Proto Labs to reduce the supply chain complexity for this customer by being a seamless single supplier for their entire project, a true one-stop shop. Next, a global technology company needed help on a fuel cell project with high requirements and tight deadlines. This customer leveraged Proto Labs' digital factory capabilities for quick-turn 3D Printing and CNC Machining parts and ordered high-requirement production CNC machine parts with tight tolerances and plating that were fulfilled via the digital network. We were able to meet stringent deadlines and manufacture high-quality finished parts, saving the customer 8 weeks in their product development process over any competing alternatives. As these examples highlight, the unique combination of Proto Labs' speed and reliability with the expanded capabilities of Hubs' digital network is already driving tangible value for customers, value in the form of speed, supply chain simplification. Breadth of manufacturing capabilities available helps accelerate the journey from prototyping to production and more. Customers are seeing the value and adopting our combined capabilities. Our long-term strategy is gaining traction as the integrated offer drives additional demand and increased share of wallet with both existing and new customers. And we are just getting started. Looking ahead to 2023, as I mentioned, we have narrowed our focus and investments into 2 primary growth areas. Injection Molding, our largest service, was negatively impacted by macroeconomic factors in 2022. We are still very confident in the competitive advantage of our Injection Molding service, and we continue to invest to make it even more competitive. There are several initiatives in place to drive growth in 2023. In prototyping, we're making our standard lead times even faster. Already this year, we launched an industry-leading 7-day standard lead time for molds, in effect cutting in half our lead times for many of the parts that we produce in Injection Molding. We're also offering expanded capabilities through our digital network. In production, we're expanding our offerings through multiple investments: first, a broader array of digital quality offers; and second, lower part pricing for high-volume orders fulfilled through the Hubs network. And across both prototyping and production, we're optimizing part and mold pricing through investments in enhanced pricing capabilities. And we're making it easier to use our Injection Molding service by improving the automated design for manufacturability feedback on our quotes and expanding our consultative design services. We expect these actions to drive Injection Molding growth in 2023. Our second priority growth area for 2023 is CNC. This is our second largest service and has been growing well. This year, we're committed to unlocking even greater growth potential via the most complete and comprehensive offer in the industry through our digital factories and our digital network. Yesterday, we announced that customers now have access to expanded capabilities offered through the digital network on CNC quotes received from protolabs.com. Customers can now benefit from the combined capabilities of the digital factory and network to leverage advanced machining capabilities designed to lower part costs at longer lead times, improve tolerances, broad -- provide broader finishing options and make possible larger and more complex part designs. In the fourth quarter, our longer lead time CNC offer fulfilled by both the digital factory and the digital network grew over 48% year-over-year, again, providing evidence that our comprehensive offer strategy is gaining traction. We've also accelerated our rate of innovation, as evidenced by the number of new offering launches in recent months. And we've strengthened our leadership team with a focus on growth and innovation. Oleg Ryaboy, our Chief Technology Officer, has been driving positive change and accelerated velocity since he started in September. In January, we welcomed Luca Mazzei as Strategic Growth Officer. Luca has more than 20 years of experience driving business growth recently as Chief Growth Officer for several industrial companies. The additions of Oleg and Luca highlight our intense focus on strategic growth and accelerated innovation moving forward. And as I look ahead, we have several more capabilities in the development pipeline that I'm excited to share with you in the future. I am confident that our narrow focus on our priority areas for growth will drive shareholder value, and we must also improve our earnings. We're committed to driving operating margin expansion in 2023 by reducing and redirecting investments in lower priority areas and aggressively managing spending. Early this year, we took several actions to better align resources to our 2 priority areas for growth and ensure those areas receive adequate investment. Through our annual planning process, we identified opportunities to shift investments away from lower priority areas of our business. Proto Labs' profitable business model generates more operating cash than any public company in our industry, and we have a very nimble capital structure. On February 7, 2023, our Board approved an additional $50 million to our stock repurchase authorization. This year, we will return capital to shareholders at an accelerated rate through repurchases, reflecting confidence in the long-term outlook realized through the execution of our strategy and focus on creating value for our shareholders. Lastly, as part of managing our business, we will continue to evaluate segments or services that are underperforming or noncore to our long-term strategy. This sort of evaluation ultimately led to the closure of our Japan business last year. Going forward, we will focus on areas with the highest potential return on investment. I remain very optimistic about the future of Proto Labs and confident that we will deliver great value for our customers and our shareholders over the long term. The past 3 years were filled with disruption and transition in the broader economy that impacted Proto Labs, but we cannot rest on the past, and we will not be guided by factors outside of our control. Our 2023 plan is very focused. We're committed on accelerating growth in our 2 priority areas, accelerating our innovation pipeline, driving earnings expansion and returning capital to shareholders at an accelerated rate. Thanks, Rob, and good morning, everyone. Our detailed financial results begin on Page 13 of the presentation. I'll begin with detailed fourth quarter results and then move to full year 2022 highlights and wrap up with our outlook for the first quarter of 2023. As a reminder, we shipped our final order in our Japan operations in September 2022. Many growth rates I provide today will exclude Japan to provide a better understanding of the organic change. Please refer to the accompanying slide presentation and the financial tables in our earnings press release for additional detail. Fourth quarter revenue of $115.6 million was just above our guidance range and represents a 1% decrease year-over-year in constant currencies and excluding Japan. Hubs had a very strong fourth quarter, generating $14.8 million of revenue in the fourth quarter, representing year-over-year growth of 49.6% or 56.5% in constant currencies. Fourth quarter revenue by region is summarized on Slide 16. In the Americas, fourth quarter revenue decreased 5.8% year-over-year, primarily due to weakness in Injection Molding parts orders. In Europe, fourth quarter revenue grew 19.9% year-over-year in constant currencies, driven by strong growth in our European CNC Machining and 3D Printing services. Transitioning to revenue by service. Fourth quarter Injection Molding revenue declined approximately 12% year-over-year at constant currencies and excluding Japan. Fourth quarter CNC Machining revenue grew double digits year-over-year at constant currencies and excluding Japan, driven by outperformance in our longer lead time offerings fulfilled via both the internal digital factory and the digital network. Fourth quarter 3D Printing grew 8.2% year-over-year at constant currencies. Sheet Metal revenue declined 20.5% year-over-year. We served 22,205 unique product developers in the fourth quarter. Excluding Japan, unique product developers served decreased 1.1%, commensurate with revenue. Turning to Slide 20 and our detailed income statement. Overall, fourth quarter non-GAAP gross margin decreased 200 basis points sequentially to 42.8%. The sequential gross margin change was primarily driven by lower volume as well as continued growth in our longer lead time network and factory offerings. Hubs gross margin in the fourth quarter was 25.4%. Total non-GAAP operating expenses were $42.3 million in the quarter or 36.6% of revenue compared to $40.9 million or 33.6% of revenue in the third quarter of 2022. The sequential increase in operating expenses was driven by a third quarter $1.2 million onetime gain on the sale of a building and continued investment at Hubs. Regarding the closure of our Japan business. We continue to incur expenses associated with the shutdown. The Japan business closure resulted in $534,000 in GAAP operating expenses during the fourth quarter. Consistent with the prior quarter, these expenses have been excluded from our non-GAAP financial results to enable clean comparisons to prior and future periods. Moving to taxes. Our non-GAAP effective tax rate in the fourth quarter was 1.6% compared to 22.4% in the third quarter. The lower fourth quarter non-GAAP effective tax rate was driven by the release of an accrual for an uncertain tax position that was resolved in November. Fourth quarter non-GAAP diluted net income per share was $0.26 compared to $0.40 in the prior quarter due to lower volume, lower internal manufacturing gross margins, increased investment in Hubs and the onetime gain on the sale of a facility in the third quarter. Transitioning to cash flow and balance sheet highlights on Slide 21. We generated $10.5 million in cash from operations in the fourth quarter. We repurchased 16.6 million in shares during the quarter as we continue to purchase opportunistically. In addition, our fourth quarter GAAP financial results included a noncash goodwill impairment charge of $118 million as a result of our annual impairment analysis, primarily driven by rising interest rates, challenging macroeconomic conditions and cost pressures in our global operations from inflation. The impairment is solely an accounting charge and has no impact on Proto Labs' cash position or liquidity. Therefore, it has been excluded from our non-GAAP financials. Shifting to the full year 2022 financial highlights beginning on Slide 22. Our full year revenue grew 3% over 2021 in constant currencies and excluding Japan. Excluding the impact of foreign currencies and Japan, CNC Machining grew approximately 18%. 3D Printing grew approximately 12%. Our Hubs business had a fantastic year, generating $48.5 million in revenue, representing over 50% growth in constant currencies. Full year 2022 non-GAAP diluted net income per share was $1.50 compared to $1.55 in 2021. Lower gross margin in 2022 was partially offset by lower operating expenses. On December 31, 2022, we had $106.5 million of cash and investments on our balance sheet and 0 debt. Now I'll provide our outlook for the first quarter of 2023 as outlined on Slide 31. We expect to generate revenue between $114 million and $122 million in the first quarter. This guidance incorporates January performance and typical seasonality patterns. The closure of our Japan operations is expected to have a $4.1 million negative year-over-year impact on our revenue growth. We expect foreign currency to have approximately a $2.2 million unfavorable impact on revenue compared to the first quarter of 2022. Moving to earnings guidance. We anticipate non-GAAP add-backs in the first quarter to include stock-based compensation expense of approximately $4.1 million and amortization expense of $1.5 million. We currently estimate our first quarter non-GAAP effective tax rate will be between 21% and 22% in the first quarter, up from 1.6% in the fourth quarter. This sequential tax rate increase represents a $0.05 per share negative impact to non-GAAP earnings per share. In summary, we expect first quarter non-GAAP EPS between $0.18 and $0.26. Thanks, Dan. On our fourth quarter call, we normally reflect on our accomplishments in the prior year. However, I believe, more importantly, this is a great time to look forward and focus on the opportunities ahead of us. We have sharpened our focus on 2 clear priority areas for growth for 2023. We've accelerated our innovation pipeline, and we're committed to earnings expansion. Our business model is profitable, and our balance sheet is strong. Proto Labs is poised for strong and sustained financial performance, which will drive long-term value creation for our shareholders. First, maybe just on the guidance. It seems like the revenue guidance is quite solid. And I'm wondering if you could comment on what you've seen here in the first 40 days or so of the year. Yes. Our seasonal pattern, Brian, is how fast do our customers come back from the holidays. And obviously, the guidance reflects, it was fairly solid in January in terms of it was not a slower pattern than some years. So customers came back solidly in January, and that's what's reflected in the guide. Okay. And then the Injection Molding business has been declining, especially sequentially in the last 2 quarters. Can you talk about, number one, in that turnaround and what does it take to do that? And what do you need to correct, what's been going wrong there? And then number two, what have you seen in the Injection Molding business specifically to start 2023? Sure. So yes, our Injection Molding business, you can think about it in 2 ways, right? We've got the molds that we make and then the subsequent parts of the production business that comes off of those molds. As we've talked about in the past, our molded parts business is the most cyclical of the businesses that we have, and we've seen some headwinds in demand in that portion of the business in this economy. And as we talked about on last quarter's call, we were hearing customers who had excess inventories from large orders that they placed earlier due to the supply chain disruption. So that's what we're working to overcome right now. And the best way that we can drive the parts business is by driving molds and new molds with customers. And so I'm pleased to say that we're starting to see positive momentum there and some growth in molds. And we're leaning into that with all the new capabilities that I talked about on the call, right? We're expanding the speed of our offerings. We've got 7-day standard lead times now for molds, which is twice as fast as our standard lead times were before. So we're able to serve our customers who have prototyping and quick-turn needs much more effectively than ever before. And we were already the fastest in the market. We're leaning into that. We're even faster. But in addition, we're leaning in on production through enhanced quality reporting and capabilities and also through cross-selling and making our offerings available through Hubs. And so as a result, just like we're building the most comprehensive CNC service, right, through the combination of the digital factory and the network through Hubs, we're really taking that same strategy to Injection Molding and greatly expanding our capabilities to drive our mold sales, which will then drive Injection Molding overall. And we expect growth this year in Injection Molding. I wanted to go back to some of the commentary that you made about shifting from some of the lower priority areas. I'm wondering if you could give us a sense as to how much of a drag on profitability some of these lower priority areas have been over the past year. Yes. So just to clarify, last year, we grew -- if you exclude Injection Molding, we grew double digit all our -- across our other services. And so the focus is in our 2 biggest areas, Injection Molding being our biggest service, right? We're really focused on driving growth there. As we drive growth there, the whole business benefits. Our second biggest service is CNC. And while that's growing well, we believe we have a tremendous opportunity with our comprehensive offering to make that grow even better. So our focus is on those 2 largest services. Now that doesn't mean that we're not making investments in our other services. We are, but we're reallocating differentially to drive our 2 biggest services, which are also -- are among our higher-margin businesses and through the combination of those 2, able to drive both revenue growth and margin expansion in the business. So that's the strategy. One other thing I would say, Jim, is the point of focusing investment is if we're not putting more resources to our higher margin, higher growth, larger opportunity areas, we're losing an opportunity there. And so as Rob laid out in the call, returning Injection Molding to growth, focusing on the combined offer within CNC, we see as some of our highest potential areas and where we're focusing investment. Got it. I wonder if you can provide some color on where the production parts business may be in terms of what you've talked about the last couple of quarters, customers rebalancing their inventories. Where are we in that process, do you think? So I think that we're making progress there. But it's paced, right? We're seeing some improvements in the macro economy. And as I said, we're seeing some growth starting in molds. So I feel like these things are improving. But these are -- I mean, molding and especially production parts coming off of molds are some of our longest lead time kind of offerings. And so that's why it's taken, I think, a few quarters. And then last question, you've seen determined and I think with the growth that you're trying to push into the Injection Molding business, getting that back on a growth path. Obviously, then the macro plays into that. And is there any sense that you can give us in terms of what you're seeing in some of the larger markets thus far this year? It sounds like you've gotten off to a reasonably good start in January. But just more broadly, as you're thinking about some of the end markets, and what gives you the confidence that business grows for the year? Yes. So Jim, I'll take this one. One thing that we saw, and I probably should have mentioned this in Brian's question, we ended up on the high end of our guidance, right, in the fourth quarter. And one of the reasons that, that occurred was our market within Europe. So we have seen a soft October within Europe, and then we saw strengthening in November and December. And Europe has started off the year nicely, right? And in Q1, like I told Brian, we've seen a good start to the year from a January perspective. And that would be, I would say, both in Europe, both in the U.S., we've seen a good start to the year. In terms of parts and end markets, right, for sure, as we've shown over the last couple of years, we are impacted by the macro. However, we're taking some of this into our own hands. And you can see that with the offers that we're launching within Injection Molding, a 7-day standard lead time offer, and we have different pricing that we're launching out within Injection Molding as well. So part of this is, yes, there is a macro story here, but part of it is taking this thing under our own control as well and putting things out there that will help grow the business. Maybe I wanted to start with margins and kind of the outlook on gross margins going forward. What's your expectation as more of the business continues to mix shift towards lower margin Hubs? Is the expectation that -- I don't know, maybe just give us some sense of the gross margin outlook for Q1 specifically and thoughts on the full year, if you can as well. Yes. I would say -- so thoughts on Q1, margin should be flat to slightly up going into Q1, and that's going to be based on volume. Really, our margin drop within last year was 2 things. One was the lower margin within Injection Molding, and it was also Hubs and some of our network and longer lead time offers growing at a faster rate than what our internal manufacturing is. I would expect throughout the year, our margin story will greatly depend on that growth within the volume, right? And it will also depend on the mix that we have moving forward of what comes through the network and what comes through our internal manufacturing. We internally have plans, and you can see in some of our releases, to grow in both, right? So that both -- we're growing both Injection Molding and growing the network. But we're going to see how the year plays out in terms of what our customer responses to those things and what is driven from a volume and a mix perspective. And with Hubs specific, is there room to expand the margin from these current levels? I mean, you've seen a nice revenue increase the last couple of quarters, but margins have actually come down there. Yes. So I think there was a slight decrease in margin from Q3 to Q4 within the Hubs business. But we didn't see anything that was alarming. I mean, we saw -- in terms of what was going on with our MPs and so forth, we saw nothing that was kind of out of the ordinary. We see room for margin expansion within Hubs, and part of that is pricing more efficiently as you get more and more volume and more and more uploads into your system. And the math, the algorithms end up pricing more and more efficiently for parts such that you're seeing some margin improvement. So I would still hold to our targeted margin range for the Hubs business being 25% to 30%. Okay. Perfect. And then I guess just last one on the growth outlook. Relative to the current level of Injection Molding, growth in '23 implies a pretty significant tick up versus the run rate here in Q4. So I just wanted to maybe have you focus a little bit on what gives you confidence that in light of everything outside your control, that amount is going to really -- I mean, it implies a pretty significant acceleration as we go through the year. And then just to be clear, you've talked a lot about Injection Molding growth. But is the assumption that CNC is going to grow as well for the year? It is. It is. So yes -- so remember, we had strong growth last year in every service but IM. As we start this year, we're seeing growth in a lot of areas. We had really strong growth in Europe, and we're making focused investments to drive growth in Injection Molding and to even further accelerate growth in CNC by bringing these comprehensive offers to the market. And so we're driving everything that we have control over to really ensure that we're able to drive that level of growth. Dan? Yes. The other thing I would say, Greg, we have plans in place, and we're executing on those plans to grow the Injection Molding business. You can see over the last few years, we're impacted, especially in that business, by different changes from a macro perspective. So yes, there's macro uncertainty into 2023, for sure. I think what we're saying is as you can see with some of the offer launches that we're doing, we're targeting for that business to grow. Gentlemen, congrats on the nice results. First, Daniel, I just want to press you a little bit, just love your confidence on just gross margins. I know you said flat to slightly up. But if revenues are kind of just up slightly and most of the growth is coming from Hubs, should we get kind of more gross margin dilution on that front? So just can you give us -- any more detail on that would be great. Yes. So a couple of things. One, we -- from Q4 to Q1, we do have some pricing that we've put in place from Q4 to Q1. We will -- depending on how the rest of the quarter comes in, there is potential of risk of higher mix into the lower margin areas, which is why I'm saying flat to only slightly up. Okay. All right. That's fine. How about for you, Rob? Just thinking back as long as I've known you guys, I've always said to you that it's kind of an expedited service. Is that -- if you think about now versus kind of maybe a few years back, can you talk about how quickly you guys turn in molds over? Has it been more of a trend towards longer lead times in the molds and less of a short time, higher margin business in the quick-turn side? Yes. So I think in general, the expedited business, that portion of the business moves with the macro and strong economies. When there's a lot of innovation and pace is faster for our customers, we definitely see more expedites, right, which come with higher margin. In slower economies, that lessens. So that's a correct interpretation, Troy. How about -- and then last question, you talked about extra services, too. So just curious, are you talking like more kind of off access cutting? Are you talking about plating, coating? Is that stuff you guys want to do internally at Proto Labs? Or is that stuff that's going to be offered through the channel and the Hubs partners? So yes. So right now, those are capabilities that we've made available through the manufacturing partner network. Over time, as we continue with our innovation pipeline, we evaluate continually which of those we might bring into the factory and thus make them available at the faster lead times. But we would still have them available through the network at the longer lead times. A couple of questions. Rob, you had mentioned last time that the company was focused on getting the word out to your existing customer base about your ability to compete for some of these longer lead time orders on the Injection Molding side. Where do you think you are in terms of customer understanding that you can actually compete for these longer lead time orders? Yes. So our sales teams have been very focused on that and aggressively going after it. But that said, we serve tens of thousands of customers, and we've got many, many more, right, that we've served over time. And so any kind of significant change to capabilities and effectively our brand, right, which was so long known for only the very fastest lead times in the world, will take time to fully penetrate the market. So we're starting to see traction now, and I expect that to increase as we go forward this year. Okay. And on the CNC opportunity, I gather from what you're saying, the larger opportunity as you move forward is more on CNC production parts as opposed to just quick turnaround time on prototypes. Do I have that right that, that is the larger opportunity now in CNC? So I think the way to think about it is that historically, all we offered was the very fastest lead times. So -- and so we had basically 0 revenue from -- a couple of years ago, we had 0 revenue from anything longer than 3- or 5-day machine parts. Now we've got offers that go out to something like 23-day standard lead times for machine parts. And so all of that is starting from very low numbers. And so we're seeing very strong growth there. We also believe that in this macro economy, that is the area of stronger demand right now. So our strategy is to be able to have the whole comprehensive offer from same day all the way through to 23 days and so forth, such that whatever the customers' use cases are, whatever their needs are, we can serve that and grow in whatever part of the economy is strongest at that time. Okay. That's helpful. And finally, with regard to -- one of the things you also mentioned last quarter was this notion that many industries were showing a lack of urgency in terms of new product development projects and so forth. It does sound like you've gotten off to a strong start this year. Are there any verticals that you can mention that stand out that seem to be moving forward more rapidly in terms of their own new product development? Yes. I think aerospace is one that was strong for us in the fourth quarter. That stuck out particularly. I think that'd probably be the one I would highlight for you. There are no further questions at this time. And with that, this does conclude today's teleconference. We do appreciate your participation. You may disconnect your lines at this time, and enjoy your weekend.

EarningCall_102

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to the Conference Call of Usiminas to Discuss the Earnings Release of the Fourth Quarter '22 and for the whole year of '22. I am Leonardo Karam, Manager of Investor Relations at Usiminas. To those who want to follow us in English, a free translation of the webcast presentation is available on the Usiminas IR website. We also have an interpreter for simultaneous translation. Choose the sound channel on the icon interpretation at the bottom of your Zoom screen. All participants are in listen-only mode and questions may be asked in writing for the Q&A icon, where you can find below in the bar. Participants who are listening in English may also ask questions using a Q&A function. Today's conference call is being recorded and being streamed through YouTube channel. This is a conference exclusive for investors, market and analysts. Please tell us who you're in your organization so that you can have your questions answered. And please limit to two questions per participant. Questions may by journalists and be submitted to media relations or using media using phone 31-3499-8918 or through email imprensa@usiminas.com. Before moving on, we would like to clarify that forward-looking statements that may be made during this conference call with respect to business prospect, forecast, operational and financial goals of the Company and its growth potential are all based on beliefs and assumptions of the executive board of Usiminas. These expectations depend largely on the performance of steel industry, domestic economic conditions, and the situation of international markets and therefore, are subject to variations. We have here with us today the executive team of Usiminas CEO, Alberto Ono; VP of Finance and IRO, Thiago Rodrigues; Industry of VP, Americo Ferreira Neto; VP of Corporate Planning, Gino Ritagliati; VP of Technology and Quality, Toshihiro Miyakoshi; Commercial VP, Miguel Homes; CEO of Mineracao Usiminas, Carlos Hector Rezzonico; CEO of Soluções Usiminas, Leonardo Zenobio; and CEO of Usiminas Mecanica, Fernando Mazzoni. Alberto will make his initial remarks followed by Thiago, who is going to present the results. Later, questions submitted to the QA and they will be answered. Let me now hand it over to Alberto. Good morning, everyone. I would like to start by thanking all of you for being here with us in our conference call of the fourth quarter '22, and we are also going to go over the results of the full year 22. 2022 was characterized by major volatility, you've all seen how we evolved throughout the years, with some events that we were not anticipating, but they turned out to be a reality. And that impacted not only the steel sales, steel processing and also the economic perspective, which started with the Russia-Ukrainian war. In the first half of the year, we've emphasized that extensively before, but also COVID cases in China and that impacted lockdown and impact of supply chain also the decrease of the development of Chinese economy, and finally, here in Brazil, the elections and the expectations for the election of the new president. It has all resulted in a very volatile complex situation and for Usinas despite all that the results of the year have shown that we have still delivered consistent results. It was the second best result for the past 13 years despite the complex scenario throughout the year, the complex situations represented consistent results. Let me also emphasize that a 2022 was the year in which we celebrated 60 years of our operation in Ipatinga. Being a company for a long time in Brazil, we are now going into a period where the CapEx and the investment is required in renewal of equipment overhauling and so on. It has already been accounted for in the investments that we made in 2022 and the same applies to 2023 as we've already communicated. So, it's important to bear in mind we've been in operation for six years in our main site, which means that we require investments to renovate, realign and recover most of our equipment. I'll say that these are the main highlights that I wanted to share with you. Thank you, Alberto. Good morning everyone. Let's go on with our slide presentation, we can go to Slide 2 where we can see the main highlights for the period, something which we have already published in the end of December, which is the minutes now part of the ISE, which is the corporate sustainability index of B3, confirming our commitment with sustainability of operations, something that really makes us very happy. We are the only steel company that it's part of this index. In terms of revenues, we have the second highest annual net revenue in history, BRL32.5 billion. BRL7.7 billion in the fourth quarter, and I'm going to provide further details. In terms of EBITDA, it was also the second highest for the past 14 years BRL4.9 billion in '22, BRL579 million in the fourth quarter. Second highest annual net income in the past 14 years, 2.1 billion profit with loss of 839 million in the fourth quarter due to internal factors that we are going to share with you later. In December, we completed our 9th issuance of debentures BRL1.5 billion with a maturity of up to 10 years, very favorable conditions, so BRL2.2 billion issued in 20 22. Solid cash position of BRL5.1 billion, very comfortable level and net debt EBITDA of BRL0.2 billion, which shows really our solid financial position. And we are going to keep on increasing our slab inventory for the realigning of BF3 as initially planned. Now going to the next slide, we can see the consolidated numbers for 2022. The first chart, we can see still sales of 4.2 million tons, 12% below '21, but still above the period before the pandemic. In iron ore, 8.6 million, within our guidance of 8% to 9% even with problems with supply chain and projection and production in the beginning of the year because of the rain in some of our sites. Now in terms of consolidated net revenue, 32.5 million below '21, but still at very high levels, if we compare against 2018 to 2022. Adjusted EBITDA has presented absolute and marginal drops. Even so, it's the highest of the past 14 years. And this drop was due to effects in steel production and in mining, as we are going to show you later, and net income of 2.1 billion just following the trend of a deterioration of some of the margins. Now in the next slide, we can see consolidated numbers of the fourth quarter. There was a reduction of the main indicators of results caused primarily due to lower volumes and low prices in the steel unit, and we are going to see that specifically in the upcoming slides. So, 7.7 billion net revenue, 9% below the third quarter EBITDA 579 billion with a decrease of 2.3 percentage points. And net income in the quarter, there was a net loss of 839 million including 1.4 billion of the impairment effect. The Company has run some regulatory recovery of some of the assets and due to the high investment levels required for coming years, generated impairment of 1.4 billion in the steel unit and a reversion of an impairment that we had already recognized of 0.3 billion. Now speaking of steel unit, sales volume was higher than the guidance 963 tons, our guidance was 950. We expected that decrease due to seasonality because the last quarter of the year tends to be weaker. The good news is in the internal market, domestic market, we exceed the volume of the fourth quarter of previous year of fourth quarter '21, showing favorable conditions in the domestic market. Net revenue we can also observe a reduction primarily due to prices in the domestic market, the reduction was 5.9%. Adjusted EBITDA had a reduction over the third quarter '22, but we have a positive effect on costs as we can see in the next slide. Here we can see the main reason for EBITDA reduction, which was due to price and sales volumes partially offset by lower costs. There was a reduction of the cost by ton of 6,640 in the third quarter to 6,470 on the fourth quarter. We also had the expectations of decrease of costs due to the cost of raw material primarily does labs and some stability in operational indicators. Concerning Mineracao Usiminas, we close the quarter with 2.2 million tons of sales, the largest volume in the year, quarter-over-quarter. And we can see stability in revenues and EBITDA level reflecting then the market indicators for the period. Usiminas Solutions, Soluções similarly to the steel unit, a lower sales volume over the third quarter '22, but still above the fourth quarter '21 with reductions of revenues and EBITDA, because of lower prices being applied. Now going into financial indicators, working capital, it has presented the stability, just a minor reduction over the third quarter even with the increase in inventory levels of slabs. Because of better control and reduction of inventory especially of gold and caulk, which have really helped us maintain stability levels and also a price repositioning of these materials. Concerning steel inventories as you can see on the right, we have the necessary inventory levels for the shutdown of BF3 we have here the level of inventories as had been initially planned. The next slide shows us the CapEx for the year, consolidated caps of BRL2.1 billion somewhat above our guidance was 2.05. This was due to the activities that are setting motion and the closer we are to the may rally and renovation of the unit more activities are required, so that's expected. During the fourth quarter there were 215 million invested in the renovation of the blast furnace and also in the steel operation 611, so total 611 million invested 1.5 billion or rather 1.1 billion in the other activities of the steel unit 364 for mining. The next slide, we can see the impact it has on cash. Generation of EBITDA improvement of working capital all offset by the CapEx invested in the period. So, we had a 65 million reduction in cash position which has not impacted significantly our results. Now, going into cash position net debt and amortization, we've maintained a very well controlled net debt BRL1.1 billion and the leverage index of point 23 times EBITDA, which is still a very comfortable level for the Company. With the issuance of the new debentures, we have now a maturity that some of the bounds for '24, '25 were extended for 10 more years. So now we are not going to have any significant debts to pay within the next 10 years, which means we can keep on making the investments as originally planned. Now to close I would like to tell you about our ESG agenda. Once again, we were included in the ISE index and the main factors that enabled our inclusion in the index are shown here. We've created the area of risk management and internal controls management. We've also approved our risk management policy and the Company, which helps us with governance giving more transparency and control. We've also evolved in the steel chain project, which includes suppliers and bringing suppliers to be our partners so that we can reach our sustainability goals. We've also completed our Emission Inventory recognized by GHG protocol, and we've also participated in the carbon disclosure project providing all the important information for the industry. For the second consecutive year, we are also part of the carbon efficient index of B3. The next slide shows our ESG goals and our status throughout the year. Most of them more matte, so water recirculation in Ipatinga, contraction of clean energy engagement of the critical suppliers we've scoped three of the climate agenda reached a minimum level of women in our apprentice training groups and execution of our innovation pilots as well as the certification of road laminate still. The other items were not met yet, so GHG inventory, we completed that for MUSA but not for solo sizes immunize. Last time accidents were outside our expected rate, this is something that we have a full commitment with. The general Customer Satisfaction Index was very close to our goal and this is constantly monitored by us and implementation of our environmental compliance program which had some changes to its scope, and we are going to have it completed now in 2023. So that was the overview of our results. Thank you, Thiago. Let's start our Q&A session now. The first question is asked to Miguel by Daniel Sasson with Itau, and he asks you Miguel, what are the results of the negotiation with the automotive? But for contracts being renewed in January, do you have the same expectations for contracts which will be renewed in April? Good morning, Daniel. Good morning, everyone, who is here with us today. The negotiation with, contracts renewed as of January 1st were concluded in the end of December and the results led to 12% price adjustments. It's important to emphasize the duration of contracts. In the Brazilian market, we had been using 12 month contracts. But as of '23, January 1st, now contracts of -- most of those contracts will be six months because of the volatility that we have come across in both the domestic and international steel industry. Another question to you Miguel about demand in the domestic market, Leonardo Correa of BTG, Carlos de Alba of Morgan Stanley, ask whether you can anticipate any improvement of demand and which are the industries that are surprising in terms of higher demand? Any other comments on selling demands for flat steel? The local demand seems to be stable, aligned with the expectations of growth or evolution of consumption of steel in 2023, disseminated by also Brazil, in its last conference call. We see it stable. We don't anticipate any sector except for oil and gas, which has been developing and presenting important projects of oil and gas for the past 8, 10 months and there are still some ongoing discussions and quotations. So, I would just highlight oil and gas, but in general, we expect very stable demand, similarly to what we have observed in the past six months. So flat demand, in other words. Miguel, one more for you. Prices in the domestic market, Daniel Sasson of Itaú and Leonardo Correa of BTG, so what were the prices in December as opposed to the average of the quarter? And Leo asks whether it has been difficult to have a price adjustment in this more challenging market? Well, concerning the average price in December in the domestic market was 1% lower than the average price of the quarter, so very much aligned with the average price of the fourth quarter of '22. It's always challenging really to have price adjustments. It requires negotiations, complex negotiations, but we believe that the foundations for price adjustments are solid, are robust, because we are under pressure and the whole steel market globally is subject to pressure and increased cost, especially because an increase of ore and carbon in the past six months. So by having a robust system and by really showing them the increased costs, we've been successful in our price renegotiations. Isabella Vasconcelos from Bradesco is asking, what are the prices of export of steel have been set quite healthy? What can we expect in terms of volume and prices for the upcoming six months? Exports will be focused on added value products to markets which are more profitable to Usiminas. There is a very important challenge, which is the relining of blast furnace three. So we want to have profitable market for exports. We expect export levels which are stable to the levels that we've had in recent quarters. So focused on automotive industry, we have a very significant share in the region, and also oil and gas projects which are added value products, therefore offering better price margins. Thank you. And there is one more. To Usiminas Solutions and maybe you can ask another to add. So Soluções Usiminas, Carlos de Alba is asking, what's the outlook for Soluções Usiminas? In terms of sales, we also follow the market. The area of solution Soluções has a sales mix very similar to that Usiminas as holding. So with ads in the automotive industry, according to the last report, there is an expectation of increase in a car manufacturing at 2%. So, we believe Usiminas Soluções will also have increased sales. We expect to have a total increase of flat steel consumed in Brazil. Soluções Usiminas is expected to follow along the natural movement, so Soluções Usiminas holding our focus on added value products on long-term commitments and development of products that can really meet specific market requests. Thank you. Now one question to Thiago. I'll try to encompass a number of questions. Most are asking about the CapEx guidance that we announced today. Daniel Sasson with Itaú; Lucas Yang of JP Morgan; Rafael Barcellos of Santander; Carlos de Alba of Morgan Stanley; Marcio Farid of Goldman Sachs. They all want to know about the guidance of CapEx. Concerning the increase of CapEx guidance, our expectation was announced of 2.4 last year, and now it's 3.2 billion. That's the CapEx for 2023. Daniel says that the CapEx for the realigning of the blast furnace has not changed. So, he likes to understand whether the increase is just due to maintenance or should we also expect that's going to be carried on in upcoming years? Lucas would also like to know more details about the CapEx and Raphael would also like to have some more details. And also Carlos, they all would like you to elaborate further. Are there more projects then realigning of blast furnace 3, concerning the CapEx new level? And finally, Marcio for reading, just concluding the guidance on CapEx has asked, what would be the CapEx for recurring maintenance from now on, Thiago? Well, thank you for your question, so many questions within one. So let me set the counter and then we can always build upon it. So the first important point is, we talk a lot about the CapEx of blast furnace 3, but there are other relevant investments being made in other operating units of Ipatinga, which are going to take place at the same time as those have the relining of blast furnace 3. For example, maintenance or overhauling in one of our reoperations which sell over 500 million, it has not had any impact in values. What we have had is an increase value of CapEx of palliative, we basically have in the operations of coke they were partial for '22. And that's going to be throughout the whole year. And with this stop for blast furnace in the coke operations, there would be a reduction of the sustained CapEx. And we've reviewed the plan we are maintaining the sustain CapEx at similar levels as we had in 2022. And this has increased the total CapEx of the steel processing. The mounting CapEx is between 801 billion. So in addition to the main shutdowns that I pointed out, some other activities will be carried out at similar levels as in 2022, as we are going to have the shutdown of important pieces of equipment. So by doing that we can take the opportunity and also perform other words once we are going to have enhanced yield and productivity once the blast furnaces back into operation. We've also had some candidates for mining primarily the compact project study and the beginning of the environmental license process and also the plant of the tailings area of salmon bio. It's also going to be a very important point, and it has requested more impact in that and also the Usiminas Solutions, it will have higher CapEx than previous years really maintaining all the different lines and also the all the different added value to our products. Well, I hope it has been enough, please let me know if you'd like to know any further details, Maintenance recurrent CapEx for sustaining and for everyone behind a between 800 million and 1 billion. That's great. The next topic concerns cost. So Caio, Bank of America; Rafael Barcellos of Santander, asking about cost expectations for upcoming quarters, can you please tell us a little bit about that, especially concerning the realigning of the blast furnace? And how do you expect that cost dynamic? While we don't give any guidance on cost, but what we can tell you is that, the market indications show that, in the first quarter, we expect to have a positive costing bag of raw material. So, slabs and some other raw materials which aren't coming at a lower price in terms of cost than what we currently have. Operationally, we don't expect any significant changes. Just a small reduction by price and operational stability, aware of the fact that, we are coming very close to the realigning of a blast furnace and there might be instability. So, stable cost in the first quarter compared to the fourth quarter 2022. Thank you, Tiago. The next question is to Carlos. Caio Ribeiro of Bank of America is asking about the guidance of volume of mining. You have announced 8.5 to 9 tons per year. But with the realigning of the blast furnace, do you think that's going to be increased sales to third-party? And if yes, how long can we expect it to extend? Thank you, Caio, for the question. Good morning, everyone. We have been monitoring the variation of demand and what it will mean in terms of the realigning of the blast furnace. So, we are planning our sales based on that as well. There is a very important part of the volume, which is going to be directed to export, primarily concerning the fine or all the granular bulk will be directed to the domestic market and we are also considering sales to this market. The main purpose of Usiminas is not to impact our production, considering the limits that we all have for in terms of increase. That's it, Leonardo. Thank you. Thank you, Carlos. We were talking about lump, right? Next question to Thiago Lofiego from BTG, he was talking the profitability for the steel unit. Concerning the operational performance of steel unit, is it possible to have profitability over 10% or is EBITDA margin? Or do you anticipate something similar to the fourth quarter '22, which was about 4%, 5%, Tiago? You see, Leonardo, operationally speaking, and cost of production, we don't see -- we don't anticipate significant improvement in the year. It's going to be an atypical year for Usiminas, very important year. We have been preparing for it to resume the operations with our blast furnace at much better condition and that's going to impact our costs in the end of the year. Through the year, we don't anticipate significant changes especially because of costs. Well, the margin may be influenced by the market. We also have a very conservative, let's say, perspective of that has been stable throughout the year. Now, concerning the expectations once the blast furnace is back in operation, we've been making investments not only there, but in also in peripheral operations and some other important equipment of the Company, we are going to recover also the cold side which is extremely important. But once we resumed the operation of the blast furnace, especially beginning of 2024, it will mean increased productivity of at least 20%. So, it does give you the importance of the investments that are being made, and how this is going to a mean a better position of Usiminas as of 2024. The next question is to Miguel. Rafael Barcellos from Santander is asking about the availability of slabs. And I'm going to combine with a question about slab inventory levels. Rafael said that the price of slab has gone up again in Brazil. So, what about availability of labs in Brazil especially once the CRP was purchased by Arcelor Mittal. And Carlos compliment by saying, how do you anticipate the increase in slab inventory levels for the next two quarters. Miguel? Concerning slab inventory as Thiago pointed out. In the end of December, there were 351,000 slabs in the inventory for the relining of blast furnace 3. We've been of course purchasing and receiving monthly, so until the end of the shutdown, which will be in April, we will need a 450,000 to 470,000 ton inventory level as was originally planned. For the whole operation, we don't anticipate any problems for our preparation before the relining. And now Rafael, the price of slabs has increased in recent weeks, which shows the trend of raw material price especially coal and ore. The slab market quickly shows these changes in cost of steel production. And if we look closely some international consultants, they are showing very critical situations of let say Chinese steel industry which are still not reflecting these costs increasing their prices were 15% or 20% negative margins. What is being seen today in the slab market should also impact finished product market, if you may compliment Miguel because Carlos asking about the pace of creating the inventory levels for the next two quarters? As we said in the previous call, it usually takes from six to eight months of preparation to come up with our inventory levels in December, there were 350,000. So, more than half is there placed on the site and the other half is part of already contracted agreements. So, from December to April, we will be building the expected level to get to 450,000 to 480,000 tones until the beginning of the relining. Thiago, the next question by Victor Sanchez of [indiscernible], he asks about MUSA cash position, 5.1 billion, how much is within MUSA? Now Thiago one more question to you. CapEx at MUSA. Isabella Vasconcelos of Bradesco BBI; Marcio Farid of Goldman Sachs are asking whether you can tell us more about the CapEx of a mining of 500 million, which was the guidance? And can you give us any more details about that? Is it maintenance? Is it any specific project of mining? Well, I don't have the numbers, the detailed number, but the year there were 364 million of investments in MUSA. The main difference over the previous year was the operation with the tailing dams some of by, the other part is sustaining and also some compacts that but I would say the main difference comes from the tailing, some of by a tailing dam discontinuation. Thank you, Thiago The next question is also to you Thiago. By [indiscernible] with XP, he asks about impairment. Can you tell us about the impairment? What was the result to the EBITDA margin combination of manufacturers? How can you explain that? Well, the main difference over the previous year where there was no impairment was the change in market conditions. The results of the year can clearly show the decrease of margin and beginning of '22 to the end of '22. So, a different market situation, in addition to a high level of CapEx you've invested in upcoming years, which meant a reduction of expected cash flow of the Company. Thank you. The next question Miguel is by Caio Greiner of BTG. He asks about slab inventory. Can you share the average price of the slab once you're creating the inventory levels? So, we have our own production of the operation of the three blast furnaces that are in operation in Ipatinga and also third part purchase. The procurement from third part represents a 60-day between negotiations and receiving. We've been creating our inventory level since the end of the third quarter and we are going to maintain it till April, so the prices have been changing because of market volatility. You can rely on international indicators because we buy slabs. It's a free market. So, we always buy them according to international market conditions. The prices vary significantly, because of volatility. There is a trend of decreased price to December, January and then an increase in prices both of domestic and international market, and this is going to impact our inventories that are going to be composed up to the shutdown in April. Thank you. The last question is to you, Thiago, about capital structure, [indiscernible] Bradesco. We would like to hear about the expectations about liquidity in this cycle of investment. What would be the minimum cash position that we would consider comfortable? Is there any review in the net leverage or in specific target there? And finally, have you anticipated any opportunities to extend our dollar debt, which is due in December '26? Thank you, Edward. The impact on cash much push out in this will be more stress during the second and third quarter. After the third quarter, when we resumed the operations of the blast furnace and once we start using most of the labs, which were in the inventory levels, there would be an inversion of the working capital. There would be an additional cash need. And then the end of the year, that will go into the expected level, so by doing that, we can certainly deal with the cash needs. We are not considering minimum cash levels. We are not going to get closer to a minimum cash level situation that leverage tends to increase somewhat, but we are not anticipating any indicator of concern. I'd say we are at a very comfortable level in terms of liquidity. Now concerning bonds due in '26, we have been monitoring the market closely. The bonds become [indiscernible] as of June or July this year. We are actively monitoring them, and once we consider it to be the most appropriate time, we will do something about that, but there is no time up to 2026. It's not something which is in our immediate agenda here. Right, thank you. With that, we close our Q&A session. I would like now to hand it over to Alberto for his closing remarks. Alberto, please. Once again, let me thank you all for your participation and thank you for the relevant questions concerning our results of 2022 and also the outlooks for 2023. I think the main point that was addressed in the questions is, our main focus for the year. It is the investment that we're going to make in our main unit of Ipatinga. And as pointed out by all my fellow officers, it's going to certainly transform our productive unit and take it to a different level in the end of the process. This is the main focus of the top leadership this year. Make sure that all investments that are made in a Ipatinga plant can really impact and be really perceived as of the beginning of next year. Thank you. If you have any questions, our Investor Relations team is here to support you. Thank you all very much for your participation.

EarningCall_103

Good day, everyone, and welcome to the Expedia Group Q4 2022 Financial Results Teleconference. My name is Emily, and I'll be the operator for today's call. [Operator Instructions] For opening remarks, I will turn the call over to Senior Vice President, Corporate Development, Strategy and Investor Relations, Harshit Vaish. Please go ahead. Good afternoon, and welcome to Expedia Group's earnings call for the fourth quarter of 2022 that ended December 31. I'm pleased to be joined on the call today by our CEO, Peter Kern, and our CFO, Julie Whalen. The following discussion, including responses to your questions, reflects management's view as of today, February 9, 2023 only. We do not undertake any obligation to update or revise this information. As always, some of the statements made on today's call are forward-looking, typically preceded by words such as we plan, we expect, we believe, we anticipate, we are optimistic or confident that or similar statements. Please refer to today's earnings release and the company's filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements. You will find reconciliation of non-GAAP measures to the most comparable GAAP measures discussed today in our earnings release, which is posted on the company's Investor Relations website at ir.expediagroup.com. And I encourage you to consistently visit our IR website for other important information. Unless otherwise stated, any reference to expenses excludes stock-based compensation. Thank you, Harshit. And good afternoon. And thank you all for joining us today. This past year was an important one in our company's journey. We did a ton of work and made great progress on many transformational initiatives, all while delivering record EBITDA. Q4 was yet another step in that journey, despite the impact to our P&L from the severe weather. Hurricane Ian in early October and the winter storms in late December drove up cancellations, causing bookings and revenue for the quarter to come in behind our expectations, despite demand otherwise accelerating through the quarter. The good news is that we have seen those booking trends come back much stronger in January post the disruptions. So, 2023 is off to a great start. And we were really pleased that our investment over the last several years in service technology and capabilities allowed us to deliver best-in-class service through these difficult travel circumstance. As I've said many times before, when your strategy is centered around long term retention of valuable customers, every element of the work must deliver for the traveler. So big thanks to our service team for all their hard work, especially over the holidays. Now, as we launch into 2023, I'm particularly pleased with how our strategy of investing in and retaining high lifetime value members is showing accelerating improvement across our business. For the fourth quarter of 2022 versus 2019, our new customers that became loyalty members grew over 60%. And we entered 2020 with a record number of active loyalty members, which is 10% higher than any prior year. And just as importantly, our quarterly active app users increased by approximately 40%. For us, these are the most important metrics to gauge the progress of our strategy. Just to remind you, our loyalty members each drive two times the gross profit on repeat business over an 18-month period as compared to non-members. And our app users each drive 2.5 times the gross profit on repeat business over the same period. When you combine these two and have a loyalty member who also uses the app, this drives the highest production of all, and that group represented the fastest growing customer cohort for us in 2022. But as strong as those numbers are, for our overall business, they're even better in our Expedia brand in the US. This is extremely important because Expedia US is the business where we've been able to make our fastest product and marketing improvements, and where we have the most complete set of capabilities to support our strategy. And the evidence is clear. In the fourth quarter of 22 versus 2019, Expedia US grew new customers that became loyalty members by over 300% and entered 2023 with nearly 70% more active loyalty members than any prior year, and almost 60% more active app users. Expedia US was able to deliver almost 20% revenue growth in 2022 as compared to 2019, and there's still plenty of improvements yet to come. Of course, when you look at our all-up B2C numbers, the accelerating performance of Expedia US has been largely offset by our intentional deemphasis of some smaller non-core brands, our pullback in certain geographies where we did not have the right model, and of course, our much discussed technical migration, which required significant work, and like all migrations resulted in some short term friction. But what I'm really excited about is that with the proof now very clear that our strategy is working, we will begin more aggressively rolling it out to our other brands and our non-US markets. After years of democratizing travel, we are now taking a leap forward to use cutting edge technology, a better marketplace, a broader rewards program, and best-in-class service to drive true customer benefit and loyalty. Because when you take care of customers and give them great experiences, they keep coming back. And that's how you win. In support of this long term strategy, you will see us maintain a higher mix of marketing spend to channels that attract desirable long term customers, rather than just chasing short term transactions. Therefore, the parameters of when and who is worth marketing to and winning as a customer will be different. We have clearly proven the value of attracting and retaining the right customers, and increasingly, our P&L will reflect that. We're starting 2023 with the highest number of active loyalty members and app users for any year. And we will see further momentum in the business this year thanks to a much larger base of loyal customers. Of course, our confidence in our strategy is ultimately only possible because of the underlying technology that we have invested so much in over the last several years. This is what has enabled Expedia US to grow faster. And all of our brands and geographies begin to ride on that same tech stack, we will expand our ability to compete and win in more places. Work that created a drag on our business in 2022 like the migration of hotels.com to our core platform become big on lots for us in 2023. As one example of this, we expect our test velocity around optimizing our sites to grow roughly fourfold with the same resources this year and more engineers and product team members are freed up post migration and our tests can be run across our entire base of core OTA traffic. In other words, we will have many more tests where the winners get deployed across a much larger base. And as we continue to invest further in product and technology and new features and capabilities to take online travel to the next level, these improvements increasingly impact more and more of our customers more rapidly worldwide. No travel player in the world has done more over the last few years to innovate around the shopping and service experience to improve the travel journey for the consumer. And just to emphasize the point, all of our advances in technology, in product and in customer service not only benefit our direct customers, but continue to benefit our expanding base of B2B partners as well. Our B2B business is one of the largest in the world and continues to grow rapidly. The breadth and depth of our products are expanding as is our partner base, reinforcing the importance of our supply and our technology as the core operating system of the travel market. To that end, we added many new partners and grew significantly in 2022, despite agents still being greatly constrained. With the return of travel into and out of China in 2023 and a robust pipeline of new partners around the world, we anticipate significant growth and a great year for our B2B business. So as we wrap up what was the most profitable year in our history, we begin what will be another exciting year of growth and the last in our major technical overhaul. This coming year, we will finish moving all of our brands on to one front-end stack. Vrbo, the last major brands to come across, has already been testing traffic on the new front end, and will make the final migration in the coming months. This last step will then allow us to launch our new One Key loyalty program, which will span all of our main brands. It will be the broadest, most flexible loyalty program in the world. And for the first time, give vacation home renters the benefits of a loyalty program. And importantly, it will complement our many partners loyalty programs as well. So overall, I'm confident that with more technical tailwinds and headwinds this year, and with a proven strategy that we will be expanding on, we will once again drive strong financial growth while completing the last of our major changes. It has taken several years and a lot of hard work, investment and patience. But we're extremely gratified about where we are and what we know we can deliver going forward. And I'm even more excited about moving the last big boulders of our plan across the line and driving greater acceleration in the future. Thanks, Peter. And hello, everyone. 2022 was a year of significant progress on our strategic growth initiatives. And our financial results are evidence that we are on the right path to deliver long term profitable growth. The accelerating success of our lodging business, particularly in our brand Expedia business in the US, which is the first of our brands to benefit from our transformative tech and marketing initiatives, enabled us to deliver total company record lodging bookings and revenue. And we did this while at the same time driving significant profitability with record EBITDA levels at over $2.3 billion and an EBITDA margin of over 20%. Our fourth quarter also benefited from continued strong lodging demand, but unfortunately was heavily impacted by Hurricane Ian in October, and the storms in the US during December. Absent these weather related events, as well as FX headwinds, our results on both the top and bottom line would have been at record fourth quarter levels. As far as the details regarding our financial performance for the fourth quarter, similar to previous earnings calls, I will discuss our revenue related and adjusted EBITDA growth metrics this quarter both on a recorded and like-for-like basis. The like-for-like growth rates excludes the contribution from Egencia, Amex GBT and the non-lodging elements of our Chase relationship. As a reminder, on November 1, 2021, we completed the sale of Egencia and our EPS business entered into a 10 year lodging supply agreement with Amex GBT. It is also important to note that our fourth quarter 2022 growth rates as compared to 2019 were negatively impacted by FX headwinds of approximately 250 basis points to gross bookings, 400 basis points to revenue, and 800 basis points to adjusted EBITDA or 70 basis points to our adjusted EBITDA margin. We believe these like-for-like numbers and the disclosure of the negative impact from FX headwinds are helpful in assessing the operational performance of our business. Please note that we will discontinue disclosing these like-for-like numbers next quarter, the first quarter of 2023, as we move away from comparing our financial performance to 2019 levels and move towards standard year-over-year comparisons. Now let's move back to our performance this quarter, starting with our gross booking trends. Total gross bookings were down 12% on a reported basis and down 2% on a like-for-like basis versus the fourth quarter of 2019. Total gross bookings were impacted by a spike in cancellations and lost transactions related to the hurricane and the winter storms in the US, as previously mentioned. If we further adjust for the approximately 250 basis points negative impact from FX during the quarter, our gross bookings would have been above 2019 levels. Growth was driven by total lodging gross bookings, which were the highest Q4 on record at plus 4% on a reported basis and plus 6% on a like-for-like basis versus Q4 2019. By month, lodging gross bookings on a reported basis were up 3% in October which was impacted by the hurricane, up 7% in November and up 2% In December, which was impacted by the winter storms in the US. Excluding the weather-related events, growth versus 2019 for each month in Q4 reached high-single digits that accelerated through the quarter. And in January, we saw a step change where our lodging gross bookings accelerated even further, growing over 20% versus 2019. While it is still early in the quarter and 2023, we are pleased to see strong lodging demand continue, including total lodging bookings for stays expected to occur in the first half of 2023, continuing to meaningfully outpace 2019 and 2022 levels. Moving to the key financial metrics in the P&L, starting with total revenue. Revenue of $2.6 billion was down 5% on a reported basis and down 1% on a like-for-like basis versus Q4 2019, and includes the 400 basis point negative impact from FX, as well as the financial impact from the weather related events. Excluding these factors, our reported revenue would have been above 2019 levels. Total revenue margin also improved to 13% for the quarter, or up approximately 90 basis points versus Q4 2019 as we continue to benefit from a mix shift towards our higher margin lodging business, which as a percentage of the total has grown approximately 1,000 basis points over the same period. Cost of sales was $408 million for the quarter, which is a cost reduction of $125 million or 24% and 380 basis points of leverage as a percentage of revenue versus 2019, driven by our divestitures and ongoing efficiencies primarily across our customer support operations. Our customer support operations continue to benefit from the various automation initiatives we have implemented over the past couple of years. And we expect that, going forward, with the further consolidation of our tech stack onto a single platform, we should be able to continue to drive efficiencies across our cloud and licensing and maintenance costs as we eliminate systems that are no longer necessary to support. Direct sales and marketing expense in the fourth quarter was $1.2 billion, which was up 20% versus 2019. The primary drivers of this increase over 2019 were associated with both our B2B and B2C businesses. Our accelerating growth in our B2B business is driving an increase in commissions paid to our partners. And these commissions fall into our direct sales and marketing line. In our B2C business, we had increased marketing spend to support our accelerating growth during the quarter. Unfortunately, given the storm related cancellations and lost transactions and their impact to the top line at the end of the quarter, we did not fully realize the anticipated return of our marketing spend. In addition, we also have been strategically mixing towards longer term investments in our marketing spend, which, given the longer term return profile of the spend, is less closely correlated to demand within any given quarter. As a result of these two factors, we saw this marketing spend deleverage versus Q4 2019. However, on the full year, we saw leverage in our total B2C spend versus 2019, inclusive of loyalty and discounting, that are contra revenue. And we expect to maintain this leverage for improvement going forward. Overhead expenses were $590 million, a cost reduction of $157 million in the fourth quarter of 2022 or 21% and 470 basis points of leverage as a percentage of revenue versus 2019. We continue to remain disciplined on our cost structure. And with the expected improvement from the consolidation of our tech stack and general growth initiatives, we believe we can continue to maintain this lower cost structure and drive long term leverage as we deliver accelerating top line growth. Overhead expenses slightly increased from the third quarter, approximately $23 million, as we continue to invest in top talent across our product and technology teams to help accelerate our various platform initiatives in support of our growth strategies that will drive long term financial returns. Adjusted EBITDA was $449 million or down 6% versus for fourth quarter 2019 and was down 2% on a like-for-like basis, which includes the negative impact from the weather related events and FX headwinds. On a margin basis, we were relatively in line with 2019 despite absorbing these negative impacts. And absent these factors, our fourth quarter adjusted EBITDA grew in the mid-teens as compared to 2019. Free cash flow for the full year was strong at positive $2.8 billion, up approximately $1.2 billion, over 70% versus 2019. The strength was driven by our record EBITDA levels on the year and an improved benefit from working capital as well as lower overall capital expenditures, as our spend is now primarily focused on our technology and product transformation. On the balance sheet, we ended the quarter with strong liquidity of $6.6 billion, driven by our unrestricted cash balance of $4.1 billion and our undrawn revolving line of credit of $2.5 billion, which provides us with ample access to cash to operate the business. This liquidity, combined with our strong free cash flow levels, enabled us to maximize our return of capital to shareholders during the quarter by further accelerating our share buybacks to approximately $350 million or 3.7 million shares in the fourth quarter. This resulted in approximately $500 million and 5.2 million shares being repurchased since the end of September 2022. Even after these buybacks, we enter 2023 with ample levels of shares remaining under our existing authorization for future repurchases at approximately 18 million shares. And given our ongoing strong liquidity, our confidence in the business, and the fact that our stock remains undervalued and does not reflect our accelerating business performance, we plan to continue to buy back our stock opportunistically in 2023. In closing, I couldn't be more excited about what lies ahead in 2023 and beyond. With accelerating demand trends and the proof points that our growth initiatives are working, combined with our strong financial position as we enter 2023 with ample liquidity and a higher margin profile business, all of this gives us the confidence in our ability to deliver double digit growth and expanding margins, as well as long term shareholder returns. Maybe two, if I could. In terms of thinking about moving all of your brands and all of your geographies on to the technology stack as we go through 2023, are there some elements of either costs that still have to be absorbed by the business model that we should be keeping in mind in 2023? And once that transition is over, how should we be thinking about possible lift from a business momentum standpoint on the other side of that transition? And maybe one quick follow-up on B2B. I know, obviously, we're not going to guide to the full year, but can you talk a little bit to some of the variables you're seeing in the B2B business that are building momentum or things that we should be keeping front of mind as we think about what growth and volume you might build in the B2B business through 2023? I'll start at the top. In terms of moving the businesses on to a single technology stack and front end stack, I think hotels.com is an instructive example, in the sense that last year we talked about this a few times. As we're moving hcom across, we obviously did less to improve Hcom as a standalone entity, because all the engineers were working on moving it. So, you lose a little momentum as you're moving something. And then there is typically an uplift period where you've got to optimize the new stack and the new product on the new stack to get back to where you were, and then get all the benefits beyond that. So there is typically, if you will, a lull that takes place as you move things and some friction that you have to absorb in the numbers. So we did that with Hcom, as I mentioned. We're now getting the benefit of much faster testing between all the OTA brands. Vrbo is the next one to move. It will suffer a little bit of the same things. But we think we can absorb that, as Julie said, and still show the growth we are planning for this year. And that unlocks, then, of course, being able to do One Key and other things. So there's a lot of unlocks on the other side, but you do have to sort of weather a little friction to get across and we've weathered it in the last year's numbers. We have a little left to weather this year. Again, we think will drive very good growth despite that. And, of course, when it's behind us grow even faster. So, that's what we're really looking at. And then, on the other side of it, you get the benefit of testing faster, improving the products faster across everybody. You get the benefit of One Key. And you also get the benefit of being able to then deprecate older stacks that have costs associated with them, engineers associated with them, etc. You can put all your resources on the most valuable thing. So, that's the big thing we've got left to do. Those are the two big hitters we're launching this year, but there's lots of other work going on under the covers constantly, both in optimization and in cleaning up and consolidating other back end things in the stack. And then, on the B2B front, there's a lot that's gone into what's growing, as I mentioned. We think Asia opening up will be good for us. We've had some big relationships there, including China where we haven't gotten much output during COVID. That will help. But really, we've been growing across many vectors. We've talked in the past about our optimized distribution product that we used to help hoteliers with their wholesale businesses. That's been growing very well. We've invested in our travel agent product, which has driven a lot of growth. And we've expanded, as I said, the breadth of our partnerships, the number of our partnerships. We continue to power a lot of the biggest supply partners, like airlines and others. So we continue to grow kind of in every dimension, sort of more partners, more depth with each partner, and new products coming all the time. So that continues to be an exciting area for us. And as we innovate faster with technology, with AI and other capabilities, those underlying capabilities become more and more valuable to our partners. Just thinking about the investment plans for 2023 and how that impacts margins. So on the one hand, you obviously have investments in One Key, driving some incremental marketing investments. What are the areas that you see potentially offset some of those incremental investments from perhaps fixed cost growth, maybe underlying marketing efficiency via bringing that function under a unified stack? Or perhaps other areas of cost efficiency that you see across the P&L? We will be investing somewhat more in the loyalty program, but we expect, as we've talked about many times, we think about our investment in acquiring and retaining customers as everything from loyalty to discounting to direct marketing spend and performance brand, et cetera. And we expect to balance those things. So we don't expect the all up cost of that, if you will, to be expanding over the course of the year. It might shift between buckets. And we believe we can underwrite that with the total spend we already have. So there may be some noise. And when we get there, we'll explain it to you in terms of how the loyalty program will roll out. But we expect to absorb that all in all those line items, just trading them off, one against another. One follow-up, if I could. Obviously, you're seeing really strong underlying demand for the industry with growth into January that looks really healthy. Obviously, this is maybe somewhat counterintuitive, given the state of the consumer savings rates and inflation. To what do you owe sort of this strong underlying demand for the overall travel industry, given the macro backdrop? I think you've heard [indiscernible] talk about it for a while, and maybe it was hopeful. But we continue to see that people are prioritizing travel over just about everything. If any of you have been traveling, I'm sure you've seen it. Rates are still very high. Demand is high. Planes are full. So I think maybe it's still the effect of COVID and people realizing there's more valuable things to do with their lives. And it's not just like revenge travel, but it's beyond that. Like, I want to keep traveling, I want to keep enriching my life. But I think we're seeing high demand. We obviously think we're doing a good job of capturing that demand, relatively speaking, but the markets are strong. We still haven't seen really Asia come back fully. I'm sure we'll see pockets. We're all worried about it. But so far, demand continues to be quite robust. And we're really pleased with how 2023 is starting. So, with any luck, there'll be soft landings all over the world. And Asia will come back and the industry will remain robust through this year. I had a follow-up on that. Could you help us think about or help us better understand the growth that you're seeing year-to-date? Should we think of that as kind of getting back to that high-single digit number? Or have you been able to surpass that? I think as Julie pointed out, January was north of 20% up in lodging, GBV, gross bookings. So we're definitely running ahead of high single digits so far. We'll have to see how the rest of the year plays out, rest of the quarter, rest of the year plays out. But it's really been driven by pretty much all quadrants. It's our brands. It's our B2B business. It's geographically dispersed. APAC is coming back a little stronger, but that's a relatively small base for us. So, it's been pretty broad. And right now, it's definitely running well ahead of where we were in the fourth quarter. Yeah. And I think just to remember, even when you go back to the third quarter, we also had high single digits. So really the fact that we're holding that ex all the storms and the noise that we've been talking to you guys about, and it's been accelerated in the fourth quarter, and we're seeing a step change as we enter into 2023, as well as with our Bex US business, we think that's a really good sign that we've got some strength ahead for this year. And I'd add, Kevin. I talked a little bit on the first question about friction. We spent a lot of last year doing some heavy lifting on things like hotels.com, having reduced testing, etc. We really spooled that up in the fourth quarter, and it's accelerating further now. So just the ability to be back and really innovating on the product in the day to day and the product is really valuable and it's increment by increment. It's small pieces. But when you add them up, it really can drive a lot. So conversions improving, lots of things are improving. So I think we're just starting to multiply those effects of all the work we've done along with the marketing and everything else. And hopefully, also, we're working in a good demand environment, which helps. But I think those things are just more tailwinds than headwinds again, and that's just helping to drive us a little faster. Just one quick follow-up on that. Can you touch on ADR trends? The kind of slower number in Q4, was that just related to the weather incident? Yeah. That was I think called out in our remarks. But that was pretty much solely due to the weather-related incidents. ADRs have been holding pretty strong, but still elevated. I don't think we've heard anyone else speak of any issues with ADRs. We've seen a little bit of movement in Vrbo. But again, it's coming of off really high levels, and it's not that significant. Slight movement. But ADRs are really holding strong for us across the board. Two, if I can. First just on the – I think on the marketing, the all-in the marketing side, loyalty, discounting and marketing and the plan for that to kind of be balanced through the year, is there a point where you get to the other side of kind of some of this longer dated spend and feel like you're going to see leverage as this bears fruit? And then sort of related to that, it sounds like the stats around loyalty and app users show a compelling uplift. How convinced are you guys that those boosts are incremental and kind of causal rather than just coincident with your heaviest users just gravitate towards those things? Anything you can share there would be great. So on the marketing side, from a leverage perspective, we actually are leveraging with our all-up spend with, obviously, loyalty and discounting which are contra revenues. When you look at totality on the year, we are leveraging and we expect to hold that, if not improve it, next year. I think we're just wanting to make sure we make the point that on any particular quarter, you can see movement, right? Because we're shifting our spend and have started to do that now for a couple of quarters where we're putting more of our spends into long term investments. And so, you could make that investment today and get the benefit two or three quarters out. And so, it's not about any one particular 90 days that we should be judging per se, the total bucket of our spends. So, we're really focused on leveraging it in total on the year across the entire spend profile. So, I think that's how you should think about it. I think it's great that we've seen it leverage. We're shooting for that again here. And I think when you look at things like the types of customers, the high lifetime value customers that we are getting and are getting significantly more in brand Expedia US business and we're seeing that translate into really strong revenue, it's a pretty exciting time to see this all come to fruition. I would just add on your question of causal or not. What we've seen, Lloyd, is that we've been able to greatly expand the numbers at a pretty rapid pace and bring more and more people into the loyalty plans and into app usage. And our historical – those trends I gave about 2x and 2.5x with even higher multiple for app loyalty members, those have held even as we've expanded the pool. So, it's not just the devotee who's becoming a loyalty member. It's really everybody that we can get into loyalty, that we can get into app usage starts to see all the member benefits, starts to get the pricing benefits and points and other things. And that's consistently sticky at bringing them back. And as Julie says, over time, we'll create more leverage in the model because once we have this bigger and bigger base of loyal customers, then the marketing beyond that, beyond loyalty, et cetera, becomes, again, trying to buy the right customers in given places and add them to the pool. And that we think we can do more effectively once we have a bigger base and more efficiently. Maybe one big picture question about the shape of the year. Your marketing spend is over 50% of revenues. I know you're working on a lot of projects to build a better customer base. Can you help us think about how you think about that long term? And when you said leverage this year, does that mean on that line? Are you thinking about as a percentage of bookings for 2023? Secondly, just a comp question. I know there's some tough virus comps – easy virus comes right now. Ton of bookings float in kind of in the spring. How are you thinking about the shape of the year, for our models? I'll let Julie deal with the second one. But to your first one, I think the way to think about is you've got to break it up a little bit. First of all, we've got expanding B2B business, where commissions are part of our marketing spend. So as that business grows and has been growing currently faster than our B2C business, you've got some movement into that mix, where the commissions are higher than this 50% level. So, it's pulling the number higher. At the same time, we're trying to use marketing to build this base of customers, leverage the model. And as the base of direct gets bigger, right, you're driving more business from direct and you start to get leverage in what you're spending to add new people to the funnel because the new people become a somewhat smaller piece of the overall pie of business. And so, that is where I think you will start to see us gain leverage, is as the big base of loyalty and app members grows and grows and grows, and we're very focused on retaining them, lowering churn, all the pieces that go into that. That is how we get a bigger direct business that we're driving on top of adding new people to the funnel. But that spend is now on top of just a bigger and bigger base of customers that keep coming back. So that's where we believe long term we get that leverage from. And the better we get at it, who knows how we will balance growth and profitability, but that is the base on which we build. We have easy comps now with virus first couple of months. And then you saw a big flood of bookings into the industry in April and May. Just want to make sure people are thinking about the models right and how you how you think about that. Obviously, [Technical Difficulty] that we believe on the year that we can drive double-digit comps year-over-year. We're obviously not speaking how it plays out by quarter. But I think what's super exciting is how we started 2023 at these levels with greater than 20 on our [Technical Difficulty] gross bookings and really coming out of the year strong. That gives us a lot of confidence. That plus Bex US and how it's performing under the covers gives us a lot of confidence for the momentum as we move throughout the year. But I wouldn't get ahead of us right now, still early in the year, early in the quarter, but we are committing to the double-digit growth on the year. A couple of questions, guys. Could you give us an update on China outbound, your partnerships there and how those work in relation to other players in the market and any early thoughts on how you would pursue that opportunity as they reopen? The second one was just really quickly on the test velocity that it can grow 4x, Vrbo cuts over in the first couple of quarters, if I got that right. If you had to put a bow around the amount of testing across all your properties, are we in the ninth inning in terms of – or eighth inning in terms of [indiscernible] and then we're homing in on that 4X test velocity. China first. Our biggest relationship there is outbound with trip.com in China, and then we have some smaller relationships and some offline travel relationships. It's early days, there's tons of interest. I'm sure you'll hear this from other players, but there's a lot of shopping going on. But it's still fairly challenging for outbound travel between the political issues, between airlift which is challenging, and there's still a lot of unique rules now getting in and out of China that the airlines are dealing with, making it hard to fly direct and so forth. And then, of course, you've got the issues of Russian airspace, with great issues with European airlift to China. So it's going to take a little while to work itself out. But interest is very high. We are seeing uplift, but we expect a big uplift to be still a little ways out. But it's very exciting, obviously, and hopefully, some of the things that are going on will quiet down, and we'll continue to see more robust cooperation between various governments to make it more possible. Certainly, the US travel industry is doing a lot to lobby to get rid of various restrictions. The second piece, we are already planned at 4x velocity. So that has a lot to do with bringing sort of the core classic OTA brands together. So Hotels, Expedia, and then some of the smaller brands that ride the same rails already. Vrbo is the next thing to come across. And it will benefit from a lot of similar testing. But it will also be a somewhat unique product in its own right. So, the 4x has nothing to do with Vrbo coming across or not. It's really around core OTA. When Vrbo comes across, it will get the knock on effect of some of these winners and some of these benefits that can go across everything, whether it's in checkout or payments or other things. But on the front end, the Vrbo front end will still be a little different, and it will get some of those benefits, but the 4x is already baked, going to happen. And I think in terms of what we're capable of as a company, I would say that's less than halfway home because as we get more and more of the whole back end of the stack aligned, as we get our test environment all aligned, we have lots of opportunity to go faster. And a lot of our tests are now really more than what used to be a single test because they're AI driven with multi variables. And so, one test might be the equivalent of 10 tests. So it's really starting to amp up considerably. And there's a lot of opportunity that we haven't gotten to during all our big transitions because we're just so focused on shifting things and moving them into one platform. And we're finally getting back to the bread and butter of doing that. And there's a lot of upside there. I wanted to start with the comment you made about the Expedia brand performing well, and that some of your smaller brands and geographies have been sort of dragging down the overall business because of sort of intentional decisions to deemphasize them. So, I'm just curious if there's going to be an inflection point when those smaller brands and geographies become less material, so that the overall growth improves as it starts to mirror the Expedia and Vrbo brands? The second question is there's been a big uptick in conversations about AI. And I'm curious if you could unpack where you see the biggest opportunities to leverage AI capabilities across the business and how that could alter your trajectory in the travel ecosystem. Customer service is obviously one that immediately comes to mind, but curious to get your perspective on that as well. I think we could probably talk about your second question for a couple hours. But I'll take your first one first, which is, yes, we precisely believe that with brand Expedia – again, we talked about Expedia in the US. Expedia is obviously in a lot of countries. And the issue has been not everything we've developed was immediately available in all languages and all geographies. Likewise, not on all brands. So as we start to be able now with hotels.com on the same stack, with each benefiting from the same goodness that comes from tests and other things, we're going to be able to roll out that playbook to more and more places. Now, there's still some work to do. Hcom's loyalty programs still different than Expedia. Once we have One Key, that will simplify that whole ecosystem as well. But we believe that those big brands, inclusive of Expedia, hotels.com, now on the same stack, and Vrbo and our B2B business, they will inflect past the slower growth of some of the smaller things. But to be clear, we want to move back into geographies, we want to play this playbook out in more places, this is not about, like, keeping the good and slowing down the bad. And then there's no bad, but slowing down the slower growing. This is about keeping the focus on the winning strategy and deploying it in as many places in as rigorous and controlled way as we can. And you're winning in more places and driving the business that way. So, it's a bit of, you're right, the big, good stuff overtaking the slower growth stuff. It's also about deploying the strategy to some of the slower growth items where we think we can still drive, whether it's a geography or a certain brand in a certain market where we believe we can play this playbook out and have the same success. So it's a combination of those things. As far as AI goes, the big conversation, we already use a fair amount of AI and machine learning in all kinds of products. There's opportunities, for sure, in some of the newer things we're all talking about, like voice et cetera. In customer service, we're already experimenting with that there. In creating content and answering queries for customers. But we're using machine learning across the board in terms of personalization, in terms of how we sort for you, what we serve up to you. We'll use it in direct consumer communications over time, et cetera. So, we're using that. And as I mentioned, we're using it in testing as well as we develop more sophisticated algorithms to test multivariable tests. Do multivariable tests, that expedites all our testing. So we're using it. I'd say probably its biggest, highest value is ultimately in personalization. But you can think about that really broadly in terms of how you get service, taking care of how you search even for properties, natural voice search, which we already have a voice search capability, but that will get better with the benefit of the new AI capability. So all of those things become big opportunities to advance it. And I think we are by far at the forefront in our category in terms of how to use it and how we can use it to best improve the customer experience. Maybe two quick ones for Julie. Julie, can you just quickly restate and clarify the guidance and expectations for the year? I think it was double digit growth. Is that in bookings? Is that versus 2019 or year-over-year? Can you just restate that for us? And I was also curious, your comments around headcount. It seems like a little bit of a different comment than we've been hearing this earnings season. How are you thinking about headcount through the year? From a guidance perspective, we said double-digit growth. That's on both top and bottom line, and it's relevant to – year-over-year. So, as I mentioned at the beginning that we're going to be switching next year to no longer be, per se, to tracking against a four year old metric. We're going to move to year-over-year. And so, that guidance is relevant to that. Regarding headcount, yes, that is different than probably what you've heard in other places. I think what's important to remember is that the team here did an incredible job, taking out $1 billion worth of cost over the last couple of years. And so, we're coming at this from a different spot than many other tech companies and so forth. And so, we've taken out a lot of that cost already. And heads, I think we're down – at some point, down 30% or so. And so, again, coming from a different spot. We're really being thoughtful about what we invest back into, for obvious reasons. We're watching the economy just like everybody else. Obviously, we're seeing incredibly strong business, but we're being thoughtful about who we invest back into. And really, our investments are primarily in product and tech to support our growth initiatives and to get us over this line. Peter has been talking about getting this tech stack completed. And so, we feel like we're in a great spot to be able to do that with limited levels of headcount growth and maintaining our strong financial discipline, keeping our cost structure below our sales growth. This is Dae Lee on for Doug. I have two. So, revisiting the demand comments, is this something that you're seeing across deals and accommodation types? Or are there any particular deals or maybe property types that might be driving some of that strength that you're seeing? With obviously your January comment, what's changed from 4Q to January that might be driving strong lodging growth in January and how sustainable do you think those vectors are going forward? I think, to your first question, we're not seeing anything – I'm sure we could dissect every variable and find some difference, but there's not anything, when you look at it broadly, that says luxury is doing well, but the bottom is doing poorly or vice versa. We are generally a little more biased towards the middle and upper end of the market. And we are seeing fairly consistent strength. As I mentioned, APAC, measured against itself, is coming back faster, but it had a longer way to come back. Obviously, the West has been back for a while. But it's also seeing nice growth. So APAC for us is not big enough to drive our overall number. So it really is kind of everything. And by and large, it's every class of product and class of – every type within a class of product. So there's nothing we've really seen that's driving like, wow, luxury is off the board and everything else is making up for other things. So we haven't seen much movement between products or trade downs or any of that. It's been pretty consistent. January, as I mentioned, we believe it's a combination of a lot of work we've put in in terms of improving the product, getting through some of the hardest transitions, getting back to testing, getting our marketing machine refined, and that's constantly improving. And we've been talking for a long time – Julie mentioned that we've been investing for a while in some of these long term vectors. And as we've all talked about, we gave up some short term business to focus on app downloads, to focus on getting the right kinds of customers. And we knew it would take some time for this to start to multiply on itself and get the benefit because people don't always book travel 20 times a year. So I think this is the benefit of time of catching up and stacking up the base of members, this base of app users, improving the product. As we've gone, we've launched a bunch of great features around flight tracking and comparison shopping and smart shopping and collaborative shopping and a bunch of new products, all of which have been very engaging in their own right. We're rolling those out to more places all the time. We just recently rolled out flight tracking to the rest of the world outside the US. So we're seeing great benefits in those things. And I think they're just starting to stack up now. There's no magic to January 1. So I can't tell you exactly why January. But post all the disruptions of the storms, we've seen really strong, robust demand and rebound. And I think it's a combination of a ton of hard work across our entire company. Maybe a couple of ones for Julie. So, first, the guidance on margin expansion was helpful, but curious if you can put any more specificity to it. Understand that, obviously, macro creates a lot of uncertainties. But is there a level that we can expect should macro trends kind of remain consistent with what you've seen in January and maybe recovery holds up through the year? Also another financial question, maybe on buybacks. What is the philosophy in terms of maintaining the velocity of buybacks? Is 4Q kind of a good proxy for us to think about, given the business is very cash flow generative and you have plenty of capacity? On margin expansion, I think, first of all, it's important to remember that we're ending this year with record EBITDA levels and margins that are expanding 200 basis points, and we're committed to expanding on top of that. So, we're really proud of where our margins are. Certainly, we would love to give a target, but I think at that point – I think I even said this last time that when you give the target, then they want the higher target. So, we're really pushing towards driving efficient growth and driving profitable growth. And we think as we're starting to demonstrate when we're getting these lifetime value customers that we can get more efficient, as we have started to do on the year with our marketing spend, and we're deriving the top line to levels that we're seeing has accelerated through the Q4 and coming in even stronger in 2023, all of that should be bode well for us to be able to drive profitability and EBITDA. And so, that's about where we're going to commit to at this point, is margin expansion. But over time, we can update you on as we move through. From a buyback perspective, as I said earlier, we're really committed to buying back our stock. We believe it's the best use of capital to maximize shareholder returns at this time. Certainly, with that momentum we're seeing in the business, our stock is still undervalued, we believe, and so therefore, we believe buying back our own stock is the best return. So we're going to continue with that. We're going to buy back opportunistically. Obviously, as you mentioned, and as we said earlier, we did buy it back on an accelerated basis, $350 million approximately in the fourth quarter. And that was on top of another $150 million that we had started sort of the end of September. And so, we're going to be continuing with these elevated levels and buying back opportunistically as we go throughout 2023. I think that was it. So thank you all for joining us. Appreciate your time and look forward to our next update. Take care. Thank you, operator.

EarningCall_104

Good morning, everyone and welcome to TGS Q4 2022 Earnings Release. My name is Kristian Johansen, I'm the CEO of TGS and with me today, I have our CFO, Sven Børre Larsen. So, I’ll give you a chance to read the forward-looking statements before I go to the first slide of the presentation, which are the highlights from Q4. So we had total POC revenues of about $227 million in Q4. That compares to about $120 million in Q4 of 2021. I’m particularly pleased about our late sales that grew from about $136 million or grew $236.6 million in Q4 this year, or in 2022. That compares to about $53 million in Q4 of 2021. We had early sales of about $31 million as compared to $55 million in Q4 of 2021. And last but not least, Magseis Fairfield was consolidated from October 11th and contributing to about $54 million to revenues after the Intercompany Eliminations due to working for TGS in that period. The EBITDA based on POC was about $151.4 million and that compared to $84 million in Q4 of 2021. We continue to have a robust balance sheet, we have cash, net cash of about $188.5 million. And that's despite being very active in the M&A market during the course of 2022. Strong contract inflow, we have about $283.4 million in Q4 of 2022. And that compared to about $162.8 million in the same quarter of 2021. So it makes me really optimistic about the future and we have a financial guidance for 2023 that I think surprised most of you quite positively, we're increasing our multi-client investments to a level of between $320 million and $350 million. In addition to that, we see POC early sales rate above 70%, you could probably assume that 70% is pretty much committed. So you can see that as a minimum funding for our projects for 2023. And then in addition to that, we keep our dividends at about $0.14 per share per quarter for 2023. So again, very pleased about the quarter, obviously, a very strong, late sales figure. But what probably excite me even more is all the new projects that we've signed over the last couple of months. And you saw this morning as well that we announced a couple of new projects for TGS. So if you look at the highlights in more detail, I want to start with a Magseis Fairfield. So the acquisition of Magseis, we've reached about 75% ownership back in October of 2022. And then we got to the 100% ownership in early January 2023. Magseis will become a separate business unit in TGS, responsible for OBN, but also all other acquisition related activities, meaning that we move our operations department into Magseis and that business unit will now be headed by the EVP, Carel Hooijkaas, who is the former CEO of Magseis. So we're very pleased to welcome Carel to the team, and also pleased about the integration process that is actually ahead of plan. We have a cost synergy potential that we have increased from the initial range of between $7 million and $9 million. And we will see a full run rate of that to be realized towards the end of 2023. And again, just to highlight the transaction rationale that we have talked about in the past that we see great benefits by owning my size and these booming markets. So number one, we secure access, of course, to the best-in-class OBN technology. It allows TGS for a strong position in ILX areas where you see significant growth as we speak. And that goes with multi-client proprietary and 4D. And you've probably seen from some of the recent contract announcements that we had -- that TGS is now in the 4D market. We're in the proprietary market for OBN and we obviously as stronger than ever player in the traditional multi-client space, where you see TGS is now capturing also a very strong position in ILX areas. We see cost synergies and we see efficiency gains from stronger utilization. In fact, we actually struggled to get capacity because Magseis is pretty much sold out. Meaning that this summer we will acquire to projects in Norway with a third-party vendor because Magseis don't have capacity to serve TGS internal needs. This will also further enhance our position in OBN processing. It's been a high priority for TGS to develop algorithms and technologies within our processing team to allow for continued growth in OBN. And then last but not least, it will improve our exposure towards energy transition related industries like offshore wind, CCS, and deep sea minerals. So very excited about the acquisition of Magseis Fairfield. Again, the name will change to TGS. They will be a separate business unit within our acquisition group and very optimistic about the future for both the former Magseis for their employees and obviously for TGS with a stronger product portfolio. So we got a long list of recently announced projects. As I said, we announced another two projects this morning but it's been quite hectic for business development teams over the past few months. And I'm just extremely pleased about all the hard work they've done and, and really mean it -- making sure that TGS stays on top of this industry. So if you start on the Western Hemisphere, we had a new onshore project announced in the Permian. Permian is coming back although relatively slowly, we don't see a big boom coming up. But we finally see seismic expanding starting to increase. I'm very pleased about that. We get two OBN projects in the US Gulf of Mexico. Last one was announced this morning. We have a project in Santos, a 3D in Santos and other 3D in Foz do Amazonas and the equatorial module where we see great growth and future prospects. We have a lead processing project in Uruguay. We have two OBN service in Norway plan for the summer they are both multi-client and we have a multi-client 2D survey in Bangladesh and now it's quite recently. I'll take you quickly through this projects before I hand it over to Sven. First one is two project two OBN service that we're doing in Norway this summer. It's Sleipner and Heimdall Terrace and you see how they stack up with our existing data library with Utsira and NOAKA. So Sleipner is about the 1,200 square kilometre survey and Heimdall Terrace we're going to acquire before Sleipner is about 500 square kilometres. The surveys and increase a contagious multi-client OBN coverage in the region to almost 4,000 square kilometres and you see how the surveys stack up and just want to say I'm really excited about this because it's this is really a new generation seismic being acquired in a very mature and prospective area of the North Sea. So -- and it also proves the value of OBN. So this area has a lot of traditional 3D seismic and the fact that our clients and are now supporting TGS to go out and acquire OBN on top of that data shows that OBN has an important role to play in mature areas. Norway is a great example. And of course, US Gulf of Mexico is another example. Then we have the Santos Sul 3D in offshore Brazil. This covers more than 15,000 square kilometres both open acreage and recently awarded permanent offer rounds blocks located in the southwest Santos basin. And you see that and how it stacks up with all the TGS projects where we have a lot of 3D in the area. We've had great success over the past few years in Brazil. And obviously this just adds to the contagious database that you see from the map. Next one is the Foz do Amazonas. This is a Phase II, we acquired the initial project back in 2013. This is an 11,400 square kilometer project. It's in the offshore Brazil equatorial margin and this is a margin that is really hot. And if you look at Petrobras five-year plan, you'll see that they have plans for drilling 16 wells in this area. And this is really the new salt basin in Brazil where they really tried to find ways to replace all the reserves from the salt basin. So, very excited about the equatorial margins. We're doing this in the partnership with CGG, and I think this data will definitely be instrumental in enabling data for the future permanent offer rounds. You're going to have our early outs PSDM products available in Q4 of 2023. And then we move over to Uruguay. This is a tonne of 3Ds processing that 25,000 square kilometer offshore in Uruguay. Uruguay is another example of a country that seems great interest now from majors and independents all over the world, partly due to their closeness to Guiana. Suriname, you know, that whole margin sees a lot of growth as we speak. And obviously, you look at the conjugate margin, you see areas such as Namibia and South Africa with great exploration success. So, there's many reasons why the industry is now looking back to Uruguay and TGS is fortunate to have a current database there and now we're doing reprocessing on that to make sure that we can serve our clients with the latest and greatest technologies also in Uruguay. Final data products will be delivered in Q3 of 2023. Next one is Bangladesh, we're doing a 2D surveying in Bangladesh. This is a regional scale 2D server. This is more of a frontier area where one of the last areas actually in the world where you still see that there is prospectivity, but there is not a lot of data. And we're acquiring this data together with SLB and we're really excited about potentially opening up Bangladesh as a new area. Great interest. Obviously, there's a population-rich area where they're quite desperate to find oil and gas and make sure that they get independence. They support future license rounds under the soon to be revised fiscal terms, which are widely accepted by the industry. And we already see great interest from industry and quite excited about that acquisition. Commenced in early January of 2023 on the Bangladesh 2D survey, We got the onshore project in the Permian Basin. This was announced late last year and it encompasses about 85 miles -- or square miles in the Mitchell County, this is in the Midland Basin. It's a prospective area where you see a lot of production activity as we speak. And obviously an area that has kept up pretty well, despite the fact that onshore spending has been down over the past few years. Quite optimistic about the Permian, where we really think that we have the right position here. We think this survey will be good. We're also looking at other surveys in the area and it's definitely on the radar screen of our clients are definitely an important area for TGS going forward. file data is here will be available in q3 of 2023. Then has said we have two new OBN awards in the US Gulf of Mexico. And this really show shows that the all the new products that we have and the bigger toolbox that we have compared to what we had about 12 months ago. So, with the acquisition of Magseis, we were really pleased to announce the first 4D OBM survey award for TGS. This is a proprietary 4D survey in Walker Ridge in the US Gulf of Mexico. We plan to mobilize that in Q3 of 2023. And we're going to work there for about 100 days. We announced this morning, and other Sparse Node Survey award is a proprietary survey, it's located in the Gulf of Mexico, allows us to keep the crew there for a long period of time, it's planned to mobilize in Q2, and this has a duration of 100 days as well. We are also pleased to talk about our ESG performance. We usually have a slide where we show all the awards that we've been getting over the years. And I'm really pleased to see that we got two new awards in Q4. One is that, we won the award for the best place to work in Energy in Houston. And that's obviously an extreme pleasure to see that our people are happy and without people happy, I think productivity will increase, and you will see that a happy workforce typically deliver better results. So extremely pleased about the ALLY GRIT Award that we got in late 2022. And then just as pleased to see that we continue to be a member of the Bloomberg 2023 Gender Equality Index. This is a third year in a row, where TGS qualified for that. We one that out of only 24 companies in the energy industry who qualified and only one out of two Norwegian companies who are qualified for the Bloomberg Gender Equality Index. So With that, I want to hand it over to Sven Børre is going to go through the financials and then I will come back and talk about the outlook. Thank you very much. Thank you for that, Kristian. Good morning, everyone, following us online. As always, I will start by going through the revenues. This slide shows the revenue by type and we start with early sales revenues on the top left hand corner. And note that, we now talk about percentage of completion revenue. So we talked about the revenues that are recognized in accordance with the progress on the related projects that we are doing. In Q4 2022, we had $41 million of POC early sales revenues recognized, this is lowered than we had in Q4 of 2021. And that's a reflection of the lower underlying multi-client investments that we had in the quarter. Coming back to that, but we recognize some non-cash risk share related investments in the – in the quarter that didn't have any associated revenue streams with it. On the late sales side, as Kristian already alluded to, we had really strong late sales in Q4, $137 million, which is well above, obviously the $53 million that we had in Q4 of 2021. And not only is the number strong itself, but we also feel that the quality of the number is rock solid. Because the it's made up by a number of different deals, there's not one single deal that sticks out there is no meaningful transfer fees, there is no individual service that contributes by a huge amount and it's fairly well spread out across the regions. So as I said, not only do we think number itself is strong, but also the quality and the way it's spread out on different regions, and different service, and different customers are, is quite an encouraging. Then looking at proprietary revenues on the bottom left hand chart is now obviously includes Magseis Fairfield, We consolidated Magseis from 11th of October, so we do not carry the revenues that Magseis had in the beginning of October. The total proprietary revenues were $60 million in the quarter, which is obviously a huge increase compared to what we had in Q4 of 2021, when we didn't have Magseis Included in the numbers. If we exclude Magseis, we had roughly $6 million of proprietary revenues related to our imaging business, which means that Magseis accounted for approximately $54 million on a net basis. This means that we had total PoC revenues of $27 million -- $227 million, sorry, in the quarter, which is a massive improvement over last year when we had $120 million. Then we are looking at PoC revenues by business unit, starting with multi-client. First a note that in this charts, we have include that the proprietary imaging revenue stream, of which I said, was around $6 million in the multi-client chart. So the $164 million of multi-client revenues include a small portion of proprietary revenues from imaging. The $164 million is, of course, a huge improvement over what we had last year, mainly driven obviously, by late sales in the multi-client business. Then, we are started to report also more numbers on our Digital Energy Solutions business units, which contains, among other all our initiatives towards the renewable industry. And as you can see, it's a fairly stable revenue stream and we show significant growth year-over-year. In the fourth quarter, we have $9 million of revenues related to this, where a significant portion is made up by subscriptions or recurring revenue streams. So, we expect to see growth in this number throughout 2023. And then looking at the data acquisition business unit, which is essentially a Magseis, which as I said, we included from 11th of October. The net contribution from Magseis was $54 million, but if you include the eliminations, it contributed by to gross revenues of about $60 million. Magseis on a standalone basis had approximately $7 million of revenues in the quarter and an EBITDA of close to $15 million. So, a fairly decent quarter for Magseis in Q4. Then, next slide focusing on operating expenses on the top left-hand chart, you can see that total operating expenses amounted to $248 million in the quarter. This includes personnel costs and other operating expenses. So not cost of goods sold, which is associated with the proprietary revenues. This is -- the operating expenses, is of course, significantly higher than the run rate that we have seen in previous quarter due to the inclusion of Magseis. And the Q4 run rate or the Q4 number is fairly representative for the run rate that you should expect going forward as well. It will probably be at a level of plus, minus $50 million split or split buys roughly $25 million to $30 million on personnel cost and $20 million to $25 million and other operating expenses. Also note that in Q1 should expect some one of charges to related to the to the Magseis integration project that we plan to charge to the Q1 accounts. If you look at the PoC, EBITDA, it was very strong in the quarter $151 million compared to $84 million in Q4 of 2021. And this is obviously a reflection of the strong performance by our multi-client business. Then looking at multi-client investments on the bottom left hand chart. We had $56 million of multi-client investments recognized in the quarter. Note that this include non-cash investments of roughly $20 million to $30 million related to an adjustment we have done to past risk share projects in our acquired mostly in our acquired portfolio. And this has to do with that we have changed from recognizing some of these projects on a net basis to recognize them on a gross basis. So $20 million to $30 million of that $56 million is related to this. You can also see that we have PoC the early sales rate. In this chart we had 55% in Q4 of 2022, compared to more than 100% in Q4 of 2021. Over time on an annualized basis, this early says rate has normally been between, it varies quite a bit, but it's been between 55% and 95% in most of the most of the years. Then looking at free cash flow $42 million in the quarter and a full year free cash flow $142 million, which we are quite pleased about, particularly taking into account that we, of course, built up quite a bit of receivables due to the strong late sales towards the end of Q4. Then looking at some libraries statistics or library financials. Note that this is measured on an IFRS basis. So you can see that our amortization in Q4 was $62 million compared $165 million in Q4 of 2021. The amortization in this quarter consisted of $39 million of straight line amortization. This is also fairly representative for the level you should expect going forward. It will probably creep up towards about the 40 million mark in the coming quarters, but broadly in line with what we saw into Q4. Accelerated amortization was obviously quite low in the quarter due to the low recognition of early sales in IFRS, where we didn't complete a whole lot of projects in this quarter, and therefore, we had a low accelerated amortization of only $14 million. And then we have some smaller impairments on certain service that summed up to $9 million. And that all-in-all, gave us this total amortization of $62 million in the quarter. If you look at the net book value of our multi-client library, it increased a bit in the quarter and that despite the low investments and that has mostly to do obviously, with the inclusion of one multiclient survey that Max took over from access. So we stood at $592 million in multiclient library at the end of 2022. This compared to 705 at the end of 2021. If you look at the investments or net book value by year completion on the bottom left hand chart, you can see that the bars represent the historical investment in each of these vintages and the diamonds represent or shows you where the book value of each vintage sit currently in our IFRS balance sheet. As you can see from all the vintages that have been completed, we are the diamond SAR at fairly low levels, meaning that our net book value of the library should be seen as a very conservative value. Then looking at revenues by vintage. As you can see -- as I also alluded to earlier, it's fairly well spread out. We had roughly 20% or 21% from older fully written down vintages, but also that the vintage as of 2018, '19, '20 and '21 and also '22 sold reasonably well. And obviously, in IFRS, we have no revenue recognition of projects that are in progress, so 0% there on the WIP balance. Then going through the IFRS income statement, and here you can see how early sales, the adapter had low LSL, so only $22.8 million in the quarter. And that was of course related to the fact that we didn't complete a whole lot of products in the quarter. There was one particular project that slipped from deliveries have slipped from Q4 into Q1 and that will contribute by roughly $15 million in Q1. So, roughly $15 million was moved from Q4 to Q1 on the early sales in measured in accordance with IFRS. All in all, we had the $219 million of IFRS revenues in the quarter, which is obviously a massive increase of what we had in the same quarter of 2021 due to the to the strong late sales. You can see that cost of goods sold are at $27 million. And this should be seen in context with the proprietary sales. Going forward, we expect this cost of goods sold line to be roughly plus minus 50% of proprietary sales, can see we had personnel cost of $29.9 million and other operational costs of $18.5 million. As I said earlier also, this should be seen as fairly representative for the run rate going forward as well. This means that we had an EBITDA of $143.5 million in our IFRS accounts which is essentially a doubling of what we had in Q4 of 2021. Subtracting amortization and depreciation we ended up with an operating result of $64.6 million as opposed to a loss of $100.8 million in Q4 of 2021. When we also recognized significant impairments of the multi-client library, subtracting net financial items, we ended up with a result before tax of $61.8 million, compared to a loss of $104.9 million in Q4 of 2021. The tax cost is fairly high in the quarter or the tax rate is fairly high in the quarter. But this has to be seen in context, where the tax rate for that for the full year, which is somewhat lower. So, but the reason, the main reason for the high tax rate in Q4 and also for the year as a whole is that we have some tax losses carried forward that are denominated in other currencies than US dollars. And when the US dollars appreciate the dollar value of those tax assets are going down, which we need to recognize that as a tax cost. All in all, this gave us a net income of $42.1 million, compared to a loss of $77 million in Q4 of last year. This corresponds to an EPS of $0.34 cents in the quarter. Then looking at their IFRS balance sheet, you should know that that goodwill obviously have changed in quite significantly in 2022. And that is related obviously to the high M&A activity that you're seeing throughout the year. Magseis has contributed with approximately $56 million of goodwill, whereas the rest of it is related to the to the other transactions where most of it is associated with predictor. You will also see that we have an increase in other current assets due to the, obviously, partially due to the inclusion of Magseis, but also due to the fact that you had a lot of late sales towards the end of Q4, which was not collected in the quarter. Then you will see that other current liabilities have gone a little bit off and this is due to the inclusion of the $45 million of interest bearing debt from Magseis. This is characterized as current liabilities, because when we acquired Magseis, we trigger the change of control clause, the banks waived that change of control until 31st of March, and therefore, it's characterized as short-term debt. But we are in the process now or signing a new loan agreement with the banks, we will sign an RCF $425 million, we will obviously not drill down fully on that, we expect to drill down only $45 million portion, which means that in the next quarter that debt elements should be moved to non-current liabilities. Looking at the cash flow statement, you'll see that – you will note that the net cash flow from operating activities $119 million or $120 million is well below that $151 million. We recognize all that PLC EBITDA, which should tell you that we obviously have built up a fairly, we have a lot of receivables to be collected in Q4. Also, you should note that the investments in the multi-client library, the cash investments in the multi-client library is fairly high in the quarter. And this, as you may remember, it was very low in Q3 when we had high booked investments. So, so this, these cash investments obviously have to be measured over time, and it will jump around a little bit in the individual quarters. And then, you will see that we had on the cash flow from financing activities, we have include that the repayment of lease liabilities from access. So this is related to the vessel leases, leases that make us happy. And all-in-all, we had enough change in our cash and cash equivalents of 8.7, or reduction of 8.7 in the quarter. And this is despite the fact that we paid off $50 million for acquiring Magseis shares during the quarter. We will -- we also paid another $55 million in the beginning of January, which you will see in our Q1 accounts. This meant that we had cash balance, solid cash balance of $188.5 million towards the end of the year. And then this strong balance sheet that we have allows us to continue to pay a dividend, despite the fact that we are increasing our investments massively in 2022. So we continue to pay a dividend of $0.14 per share, which in this quarter corresponds to NOK 1.46 per share on Norwegian kroner per share. And the share will go ex-dividend in one week. And it will be paid on the second of March. Thank you, Sven and excited to come back and talk about the market outlook for 2023. So I think the first slide. I mean, there should be no need to show a slide which says that there are signs of continued recovery and seismic spending after you have a late sales growth of 167%. But the fact is that the global seismic market grew by more than 30% in 2022, from relatively low-levels, as you can see from the graph on the on the left hand side. And it's an interesting comparison to look at how the floater market is expected to develop for the next few years and if you assume that the correlation between seismic and floaters and keep in mind that the floating market is about that has about 50% exposure to expiration. So there is a reason for that strong correlation in the past. And if you believe that the correlation will continue for the future. And you believe the numbers for the floaters are correct then, obviously we are looking at a very promising seismic market for the next few years. And you should also when you look at this in a historical context and look back on the good years from 2012 to 2014, where you see the market was way bigger than what it is today, you should keep in mind that the market has consolidated significantly in the meantime. So looking at TGS position today, compared to our position back in 2012, or 2013, we're a completely different company. And we have, we're well positioned now and have leading positions both in mature and frontier regions. We have an extremely broad product offering. We have the world's by far leading 2D Data Library well positioned for recovery in frontier. We have the largest at least modern 3d Data Library, if you look at investments over the past five years, I think we account for about 40%, or close to 40% of the total investments in multi-client, over the past five years in our industry, so of course, the market leading position in 3D as well. We announced the first four day contracts. Last week, we announced an OBN contract in the US Gulf of Mexico. This morning, we have taken significant steps, in terms of improving our imaging reputation and product portfolio there and technical image. We have about 10 million geological data wells, mainly in the US Gulf of Mexico, but it's a global portfolio wells and then, as we mentioned, a leading multi-client library. So it puts us in an extremely good position for the recovery of the market. And again, if you believe in the numbers from ABG, here, and you believe that the floaters are going to continue to grow and see significant growth, double digit growth over the next three years. And you believe that historical correlation with a seismic market is going to continue. Then we're looking at an extremely bright future for seismic and first and foremost, for TGS. And I think that's further strengthened by the next bar chart, which shows the growth in the OBN demand for 2023. So if you look at 2022, this is basically an $800 million market where TG -- everywhere Magseis or TGS now has a market share of about 35% to 40%. That market is already at around $1 billion or slightly above $1 billion in terms of activity expected for 2023. And this is based on signed contracts at this stage, so extremely well positioned for that growth. You also see a healthy growth in terms of -- this is a good regional distribution, you see growth pretty much all over the world. You see, obviously, Northwest European being strong, you see Gulf of Mexico, probably even strong enough, what you see from these numbers with the two contract announcements by Magseis or TGS, over the past week or so. But, again, a very healthy growth, a well distribution in terms of geographies and a very strong position for TGS in this markets. And it's particularly interesting to listen to BP’s earnings call two days ago, when I said that, we continue to drive down unit costs, we continue to drive capital productivity in the wells area. We deployed new technology. Ocean Bottom Seismic now is being deployed widely across our portfolio, giving you a better view of the barrels that remain. And this is obviously music to our ears. And I just think that the timing of TGS entering this market couldn't be better. And we are extremely exciting -- excited about including Magseis into our TGS family. And we think that there are many, many years with great opportunities in the OBN market for TGS to play a key role. We move on and look at the contract backlog and inflow. This further strengthens my message from the previous two slides. You see the acquisition backlog is slightly down in Q4 of 2022, but expected to come up again in Q1 of 2023, because of the new contract announcement of two 100-day projects in the Gulf of Mexico announced over the past week or so in the acquisition markets. TGS backlog has never been better, if you just look at the timescale that we're referring to here. So the last 12 quarters, it's a highest backlog we've reported to the market and then you have the IFRS backlog of contracts that we still not have recognized on top of that. So it means that TGS has a backlog of more than $500 million IFRS as we speak. You can see on the right hand side how the early sales are expected to be recognized according to IFRS, gives you more clarity about the timing recognition of that. And again, if you look at the contract inflow, you saw Q3 was record high, Q4 was not as high as Q3, but it was really good. And as you've seen from my first part of the presentation today, there's been numerous projects announced over the past couple of weeks. That makes us again very optimistic about 2023. It gives us really good visibility in terms of our guidance and means that we are optimistic about the year to come. The OBN crew activity plan and I'm pleased to announce this, so this is the first time we're talking about an OBN and crew activity plan and it just looks really good. You see all the dots are basically being colored in terms of contracts that have already been awarded. And the crews are basically fully utilized as we speak. The ZXPLR crew 1, you see that we moved from the US Gulf of Mexico to Latin America, we're working in Guyana now going to be there for the rest of the year. And I think honestly, we're going to be there for quite some time after that too. The ZXPLR crew 2 is working in the US Gulf of Mexico is working for TGS as we speak, then it's going to move on to do a couple of proprietary jobs. And then I think that crew is going to stay in the US Gulf of Mexico for many years to come. Z700. It's going to Asia, and then it's moving back to North Sea after that. And then you see we have full utilization of the reservoir monitoring source crews both crew 1, 2 and 3 are basically fully utilized. We also have some interesting renewable projects, working on the Greensand project in Denmark, which is the CCS project. So again, can't be much better than this. I think the only problem or concern I have is that we don't get capacity to acquire our own data, which was part of the reason we acquired the company. But it's a good problem to have. And that just shows that this market is extremely promising and the timing of the acquisition again, it couldn't be better. So very pleased about that. Licencing round activity. Again, if you just looked at and focus on the Atlantic margin and the southern part of the Atlantic margin, you see new countries popping up almost every week in terms of plans for licensing rounds. I think the list for Africa has never been longer in the list for Latin America, where you see countries like Barbados, and Trinidad and Uruguay. Coming back on the map. I mean, this is obviously driven by the great exploration success we've seen in areas such as Guyana, Namibia, Suriname, and you name it, I mean, that drives a lot of exploration activity going forward, having the leading data library in the industry, of course, we capitalize on this. And this is a great position to be in. I mean, if you look at the map here, and you look at all the data we have at TGS, partly from the organic investments we've done. Again, as I said, we account for almost 40% of the total investments in seismic over the past five years. We acquired that spectrum in 2019. We really start to see the benefits of that in terms of our position in the South Atlantic, and then the ION data library gave us almost 30% more coverage around the world. So just a really good position to be. And when I look at this map and look at the different licensing rounds that are coming up either in 2023 or 2024, I mean, we basically have data everywhere. So it's just really, really a great pleasure to see the activity picked up as it is right now. Moving to Asia Pacific, you see Australia, which always has been a relatively important region for TGS. But I think more importantly, if you look at India, Indonesia, Malaysia and Bangladesh, these are areas with really, really high population, really high population growth. And these -- some of these countries are importing, you know, as much as 80% to 90% of their energy needs, with the record high energy prices. So there's a great push now to do more exploration in some of these countries. And again, TGS is well positioned. And we also have plans to improve our position going forward. So a very positive slide in terms of predicting future activity, both in terms of new investments, but also late sales for TGS in 2023, in the years to come after that. So again, the guidance we talked about this earlier in the presentation, but we are very confident about our multi-client investments and the growth that we see in the markets. We're guiding now a range of between $300 million and $350 million. That's obviously significantly up from what we invested in 2021 or 2022. But more importantly, we already have about $200 million, so slightly more than $200 million committed currently. And if you look at the funding of the early sales rate and what has been committed, it makes us extremely confident in terms of guiding and overall early sales rate of above 70% for 2023. So, again, as we mentioned earlier in the presentation, most of that has already been secured. You can look at the 70% more like a minimum number in terms of what the funding is going to be in 2023. Dividend as Sven discussed this is going to be $0.14 per share, despite the fact that we increase our investments significantly. So, we keep our dividend unchanged. And then we will come back and provide further detail on the financial outlook at the Capital Markets Day on 7th of March in 2023. And if we move to that, we're going to have a keynote speaker, his name is Dr. Scott Tinker, He's a professor at the University of Texas. He is probably one of the world's most widely known speakers in the area of energy and environment and the dual challenge that we're faced with today. So, I really encourage you to come and listen to Scott Tinker and obviously listening to the Executives of TGS is going to go through market outlook. We're going to talk about the financial outlook, of course, status of the Magseis integration, some of the strategic priorities going forward. And of course, it gives you a chance to meet the Executives of TGS. And potentially get a drink as well when we finish this session around 4 P.M. on the 7th of March 2023. So, with that, I just want to summaries the presentation. Again, a significant market improvements, best Q4 late sales since 2014, continuous improvement in order inflow, very strong backlog of about $451 million from POC, but about $100 million higher if you account for the IFRS. Robust balance sheet, we have a cash balance of about $189 million, that's after significant M&A activity. That was at the end of the year. After that, we paid out another bout $50 million related to the M&A transaction of Magseis. But as you can expect, the cash flow is also really good in terms of inflow. So, our cash balance today is about $200 million, despite the fact that we paid out another $50 million. Low interest bearing debt and a strong working capital position from end of year sales, which again means that Q1 cash flow as always, we'll get really strong. Industry leading OBM position, healthy backlog. One new project announced this morning, one announced last week, promising pipeline and lack of support and supply that market is definitely getting very tight as we speak. And as I said, TGS really has problems to get access to that capacity, which was the main reason why we acquired the company in the first place. But again, a great problem to have. MC investments are now back to pre-COVID levels, we expect them range of $320 million to $350 million, and feel very good about that guidance, feel that we have already secured more than $200 million at record high prefunding in that regard. So, high visibility and high prefunding levels. Yes, so this system will allow you to post questions on mine. We have already got some questions. So, I'll start reading them up. First question is from [indiscernible]. What level of shipwright increases have you assumed when calculating your investment guidance? Yes, I mean, a lot of this has already been secured. And we have some long-term agreements with -- we have one long-term contract with PXG that we entered into a couple of years ago, and we have another one that we're working on right now that is soon to be released on with a different vendor. And I think we're pretty good and had a good history of working long-term with our partners in that regard. I think on the streamer side, we're probably up 10%-ish year-on-year from 2022. On the OBM side is obviously more because that market is getting really tight. And -- but obviously, we have also the pleasure of using Magseis for some of our internal projects. So overall, we see definitely some inflation, but not nearly as much as some people would expect. Next question is from Mick Pickup at Barclays. Can you tell us what data you will be producing for Magseis performance to help us model? Yes, we can. So now the only project that TGS’s most declined business is scheduled with Magseis is ongoing amendment to project. And as you can see, there was elimination there are roughly $6 million in Q4. And we expect the elimination, mostly in Q1, but perhaps a little bit in Q4 to be total of around $20 million. And then, if there is a question from John Olaisen[ph]at ABG. With MAXSIZE capacity almost sold out. Are you considering increasing the OBM capacity? And could you elaborate on what is needed in order to increase capacity in terms of CapEx timing, et cetera? Could you comment on OBM contract pricing/direct development, please? Yeah, I can't be too specific on that. But as I said, I mean, that market is getting really tight. I mean, the good thing about a tighter market is that you have the ability to raise prices. And I think there's a desperate need in that industry to raise prices because they've been too long -- too low for a long period of time. I mean, nobody's making money historic in that business. I think for us, first of all, we need to make sure that we continue to tighten the market we need to continue to see longer term contracts. We need to see that when we put a cruise somewhere in the world, we need to keep it there for long periods of time rather than traveling back and froth in [indiscernible]. So in that regard, I think, that's going to be a key priority going forward is to really close the gaps that we've seen historically in Magseis portfolio. I think the market is really helping us to do that. So in that regard, I feel very confident that we need to see higher margins, of course. We need to see higher pricing overall. So I think that's going to be the key priority. If it gets so tight, that we're not in a position to fulfil our multi clients plans, we need to have a plan B for that. But again, first of all, the focus for TGS now is to increase the profitability really making that a money making business and of course, all the pieces should be in place to do that. So I think that's probably as far as I want to go in terms of talking about pricing and our plans going forward. Then there is a question from Jorgen Lande, Danske. Good morning, you expressed that getting access to OBM capacity is under pressure. And if market demand is increasing further, you could potentially be limited on your multi-client investment plans. Have this realization triggered any new perspectives on new vessel capacity from your side? Thank you. Yeah, we probably see, as I said, on the streamer side, we feel like we are pretty well equipped in terms of capacity going forward. We are constantly working with our vendors to make sure that we can fulfil our investment plans. So not too concerned about that. I think on the OBM side, again, I refer to what I say -- I said at the previous question we are constantly working with, you know, how do we number one make Magseis a profitable business? And then number two, you know how we're going to play this market going forward in terms of, of capacity. And it's all that game between capacity utilization and prices? Of course. Then there is a question from Christopher Møllerløkken. Based on the guidance you gave on OpEx, it seems that you are planning for Magseis to deliver an EBITA margin of close to 30% far above what the company has achieved, historically, what is driving this improvement? I can answer that first of all, of course, we are quite optimistic that the profitability Magseis as part of TGS will increase significantly. That's not to say that EBITDA margin will be 30%. What you should be aware of is that the categorization of the different cost lines is not the same. Now that Magseis is part of the TGS P&L instead of being reported separately as they did. So the categorization is not exactly the same, which means that you may be drawing wrong conclusion when you calculate backwards to 30%, Christopher. But we will provide more detailed information on Magseis as part of TGS in the Capital Markets Day on the 7th of March. Then, Erik Aspen Forså from Carnegie is asking, how much of the 2023 multi-client investments are dedicated to OBN or where will you use Magseis crews? I can answer that. I will -- we are close to one-third of our plants being covered by OBN, but as we have talked about already Magseis is a bit limited on capacity, and for the projects in the North Sea, we have had to use other vendors and then Magseis. So the Magseis portion of that will be lower. And then there is a question from Kevin Roger at Kepler. Number one on the multi-client CapEx guidance, how much will be related to Magseis notes? We have already covered that I guess. Number two, you sign this morning a note contract for about 100 days duration, can you give some color on the financial details of such a contracts? And in general, not necessarily linking it to discontract, but you should for OBN crew you could assume that there is a revenue contribution of depending on the contract type and what costs you're taking on or not taking on, it could be between $10 million to $12 million, $13 million per month. That's a very rough indication of what you could expect that size. Not necessarily. I mean, I think we partner when the client is better off by us partnering, it always if one party has the permit, and another party has perhaps a vessel, I mean, that should be a good combination where you partner up and you make sure that you get the data delivered to clients sooner rather than later. So I think we would always look at this in terms of, how can we maximize the efficiency of the project? And I think a couple of the CGG partnerships are related to joint ownership of underlying data. And if you have the underlying data together, then I think it's usually makes sense that you overshoot that in the partnership rather than starting to fight about that. So I think there's probably a higher degree of partnerships overall in our industry, but I, usually we would like to do things ourselves if we can. Then there is a question from Stephen DNB [ph]. You had a significant working capital build in 2022? to what extent do you expect this to reverse in 2023 in light of higher investments, and likely growing revenues? On the working capital element is obviously it has to do partially, of course, with the M&A activity that we've gone through and the inclusion of microsites, and also due to the fact that you had a very strong Q4, with a lot of the late sales being closed in December of 2022, which means that we will obviously build up a fair receivable and an accrued revenue balance there. And of course, when investments are growing, you will normally see that, that our payables balances is growing. In 2023, the investments will be fairly front end loaded. So we expect that Q4 the way we see it now, Q4 will be the lowest in terms of investments, and that may have some bearing on the payables level that we that we have in our balance sheet towards the end of 2023. Then there is a question from also [indiscernible] organic multi-client late sales was upon run 23% in 2022 versus 2021. When exploration spending up 20% and seismic market up more than 30% what growth should we expect in multi-client late sales for TGS in 2023, when expiration spending expected are 15% to 20%. Yeah. We don't give any guidance on late sales and late sales, it's always kind of hard to predict. I think 2022 was a bit extraordinary in terms of obviously there was a big transfer fee in Q2. We probably didn't expect that to be as big for the industry as it was and neither do we have great visibility or transfer fees in 2023. So I mean, there are still things that could surprise positively in terms of M&A activity among our clients. So it's hard to predict. I mean, our goal is usually that we should be at the market growth at least. And then you probably need to adjust a little bit for some of these one-offs in 2022. But it's hard to say. And that's probably the reason why we don't want to guide specifically on that. On the EP side or the pre-funding side, and the early participants, as we call it, I think we feel very confident that that number is really going to drive revenues for 2023, partly because of increased investments, but also because of great interest from our clients on some of these new investments where you see that We guided a pre-sales ratio of about 70%. But as I said, it's should be seen as a minimum, I mean that number to get significantly higher than that. And in that regard, we feel very confident about that part of the equation. Then there is another question from Mick Pickup at Barclays. New energy activity got limited exposure in this presentation. Can you talk to the outlook for 2022? And how you feel about that business? How you feel that business is progressing? Yes, I think our strategy remains firm. We came out in 2019, with a strategy plan where this was part of our plan to build the business, the data business also for renewables. We've seen obviously, a TGS has already taken a great position in offshore wind, where we have good brand recognition already. We're one of the few players who actually make money and make a profit in renewables or in offshore wind. We see the CCS market is obviously picking up and as you know, TGS has all the data and ingredients needed to serve that markets now with 40 capacity from Magseis and obviously an existing library for CCS usage. So I think we will definitely come back and talk more about that in our Capital Markets Day on March 7. But I think nothing has changed from our side. We're still very committed to the renewable industry and in fact when we look back on what we communicated in 2019 and 2021 and what we are going to communicate in the Capital Markets Day in 2023 nothing has really changed. This is part of a long-term plan. And we are developing according to that plan. And you see from the numbers to that we're doing pretty well. All right. Thank you very much. And thanks for your attention. And we welcome you back to our Capital Markets Day on the March 7. And I’m very excited to see you there, and share our plans about not only 2023, but also about longer-term plans of TGS. So thank you very much.

EarningCall_105

Welcome to the Prospect Capital Second Fiscal Quarter Earnings Release and Conference Call. [Operator Instructions] Please note, this event is being recorded. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin? This call contains forward-looking statements that are intended to be subject to Safe Harbor protection. Actual developments and results are highly likely to vary materially and we do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release and 10-Q filed previously and available on our website, prospectstreet.com. Thank you, Kristin. In the December quarter our net investment income, or NII was $106.7 million, or basic NII of $0.23 per common share, exceeding our distribution rate per common share by $0.05. Our basic NII coverage of our common distribution is now 128%. Our annualized basic NII yield is 9.3% on a booked basis and 12.3% based on our February 7 stock close. Our basic net income applicable to common stockholders was $55.6 million or $0.14 per common share. Our NAV stood at $9.94 per common share in December, down $0.07 and 0.7% from the prior quarter, largely due to unrealized mark-to-market depreciation from macro conditions. Over the 11 quarters from the pre-pandemic December 2019 quarter to the September 2022 quarter, Prospect delivered the highest growth in the business development company industry in net asset value per common share, with NAV per common share increasing by 15.6% over that time period. Since inception in 2004, Prospect has invested $19.9 billion across 407 investments, exiting 275 of these investments. We have outperformed our peers during past periods of macro volatility as a direct result of our previous derisking, not chasing leverage, as well as other risk management controls, including avoidance of cyclical industries and utilization of longer dated flexible financing. We are staying true to the strategy that has served us well since 1988, controlling and reducing portfolio and balance sheet risk, both to protect the capital entrusted to us and to protect the ability of such capital to generate earnings for our shareholders. In the December quarter, our net debt-to-equity ratio was 49.4%, down 24.7 percentage points from March 2020, and down 4.1 percentage points from the September 2022 quarter, as we continue to run an underleveraged balance sheet, which has been the case for us over multiple quarters and years. Over the past five years, other BDCs have increased leverage, with a typical list of BDC now at 117% debt to total equity, or approximately 67 percentage points higher than for Prospect. Running at less than half the debt leverage of the rest of the industry, Prospect has not increased debt leverage, instead electing lower risk from lower debt leverage with a cautious approach given macro dynamics. In May 2020, we moved our minimum 1940 Act's regulatory asset coverage to 150%, equivalent to 200% debt to equity, which not only increased our cushion, but also gave us flexibility to pursue our subsequently announced junior capital perpetual preferred equity issuance, which counts towards 40 Act asset coverage, but which gets significant equity treatment by our rating agencies. We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.7 to 0.85 debt to equity, and we are currently significantly below such target range. Prospect's balance sheet is highly differentiated from peers with 100% of our debt funding coming from unsecured and nonrecourse debt, the case for Prospect for at least 15 years. Unsecured debt was 71.3% of our total debt in December 2022 or 23 percentage points higher than 48% for the typical listed BDC. Our unsecured and diversified funding profile provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility than many of our BDC peers. On the cash shareholder distribution front, we are pleased to report the Board's declaration of continued steady monthly distributions. We are announcing monthly cash common shareholder distributions of $0.06 per share for each of February, March and April. These three months represent the 66th, 67th, and 68th consecutive $0.06 per share cash distributions. Consistent with past practice, we plan on announcing our next set of shareholder distributions in May. Our goal over the long term is to sustain shareholder distributions, providing stability against a macro backdrop, delivering greater volatility elsewhere. Since our IPO 19 years ago, through our April 2023 distribution, at the current share count, we will have paid $20.04 per common share to original shareholders, representing two times December common NAV and aggregating over $3.87 billion in cumulative distributions to all common shareholders. Since October 2017, our NII per common share, less preferred dividends, has aggregated $4.20, while our common shareholder distributions per common share have aggregated $3.78 with our NII exceeding distributions during this period by $0.42 per share and representing 111% coverage. We are also pleased to announce continued preferred shareholder distributions following successful launches of our $1.75 billion non-traded preferred programs, and $150 million listed preferred. We've raised approximately $1.4 billion in preferred stock to date with strong support from institutional investors, RIAs and broker dealers, including the addition of two top five sized independent broker-dealer systems as well as top wirehouse and regional broker-dealer systems. We're currently focused on multiple initiatives to enhance our NII, return on equity and NAV in an accretive fashion including; first, our $1.75 billion perpetual preferred equity programs, which could potentially be increased in capacity in an accretive fashion. Two, a greater utilization of our cost-efficient revolving credit facility with an incremental cost of approximately 5.91% at today's one month SOFR. Three, increase of short-term LIBOR and SOFR rates based on Fed tightening boosting asset yields. And four, increased primary and secondary originations of senior secured debt and selected equity investments to deliver targeted risk-adjusted yields and total returns as we deploy available capital from our current underleveraged balance sheet. We believe there is no greater alignment between management and shareholders than for management to purchase a significant amount of stock, particularly when management has purchased stock on the same basis as other shareholders in the open market as we have. Prospect's management is the largest shareholder in Prospect and has never sold a share. Our senior management team and employees happily eat our own cooking, currently owning approximately 28% of shares outstanding, representing approximately $1.1 billion of our common equity as measured at net asset value. Thank you, John. Our scale platform, with approximately $8.8 billion of assets and undrawn credit at Prospect Capital Corporation, continues to deliver solid performance in the current dynamic environment. Our experienced team consists of over 100 professionals, representing one of the largest middle market investment groups in the industry. With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that spans third-party, private equity sponsor-related lending, direct non-sponsor lending, Prospect-sponsored operating and financial buyouts, structured credit and real estate yield investing. Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities, coupled with wider spread primary opportunities with a pullback from other investment groups, particularly highly leveraged ones. Unlike many other groups, we have maintained and continued to maintain significant dry powder that we expect will enable us to capitalize on such attractive opportunities as they arise. This diversity of origination approaches allows us to source a broad range and high volume of opportunities. Then select in a disciplined bottoms-up manner the opportunities we deem to be the most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low, single-digit percentage of such opportunities. Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack, with a preference for secured lending and senior loans. As of December, our portfolio at fair value comprised 53% first lien debt, up 1.2% from the prior quarter, 18.5% second lien debt, down 0.5% from the prior quarter, 9% subordinated structured notes with underlying secured first lien collateral, down 0.2% from the prior quarter and 19.5% unsecured debt and equity investments, down 0.5% from the prior quarter, resulting in 80.5% of our investments being assets with underlying secured debt benefiting from borrower-pledged collateral. That number up 0.5% from the prior quarter. Prospect's approach is one that generates attractive risk-adjusted yields. In our performing interest-bearing investments, we're generating an annualized yield of 12.9% as of December, an increase of 0.5 percentage points from the prior quarter and a significant contributor to NII growth this past quarter. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We've continued to prioritize senior and secured debt with our originations to protect against downside risk, while still achieving above-market yields through credit selection discipline and a differentiated origination approach. As of December, we held 130 portfolio companies, an increase of two from the prior quarter with a fair value of $7.8 billion, an increase of approximately $188 million. We also continue to invest in a diversified fashion across many different portfolio company industries, with a preference for avoiding cyclicality and with no significant industry concentration. The largest is 17.7%. As of December, our asset concentration in the energy industry stood at 1.6%. Our concentration in the hotel, restaurant and leisure sector stood at 0.3%, and our concentration in the retail industry stood at 0.4%. Nonaccruals, as a percentage of total assets, stood at approximately 0.5% in December, up 0.2% from the prior quarter and down 0.4% from June of 2020. Our weighted average middle-market portfolio net leverage stood at 5.4 times EBITDA, substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at $112 million. Originations in the December quarter aggregated $308 million. We also experienced $77 million of repayments and exits as a validation of our capital preservation objective, resulting in net originations of $231 million. During the December quarter, our originations comprised 86.6% middle-market lending, 8.5% real estate, 3.5% middle-market lending and buyouts and 1.4% structured notes. To date, we've deployed significant capital in the real estate arena through our private REIT strategy, largely focused on multifamily workforce, stabilized yield acquisitions, and in the past year an expansion into senior living with attractive in-place 5 to 12 year financing. To date, we've acquired $3.8 billion in 105 properties across multifamily, 81 properties, student housing, 8 properties, self-storage, 12 properties, and senior living, 4 properties. In the current higher financing cost environment, we're focusing on preferred structures with significant third-party capital support underneath our investment attachment point. NPRC, our private REIT, has real estate properties that have benefited over the last several years, and more recently from rising rents, showing the inflation hedge nature of this business segment, strong occupancies, high collections, suburban work-from-home dynamics, high-returning value-added renovation programs and attractive financing recapitalizations resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses. NPRC, as of December, and not including partially exited deals, where we received back more than our capital invested from distributions and recapitalization, has exited completely 45 properties at an average net realized internal rate of return to NPRC of 25.2%, an average realized cash multiple of invested capital of 2.5 times, with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships. Our structured credit business has delivered attractive cash yields, demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance, and focusing on favorable risk-adjusted opportunities. As of December, we held $699 million across 37 nonrecourse subordinated structured notes investments. We've maintained a relatively static size for our subordinated structured notes portfolio on a dollar basis, electing to grow our other investment strategies and resulting in the structured notes portfolio now comprising less than 10% of our investment portfolio. These underlying structured credit portfolios comprise around 1,700 loans and a total asset base of around $15 billion. In the December quarter, this portfolio generated an annualized cash yield of 11.6% and GAAP yield of 14.9%. That's up 1.7% from the prior quarter, with the difference representing a significant amortization of our cost basis. As of December, our subordinated structured credit portfolio has generated $1.47 billion in cumulative cash distributions to us, representing around 108% of our original investment. Through December, we've also exited 11 investments, with an average realized internal rate of return of 15.2%, and cash-on-cash multiple of 1.44 times. Our subordinated structured credit portfolio consists entirely of majority-owned positions. Such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases, we receive fee rebates because of our majority position. As majority holder, we control the ability to call a transaction in our sole discretion in the future, and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low. We, as a majority investor, can refinance liabilities on more advantageous terms, remove bond baskets in exchange for better terms from debt investors in the deal, and extend or reset the investment period to enhance value. We completed 32 refinancings and resets since December 2017. So far in the current March 2023 quarter, across our overall business, we booked $26 million in originations and experienced $40 million of repayments for $15 million of net repayments. Our originations have consisted of 51.1% middle-market lending and 48.9% real estate. Thank you, Grier. We believe our prudent leverage, diversified access to match book funding, substantial majority of unencumbered assets, weighting toward unsecured fixed rate debt, avoidance of unfunded asset commitments and lack of near-term maturities demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 29 years into the future. Our total unfunded eligible commitments to non-controlled portfolio companies totals approximately $84 million, representing approximately 1.1% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stands at over $1 billion. We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop a notes program, issue under a bond and equity ATM, acquire another BDC and many other lists of firsts. In 2020, we also added our programmatic perpetual preferred issuance to that list of firsts, followed in 2021 by our listed perpetual preferred as another first in the industry. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right-hand side of our balance sheet. As of December 2022, we held over $5.2 billion of our assets as unencumbered assets, representing over 66% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, a nonrecourse SPV, where in September 2022, we completed an upsizing and extension of our revolver to a refreshed five-year maturity. We currently have $1.7 billion of commitments from 49 banks, an increase of seven lenders from August 2022, and demonstrating strong support of our company from the lender community with the diversity unmatched by any other company in our industry. The facility revolves until September 2026, followed by a year of amortization with interest distributions continuing to be allowed to us. Our drawn pricing is now SOFR plus 2.05%. Of our floating rate assets, 94.1% have LIBOR or SOFR floors with a weighted average floor of 1.20%. Short-term rates have now exceeded these floors, giving us the benefit of increased asset yields from Fed rate hikes. Outside of our revolver and benefiting from our unencumbered assets we've issued at Prospect Capital Corporation, including in the past few years, multiple types of investment-grade unsecured debt, including convertible bonds, institutional bonds, baby bonds and program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions and no cross defaults in our revolver. We enjoy an investment-grade BBB minus rating from S&P, an investment-grade Baa3 rating from Moody's, an investment-grade BBB minus rating from Kroll, an investment-grade BBB rating from Egan-Jones and an investment-grade BBB low rating from DBRS. In 2021, we received the latter investment-grade rating, taking us to 5 investment-grade ratings more than any other company in our industry. All of these ratings have stable outlooks. We have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 29 years. Our debt maturities extend through 2052. With so many banks and debt investors across so many unsecured and nonrecourse debt tranches, we have substantially reduced our counterparty risk over the years. In the December 2022 quarter, we have continued utilizing our low cost revolving credit with an incremental 5.91% cost. We also have continued with our weekly programmatic InterNotes issuance on an efficient funding basis. To date, we have raised approximately $1.4 billion in aggregate issuance of our perpetual preferred stock across our preferred programs and listed preferred, including $298 million in the December 2022 quarter and $70 million to date in the current March 2023 quarter, with the ability potentially to upsize such programs based on significant balance sheet capacity. We now have six separate unsecured debt issuances aggregating $1.5 billion not including our program notes, with maturities extending through October 2028. As at December 2022, we had $350 million of program notes outstanding with staggered maturities through March 2052. At December 31, 2022, our weighted average cost of unsecured debt financing was 4.33%, remaining constant from September 30, 2022, and a decrease of 0.06% from December 31, 2021. In 2020, we added a shareholder loyalty benefit to our dividend reinvestment plan, or DRIP, that allows for a 5% discount to the market price for DRIP participants. As many brokerage firms either do not make DRIPs automatic or have their own synthetic DRIPs with no such 5% discount benefit, we encourage any shareholder interested in DRIP participation to contact your broker. Make sure to specify you wish to participate in the Prospect Capital Corporation DRIP plan through DTC at a 5% discount, and obtain confirmation of same from your broker. Our preferred holders can also elect to DRIP at a price per share of $25.

EarningCall_106

Greetings, and welcome to the Flux Power Holdings Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Your host today Ron Dutt, Chief Executive Officer; and Chuck Scheiwe, Chief Financial Officer will present results of operations for our second quarter of fiscal year 2023 ended December 31, 2022. A press release detailing these results crossed the wires this afternoon at 4:01 PM Eastern Time and is available in the Investor Relations section of our company's website at fluxpower.com. Before we begin the formal presentation, I would like to remind everyone that the statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. Thank you, Sean, and good afternoon everyone. I'm pleased to welcome you to today's second quarter fiscal 2023 financial results conference call. Firstly, please note that on slide 3 for those of you who have the presentation, there is a short reminder of what we do. That is electrifying commerce. We are powering material handling, air support -- airport ground support, solar energy storage, Port Authority equipment and other applications with new and clean technology. Now on to our Q2 results. Our second quarter reflected our cadence of strong revenue growth as we continue to focus on fulfilling orders. In Q2 2023, revenues were $17.2 million, up 123% from $7.7 million in the prior year, marking our 18th consecutive quarter of year-on-year revenue growth. In the second quarter of fiscal 2023, we received $20.7 million in customer purchase orders from existing and new Fortune 500 customers, reflecting the alignment of timing of deliveries with customer new forklift orders. To highlight the importance of our building strong relationships with our existing customers, over 95% of revenue during the quarter was contributed from customers with whom we have long-term relationships. Our commitment, consistent performance and trustworthiness are the foundation for long-term sustainable relationships with our customers. Our emphasis on product, service, and quality continues to support ongoing new purchase needs and service requirements. We have experienced that business from our installed base will help drive new customers to our technology. And developing our technology internally also ensures our customers' has the most up-to-date products and services on a sustainable basis. For the second quarter, our customer order backlog increased from $26.9 million to $30.4 million as of December 31, 2022. Our strategic initiatives to improve sourcing actions to mitigate parts shortages, accelerate backlog conversion to shipments, and increase inventory turns has helped to mitigate backlog expansion. These initiatives are also increasing gross margin that will lead to profitability. New orders in Q2 2023 increased to $20.7 million, compared with $19.8 million in Q2 2022 and was 113% higher compared to $9.7 million in Q1 2023. Due to the timing of deliveries of customer new forklift orders arising from supply chain disruptions. We were pleased to see that our supply chain disruptions continued to abate during the second quarter, while at the same time, we continue to pursue strategic supply chain and profitability improvement initiatives. Also and importantly, progress with new accounts was substantial in the second quarter, with two new Fortune 500 customers added, each having seven-figure revenue potential. For the past 12 months, we have taken aggressive efforts to mitigate supply chain issues. We recently launched a project for automated cell module production to manage SKUs and accommodate secondary cells suppliers. We also leveraged increased sales volumes to resource steel and board components to lower costs regions and to higher volume suppliers. Recently, we expanded our in-house our testing and product validation capabilities with all equipment needed onsite to satisfy UL 2530, that's UL Underwriters Laboratory and UN 38.3 compliance testing, which included an onsite vibration table being added to the other equipment eliminating the need to outsource testing for either UL or UN certifications, and of course, expediting the process. During the December ending quarter, we began exceeding lower shipping costs as supply chain disruption ease and we are utilizing lower cost, more reliable and secondary suppliers of key components that meet required specifications. Although our supply chain disruptions have improved, we increased our inventory of raw materials, finished goods and component parts to 19. 5 million as of December 31st 2022, to mitigate supply chain disruptions that were occurring and protect our customers for timely deliveries. We are introducing over the next 12 months new product designs, based on a new modular platform for our battery packs to address customer needs. Some of the improvements include higher capacities for more demanding shifts, easier servicing and other features, to solve a variety of existing performance challenges of diverse customer operations. At the same time, our new designs provide reduction of number of parts, part commonality across models, and improved serviceability. We're now building and shipping the first few models of our new platform and scheduling UL listing, forklift OEM approvals and UN38.3 certification. As the supply chain disruption is abating, as I mentioned, our profitability improvement initiatives have shown positive results and continue to improve margin of shipped packs. Our adjusted EBITDA loss fell again this quarter and decreased by $700,000 to a loss of $900,000 compared to a loss of $1.5 million in Q1 2023 and a loss of $4.7 million in Q2 2022. This was helped by higher revenue, design cost reductions to lower material cost and assembly and other improvements in gross margin. Improved production processes, including progress implementing Lean Manufacturing, have resulted in increased efficiency and higher throughput as well. Our efforts on increasing revenue and margin improvement, specifically for adjusted EBITDA are reflected on slide seven, showing the upward trend over the past fiscal year. We're executing our specific supply chain and cost reduction initiatives to continue this momentum. We implemented a $5 million subordinated line of credit facility on May 11 of 2022, included $4 million of signed, committed credit availability. We recently announced and amended agreement to increase the availability, available capacity of our Silicon Valley Bank working capital line of credit by $6 million to a total of $14 million, to support our higher working capital requirements related to increase customer demand. The current availability on the SVB line along with a $4 million of subordinated line of credit, provide the working capital needed to meet our goals. Our current and potential pipeline of customers continues to expand with two new Fortune 500 customers this past quarter, and a full product line that caters to large fleets who seek a relationship partner to meet their ongoing needs. These customers represent a diverse base in multiple sectors, all of whom are seeking lower costs and higher performance lithium-ion solutions. Our primary revenue has come from orders for our packs for new forklift and GSE that's ground support equipment deliveries. As customer adoption of lithium-ion, tax increase across fleets, we anticipate adoption to increase orders to replace lead acid batteries that are at the end of their lives. We have taken actions to restore our gross margin improvement path. As highlighted on Slide 9, our gross margin improved sequentially to 24% in the second quarter of 2023, from 22% in the first quarter of fiscal 2023 and from 20% in the fiscal fourth quarter of 2022. All this reflects the progress and restoring our gross margin trajectory. Our improvement initiatives include a number of actions that have begun to impact gross margin. Price increases on new orders, increased back volumes, more competitive shipping costs, lower costs, more reliable and secondary suppliers of key components, improved manufacturing capacity and production processes, new product designs to lower costs and finally, transition of product lines to a new modular platform, all of these are part of our plan to accelerate gross margin improvement. As supply chain disruptions has improved as mentioned earlier, we have also achieved production, process improvements and better supply chain management. During the quarter, inventory increased to 19.5 million from 18.9 million at September 30, 2022 reflecting a trend towards normalization of backlog and inventory levels. On the technology front, we continue to see customer interest in our proprietary sky BMS telematics product, which provides for remote fleet management and monitoring, and delivers battery pack data to optimize performance and customer fleet tracking. I'm happy to report that customer feedback remains very positive with Flux Power as the leader of the technology for these applications. We intend to place a high priority on continued development of features and capabilities for warehouse managers to increase their productivity and reduce their operating costs. Looking beyond reaching profitability, and building on our success in the material handling industry, we're also focused on broadening our reach into related verticals, such as warehouse robotics. With our operational strategy, including six assembly lines, we are well positioned to continue to leverage our capabilities as the adoption of lithium energy solutions continues to accelerate. With that, I will now turn it over to do Chuck Scheiwe, our Chief Financial Officer to review the financial results for the quarter ended December 31, 2022. Chuck? Thanks for Ron. Now turning to review our financial results in the quarter ended December 31, 2022. As Ron mentioned, revenue for the fiscal second quarter of 2023 increased by 123% to $17.2 million, compared to $7.7 million in the fiscal second quarter of 2022. This was driven by increased sales volumes and models with higher selling prices, including increased sales existing and new customers. Gross profit for the first second quarter of 2023 increased to $4.1 million. This was compared to a gross profit of $1 million in the fiscal second quarter of 2022. Gross margin was 24% in the fiscal second quarter of 2023, as compared to 14% in the fiscal second quarter of 2022. This reflects higher volume of units sold with higher gross margins, and lower cost of sales as a result of the gross margin improvement initiatives we have discussed. Selling and administrative expenses increased to $4.3 million in the fiscal second quarter of 2023. This is compared to $4 million in the fiscal second quarter of 2022. This was reflecting increases in marketing expenses, commissions, insurance premiums, depreciation, recruiting costs and our outbound shipping costs. Research and development expenses decreased to $1.2 million in the fiscal second quarter of 2023, this is compared to $2.1 million in the fiscal second quarter of 2022 and this was primarily due to lower staff lending expenses and timing of expenses related to development of our new products. Adjusted EBITDA loss was 900k for the free month ended December 31, 900,000 for December 31, 2022. This was an improvement from the $4.7 million for the three months ended December 31, 2021. And it was $2.4 million for the six months ended December 31, 2022. That's a 71% improvement from an adjusted EBITDA loss of $8.5 million for the six months in December 31, of 2021. Net loss for the fiscal second quarter of 2023 decreased to $1.7 million from a net loss of $5.1 million in fiscal second quarter of 2022. This is reflecting gross margin profit from higher revenue and also partially offset by increases in operating expenses and interest expense. Our cash used in operations for the six months ended December 31, 2022. It declined by 88% to $1.9 million compared to the first six months a year ago. We ended the fiscal second quarter of 2023 with $200,000 cash and we have our $14 million working capital line of credit with Silicon Valley Bank, as well as our $5 million credit facility of which there's $4 million of signed committed debt availability. These are both resources to manage working capital needs. We believe that our existing cash and additional funding available under our SVB credit facility and our subordinated LOC will be sufficient to meet our anticipated capital resources to fund our planned operations for the next 12 months. As we discussed, we fully intend to avoid raising equity capital prior to recent profitability. We are on track. We are executing to our gross margin improvements. And we are working through our cost control initiatives. And we continue to explore increased options for our working capital availability. Thanks, Chuck. As Chuck mentioned -- and I'm going to say this again, because it's important, we fully intend to avoid raising equity capital prior to reaching profitability, which is currently our top priority. Looking ahead, we believe the combination of existing customer orders and acquisition of new customers who wants the benefits of lithium ion technology and drive continued revenue growth. Product, service and quality are key factors as to why we continue to win business, and will ensure our goal to continue our growth trajectory. Our current production facility should support annual revenue well beyond $100 million annually, given our facility footprint, second chip build out that's beginning and lean manufacturing input implementation that is in progress. In summary, we are well-positioned to execute our strategy of electrifying commerce, as we offer customers stored energy solutions to increase productivity at a lower product life costs. We are encouraged by strong purchase orders, improving backlog and continued expansion of margins through improved sourcing and supply chain management, continuing process improvement and pricing. We continue to execute actions to improve adjusted EBITDA as shown on slide 7, which is a key indicator to achieve profitability. And further, we anticipate expanding into new markets having strong demand for our value proposition of higher performance and service at lower cost. I look forward to providing our shareholders with further updates in the near-term as we continue to leverage our leadership position in lithium ion, technology solutions, and with our growing list of new and diverse large customers. I thank you all for attending. And now I would like to handle the call over -- to the Operator to begin our question and answer session. Operator? Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from Amit Dayal with H.C. Wainwright. Please go ahead. Thank you. Good afternoon, everyone. So there are -- a lot of emphasis on gross margins and cash flows. Where do you expect to sort of be with gross margins, say in the next 12 months? We get that question asked a lot. And we've been advised by some pretty good sources, not to give guidance at this point with blocks at this stage, but I think we can give you the direction here that you can probably figure it out yourself. You can see our trajectory on gross margin that's continuing, we're executing to very specific set of actions. They're going to get us to profitability. We meet once every week on this very, there's a lot of opportunity on supply chain, design cost reductions and other actions as the growing emerging company like we are as we build volume that really enables us to lower cost in all those areas I mentioned. So run that trajectory. And then look at the other trajectory on our revenue. And our revenue is -- has a pretty consistent trajectory to it. And we are continuing to bring on new large customers; some of our key customers have hundreds of locations around the country that we deliver to. So we have developed that infrastructure, production, delivery and service to support that. We're getting other companies that are seeing that other large fleets, our sales guys are working on that, we see that trajectory -- our trajectory continuing with that. We're not losing customers, from time-to-time we see through the supply chain disruption that there can be some rescheduling of time -- the forklift manufacture; some of those lines can run into delays as well. So our packs are aligned with timing of the delivery of those forklifts, so you can see a little movement here and there quarter-to-quarter, but we're very confident on the longer term annual pace of our business, and the customer. So run that line out and you'll see that when you do that it's in the very near future, you'll see the very impressive quarter-over-quarter, quarter-over-prior year increases in our margin, and getting to that breakeven is a combination of continuing growth of revenue projection, to cover our infrastructure and operating costs that are in place to bring on these new large customers that we can serve, and most importantly retain and keep happy. Got it. Thank you for that Ron. And then just, in the press release, you highlight that a lot of business is still coming from existing customers. Is there any risk of saturation, reaching saturation with those customers, or is that runway still pretty strong for you? Yeah. It's -- there's a lot of momentum to it. Let me put it that way. These fleets have many locations, as I mentioned, they don't convert to lithium all at once it's too disruptive. And it's really, as I referred to earlier, it's tied to primarily whenever they need a new forklift, then they will add the new lithium pack. So it's an ongoing month after month, quarter after quarter to do that. And -- so we can cancel that out quite a few quarters and years and particularly as they can convert all their facilities. And then then you get into ramp 2 [ph] and VANTAGE AIR when those have to be replaced. And that's not to mention that the forklift, particularly larger ones, that forklift lasts longer than the battery. So I think as the operations, we think that we will start seeing more replacement of lead acid batteries as that lead acid batteries, which typically have a shorter life need replacement and once they see and get comfortable with the operating and benefits and operating environment and -- of the lithium, they will, some of that will begin. So we see that continuing, I'd say and I'd say secondly, and probably as important as anything. Just fly into LAX [ph], New York or any place, look down and see the massive amounts of warehouses and those are just all over the country. We're just beginning to scratch the surface here. The bankers tell us that, you know, maybe 7% 8% penetration of lithium is the current status of electric forklifts. And so there's a long way to go. We're just beginning this. We're just scratching the surface and there's a lot of low hanging fruit. But we add you have to execute and that's what we're doing. So we believe our new customer outreach and acquisition is very promising. And the other key of that -- any of those large customers like investors don't want to be the first one in a deal. And when he sees it – so like customers, we have, as shown on one of our slides that adds -- that's a great leverage point. Understood. Thank you for that. Just one last one for me, Ron. In the last earnings calls, you highlighted, you know, product opportunities in adjacent areas, has there been any progress on that front or even any revenues coming from new adjacent product opportunities Other than, ground support equipment, which were, which is really gaining a lot of momentum. We have felt we needed to focus on a number -- number one priority right now, which is growing that core business that we have. There's a lot of momentum, a lot of opportunity using existing sales channels, production processes. So we have focused on those, I think, to expand the way we see -- we want to expand in the future, which is building scale, we've been saying this for eight years and being the leading supplier to these fortune 100 companies. We're going to have to build scale to do that. So to do that, we need to be profitable, we take capital to grow like that. We don't want to raise equity capital at this point, for all the obvious reasons. The market is not attractive and we feel that we're on a very positive track. We're excited about reaching profitability, and then going into that next phase of growth, which will include a lot of these adjacencies that we've been looking at. We have been exploring, we did projects on 400 volt autonomous shuttle vehicles, we've done projects on solar backup. We have the technology, we have the capability. But growing scale in any of those sectors, there's going to take some capital commitment. So, we're excited about that -- really excited about that. But I hope that explains to you why we haven't been ringing the bell on adjacent revenue the past few quarters. Hey, thanks. Hey, Ron and Chuck, congrats on that continued great growth and progress on profitability. I want to ask about the rollout of new designs, sounds like you're shipping some new models out to OEMs now. Can you just need to get a sense of when we might start to see some of that benefit from the margins and how we should think about that rolling through the rest of the portfolio? Yes, no good, quite said. We're really excited about that. We started doing this eight years ago, and we were just innovating exploring. And being a first mover, we've had -- been able to have a lot of experience, a lot of battle scars, what's worked, what doesn't, knowing our customers, there's just so much to learn, like in every industry, on the inside, knowing the customer and what they want and the wide operating condition. So, we have we have leverage those lessons. We've been shipping a new we call it G80 pack, 80 volt 200 amp power and 400 amp power versions and shipping those and those in particular have been going to the ground support equipment sector. They're very modular. I am -- very impressive decrease in part count serviceability and the ability to produce. So, that modular type, where it's a little bit like Legos, if you link the battery cells together and modules and either parallel or series that number of them to get -- serves a whole spectrum of different power capability. So, we've got -- we're using that -- those basic modules and technology to develop packs for our full product lineup needs of material handling and ground support equipment. So, we're working on those -- most of our packs, at particularly all the material handling packs, we sell with underwriters laboratory or UL listing, which certifies for durability and safety. We found long time ago, the large customers want that and that gives us an advantage in those sectors. It also gives us advantage -- our packs are durable and safe. And so we're in the process of each of those models and, and typically and family to model we run them through that UL listing, which we're doing right now. And we'll get a big chunk of that done very soon. And then, we need to have the forklift OEMs, review that from an engineering standpoint, because it's gone in airport, Chip. And it's all part of the customer experience for them and relationship with them. So they want to be confident of what they have. So that takes some time too. So all this takes a little more time, than just designing a pack and assembling it and shipping it. But, what it does, it takes a little more time. But those aspects of it provide great, a very convincing to the OEMs and our end-customers that they can be comfortable with the products that we're putting out. So, we look for that over, during this year, over the course of this year to get all those out this calendar year. Yeah. Got it. It's helpful and safe to assume that, not having to outsource, the UL listing process that speeds things up a bit? Yeah. Yeah. Yeah, it does. Because, in the world of lithium, the Underwriters Laboratories are being flooded with adding to test, to verify, all kinds of different uses, configures of lithium, from medical to you name it. And so we've noticed a slowdown in our response time. So our reaction was well, we don't want to put up with that. And our answer was to, I mean, we've had a relationship with them since 2016. So, we've done enough business in that relationship. They trust us. They don't do this as anybody, but they will trust us based on our experiences, they are testing ourselves with their oversight. So we can do that. We can accelerate that, very significantly. Perfect. And another question Ron, with two new Fortune 500 logos, you talked about? Is that incremental to, I think you talked about two $2 million in last quarter, is there some addition to that. That is first question. Yes, yes, yes, we're pretty careful here to attract new customers each quarter. We tagged our salespeople and incentivize them with this. And it's once who we shipped packs to that quarter, and we secure the relationship with them to the point that we're confident, it's a long-term relationship, we look at the size of their fleet. And project that there going be a very, very large customer. So, a small customer is down the street now. We don't count that kind of business. We're not even focused on that business. But it's the once that we get to that point in that quarter. Perfect. And my follow-up there Ron, I think you talked about it was more than 95% of revenues coming from customers that have been around a while. How does that compare to backlog? Really, when we think about some of these new wins you've had and more recent times. Yeah. The backlog really varies a lot. It varies from orders where the customer wants it delivered in six weeks or even less than certain packs, we have a shorter lead time. Two, customers that are projecting out through the end of this calendar year and a backlog, as a footnote, doesn't include letters of intent that we've received for large volumes in calendar year 2024, and 2025 we want to protect their place in the line and some of our very large customers. To give you just a little more perspective on that, so we said our backlog is around 30 million, about a little less than 25% of that won't be shipped until July 1 through December 31. Hi. Thank you for taking my questions, and congrats on the strong quarter. I guess going back to the new large customer wins you announced this quarter. Can you talk about, I guess, where are those customers are in their adoption cycle of lithium-ion and replacement of lead acid and highlight what -- how competitive was the bidding process and what puts guide you over the edge? Okay. So if I understand the question is you want to get some color on, as we acquired these new customers -- sorry, my Apple Watch was trying to answer the question -- new customers and to color on the acquisition of how that goes, particularly, for example, the two new customers we added this quarter? Is that the question I'm asking? I want to make sure I'm focusing. So typically, our sales people will collaborate with the OEM sales force. Toyota Crown, they'll collaborate with major dealers, distributors, occasionally go direct and reach out to these customers or we've had customers reach out to us and say, hey, we're interested in your packs. But we'll want to demo a pack. And so, our people work with them, what kind of pack is appropriate for what you want, they demo it. They -- we work with them some more to make sure they got the right power ratings and the right packs, and then they'll go typically pilot some, and then they'll start ordering. Our whole -- all of our target customers have many locations around the country. So they'll pick one location, let's say, all right, let's start putting lithium in that facility. And so that may be 10, or 50, or whatever. And they’ll ship that, they'll get comfortable with how it works. The operating environment is a little bit different. We got computers on backpacks, they don't, they need a whole giant room to charge lead acid battery, you don't need any of that with us, but I got to keep ours charged, the battery chargers might be a little bit different. So they get comfortable with all that. And the operators need to get comfortable with it. The warehouse, people need to be comfortable, the finance, general management needs to be comfortable with it. And then once you've reached that point, then our salespeople work with them to start planning their needs. That's one of the other facilities and what it begins to look like, when they're going to do it, they have capital budget, expense budgets to deal with. So there's a fair amount of dependencies that drive the timing of that. And so it varies across company, but you can see, it doesn't -- it's not like going out and buying a battery for your flashlight, just to be absurd about it. But so with these two customers, that was started quite some time ago. The good news is once they start down this road utilizing Flux, this is a very sticky proposition. Once we -- we had to perform. I mean, we could screw up and they could drop us and go with somebody else. So we haven't lost any customers. And it's very sticky, so anybody's got to take business away probably has to do it from the standpoint either our service was terrible, or our price was way, way too high. And we haven't been experiencing any of that. So there's a stickiness to it. So it can take longer. But once you get it, it's yours to lose really, that's a general statement on simplifying somewhat, but that's exactly what's been our experience. There are no further questions at this time. I would like to turn the floor back over to Mr. Dutt for closing comments. Please go ahead. Thank you, operator. I would like to thank each of you for joining our financial results conference call today, and look forward to continuing to update you on our ongoing progress and growth. If we're unable to answer any question or addressing your questions, please reach out to our IR firm, NZ Group, who would be more than happy to assist you. Good day.

EarningCall_107

Hello and welcome to the TechTarget Reports Fourth Quarter and Full Year 2022 Financial Results Conference Call and Webcast. My name is Lauren, and I will be coordinating your call today. [Operator Instructions]. Thank you, Lauren, and good morning. Joining me today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our CEO; and Dan Noreck, our CFO. Before turning the call over to Greg, I'd like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on our business in advance of the call, we posted our shareholder letter on the Investor Relations section of our website and furnished it on a Form 8-K. Following Greg's introductory remarks, the management team will be available to answer your questions. Any statements made today by TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties, are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filing with the SEC. These statements speak only as of the date of this call, and TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures, to the extent available without unreasonable effort, accompanies our shareholder letter. Great. Thank you, Charlie. For the full year 2022, GAAP revenue grew 13% to approximately $297.5 million; adjusted revenue grew 9% to approximately $299.2 million. Net income was approximately $41.6 million, an increase of 4,285%; adjusted EBITDA grew 16% to $122.4 million; net income margin was 14%; adjusted EBITDA margin was 41%. GAAP gross margin was 74%; adjusted gross margin was 77%. Longer-term revenue grew 18% to $123.5 million, representing 41% of total revenue. Cash flow from operations was $90.7 million; free cash flow was $76.7 million. For Q4 2022, GAAP revenue was approximately $73 million, a decrease of 5%; adjusted revenue decreased 7% to approximately $73 million. Net income was approximately $7.2 million, an increase of 145%; adjusted EBITDA decreased 9% to $29.5 million. Net income margin was 10%; adjusted EBITDA margin was 40%. GAAP gross margin was 73%; adjusted gross margin was 76%. Longer-term revenue grew 5% to $29 million, representing 40% of revenue. Cash flow from operations was $19.8 million; free cash flow was $16.6 million. Two, if I can. First, just with respect to the macro environment, you've been through cycles before. So could you give some context on just how the current environment compares to past periods of anxiety and elongated sales cycles that you've seen? And how long do you think that could last and pressure some of the KPIs that you said deteriorated a bit in Q4? And then secondarily, I just wanted to talk about efficiency. I saw the head count reduction in there. You alluded to some other potential savings on excess office space. So kind of walk through what savings is contemplated in the guide today and where you think you have some further opportunities over the course of the year. Great. Yes, Justin, in terms of the macro cycles, what we've seen is -- I think it's been highlighted and documented over the last 45 days, how quick and material companies are laying off and it's very widespread. So we started seeing signs of that a little bit after our Q3 earnings call in November, but it really was the middle of December and all the way through today where there is widespread, quick and very deep cuts. So when we see that -- and I don't recall in past cycles, the material cuts and the deep cuts and how fast they came. So there's a behavior element to that where when customers cut head count, they were also very nervous on allocating any budget, and they made those quick decisions to hold on. So everything that our brands seeing, conversations with customers, partners, so even some of the competitors is Q4 got worse. It got really bad at the end of December, worse than Q3, and Q1 is off to a slow start because of this behavior. So I think that's something that we've seen on that. And that's obviously going to elongate sales cycles, budget reviews, approvals, and that's continuing as we see in today currently. In terms of efficiency, yes, we had a reduction in head count in December of about 5% of the workforce. And as we go into this year, we've announced a 90-day hiring freeze and a budget freeze on that, only imperative business travel for customer and employing customer engagement. We are looking at lease and subletting some of the buildings and office space. And we feel that we're in a pretty good shape. It's really important that even during a downturn that we stay opportunistic around the key priorities that will help, which we've seen historically covered us for a while, where we take an opportunity to take market share by making the right investments. So yes, we've down -- we've lowered our overall EBITDA margin guidance to 35%. Could we have maintained at 40%? We believe we could, but I don't think it would have been the right decision in terms of addressing the short-term opportunity to take advantage and gain market share for the long-term growth opportunity because the overall trends that we've seen and we've talked about over the last 3 years haven't changed. When you look at our customers, their sales and marketing departments have to be modernized, and they really want to focus on first-party data, having access to real first-party data, not only at the account level but the individual prospect level, is really critical to our customers. And privacy and compliance concerns that continue to go -- address this market really put us -- those long-term elements and those long-term, I'll call it, tailwinds don't really go away even during a downturn in the macro. So... Maybe a couple of questions on kind of the guidance as well. Just in terms of kind of the reduction in spend, is that kind of across all client types, all sizes? And second, any product areas you would call out specifically where you see more pressures are more in the advertising side versus Priority Engine, et cetera? Yes. We're seeing reduction across all customer bases from SMB, mid-market to enterprise. It is -- like I mentioned in the previous answer, it's been really quick and really wide and really deep on that. So we've seen that across the board. I think customers are trying to reset their costs, manage their budget, figure out what's going on. And I've seen probably the highest level of uncertainty than I've seen in previous downturns. In terms of product mix, yes, we actually do see a mix in product spend and product mix. The first thing that will absolutely get pulled back is the brand. And we've talked about this in the past. It's less than 10% of our overall business, really hard to measure for companies, and they pull that back. When markets get better, that's probably one of the first things they come back on, and they will increase their brand investments on that side. We also see a reallocation. We'll see that some of the long-term contracts, which might be a Priority Engine, might get reallocated to short-term product needs. So we have a qualified sales opportunity HQL type of product, where our customers are trying to win any deal that they can see right now and they want to have more form of the funnel type of product mix that they can do. So we'll start seeing that mix. I've talked to some customers where they had allocated to appointment setting for the short term. What I would say on that is it's really important for customers to manage their pipeline because this is what we typically see. We see customers will retreat, leverage their own data right now, try to orchestrate it in a very organized way. And they are looking at a pipeline that they appear to be healthy. And if that pipeline doesn't progress over the next quarter or 2 quarters and it doesn't progress into closed deals, they then realize that they still have numbers to hit. They have to quickly get that pipeline built up. And what we've seen historically, and we've predicted this will happen again, there's a quick flight back to quality. And that's where our first-party intent data at -- not only at account level but at the prospect level is really what we believe is the quickest path and the truest path to our company's next deal, our customers' opportunity to land the next deal. Got it. Great. And any more color you can provide -- or, in the letter, you talk about investments in the Content Enablement Services as well as the Content to Close concept. Can you just provide a little bit more details around that? Yes. We believe that, that is still a really good growth area, and we're seeing that part of the business continue to grow. We talked about the dynamics and the demographics of today's buyer. Today's buyer, we've seen in multiple studies and what we're seeing in our own research, a majority of those buyers today want a rep-less experience when they're dealing with their next purchase or their next opportunity. And what does that mean? They want to engage relevant information, relevant content, project-based content really to help guide them without having to take a call for the sales rep. We made the acquisition of ESG a couple of years ago, and we really focused on our efforts around making sure that our customers have a good content experience to help them position their product, position their overall company's value prop against the competitive set. But also, and especially in times like this, there's economic validation. Why should you be buying my solution right now in a downturn? And our customers are really craving for that, saying, we need to make sure that we're taking advantage of the downturn to capture market share as well. So that's all part of this end-to-end Content to Close concept: helping our customers build, create and execute on the right content and messaging strategy, putting that content into the right executable programs to engage the right buyers, and then helping prioritize those buyers in accounts back into their sales force through our Priority Engine and other platforms that we can then help them close more deals quickly. The Q1 guidance implies below normal seasonal trends that typically include a sequential decline in revenue of roughly 10%. What does this imply for the normal seasonal pattern for the business in 2023, where Q2 and Q4 are typically your strongest quarters? Do you still expect that dynamic to play out in 2023 just off of an overall lower revenue base, implying that revenue should improve sequentially in Q2? Yes. Good question, Joshua. So based on what we see right now, the pattern should stay pretty consistent on that. In Q1, as you see, it's lower than our normal seasonality. And that's because what we talked about earlier, the end of December and out of the gates in Jan, we're just seeing a lot of customers really trying to navigate their budgets and their cost cutting. And obviously, that's account of some of massive layoffs that we've seen. But we expect Q2 to grow. Q3 would be relatively consistent with Q2, maybe up slightly. And then Q4 would be our biggest quarter. And when you take a look at that and you compare it even to last year's comps, we still believe that pattern will shake out for 2023. Got it. That's super helpful. And then if you look at the customer additions of 539 in 2022, that's a really pretty strong impressive number. Given the lower outlook here for 2023, is the slower spending include these new customers that you just brought on in the last year, spending less as well? Or can you give us any color on either the profile of the customers that you added in terms of technology vertical or size? And how are they going to spend in terms of your expectations this year? Yes. I think in terms of the new customers that we added, it spreads across all of our customer segmentations. So a lot of small customers and some midsized customers and then add on too a few of the larger customers as well. And we've added those customers throughout 2022, but they're also going to be going through -- we're baking into everything of our guidance today of what we know and what we're seeing in the behavior in the market. So those customers will also have decisions to make in terms of budget coming out of the gate, managing expenses and then identifying where they're wide on pipeline. And we believe that the -- a lot of those customers will stay with us. Some will grow, some may reduce their spend, some may delay their spend. But I think the one common theme that we've seen even in past downturns is when you identify the current pipeline within customers not progressing and trying to do it with their own data or leverage what they currently have, there is a fight back to quality. When that happens, we're not sure. I mean this market has changed so much in the last 45 days, and we continue to see announcements every day in terms of massive layoffs. But that's what we expect to see going into 2023. Zack Ajzenman on for Bryan. First question on guidance and visibility. Just curious on the macro considerations that you're embedding here for the calendar '23 outlook. And what's the underlying Priority Engine growth assumption? I think the macro considerations that we're taking is today's reality. Like we're taking a look at what we know right now, what we've seen in the last 30 days or 45 days, and that's what we've baked into our guidance. As I mentioned, it's moved so fast in the last 45 days. I mean you can see the announcements, you can see the depth of cuts, and you can see the breadth of cuts. So we can only predict based on what we know and what we're experiencing today. And in terms of Priority Engine, I expect that to slow down this year because that's a commitment to long-term contracts. We've seen that in the past where people might slow it down. We might see a deceleration in revenue for the first couple of quarters on that. And when things turn around, again, what we're doing not only on the business side, on the product development side, we expect to see on the booking side a pickup after we navigate through that. So I think you're going to see it decline a little bit during the year. We've seen that with the behavior of our customers at the end of December and the beginning of January. And that's really what was all based on what we are dealing with right now and today's customer behavior. Understood. And then a follow-up on the same customer sales metric. It stood at 100% in 2022. So it was about flattish. Can you give us a sense of where this metric stood after the first 9 months of the year? Just trying to get a sense of what changed in 4Q as it relates to the same customer sales metric. And what's the assumption embedded for same customer sales in the 2023 outlook? So we only disclose that on an annual basis. And that's when we started providing these numbers 2 years ago or 3 years ago, it was on the annual basis. So we don't want to disclose on the quarterly basis. But I would say that there'll be some pressure on that number in 2023. We monitor it. We don't disclose it each quarter, but I would just say there'll be a little bit of pressure just based on today's current customer behavior and their pullback on short-term budgets. Just one quick one in terms of the different products that you guys have. And completely understanding that brand marketing can shift pretty quickly depending on the macro. But maybe what are some of the trends that you're seeing in solutions such as Priority Engine? Are customers being proactive here and maybe reducing spend as they're reducing head count? Or is that something that they might look to do upon renewal? Bhavin, I think you cut out for a little bit. But in terms of -- you talked about the brand piece and that just turning it on the Priority Engine. We're seeing some people delay their renewals because they don't want to commit to the annual or multiyear deals. We're seeing a shift on some of those, on the product shift from Priority Engine to some of our qualified sales opportunities and HQL products because, again, customers will look at it. They have a lot of pressure to land the current pipeline that they have in place. They want as much information to help land those deals, identify new deals and close them over the next 30 to 45 days. So we'll continue to see some of those shifts. I mentioned earlier, we're actually speaking to a couple of customers and they said, listen, we're putting a lot of stuff on hold right now. We'll be back in a quarter or we'll back in 2 quarters, and we're looking at appointment setting because we need to see some short-term numbers. You can turn on that and in terms of the -- that approach is, you really negatively impact your pipeline, and you have to be looking at this more than over a 30-day or a 90-day period. So customers might reallocate their budget. We have a lot of customers that want to stay with us in terms of buying the content marketing, content syndication, QSOs. But you will see a shift over the next quarter, possibly 2 in terms of where budgets get tight or reduced, they may reallocate to more of this short-term gratification, I need to be in front of a customer or a prospect ASAP. But that -- we've seen this before, and the pendulum swings back to flight back to quality. I need to get in front of the customers. Where are my customers when they're not with me? The research on the TechTarget sites and communities that our editorial team produces and our analyst team produces, and that will come back in our prediction. Got it. Super helpful. Just one quick follow-up. In terms of -- just some of what you just mentioned in terms of your content on your websites, what are you seeing in terms of traffic trends or change in registered users more real time? Have you seen a decline as maybe enterprises are less apt to kind of make IT purchases? Or are you seeing that remain stable? Actually -- it's actually the opposite. It's been very positive. So our organic traffic increased 50% year-over-year. So that tells me that our customers, their prospects and their customers are going to our sites to get information. Now these deals might get extended. It may get elongated as well, just like we were seeing with our customers. But they're actively researching because they know they have to make the right technology decision at the right time, and they're leveraging our sites. And that's also been shown in our Google Search rankings. We have 1.2 million search terms that rank 1 on Page 1 of Google. So we're seeing the activity there. And what we've really said to our customers are, your prospects and your existing customers research with TechTarget. And that is proven based on the organic growth in traffic of 50% and 1.2 million key terms that are ranked on Page 1 of Google organically. Got it. Super helpful. Just a quick clarification. That 50%, that's an annual number. Any way to think about just what that trajectory looked like in 4Q or even what you're seeing in January? We report it year-over-year. So that 50% was up from last Q1 in 2022, which, I mean, still some positive trends. Just wondering, any comments on churn related to long-term contracts? I'm just -- I'm curious to what degree those are being paused or if there's any instances where those are just being outright canceled. Yes. Jason, some are being delayed. We have some are being canceled with the beginning of the year with the budget cuts that we're seeing. We're seeing some of them getting reallocated to other products. And then we're also seeing that . I mean there are people that are still buying the long-term contracts. But I just think it goes back to this whole uncertainty over the last 45 days. And you can correct me if I'm wrong, it's been a long time, if ever, that I've seen a period so many times in 45 days in the enterprise tech business versus more of a forecasted and more predictable reduction. So that's what we're seeing in terms of the churn on the long-term contracts as it relates to Priority Engine. And then in past recoveries, I know you guys have been really successful gaining share. It sounds like you're leaning into that opportunity now. Just curious what specifically you can do or what are the key areas of investment that you think position you for more share gain on the other end of this kind of macro uncertainty. Yes. You know what? I think there's 3 areas that we're really laser-focused on. Number one is the Content Enablement business and making sure that we're investing in the right resources and the functionality to help with our customers who need purpose-built, relevant and impactful content. Because without the content, we're not going to be able to engage with buyers. These are really savvy enterprise tech buyers. As I mentioned earlier, I mentioned in the past couple of earnings calls, close to 50% of those buyers want a rep-less experience. They don't want to be dealing with vendors' sales teams out of the gate. They want information and they need relevant information. It's got to be pretty deep, rich, relevant, technical ROI, TCO type of information. And that's what we see, the metrics over the long term. And those demographics and those buyers are not changed, and they're not going back to the old days. So we're going to continue to invest in that. We've reallocated teams, technology process towards the Content Enablement business. They're a really good opportunity with our Priority Engine platform in terms of -- we've talked about this in terms of having tight integrations into our customers' workflow. We have increased our resources in the development team by 40%-plus over the last 7 months in really the better integration, automation, visualization and really about attribution by marrying our first-party data with our customers' first-party data to help them out and identify clearly at the account, at the prospect level. But not only showing that but also highlighting that in our ROI Dashboards and visual capabilities. And that's really important, and we're working on that. And you're going to see some announcements coming out later in the first half of 2023. We've also put a lot of work into the enhancements around our BrightTALK channel platform. Our customers are coming to us today and they're saying, gosh, we need to have -- we need to stay close to our existing customers, customer retention. We need to find that net new deal. And there's a way to effectively stay part of your customers through episodic content through a webinar platform. And what we've built and what we'll release will show a big focus on engagement and conversions so that they can stay in front of their customers, get better conversion, leverage that information, integrate it also into our overall platform capabilities to help them. So those are 3 key areas that we're really focused on in terms of gaining market share. And again, you've covered us for a long time. And when we've seen a dip, and it's been quick, we typically do the right things, stay opportunistic, manage our cost structure and gain market share and come out strong on the other end. I wanted to get a little bit of greater detail on the geographic commentary. You talked about in Q4, EU up 9%; U.S., up 3%. Just as we look at Q1 and your guidance for a revenue decline of about 16%, how is that weighted between the geographies? We don't disclose how that's weighted, but I would tell you, Eric, that the international markets are a little worse shape than North America. So we've seen that. You've watched all the news in EMEA over the last couple of quarters. You saw it coming. And they're getting hit a little bit more. So I think that North America will hold up a little bit more than the international markets, but it's going to be fairly consistent in terms of the ratio. Absolutely. I mean for the folks that have the regional budgets, they're still seeing it. A lot of the regional field marketers and sales teams and marketers are getting the mandates from corporate, and a lot of those corporate offices are in North America and they're saying pull back. They're going to pull back quickly on that, and they're going to wait for the green light to go. So now like I said, it all goes back to pipeline, progression of pipeline, impact of what they're doing and then a flight back to quality. So if it's a quarter, it's a quarter. If it's 2 quarters -- it's going to happen, and we know that. And then there'll be a flight back to quality, and there'll be a flight back to accelerate my pipeline because they all have numbers to hit across each region. Got it. And then my last question has to do with the buyback. You announced a $200 million buyback in November of 2022. That plan assumed, I want to say, $100 million of free cash flow in 2023. Given the reduction in outlook for 2023, are we going to be less aggressive on the buyback? And then what is the new free cash flow expectation for 2023? I'll answer the buyback approach on this. And I think we want to continue to be aggressive on the buyback and continue to stick to the plan that we laid out. We've seen over the history of our buybacks, it's been very accretive for the shareholders and for the overall organization. We've taken out close to 40% of our shares over the time at a price that's very attractive. And we believe in the future of the business, and we believe in where we can bring the business. In terms of the free cash flow, I don't know if we gave any guidance on that. So you can make some assumptions based on last year's numbers and this year's guidance what we do for free cash flow. Thank you. We have no further questions. This concludes today's call. Thank you for joining. You may now disconnect your lines.

EarningCall_108

Good morning and welcome to Apollo Global Management's Fourth Quarter and Full Year 2022 Earnings Conference Call. During today’s discussion, all callers will be placed in listen-only mode. And following management’s prepared remarks, the conference call will open for questions. Please limit yourself to one question and then rejoin the queue. This conference call is being recorded. This call may include forward-looking statements and projections, which does not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Apollo will be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's Web site. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Apollo fund. Thanks, Donna, and a special thanks to a couple of members of the research community who selected two of the three songs for our hold music jukebox that was playing before we got on the line today. Earlier this morning, we published our earnings release and financial supplement on the Investor Relations portion of our Web site. In short, we’re very pleased to deliver a strong set of results for 2022 that featured record fee-related earnings of $1.4 billion or $2.36 per share and record normalized spread-related earnings of $2.3 billion or $3.88 per share. This strong combination of fee and spread-related earnings alongside principal investing income drove total adjusted net income of $3.1 billion or $5.21 per share for the full year. Joining me this morning to discuss these results and our positive outlook on the business in further detail are Marc Rowan, CEO; Jim Zelter, Co-President; and Martin Kelly, CFO. Thank you, Noah, and good morning to all. 2022 was a transformational year for the firm. At the end of 2021, we held our first Investor Day and we set out our five-year targets and laid out what we needed to accomplish internally to achieve those targets. End of 2021 seems like a lifetime ago or at least a Fed regime or two ago. However, in 2022, we met or exceeded those targets. Record FRE of 1.4 billion was in line with our target and record normalized SRE of 2.3 billion was meaningfully ahead of target. As important and as we suggested, we restarted the growth engine. Inflows in 2021 were 75 billion. Inflows this year, 128 billion. Inflows for '23 will be higher. We expect a record year of capital raising in 2023. As I've often cautioned, capital raising is the reward for good performance. It is not actually the goal that we set out. AUM ended the year at 548 billion, or X rates, and FX would have been about 565 billion, all in meaningful progress against our five-year targets. Recall that in Investor Day, we laid out three key objectives or three key pillars that we had to focus on to achieve our plan; global wealth, origination and capital solutions. Global wealth had a really strong 2022. We ended the year with approximately 30 billion of AUM in our global wealth segment, including 6 billion of capital raised in 2022, accounting for and implementing successfully the Griffin acquisition during the mid part of the year. We are on track to meet or exceed our $50 billion target at the end of 2026. When we laid out these targets, we had zero perpetual products in the marketplace. By year end, we expect nine perpetual products in the marketplace. In short, we've had tremendous receptivity to our product and to our franchise in the global wealth community. Our goal here, like the goal elsewhere in our organization, is not to be the biggest. We will not necessarily be the fastest growing. We will be seen and are seen as the innovator in this marketplace, showing the global wealth community the kinds of products that they have never seen before and addressing the unique needs of this interesting constituency. Origination volume totaled north of 100 billion on a 12-month basis. We now have 15 platforms, including seven platforms, which were new additions during 2022. You will hear later in the call the most recent edition, Atlas, formerly known as the Credit Suisse securitized products group. We are definitely on track here to meet or exceed our $150 billion annual target at the end of 2026. Having a steady source of unique credit production every year really enables us to power our business to make the kind of projections and predictability and the client commitments that are necessary for us to grow. This is good for our FRE business, in that it powers our third parties, particularly in private credit and it is especially good for our SRE business, in that we produce reliable amounts of excess spread, particularly in investment grade private credit. I'm going to spend a second just on that term. We hear the term private credit a lot. We actually have no idea what the words private credit mean. They're just two words that will follow each other. What we have focused on in our platform and what we have done uniquely is to create a source of private investment grade credit. Very few people, very few organizations have that capability. This is in addition to the strength that the franchise has always had in more generic private credit. Jim will spend a lot of time on this in his remarks and it is a very important part of our franchise going forward and a huge differentiator. The third pillar that we set out was our capital solutions business. Capital solutions in 2021 was approximately 250 million of annual revenue. And we suggested that at the end of 2026, we wanted that to be north of 500 million of annual revenue. In 2022, we exceeded 400 million of annual revenue. It gives me great confidence that we are on track to meet or exceed the five-year projections that we laid out at the beginning of 2021. The team has been fully built out globally. We have a massive pipeline that we executed on partially in 2022, and will carry over into the first quarter of 2023, which Martin will touch on. And most important is to help understand and help explain the ecosystem that we are creating. 15 platforms, 15 companies whose only job is to produce credit wake up every day and do what they do, they produce credit. We, as a diversified buyer of credit for our own balance sheet in SRE we want 25% of everything and 100% of nothing. And so what that means, we are creating every day credit that needs to be syndicated into the marketplace. Some of that goes into funds or to SMAs of clients who have previously come to the Apollo platform. The rest of it goes into our capital solutions business. This is a strategic imperative for us, and does two very interesting things. One, as we place credit with third parties, we earn fees. Earning fees is a fundamental part of our business model. But as important, they are expanding our ecosystem. We have done business in the alternative community with investors with circa 3,500 counterparties for a long period of time. This is an opportunity with unique product with side-by-side with align product, with recurring product for our capital solutions group to go out and build new relationships. Sometimes those new relationships will result in one-off transactions, which is just fine. But oftentimes those new relationships will open up client's eyes as to what we can do, and we will turn those into SMAs and recurring revenues. This is an ecosystem that is picking up tremendous traction and the team here is doing an unbelievable job. As excited as I am about the '22 performance against the three initiatives, I now want to turn to Athene who had just an awesome year. Inflows at Athene on an organic basis were some 48 billion. Athene was the number one purveyor of annuities in the United States, despite not being represented in a lot of annuity markets. New business was put on the books in the fourth quarter at about 145 basis points of spread versus about 120 basis points of spread for the full year. Both of those targets are meaningfully ahead of what we would consider normal levels of business. 2023 I believe will also continue to be very strong. I doubt it will continue at the same levels that we saw in the fourth quarter. But new business is being put on the books very profitably. Athene’s alt portfolio, which as many of you also understand forms the foundation for AAA, our retail product, our equity replacement product was up 10% during the year versus the S&P benchmark, which was down almost 20%, very strong performance and an indication that Athene and AAA are doing something other than buying and providing clients with market beta. As we step back and we think about our positioning in this marketplace, one of the questions we ask the team who is the fortress balance sheet in our industry? And the answer is we are the fortress balance sheet in our industry. We are A plus across all three agencies. We ended the year 2 billion of excess capital and more than 1 billion ahead of S&P AA. Some years ago we introduced was the first sizable reinsurance sidecar for our industry, affectionately known as ADIP1, with 3.25 billion of capital. That sidecar has now been nearly fully deployed. And yesterday or earlier this morning, we announced the first closing for ADIP2 of some $2 billion and we expect that ADIP2 will be larger than ADIP1. And further that ADIP2 will take an increased share of the new business that Athene puts on the books. This is good all around. This is good for Athene from a capital generation point of view and a capital efficiency point of view, even though it will mean that some of their assets are now essentially belong to investors and they will realize the benefits of SRE growth. It is good for FRE and it is good for our origination franchises creating additional capacity that needs to be filled which will further spur the flywheel of our capital solutions and other businesses. In short, an amazing year for Athene. Our success in this business of retirement solutions has not gone unnoticed. By some measure, there are now north of 100 asset management entities or insurance entities who have become asset managers pursuing a strategy similar to that which Athene started on 13 years ago. To be successful in this business and to understand where we sit relative to the rest of the business, I believe there are four things that contribute to success. First is capital. Massive amounts of capital in an industry that has not been able to raise capital. The second is an ability everyday to create investment grade spread. This is something in a skill set that is not traditionally resonant within the alternatives industry, or quite frankly within traditional asset management. It is a skill that we have built up. The third is a really attractive cost structure. You need scale, because ultimately spread is a function of your net interest margin, but it's also a function of a very efficient cost base. And finally, you need a very attractive cost of funds. If your cost of funds is low, because you're efficient and because your products are well designed, you do not need to take investment risk to earn good returns. And if you're a good investor, returns can actually be quite high. Everything goes in reverse if your cost of funds is very high. What we are watching in our industry is the haves, like Athene, where we have some 48 billion of organic origination versus the have-nots, the market entrants, who in fact are paying up for inorganic blocks at very high cost of funds, which also are very expensive to administer on a hope that they will get to scale. I believe that the vast majority of new entrants, although not all, will not be successful and will learn a very expensive lesson along the way. We are also in a period of time where the increased activity by asset managers has resulted in increased regulatory interest in what we are doing. We have spent 13 years creating the kinds of regulatory dialogues and transparency and putting out a best-in-class set of standards. We are, to my knowledge, not just a fortress balance sheet, but the most transparent of the companies. We regularly publish stress tests, although we are not required. We regularly publish details of assets that we are not required. We regularly go back and forth with respect to our reinsurance so that people understand there is no “arbitrage” between the U.S. regulatory standard and the Bermuda regulatory standard. All of the things I've just mentioned are not generally followed by many, although some are good actors of the new entrants. What you will see in 2023 on our part is an increased foot forward to help lead this regulatory dialogue to make sure that we get to the right place with appropriate transparency and appropriate oversight. This is an amazing business that is driven by powerful trends, but it is also a business of promises to retirees. We expect that we will be included among a group of companies as internationally active insurance groups at some point in 2023, giving us an opportunity and a seat at the table to participate in shaping the regulatory future for our industry, which is changing very fast. FRE for us is the flipside of FRE. The ability to generate safe yield is something that very few people have. Who need safe yield? Retirees need safe yield, pension funds, replacing a portion of their fixed income need safe yield, banks need safe yield, Japanese insurance companies and international investors need safe yield. The world is short safe yield. And we are very good at producing it. So when we produce it in an asset that is short, we want to maximize the profitability of our capability. And then why I say that SRE is the flipside of that. We are FRE for the safe field we produce for third parties and for Athene. But then on top of that, we are an SRE or spread-related earnings by matching the safe yield with long-term sticky liabilities. In 2022, a number of other forms of so called permanent capital went in reverse. 2022 was an awesome year for Athene. Let me step back and now return to a higher level view of our business. Our business, as I've suggested previously, exists and our industry exists to provide investors excess return per unit of risk. It does not exist for us to grow or for us to pursue that which we want. We are fundamentally responding to investor needs. Fortunately, we have very strong tailwinds as a firm and as an industry for the need for income, excess return per unit of risk. Our business strategy is being driven and growth is being driven in areas where we believe we can continue to produce excess return per unit of risk. Our business is guided not just by excess return by unit of risk, but by an aligned investing philosophy. The combination of Athene and Athora in our balance sheet side by side with investors ensures investors at all points in time that we are fully aligned with them. Finally, as I'm sure Jim will pivot on to, purchase price matters. The purchase price matters strategy is very hard to pursue in a risk-on everything rally [ph]. Nonetheless, we did that and the reward for doing that was certainly available and shown in 2022. But I believe the positioning we've taken out and our industry tailwinds really bode well for us going forward. 2023 will be a very good year for Apollo. We are on offense. We have 50 billion of dry powder across the platform. We deployed 160 billion in 2022. Fundamentally, we do better when markets are uncertain and when there is uncertainty in the economy. We expect FRE and SRE in 2023 to be up more than 20% over 2022, as I'm sure Martin will detail in his remarks. But we also have an amazing opportunity in our business to really focus on operating leverage. We have enough in front of us with the initiatives that are currently on our plate to not just meet our 2023 goals but to meet our five-year targets. Alongside the three pillars of global wealth, origination and capital solutions, we have added a number of growth initiatives and I will not steal Jim Zelter's thunder as he lays out the things that are in front of us to focus on. Suffice it to say, 2023 will be a year of execution. We will return the business to operating leverage in 2023 and again in 2024. The team here feels great. There's tremendous momentum. We are incredibly engaged and energized. And at the end of the day, what makes this a great place is the people. This is a group of hardworking charitable people where the vast majority of the team, 93% are involved in our giving programs. And our job is to be the single best place to be a partner in the financial services industry. And with that, I want to thank the employees for an amazing year and the investors and analysts for all the time you've given us to understand what we're trying to do. Thanks, Marc. As you've heard us say before, one of our core tenants is excess return per unit of risk. After 12-plus years of low rates and relatively free money, the best investors will begin to reveal themselves. And strong investment performance is the foundation of our business and we take our responsibility to provide differentiating returns to our clients quite seriously. As we look out to 2023, we believe this is a particularly good time for Apollo to generate excess return. While other managers may be in a defensive position, we have been patiently waiting for this type of environment and we're confident there will be meaningful opportunities to deploy capital amid a heightened period of volatility and candidly a foggy capital markets backdrop. Marc provided a high level update on our three key growth pillars, and I'd like to deep dive for a moment into origination. As we addressed at that Investor Day a short 16 months ago, a large portion of what we do is this high grade, fixed income replacement end of the market. Central to our strategy is the ability to originate a recurring supply of these durable assets. And one of the primary ways we do though is through these platforms, real operating businesses within a variety of industries. Platform origination is clearly a differentiated way to originate these investment grades assets at scale, which is needed to grow our retirement services business profitably and increasingly to third party accounts that want the same alpha in their portfolio. Importantly, however, rather than expand HoldCo balance sheet resources, the capital used to purchase these origination platforms can be sourced via the normal course purchasing power of Athene’s alt portfolio as well as AAA. At year end, our platform ecosystem was producing approximately 35 billion of annual volume and generating about 425 basis points of excess spread versus equivalent IG benchmarks. We've assembled this portfolio of 16 platforms across asset classes in sectors which had been acquired through a variety of funds we manage and also built organically, and we're now focused on scale and execution of those. Metaphorically speaking, we pay the tuition to develop this important capability of scale, which we think is a great competitive advantage or MO [ph]. This advantage will expand following this week's or yesterday's announcement of the CS securitized products group platform, which has been renamed Atlas SP. This platform is a best-in-class asset-backed warehousing business, really a finance company of finance companies, with an extensive network of clients, an amazing 20-year track record of negligible losses. The industry-leading team at Atlas is excited to be working with Apollo. And through the closing process, it's become clear that the variety of counterparties also want to work with the Apollo ecosystem. Many investors are reaching out to us as they expand their private credit exposure from direct lending into a broad base of asset-based finance capabilities. We think this is the largely untapped part of the 40 trillion IG fixed income replacement market. And simply put, we believe the opportunity to source resilient yield in asset-based finance is where sponsor finance was and private credit was 10 years ago. In addition to the three growth pillars, we began to execute on six additional strategic initiatives that we've mentioned past. We've organized our efforts and resources around these initiatives, and now '23 is focused on execution. In this competitive fundraising landscape, our innovative and differentiated product offerings we believe will stand out. And we're seeing early indications of those facts. And I'll mention a few here. We continue to be very optimistic on the growth of AAA or Apollo Aligned Alternatives. We're broadening the distribution system domestically through additional bank platform and a variety of other independent channels as well as globally to Asia and Europe. To note, we're launching our European product platform in the coming months, designed to offer a full suite of options to individuals in Europe, and AAA will be the first product available on that platform. We've also begun marketing Athene Altitude [ph]. This is a product designed to offer a range of Apollo managed funds across this risk-reward spectrum, but to do so in a tax efficient vehicle. While still early, we raised 300 million in the fourth quarter from our first client, a third party insurance firm, to invest in AAA through Athene Altitude. Additionally, a couple of key organic initiatives in nascent asset classes are building scale. Our sponsor and secondary solutions platform, named S3, has gained momentum following a cornerstone investment from [indiscernible] last year. This overall business has committed or deployed over 13 billion of capital since 2020, mainly in fund finance but has been committed over 1 billion into equity and credit secondaries over the past six months. And we expect formally to launch fundraising for an equity secondaries fund in the second quarter and opportunistically raise capital for our credit secondaries fund ahead of a dedicated fundraise in 2024. We're seeing a similar story in our clean transition franchise. Since launching our sustainable investing platform about a year ago, we've committed or deployed over 6 billion of capital into these investments. And later this month, we will be adding a dedicated team for climate and infrastructure yield to further boost our origination capabilities across the board. And we anticipate launching fundraising for clean transition finance and opportunistic vehicles in the latter half of this year. Next, we're bringing in the investment toolkit that has made Athene and Athora successful to others in the retirement services industry. Our proprietary origination volume has grown, as Marc said, in consistency and diversity. And now we're reaching a point where we can distribute more of these assets to third parties who have the same fundamental needs. We are building on a strong foundation of existing relationships in that area. And over the next year, we aim to raise over $10 billion of capital from others in the retirement services space. And finally, we're replicating the successful sidecar structure we've had with MidCap and ADIP in a variety of other areas in our business and to do so in a simplified, cost effective manner to really scale and partner with the investors, as Marc mentioned, in the Apollo ecosystem. Turning to our broader fundraising activities apart from these new six initiatives, our momentum on a variety of fronts is strong. In asset management, we had strong inflows and included 46 billion of third party fundraising, which doubled 2021 levels. In the fourth quarter specifically, total fundraising of 9 billion was driven by new capital for Athora income and incremental capital for a variety of drawdown fundraisers, co-investment capital, and in our global wealth, including 800 million for AAA. Looking to '23, we expect a record amount of capital from third party investors exceeding the strong levels achieved last year. And we're already in the market with a range of drawdown funds, including our fourth vintage European principal finance, our third infrastructure fund, as Marc mentioned, ADIP2 and certainly our 10th vintage of our flagship private equity fund. Additionally, a variety of funds and manager accounts across the yield strategies that are currently raising capital, or will be later in the year similar to our Accord series as well as a variety of perpetual products, as Marc mentioned, in the global wealth channel, including the non-traded BDC, non-traded REIT and two interval funds. Regarding Fund X fundraising, I'm pleased to report that we are experiencing broad support from the existing shareholder investor base and gaining traction with new investors, especially from non-U.S. regions and the global wealth channel. Through January, we've received commitments approximately 15 billion. And with congestion dynamics in the market, it's difficult to predict the ultimate size of the fund and exact timing. However, we expect to close on the majority of incremental commitments in the back half of the second quarter, and we believe the fund will land within striking distance of our target. Coming into the new year, we believe investors are focusing on managers with healthy portfolios who had less exposure to growth-oriented sectors, which certainly bodes well for our long tenured strategy. It's worth noting that our private equity fund portfolios outperformed the S&P by over 25% in 2022 and our flagship PE Fund IX appreciated 22% during the year. Revenue and EBITDA trends remain strong in those portfolios, up mid-teens percent year-over-year across the broader fund portfolios. Historically, and as you've heard, we've generated some of our best returns for investors and midmarket downturns and we're one of the few funds with a complete product toolbox. Our proprietary financing capabilities have allowed us to execute transactions when the traditional markets are more restricted as they are now. And our flexible mandate across corporate carve-outs, public to privates in distressed allows us to pivot to more attractive opportunities. For example, Fund X began its investment period in October. We've already deployed 1 billion of capital into nine distressed positions through year end, as well as another 2 billion in a take private along other variety of funds, and a sizable chunk of capital to a structured financing. Moving to retirement services. As Marc mentioned, Athene had a spectacular year of organic inflows totaling 48 billion, including 11 billion in the fourth quarter. The most significant contributor to the fourth quarter was the retail channel, which was 7.5 billion, a new quarterly record. And retail annuities are certainly in high demand industry-wide as principal protected products with attractive guaranteed yield are compelling in today's environment. Zooming in though, it's clear that Athene success is driven more than just the industry tied expanding distribution, differentiated asset origination and ample capital resources to support that robust growth, which has allowed us to generate record flows while writing business at compelling spreads. For '23, we expect another robust year of organic growth from Athene across all channels, with gross inflows exceeding 2022 levels and reaching new highs. Retail and flow insurance should remain the strongest but also benefit from a solid pipeline of new distribution relationships in both the U.S. and Asia. And we also expect pension group annuity is likely to remain heightened as the funded status of many corporate pension plans continues to exceed 100%. And while the public FABN market remains less attractive, we're seeing more opportunities in private transactions that require our overall flexibility. Reflecting on the past year, we’ve certainly re-instilled a growth through all assets of our facets of our business and put the building blocks to execute our five-year plan in place. As we said, 2023 will be a pivotal year of execution and optimization. And we're seeing great momentum already. Great. Thanks, Jim, and good morning, everyone. As Marc and Jim have highlighted, 2022 was a very successful year of growth and execution for Apollo. Amid a backdrop of significant market choppiness, our financial results demonstrate the strength and resiliency of our earnings streams. In our first full year post merger, the combination of our asset management and retirement services businesses proved increasingly valuable. FRE and SRE comprised 93% of total pre-tax earnings in 2022. And on average, we expect 90% or more of our earnings to be driven by stable recurring predictable earnings streams over the long term. This translates to a meaningfully less potential for volatility versus other businesses that may be more reliant on incentive and investment-based income streams. Our business model is fully aligned with the growth of FRE and SRE inextricably linked and highly correlated. We intend to drive consistent and attractive earnings growth, regardless of the macro backdrop, in line with our stated goal from Investor Day of doubling earnings by 2026. 2022 was a solid proof point of our progress towards this goal, as we met or exceeded nearly all of our key financial and business targets, which we outlined on Page 4 of our earnings release. FRE of $1.4 billion in '22 grew 11% year-over-year, in line with our expectations, while we absorbed costs associated with significant investments in our next chapter of growth. Management fees increased 14% year-over-year, supported by strong fundraising from both our asset management and retirement services clients, as well as a solid pace of capital deployment. As Marc mentioned, capital solutions fees reached a record quarterly $142 million in the fourth quarter, bringing full year revenue to $414 million, up approximately 40% year-over-year, an incredible result amid a turbulent capital markets backdrop, highlighting the quality of our team and the capabilities we've built. Finally, full year FRE margin of 54% was in line with our previously communicated guidance. In retirement services, normalized net spread reached 140 basis points and 123 basis points in the fourth quarter and for the full year '22, respectively, well above our initial 110 to 115 basis point guidance as the higher interest rate backdrop, more interesting investing climate, and robust organic growth trends drove upside to our expectations. Athene’s alternative investment portfolio returned 10.4% in 2022, very close to our 11% normalized assumption, driven by a broad-based strength across strategic retirement services platforms, origination platforms and fund investment returns. Entering 2023, we expect another year of strength across the businesses. I'll walk through some of the key building blocks. As previously communicated, we expect fee-related revenue growth of more than 20% in 2023. The bulk of this growth should be driven by management fees, resulting from a variety of new strategic growth initiatives that Marc and Jim walked through, robust organic inflows from Athene, strong capital deployment in yield and hybrid strategies, and additional capital raised for Fund X. Turning to capital solutions. Fee revenue from this business far exceeded our expectations in 2022, growing approximately twice as fast as we originally expected. Given the strong outperformance, we currently see last year's level providing a good baseline for 2023, which is tracking very nicely versus our $500 million target by 2026. We see a healthy pipeline of transactions to support this revenue. Moving to expenses. We expect our rate of growth in total fee-related expenses to moderate as we progress through 2023 driving positive operating leverage versus our full year 2022 margin. We added almost 400 Apollo employees to our total headcount in 2022 following several previous years of significant headcount expansion. We've been very fortunate to attract top talent in the industry across investing, fundraising, product development, capital markets and enterprise solutions. This has helped drive strong 2022 financial results and solid progress as we look forward on our growth initiatives. We expect that the bulk of our senior hiring is now behind us. Relatedly, we've seen a meaningful increase in our non-comp expenses to support this higher run rate level of employees as well as our strategic initiatives, which has materialized principally through growing occupancy and technology costs. Additionally, our travel and entertainment expenses have normalized back to pre-COVID levels. We're prudently managing discretionary expenses as we enter the new year, which should help drive a lower growth rate year-over-year in 2023. However, you should expect the fourth quarter of 2022 non-comp to be a good jumping off point for 2023. Altogether, we expect FRE growth of 25% in 2023, equating to approximately $1.75 billion or slightly under $3.00 per share. Turning to retirement services, we expect another strong year of growth in spread-related earnings as Athene continues to fire on all cylinders. We generated extraordinary normalized SRE in the fourth quarter, which was driven by another year of record organic inflows, underwritten to spreads above our target returns, as well as historic interest rate tailwinds. These ingredients led to a truly remarkable performance. To an increasing degree now, as we look forward, we have the flexibility to choose how much we want to grow and how we want to fund that growth. Given the rising rate, wider spread and strong demand environment of last year, we leaned in and added tens of billions of dollars of highly profitable business that we believe will drive predictable and durable spread-related earnings for years to come. We find Athene’s growth in a highly capital efficient manner, utilizing its fortress balance sheet resources, which includes third party capital via the ADIP equity sidecars that Marc referenced. For every $100 of inflows sourced, we put up approximately $8 of capital. Last year, Athene contributed approximately 80% of that capital, as ADIP deployed most of its remaining dry powder. And as ADIP2 comes online, we expect greater utilization of third party capital to support incremental growth, likely double 2022's level or approximately 40%, which will make the business even more capital efficient than it already is today. In addition to increasing capital efficiency, ADIP provides external validation by sophisticated third party investors of Athene’s core business, risk framework, fee structure and strong returns on capital. Importantly, Apollo earns management fees on total gross assets within the Athene complex, including those managed on behalf of the third party investors in ADIP. Because of this mechanism, we are agnostic to the method of funding for Athene’s growth from an asset management perspective, as fee-related earnings benefit dollar-for-dollar in either scenario. As we have emphasized before, SRE is a highly attractive running stream, and the economics of growing it represent a highly attractive return on group capital as we evaluate the highest and best uses of capital across the complex. The returns on capital are even more attractive with more equity sidecar funding, and that's another reason we intend to utilize it to a greater degree. We expect this effort will result in Athene’s net invested assets growing by a mid-single digit rate in 2023. As you know, we have benefited from higher rates due to an allocation to floating rate assets and the positive impacts on new money yields. With the forward curve signaling a flatter trajectory, we currently expect our normalized net investment spread to remain in the vicinity of the strong fourth quarter level, which we expect will underpin a normalized net spread of 135 to 140 basis points for the full year 2023. Combining our current expectations for organic growth, the use of ADIP equity, the investing environment and the interest rate backdrop, we expect normalized SRE growth of approximately 20% in 2023. And when combining FRE and normalized SRE, we expect year-over-year earnings growth of more than 20% in '23. As it relates to principal investing, we expect continued equity market volatility and relatively muted capital markets activity, at least in the first half of '23. Although it's difficult to predict market trends with any accuracy, based on the visibility we have into our pipeline through the first half of the year, we currently expect PII to be below our multiyear average target of $1 per share in '23. If markets continue to improve, it's entirely possible we'll move more actively into a monetizing phase in the back half of the year. Now, finally, let me spend a minute on capital. As a reminder, we expect to generate $15 billion of capital to invest over 2022 to '26, including $5 billion to fund the base dividend of $1.60 per share, $5 billion for additional capital returned via opportunistic buybacks and dividend increases and $5 billion for strategic growth investments. In 2022, we spent nearly $1 billion of capital on the base dividend, about $350 million of capital on strategic investments, and over $300 million of capital for opportunistic share repurchases above ongoing stock comp immunization. Given the line of sight we have into a strong earnings growth year, we intend to raise the annual dividend by 7.5% to $1.72 per share, starting with the first quarter 2023 dividend declaration. We also expect to be a regular buyer of our stock as we believe the intrinsic value remains highly compelling. In conclusion, we ended the year on a very strong note in what was a very difficult market backdrop. We’re refreshed and focused on executing the next leg of our strategic five-year plan with great enthusiasm. Thank you. The floor is now open for questions. [Operator Instructions]. As a reminder, we do ask that you please limit yourself to one question and then rejoin for any additional questions. The first question today is coming from Glenn Schorr of Evercore. Please go ahead. Hi. Thank you. Appreciate all the detail, particularly on retirement services. I have a quickie, little and big picture on retirement services. On Slide 24, you go through 11 billion of inflows attributable to Athene on the gross inflows, but you also have 11 billion gross outflows. It looks like half was a sale and half was actually policy-driven withdrawal. So curious if you could just talk to that, and then what you're assuming on surrenders? And then maybe you could just flush out a little bit more about your comments on just investment grade and the credit portfolio holding up in this backdrop? Thank you. I appreciate it. Glenn, it’s Marc. I'll take the first piece of it and then Martin will pick up. So surrenders basically continue at normal levels. What you're watching in the fourth quarter is a normal level of surrenders, the maturity of one FABN, which is a scheduled maturity of the FABN. And then during the year, we reinsured just under 5 billion to Catalina. Catalina is our closed block P&C business. We do not believe the closed block P&C market to be that attractive. And so we are in the process of diversifying Catalina’s business from fully closed block P&C to 50% closed block P&C, which is mostly in runoff, but with a long tail, and 50% annuity. It is another source of capital. Think of it like ADIP and it participates side by side with ADIP2 and ADIP1 in these sorts of transactions. But it is modest in its capital base. So maybe it grows to 10 billion or 15 billion over a number of years. But it is really more just a sideshow to what else is going on in the business. In terms of credit, there's just nothing going on in the portfolio. Impairments were like in the 2 to 3 basis points. There's just nothing we see, Glenn, that gives us cause for concern across the portfolio. And again, it gets back to this notion. We speak a lot about the words private credit. And I say -- as you've heard me say, there are two words that are both English words that actually don't mean anything. Private credit can be AA and private credit can be below investment grade. Both have their place in portfolio. On a regulated balance sheet, it is investment grade private credit, excess spread over publicly traded corporates but without excess risk. Thanks for all the detail as well. Marc, I had a question for you around the origination ecosystem that you guys have build. That continues to be a really powerful engine for the whole organization. So $100 billion annual origination this year, very good run rate while kind of on your way to your goals. My question is over the course of '22, how much of that has been placed with third party clients that pay your management fee, whether it's a separate account nor through a commingled fund? How much is being placed at Athene or Athora? And ultimately, as you look forward, what would you want that mix to look like ideally? So Alex, I'll size the business and it's not a statistic I have in front of me, but I'll give you a feel and we'll get back to with the detail. So of the 100 billion of origination, as Jim mentioned, 35 billion this year came off platforms and 65 billion came from what I would say more traditional sources of origination, us calling on companies, high-grade alpha, or other methods of origination. The run rate of the platforms, given that we added seven new platforms in '22 plus the addition now of Atlas means that the run rate will be materially above the 35 billion. The vast majority of what’s being originated by the way is investment grade. My gut tells me that about a third of that ends up in the Apollo ecosystem, meaning Athene and Athora. That another chunk of that maybe 20%, 25% goes into SMAs. And somewhere in the balance is going through our capital solutions business as we build the business. Going forward, we will always be expanding into new clients. I think the Athene-Athora share is kind of where it needs to be. As I jokingly said on the call, Athene wants 25% of everything and 100% of nothing; Athora wants 5% to 10% of everything. And the balance, therefore, is available to clients. Our job is to build the third party recurring client business to another 35% or 40%, leaving 15% or 20% as capital markets. Clearly, we view capital solutions as both a moneymaker in the fee business but as important as a client generator. New clients, particularly investment grade clients, who have never come to the alternatives industry, much less Apollo, are for the first time seeing that they can come and pick up to 200, 300, 400 basis points over the comparable publicly traded IG rating. And so for a portion of their portfolio, they're doing it. And while we're having a discussion, and it sounds relatively normal, this is not a product they can buy. And so they're experiencing the product for the first time through capital solutions. And as they get comfortable with the product, we're moving them into sidecars and into recurring sources of revenue. I’m going to turn it to Jim. The only double-click I'd say on that, Alex, and it's really the core of our business, in our securitized products Atlas, in the past, investors only had access to the end results, i.e. the asset would be in a warehouse platform and they'd have access to the securitized product. What we're doing for our retirement services balance sheets and a few others now is offering that interim role where they can have access to that pre-securitized product. And again, that ecosystem, it creates a flywheel. It started several years ago with our high-grade alpha what we did in ADNOC and Hertz and AB InBev, but that's opened an amazing amount of doors for us of folks coming into our ecosystem, giving us sidecars or SMAs and then they come into commingled funds. But we will put a little bit finer pin on that. But it really creates an ecosystem, as Marc said. Hi. Good morning, everyone. I have a follow up on the origination discussion. Could you maybe more specifically frame what the annual origination volume of the Atlas team has been running at? And then more broadly, the release seems to suggest this is kind of the first announcement related to the Credit Suisse transactions. Does that mean there are more incremental things that are going to be announced here like this beginning? Yes, so this is a group that historically had originated in excess of 50 billion a year over the last several years. Sometimes it was chunky or sometimes less, but it's a massive platform in excess of 250 underlying financing facilities or partnerships. The reason why you're seeing the release as stated is it's a bit of a staged closing. There needs to be investor consents as well as a variety of some international licenses and regulatory approvals. So the bulk of what we announced in the last 24 hours is the initial closing. You'll see some rolling closes over the next several months. And it will all be done by midyear. But the fact is that the team is engaged. They've been rebranded. They're operating as an appropriate entity. And for us, it's really the first stage. But what's interesting about it is there will be not only assets and facilities we manage on behalf of our retirement services, but as we roll out a variety of commingled or SMA sidecars along, there will be a residual portfolio that we manage on behalf of Credit Suisse over the next several years. Patrick, it’s Marc. I want to give you a way of thinking about this. And again, we always have to execute before. But what do we see here? This is a business that has not heretofore existed outside of the banking system. And each of the banks who own one of these businesses is competitive with the other banks. We are not a competitor to the banking system. We actually don't want what the banking system wants. We don't want the client. And I'm saying it in a confusing way. But we can’t sell the client equity, advice, M&A, treasury, payments, FX, and derivatives. And the banking system wants to sell all those things. And what they don't want for the most part is the asset. So we are actually an incredible partner to the banking system. But if you're in a competitive bank or a boutique, you historically have not wanted to bring your client to this business, because you're bringing it to a competitor who's interested in the same thing that you are. Our job here is to represent a capital box, which will serve as an investment grade capital box, as Jim suggested. We will build and have a massive warehouse business. The warehouse business is a really good business. The stat I have in my mind is more than 350 billion of origination over the last seven, eight years with de minimis losses. At spreads, we believe single A credit spreads, but at very wide spreads, which then the warehouses are cleaned out through securitization, which is broadly available to a variety of investors. Our job is to scale that, but also to become the financing partner to lots of boutiques who have clients where they're nervous about bringing them to banks who are their full fledged competitors. Also, we're a great partner to existing banking system on hold positions. People who have securitizing businesses where they just don't want the hold, or they don't want the capital, bringing us in to be a side by side with them, they are bringing in someone who is not a competitor for their client. That's our job. And we have a lot of work in front of us. But Jay Kim has built an amazing team, and we're very excited about what can be done here. We expect, as I suggested previously, this will be accretive financially in 2023. But it's up to us to make it in 2023 strategically accretive to our platform. Just a follow up to Glenn's question on retirement and OTTIs. Your historical loss rate has been very low, 7 basis points annualized. But what was the loss rate in 4Q? And do you have any view on how this should trend this year, especially in light of the prospects for an economic recession? Yes. So Craig, it’s Martin. The loss rate was right on top of that in Q4. As we go through every asset class and go through a pretty rigorous process, we're just not seeing -- we're not seeing any uptick. If you look at the headline, there was some peak-up CECL adjustments, which were just sort of accounting required, but don't reflect actual credit losses. But the actual changes in the reserves, incidence of any stress and actual realized losses coming through, we're just not seeing it across resi loans, commercial loans, asset backs, any other asset class. And if I can just highlight, Craig, I know there's lots of questions about credit cycle and a concern from our perspective, and we're not the economist. We will let Torsten do that. And we're just following our discipline of purchase price matters. The reality is there are certain sectors that are doing very well post COVID. There are certain that are having a bit of a challenge. Hotels, entertainment, lodging, airlines doing very well; hard industrials or the auto sector is having a tough time. Our IG book, a lot of financials have the big banks. Big IG book, CLO book really strong, AA, AAA book. So we really feel like we have a very well thought out strategic asset allocation and how we put it together is showing the robust nature of the portfolio. I'll just finish it, Craig. You're going to see a tremendous amount of additional activity from Athene this year in communicating its portfolio what's going on? We have a tremendously good story to tell and the team is anxious to tell it, and they're going to be very visible and very transparent in how that gets sold. But I'll just echo where Martin and Jim started. We're just not seeing it in the portfolio. Absolute normalcy in terms of credit and we're getting paid for structure and for illiquidity and for origination. We're not getting paid for credit. Good morning. Thanks for taking the question. I wanted to circle back on the normalized SRE spread. If I heard Martin correctly, I think he was suggesting 135 to 140 for '23. Maybe you can correct me or not. But maybe you could just help unpack some of the moving pieces in your guidance. Clearly, the benefit from higher rates, I think 20% of the book is floating, but also think a portion of the liabilities are also floating. We're seeing cost of funds ticking up here in the quarter. So I was just hoping you could elaborate on some of the moving pieces, where are cost of funds on new business? And as you look out three to five years, where do you see that net SRE spread settling out to over time? Thank you. Yes. So Mike, that's the reason we provide a single net number to sort of get through the puts and takes that go into that. The benefit of interest rate increases on the floating rate assets is starting to diminish, as you'd expect, right? A lot of that benefit has come through the numbers. And if we just assume that today's rate curve at the short end holds for the year, over the next couple of quarters that will flat line out, right? So that's a temporary benefit for the year. There's also option costs that are required to hedge rate features and policies, which are part of that. And so we're seeing some headwinds there. And we're assuming that fourth quarter was extraordinary in terms of net spreads. We had 145 basis points of fully netted costs, 185 before OpEx and financing costs. And so we don't expect in our models that that will continue. And so if you bring that down to a more normalized level and net all of the above, including what we think is an appropriate allocation to alts for the year, you get to that 135 to 140 basis points. And that's the reason we're trying to anchor around a single metric, which we believe is the most sort of appropriate view of spread for the year, given the components that go into it. Maybe I'll take the two pieces of it that Martin didn't flush out. One is in alts. One has to be stepping back and saying that if I look at the relative attractiveness of asset classes, a credit is simply more attractive than equity. And so you will see that reflected on the margin allocations from Athene. And all of this nets down into credit requires less capital than equity, which allows us to do more business. The other piece, and it's important that you track this through in the model, is we have a choice. And the choice is keep 100% of the business on the books, realize the growth in SRE and deploy our own capital, as that’s Athene’s balance sheet capital, or allocate a portion of the business to sidecars and essentially receive a fee for fronting that at Athene, receive FRE at Apollo for managing that and allow investors to earn the spread. Given the attractiveness of credit, this for investors is another opportunity for investors to invest in private investment grade credit with perfectly matched low cost liabilities, which is why we've seen such good take up at ADIP2 in addition to the really strong performance of ADIP1. And so as Martin suggested, we expect a very strong origination here, organically. Not even looking at inorganic where the cost of funds is now not sufficiently attractive to justify spending any money. But we will allocate more of that growth to sidecars than we will to the Athene balance sheet. And so it is not just understanding the spread of the business. It's understanding how much of the business we elect to keep. And so the second number I think you need to anchor on is we're expecting SRE growth of about 20% year-over-year. Combination of basis points margin, which in part reflects a decision between debt and equity, and then on the growth side, how much capital we want to deploy as principal versus how much we want to deploy through the sidecars? We're in a fortunate position where we have that choice. Hi, everyone. Good morning. Another on the Atlas partners origination. Will Athene provide the warehouse financing? And if so, are you offering similar to what banks do on advanced rates or go further? And then relatedly for the equity of those deals, will you mainly sell to something like AAA internal or more so external parties? Thank you. Okay. Let's take a step back for a second. No, Athene is not offering warehouses. We're going out. There's a consortium of global banks that you're very familiar with that are offering us appropriate financing facilities for the commercial real estate, the resi real estate and the consumer facilities, again, global banks, massive facilities. And what Athene will take as other investors, they'll take either the mezzanine or the residual of that financing facility. And again, I contrast this to what we were talking earlier. They're not taking residual securitization risk, which is a higher attachment and lower spread. What Athene and the other investors will have access to is those financing facilities with lower attachment points and higher spreads behind those senior banks. So think spreads 350, 450 over; think attachment points 55% to 65%, where once those companies go to the securitization market, the attachment point goes to 80%, 85% at dramatically tighter spreads. So what we're talking about is offering these investors Athene, Athora and many, many others to get earlier in the process, earlier in the manufacturing of these facilities than ever had they've been able to participate before. I think it's important to say, we're not in the credit risk business in what we're talking about. There's nothing about the advanced rate that is going to be different than that which that is available commercially everywhere. We want to get paid for structure and direct origination. We are not looking to get paid for credit risk unless we're in a credit fund that is supposed to get paid for credit risk. This is about avoidance. And in terms of the funding of this, the funding of this, there's very little equity funding that is required for the platform upfront. It will be funded by AAA and by third party investors side by side. And this will -- the funding structure itself is all laid out in the 10-K coming up. Great. Good morning. Thanks very much. I wanted to come back to your comments about the capital efficiency at Athene. The sidecars contribution is now stepping up to about 40% of the capital. I guess that's a fair amount of capital being freed up. And I was curious about where you're looking to deploy that capital. And I think the last couple of quarters, you've mentioned buybacks were right at the top of your capital hierarchy. I suppose how are you thinking about all that? Thank you. Good morning. It's Martin. So at the top of the house, we have choices, and the choices are to buy back stock, which we expect to be programmatic about. We think that that's a very attractive use of capital, given the business plan we see in front of us even at current multiples. I think a small portion for increasing the dividend, because we think that's important to be sort of an S&P like company. And then a portion to invest in the business, which frankly I think we see less need to do right now given most of the growth is organic, and the three initiatives and the next six are being built out with people and not being acquired. So that HoldCo capital benefits from a dividend up from Athene each year of $750 million. We expect that that will continue at its current level. And then when you look at the capital efficiency at the Athene level, Athene is growing massively. So growth requires capital. Athene is creating meaningful earnings, 2.3 billion of SRE in the year just finished, up 20% next year. That will be used to fund growth that's not retained by ADIP and to fund the $750 million dividend. But as we look at the choice to spend $1 of capital of Athene with or without the benefit of ADIP, it's clearly more accretive across the group to leverage ADIP. And ADIP validates the structure and has terrific returns for its own investors. And then there's AAA, right, which gets to the platform strategy. So they're the key pockets of capital that we look at, and we're looking to optimize it, realizing that uses of capital for buybacks, dividend increases and investments are all attractive in their own ways. But growth requires capital at Athene. And so we're very focused on making sure that we can manage that appropriately and maintain low leverage and strong capital levels above what's required to ensure that the balance sheet is really robust. Hi, guys. Thanks so much for taking my question. I wanted to dig in a little bit on the inflow outlook for Athene. It sounds like you guys have a lot of confidence that growth is going to continue pretty nicely into next year. I'm just kind of curious, on the retail side, how much of that is coming from new distribution versus sort of ongoing, just underlying strength given where rates are? And on the pension side, just kind of curious, you explained that it's somewhat seasonal. But just curious, what we should think of as kind of a normalized run rate as we go into next year? Thanks. So we'll get back to on the absolute breakdown between new distribution and strong distribution. But it is clear to me that consumers prefer higher rates versus lower rates. And so you're seeing a tailwind to the industry. Having said that, new distribution, new pockets we opened up in the beginning of last year have been incredibly strong. And I won't steal Athene’s thunder or their announcement, but they expect this year to be at least two massive launches. And so we are still early in our build out phase of expanding distribution, not to mention new suites of products and everything else. So I think there the tailwind is really good across distribution. And based on what we've seen, at least so far, early dates, it appears that '23 is off to a really good start. In terms of PRT, this is not a -- there's a lot of volume to do out there. But the only business worth doing is business that comes at acceptable spreads. And so we have a budget of what we want to do for the year, roughly 10-ish billion, and it's our job to optimize within the deals that are out there and that which provides us the greatest spread in term and the best mix of business. We expect -- and I'll say we expect that we will exceed organically in '23 what Athene did in '22. And we will likely have to make choices and temper our growth. This will not be a question of whether there's business to do. This is going to be a question of how much business we want to do. Great, thanks. Hoping maybe we could get just a little bit of an update on sort of the outlook for global wealth. Appreciate it's still early days, but hoping we could get a sense of how to think about the cadence and flows while balancing I think your comments of not looking to be necessarily the biggest or fastest growing kind of product generation? And then also if you could just maybe give us a sense of what the incremental products are that we might be able to expect as it relates to the sort of nine perpetual products by year and that you called out in prepared remarks? Thank you. Thanks for the question. We'll just dimensionalize it, like taking a step back, Marc talked about what we did last year around 6 billion. We got about 30 billion in the entire platform right now of products within various global wealth channels in terms of our existing products. And as you point out, like of the 9 billion to 10 billion this year, probably two thirds of that, 6.5 billion, 7 billion will be in the perpetual type of product that we've created, which is AAA, Apollo Debt Solutions, which has been out ADS, as well as a variety of non-traded REITs. And we also purchased a couple of products from Griffin, an interval fund in real estate and an interval fund in credit. So we see broad growth across those. And then the residual of the 9 billion this year will be a variety of our institutional products that we put in the appropriate wrapper. But again, our view is you're stepping back is this is a long journey. Certainly the characteristics of those who are going to win, not everybody is going to win. The distribution channels want a handful of producers or providers. We have the track record. We have the brand now. And what’s additional necessary is the technology and the education. So those are how we want to solve the riddle, if you will. But we're not seeing -- the vehicles we have had solid performance. We've not gotten anything that we would think as any kind of redemptions at year end from Windows. So we're happy with the journey we're on and it's, as I said, between the retail perpetual funds from none a couple of years ago to almost nine at year end to the variety of drawdown funds, more than five of those. We feel very comfortable with our product set. Thank you and good morning. Just a quick follow up on retail wealth. Marc, I think mentioned some of the challenges that product elsewhere faced last year. Just wondering, has that kind of dampened sentiment? How do you view the take up? And also Jim just mentioned your education? How much recognition have you seen so far that some of the Apollo products are just truly distinctive and a better mousetrap? Thank you. Well, certainly, as we've talked about what we're doing on AAA, Apollo Aligned Alternatives, we think, as Marc has been public saying, we think that could be the largest flagship vehicle of our firm over the next several years. Certainly what we're doing with some of the insurance products and what we're doing with the Apollo Altitude, we think those are a bit, I use the term groundbreaking, but we think they're providing incredible value. And they're somewhat unmatched in terms of the attributes. That being said, there's been some noise about some other folks out there having some redemptions. First of all, I think they're doing the right thing by the discipline that they're engaging in, in terms of making sure people don't think that the incremental yield comes without a cost. But that being said, this is a mere hiccup in a long successful transition and journey, and we're happy to be part of that transition. But no doubt, it's not just about you have to have multiple resources to create all those things we talked about. We've launched this Apollo Academy, which is a broad, broad education set available to those channels. And the take up on that has been extraordinary. So it's not only product creation, execution returns, but also technology applications as well as education. Thank you. Ladies and gentlemen, we have reached the allotted time for questions for today's event. I will now turn the floor back over to Mr. Gunn for closing comments. Great. Thanks again, Donna. And thank you everyone for your time and attention this morning. I appreciate your continued interest in Apollo. And if you have any follow-up questions on what we discussed on today's call, please feel free to reach out. We look forward to speaking with you again next quarter. Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

EarningCall_109

Hello and welcome to the DLH Holdings Fiscal 2023 First Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer; and Kathryn JohnBull, Chief Financial Officer. The company’s earnings release and PowerPoint presentation are available on our website under the Investor page. I would now like to provide a brief safe harbor statement, which is also shown on Slide 3 of the presentation. This call may include forward-looking statements that relate to the company’s outlook for fiscal 2023 and beyond. These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the company’s annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. On today’s call, we will be referencing both GAAP and non-GAAP financial measures. A reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH’s website. President and CEO, Zach Parker, will speak next; followed by CFO, Kathryn JohnBull, after which we’ll open it up for questions. Thank you, Chris, and good morning, everyone. Welcome to the 2023 first quarter conference call. I’m truly excited about how well our leadership team and our talented workforce has delivered during this quarter. And I’m really excited to give you an update around all of those aspects on this session. Beginning with slide 4, I will first provide a high level overview of the quarter’s major developments and accomplishments, including of course, our acquisition of the privately held GRSi on December 8 of last year, adding approximately 700 highly credentialed professionals to DLH and significantly strengthening our digital transformation and cyber capabilities. DLH has incorporated some tremendously talented expertise, both technically and analytically into already nationally recognized team of researchers, analysts, technologists and project managers. This powerful combination of resources positions DLH, to drive even greater value for our shareholders, our stakeholders, which include our talented employees in this leadership team, our mission critical customers and our shareholders. What we now bring to the market is more differentiated and powerful than ever before. And we look forward to this new growth stage in the company’s history. Truly excited about the trajectory. Given the date of the acquisition, our financial results for this quarter include a portion of GRSi, we are well on our way to integrating this unique enterprise, which I’ll discuss even more in a moment. Q1 revenue was 72.7 million, which was lower than last year due to the large short term FEMA contracts, which we completed in Alaska during fiscal year 2022. Kathryn will provide pro forma and adjusted numbers for all of our results momentarily. We reported operating income at 3.9 million and reported EBITDA was 6.3 million. Following the acquisition of GRSi our debt grew and at the end of the quarter, we had approximately 203 million of indebtedness outstanding. However, as prior transactions, we have a plan and a strong track record of using the company’s operating cash flow to delever the balance sheet as quickly as possible. Our reported EPS was $0.11 per diluted share. Bolstered by the acquisition our backlog stood at 965 million at the end of the quarter, putting us in great shape for the rest of fiscal ‘23 and beyond. Turning to slide 5, I want to briefly provide an overview of our most recent transaction. As a reminder, we hosted a conference call specifically for the GRSi equity decision in December, which referenced a detailed presentation on our website. And I’d encourage our listeners to pursue this if they have not done so already. That said, I believe this acquisition is one of the most strategically important decisions we’ve made over the past decade has brought together tremendous capabilities and complementary businesses in terms of clients, capabilities, culture, and strengthen our position for organic growth and a leader in digital transformation and IT modernization. The acquisition also expands our portfolio of programs at the National Institutes of Health, which has been a strategic target for us for some time, and is offered diversified opportunities within the Department of Defense, particularly the Navy and the Marine Corps, which also have been very, very targeted enterprises. The information warfare community really helps to elevate our cyber positions and all things associated with digital transformation. The bottom line is that this acquisition significantly broadens our technical capabilities, providing us greater access to mission critical areas expected to accelerate growth. I think most of our investors are aware that we have been moving into the digital transformation space for some time. And this is where GRSi has unique and proven experience, expertise, as well as a strong track record. Combining the technical capabilities with our nationally recognized research scientific research expertise and capabilities, along with our R&D competencies derived from our IBA acquisition, our role in providing highly differentiated solutions critical to the host of new business development initiatives remains tanomo. The GRSi has also enhanced our cybersecurity offerings, further diversifying our operational capabilities, opened up new markets and brought an attractive book of business. At closing, the company had a combined backlog of just around 1 billion and annualized adjusted EBITDA of approximately 50 million. Given this transformational acquisition and a strong demand for our technology enabled services, we remain optimistic about the federal market and growth going forward. There continues to be a commitment throughout the government, for instance, infrastructure upgrades, overall modernization, enhance cloud computing and cybersecurity. And we have a solid pipeline of opportunities on the horizon and are actively engaged in new business development opportunities to expand that business, particularly in the scientific and research side where we’re looking at opportunities such as the major CIO-SP4 opportunity, coming up in the near term. Suffice it to say, we are at a whole new level in terms of size and scope. But we’re still the same innovative DLH with the entrepreneurial spirit to provide innovative cost effective technology solutions to our core customers in the adjacent markets. Thank you, Zach and good morning, everyone. We’re pleased to report our first quarter for fiscal 2023, which includes the acquisition of GRSi. As Zach mentioned this closed on December 8 of 2022. Turning to slide 7, we’re providing a bridge from the reported GAAP numbers to the adjusted results excluding both the GRSi transaction given its short duration in the quarter, and last year’s short term FEMA contracts in Alaska which we’ve discussed in the past. We’ve also adjusted the fiscal 2023 first quarter for corporate development costs incurred to complete the GRSi acquisition such as legal expenses, and financial due diligence costs among other items. These results are prepared on a non-GAAP basis and a full reconciliation to GAAP is included in the back of the presentation available on our website as well as in our press release and associated filings. But the high level takeaway is that on an apples to apples comparison basis DLH continues to report solid performance from the underlying legacy business. Slide 8 shows this information in graphic form. The 7% adjusted revenue growth year-over-year generally reflects higher demand for our key programs. Adjusted income from operations was 5.3 million for the quarter versus 4.9 in the prior year period. We anticipate operating margins to be positively impacted going forward, reflecting our growing base of business, as well as GRSi’s relatively higher value revenue mix. Net interest expense was 1.8 million in the fiscal first quarter of 2023 versus 0.7 million in the prior year period, reflecting higher debt outstanding due to the GRSi acquisition. Following the close of the quarter, we implemented an additional floating to fixed interest rate swap. The notional amount of covered under swaps increased to 112 million or approximately 60% of the term debt outstanding with the remaining balance of debt subject to floating interest rates. The fixed rate for the additional swap is 4.1% plus the applicable credit spread and the swap matures in January 2026. We believe the swap will substantially mitigate interest rate risk. DLH recorded a provision of 0.5 million and 2.7 million for tax expense during the first quarter of fiscal 2023 and 2022 respectively. We reported adjusted net income in the first quarter of approximately 3.6 million or adjusted diluted earnings per share of $0.25 versus 3.1 million or $0.22 per diluted share last year. Adjusted EBITDA for the three months ended December 31, 2022 was approximately 7.2 million versus 6.9 million in the prior year period or 10.9% and 11.1% of revenue respectively. Moving to slide 9. We provide some historical perspective regarding our ability to pay down debt using the company’s substantial operating cash flow. The bars represent debt levels at the end of each quarter for the past few years, during which time we completed the acquisitions of S3 and IBA. The company has a strong track record of rapidly de-levering the balance sheet after transactions are undertaken. We are confident that this time is no different. And we anticipate future periods to continue in this tradition. Following the acquisition of GRSi as shown on slide 10. When the transaction closed, we had approximately 208 million of debt outstanding. And we subsequently, prior to the end of the quarter, reduce that balance to just under 204 million. However, while we’re not providing specific guidance, based on our experience modeling our operating cash flow expectations, we anticipate that our debt will be between 180 and 190 million in fiscal year and if that’s the case, our leverage ratio will be under four times and thereafter we expect our cash generation to continue paying down debt, strengthening the balance sheet over the coming years. We believe our investors have come to trust our operational excellence and track record in this regard providing them confidence in our ability to proceed in this tradition. We look forward to doing just that. This concludes my discussion of the financial statement. With that I would now like to turn the call over to our operator to open for questions. Thank you very much. We will now begin the question and answer session. [Operator Instructions] Today’s first question comes from Joe Gomes with Noble Capital. Please go ahead. Thank you. So, first one, I am going to lay it out there for Zach, you mentioned you’re going to talk a little bit about the GRSi integration and how that’s been going. So maybe you can just kind of give us a little bit more detail on integration and if you’re seeing the opportunity for cross selling opportunities and maybe even when you model the transaction I believe you factored in zero expense savings. And are you seeing anything on the expense side that might lead to some expense savings? Yes, no. Great, great questions. Joe, and thank you for the lead in with regard to integration and our compatibilities, I think we certainly featured some of the quotes between myself and David with regard to the cultural fit. And we did a lot during the diligence phase, both directions, in that regard, as extremely important to the company as well as ourselves, that we would see that tremendously great fit as post closings go, that’s always a critical component of success factors. And I got to tell you that it has been going tremendously well. We have stood up an IMO and integration management office, that is consists of representatives from the new company and in our heritage resources. They’ve got their swim lanes, and it’s going very, very, very well. So we’re excited about that. With regard to cross selling. Absolutely. We kind of started that during diligence phase. We really feel like we want to come out of the gate with some really great synergies, and it’s probably one of the areas I’m most excited about as we talked about some of our previous IDIQ wins. I’m thrilled when I see a room that has some technologists supporting NIH, that come with the GRSi addition, working collaboratively with some of our nationally recognized scientific researchers, all working on a value proposition and a solution set for some of these customers that we would otherwise not been able to have in the room together. And it’s really refreshing to see that inside of our first 100 days of integration, that our teams are working very, very collaboratively in that regard. And so we do see not only enhancements to some of our existing work, but new opportunities that we started developing in a pipeline that do reflect the power of the two companies, not just any of them individually. So really, really great there. We have actually started to implement some synergies, some expense savings already show up in another quarter. So and of course, we have a plan for a lot of the infrastructure redundancies to be taken out over the course of the year. And IMO has a pretty good cadence and a schedule on those we see. Nothing really taken us beyond the end of this fiscal. But we have a lot of quick wins already under our belt. So it’s going well, Joe. Great, and one follow up. So scanning through the queue. You had really strong performance over at the VA headstart at a pharmacy revenues were up 23% year-over-year. Headstart revenues were up almost 34% year-over-year. I was just wondering, maybe you can touch base as to what is driving that? And is that something that you see continuing? Or do you think that those kinds of types of growth rates will moderate over the rest of the year? Well, with respect to the headstart, specifically, that program specifically, it’s really more a case of returning to norm, if you’ll remember, and boy, I’m happy to be among those who has put COVID way in the rearview mirror. But it hasn’t been that long ago, it was just this time last year that dealing with Omicron caused a significant realignment of the schedule. And so some things that traditionally would have happened in our Q1 moved into Q2 and three. So this year is performing much more to the norm. So I think programmatically the program while we have had some nice opportunities to continue to grow our reach there, largely the volume on that program is going to be pretty consistent year-on-year. It’s just a matter of which quarter it’ll roll out in. In contrast, as you probably remember in the successive quarters of ‘22, the pharmacy program and both besides that VA program grew pretty significantly over the course of the year, as the VA really took some operational changes to redirect work and really kind of rethink their business model using again COVID as kind of an excuse to kind of do some, make some efficiency gains that were probably long overdue, and steering work through that automated distribution center that they have previously held at their locations. And so are those came on largely throughout Q2 last year. And so they’re kind of catching up in Q1 this year, as compared to Q1 last year. But we think that Q1 volume kind of represents the norm of that programs going forward. Grate talking to you Joe, and thanks for being a straight man on the revenue synergies. As you can tell, we’re extremely excited about that. Hi, there, this is Jerome on for Brian, good quarter guys. Can you just piggybacking of the ultimate integration question, should we expect the LHC personnel to focus more on BPO RFPs whereas GRSi person will focus on the IP opportunities? Well, we’re not going to operate that way. I think it’s the real thing that we should expect each of us brings our strengths but really, the opportunity is in driving convergence on those pursuits. We know each of us has our strength and expertise that we bring to it. And while each group will continue to leverage its expertise and capabilities. Really, the homerun for us are really the icing on the cake, or whatever cliche you want to use, in that scenario, where we take the expertise that both of us bring together both in terms of capabilities, as Zach described in in terms of business models, from a customer perspective, and really driving convergence on those to drive those revenue synergies that we talked about. Yes, and I’d say our vision a lot as it aligned with the priority of this deal, was to really be able to make this be a one plus one equals three. I know you hear that often and some of these kinds of deals. But in this particular case, it isn’t really just having two separate channels, as Kathryn has indicated, we really believe there’s really great value creation that’s going to come from positioning us in in spaces that neither one has been before or would have been able to drive before. And we’re starting to see that with some of our opportunities now. If you think about some of the opportunities, for instance, we bid in one, an IDIQ, where the VA wants to do more innovation, and drive more innovation in their systems development. And we had a strong and we’ll continue to have a strong partnership team for that. But infusing the talent that comes with GRSi into that mix, supporting our existing competencies, adds some abilities that are really going to position us in a much more competitive light on the task orders as we hope to start to see some of those later this fiscal year. And so that alignment really is going to be more of driving technology innovations into not only current customers, but now hitting those adjacencies much harder than we had been able to do in the past. Yes. Just a visibility on the pipeline. Yes. more forthcoming on that Sherman as we really give fuller treatment of the addressable markets. We’re going to we’ve already moved well beyond talking about GRSi as a standalone. So when we talk about this, the best place in the first place, you’ll probably see this laid out in broad strokes is the upcoming annual shareholders meeting where we’ll have some visibility into the addressable markets of the enterprise, leveraging the capabilities of both GRSi and DLH. But we are intentionally moving away from what’s the pipeline for GRSi versus what’s the pipeline for the company. It’s really ideal each pipeline. So you’ll see there, how we think that’ll drive more meaningful definition of the pipeline, and really broader markets that we can access because of that broader capability. Yes. And let me add to that. So as Kathryn has indicated, probably at least a month or two before close, we did some really, really diligent singing around some opportunities that were not in either of our respective pipelines. And again, we’re viewing this as DLH pipeline of which we’ve got three major operating entities that bring really strong capabilities to go to market. And that’s very important for us to have that full one DLH approach, as opposed to an addition of standalone entities. You’ll see us evolving structurally over the course of the next year in that regard, but from a market pursuit, our go to market strategy right now is literally a one DLH approach, we will address a single pipeline, there obviously be some leads and partners, and collaboration, etc, on most of these deals now. But I’m excited the reason I’m so excited about Joe’s observation earlier, and his question earlier is just that, that that cross selling, is driving, we’re driving our pipeline. So this is going to depend upon cross selling. And that’s the exciting part about it. As Kathryn indicated, you’ll get a little more color around what that looks like in our upcoming annual meeting next month. Good morning, everybody. Hey the indignity of West Coast never treated, right. My question is maybe just frame out what the seam up or a pea process looks like today. And you know, how, how does it look and feel from, different ways they’ve approached the contract in the past, and then maybe sort of different ways that you’re thinking about your own capabilities and what you want to do, and how relevant this is to you. Just maybe frame out some of the puts and takes and then lastly, like timeline, what’s your best guess and how this rolls through? Good luck. I’ll start with the timeline piece and then give some color again, around the VAs acquisition process. Timeline wise, let me make sure we’re level setting everyone. We are continue to be on so source bridges since 2016. It’s amazingly long, procurement administrative lead time, and Paul, if you will. But that is actually where we’re currently operating November of 2016, is when the second of the major contracts were awarded in 2011 12 timeframe came to fruition. Now, with regard to the way in which they’ve come out, they’ve actually come out the same as they did somewhat similar to the way in which they did for the contracts that we won that ended in 2016. So that was, of course, in the 2010-’11 competition arena, those contracts, the contracts we’re performing on today, were all awarded as unsolicited as individual site bids. So we had maybe 40%, 50% share of one set of those and a little more on the other set. But they were procured by the government and VA as seven standalone VA, some companies would be one or two. Some could be more. We of course, where we had three or four of them as an incumbent, we did bid all seven. So happened that we won all seven and having had that clean sweep the government has managed the work and we’ve collaboratively agreed to manage the work as though it was a logistics contract and a pharma contract. But in each of those cases, they were individually solicited just like they are now by site. And then of course, they gave preferential treatment to small business in that arena as would normally be the case. And then, of course, over the last few years, we’ve had various versions of the kingdom where induced acquisition changes, and appropriately so the VA remains strongly committed as our way to the small business community, and particularly in service disabled veteran owned small businesses. We have partnerships that we’ve put into place over the last few years. And that’s been an integral part of our strategy and continues to remain an integral part of our strategy even today, is to leverage approaches that would have benefit for SPOSB. So the current state, as you’ve seen, other solicitations, again, are back like they were when we won the last time as standalone businesses, standalone sites. The difference here is rather than in encouraging service disabled small businesses as teammates, it is currently in a set aside mode, so that the SPOSB has to be a part of the prime position for each of these. So we’re continuing to support them. We’ll evaluate, how the evolution of the acquisition strategy would come. And we’ll come out as a work to a conclusion on this acquisition process. But either way, we remain fully committed to serving our veterans the way in which we have providing differentiating capabilities to net out as high customer satisfaction ratings, up to an including JD Power Awards on a pretty extensive basis. So we remain committed with our in our partnership with our veterans, and we’ll continue to embrace the small business investment as well. So just given the highly efficient way in which the government works, particularly today, how would you envision a timeline of submission review initial awards subsequent complaints and whining, and then into a final next face of the -- just roughly speaking? Well, they currently have bridge coverage, I think we talked about in our filing that characterizes through the end of this fiscal year. That has to be an indication of the VA’s thinking with regard to having coverage up through the end of this fiscal year to allow them to go through the adjudication of proposals in any potential protest. I can’t tell you that proposals have been submitted for each of those sites thus far. So they have an idea of the competitive landscape and what their load of proposals to review will be. We are a part of them. And the jury’s out as in terms of what the time table is going to take to execute that. But as we had indicated previously, we do feel that we won’t see any disruption during this fiscal year. And every indication is that the VA is tracking with that as well. And so a 2024 calendar of some conceptual change would be there or they’re just, they’re just okay. And just to be clear, so the way you frame that? Would it be fair to say that if you look at things on a curve, that winning all seven is sort of on the right side of possible, but maybe not both likely and losing all steps and is also on the other side of the curve is unlikely that you’ll you think normal and customary somewhere in the middle is a reasonable middle of the curve expectation? Would that be a fair statement out? No. No Jeff, now, you look, I’m rooting for Patrick Mahomes, but I wouldn’t be betting on Philly. So, it’s one of those sorts of things where we are very optimistic and continue to lean into protecting our business. And so we’re not modeling scenarios that suggest that we will subordinate. Any of these clients and critical mission critical work that we do for this agency. Our leadership team is aligned that way. Our relationship partners are aligned that way. And our history has demonstrated that we’ve been able to deliver, but in any case, obviously, the third parties can take a look at what they think may happen, but we’re really committed and optimistic that we offer or going to offer some solutions that are going to prevail. My last question. So it would it be fair to say that there is a, there’s economic advantage to running the whole show ergo, different competitors will have, if you’re only going to go for or win or expect to win, maybe two, that would provide inferior economics. In other words, the attractiveness of a part of your winning a part of this is infinitely less interesting economically than running the whole program as you are now. Is that a fair statement? Well we obviously don’t discuss proprietary bidding strategies. But I think your question is a fair question relative to if you’re looking from the outside does it make sense for the government to maybe expect to see some synergies if you are operating across all domains. And I would say there’s, there’s good reason to Yes, that’s a fair question. And there’s good reason to think that might be the case. Hey, good morning, Zach. And Kathryn I don’t have any questions. I’m good. Thanks. I just wanted to say a big thank you. You guys keep banging it, knocking it out of the court, quarter-after-quarter-after-quarter. And it’s much appreciated. So thanks again, and hope you all have a great weekend. We appreciate your support. It’s very gratifying to see the strategy that we laid out many years ago come into fruition. And we are excited. Yes. And as you know, Bert, obviously, we put on a little more debt than you used to be in too comfortable but history. Certainly the market, we think knows our history. And hopefully we’ll be able to chat a little more about that. You’ll see Kathryn has taken some steps already. And you can see that trajectory. And we can talk a little bit about that more if we see you in New York next month. I think it’s a great thing, because the stock will get beat up, we can all get in load up for more, and then it’ll clean the balance sheet will clean up. It happens over and over. At this time, there are no additional callers in queue. So I’ll turn back to Mr. Parker for any closing remarks. Thank you, MJ. And, again, a special thanks to all of you for your interest and your continued support for DLH as Kathryn indicated. We are really pleased that the strategy has empowered us to get into what we call our third phase now and probably in many ways, our most exciting phase of the implementing a strategy for DLH. We want to invite you to join us next month at our annual meeting for greater disclosure of the new DLH. So with that, thank you. Have a productive and a blessed day. Bye for now.

EarningCall_110

Good morning, ladies and gentlemen, and welcome to the Trinseo Fourth Quarter 2022 Financial Results Conference Call. We welcome the Trinseo management team, Frank Bozich, President and CEO; and David Stasse, Executive Vice President and CFO; and Andy Myers, Director of Investor Relations. Today's conference call will include brief remarks by the management team followed by a question-and-answer session. The company distributed its press release along with its presentation slides at close of market Wednesday, February 8. These documents are posted on the company's Investor Relations website and furnished on a Form 8-K filled with the Securities and Exchange Commission. [Operator Instructions] Thanks, Abby, and good morning, everyone. At this time, all participants are in a listen-only mode. After our brief remarks instruction will follow to participants for question and answer session. Our disclosure rules and cautionary note on forward-looking statements are noted on Slide 2. During this presentation, we may make certain forward-looking statements, including issuing guidance and describing our future expectations. We must caution you that actual results could differ materially from what is discussed, described or implied in these statements. Factors that could cause actual results to differ include, but are not limited to, risk factors set forth in Item 1A of our annual report on Form 10-K or in our other filings made with the Securities and Exchange Commission. The company undertakes no obligation to update or revise its forward-looking statements. Today's presentation includes certain non-GAAP measurements. A reconciliation of these measurements to corresponding GAAP measures is provided in our earnings release and in the appendix of our investor presentation. A replay of the conference call and transcript will be archived on the company's Investor Relations website shortly following the call. The replay will be available until February 9, 2024. Thanks, Andy, and welcome to our year-end 2022 call. I'm proud of what we accomplished over the course of 2022 while being faced with significant macroeconomic headwinds, which are well documented at this point. Operating in this challenging environment did lead to earnings and cash generation that were below our expectations, especially following our record profitability in 2021. But we focused our efforts throughout the past year on initiatives that will improve our strategic position when demand recovers. These can be broken down into 3 categories: asset restructuring, organizational improvements and growth in specialty products and our sustainable technologies. In the second half of 2022, we announced an asset restructuring plan to improve our competitive footprint. This included the closure of our Styrenics production plant in Boland, Germany and 1 turbinate production line in Stade, Germany. Both closures are expected to result in lower costs as well as reduced exposure to cyclical commodity markets. The restructuring is expected to result in $60 million of annual profitability improvement versus the fourth quarter run rate and essentially all of it should be realized in 2023. In addition, we still plan to separate the Styrenics business as an internal step to further shift our production portfolio towards specialty materials. While the formal sales process remains paused, we have largely completed the separation work and we'll be well prepared to complete the process when the opportunity comes. We improved our organizational structure through the creation of a Chief Commercial Officer, Chief Sustainability Officer and Chief Technology Officer roles. These 3 key positions will enhance the execution of our strategy, enabling us to better serve our customers, achieving our sustainability goals and grow our product portfolio. We continue our growth in Specialty Products and sustainability even in a challenging economic environment. We made significant progress on integrating the 2021 acquisitions of PMMA business and Aristech surfaces to unlock cost synergies and tap into additional revenue opportunities through new specialty product offerings. For example, our North American volume and unit margin of specialty resins grew 2% and 12% year-over-year in 2022 despite a slowing market. In November, we completed the ERP implementation for the legacy Altra Glass sites, which resulted in lower cost by exiting the Arkema TSAs. We remain on schedule to capture the $60 million of annual run rate synergies by the end of 2024. These acquisitions have expanded our offerings of unique solutions to our customers especially in material substitution applications. For example, replacing fiberglass with ABS to provide rigid backing for PMMA sheets and bath and spa applications, provides our customers with high-performing product that's also more environmentally friendly. We're also seeing strong results in the growth of our products containing recycled materials, which are in very high demand from our customers. During 2022, the volume and variable margin of these products grew 63% and 69%, respectively, versus the prior year. While these products represented only 1% of the sales volume of the company, they delivered 3% of the variable margin for the whole company, which confirms they have very high growth potential and more market resiliency. Supporting this effort, we have created a strong IP pipeline, which has more than doubled from the 2020 level. This gives me confidence that we'll continue to grow our product offerings in both sustainable solutions and specialty materials. The growth of products containing recycled materials is moving us closer to achieving 1 of our 2030 sustainability goals, which is that 40% of Trinseo products will be sustainably advantaged by 2030. We're making progress on our other goals as well, including reduced carbon emissions and achieving improved gender balance in our workforce. Perhaps most importantly, we delivered another excellent year of EHS performance with 74% of our eligible sites receiving a Triple Zero award, meaning the site achieved no injuries, spills or process safety incidents. Trinseo has been an industry leader in safety and responsible operations since its formation, and I want to commend our employees and leaders for continuing to make safety and responsible site operations a priority. Next, I'd like to briefly discuss our view on the economic environment during the fourth quarter. We observed many of the same macroeconomic headwinds that were prevalent during the third quarter, including subdued demand stemming from geopolitical conflict and elevated energy costs in Europe. COVID-19-related impacts in China and rising interest rates, which especially curbed demand for building and construction applications. These lower demand levels and overall economic uncertainty prompted a continuation of significant destocking from our customers and an earlier-than-normal year-end shutdowns. Additionally, the low level of demand in China, coupled with high production costs in Europe, created a temporary arbitrage window for Asian use products to make their way into Europe and North America. This created volume and margin pressure for some of our curated less specialized products, including ABS, polycarbonate, MMA and PMMA extruded sheets. While this situation existed in the second half of 2022, we don't view this as a structural change in trade flows, and we expect this temporary headwind to fade, especially as demand improves in China and the costs continue to moderate in Europe. Before I turn the call over to Dave, I'd like to provide more detail on the drivers of the recent performance in Engineered Materials segment. The fourth quarter was adversely affected by several factors, which impacted both volumes and margins. First, the quarter was impacted by $10 million due to the losses on natural gas hedges that were put in place in the second half of 2022. Next, customer destocking continued in the fourth quarter due to declining prices inventory management and extended urine shutdowns, which resulted in an EBITDA impact of about $10 million. We anticipate that we will see an end of destocking early this year, likely in the first quarter. In addition, underlying market weakness from economic uncertainty and high interest rates continued to impact demand, particularly in building and construction and consumer durable applications. and this had an EBITDA impact of about $15 million during the quarter. I would also like to highlight the spike in MMA-related feedstock costs in Europe in the second half of 2022 and the window this created for lower-cost Asian imports. Like most of the industry, we utilized the C3 route to MMA synthesis. But we are somewhat unique in the European market and that we neutralize benselfuric acid in our process with ammonia to produce ammonium sulfate, which we sell into the fertilizer market. In almost all market conditions, this is a cost advantage as we realize the credit for ammonium sulfate sales as an offset to MMA manufacturing cost. Two critical raw materials in this process are methane and ammonia. And in the second half of 2022, methane and ammonia prices rose in dramatic fashion. Even with the significant increase in ammonium sulfate prices, we could not offset the net impact of the cost increases because of the price of ammonium sulfate was capped by lower-cost imports and because of economic considerations for farmers. The high ammonia cost was driven by extensive shutdowns in ammonia production in Europe, which led to our main supplier to declare force majeure. Conversely, a significant amount of MMA capacity in China utilizes the C4 production route, low gasoline demand in China stemming from COVID shutdowns created an abundant supply of C4, which temporarily lowered MMA production costs in China. This, along with the lower end market demand in Asia, created a temporary window for lower-cost MMA and standard grade PMMA to be sold into Europe. We do not believe these are long-term structural issues for us, and we anticipate this situation will normalize with lower energy and ammonia prices in Europe, along with more normal mobility and demand returning in China over the course of this year. In any event, we have other supply chain options to help alleviate this impact in the medium term, if necessary. We estimate this temporary arbitrage impacted the fourth quarter results by about $10 million in Engineered Materials. Obviously, we're not satisfied with the recent earnings in Engineered Materials, but we view the current headwinds as temporary and expect significant earnings improvement when energy prices normalize and demand returns. We've taken action where possible, such as restructuring of the PMMA sheet business in North America, and we're prepared to take additional steps as appropriate. As we will also add, I'm encouraged that the margin of our more specialized products in the segment, such as specialty and modified PMMA resins and PC ABS compounds have maintained -- have been maintained in this environment -- with in an environment with steeply rising costs. Thank you, Frank. Our fourth quarter adjusted EBITDA was below our previously announced guidance due to $19 million of negative net timing impacts caused by falling raw material prices as well as $15 million of unfavorable impact from nat gas hedges. I'd like to spend a minute explaining our philosophy related to the use of natural gas hedging to manage our cost risk and how it has changed over the last 9 months. Volumetrically, about 60% of the gas we purchase is in Europe. In 2022, this represented over 90% of our cash spent on natural gas. We formed a view in mid-2022 that record gas prices in Europe would have to fall because of the high levels of storage and declining industrial demand. As such, we hedged our natural gas only out a few months. We've since seen European natural gas prices fall over 80% and North American gas prices by over 60% and we've been layering in 2023 and some 2024 hedges on the way down. Because we don't qualify for hedge accounting treatment for all of our hedges, we will have some mark-to-market volatility in the P&L going forward, but I wouldn't expect it to be the same magnitude as Q4. During the quarter, we reported a noncash $297 million goodwill impairment charge related to the PMMA and tech services acquisitions. The impairment charge resulted from our annual goodwill impairment analysis and was deemed necessary given the challenging macroeconomic environment, particularly for building and construction, as well as a prolonged drop in our market capitalization. We view these businesses as integral components of our evolution as a specialty materials provider and remain excited about the growth opportunities they will provide in the future. Fourth quarter free cash flow of negative $20 million was below our expectation, caused mainly by lower earnings and the $34 million payment to the European Commission to settle the 2018 styrene purchasing investigation. An accrual for this was booked earlier in the year and with this cash payment, we consider this matter closed. We ended the year with $717 million of available liquidity, including $212 million of cash on the balance sheet. As it relates to capital structure, our nearest term maturity is a $660 million term loan that matures in September 2024. The financing markets have improved considerably to start the year and refinancing this loan is a priority for us. Our strong liquidity position and our view that the bottom of this earnings cycle is behind us, gives us great confidence in our ability to weather this economic downturn. Now I'll turn the call back over to Frank, who will talk about our expectations for 2023 and the first quarter. Thanks, Dave. Looking back at 2022, it was a year of 2 halves, with the second half earnings substantially lower than the first half. This decrease was essentially from lower demand, which led to both reduced sales volume as well as margins. While raw materials and energy prices were elevated in the first half of last year, these costs were passed through in our pricing. However, higher interest rates and energy prices as well as COVID lockdowns in China, eroded consumer spending in all 3 regions, resulting in lower sales volumes and margins. So we view an increase in demand as the number one catalyst for earnings improvement. For the full year 2023, we are guiding to a net income of $3 million to $33 million and an adjusted EBITDA of $375 million to $425 million. We expect demand levels to improve as the year progresses with first quarter sales volumes slightly higher than fourth quarter from seasonality. We view this as the trough level demand. For the remainder of the year, we see volumes about 10% higher than this trough level, which equates to about $30 million of the EBITDA per quarter. To give you some added perspective, a 10% volume increase would represent a recovery of about half the volume drop from the first half to the second half of [Audio Gap] should come from a few areas: first, the end of the Asian arbitrage window, which we see closing in February based on the steep drop in natural gas and ammonia prices in Europe; second, and also a contributing factor to the end of the arbitrage window, we're forecasting flat volume growth in Asia in the first quarter and a 10% increase from this level for the remainder of the year. We view this as a very modest assumption in the context of the depressed demand levels we've seen in China over the last 3 quarters. This is supported by feedback we've received by key customers in the Appliance segment. Third, the end of destocking, which we believe will occur in the first quarter, but many customers will likely keep inventories until signs of real demand recovery emerge. You can see in the appendix of our earnings deck that prior destocking cycles for ABS and polystyrene products have taken about 2 quarters to play out, and it's typically followed by a snap back driven by restocking. Our outlook for 2023 does not reflect the typical sharp rise in orders from restocking. Finally, modest auto growth. We expect the global automotive market to grow by low single-digit percentage but we expect to grow at a higher rate due to our mix of applications as well as geographic exposure to regions where more growth is anticipated, such as the North America, where days demand of inventory is still meaningfully lower than the historical averages. We see this 2023 forecast assumptions as independent from an economic recovery or restocking cycle, both of which would represent an upside to our plan. Clearly, an increase in sales volume will be a key factor for higher earnings. But we're anticipating additional benefits from the footprint actions that we've implemented, which are expected to increase annual adjusted EBITDA by approximately $60 million versus the fourth quarter run rate. Cash generation is anticipated to improve in 2023 as well with expected cash from operations of $100 million and a breakeven free cash flow. This implies capital spending of $100 million, which is about $50 million lower than last year. Our CapEx guidance includes all necessary plant maintenance as well as the continuation of our growth programs, which have yielded very positive results, including expanded offerings of specialty products, sustainable solutions and unique offerings in material substitution. We have decided to postpone the second phase of our ERP implementation, which largely involved migrating our legacy businesses to Espana. Our cash guidance also includes a $40 million cash outlay for the asset restructuring actions as well as a working capital use given the expected higher demand at the end of 2023. There's no question that the business conditions in the second half of 2022 were some of the most challenging that we faced as a company. But we believe that we've weathered the worst of this downturn and based on the actions we've taken, along with the destocking cycle winding down, we are poised to grow earnings in 2023. The order book we have so far in Q1 is encouraging, and we're confident in our ability to generate and manage cash even in a period of prolonged weaker demand and will benefit as we continue evolving into a company offering more specialty and sustainable products. And now we're happy to take your questions. Frank and Dave, I thought the commentary on the recycled products was pretty interesting. I think you said it was 1% of your volumes, but 3% of your margins. Could you talk about how you price these recycled products? Is it like a fixed contract, like a fixed spread on your end? And then as we think about this price premium that you're getting, how much of that comes from like regulatory factors? And how much of that is just like a voluntary premium that these brands pay to improve their ESG scores. So thanks for the question, great question. Most of the premium we're getting is basically being driven by self-imposed goals that most of our end customers are setting on themselves rounding related to CO2 intensity reduction. So -- and we're basically -- in the current environment relative to the availability of these materials, there's an unlimited demand. So we see this as -- and a big opportunity for us and is we're trying to accelerate the availability of the key feedstocks that allow us to supply more into the market every quarter. So there are some regulatory drivers that will come. I think there are some various packaging taxes that will be imposed in Europe and that I think that's reflected in the pricing that we're getting. But again, most of it is self-imposed, and it's a negotiated price rather than a formulaic price that we have with the customers. And then, Frank, you called out weakness in Q4 in areas like construction, durables and electronics. Could you talk about how each of those markets are faring today versus the Q4 level? Yes. So what we're seeing is the level in Q1 that would be consistent with that level but obviously, with the normal Q1 seasonality. So far, we haven't -- we aren't seeing a significant demand increase in those underlying markets other than seasonality. . Given your headquarters location, I feel like you need to say go Eagles. So we'll see on Sunday. David, I have a random question for you that's in the footnotes at the bottom of Slide 16, talking about your 2026 revolver suggesting that it's going to end at $102 million at the end of the first quarter. Can you talk a little bit about that? And what should we -- what should -- what are you meaning to imply there? Well, yes. So the revolver, it has and always has a -- there's a covenant attached to it that measures a certain leverage ratio. And if that leverage ratio goes above a certain threshold, which were not at the end of the year, but we will likely will be at the end of the first quarter, the availability under the revolver shrinks to 30% of the revolver. So a $375 million revolver. We have a small amount of letters of credit drawn against that, which is just normal business. So all of that is available to us today. At the end of the first quarter, I expect on an LTM basis, our leverage ratio will go beyond what's stipulated in the covenants, at which point only 30% or 112 -- well, $102 million will have available to us under the revolver, okay? So that's how that works, the mechanics of that, given the guidance that we laid out here today and what we expect to have happen in the business, we expect that leverage ratio to go below the threshold and have available -- the full availability under the revolver by the end of the year. But look, to be clear, Frank, I'm a I don't see that affecting us operationally. As we said, we ended the year with $212 million of cash. We have $150 million effectively in ABL and asset-backed receivables line available to us. there's no covenants attached to that, and that's a fully committed facility. And then beyond that, we would still have $102 million available under the revolver. So we highlighted that and put that in here because we think it's instructive for investors, but I don't foresee the need for us to need that liquidity. That's an excellent synopsis sincerely appreciate that. And Frank, coming back to the Engineered Materials business. Some of the expectation is to see an improvement post Chinese New Year. I'm curious, you did mention that your order book is somewhat encouraging. Can you add a little more color with respect to the Engineered Materials business and what you're seeing there and expectations there? Sure. I think that clearly, we -- one of the big benefits that we're going to have is not having the hedge headwind that we had in Q4 and Q1. And -- so I would expect that to be an improvement over where we were in the quarter. We'll have some normal seasonality. But as it relates to that arbitrage window and sort of the destocking I think there's going to be overhang through Q1 is what we would anticipate. And then we get back to more of a normalized over the course of 2023, we'll get back to levels like we were in the first half of 2022, which is about a $35 million per quarter run rate in the business. There was -- now for us to get back to where we should be with the business, we need to see a structural market improvement in automotive and in building and construction, particularly around the Asian imports that sales of building and construction products in Asia that used to be exported into Europe. So we see that as a longer-term improvement. But our expectation is we get back to the first half 2022 levels during the -- in the second half of 2023. Frank and Dave. Frank. Just on European natural gas prices, given the reduction we've seen, any change in your thought process on European asset restructuring? . Any -- well, first of all, no, I don't believe that any of the actions that we've taken, I would have any reason to second guess those given the reduction, I think that's consistent both strategically and in the near-term financials. So -- and in fact, we're going to see a benefit from both of those restructuring plans early in 2023. The -- just give you this color. Bolin was -- our Boehlen styrene monomer plant was only predict contributed a positive EBITDA contribution in 2 quarters during the last 3 years. So again, this is the right decision long term and we'll see the near-term benefit from it. Obviously, with improvement, we see other we'll see our other assets be more competitive versus like I described in the script versus this temporary arbitrage window, which we see largely closing at this point. No, very helpful. And just to have a view on the global styrene cycle the next couple of years in terms of new capacity margins and how that might trend? Dave, this is Dave. I'll take that. I would say -- first of all, I'll start off with AMS. AMS continues to be a very steady performer despite the kind of trough level conditions it's low-cost Gulf Coast producer. So I mean, I see them as being relatively immune. We would see the building cycle, we would see 23 million as probably the trough, maybe 24 -- 23, 24 at the latest pending of the trough or ending of the capacity is probably 2023. And then mid-single-digit additions coming online globally in 2023, and that's all in China, obviously, and then starting to recover from there. So I would say probably some recovery in global styrene margins and operating rates in 24, 25. Now look, the thing I would say is with the closure of Boehlen, I mean, we kind of -- we've substantially reduced our exposure to styrene. We're now just producing at the 1 site in Trinity in the Netherlands. That is just supplying our internal downstream needs within Europe. So closing that site, I think, kind of reduces the profit exposure to the styrene cycle. First question, can you just talk -- give a little bit more color about your expectations for first quarter EBITDA growth sequentially? And then second, if I heard correctly, it sounds like you're really not assuming much if at all, economic recovery in your full year guidance. So I mean, they just optically seems like a pretty steep ramp from the back half of '22. Yes. Let me -- I think the best way to think about the -- to bridge Q4 to Q1 is basically, Q4, excluding raw material timing was about $25 million of EBITDA. It also included $15 million of hedge headwind. And then we'll -- and then additionally, we'll benefit from about $15 million in the quarter from the run rate savings from the restructuring activities that we had. And then we'll have about a normal benefit from some of the year-end effect or seasonality plus lower cost in Europe, and that gets us -- I mean we have a high degree of confidence in though those factors added to the Q4 run rate in Q1. And then as we described if we recover -- we think there's a 10% volume increase from this level from a number of factors, Asia recovery, also the end of this arbitrage pressure that we saw in Europe and North America -- and so a 10% recovery in volume from those levels at $30 million per quarter of adjusted EBITDA. So we don't see that as a very aggressive assumption, really contemplates not a lot of underlying improvement beyond that. So there's upside if we see that. Great. And then second, I just wanted to ask briefly on the styrene separation. I mean Dave just talked about a pretty choppy styrene outlook until '24 '25. And obviously, a lot has changed since you started the sale process 1.5 years ago. So can you maybe just talk about how your approach is at all as kind of changed? Is there a different kind of suitable valuation or structure for separation, just again, broadly how you're approaching it today versus maybe when we started this off. Well, I think, one, we've improved the business with the actions that we've taken, as Dave outlined with Boehlen. I think also that as we've gone through this cycle. It's demonstrated the resilience of this business, our polystyrene business. So I think that those are all very, very helpful. And the other thing I would point out is this year, we're making -- taking the first steps to establish our own recycled polystyrene assets in Europe with our with a project that, frankly, we see as being the best-in-class in the industry. So I think those things will position the asset to be more attractive than it was when we initially marketed it. And when the capital markets improve and we see well coupled with those improvements in the business, we'll make a decision on when to restart that process. But I guess, when -- the bottom line is I see it as more attractive and a better positioned asset to sell when the capital markets improved based on those actions. It's Dan Rizzo on for Laurence. I just have one. I was just wondering if the macro environment, particularly in North America, were to deteriorate significantly, do you still see a bridge where you can hit the low end of your 2023 outlook? . Yes. It's Dave. I'll answer that. The answer is yes. I mean, we have a pretty small footprint in North America, in fact, a large footprint is of our JV, which is America Styrenics, which I see as I mentioned earlier, if you look historically, a pretty stable -- quite a stable EBITDA generator. So beyond that, our footprint in North America is actually quite small. So our exposure to North America, I'd say, is we've got 2 Latex plants in ABS and compounding business that primarily serves automotive in North America, but those are relatively small. So I think the answer is yes. We do see a path still to hitting the low end of the guidance in that scenario. I think in terms of earnings exposure, I think we have far more exposure both direct and indirect to recovery in China than we do to what happens in North America, not only because of demand in China and in greater Asia, but also because of the overwash that currently exists from stuff produced in Asia not getting soaked up in China. So that's how I'd answer that question, Matt. This is actually Stefan Diaz sitting in for Angel. So I guess a quick question here. You postponed your legacy ERP upgrade in 2023. Is this something that you expect would come back in 2024? Or how should we think maybe, I think, generally, regarding CapEx or general investments. Well, yes, we frankly, we don't have to do this conversion, we're under no time pressure to do that conversion in 2024. And so as conditions improve and we fully fund our other priorities, we'll make a decision on that. Obviously, we want to do it and there's operational benefits and cost savings from doing that implementation. But right now, that significant spend is not a priority in this environment. But again, I wouldn't put us on the clock for any specific timing to do it, we're under no pressure, too. And then in your EM segment, could you give a little bit of color on where your operating rates are and where do you see them progressing throughout 2023? Yes, that's a great question. So I would say, for us in the low 70% operating rates is where the -- our PMMA assets are running the asset utilization on MMA is quite different by region. And clearly in Europe, during the second half of last year, there was significant capacity that was idled. So operating rates in Europe have been extremely low in the second half of last year and volumes moved from, as we pointed out, from Asia into the region. So I would say we would expect some of those assets to restart in 2023, but some of them are marginal assets on the cost curve anyway, and it's possible they don't restart at all. So I guess that's how I would characterize it. Dave, I just wanted to revisit a couple of the questions that were asked earlier on the full year guidance, $375 million to $425 million in EBITDA. I mean from the sounds of it, it seems you guys are being pretty conservative with the 10% volume gains, it seems you're factoring into this guidance. I mean you had some interesting charts in the presentation, which looked at where volumes are right now, what a snapback could look like. So now looking at those historic trends, if things do actually snap back and if the restocking is actually fairly rapid, what could those volumes look like? So that's one part of it. And again, going back to this sort of full year guidance, I also want to get a sense of what European nat gas prices you're factoring in as well. Yes. I'll take the last question first, Hassan. I mean we -- generally, when we do forecast, we forecast based on what the current forward curve for natural gas is. So we're kind of in the -- in Europe, we're kind of in the high 50s or 60 right now. So that's what we're -- that's what's baked into the guidance that we're giving right now. So if we got -- so I guess if you -- going to the first part of your question, if you -- if we saw a recovery back to the first half '22 levels that would be an additional $30 million of EBITDA per quarter incremental to what we've already guided. Now and I'll remind you, in the first half of 2022, there was also some volume pressure in the underlying markets because of the chip shortage and chip constraints in automotive as well as some pressure on Chinese production that was essentially sales that would go into Europe. So again, I think we would expect that a real snapback would get us back to the half one 2022 levels, but there's still market improvement while above that, that's possible if we see markets normalize completely. And sort of moving gears a bit. Look, it's -- seems like 23 still sort of a trough as year or coming out of a trough. And then we go into '24 and '25 and you guys have obviously some chunky debt maturities. So I'm just trying to sort of think through how you guys are thinking about share buybacks. I mean I would imagine they're off the table for a while. So if you look at the volume mix about slightly over 50% of the volume that we've historically had in the business is formulated formulated specialty materials. And as I mentioned on the call, the margins and volume of those materials actually held up quite well. Then you have less formulated or nonformulated materials or more standard grade materials like standard grade resins and/or the PMMA sheet business. And that's where we saw most of the volume pressure when the prices between the regions dislocated so dramatically in the second half. So I would say 50% to 60% is formulated and compounded in specialty applications and 40% of it is more standard grade materials. And then I think the prior rule of thumb for your Europe's styrene assets was a $50 ton styrene monomer change equal $35 million of earnings. It sounds like Terneuzen is a little more profitable. So how does that change? And then how much styrene monomer are you going to be buying with the closure of Boehlen? So let me take the second half of that question. So we're somewhere about a third of our purchases will be merchant market. Purchases now with the closure of Boehlen. And then with Terneuzen operating, we can make the other two-thirds of our needs. Yes. I'll take, Eric, the second half of that question. I think the rule of thumb, you're right, the old rule of thumb was a $50 change in margin would be about $35 million, that is now about $20 million. And ladies and gentlemen, that is all the time we have for questions today, and this will conclude today's conference call. We thank you for your participation, and you may now disconnect.

EarningCall_111

[Interpreted] Hello all. If you like to hear this session in English, please click the globe icon on the bottom and select English channel. Thank you, everyone, for joining Renesas Electronics' Fiscal '22 Q4 and Full Year Results Briefing. Simultaneous interpretation channels can be used. Please click on the globe mark at the bottom of the screen and choose the language of your choice. Speakers, please turn your video on. At today's briefing, we have with us our Representative Director, President and CEO; Hidetoshi Shibata; SVP and CFO, Shuhei Shinkai; SVP, Co-General Manager of Automotive Solutions Business, Takeshi Kataoka. We also have staff members on the call. Mr. Shibata will brief you all first, then after, Mr. Shinkai will explain results for Q4 and the full year, followed by Q&A. The total amount of time provided is 60 minutes long. And the materials that we're going to use today for the briefing are the materials available on our Investor Relations site. [Interpreted] Hello. This is Shibata speaking, the CEO. First of all, in Turkey and Syria, there was a massive earthquake and there are those who have been directly or indirectly been affected and presently may be in pain. And I would like to extend my condolences. In Turkey, we have several dozens of employees there. And back in 2011, Turkey, we were affected by the Great Eastern Earthquake, and we were supported by our friends from Turkey and other countries. We still have that fresh in our minds. So, we would like to make donations and try to extend our support as much as possible. Thank you for that. And for today, it is our full year results briefing. For fiscal year '22, revenue as well as our profitability, gross margins, operating margins, and EBIT margins have achieved record highs for our company. For GAAP and non-GAAP numbers -- for non-GAAP, it's pretty obvious. But given for non-GAAP, we were able to achieve record high numbers. Last year, we had an Analyst or Capital Market Day, and I touched upon this. But for last year, from many industries and stakeholders, they were telling us that we finally came back to the global market, and we were being extremely encouraged and now being able to see it be materialized in numbers is something that we feel very happy about. And especially -- although there were lot of predicaments and difficulties, we were able to make these achievements because of our 22,000 employees and their hard work. So, I would like to take this opportunity to tell you that we feel proud of these achievements. So regarding the market, PC, mobile, consumer in these segments, the considerably large adjustments or correction has been ongoing. And I think Mr. Shinkai will touch upon this later, but for inventory levels and amount, whether it be our inventory or distribution inventory, I think we are fairly able to control it well. So, I hope you can check that. And under these circumstances. At early last year, we did some share buybacks, but once again, we have decided to do another round of share buybacks this time around. Market corrections are ongoing, but our stock prices have relatively been firm. Also -- and with the acquisition of Dialog, we did a capital raise and we wanted to try to buy that portion back at least. So from these two reasons, up to JPY50 billion, which is smaller in scale compared to last year, but the share buyback scale will be up to 50, JPY50 billion. Furthermore, finally, another point I wanted to make, which is a housekeeping announcement. I don't want to forget it. That's why I'm going to say it now instead of the end. But typically, ever since I become the CEO, twice a year towards the capital market, we have been providing updates. But like we've been communicating, we are now at a comparable position against our peers compared to the past, humbly speaking. So for this Analyst Day as well, like our peers are doing, I would like to do it once a year. That is the cycle we would like to follow in updating you going forward. This year, we haven't decided completely yet, but we're thinking around the May timeframe where we could provide presentations. So the way we are going to be conducting this will be different from the past. We hope you understand. [Interpreted] This is the CFO. My name is Shinkai. For Q4 and fiscal year 2022 results, I would like to explain based off the presentation that has been posted on our Investor Relations site. Please turn to Page 4 in the presentation. So for Q4 results, as you could see in navy in the middle, revenue was JPY391.3 billion. Gross margin was 56%. Operating profit, JPY135.7 billion, which was 34.7% in operating margin and JPY109.3 billion. And profit attributable to the owner, excluding FX impact, it was JPY85.6 billion and JPY155.5 million for EBITDA and the dollar was JPY144 against the dollar and JPY144 against the euro for this period. And going three columns to the right are the comparisons against our expectations are shown. I'll explain this later. And for the full-year results, it is in maybe once again on the right. It was JPY1,502 billion plus for revenue. And this time around as well, we wanted to show you the constant level of net profit. Therefore, net profit, excluding FX is also shown here. In Q4, the cash pooling method between group companies has changed. And when we conducted this change, gains and losses related to FX has been incurred. Ever since Q1, with the pooling factor, FX impact exposure has become quite small. So we are -- have been able to minimize its impact. Please turn the page. The revenue trends are shown here by quarter. So for Q4, it is on the very right. Overall, on a year-over-year basis, our revenue went up by 24.5% and Q-on-Q by 1%. If you exclude FX impact on year-on-year, it was up by 4.1% in revenue and minus 3.5% Q-on-Q. For the breakdown, the details are shown here. Automotive went up by 7.5% Q-on-Q, and industrial infrastructure IoT went down in revenue by 3.5%. Likewise, if you exclude FX impact, Q-on-Q, automotive was up by 3.3% and industrial infrastructure IoT was down by 8.6%. Please turn the page. For Q4, revenue and gross operating margin, to talk about the total first. Comparison against guidance is shown at the top right. So revenue compared to the median, it was up by 1.6%. It exceeded our expectations. And half of it was due to FX and the other half was due to automotive. In the overseas market, we were able to see growth. And gross margins compared to our guidance, it was above by 2%. Major reason was product mix, which was about 40% and manufacturing expenses improved as well. And for product mix or for FX, the foreign currency ratio went up and it’s up, impact was about a quarter and the rest was due to product mix. And royalty sales increased. And for manufacturing expenses, at the end of the year, last year, we did some regular inspections that went down and mainly around OSATs, manufacturing expenses went down. That led to an improvement. And for operating expenses, R&D, SG&A was below our expectations and operating margins as a result was 4.2 percentage points higher than expectations. And looking at the bottom right, Q-on-Q. So revenue went up by 1%. Excluding our currency impact, it was down. And by segment, industrial infrastructure, IoT was down due to less demand from PCs and so forth and mobile. And for gross margins, it was minus 1 percentage point because of less production recovery and higher production costs. And for operating costs, R&D, SG&A went up, respectively. Next is by segment, which you can refer to on the left-hand side, gross margin and operating margins on a Q-on-Q basis. Industrial infrastructure, IoT changed substantially. And in Q4, there was settlement expenses related to a litigation which is one-off that was recognized. Therefore, it was half of the decline Q-on-Q. So next page, please, this is in-house inventory. On the right-hand side, the company total DOI declined Q-on-Q. And it is 98 days. Looking at each segment, for both of the segments, DOI declined. As of the end of fourth quarter, the yen strengthened, so that was a positive element. And excluding FX impact, it was Q-o-Q increase to 111 days. This is sales channel inventory in WOI. And the WOI Q-on-Q declined and both -- in both segments, it is seven weeks or so. This is inventory analysis and the outlook. From in-house inventory to the left, from third quarter to fourth quarter, the actual amount declined and that was due to FX impact. Excluding FX, it increased. The valuation increased, reflecting material and utility cost increase. Also for materials in response to BCM, we have conducted upfront ordering of the maintenance parts and the purposes for stable operation. We expect this to slightly increase in the first quarter. Regarding work in process, we have strengthened the die banks (ph), and we are continuing. On the other hand, we suppressed the wafer input, including purchase from foundry in response to the demand. So first quarter work-in-process will be a slight decline. The die bank operation, we have target volume per product line. An d depending on the product, they are different and volume-based, four weeks to 12 weeks, average is six weeks to seven weeks. That is the target of the building up of our die bank inventory. Six weeks to seven weeks means roughly 45 days. We are to hold in wafer as the monetary amount will be half. The impact to DOI will be half, roughly 22 days to 23 days. As I have said, as of the end of fourth quarter, DOI was 98 days, out of which die banks are actual for in-house and foundry combined 18 days. The target is 22 days to 23 days. So, we needed to build up some more. Out of 18 days, roughly four days is the in-house production part. Legacy product category, we completed almost entirely the expansion for die bank, but we still need to expand the inventory level of die bank for our growth products. Therefore, finished goods in fourth quarter, mostly for automotive application, we shipped the production done in the previous quarter. On the other hand, in the industry infrastructure and IoT, we suppressed the shipment to the sales channel by looking at the demand. So it is flat. In the first quarter and onwards, according to the demand, we will conduct shipment. So the inventory level of finished goods Q-on-Q will likely be flat. For all of the channels, the trend of the demand is being monitored quite conservatively so that there will not be excessive inventory in the sales channel. So first quarter as well, we will conservatively manage the inventory so as not to consume the future demand. For industrial and infrastructure IoT, fourth quarter, the inventory actual amount in WOI slightly declined Q-on-Q. In the first quarter, we expect a slight decline of the inventory level, but we also expect a slight decline of the demand. So, we expect WOI to increase slightly. In the automotive, we recovered what was decreased excessively in the third quarter. However, the financial demand was higher than our expectations. Therefore, for actual amount in WOI, we saw a Q-on-Q decrease. So in the first quarter, in order to compensate for the excessive decrease in the fourth quarter, we expect, both the amount in WOI to increase. This is the utilization rate of the front-end. And fourth quarter wafer input base utilization was 80% or so, and in line with our expectation. We scheduled -- there was a scheduled maintenance at the end of the year and the beginning of the year, and the days of operation were lower. That was the reason. And for the first quarter, due to decline in the number of days of operation and production adjustment, we expect the rate of utilization to slightly decline. This is EBITDA and FCF. Fourth quarter EBITDA is JPY155.5 billion. Fourth quarter operating cash flow was JPY106.2 billion. Free cash flow was JPY83.9 billion. From EBITDA to operating cash flow of JPY38 billion was the increase of the GAAP Q-on-Q. And the 30% of the reason is a one-time reason and also the upfront payment of the -- in order to ensure production capacity. Also settlement of the -- our patent lawsuit and other working capital increase is included. This is the forecast of the first quarter 2023. Please look at the first quarter column highlighted in dark blue. The revenue in midpoint forecast at JPY355 billion, our gross margin 54.5%; operating margin 32.5%. The revenue, we expect a 2.4% increase year-on-year and Q-on-Q minus 9.3%. Excluding foreign exchange impact year-on-year minus 7%. Q-on-Q is minus 3.3%. In gross margin, Q-on-Q decline is minus 1.5 percentage points. The reduction of the in-house production is the major -- a major reason. We are expecting the adjustment in the production. And for production cost, foundry cost, raw material, utility, the increase of those costs are reflected. The operating margin Q-on-Q, 2.2 percentage point reduction. FX itself due to seasonality, it will decline. But due to the revenue decrease, we expect a negative operating margin. Next page, please. This is the acquisition and tender offer of our own shares. Following April last year, we will conduct the acquisition of our own shares. The upper limit is JPY50 billion, slightly lower this time. INCJ is planning to tender 40 million shares. The impact is shown to the right. Next page, please. Please turn to Page 18 of the appendix. -- excuse me, Page 19. These are GAAP and non-GAAP reconciliations. The fourth quarter non-recurring items, there is a large number. This is the reconciliation cost for the patent-related lawsuit. This is the CapEx, capital expenditure, up by first half of 2022. Major investment for the increase of the production is being completed. So in the following period, we expect one single-digit CapEx per sales. Thank you. [Interpreted] We'd like to now proceed to Q&A. Mr. Shibata, Mr. Kataoka. Can you turn your video on? [Operator Instructions] So now UBS Securities. Mr. Yasui, please go ahead with your question. [Interpreted] Thank you. This is Yasui from UBS. I have two questions. My first question is regarding the sales channel distribution inventory. Thank you for giving us the information. Two quarters in a row, it has been going down for automotive. So from a demand-supply point of view, is it like your supply hasn't caught up? And throughout the year, can you also comment on whether steady demand can be expected just for automotive first? And also if you can touch about -- give us some guidance on industrial infrastructure IoT as well. And FX is still moving. So when you think about the year, how much of an impact are you expecting at the revenue and profit level next -- this fiscal year? [Interpreted] Well, I will answer the first part of your question. For FX, Mr. Shinkai will take that question. Whether or not we haven't been able to catch up with demand, I don't really think so. It's not the case. As Mr. Shinkai said earlier, right now, for 40-nanometer MCU, we are ramping up right now, and it's selling as we make them. So demand and supply is tight. But overall, it's not as if we haven't been able to catch up with demand against the supply chain. How should I put it? Including ourselves, people's perspective has changed, which is one reason why. But people are feeling – but we are feeling that we should start to carry more inventory. So, there's a certain level that we were shipping for, but the channel is selling through more. Therefore, in order to recover back the inventory up, as Mr. Shinkai mentioned, for the first quarter, for the end event beyond the channel, we are trying to supply more to ramp up the inventory levels. But if levels are at the current level, it's not as if we are short of inventory. So, we want to ensure that we maintain the sweet spot by controlling our inventory up and down. [Interpreted] Yes. For FX, the variability is quite significant. And as we've been communicating from before, when the yen strengthens, in order to protect the downside, we have been hedging. Therefore, benefiting the upside of the weakening yen is being controlled. We haven't been able to benefit completely. So if currencies stay within the range, we have been successful with our hedging, but if it's out of range, it's different. So for Q1 and what our view is -- at this level of currency sensitivity wise, at the revenue level, with the one year move against the dollar, it's JPY1.7 billion and for JPY1 billion gross profit and JPY700 million against the operating profit level, that is the sensitivity. [Interpreted] Thank you. I have two questions. Regarding sales on the first quarter, Q-on-Q, minus 3%, excluding FX, and the reasons were explained by Shibata, Shinkai. If you break them down into automotive and IIoT, what would it be? And also could you provide that outlook for 2023? The treasury stock -- share buyback will be JPY50 billion. And considering the cash flow generating capability, I believe you have more potential to conduct the share buyback. But why was it this amount? Did you discuss with the major shareholders to take it slowly or looking at the balance of share buyback and the dividend, if you could explain the background? [Interpreted] Your first point, how shall I reply? FX from fourth quarter to first quarter, yen has strengthened significantly. So if we reflect the FX entirely, then the visibility will be sacrificed. So why don't we keep the FX constant. In replying, in first quarter, automotive, the sales will grow. That is our outlook. Major factor, there are two that were already mentioned. 47 microcomputer demand is extremely strong. The demand is strong, or the platform is ramping up, increasing that is the situation. And also partially, we want to restock the sales channel inventory. So, our automotive will grow without FX impact. Regarding IIoT, even FX is fixed. High single-digit sales decline is our expectation. To put it simply, PC, mobile consumers in these areas, in the short term, the market is still soft. So the sales channel inventory, we don't want to keep excessive level. So, we are careful to sell to the sales channel. Many people comments about various things. But in the second quarter, the adjustment for PCs will bottom out. I think that is the dominant view lately. And towards second half, what would be the truly new demand that will emerge? That is the major question. We don't have that visibility yet. And in second quarter, we expect correction or adjustment to a certain extent. So in the first quarter, we are careful not to build up excessive inventory in the first quarter. And regarding share buyback, there's no major logic. However, along with the acquisition of Dialog, we conducted fundraising to a certain extent and we wanted to recover that amount in terms of EPS. And we were considering larger scale, a continuous share buyback. At least compared to last year's share buyback, the share price level is coming up. So, we are thinking of doing this in small installments. And compared to global peers, we are back in the global market, in the global map. So, we are serious about looking into dividend. So considering these factors form share buyback, I think it's a good opportunity to shift our focus a little bit to dividend. So after various discussions, we may continue share buyback. But for now, reduce the scale and expand the option. So, this is a result of such thinking. Thank you. [Interpreted] Thank you very much. First question is, you were saying from before, order backlog, and you never know when if that's going to change. But you were saying last time around that so far, it remains to be firm. So what about now? What's the sentiment? Is order backlog going to materialize? Have you been gaining visibility or is it still uncertain? So can you talk about what's actually happening in the field? [Interpreted] Well, for order backlog and its quality, I think, rather, it's getting better. That's how I feel. For the things that they don't need, we have been proactive in telling them you should cancel those orders. And I think that's a consequence of that. Whether this is good or bad, I'm not sure. But because we are going back to normal times to a certain extent, for those applications where the product life cycle is not that long, such as PC, mobile and consumer. For this part of the business under current environment circumstances, we don't have to order out into the future. So for 2021, they attempted to place orders over the long term that was non-returnable and non-cancelable. But nowadays, those practices are gone, and they're just placing orders for the near term. So operationally, it has shifted. So, order backlog overall has been declining somewhat, but the content of the backlog is more intense and better. So, I would say, we are becoming healthier and sounder. And for a total order backlog, we still have a high level. So, I think it is at a -- we're in good conditions. Other than that, lately, inflation seems to have settled down somewhat and because of the warm winter in Europe. Energy-wise as well, the worst case scenario hasn't hit us. So if comp conditions are ongoing, order backlog can be credible and we expect backlog to increase even more. And towards the second half of the year, energy inflation, circumstances, it really depends on how macro trends unfold. So that's it for me. Thank you. [Interpreted] My second question is, you were talking about Q1 in non-automotive. And for consumer, PC, mobile, with Q2 being the bottom, but for data centers and so forth in industrial, what is your image for the first quarter? [Interpreted] For industrial, it's pretty strong. It is strong for EVs and decarbonization-related applications and the move out of fossil fuels, although it may not be directly related. The conversion to heat pumps is another reason why. So, I think there is a structural change that is taking place. And because of that, for industrial, we continue to see firmness. For data centers, I think we're seeing some stagnant signs. Investments into data centers are stagnant at this moment. And from our point of view, VR14, VR5, NPUs, as they progress into next generation, structurally, we are expecting content growth. However, this process has somewhat been pushed out. So, we do think we are going to see growth, but we're not expecting a strong momentum to continue around the second quarter. In the second half, we are expecting that we might start to see a pickup, but we are not sure about the macro conditions in the second half, whether they be good or bad at this moment. So, I don't think I should comment on that at this point in time. [Interpreted] This is Eguchi. Can you hear me? I have two questions. First is regarding supply chain. In your presentation, you talked about the fees to OSAT going down. Your suppliers manufacturing companies, the operations -- has these operations returned to normal? And cost increase of the materials at that new supply, what is the pressure coming from that? The geopolitical risk is going up. So the concept of footprint in outsourcing, how are you handling such risks? [Interpreted] Let me quickly reply to your second question. The first part, the overall picture will be replied by Shinkai-san and Kataoka-san. We'll talk about some anecdotal topics. So, that would be the order. With regards to geopolitical risks, you correctly pointed that out. The overall market capacity is strengthening or securing such a movement within the entire market is to be monitored thoroughly. So how should I say? Depend through the attention of the geopolitical risks, we should not have our business being affected. So, we are looking into measures. We have been fab-light, and we will continue to be fab-light. That will be unchanged. So our foundries and our partners and with OSAT, we need to have a good discussion. For instance, the nationality, even if the nationality is Taiwanese, we are proactively expanding the capacity outside of Taiwan. So, we are not going to rush to move from right to left, but we will move step by step in order to strengthen our supply chain resiliency. We are to tackle this carefully. So when the time comes, we are going to provide information in an appropriate manner. The OSAT situation and overall picture, Shinkai-san? [Interpreted] The procurement overall picture on this topic, the tightening of demand and supply compared to the past, I think it has settled down a bit. It's not just OSAT, it's foundry and raw materials in all areas. The overall picture is calmer. But depending on the product, there are shortages that are continuing. So for such items, the costs will also be high. For instance, foundry, 8-inch product or mature node product, for those products, capacity is limited and the popularity is high. OSAT, depending on the package type, there are large various or consumer appliances. There are differences just depending on the product. For raw material, the situation is similar. The supply and demand is tighter in one area and loosened in other areas. Kataoka-san, anything to add? [Interpreted] Well, this is more of a real-world situation. In a nutshell, it has -- the stress has been alleviated, but our process node, specific process node continues to be tight. With regards to the costs, it has come down. But for this year, year-on-year basis, on a total basis, the prices have gone up slightly. Especially energy costs has been going up for raw materials. And during the two to three -- past two years to three years, the supply and demand was tight. So through LTA, various semiconductor companies have secured. So although, the overall demand is declining, the demand that is not real exists. So if we try to get them additionally, then costs goes up for such a case. So overall, the cost is slightly higher. So for such higher costs, throughout the industry, the cost increase has been born in a fair manner. That’s it from me. Thank you. The utility is a headache. We are receiving impacts to a certain extent. Thank you. [Interpreted] It's not related to your results, but I have two questions. One is last year, you were saying that you're going to do SiC as well. And do you have any updates around it and any plans around its launch? Electronic was when you referred to this and also last month. In order to secure semiconductors, there was a plan that was announced. But can you talk from your point of view about good things or not so great things that are likely to happen? [Interpreted] For SiC, there is some progress being made, but we want to wait a little more to see more progress before we make any grand announcement. So, I hope you can wait for a little bit more. Regarding the subsidies, we do appreciate it. For Kofu, our plant as well as our own capacity, we would like to expand even more. So being able to receive grants is something that we truly appreciate. So, we really hope that these types of measures will be ongoing. And also the stabilization of the supply chain as well as the contributions to industry in Japan is what we would like to have in mind and also be aligned with the government and expand our capacity by leveraging the grant system. So, we would like to move hand-in-hand. Thank you. [Interpreted] I have two questions. First point, regarding channel inventory and especially for IIBU, I understand that you are suppressing the shipments. That is mostly on PCs and smartphones. You mentioned the industrial equipment demand is strong, and also the data center application are in a plateau. The tight situation is still continuing. That is my first question. Second question. The demand is softening and the utilization is continuously declining. In the first quarter, the utilization will decline by several percentage points. And if you have an outlook for the second quarter utilization, can you share? [Interpreted] For industrial applications, the channel inventory is quite small. The volume itself is not that large. So in terms of monetary value, it's not going to move the overall picture. From BCP, die bank perspective, there are many items with shortage. So for industrial, we need to strengthen our production. In terms of the overall volume and amount, it is very small. So the visibility would be very small. With regards to data center, it will depend on the item. In the past, I briefly mentioned about the power stage, the kit sales controller and switching device used as a set. There's such a product. And in the past, there was shortage in controller, and we were able to prepare a switching device first, and the inventory rose. So especially related to power, such inventory buildup through mismatch is happening. [Interpreted] It's in line with the demand. So, there is no excess or shortage overall, but there are some items if you look deeper with higher inventory or lower inventory. So it's not really constant. That is the situation. So, we try to even them out and working to do so continuously. What was your second question? [Interpreted] Well, first quarter would be the bottom. Shinkai-san, correct me, if I'm wrong. It will be up to the situation in the second half. So as of today, we don't have the visibility. According to the current forecast, second half will come up as growth. So long as we can maintain that forecast, then utilization will start to come up in the second quarter. FX and others will be very volatile. So, we need to catch the signs of changes. Thank you. [Interpreted] This is Sugiura from Daiwa Securities. Thank you for taking my question. I have two questions. The first one is about what was discussed earlier in the Q&A about cancellations and you actually approaching the customer to cancel orders that they don't need. And three months ago at the results briefing, you were commenting on the same thing. But that time around, there were differences in customer acceptance based off what you were offering. For PC, smartphones, they do accept that proposal, but in other cases, they did not. So have you been experiencing any changes? Are there more customers accepting your proposal or are trends the same? So that's my first question. My second question is prices and the direction of semiconductor prices. You're saying that raw material prices have gone up even more and foundry procurement prices also have been going up. So a reflection of that, more procured products as well as your in-house production, do you think prices can be increased this year or because of the deterioration of the economic -- and the economy because of worst sentiment from customers, is there more pricing pressure? And do you think it's going to be hard to raise prices? So can you talk about the direction of prices going forward? Thank you. [Interpreted] Well, for prices, that's a really difficult question. It's really hard to say. It's hard to say. It's more about prices from next year onwards. That's hard to say. But like I always say, it's pretty much the same as what I said before, supply prices. Opportunistic trends are not the case like we've been seeing in the past. I think prices as a level are up compared to the past, whether it be foundry prices, raw material prices. Prices have gone up like in reality. Therefore, based off what we're seeing, of course, demand fluctuates. That's a given. But ASPs for semiconductors compared to the past do not fluctuate as much. Having said that, for semiconductors overall, memories that are commodities do fluctuate more, I presume. But for the products we carry, not all of our products have commoditized. So, we would like to be -- watch the trends closely. But for embedded products, I don't think they fluctuate as much as before. That is my view. Also, for the cleanup of order backlog, overall, I think we are past the peak and cancellations. Customers that are pushing out pretty much agree and they have agreed to accept our terms. Of course, partially for some Chinese customers because the macro situation is changing drastically, meaning their economy was stagnant because of the lockdown. But then from Q2 onwards, there might be stimulus measures from the government. So the stop and go is pretty drastic in China. So compared to other regions across the world, China might be an anomaly. However, overall, I think we are pretty much in the final stages. That's my view. Thank you. [Interpreted] I'm Sita from Semicon Portal. Thank you very much for this opportunity today. Year-on-year 51%, this is a very high number. Mr. Shibata, you said that we're now in part of the global map, and you are still humble. I think you are the top company among the global peers in terms of the growth rate. So this time, FY '22, the overseas ratio, regional breakdown, it can be rough figures, but if you have that information, could you share? Another point is Kofu fabs current situation. So those are the two questions. [Interpreted] Shinkai-san will reply to both of the questions. Sita-san, I'm happy for your compliment. When looking at the numbers, there are two cautions to be made. One is regarding Dialog. It's August or September is when the consideration started with Dialog. So full year contribution, well, on the full-year basis, the growth rate would be 40% or so. So, 51% is a little bit superficial. Last year, it was good because the yen weakened significantly, and there is a large impact coming from that. So this number, well, we shouldn't be complacent just because we achieved this number. And I would like data centers support us continuously. Shinkai-san, please. [Interpreted] First point, the ratio of domestic versus international, if 75% are international, 25% domestic in FY '22 and FY '21, compared on a year-on-year basis, international is increasing partly due to acquisition of Dialog. The second is Kofu fab. What was the question? [Interpreted] It was restart of the operation. We are working on the preparation cleanup of the building and soil cleanup and equipment procurement is underway. So against our schedule, well in line with the schedule. We expect to start mass production. So far, there is no hiccup in the procurement and preparation. [Interpreted] Japan 20% or so; America, 10%; Europe slightly below 20%; China, roughly 30% and the rest of Asia, 20%. That is the rough breakdown. [Interpreted] So next is the final question because of time. From Toyo Kezai, Mr. Sasaki, please unmute and go ahead with your question. [Interpreted] Thank you for taking my question. This is Sasaki from Toyo [indiscernible]. For fiscal year '23 and your expectations, can you give us some implications? For automotive, do you think it's going to continue to be at risk without correction? And for IIBU, you're saying hitting the bottom in Q2. But then after, what kind of recovery are you expecting as a story together with a pickup in the macro economy? Are you expecting a recovery or are you expecting like data centers or a certain application to be the driver? Can you give us some implications that you are feeling right now? And my second question is regarding share buybacks and shareholder return and your thoughts around it? For INCJ, are you going to start dividends after the acquisition of shares or are you going to do this concurrently? So what are the conditions of when you're going to start paying dividends? [Interpreted] For Q2, we don't have it. But for the first question, it's really dependent on the macro situation. So overall, at this point in time, it is really hard to say whether we're going to see things move upwards or downwards, but structurally speaking, for us and tailwinds, meaning drivers of our growth, it goes back to my previous comment around, well, of course for data centers, although we're expecting a slowdown, we still expect growth from it and also in the Intel NPU generational changes. AMD especially is increasing its share. And currently, AMD, when they increase their share, our pie expands. That's our business structure. So the generational change in AMD's market share increase will both be tailwinds for us, for data centers. Over the short term, I think we'll see ups and downs, but we do believe this is promising. Other than that, as a -- and so forth, they can also be growth drivers as well for industrial. Therefore, we do expect growth to be ongoing. For automotive, it's really hard to tell. Structurally, of course, electrification, expansion of ADAS are factors, but there are some other factors of content increase due to greater demand for electronic components. So as a trend, we do believe there's -- that's going to serve as a headwind as well, of course, for some OEMs. And when you look at their announcements, they are saying that working capital is increasing and inventory levels are high up. So for some products, we might go through some corrections. But structurally, we are expecting growth. That's what we are envisioning at this point in time. That’s it from me. Thank you. [Interpreted] Thank you very much. We would like to close Q&A session now. Lastly, Mr. Shibata will say a few words. [Interpreted] There's no additional message. But major macro factors still exists in large volume. We will continue to focus on forecasting and also control our business. Thank you very much for attending this session in your busy schedule.

EarningCall_112

Good day, and welcome to the SPS Commerce Q4 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Thank you, Sarah. Good afternoon and -- everyone, and thank you for joining us on SPS Commerce fourth quarter and fiscal year 2022 conference call. We will make certain statements today, including with respect to our expected financial results, go-to-market strategy and efforts designed to increase our traction and penetration with retailers and other customers. These statements are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to our SEC filings, specifically our Form 10-K, as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website at spscommerce.com and at the SEC's website sec.gov. In addition, we are providing a historical datasheet for easy reference on our Investor Relations section of our website, spscommerce.com. During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP income per share. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with the comparable GAAP measures. 2022 was another strong year for SPS Commerce. The ongoing transition to omnichannel and retail and increasing complexity in supply chain management continue to fuel the need for automation. Q4 of 2022 represented our 88 consecutive quarter of revenue growth, driven by our network effect, community go-to-market approach, retail expertise and execution, all of which culminate an excellent customer experience and underscore SPS Commerce's competitive differentiation. For the full year 2022, revenue grew 17% to $450.9 million. Recurring revenue grew 18%, led by fulfillment growth of 19% and analytics, which grew 10%. In 2022, the number of recurring revenue customers reached 42,300. SPS Commerce offer solutions to address supply chain challenges and make trading partner relationships more collaborative and profitable. For some of our customers, gaining EDI or API capability enables them to outsource fulfillment and inventory management to partners like Shopify, Amazon or Etsy, and take advantage of their vast market reach, as well as their scale to enjoy discounted shipping rates and faster delivery. Other customers leverage our full suite of solutions, which are designed to simplify omnichannel fulfillment for brands and suppliers of all sizes and across many industries. We help those customers achieve scale, supply chain efficiency and international expansion. Gym+Coffee, one of Ireland's largest and fastest growing active and athleisure brands, used EDI and automation to synchronize inventory across all sales channels and prioritized order fulfillment based on warehouse locations to offer fast and efficient delivery to a global customer base. Daikin Industries, the world's number one indoor comfort solutions company and the largest HVAC manufacturer, has over 90 production sites worldwide. To support their growth plan, Daikin partnered with SPS to drive EDI compliance across all their suppliers. PetCulture, a joint venture between Woolworths and PetSure in Australia, achieved 85% EDI compliance with SPS Commerce onboarding program, and set up a process to bring on new vendors within 48 hours. To help grocers stay competitive and meet changing consumer shopping expectations, many are standardizing how they exchange information across supply chain, and EDI remains one of the most common protocols. Most large retailers require EDI compliance, and for suppliers like Twin Cups, automation was necessary to scale and remain lean while signing new customers such as Safeway and Target. Peavey Industries, a leading farm and ranch supply retailer in Canada, work closely with SPS to automate nearly 93% of the retailer's purchase order volume through EDI. Peavey also leverages SPS' analytics solution, sharing point of sale data with vendors for greater visibility into its inventory position to drive sales performance and develop vendor partnerships that support its ongoing success. Global companies such as Crocs are leveraging sell-through data across all their sales channels to help drive visibility, profitability and predictability to mitigate inventory pressure across their supply chain. Lastly, SPS continually strives to help trading partners work better together as we expand our network and build on our leadership position. In 2022, we acquired GCommerce, a software solution provider known for its expertise in automotive aftermarket industry. We also acquired InterTrade Systems to strengthen our leadership across apparel and general merchandise markets. Over the years, SPS has consistently executed on our mission to connect all retail trading partners through the easiest-to-join end use network. Since 2017, we realigned our sales force, increased our focus on digital marketing and launched a new fulfillment solution and add-on products. We also remain laser-focused on improving customer experience, as we significantly enhanced full-service omnichannel supply chain solutions and system integrations through internal development and targeted acquisitions. These strategic investments are consistent with our core value, win today, win tomorrow, which helped us build the world's largest cloud retail network and positions us for continued success. We had a great fourth quarter. Revenue for the quarter was $122 million, a 19% increase over Q4 of last year and represented our 88th consecutive quarter of revenue growth. Recurring revenue this quarter grew 20% year-over-year. Adjusted EBITDA increased 26% in the quarter to $35 million. For the year, revenue was $450.9 million, a 17% increase, and recurring revenue grew 18%. The total number of recurring revenue customers increased 13% year-over-year to approximately 42,300, and wallet share increased 4% to 10,500. As a reminder, in July, we announced an acquisition of GCommerce and the addition of approximately 500 customers to our network. And in October, we announced an acquisition of InterTrade and the addition of approximately 2,500 customers. Now turning to guidance. For the first quarter of 2023, we expect revenue to be in the range of $123.3 million to $124.3 million. For the full year, we expect revenue to be in the range of $523 million to $526 million, representing approximately 16% to 17% growth over 2022. For the first quarter of 2023, we expect adjusted EBITDA to be in the range of $35 million to $35.7 million. For the full year, we expect adjusted EBITDA to be in the range of $152.5 million to $154.5 million, which is higher than the $151 million to $153 million previously communicated on the Q3 2022 earnings conference call, and represents 15% to 17% growth over 2022. For Q1 2023, we expect fully diluted earnings share to be in the range of $0.26 to $0.27, with fully diluted weighted average shares outstanding of approximately 37.2 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.56 to $0.57, with stock-based compensation expense of approximately $12 million, depreciation expense of approximately $4.8 million and amortization expense of approximately $3.9 million. For the full year 2023, we expect fully diluted earnings per share to be in the range of $1.49 to $1.55. We expect fully diluted weighted average shares outstanding of approximately 37.3 million shares. We expect non-GAAP diluted earnings per share to be in the range of $2.63 to $2.69, with stock-based compensation expense of approximately $45 million. We expect depreciation expense of approximately $19.8 million, and we expect amortization expense for the year to be approximately $15.6 million. For the year, you should model approximately 30% effective tax rate calculated on GAAP pre-tax net earnings. Beyond 2023, we maintain our annual revenue growth expectations of 15% or greater, and we continue to expect adjusted EBITDA dollar growth of 15% to 25%, as we invest in the business to capitalize on market dynamics and support current and future growth. In the long-term, we maintain our target model for adjusted EBITDA margin of 35%. In summary, SPS Commerce achieved strong fourth quarter and full year 2022 results. We continue to deliver profitable growth and invest in the future to capitalize on existing and new opportunities across our expanding addressable market. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Pfau with William Blair. Please go ahead. Yes, great. Thanks for taking my question, and congrats on the strong end to the year. Wanted to start off on analytics and the 10% growth rate that you saw in '22. I believe it was around 10% in '21 as well. How are you thinking about analytics for '23? Is there potential to see acceleration? And what would drive that? Sure, Matt. When we think about analytics for 2022, you're correct, it was approximately 10%, similar to the growth rate from the prior year. When we think about the next year or this current year 2023, you should expect a pretty similar -- around a similar growth rate. Longer-term, we do think that analytics can grow at a rate similar to fulfillment. But when we think about this year of 2023, probably more similar in a growth rate of what we experienced in 2022. Got it. And Kim, on the margin guidance, I think the EBITDA margin guidance for '23 is essentially flat with '22. What should we think about that's driving that to be flat year-over-year? Thanks. Sure. When you think it's really being driven because of the strong EBITDA dollars in 2022. So, in 2022, our EBITDA growth was about 24% year-over-year. Keep in mind, remember we've given a range of sort of 15% to 25% on an annual basis. So, you saw a lot more of that in 2022. The real driver for that had to do with timing of hires, particularly in the customer success and sales area. We're a little bit lighter on that in the first part of 2022 and made great progress in the latter part of the year. So, in 2023, you have that full year of expense associated with all those resources that we added. If you were to look at '22 and '23 and sort of add it together, you're going to get more of a normalized EBITDA growth rate, probably more in the midpoint, but that's why you saw a lot more the higher end in '22 and closer to the lower end -- our expectation is sort of that 15% to 17% in 2023. Hi, Archie and Kim. Congrats on the nice quarter and thanks for taking my questions. I guess I'll ask the obligatory macro question because it's on everyone's mind, but I'll ask you with a spin. We've seen a couple of software companies report over the last week or two that have a focus on smaller kind of SMB-sized customers. And knowing that still comprises a decent chunk of your customer segments, are you seeing any pressure there for spending on software, because we're starting to see that at least pop up in other SMB-focused vendors? Yes. Thanks, Scott. Typically, we're not. And part of the reason is because of the level of spend. You're at a very small level of spend, and especially on the fulfillment product where if you're a small vendor and you are going to do business with Costco or Loblaws or somebody, you've worked really hard to get that relationship. And it's just part of cost of doing business. So, I think there's two things: one, it's more or less mandatory; and two, it is typically fairly small fee, $100, $200 a month. Got it. Helpful. And then, Kim, I just wanted you to double check my math with inorganic customer contributions this quarter from the acquisition. It looks like there's roughly 250 that were added organically, if my math is correct. And then, wanted to get your all thoughts on customer additions this year. They spiked in '20 and '21 for several reasons. It looks like they normalized a little bit, yet you're still driving that 15%-plus subscription revenue growth target that you are talking about, which to me suggests you're either selling more products or you're having more success selling upmarket. How do we think about that kind of [custom] (ph) mix or opportunity mix to trend maybe in the next year or two relative to what you've seen recently? Sure. So, you are correct, we did see in ['20, '21] (ph) sort of heightened net customer adds and that was something that we said was sort of a high watermark, not something that we were anticipating going forward. 2022 was back a bit more to sort of, if you want to call it, pre-pandemic levels, maybe a little bit higher all in, but pretty closer to that. And that's really maybe, I guess, what you could think about as sort of your future view of that. Obviously, we do have some acquisitions and our stated goal of revenue -- top-line revenue growth of 15% or greater is an all-in number, right? So that does also include acquisitions. Specific to Q4, do keep in mind, that tends to be a seasonally lower net customer add quarter. So, if you adjust for the acquisitions, you'll see that, that number was somewhat in line with prior Q4's adjusted for acquisitions. We do see, however, a continued trend that the longer a customer is with us, we do have the opportunity to get more revenue from that customer really based on how they're using us. So, typically, they're going to use us for more connections, potentially for additional products and services. So, once we acquire that customer typically in the future, now that future may be out a year or two, but it will translate into more additional dollars per customer, and that side of the equation would show up on that wallet share or that ARPU number. It's also why we really do think both that customer adds as well as that wallet share, both of them combined will continue to be really solid and meaningful contributors to that overall 15% stated growth number. Great. Hi, everyone. I guess, Archie, in the past, you've discussed change events at retailers being good for you, good for lead generation. Are you seeing any changes in the composition of those change events? And I guess, where I'm going with the question, I think, there's been pretty high activity in ERP upgrading, new supply chain systems, those are good for you. Do you think retailers have maybe neglected their brick-and-mortar footprint a bit over recent years, and so, as they circle back, there's actually one more channel that you can now address? I think you're exactly spot on. I think the reality is that the retailers really made sure that they met the demands and expectations of the consumer during the pandemic. And now they have a lot of work to now make that profitable. I think that with -- really it was an ecom and a brick-and-mortar game four, five years ago, and now it truly is much more of an omnichannel game. I know that's a buzzword. But I think if a retailer really wants to operate in a true omnichannel way, they have a lot of work to continue to make their business more efficient. Okay. That's great. And then, Tim, one for you. Just as I think about the EBITDA guidance, so is the right interpretation here that the range for 2023, I think, that moved higher by pretty much the overage in your performance here in 4Q exiting the year. So, is the right read that the base just shifted up a bit? And all those things you still intend to invest in and layer on, really no changes here, so we're just kind of seeing the baseline effects into the forecast? That would be correct. We have not made changes in our views of investments that we think are appropriate for both the short-term as well as the long-term in our sort of win today, win tomorrow value that we hold very dear to us. But we were in a position based on sort of how we exited the year and based on our expectations for 2023 to be able to take up the guidance for EBITDA about $1.5 million on the low end and high end versus what we said 90 days ago. Great. Thanks. Hey, guys, another real nice quarter. Just a couple from me. Maybe on -- as it relates to the new suppliers that you're signing, any variance in the types of new suppliers that are coming aboard versus historical, namely the size of the suppliers, the platforms they are on, the pain points, [geos] (ph)? Just wondering if there's any variance in terms of the new adds outside of obviously the acquired customers? Yes, not a significant change. Obviously, as we moved to omnichannel, there's more and more of that activity. Interesting in our -- when we're going after new customers, we have customers that are around our average. We have customers that are well below a few thousand dollars a year, and then we have large customers, and we continue to see success in all three of those types of customers. So, it tends to be across the board and pretty diverse actually. Got it. And, Kim, on the net adds number, curious as you reflect back on '22, the gross churn numbers, just what you saw and if there's any variance? Just maybe a refresh on what you typically see in churn and if you saw anything different? Sure, we really did not see anything different. Annualized churn is about 12% and that's -- '22 was at that 12%, similar to historical. Yes. Okay. And then, just last one and I'll jump off the -- obviously, GCommerce, InterTrade, you referenced the two. Any observations on them either particularly standing out as well ahead of expectations? Are they both meeting expectations? How would you characterize it? Yes, I would say a couple of things. One, they're both meeting expectations. I think we've had very good reaction from the customer standpoint. And then, I think the talent from both of those teams is very, very strong. And so, thrilled to have them part of the team. Hi. This is Matthew Kikkert on for Parker. Thanks a lot for taking my questions, and congrats on the quarter. To start, I know a while back you launched the fulfillment solution on the Oracle Cloud Marketplace. First, how has the traction in that partnership progressed? And secondly, are you looking to expand that Oracle partnership at all or expand other partnerships to gain further market awareness? Yes. Well, first off, the channel part of our business is a very robust and a very important part of our business. And just the focus area is on Oracle, NetSuite, SAP, Sage, the Microsoft space and the Intuit space. Those are all really important parts. And so, we continue to do a couple of things. One, make sure we have people in those fields, making sure we're aware of leads and people are aware of our capabilities, but also making sure that our capabilities are the best in the marketplace, that last mile of integration. Obviously, we can -- we have the best solution. We have -- we, obviously, have the biggest network. But I think one thing that's very different from five years ago is we clearly back-end system -- integration into whether it's Oracle or NetSuite or SAP, we are the best far and away at integrating back end of the back-end system. So, we will continue to drive that forward and continue to invest to make our solutions stand out in the marketplace. Okay. That's great to hear. And then, secondly, you talked a little bit on the call about kind of implied EBITDA margins stand flat into 2023. But as we move forward beyond that moving toward that 35% EBITDA margin target, are there any levers that you have in mind anticipating on pulling back on in order to get that additional EBITDA leverage? Sure. When we think about long-term 35%, there is multiple components there. When you look at relative to where we currently are, we would expect to see more improvement in gross margin as well as in G&A. Sales and marketing, there could be a little bit, but nothing too large. We've already seen a lot of efficiencies gain there. And then, on the R&D side, we do think that range of, if you want to call it, sort of 9% to 11%, 10% to 12%, somewhere in there is sort of an appropriate range as a percent of revenue. So, in the future, you would expect to see more come from sort of the gross margin or the G&A side of the world. Specific to '23, because we're -- the EBITDA expectation is sort of that 15% to 17% and our revenue expectation is 16% to 17%, that's why you're not seeing an improvement in margin in '23. '22 you certainly got, obviously -- you've seen margin expansion in prior years and there will be years in the future where you would expect to see that as well on our path to 35% overall adjusted EBITDA margin. Hi. Thank you for taking my question and nice job on the quarter and the year. Archie, starting with you, I was wondering if you'd just walk us through what you believe are your or the firm's top two or three priorities in the coming year? Yes. First off, I think investing in add-on products through acquisitions and building to be able to expand the market opportunity for us with our 42,000 recurring revenue suppliers. And then, obviously, we'll get one of the priorities always is to continue to expand the network, that is our competitive advantage. And then, I think some of the things as we look long term to make sure that we can meet our margin expansion, continue to invest in, what I would consider, our back-end integrations to make the processes for our support and implementation teams more efficient. Okay, great. Thanks. And then, on the hiring side, Kim, I was wondering if you could just provide a little color on where the company stands with respect to hiring this year. Maybe just talk a little bit about where -- what parts of the business you'll be hiring in and maybe what parts you won't be? Sure. So, we exited 2022 in -- being in a great position where we're able to hire a lot of talent across the board, but from a quantity, customer success would be the largest. We certainly did add also in the sales space, technology and other areas, but customer success being the largest. When we think about 2023, we're going to continue to invest across the organization and across different areas in the organization, as we see that is appropriate not only to meet our existing customers' needs, but also the future opportunities that we see. So, in '22, we specifically highlighted customer success was an area where we know we're a little bit behind and we needed to sort of catch up on that hiring, great that we're able to do it. '23 will be more about, if you want to call it, a typical year. If there is such a thing as a typical year where we will be adding resources throughout the organization, but not maybe at that large part in one particular area of the company. This concludes our question-and-answer session. And our conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.

EarningCall_113

Good day and thank you for standing by. Welcome to the Fourth Quarter and Full Year 2022 Sealed Air Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Sullivan. Thank you and good morning, everyone. With me today are Ted Doheny, our CEO; Emile Chammas, our COO; and Christopher Stephens, our CFO. Before we begin our call, I would like to note we have provided a slide presentation to help guide our discussion. Please visit sealedair.com where today’s webcast and presentation can be downloaded from our Investors page. Statements made during this call stating management’s outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled Forward-Looking Statements in our earnings release and slide presentation, which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our website or on the SEC’s website. We discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and the reconciliation to the U.S. GAAP in our earnings release. Included in the appendix of today’s presentation, you will find U.S. GAAP financial results that correspond to the non-U.S. GAAP measures we referenced throughout the presentation. Thank you, Brian and thank you for joining our call today. Today, we will discuss our Q4 and year end results, our 2023 outlook, Reinvent SEE 2.0 and our acquisition of Liquibox. After that, we will open up the call for your questions. Starting on Slide 3, the graphic is showing where we are taking packaging with automation, digital and sustainability solutions. We start with our purpose. We are in the business to protect, to solve critical packaging challenges and to make our world better than we found it. This enables our vision to become a world class company, partnering with our customers on automation, digital and sustainability packaging solutions. Moving to Slide 4, we are excited to announce that on February 1, earlier than originally anticipated, we completed our acquisition of Liquibox, a global leader in sustainable packaging for the fluids and liquids industry and the pioneer innovator of bag-in-box solutions. Fluids and liquids is our fastest growing and highest margin product line within our Cryovac portfolio, is a fast growing, attractive market for us as flexible packaging is disrupting the rigid container market. Liquibox brings to see new competitive capabilities and is highly synergistic with our existing business. The combined Liquibox and Cryovac business in 2023 is expected to exceed $600 million, representing more than 10% of our portfolio. Our plan is to turn the fluids and liquids business into a $1 billion vertical by 2025 with an operating leverage of over 40%. Liquibox will enable us to open significant new opportunities for growth in areas like ready-to-drink liquids, wine and spirits, consumer packaged goods, quick-service restaurants and other attractive spaces as the best suitable and cost-effective alternative to rigid containers. The combined business will leverage upon Cryovac technology for freshness and shelf life extension, broad market access and global footprint. To the question of why now? We have been investing in this attractive space for quite some time. Our team identified Liquibox as a prime target in our M&A pipeline and the most coveted asset in the fluids and liquids space. As the window of opportunity was getting closer, we preempted a potential auction process. We quickly closed the transaction within 3 months, 2 months earlier than originally anticipated. I have appointed Emile Chammas to lead the fluids and liquids vertical, deploying our proprietary integration playbook, delivering on our target revenue ambitions of greater than $1 billion and achieving cost synergies of approximately $30 million before year three. Under Emile’s leadership, SEE’s and Liquibox cross-functional teams are highly energized to implement the plans they have been jointly developing. Let’s turn to Slide 5, which highlights how we are moving to be a market-driven customer-first company fueled by our iconic brands. Our solutions focus on automation, digital and sustainability create value for our customers by improving their productivity, sustainability and enhancing their competitive advantages while allowing SEE to deliver growth faster than the markets we serve. Our digital online sales have now ramped up to 10% of our total sales in Q4, doubling that from Q3. This digital transformation will be a driving force behind the evolution of our go-to-market strategy and source of new innovation while enabling us to reach more customers effectively and efficiently. Our online sales platform, MySEE empowers us to reach new customers and new geographies for a highly profitable Bubble Wrap inflatable solutions. In the quarter, we converted two of our largest distributors to online partners to make this happen. Our Cryovac’s fluids and liquids business grew over 20% in 2022. Now with the addition of Liquibox, we expect this new vertical to be over 10% of our portfolio with a 40% operating leverage. In fresh proteins, we saw retail markets going down in Q4, driven by declining customer spending. Consumers are trading down from premium proteins and customers are working through excess inventory. Leading with SEE automation, we were able to win with major customer conversions. Fulfillment, industrial and especially electronic markets were significantly down in Q4. Destocking amplify this trend. The outlook for these markets is to stay challenged in the first half with a rebound in the second half of 2023. We plan gains from new innovations in automation that were constrained over the past 24 months. Following our investments to double capacity, including our new developments in fiber-based solutions, we are well positioned for growth in the second half of 2023. We are excited about the recent launch of our new line of paper Bubble Wrap mailers and high recycled content Bubble Wrap filler solutions. Moving to Slide 6, following the success of Reinvent SEE, we now advance to the next phase of our transformation with Reinvent SEE 2.0, moving from the best in packaging to a digitally driven world-class automated solutions company. Starting in 2018, Reinvent SEE built and solidified the foundation for the next phase of SEE’s journey through development of the SEE operating model and our growth platforms, including leading with automation, digital and sustainability. Reflecting on the last 5 years, we have met or exceeded our operating model targets. Sales growth has compounded at 5% versus our 5% to 7% target. Adjusted EBITDA has been 8% versus our targeted range of 7% to 9%. Adjusted EPS growth has compounded at 18% versus our goal of over 10% and we have averaged 89% free cash flow conversion over the last 3 years. 2022 was challenged on free cash flow with the building of working capital as we fought through supply constraints and volume headwinds. Reinvent SEE 2.0 focuses on high-quality profitable growth and improved productivity. The Liquibox transaction accelerates our growth platforms, highlighting our transformation from product to customer-first solutions approach. Our digital transformation will empower us to attack new areas of opportunity and will drive profitability to accelerating the use of automation in our own operations. By moving the business online, we will focus efforts to grow faster than the markets we serve through a simplified, more digitized organization, reducing our cost structure by $35 million to $45 million over the next 12 to 18 months. Let’s now discuss how Reinvent SEE 2.0 will fuel our SEE operating engine. Turning to Slide 7, we have updated the SEE operating model out to 2027 with Reinvent SEE 2.0 targets. On the left side of the slide, we outlined the SEE operating model growth assumptions. In 2023, we expect a flat growth performance despite a 3% market decline. The downturn in the first half will be recovered by a strong second half. Liquibox will add 6% profitable growth to the total SEE for the full year. We are confident our SEE operating engine will convert sales at more than 30% operating leverage, resulting in continued margin expansion. The combination of the SEE operating engine, our high-performance culture, digital transformation, accretive acquisitions and strong free cash flow generation will deliver world class growth and returns in the next 5 years. Let’s turn to Slide 8 to discuss Q4 and full year results. In the quarter, on a constant currency basis, net sales were down 4% and adjusted EBITDA was down 7%. Despite the tough environment, we maintained adjusted EBITDA margins above 21%. On a full year basis in constant currency net sales were up 6% and adjusted EBITDA was up 10%. Our margin expanded by 110 basis points, setting a new record in earnings for SEE. Adjusted earnings per share in the quarter of $0.99 were down 7% compared to a year ago and up 20% for the full year of 2022 on a constant currency basis. Free cash flow through Q4, though disappointing, was a source of cash of $376 million. We continue to invest in our people and our business as we accelerate our journey to world class. Moving to Slide 9, we updated our SEE automation growth plan. Full year 2022 automation sales were up $475 million, up 10% in constant dollars. In Q4, we added a record – in Q4, we had a record quarter with equipment sales up 24% year-over-year, driven by Food Equipment, which was up 30%. We continue to work with our customers to deploy automation solutions that create savings and fast returns by addressing labor shortages, inflation, safety and productivity. Our bookings continue to outpace revenue for 2022 and though supply shortages linger, we expect to deliver double-digit growth in 2023 to achieve revenues greater than $525 million. We are aggressively expanding our SEE automation solutions portfolio and driving faster growth by integrating equipment and technologies like robotics, vision systems, digital printing from our network of strategic suppliers. In 2023, we are expanding our SEE automation solutions and auto bagging, filling and boxing with their respective fiber-based materials. Thank you, Ted and good morning everyone. Let’s start on Slide 10 to review our fourth quarter net sales of $1.4 billion by segment and by region. In constant dollars, net sales were down 4%, with 4% growth in Food, while Protective was down 15%. By region, we grew EMEA by 5%, offset by declines in Americas of 7% and APAC of 3%. In constant dollars, full year net sales were up 6% to $5.6 billion. Food was up 11%, while Protective was essentially flat. By region, we were up 6% in Americas, up 7% in EMEA and up 2% in APAC. On Slide 11, we summarize our Q4 and full year ‘22 performance, primarily driven by inventory destocking and lower demand in our protective end markets and FX headwinds, we had a challenging fourth quarter with sales down 8% as reported versus Q4 ‘21. However, for the full year, we delivered reported sales growth of 2%. Q4 adjusted EBITDA of $297 million decreased $33 million or 10% compared to last year with margins of 21.1%, down 40 basis points. For the full year, adjusted EBITDA grew 7% to $1.21 billion with margin expansion of 110 basis points to 21.5%. This performance was driven by positive net price realization, which we define as year-over-year price realization, less inflation on direct material, freight, non-material and labor costs as well as productivity and – as well as productivity gains, which more than offset lower volumes, higher operating costs and unfavorable FX impacts. As it relates to adjusted earnings per diluted share in Q4 of $0.99, our adjusted tax rate was 26.1% compared to 26.2% in the same period last year. On a full year basis, our adjusted earnings per diluted share was $4.10, with an adjusted tax rate of 25.4% compared to 26.1% in 2021. We had no share repurchase activity in Q4, but repurchased approximately $280 million or 4.5 million shares in 2022. Our weighted average diluted shares outstanding in Q4 ‘22 was $146.1 million and $147.1 million for the full year. At year end, we had $616 million remaining under our authorized share repurchase program. Turning to quarterly segment results on Slide 12, starting with Food. In Q4, Food net sales of $874 million were up 4% on an organic basis, which consisted of 7% price realization to help offset inflationary pressures across all cost categories and volume declines of 3%. Food adjusted EBITDA of $202 million in Q4 increased 2% in constant dollars compared to last year with margins at 23.1%, down 20 basis points. Protective Q4 net sales of $532 million were down 14% organically with price realization of 6% being offset by volume declines. We expect market contractions and a negative economic outlook to continue to put pressure across our Protective fulfillment in industrial end markets in the first half of 2023. Protective adjusted EBITDA of $102 million was down 15% in constant dollars in Q4 with margins at 19.2%, only down 10 basis points despite the end-market weakness and customer destocking activity. Looking at Slide 13, we could see full year segment results starting with Food. Food net sales of $3.3 billion were up 11% on an organic basis, which consisted of 13% price realization to help offset inflationary pressures and volume declines of 2% overall. For the year, adjusted EBITDA of $755 million was up 13% in constant dollars with margins of 22.8%, up 70 basis points. Food automation sales for the year, which include equipment, systems, parts and services, account for approximately 8% of segment sales were up high single-digits. Protective net sales of $2.3 billion were up 1% organically with price realization of 12% being offset by volume declines of 11% in the year. Adjusted EBITDA of $466 million was up 9% organically with margins up 20%, up 160 basis points. As for Protective automation sales in the year, which account for approximately 9% of the segment sales, they were up double-digits, fueled by our auto boxing solution. Now, let’s turn to free cash flow on Slide 14. Full year free cash flow of $376 million compared to $497 million in the same period a year ago. The $120 million decline was mainly driven by increased inventory, reductions of accounts payable and higher cash taxes, which were partially offset by favorable adjusted EBITDA. With regards to the reduction in accounts payable, we expect this non-structural use of cash in 2022 to benefit 2023 as we monetize working capital to drive growth and de-lever. On Slide 15, we outlined our purpose-driven allocation strategy focused on maximizing value for our shareholders. We maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives. We capitalize on the strength of our balance sheet by engaging our bank group in Q4 and accessing the bond markets last month to successfully finance the Liquibox acquisition. We expect to delever throughout the year, estimating 3.5x or below by the end of 2023. Let’s turn to Slide 16 to review our 2023 outlook. We expect net sales to be in the range of $5.85 billion to $6.1 billion, which at the midpoint assumes mid-single-digit growth on a reported basis and low single-digit growth organic. We expect Liquibox to contribute between $340 million to $360 million in sales in 2023 given 11 months under our ownership. We expect full year adjusted EBITDA to be in the range of $1.25 billion to $1.3 billion, which assumes adjusted EBITDA margin of approximately 21%. Full year adjusted EPS is expected to be in the range of $3.50 to $3.80 assuming depreciation and amortization at the midpoint of approximately $275 million, an adjusted effective tax rate between 26% to 27%, net interest expense of approximately $275 million at the midpoint and approximately 146 million average shares outstanding. The lower 2023 adjusted EPS is largely driven by non-operating items such as higher – expense of $0.08 and higher base business interest expense of $0.27. And lastly, we expect 2023 free cash flow in the range of $475 million to $525 million, which implies a free cash flow conversion of greater than 90%. As noted in our earnings release, we have reached a tentative agreement to settle the legacy IRS tax matter related to the Cryovac acquisition from W.R. Grace. Our 2023 free cash flow range excludes any potential cash settlement as a tentative agreement is subject to further review and approval. As it relates to Reinvent 2.0 we plan to include both the costs and the benefits in our adjusted results as we accelerate our digital transformation to drive higher levels of productivity and operating efficiency. As we’ve highlighted before, in our SEE operating model on Slide 7, our digital transformation will be driving 1% growth over time by broadening our sales reach, making it easier to do business with us and delivering 30 basis point operational efficiency gains. So as we look ahead to 2023, we anticipate continued softness in the first half. We will remain disciplined to drive the necessary actions to preserve our margins and generate strong free cash flow. With the successful integration of Liquibox the strong value creation, we expect this acquisition to have with our Cryovac brand at the midpoint of our 2023 sales guidance, we expect to be in line with our SEE operating model sales target of 5% to 7%. Thanks, Chris. Before we open up the call for questions, I wanted to share some insights from my travels around the world, as we’ve increased our face-to-face meetings in the post-COVID environment. I’ve been able to meet with our employees, our largest customers and see some of our latest automation solutions and action. It was great to see the progress in our own facilities around the world. Our investments in Touchless automation eliminate millions of touches while providing higher quality materials and removing people from harm’s web. It’s also been uplifting for me to see how embedded we are with our customers and hear firsthand how we help them through incredible challenges in their facilities. It was exciting to see our latest automation solutions in action and hear from our customers how much they value our partnership. Our automation, digital and sustainability focus is driving value with our customers and our internal operations. Finally, I’m really energized by the cultural fit in working relationship with the Liquibox team, as we jointly uncover more opportunities. With that, I will open up the call for questions. Operator, Victor, we would like to open up now for the Q&A session. [Operator Instructions] Our first question will come from the line of Arun Viswanathan from RBC Capital Markets. Your line is open. Great. Thanks for taking my question. Good morning. I guess I just wanted to understand your thinking on growth this year. So it sounds like there is some challenges on the volume front. You noted a challenging macro economic background. How do you see volumes evolving, I guess, both in protective and food as you go through the year, you will face some easier comps, I guess, in the back half, but – yes, maybe we can just start with that. Thanks. Thanks, Arun. I’ll open up with that. And so as we shared in our opening comments, we’re seeing the first half of the year still be challenged on the volumes in both business, starting with the protective side. We’ve definitely seen, as you’ve been seeing in the major markets, especially in things like electronics and e-commerce. So we’re still feeling pressure. We’re still going to feel the destocking in the first half of the year into the first quarter. On the second half of the year, we’re actually – we see a rebound. We still think in our guidance, we have our protective still down a couple of percent in our guidance, but we definitely think we should have a strong rebound in the second half of the year, especially with some of our new products coming in place, we think we can power through that. And as we talked about with Reinvent SEE and moving further on digital with their distribution, again, I think we have some upside potential. On the food side, as we see that shifting with the volumes – still under pressure, also having destocking, the same story. The first half would be challenged, but we do think we have some significant opportunity for growth in the second half, and we’re actually guiding to see the food volumes up a couple of percent. On the food side as well as the protective, we really see the automation kicking in. It’s still really tough out there for our customers with getting labor, inflation, etcetera. So we see some of that pick up coming in. We did this. We highlighted. We had strong automation in the fourth quarter. So we see that continuing into the second half of the year. Okay, next question. Thank you. [Operator Instructions] Our next question will come from the line of George Staphos from Bank of America. Your line is open. Hi, everyone. Good morning. Thanks for the details. Congratulations on the progress through 2022. My question is on Liquibox. Can you talk to the amount of synergies you’re building into the EBITDA contribution you expect from the business this year? And relatedly, bag and box, you see competition across several key characteristics of the package. Where would you say whether it’s the carton, the valve, the material you’re seeing competitors catch up to Liquibox? Or where are you seeing yourselves putting distance between yourselves and your peers in that market? Thanks, guys. Good luck in the quarter. Thanks, George. I’ll open it up. And since I have a Emile here on the call, I’ll let Emile give some insight to that. As far as the growth on the synergies that we have in the model, we have the $30 million of cost out there. We feel pretty confident on that, Emile can talk to you about that. What we’re most excited leading to the second part of your question, of where we see the growth synergies for what Liquibox already has. And in talking with them and learning with them and actually hearing much more in the marketplace, their market position is actually something that we could actually extend. The teams have met with our internal teams on what we’re doing on liquids and what we’ve done, especially with our – products and where we’ve had some significant penetration in the quick service market. And bringing a full solution, we think we could actually extend their market leadership with the two teams together. And what I’m excited about, just our first month together with the team is what the growth opportunities are. But Emile, if you want to cover that a little bit? Absolutely. Thank you, Ted. And thanks, George, for the question. I guess just to remind ourselves, we’re only day 8 after – since we closed the acquisition. But let me address the question in a couple of different ways. First of all, there is obviously the competitive set of Liquibox. But really, the piece around that is a $7 billion of addressable market and how we convert rigid to liquids. Within the Liquibox capabilities and strength, it’s really around the fitments, the lightweight and downgauging even of existing solutions, and it’s all about the sustainability. This Liquipure is a unique product in the market that allows for the full recyclability. And as the team I’ve met over the last couple of weeks, pretty close only to certain extent, what we could share that since a 8 days ago, we now can fully work together. The teams are just incredibly excited in terms of the opportunities. Bringing the Liquibox expertise into the market and coupling that with Sealed Air’s capabilities around extrusion, around sourcing and footprint so we see tremendous opportunities in terms of the short-term ones, leveraging the footprint of Sealed Air, around markets where Liquibox are present today the customer relationships on both sides – Fluids segment as well as in terms of how we drive the synergies since [indiscernible] synergies. So on synergies side, we’re unpacking the entire fees. Obviously, the market piece that I’ve just talked about, but also internally, how do we collectively buy better. Obviously, Sealed Air, as you know, George, we buy more than 1 billion pounds of resins versus a smaller size of Liquibox around the film expertise, this is what the Cryovac extrusion, the film structure piece of it. And then really, the company – the small company, they have done a tremendous job with the resources they had and now bringing in a much larger company, how we can even accelerate the path even in terms of the touchless automation within their plans and then bringing them into our digital capabilities in terms of how we go to market using MySEE as well as digital. So again, day 8, but many great opportunities that we hope to update you in the upcoming quarterly calls. Thanks. Good morning, everybody. I guess first off, back to the 2023 question. How should we think about the weighting between the first half and second half on EBITDA and EPS? Excuse me. And then on your 2027 financial targets, which is obviously very helpful, kind of keep focus on the algorithm. How do you think the weighting changes between food and protective from a portfolio standpoint? And I guess I’m just asking because you have some of the internal initiatives outlined and acquisitions, etcetera, will the portfolio become more effectively recession – resistant than what we have currently? Thanks for your question, Ghansham. So maybe address your first part there. So as we typically do to try to provide, although we don’t give quarterly guidance, we try to provide with our investors in understanding of first half, second half. And we made some prepared remarks – in our prepared remarks, just thinking about the first half softness is what we expect to see. So talk about maybe 46%, 47% in terms of the first half, followed by a rebound and expected rebound in the second half is somewhat reflected in our guidance for the full year. And I’ll have – let Ted add some additional color. But as we continue to drive the business in terms of putting expectations out there in our operating model, we had 2025. We’ve now adjusted that to 2027. Main item in there is coming in with the Liquibox being added to our portfolio and expect we have in terms of driving that growth. And the expectation that automation is going to continue to be a big portion of our overall sales, as we pursue that. But Ted, maybe some additional thoughts. Yes. Ghansham, on the second part of the question is we’re moving the portfolio as you look at 2027. So you see the shift, and we’re very consciously talking about Cryovac and that their food business and moving at the portfolio, moving it from where it was 45%, 55% to now over 60%. The fluids portfolio, if you look at it being over 10%, it’s actually another percent because part of the fluids is into our medical space. So you can see it’s becoming a very strong part of our portfolio going forward in shifting that strong growth to the food side of the business and our portfolio. But the other side of our portfolio to highlight, it’s in the Reinvent SEE, as we drive to digital and the automation is really looking at our portfolio to be a full automation portfolio. So what does that mean? Where we’re leading with equipment where we can automate our customers’ facility and have that pull-through materials. One of our fastest-growing product lines has been in the fiber-based solutions, both food and the protective in bringing automation into that space. And as Emile was talking about with Liquibox, right now, they do very well, and we do very well with bags. And now we have fittings but the box part is a significant opportunity, as we bring some of our auto boxing, digital, technology and to pull that material through. So the portfolio is shifting in two ways, shifting to be a stronger portion of our portfolio to that very stable, high profitable business, as we’re adding fluids. But also as we continue to shift the portfolio to a full solutions model with that automation and pull-through on materials so we think, exciting for where the portfolio shift. One other piece just to highlight it – I highlighted in the – my prepared remarks is looking at the liquids and fluids portfolio is now going to be leveraging at a 40% where the operating engine despite all of our issues, the engine has been performing and operating at a really strong leverage over and now putting a part of our portfolio that’s actually going to be more profitable than the existing base. So that 40% leverage is really going to be driving earnings over the next 5 years. Okay, next question? Thank you. [Operator Instructions] Our next question will come from the line of Phil Ng from Jefferies. Your line is open. Hey, guys. Good morning. In your full year guidance, I believe you’re baking in some share gains by a few points versus the market. Just want to get a little hand on what’s driving that? Have you kind of recapture some of the share that you may have lost last year on the food side? And it’s good to see equipment sales bounced back pretty nicely in the fourth quarter. Are most of the supply chain issues on the equipment side behind you, and that’s the opportunity as well as the access to materials, I think, on the specialty chemical side? Yes. So just to – the – we were getting ahead on those supply chain issues on the equipment side. So I think we’re in a good shape. I think we can grow that business, and you’ll see that strong growth coming back and expecting more. The first part of the question, remind me Chris? Okay. The share gain on food, yes, definitely, we see that in our guidance. The part of the food we have it at 2% for the full year growth on food. And part of that is the share gain. But on the second half, we see some of that market coming back. We now have that specialty resin that we highlighted before. We definitely – we’re in a really good position with our food business. I mean our Cryovac materials and automation is the preference in the marketplace and as we’re driving that. Now having the material, we think we can get that share back, and that’s in part of our guidance. But it’s against a tough first half outlook. So short answer is yes, we expect that share gain back, both on materials and we expect more share gain on the automation. Well, partly, we identified that in the first to fourth quarter with the equipment coming in, that’s identifying that, that’s coming. So part of that strong fourth quarter gain on the equipment – the answer is yes. More to come now. More to come. Right. And then specific on the food side, given the specialty resins challenges, getting that back online, getting that in place, the business that went elsewhere for us in terms of dual sourcing or loss of share, we have been making slow gains in the fourth quarter and expect that to continue every quarter as we execute in 2023. On the protective side, just if you’re asking you – was focused on the food, but we also think same thing as we get through the destocking and again, just really highlighting is we move specialty on the protective side where we have a distribution. Moving those distributors to online partners as we go further digital with MySEE, we definitely think it’s going to expand our reach and our capability when we get through some of this destocking on the protective side. So, we think we have some share opportunities there as well. One moment for our next question. Our next question comes from the line of Anthony Pettinari from Citi. Your line is open. Hey. Following up on, I think Ghansham’s question, and I appreciate all the detail on first half versus second half. But I was just wondering if you could provide any color or put a finer point on how 1Q EPS might compare to 4Q. You talked about the protective volume weakness and I guess the cost saves are more second half weighted, and I think you have two months of Liquibox. So, just wondering how 1Q EPS might compared to 4Q? And then just some packagers have talked about steep slowdown in December, but then kind of pretty strong start in January. I am just wondering if you saw a similar dynamic across either of your businesses. Sure, Anthony. As you know, we don’t actually give quarterly guidance, but we would like to give – you guys as well as investors just to feel for the first half and second half. But we definitely, from a sequential point of view, expect earnings per share in Q1 to be down going into the year. So, you kind of – from a modeling point of view, think of it as 46%, 47% first half. And then as you may split it, we would expect Q1 to be a softer quarter, given what is going on mostly on the protective side. Coming off some pretty strong growth on automation in Q1, I don’t necessarily expect to see that same level of growth in Q4 of it in terms of Q1. So, anyway, some headwinds faced us in Q1 that is reflected in our view of that first half and second half. One moment for our next question. Our next question will come from the line of Angel Castillo from Morgan Stanley. Your line is open. Hi. Good morning. Thanks for taking my question. I was just hoping we could unpack a little bit more of the kind of 2023 growth. You talked about volumes, but I guess if I look at the organic growth that was outlined of maybe minus 1% to plus 3% kind of implies flattish to modestly up. And then I think the Liquibox contribution, if I – if we just look at the EBITDA margin that, that business has, implies that the EBITDA full year guide based on those two factors would be – would kind of put you at the high end of the guide just with that starting point. So, just curious, should we kind of view that as conservatism, or is there any other kind of factors that as we think about maybe a more base business kind of flattish and contribution from Liquibox that maybe are offsetting some of it, whether it’s anything on the cost side or kind of cost of ramping up that business or integrating it? Okay. Thanks for the question Angel. So, let me – so, to your point, let me unpack it. So, we talk about overall food being up in ‘23, low-single digits from a volume perspective as well as a price, as we continue to benefit from some price actions that we took in 2022 that will continue to benefit us in ‘23. That’s on the food side. FX is for both segments providing some level of headwind when you think about it on a reported basis. But when you get to protective, protective is where the pinch point is. I mean we saw it in the second half of last year. We continued that that outlook to be negative for us, unfortunately, in the first half of this year, so roughly down low-single digit growth. We don’t expect much in the way of price activity in the first half given where we are recovering, the inflationary pressures that we have seen and that will continue to evolve as we execute in 2023. So, hopefully that gives you – provides a little bit of color. And then the automation piece of it, just to overlay and recognize automation for both food as well as protective is less than 10% of each segment sales, but that overall growth algorithm growing that business double digits is what we expect that we shared on slide , something – Slide 9 in our earnings supplement. Yes. And just again to highlight to your second part of your question on Liquibox. So basically, the simple story is we are seeing a flat year first half being challenge, second half being recovery. So, the question of the conservatism could be is just are these markets that we are facing in the first half are they as tough as we are seeing. The optimism is moving on to the high end of the guide is if we get through that first half, we definitely see the opportunity in the second half. On Liquibox alone, you saw in the model, we put the $30 million of cost-out in the first 3 years. Emile is in the room, and Emile is definitely working on the cost side of that, even though we have said eight days official. But I think we really see some good opportunities on the costs out there quick on the Liquibox. But the part on the Liquibox that we are really excited about is the growth side. That’s we are working with the team right now. That’s been fairly resilient, it’s into the markets that we really like with the quick service. It is converting rigid container market. So, that’s really the upside, can we do more. And I will just highlight again, if you look at the numbers what we have in for Liquibox, that’s going to be leveraging better than the rest of the core business. So, that’s the upside on the earnings. And I just want to highlight it, we didn’t mention it, but paying down that debt quickly that’s how we are going to get the EPS back to where the model says it should be, and we want to pay down that debt very fast, and that’s what we are focused on. One moment for our next question. Our next question will come from the line of Adam Josephson from KeyBanc. Your line is open. Hi Chris. Good morning. Thanks very much for taking my question. In terms of guidance, just a two-pronged question. One is, obviously, there are cost levers you can pull and you are able to achieve your EBITDA guidance, I think volume and free cash flow obviously, last year were a lot harder for you. How much confidence would you say you have in the various components of your guidance, just given your experience last year with – specifically with volume and free cash flow? And just, Chris, could you tell me what your pro forma leverage is now as well as what exactly your working capital expectations are for the year? Thank you very much. Yes. So, good. So, let me just answer the second half of your question and we will come back to the overall guidance, but for purposes of – we anticipate right now, Q1 to end at a leverage ratio of roughly 3.5x and also continue to kind of work that down recognizing our working capital improvements in terms of the normalization that we talked about, getting inventory reduced, selling through that inventory, collecting those receivables. We would see that working capital cash generation come through using that excess cash to pay down debt. It would be priority one. So, the overall guidance, as you see on Slide 16, when we provide our full year view, we have got outlook ranges that we would like to provide to give you guys as well as investors a sense of what we are seeing on the potential downside of our guide versus the upside range, and I will let you – you can kind of read through them yourself. But specific to your question on sales, pretty confident that – recognize the first half, second half discussion, we discussed for – if I break it down on a regional basis. One reason I wanted to highlight for us is APAC recognizing China opening up again. And Ted recently been over in Asia, just listening to our team over in APAC, is that although it is somewhat muted initially, we are not too bullish in terms of how quickly that’s going to come back, but we would expect second half improvement out of our business in China to help give us some confidence in terms of that top line sales. Food will continue to be resilient regardless of what happens in terms of the consumer behavior, in terms of what they choose to buy since we play in most, if not all, of the proteins. You get to the protective side, we are hopeful that it’s the first half type of situation every quarter getting it better and better in terms of our protective end markets. But that’s a little bit on the cautious side. And we talked about the destocking potentially persisting. And then the other element of our four metrics that we provide, you mentioned free cash flow. I would say the confidence is pretty high. We saw the reduction in inventory to start to occur second half of the year, getting more meaningful in the fourth quarter. That will continue in the first half of the year, and we would expect that, that cash generation would show a better profile than what we have seen in 2022. So, that’s what gives us confidence. I would also want to highlight that we are very conscious to make sure when we think about the cost actions, when we think about the investment actions, we do not want to starve areas that’s going to help our future growth. So CapEx, as an example, you can see we expect to spend more next year than we did in the prior year. We think about innovation and the things that we are doing with reformulations, to be able to meet the markets and meet our sustainability goals, etcetera, etcetera. We are not holding back on the investments in our business to drive where we are going. Maybe let me just add on the working capital, just to kind of give the confidence. So, in a nutshell, what happened last year, first six months disruptions across the world on every single category of items we are buying. And our lead times to our customers on many product lines were extended by more than 5x the normal lead time. So, we had to build the inventory to make sure that we are not starving the growth. And as we got over that hump essentially our inventory peaked in the Q3 period last year. At the same time, the end market started softening customers started destocking as they saw the lead times were returning back to normal. And that’s where we got caught in that trench. But from that peak to trough at year-end, we did take out more than $150 million in inventory. The second piece is all those material supply issues are behind us. There is ample supply of materials. One area is much better, but still impacts a little bit on long lead times, that’s on the electronics side, but we are managing through that. And so, we are going to continue driving our working capital where at least. That’s a short story what happened last year. It wasn’t a fluke, is a couple of things that happen exactly at the same time, and we just power through it and make the rest happen. One moment for our next question. Our next question will come from the line of Adam Samuelson from Goldman Sachs. Your line is open. Hi. Thank you. Good morning everyone. A lot of ground has been covered, a couple of just cleanup type questions, if I may. Maybe first, in the new SEE 2.0, the contribution from digital growth is anticipated. I mean is that a – so I think about that being a pretty meaningful mix driver and how digital plays into your revenue growth and value capture that coming with pretty healthy incremental margins and that probably being a disproportionate driver of some of the operating leverage that you are forecasting? And then I just want to be clear on some of the changes in the way guidance is now being couched that restructuring costs are going to be included in the EBITDA guidance, not stripped out as a special item. So, like Chris, there is a $23 million restructuring that’s included in the 2023 outlook. I just want to be clear that that’s in the $1.25 billion to $1.3 billion of adjusted EBITDA? Yes. So, let me answer maybe the second half of your question, I will let Ted comment around the digital piece. That’s very much a big portion of what we are identifying as opportunities for Reinvent SEE 2.0. So, on the restructuring side, what we have profiled out on Page 16 is that restructuring mainly consists of the continuation of Reinvent, the program from several years ago, kind of concluding on that particular transaction as well as some of the restructurings we have got identified on the integration given the M&A deal. What we are specifically identifying to your point, is that Reinvent SEE 2.0 costs as well as the cash profile as we continue to execute that over the next 12 months to 18 months, you could see what we have targeted for overall structural changes and benefits. That will – it is currently not reflected in our guidance. But at the same time, we view it as potential upside as we continued to manage costs in terms of what is in our control and how we are looking to change the structural dynamic of our company to buy it for margin expansion. So, on future calls, we will continue to update yourselves as well as investors on how we are executing that particular program. And on the digital side, if you look at Slide 7, and as you highlight on 2.0, we are highlighting where digital is hitting. And on the sales side, incremental sales and there is a few things that we would identify as a digital sale. The one that is very clear is when we start bringing our digital printing and actually put digital printing connected to our equipment and adding digital incremental sales to our automation. Digital also shows up as we work with our packaging and be able to actually put digital coding on our packaging, letting our customers be able to mark the products, as we have talked before about track and trace as we get our digital printing deployed around the world. But also the digital is our access to market, going with MySEE, we think we can actually increase our capability. And then the last piece is on the digital printing, especially as we have talked about, even with our fiber-based products that actually doing the printing with corrugated, fiberboard, pulling it into some of our other solutions. So, we think we have some growth opportunities there. So, that’s 1% incremental to what we are already doing in the model. But the second part is also in there that we are putting digital into the savings, as we are driving our operating engine. As we are creating our digital platform on MySEE, working more effectively and efficiently, some of our largest customers want to interact with us digitally, just like they have done in the COVID, whether it’s designing a product online, using our design studios, being fully Touchless from designing the product and actually sending those digital signals to our factories extreme, but not significant savings to our customers. So, it’s part of that engine of how we are going to convert those additional sales to a more efficient and effective operation. And it’s also connected to the Touchless piece that Emile’s team is just really doing some exciting stuff with our factories as driving Touchless automation. And the digital is a big piece of making all that happen. Okay. Operator, I think we have a chance or time for one more question. Thank you. One moment for our last question. Last question will come from the line of Larry De Maria from William Blair. Your line is open. Okay. Thank you and good morning. First, a clarification and a question, $275 million D&A versus run rate, it seems like a big jump. Can you just clarify what’s in there, why the jump? And then secondly, you highlighted 18% EPS growth CAGR over the prior 5 years. We just did an acquisition. We invested heavily in digital, driving automation. Are you only committing to over 10% growth? But it seems like the step up for the next 5 years is arguably better than it was in the prior 5 years. So, can you just talk to that and why it shouldn’t be better than over 10%? Sure, Larry. Let me address your kind of the D&A related question, and then we will get into the growth aspect. So first, as it just relates to the D&A, really, a reflection of the investments, incremental investments we have made in our business. As you know, we have increased pretty meaningfully the CapEx profile in our business. So, the jump in D&A is primarily driven by those investments in the amortization. Yes. Okay. So, I will take the second part, Larry. If you – if we look at our operating model slide, so exactly as you said, if you look at that backward slope of the last 5 years at 18%. And then you see the challenge we have in 2023 on EPS, as Chris has highlighted in the bridge, specifically the biggest one being the interest rates. And again, how do we pay down that debt as fast as possible. So, if you look at the slope of that curve from where it is in 23 to 27. It’s actually the 15% growth rate. But that target that we had out there is greater than 10%. Let’s continue to go beat what we say we are going to do. So, it actually the slope of that curve is higher than 10%, but we are also recognizing we took the dip in 2023 to get there. We think the model to your point, especially as we are adding higher margin as we continue to have margin expansion, we think beating that 10% EPS growth into 2027 is more than possible. I want to thank everyone for the entire call for today. We are in hope you feel the excitement, we are really excited about the opportunities what Liquibox brings to us and how it’s going to accelerate our growth to the future. And we look forward to speaking with all of you in May. Thank you everybody.

EarningCall_114

Good day, ladies and gentlemen, and welcome to Pixelworks, Inc.'s Fourth Quarter 2022 Earnings Conference Call. I will be your operator for today's call. At this time, all participants are in a listen only mode. Following management's prepared remarks, instructions will be given for the question-and-answer session. This conference call is being recorded for replay purposes. Thank you, Andrew. Good afternoon and thank you for joining today's call. With me on the call are Pixelworks' President and CEO, Todd DeBonis and Chief Financial Officer, Haley Aman. The purpose of today's conference call is to supplement the information provided in Pixelworks press release issued earlier today announcing the company's financial results for the fourth quarter of 2022. Before we begin, I'd like to remind you of various remarks we make on this call, including those about projected future financial results, economic and market trends and competitive position constitute forward-looking statements. These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to different materially. All forward-looking statements are based on the company's beliefs as of today, Thursday, February 09, 2023. The company undertakes no obligation to update any such statements to reflect events or circumstances occurring after today. Please refer to today's press release, our annual report on Form 10 K for the year ended December 31, 2021, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results. Additionally, the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms, including gross margin, operating expense, at loss, net loss per share. Non-GAAP measures exclude amortization of acquired intangible assets and stock-based compensation expense, as well as the tax effect of the non-GAAP adjustments and the impact of non-GAAP adjustments to redeemable non-controlling interests. The company uses these non-GAAP measures internally to assess operating performance. We believe these non-GAAP measures provide a meaningful perspective into core operating results and underlying cash flow dynamics. We caution investors to consider these measures in addition to and not as a substitute for not-superior truth company's consolidated financial results as presented in accordance with GAAP. Also note throughout the company's press release and management statements during this conference call, we refer to net loss attributable to Pixelworks, Inc. as simply net loss. For additional details and a reconciliation of GAAP to non-GAAP net loss and GAAP net loss to adjusted EBITDA please refer to the company's press release issued earlier today. Thank you, Brett, and good afternoon to those participating on the call. I'm pleased to be joining you today from a morning in Shanghai. I've recently been catching up with the team and our customers. Let me start with a few observations that I've made over the last two weeks here in China. First, with the rollback of China's strict COVID policies in mid-November, what many might not realize is that a majority of people here, including nearly all of the employees throughout China are employees, spent December at home with COVID and then recovering, making it a very weak month in terms of productivity. It wasn't until the turn of the calendar year that real normalization began and increased productivity in the return of the consumer engagement. And having personally witnessed the tailend of the recent Chinese Lunar New Year holiday, it is readily apparent that people are enthusiastic about getting back to normal, traveling locally and spending again. At a high level, these are encouraging and positive signs not only for our China-based employees and their families, but also for Pixelworks' overall business as well as the global macroeconomic environment. Turning to a recap of our financial results. For the fourth quarter, both top and bottom line were slightly lower than the midpoint of our guidance. Total revenue was up 2% year-over-year as our team continue to execute well in the face of growing macro and end markets market specific challenges. Looking at the full year, we delivered double-digit growth across each of our target end markets and total revenue growing 27% over the prior year, and this was following our annual growth of 35% in 2021. During what has been a challenging period for most of the semiconductor industry, this solid growth, combined with Pixelworks' history of technology leadership and visual processing, has served us well in the local private capital markets here in China. In late December, we completed the agreement to take in another strategic investment in our Shanghai subsidiary, which was fully closed and funded in early February. The latest capital investment, which was funded by two previous investors as well as Pixelworks' Shanghai employees, generated proceeds equivalent to approximately $15.7 million in exchange for just over 3% equity interest in the subsidiary. Recalling that some U.S. investors were skeptical when we announced the first private placement in Pixelworks' Shanghai in October of 2020, I would highlight that this third round of strategic investment valued the subsidiary at more than $500 million and today Pixelworks Inc. continues to hold a majority equity interest of approximately 78%. Collectively, these strategic investments are a testament to the recognized value of Pixelworks' technology in China, as well as the future growth opportunity of the business. These transactions have also served to fund our ongoing growth initiatives as well as properly capitalized Pixelworks Shanghai in advance of applying for a local listing later this year. Shifting to the end markets and starting with mobile. The industry-wide inventory correction in smartphones, coupled with softer consumer demand in China, continued to play out as expected, resulting in lower mobile revenue in the fourth quarter. As discussed on our last conference call, we've kept internal inventory of our visual processor ICs lean while reducing our channel inventory back to normal levels. For Pixelworks in Q4, the impact has largely a derivative of the current market dynamics with mobile OEMs slowing the pace of new smartphone launches, rescheduling various other models and cancelling certain programs as they've prioritized working down excess component inventory. Although the gap in OEM launches of next-gen smartphone models has temporarily paused our quarterly growth, our mobile business still had a very solid year in spite of the weaker overall smartphone market. For the full year mobile revenue was up 17% over 2021, which was up 200% over 2020, with our visual processing solutions incorporated in 20 newly launched smartphone models in 2022. Our mobile customers continue to include nearly all of the tier one handset OEMs and their affiliate premium brands in China. And despite taking a little longer than originally targeted, I'm confident we will announce models from the fourth tier one for our visual processor line-up in 2023. Underpinning or expanded penetration of these tier ones has been our commitment to maintaining a deep level of engagement with the customers and deliver uniquely differentiated visual performance as well as our ongoing strategic initiatives to cultivate a more collaborative mobile display ecosystem. As highlighted on previous calls, we've made multiple ground-breaking achievements over the last year in our efforts to champion a comprehensive and engaged ecosystem for mobile gaming. This included our first ever direct collaboration with multiple leading gaming engine platforms and design studios, which we expect to yield the release of a series of additional top mobile gains over the coming year that are specifically designed to support the rendering accelerator in our X7 visual processor. As the most recent example of our broader ecosystem efforts, in November, we announced an expanded collaboration with MediaTek to incorporate Pixelworks' visual processing Pro Software into their latest Dimensity 9200 9,200 5G smartphone chipset. This new cooperation specifically targeted the enabling of precision color and high frame rate displays, ensuring that smartphones built on the Dimensity 9200 platform are capable of delivering a true next-gen flagship gaming experience. This ongoing technical collaboration will serve to further improve the gaming experience and encourage broader market adoption of high frame rate mobile gaming models and the content. Briefly highlighting a few recent announced mobile wins. In late December, the HONOR 80 GT and iQOO Neo 7 Racing Edition smartphones were both launched incorporating Pixelworks' upgraded X5 Plus visual processor. Each of these phones are built on Qualcomm's, recently released Snapdragon 8+ Gen 1 mobile platform, and they support 120 Hertz refresh rate while leveraging Pixelworks' X5 series of our patented motion engine technology. HDR enhancement and multiple other dimensions of visual effect enhancement, all of which are tailored to provide a superior high frame rate gaming experience. In January, OnePlus launched its latest flagship smartphone, the OnePlus 11, incorporating Pixelworks' X7 visual processor. It's one of the first phones launched with our newest Generation X7 series. The OnePlus 11 redefines the meaning of visual excellence for mobile gaming. Built on the Snapdragon 8 Gen 2 mobile platform, this smartphone sports an eye-catching 6.7-inch 2K curve display, with the real LTPO 3.0 technology, while simultaneously supporting refresh rates of up to 120 hertz. Following the first of its kind in-depth collaboration with OnePlus on this flagship this smartphone leverages the core technologies in X7 chipset and features our new ultra low latency motion engine for high frame rate together with low power super resolution for simultaneous display in 2K resolution. Earlier this week, OnePlus followed up with the launch of the OnePlus ACE 2 smartphone, also incorporated an RX7 chipset. The OnePlus ACE 2 is built on a Snapdragon 8 plus Gen 1 mobile platform and comes with a 1.5 K amoled screen supporting refresh rates up to 120 hertz. This model similarly features our X7's new ultra low latency motion engine and low power super resolution, together with always on HDR and industry leading color calibration. Also noteworthy is that Pixelworks' ultra-low latency motion engine technology in both the OnePlus 11 and the OnePlus ACE 2 smartphones, have now been optimized for over a 100 of the most popular mobile gains. Turning to the latest developments of our true motion platform, following the release of light storm entertainment's Avatar in September, I can now confirm that Pixelworks' TrueCut motion grading was also utilized in James Cameron's newly released Avatar The Way of the Water. This long awaited sequel frequently referred to as Avatar 2 was distributed globally to theaters by 20th Century in 4K HDR high frame rate and uniquely shown in cinematic high frame rate. When I first looked, the film had surpassed gross box office sales of 2.1 billion, ranking it among the top five highest gross movies of all time in less than two months. Equally amazing. Whether they realize it or not is that tens of millions of people from around the world have now personally experienced TrueCut motion. Most importantly, this extremely successful and highly praised release prove that there is a global ecosystem in place capable of capable of supporting cinematic high frame rate paving. The way for expanded industry adoption as previously announced TrueCut motion will also be featured in the re-release of Titanic remastered in 4K HDR later this month. These three high profile titles have significantly heightened the interest and awareness of our TrueCut motion platform. We aim to continue building on the strong momentum in 2023 by assembling a critical mass of theatrical titles together by growing a global home entertainment ecosystem. Shifting to our projector, business demand remained relatively steady through the back half of the year with revenue in the fourth quarter increasing more than 13% year over year for the full year revenue was up 23% as projector customers placed significant orders in response to very tight supply environment. Generally speaking, projector OEMs have continued to see the GA gradual improvement in their supply chains. However, supply lead times and pricing on certain components have yet to fully normalize. Combined with two consecutive years of roughly 20% growth, the current consensus among these customers has been to moderate their orders and expectations entering 2023 until they have better visibility into the global macro trends and end market demand More specific to Pixelworks in the fourth quarter, I'm pleased to report that the team successfully completed a significant milestone on our co-development project with our largest projector customer. As a result of this milestone, we recognized an r and D credit reducing our OPEX for the quarter. All remaining activity associated with this co-development project remains on track and we currently expect this new SSC chip to be available for the production at the end of this year. Briefly following on my comments last quarter related to end of life, we implemented a group of legacy IC products we have historically sold in the very niche video delivery applications. As previously discussed, these applications typically require unique packaging and lower unit volumes, making them increasingly difficult to source materials for and supply efficiently. We received solid customer response on the last time purchase orders for the fourth quarter, which contributed to a sizable one-time increase in revenue. The EOL of these non-strategic products will lower the quarterly revenue contribution from video delivery going forward. However, it will also eliminate, eliminate operational inefficiencies and enable a more productive reallocation of our team and resources. Although going forward, we will address a relatively small legacy market in which we will continue to market and sell a selective series of our transcoder ICS for consumer applications in Japan and as well as OTA devices in the us. In summary, the team has done a good job of mitigating impacts of both the macro and industry specific headwinds over the past couple of quarters. Although we expect market conditions to remain challenging in the current quarter, the entire organization is now well capitalized to continue executing on our longer term strategic initiatives. This includes ongoing efforts to further expand the ecosystem in support of mobile gaming, including an aggressive visual processor roadmap and our TrueCut motion platform. While we continue to prepare our pixel work Shanghai subsidiary to apply for a star market listing, we believe we are well positioned for the market recovery and mobile and our currently seen channel inventories and design activities support this with a growing pipeline of design ends for our X7 visual processor. In addition, we are in target to introduce a new mobile visual processor in the second half of this year and sample our new projector SSC in Q2 of this year. Lastly, we also continue to field significant inbound interest in are evaluating multiple prospective strategic license agreement engagements that represent the potential for expanded growth opportunities spanning both our existing and new adjacent and markets taking all together. I firmly believe that we can achieve renewed momentum and resume our recent growth trajectory in the coming quarters of 2023. Thank you. Todd. Revenue for the fourth quarter of 2022 was $16.9 million. Our top line results in the quarter were primarily driven by continued year over year growth in the projector market combined with an increase in revenue contribution from video delivery related to increased sales of end of life products. The breakdown of revenue in the fourth quarter was as follows, revenue from mobile was approximately $3.6 million, representing 22% of total revenue in the fourth quarter. Revenue from projector was approximately 9.2 million. Video delivery revenue in the fourth quarter increased to approximately 4 million, reflecting the last time purchase orders for specific end of life products. Following the E O L in the fourth quarter, we anticipate lower quarterly revenue contribution from sales into the video delivery market. As such, beginning with the first quarter of 2023, the revenue breakout that I just provided will group revenue contributions from projector and video delivery into a single market category called home and enterprise non gap. Gross profit margin was 53.3% in the fourth quarter of 2022 compared to 49.8% in the third quarter of 2022 and compared to 55% in the fourth quarter of 2021, non-GAAP operating expenses were 10.8 million in the fourth quarter compared to $12.2 million last quarter and $11 million in the fourth quarter of 2021. As indicated on our previous conference call during the quarter, we completed the next milestone related to our co-development agreement and as a result we recognized a $2.5 million credit to R&D, which reduced our total operating expenses for the fourth quarter on a non-GAAP basis. Fourth quarter 2022 net loss was approximately $800,000 or a loss of $0.01 per share compared to a net loss of $3.2 million or a loss of $0.06 per share in the prior quarter, and a net loss of $1.4 million or a loss of $0.03 per share in the fourth quarter of 2021. Adjusted EBITDA for the fourth quarter of 2022 was a negative $1 million compared to a negative $2.1 million last quarter and a negative $1.1 million in the fourth quarter of 2021. Turning to the balance sheet, we ended the quarter with cash and cash equivalent of $56.8 million. I'd like to point out that the cash balance at quarter end does not include the proceeds from the most recent sale of equity interest in our Shanghai subsidiary, which we announced in late December. As Todd mentioned, we successfully closed this transaction after the end of the quarter and the proceeds will be included in the company's reported cash balance for the first quarter of 2023. Shifting to our current expectations and guidance for the first quarter of 2023, based on current order trends in backlog, we expect a weaker than normal first quarter. In addition to historical seasonality in the projector market, we are also expecting projector customers to continue to work through existing inventory in the first quarter. Also, as Todd mentioned, we expect the first quarter to reflect the trough of the inventory correction in the smartphone market. With that, we anticipate total revenue in the first quarter to be in a range of between $9 million and 11 million. We believe this quarter will be the low point for the year with revenue beginning to recover in the second quarter, followed by an anticipated return to year over year growth in the second half of the year. Non-GAAP gross profit margin in the first quarter is expected to be between 43% and 45%. This anticipated gross margin range reflects product mix and reduced absorption rate associated with lower revenue as unit sales of ICS and total revenue recover, we expect post margin to return to our targeted historical range in the low fifties. We expect operating expenses in the first quarter to range between $12.5 million and $13.5 million on a non-GAAP basis. As a reminder, operating expenses in the fourth quarter benefited from a $2.5 million milestone credit to R&D related to our co-development project. Excluding this credit anticipated first quarter operating expenses at the midpoint would be approximately flat to down compared to the fourth quarter. Lastly, we expect first quarter non-GAAP EPS to range between a loss of $0.18 per share and a loss of $0.14 per share. That completes our prepared remarks and we look forward to taking your questions. Yes, thank you for taking my questions. I appreciate it. Just wondering, in terms of the commentary on the Chinese smartphone, you're indicating that it will bottom in in Q1. I'm just wondering if you could maybe elaborate a little bit further in terms of where the channel inventory is right now. You talked about kind of growth in the second quarter. Is this based on kind of feedback you're getting from customers? Are they starting to plan for that? Just any issues on the - any questions on the mobile China segment? So, I think there’s - you're getting all kinds of feedback, Raji, from all different companies that are exposed like we are. In our particular case, we [indiscernible] lean. So then the next thing is to keep an eye on the channel inventories. Our channel inventories peaked in Q3 for mobile. And they came down reasonably well in Q4, but part of that was a down revenue quarter for mobile in Q4. We will see another down quarter in Q1. But as of today, our mobile inventories are either back to normal levels or I would suggest given the ramp we're going to see in the back half of the year, they're lean. Now, the customer inventory levels, I would say is a mixed bag. I have one customer that overbought the older processor, you'll see more phone launches from them out of the older processor as they digest that inventory, but they're sitting on that inventory, right? They're working through that inventory. They'll probably - that customer will probably get through that inventory Q2 into early Q3. But the rest of the customers I would say are at normal inventory levels today. And if they are leaning on our new processor, they don't have inventory, we're ramping those inventories. So, for example, OnePlus, you've already seen some models come out of them. You'll probably see more models come out of them. They're all X7-related. They were not sitting on inventory of X7, right? So if you put the whole thing together, our mobile inventories I would suggest are back to normal or below normal. And so the growth going forward, Q2, Q3, Q4 will purely depend on how successful we are with new phone launches and then the volume of those phone launches. And probably to give you one more layer of granularity there, in the first two weeks, so these two OnePlus launches have been well received. They have upticked their forecast from us in the first two weeks. I appreciate all that color, Todd. Thank you. Just staying on the topic of China, if I can, what's been the feedback in terms of the customer forecast? I know you mentioned the OnePlus kind of upticking their forecast. When you kind of look at the China handset customers as they - and I appreciate somewhere kind of, it's a mixed bag. But in general, when they're looking at their forecast for 2023 and then maybe even 2024, is there a conservative kind of rebuild that's being kind of felt in their forecast or because they're going to be more cautious of what happened last year? Or how do you think about that? So their hard forecasts and their ordering patterns are cautious. My personal expectation is too cautious. I think they're going to get bit on the upside of demand in the back half of the year. And it’s interesting. And then you talked a little bit about anecdotally kind of what you're seeing in China. I guess how would you describe, from your vantage point, the Chinese economy and the China consumer based on your conversations with folks there and talking to the employees as well? Is there an expectation that there's going to be more of a reopening and things are going to get back to normal relatively soon? Or is there still kind of caution there? Once again, ladies and gentlemen, please standby. Your conference will resume momentarily. [Operator instructions] Okay. Todd, I see you’re now connected. Please continue and Rajiv is still on. Okay. So I don't know where I dropped off. I think I dropped off somewhere I was talking about that they -- phone OEM customers had to do abnormal behavior, which is digest older technology inventory. And I think their end markets were soft. So this caused them to be cautious. Their hard forecasts and their ordering pattern is still cautious, right? I mean, in my particular case, these phones, they're upticking, but I would say in general, they're still cautious. The dialogue though, I can see them warming up, and it really has been they're trying to gauge it collectively all four tier one OEMs. So I would suggest some are more exposed to the international markets than others, but collectively, 70% of their volume comes to China. And so it's the main driver for them, and it's the main driver for their sentiment. And, if you just walk around, it is busy. People are not, I would - I figured they would be shell shot from what they went through for the last 12 months. They are not, they're just -- they're ready to get out and they're ready to resume their lives. And I think you'll start to see some the consumer come back. I think they'll be cautious. And I think that the sup, the phone OEMs are sort of warming up to that. I've talked to three of the four tier ones already in the first two weeks I've been here they, two of them are bullish. One of them is sanguine, right? It's mixed color. I think it's going to change what, I think what they're worried about is that they're seeing a near term uptick in business. They don't know if it's sustainable, but they don't know. In terms of the, the inventory of components that the Chinese handset customers are holding, do you think we're at bare bone levels? Is there any way to kind of quantify that relative to history? Well, like I said, different vendors, different situation, right? I've also met with, I have many friends in the industry over here that, that represent other suppliers into the, the supply chain for mobile phones. And, I had dinner with a gentleman two nights ago and, and he, he represents a large supplier into the market and their channel inventories are still at six to eight months and their customer inventories are at another six months. And so in that particular, in that particular supplier's situation, I would call normal four months of customer inventory, maybe three months of customer inventory, depending if you're ramping or not and 45 days of channel inventory. So, they're a long ways from normal. Appreciate all the color using those same -- using those same numbers. I would say our channel inventory is normal in aggregate, our customer inventory is still a little bloated, which is why we have the Q1 forecast. But, the question for us is, is how much does it bounce back in Q2? If I look at the long term program, so there's the short term, what is the market telling us? It, it's cautiously optimistic. And then in Pixelworks is, okay, is your strategic initiative to be adopted by more customers and then have those customers widen the exposure of the use of your visual processor and reinforce that use of your visual processor by having the ecosystem come in and support your features. If I look at the back half of the year, our strategy is absolutely intact. We will expand our customers and expand the models within the customers, and we will announce ecosystem partners that previously had not supported our solution. So in our case, I'm, I'm bullish for the back half of the year if the market comes back to normalize, I'm really bullish. Hi Todd. So maybe this question's a little hard, but Todd, do you have any idea how far out the unit crossover is for X7 just to get an idea of how that would ramp up or are there too many moving parts in that question to be able to answer that? Yes. Now, you got to remember, I think collectively we shipped last year all processors, which we're predominantly X5, X6, and in the ramp up of X7, between nine and 10 million units, something like this. We had customers telling, at the beginning of last year, telling us they were going to consume way more than that. That was capacity limited. Okay. Of course coming into the back half of the year, some of those customers were not so bullish and they were -- they overbought, we held them accountable for their aggressive purchases. So those are the customer, there's some of those customers, one of them in particular that's sitting on some, they're burning through X5, right. But as far as, and we still have some customers putting X5 in new programs, it's not like it's debt, it's just because it's at a different cost point than X7. And, but I would say on an ongoing basis, we've already crossed that point and there's some people talking if as we expand the models within the customers, we've already announced they usually start at flagship premium with us. And so there's only so many flagship premium models. So that means to expand, sometimes you have to push down into mid-market to lower premium. And in those models they're very price sensitive. Right. So you could see an uptick if we're very successful there, you see an uptick in X5 volume. I don't think it will cross back, but it could. Okay. Sounds like a lot of X5s already shipped in and the customer's going to absorb it. And is the pricing on X7 Todd still abruptly two X5? Is that what do you think about it? I wouldn't say quite 2X. I would say, I would say we've been aggressive, but it's significantly higher it's between, 50% and 80% higher than okay X5. Great. And my last question's on licensing, you talked about in the prepared marks licensing opportunity, you weren't specific there. I'm wondering if that was reference to TrueCut or whether there other core video licensing opportunities or projector somehow. And if TrueCut, I'm sorry, go ahead. Sorry. Cut you off. If it's okay if it's true. Cut. If it's the pipeline there is coming in with the, the movie success and so forth to formalize sort of revenue opportunity there. Yep. Okay. So, to make sure we clear that up for everybody on the call that was not a reference to TrueCut. Our business model is to it's a service support and licensing model for the content creators so that they can use our technology to create 4K HDR high frame rate cinematic content. With that engagement, they have the rights to distribute that content for theatrical releases. So there's no further licensing for theatrical releases beyond the initial engagement. But they don't have the right to distribute for home entertainment, that high frame rate content that they use TrueCut motion with. So the business model is the distributors, whether they be streaming companies, etcetera, have to support the TrueCut motion ecosystem and have the rights to distribute high frame rate, TrueCut motion, high frame rate content, and the device manufacturers would have to have the rights to display TrueCut motion content. What I was referring there from the previous statement was it had nothing to do with TrueCut, but I wanted to take the opportunity to make sure everybody understood the business model with TrueCut. Because I think I've seen a lot of questioning on people where people don't understand the business model. Well, that's the business model I just explained. I've asked all the analysts to not model revenue from TrueCut right now. Now we clearly are getting some revenue, I just don't want to model it because until we really gain major support from a large distributors streaming companies you're just looking at theatrical releases, which is not a big revenue. If it gets to the point where it's material, then I'll have you guys start to model it. Once we have a signed on distributor, the device OEMs are very excited about adding TrueCut motion to their devices and using high frame rate content to illustrate their newest devices, whether they be TVs, phones, other visual devices, especially devices that can, that can show 3D content. So I just didn't, I just don't want you guys to model it until we get a little bit further ahead with the distribution part of that ecosystem. Once that happens, we're going to have to model it. We'll have to talk about it a lot more. But that said, what I was referring to in the prepared remarks was we have been approached by several companies now that, that it is clear to me this distributed architecture approach for mobile gaming in China is here to stay at least for the foreseeable future. And there are people working on silicon solutions to address that market. And now they want they've engaged with us to see if we would support them with the licensing of our rendering accelerator radar architecture. We are not in the IP business, but if, depending on who it is, and if it supports our overall strategy to get more devices in the market, because the more devices in the market that support this, the more that the gaming ecosystem that enter the studios are willing to optimize their games to work with the hardware. It's a virtuous cycle. And so if we could license our technology to somebody that I, that there's two things. One does it I don't want to take the air out of our market momentum, but two, if it's additive without taking the air of the market momentum, it may make a lot of sense for us, not just from a financial standpoint of the licensing, but putting more devices out there in the long term, the more devices we have out there. That's the number one thing we talked to with the content people. How many phones is your processor going to be on today, tomorrow, next year, the following year, et cetera. The bigger those numbers are, the, the more they want to support us. Hi Todd, Haley. Thanks for taking my questions and good morning to you Todd. Let's see here. I want to make sure I heard some of your language here specifically on how to think about the second half of the year. I think you said the first quarter is the bottom of growing in the second quarter, and did I hear you correctly that you're expecting year and year growth in the second half of the year? And is, and so does that mean each quarter or just collectively in the second half? So we expect for sure year over year growth for the mobile business. I'm still, projector. I think you'll see a dip in q1, but it'll come back in the back half. Does it come back to the point where it shows strong year over year growth? I think that's yet to be seen. And then, with video delivery, because we did this big end of life in the second half of this year, you won't see year over year growth and video delivery. Okay. Now, if the mobile year over year growth is strong enough, you'll see corporate year over year growth in the second half. Okay. So that comment wasn't across the entire company, it's across specific segments. I just want to be clear. Yes, I think I made the growth comment specifically. I Hay Haley mentioned that we expect growth in the back half of the year, which is I think the mobile gonna be strong enough exiting the year that you'll see corporate year-over-year growth. Okay, that's helpful. So how do we how do you think the distribution of mobile revenues as we get through the, into the second half of the year, how do, how do you think this progresses? You've talked specifically and hopefully I collect your comments correctly about, sorry, I'm scrolling up on my notes. Expect to yield a series of top mobile games in the next tier supporting our rendering accelerator in next seven. How do we think is this, is this entirely driven by gaming and how broad are we expecting the uptake here by all the tier one targets you have in China? I would say it's not entirely driven by gaming. So, one of the things right now that we're doing is many, many of the models we win, some of the OEMs will go out and market that model globally, but they will have a different skew for China than they do internationally. We are gaming, mobile gaming is, if you really go look at how these guys are marketing their premium and flagship phones, they're trying to market the, the new utility that their new phones will give you and why you should spend money and upgrade your phone. And in China, mobile gaming is either the key utilities that they're trying to bring you, depending on the model and the demographic targeting or the second biggest feature they're targeting, which the first would be camera and internationally. And then, consuming social and video content, which we also improve is further down on the list as far as what you utility they bring you. What we're trying to get these China mobile OEMs to do is take this expertise and differentiation that they've built into their China models, which is unique and market it internationally because that's what differentiates them in many of these international markets because, who they butt up against in the international markets, and I'm talking about Android, they butt up against Samsung. So this gives all of those four tier ones a significant differentiation advantage, and not just because of us, but because this is where mobile gaming content is king. And so if they have optimized content and our visual processor in their models, many of those studios that I just, that I'm mentioning, so with Genson impact, Tencent with many of their games, net East by Dance has multiple studios developing games. Many of those game manufacturers giving what's going on here in China are putting a great deal of effort to market their gaming content internationally. So we are trying to convince the mobile OEMs to start to do that. So that's, that's another, it's not just getting into models, but then let's convincing them to get into the international models. Now the reason, reason I bring all that up, Suji is you said, is that just mobile gaming? One of the things that they, they, that they clearly recognize is the internationally the consumption of quality video content is higher on the rank than in China. And so they ask us to provide improvements for consuming video long form video content on their phone. And one of the features we put in X7 we haven't highlighted a lot, is we have a way to do a cinematic high frame rate conversion on the phone. This is not TrueCut motion. Okay. TrueCut motion converts the content and makes it high frame rate content at the source. But what we do is have a feature to do cinematic high frame rate content conversion on the phone. And so we are pushing that and specifically to expand into more international models here in China. But yes, with all that said, the reason we're really gaining momentum is mobile gaming, the ecosystem for mobile gaming, the performance of using our processor with that ecosystem in mobile gaming targeting the Chinese consumer. Okay. So would it be fair to conclude from what you just said here that you think the biggest single factor and upside potential for your mobile business second happen going forward? Is international introduction of your X7 naval phones or is it some other single factor that you think is more important? Well, there's, there's two. There's two. So if we gain a fourth tier one, that's an uptick in market for us. So if you see us announce with the one tier one we haven't announced yet, then that's an uptick. Second, if we can expand all the customers from just targeting their, what they call their domestic models, their China specific models to expanding to their international model, you get to leverage the R&D work that's already done on that model, and you just get higher, higher volume from the same r and d work. And then three, we are talking with customers to expand to higher volume, lower priced models, the gaming functionality and features, their customers are pushing them and demanding it. We've had customers come to us and say, we get a great deal of feedback and they want to know why we don't have the display processor technology on this particular model, which is usually a lower end model. And so there are companies that are exploring whether they can put it on these, these higher volume models, but of course their first approach is to come in and want me to sell it for cost and our answer is no. So those are the three ways, right? Expand the customers, one, expand the international models with the same target targets we're doing two, and then expand the, the model line-up within the existing customers. Three. Okay. And to that last point there, Todd would this, these lower price models, would you expect any of them be doing it with X7 or would that be mostly X5 or even older opportunity, Different discussions with different OEMs, they're going to lean on the cost. They're very cost driven. So I would, if I was a betting person, I would say that some of these higher volumes, they're gonna try to go to the lowest cost technology we have. But at the same time we make such, the actual visual improvement that you can see between X5 and X7 is palatable. It's noticeable. And if you look at our roadmap, which we haven't announced yet, but the, some of the tier one customers have seen it, going to see another fundamental leap forward by 2024 ASPs will go up, not because we're just trying to extract more value, but to make these fundamental leaps in performance, we have to be more aggressive on how we do the technology, which twofold, one, we're putting more transistors down, and two, we're moving to lower process nodes, which are more expensive. Fair enough. That's great perspective, Todd. The last quick question for me I haven't heard anything, any direct statement here about how you feel like the engagement with TrueCut is going with potential streaming partners here. But I guess, and we're not close enough to have any sort of big announcement, maybe you just characterize the, the progress in the last quarter any feedback you've gotten from Avatar two and potential other releases, and then how do we think about these other theatrical releases you're looking for this year? So, we've had discussions with major distributors about high frame rate technology. We continue to have those discussions. They are bullish by the way, but they want to kick it off. They want more content. Now they're actually even helping us by making introductions to, to studios that they rely on for content. So they're I would say that our streaming discussions are a positive thing, but to get it to the point where they're ready to go out and really, so once they announce it, what do they have to do? They have to market it and they have to go communicate to all their streaming customers the value proposition of TrueCut Motion. And so they want to be sure that when they go spend all that energy and money, that they got enough content to follow through with the value proposition. So with that said anytime they extend help to us, we take it. We were already spending a lot of time trying to cultivate more theatrical content because more theatrical content becomes a pool of content for distribution to home entertainment and I would say that the release of Way of the Water put all of our technology put high frame rate 3D out in thousands of theaters globally with there's some people that review it and don't like it, but they're minor. They're very small group of people. The grand majority of the people love the immersive effects that high frame rate 3D brought with that movie. They love the technology, they love the movie, which is a story and how it was delivered. And James Cameron did a great job, but they also love the technology used to help deliver that story. And that clearly has helped us be credible in trying to expand the use of that technology and get more people to bring out high frame rate theatrical content. But that's all a work in progress. So no announcements to be made. A lot of work to be done. Okay. Well as always, Todd, I appreciate all the detail. I am all done. Thank you. Thank you, Richard. Well it was a longer call today than I expected. I'm here for another couple of weeks. It's interesting times over here. And then we get to see how the rest of the year unfolds. But I would say in general, I am more positive today than I was two weeks ago when I arrived. So, but that said everybody enjoy the evening. Thank you.

EarningCall_115

Hello, and welcome to Aperam Q4 Results Call. My name is Prisla, and I will be your coordinator for today's event. Please note, this call is being recorded, and your line will be on listen-only, however you will have the opportunity to ask questions at the end during the Q&A session. [Operator Instructions] I will now hand you over to your host, Mr. Tim Di Maulo, the CEO, to begin today's conference. Thank you. Hello. Good afternoon, and welcome to Aperam’s Q4 conference call. I'm sure that you all have listened to our management podcast for the quarter. And we are well aware of how we see the state of Aperam business and the overall industry. If you still have work to do the podcast remains available on Aperam website in the Investors section for your reference. And as usual, we can start with the Q&A and we have -- I will be a bit to answer to you. Thank you, Mr. Tim. [Operator Instructions] We'll take our first question from Tristan Gresser from Exane BNP Paribas. Please go ahead, sir. Your line is open. Yes. Hi, just two questions, please from my side. The first one on the guidance, so you referred to a normal Q1 EBITDA. Is it fair to look at the legacy business at around maybe EUR120 on average with stainless & electrical, as always, et cetera, for Q1 and then add on top of that, the recycling contribution? And also could you remind us what you consider to be the recycling business normal, kind of, earning power. I think, I remember ELG was around EUR55 million on an annual basis, but not sure about Bioenergia recycle. Thank you. Okay. Thank you. So when we are refer in guidance that to an increase, we are referring to Q1 versus Q4. So an increase is always something which has a certain relevance. And it will be, let's say, in line with the result of previous acquisition of ELG, of course. But Bioenergia was already in the scope, so you have not to count, double count the Bioenergia, because it was already in the scope. So it's clear that there are two elements that play on that. There will be less negative inventory impact. There is a lower cost of inflation and energy, which have been particularly strong in Q4. On the same time, we cannot rise the volume as a normal, let's say, Q1 for two reason, but one is the normal seasonal effect of Brazil, so this happens every year. The second one is that we have a long standstill for DoD, so this will be a very long one for which we are, let's say, we have anticipate to Q1 something that could have normally been done later. To take maximum profit of the fact that we see the market still in the face of destocking. But of course, this will imply at least the two things: One is more than normal average inventories, and second, that to the Europe volumes will not be at their maximum in Q1. Okay, that's helpful. So normal legacy business and then the recycling business, but not the Bioenergia and recycle that we're here prior. The second one, please, this time on the working capital guidance, I think in the slides you referred to less net working capital release in Q1, but still release. But am I having a hard time reconciling it with the net debt being stable in Q1? Aside from the dividend, the taxes and the EBITDA guidance, any other elements, maybe cash elements that we need to be aware in Q1? Thank you. Hi, Tristan. Sud here, thanks for that question. So let me take that question of, so to answer the first part of the question, right? So when we say less net working capital release, this is compared to what we've done in the past, right? So there's two reasons for that: One is the fact that we've stated extensively in our podcast that we have moved up first phase of our significant retooling of our asset in Genk. As a result, we started building inventories in Q4 and we'll continue to do it in Q1, so this happens in Q2. So that is one effect, which is the inventory buildup for the shutdown, right? So this is something that you have to keep in mind. And the other one is the fact that nickel prices for example, continue to be still high and while some other prices have come down, raw material prices still are at a stable high level. As a result, if there is any sizable reduction in volumes also or any small reduction in volumes also it's going to be compensated by the price effect as it looks right now, okay? Now that's the reason we mentioned in our guidance also, nickel price will play a role going forward towards the end of the quarter how that looks, okay? That's the first part. The second part of the question, any other items you have to keep in mind for the cash guidance for Q1? And I guess this is something which you may have noticed in our Q4. There is a larger than normal other cash flow items effect, which is usually double the size of what we show. And this about EUR90 million, right? Of this EUR90 million Q4 effect, slightly more than half, I would say around 50% to 60% of that should revert back in the first half of the year. It comes specifically from a lot of small items, but primarily because of a factor that in Q4, we actually were started purchasing raw materials and building up inventory in preparing for all these major shutdowns we've had for 2023. And there is a significant VAT payable component, which typically in Q4 increases, because the shipments are low and we purchased in preparation for Q1. But this time that effect has been extra magnified, because of the high price of raw materials number one. But also because of the fact that we have built this extra inventory to prepare for the shutdowns coming in Q2. So that's the reason you say that. So that's something which you should factor in going forward. But again, to be very clear and give you a clear guidance on that, not in Q1, but coming back in Q2. Is that clear? Yes. So 50%, 60% of the EUR90 million to be revert back positively in H1, if I understood correctly. But then maybe on the first part, so do you expect to build in working capital? Thank you. We'll move on to our next participant, Dominic OKane from J.P Morgan. Please go ahead, sir. Your line is open. Hello, just a question on the derivatives and specifically the nickel hedging. Could you maybe just give us some details of how to think about, how the book looks, the duration and kind of price exposure? And obviously, maybe same question for FX, given FX moves have been quite volatile in the last couple of months? So I think firstly, let me split out and say that after EUR90 million I mentioned about 10% of it is from realized derivatives, and it's a timing effect and it's going to come back again over the next quarters, okay? So just to kind of -- to connect it back just in terms of cash flow. In terms of EBITDA, when you're looking at that large number, of that number 80% of that effect is from unrealized derivatives just based on the MTM value on 31st of December, right? Considering the MTM value on the 30th of September, if you look at it, there was a significant jump close to 30% to 40%, 40% jump in nickel price and that's the part, right? And the remaining part, you can consider it as coming from derivatives, almost 50% from realized FX and 50% from unrealized FX. Now you have to keep in mind FX derivatives are to match our foreign exchange sales. So the revenues have been realized already. So it's always been there and it's just visible now in the ETR or in the EBITDA line items P&L just because of the significant jumps you've seen, right? So and unrealized part is again the MTM of the unrealized derivatives we carry. And the structure of the nickel derivatives and FX derivatives, I can tell you, follows the same structure of our sales contracts, which we've given in the past and that's how we settle these derivatives going forward. Thank you. We'll move on to our next participant Patrick Mann from Bank of America. Please go ahead, sir. Your line is open. Good day. Thanks for the call. Two questions, one is just on leadership journey. So I mean, we've got to the run rate pretty much of, I think, there's only EUR28 million left to go of [Indiscernible], which is only meant to end of next year. So how should we think about it? Is it going to be just a EUR28 million improvement for 2023? Or is the possibility that either you exceed your targets or you bring forward Phase 5. So just how should we think about that and where you are in the Stage 4 -- Phase 4? That's the first question. Yes, I'll wait to ask the second question after. So first, Patrick, I know since you've been following us for a long time. You know that we structure our leadership journeys on a three-year rhythm. And we would like to stick to that rhythm, right? What we have already done is that the investments for Phase 5, we've started announced in 2021 already to bring them forward. What we have not yet announced and we will do that in due course towards the end of the year is the fact how our Phase 5 is going to look like. But our Phase 5 investments, the details have been given to you. And typically, we set a benchmark of at least 15% IRR on our projects. So that should give you a view on the investments we have announced in our Capital Markets Days, we've gone ahead and actually given out the CapEx sums for each of the divisions for this space. And you should be able to give a ballpark figure. So we are designing Phase 5 knowing the fact that we are transforming Aperam and what we have communicated is a EUR300 million program until end of 2025. So this will be a majority chunk of getting how do we get to Phase 5, okay? And on your question on the mathematics of there is only EUR28 million left, there's two parts to the discussion. One, on a practical basis, the program was designed thinking about the fact that 2023 is going to be a year of a lot of investment standstills. And now that the market is also down. We have pulled for some of these investments. So on a run rate basis, yes, our focus will be to sustain the gains, which we have made in the last couple of years and get the EUR28 million. But if you are going to ask me, are we going to stop saving when we reach EUR28 million, you know the answer from our track record, we will continue doing that. No, good. Thanks a lot, Sud. The second question, I wanted to ask about this Econick, botanical investment in your ventures fund. So I mean in the podcast you said it could actually end up being quite a material contributor to your primary nickel. But obviously, it looks like it's that pilot plant stage or when do you think you'll have an idea of whether or not this is kind of work and it's going to contribute meaningfully? Is it what we know in five years' time or is this what we know in a year's time? How should we think about the time frames of whether this payables? So we are very excited about this, because we have proven the technology. So the technology is proven. Now it is bringing this technology at a larger scale, and so what we have announced here is after that we have already invested in launching industrial scale pilots in a few countries. And so we are now, let's say, in a period of a couple of years in which we will ramp up this pilot in -- at industrial scale. And then the deployment will come after we have all the learnings at what is the management of this, kind of, project on larger scale, okay? So you can imagine that there are a few things that have to be fine-tuned, especially in terms of the management of the season of the different kind of ground et cetera. But I'm very confident that in -- with this ramp up, we will be starting from the three years from now. Having something which is relevant that can be eventually reported, we will see later. With knowing that what -- of what we are sure is that this kind of nickel will be in -- among the best in term of competitiveness and will be the only one with the scrap to be at zero carbon impact, because you understand it's coming from biomass from the company. Biomass will be used also to produce green electricity for the local community. Yes. You have understood that. We are really serious in invest in the circular economy and in a greener and greener production of stainless steel. We have invested more than EUR500 million in the scrap collection. We have invested in the forest. We have launched recently the purchase of new 50,000 hectares of forest in Brazil, which we will add on top of the actual ones. So we are investing in that. We are serious and this technology has let's say, a serious future and we have invested is years that we are collaborating with this university to fine-tune the process and now that the process is finalized. We are launching the -- at industrial scale. Yes. Good afternoon, so the first question on the guidance for Q1, is it fair to assume that leaving aside positive inventory valuation, EBITDA will be down in Q1 versus Q4, given that we still have quite muted volumes. And at the same time lower pricing and higher costs? So that's my first question. You know, you have to maximize, Sud here. So Maxime, you have to just keep in mind the fast of inventory valuation will also depend basically. And I don't know if your model has taken the account of the fact that shipments been depressed in Q4. So some of the negative valuation as long as you take time to ship material longer than, you know, we have had second half of the year in which pretty much all producers have experienced due to the destocking in Europe reduction in shipments, right? So this effect will move into Q1. And if this moves into Q1, the inventory valuation effect, which you are expecting is going to be subdued and not as high. So I can tell you just on an underlying basis without the inventory valuation. If we look at it, between Q4 and Q1, there will be a slight reduction, but not to the magnitude you're expecting. Okay, okay. And then I have a more general question about hedging, about nickel hedging, because basically why you still need to hedge your LME nickel, because my understanding is that [Indiscernible] is more or less not correlated from the nickel price on LME. And this is one you're buying actually. And perhaps related to that, are you still able to [pass from] (ph) higher cost for nickel in your selling prices, I mean, the work, I mean, does the mechanism of alloys surcharge still work now a days. I mean, on your activity both in Europe and in Brazil? See the first thing is that as put forth in our risk management policy, we do have hedges on a certain portion of our inventory, right? Because based on nickel price, as it goes down, we use these hedges to manage the risk of inventory valuation on our inventory, okay, number one. Number two is that we don't care if it's surcharge pricing or fixed pricing, it is an artificial construct. When you look at the total value, we always say that we pass the price of nickel. Imagine when LME nickel went to EUR48,000 in March of 2022, even then prices went up to even EUR6,000 per tonne in Europe, okay? So this is something that you have to keep in mind that there is a pass through. Now the pass through may again depend on the demand cycle, but fundamentally for us, the pass through is still there. Okay. Okay. Thank you. That's helpful. And perhaps the last question on Brazil. So you're quite confident that the new duties imposed on the Indonesian imports will benefit your position? So is it possible to have some ideas about the market share so far of the Indonesian production in Brazil? And what will be now the price differential between Brazilian and Indonesian production as the duties have been introduced? So fundamentally, Indonesia, as you know, when has no duty is the price sector in the world, okay, directly or sometimes with the margin with some, let's say, special circuit. So this duty, which is around 19% adds to the import duty, which we have already in Brazil for all the goods which are imported, which is 11.6%. So you have something like we have a new protection, which reached now 30%, which we consider something extremely important to avoid that the price sector in Brazil being Indonesia, which was the most aggressive policy in the world. So it is something relevant. The -- you can let's say immediately say that from -- for the same kind of price that Indonesia do usually, there is a 19% difference and you can calculate. Thank you. We'll move on to our next participant, Sandeep Peety from Morgan Stanley. Please go ahead, sir. Your line is open. Thank you, operator. Good morning. I have two questions. Firstly, the company has built in total EUR800 million in net working capital during 2021 and 2022? I understand that net working capital will be flat during 1Q? But can you give us some indication for the full-year? And are you expecting this build to be at least partially released during the year? So first things, thanks, Sandeep. First thing, in terms of the EUR800 million accounting, I hope you're doing it on the same scope without ESG, right? So of that EUR800 million there is two factors you have to keep in mind. One is the fact that which we have shown as a clear chart in Q3, and I can ask you to refer back at that chart in our investor presentation. Is -- there is a significant price effect in it. There is no structural volume effect in this EUR800 million build until when you talk about the end of H1 2022. And since then, we started releasing net working capital, right? So the second fact you have to keep in mind is that since you are taking 2021 start, which we also rightfully do to run our company. It starts with the COVID end use 2020, where there was a significant release in working capital, because I just give you the number, there was a 19% reduction in activity during the COVID year. As a result, we had reduced inventory below normal levels by the same amount. This is the reason in the 2020 year we could already return EUR340 million of cash -- sorry, EUR190 of cash, okay? So these two things you have to keep in mind. So there is a normalization to regular working levels inventory in a regular business year, plus enormous price effect. So that is the explanation for your EUR800 million build up and the bridges there clearly, which we have shown The second part you have to keep in mind is that we have announced a set of transformations. And for this year, I just -- in the beginning of the question, I was answering, Tristan and I said that you can expect close to around EUR40 million release during the year from the buildup. And this is something which I have already mentioned in the beginning of the year. However, this year will be a year where we build inventory in one quarter and release it in the next quarter as we do all these transformation projects through our plan to go to EUR300 million EBITDA plus in 2025. Does that give you some color? No, perfect. And after releasing this EUR40 million, are you then comfortable with the inventory and accounts receivable and payable? Does it go back to levels? Sandeep, again, just to give you an example, December 2022 to Jan ‘21, nickel has gone up 81%, ferrochrome has gone up 27%, electricity has gone up 112%, natural gas has gone up 290% and then you go to the smaller particles like very ferro silicon, molybdenum, everything what we pass through. And if you look at this, these are price effects and we have said that as soon as the price effects come down will automatically release no structural changes needed on our parts. So it completely depends on the price from a digital device. Thank you. We'll move on to our next participant, Bastian Synagowitz from Deutsche Bank. Please go ahead. Your line is open. Yes. Hi, good afternoon, all. I've got a couple of questions. Can I please follow-up on the stillstand, which you plan for the new AOD in Genk? What will be the EBITDA impact, which should take to that in the first quarter, I presume there will one -- will be one, will that be also dragging into the second quarter? That is my first question. So we don't show this as an impact on EBITDA, whether you have to take in mind that this kind of standstill are very important, because it is something like six weeks of the melt shop stoppage that we have and that we will have to do the second one during the maintenance time in summer, which will be then at the beginning of the ramp up for September. We have prepared the company with inventories, and so as it is the upstream, so you have seen and this is the question of everybody why our inventory has been higher-than-normal in -- at the end of Q4 and higher-than-normal in Q1. It is exactly because we needed to prepare for the upstream, it is a long distance still, which has an impact. So this impact is -- by the way, it is a good moment, because in fact, we have processed also for relatively low cost of the energy, which has been in a trough during the last, let's say, the last weeks. A relatively good price of the raw material, compared to what we have seen in the past. So it is -- has been a good moment. But there is an impact on the net working capital. Thanks for clarifying, Tim. Maybe just to follow-up, but I guess given the magnitude, I presume, there's still like a certain OpEx effect on EBITDA as well. You've been talking about working capital. But I'm sure there must be something on the earnings side as well. Is that at least set to assume even though if you don't quantify it pretty long? No. But -- so the question is always, Bastian, on -- this is a project which we have announced as part of our transformation to 2025. So this is a CapEx project and when we announced, we said it is going to improve the mix. It is not a maintenance project. It is transforming the AOD footprint in Genk to produce higher value products to connect it to the downstream. If you remember the discussion on how we will produce our downstream entity in France and Gueugnon to make not just one type of commodity, but three types of products. This is a transformation on the upstream side to our company with that to improve our mix. It's not capacity addition. So as a result, it is not maintenance, okay, they might be negligible in the scale of quarter’s results, FX on OpEx, but it is not -- it is a CapEx project and it's in the CapEx guidance we have given you. And always with the return, because this project is in line with the leadership journey. So there will be important economy of scale, for example, in closing an older converter that we have already -- we are already using with a much less efficiency cost of consumable, cost of energy, et cetera. So there is a high level of savings in term of energy, because we are putting the last technology to cogenerate and reduce the impact of the energy. So it will -- the efficiency will be excellent and a part of our leadership journey. But this will come when it will be fully ramp up. From the moment, we cannot disclose this is part of the normal leadership Journey. Yes. No, thanks for that. I'm clear on what you're aiming to do there. I guess just when you take out an asset on the upstream side with a lot of fixed costs, for six weeks, one would have expected that there is certain cost impact and that is what I was asked, but seems like there is going to be at least not a significant from what you're telling us. I understand what you say. So indeed, when you do in your logic. There is a lower production due to that. And so in fixed cost, there is a clear negative impact for this. There is a disruption of the flow, et cetera. So we have to spend, we don't quantify externally. We know carefully the figures. We know quantify externally the impact, but there is an impact linked to that. You're right. Yes. Okay, okay. Cool, we're waiting for it. We're going to see it in the second quarter, I presume then. Then over to my next question, which is on your electrical steel project in Brazil. Can you maybe certainly remind us what is your current capacity? I think there have been a couple of movements. The last number I had in my mind is around 18,0000 tonnes, I'm not sure that is still correct. And then maybe can you also let us know where this number will go to as your -- I think upgrading it in a thought you actually here increase your -- also your volume capability, but maybe that's not correct? And then lastly, maybe if you can give us even a bit of color on how much that project will be contributing to the leadership journey, because I suppose electrical steel must be a pretty profitable business here, not just today, but also obviously with the outlook. So if you could give us maybe a little bit more color on that, that'll be great. So you're right. We are very excited with the story of the electrical steel, because electrical steel has a brilliant future in not only for -- because everybody is talking about the electrical car, electrical vehicle in general, but it is also distribution. We have the two lines, one line is the oriented grains, which is more niche, but they are extremely important in their profitable products, because they are on the transformer. And this, of course, with the more and more use of electricity, there is a big demand already today. And second for the electrical car for all the application in electrics. Electrical still are very important for Brazil, because remember, we have a capacity, total capacity, which is around 700,000 tonnes, 800,000 tonnes out of it. The Brazilian market is only in the range of 375,000 tonnes. So we are not aiming to export stainless, so you have the complement, which is in larger majority, the electrical steel, both for oriented grain and non-oriented grain, which is the common electrical steel use for electric car. And on this kind of non-oriented grain, we are -- I will say, at the top of technology with the possibilities are already easy grades. Whenever there is a demand. And by the way, with an impact with something which is interesting, because as our production is based on charcoal, it is the lowest CO2 content in the world. Yes. Tim, thanks for that. Can I just follow-up and sorry, I didn't really follow all of the numbers correctly? So I thought you had around 180,000 tonnes of electrical steel capacity taking both GEO and non-GEO together? And how is this going to move? Is this going to go to such a 300? Sorry, I was not able to follow it? So in term of capacity and what we serve, it is more complex than this, because it depends a lot of the mix, okay? So you have a hot rolling mill, which is around 850,000 tonnes or 900,000 tonnes. Then you have fundamentally stainless steel, which is nearly 40% electrical steels, which are a big part of the complement and the rest is some special carbon steel. So you might have seen some numbers, which depends also on the mix where the -- where there is the major constraint is on the oriented grain, which are limited on non-oriented grain. We have capacities, which are much higher. And we are developing with the new investment, but we are developing more on qualities. So we are upgrading the level of quality of our electrical steel instead of increasing the volumes. [Multiples Speakers] in the -- in a little days more in that in the range, so probably you are referring to figures which are on the sales, then you have some yield, you have some part. Okay, okay. Thanks for walking us through that. Then very last question on the new nickel venture. I already tried hard with Tristan, but I didn't get anything out of it. Could you let us know maybe how much CapEx plan to invest during the pilot phase in the next couple of years? So how much is this going to be? So it is part of what we keep the most secret. So we will not give guidance on this. But the fact that we are not declaring big numbers means that there are not huge numbers. What is important is then while we are working since years in R&D and we deal with our partners and the technology will be developed -- we developed. We will deploy now that is added to the technology has been developed. Thank you. [Operator Instructions] Let's move on to our next participant, Krishan Agarwal from Citibank. Please go ahead. Your line is open. Hi, Tim. Thanks a lot for taking my question and apologies for the croaky voice. Most of the questions have been answered. If I can ask you on the market situation in terms of the targets you have given on the slide five. Inventories are coming down and then ports at normal levels or record -- at low levels. So, I mean, if I think from a purely from the marketing perspective, this is the kind of ideas set up where production is running low, imports are lower and inventories are normalizing? Would you like to share some kind of anecdotes from your order book, as well have you started in those early signs of market underlying demand improving or the restock happening? Where the lead times are? Just a broader view on how the things are looking like from the market point of view? So thanks for the question. You know, that our market is unfortunately once again a market, which has been submitted to the very high volatility, which has been created by the special condition of the age of nickel, et cetera. So this special condition are very unique, okay. I've never seen in my life that such a big muscle import have arrived in Europe in a so short-term. So we are in the final phase of the destocking and destocking has not yet finished, but you see that there are not anymore of the condition to import, which is a good sign, because this means that the destocking will happen. Now there is a couple of question mark about the market. So some markets are, let's say, under pressure, because of the high interest rate and typically in construction and consumer goods. Other markets are solid like automotive food and beverages and also increasing and improving significantly in the capital goods. So we are confident that at the end of the destocking phase, which is happening, so we should be at the end very soon. As you can see from the figures, there will be recovery of the demand. Now for us, it is not so bad or not so impacting that the final consumption is plus or minus 5%. This is not a problem, because with plus or minus 5% or even 10%, we can leave. We have enough capacity to [variabilize] (ph) our cost. And to adapt our capacity to the real demand. What has been destroying the market in the second half of the year has been this massive import with -- I don't know if you have seen the figures about in second half -- in the first half of the year, imports have reached in some months incredible level up to 50% of the mark. So this has been the part which is bad for the market. Now the normalization, I'm sure will come. We have in front of us, on core at least still, I don't know few weeks. And we are fully in line with our, let's say, industrial plan also. We are stopping at the right moment, et cetera. At the end of destocking, the possibility of recovery of the market at a normal level is there. Yes, yes. I mean, that's a fantastic update. And then if I can try my luck with the Sud, a little bit. There's a lot of new positive and a negative of inventory impact, particularly on the stainless & electrical and recycling. Is there any way you can help us guide on the magnitude of both the negative and the positive? Just to make the modeling for the Q1 a little easier? Sorry. I mean, the thing is that we were talking about very high-double-digit effects for the last two quarters in different directions. And I mean if prices of raw materials remain the same as there -- they’ll be probably, I would say, mid-double digit. Thank you. We'll move on to our next participant, Tristan Gresser from Exane BNP Paribas. Please go ahead. Your line is open. Yes. Hi, maybe just one quick follow-up. On the import situation in Europe, I think in your prepared remarks, you shared quite a positive message there, but we've seen Asian prices relative stable with European prices picking up with higher raw material. So just wanted to confirm that is still your view at the moment with current market condition the door is now not slightly open again? And also, I think in your prepared remarks, you also flagged that some potential additional measures the European Commission could take. Could you tell us a little bit more is that ongoing cases or new cases you potentially looking at? Thank you. So thank you for the question. It is very, very simple to see this in one of our slide, page one or seven, where you can see that the gap versus Asia price in U.S. dollar per tonne has been extremely high from the second half of last year to let's say April of this year. This incredible gap has been, let's say, the fruit of many reason. On top, reason of linked to the logistic, the very high cost of logistic, the gap between the correlation of the LME to the normal nickel used by stainless steel producer, the situation of Asia where the lockdown has increased a lot to the inventory and sold inventory in China, which has been a big push to sell in Europe. So a lot of reason for which the wind of imports has been extremely high in between the second half of last year 2021 and the first half of 2022. Now the gap of price is normal. So you have the normal premium that is asked for an import. You have the cost of the transport cost. The service is high. And on top, when the volatility of the market is also high and there is not the booming expectation that we had at the beginning of the year, people are much more careful and tend not to invest in inventory and trying to speculate. On top, I think there has been some bad surprises for some of the people, which were importing, because at the end, even if they have imported much lower prices at a certain moment, the -- some imports have arrived at much higher price than the price of the European. So I'm quite confident that the situation that we see today of a very low level of imports is structural. And compared to what was in the past, the measure, the trade defense measure are extremely powerful and will be effective in a normalized market. Thank you, Tristan. It appears there is no further -- sorry, we have another participant, Rochus Brauneiser from Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Thanks for taking the question. Sorry, a bit late on the call, so I'm not sure whether this has been answered before. I'd like to understand how we shall think about directionally for the European part of the stainless business, I would guess that Europe segment was loss making in Q4 probably for the first time in many years? Are you -- would you already expect it to turn positive in Q1 again? Or is that more a Q2 story? So Rochu, hi. No, we did not answer this question, so I'm glad to take this one. So Europe was, if you take out inventory valuation effect on operational basis, was positive also in Q4 or so, just to give you an idea, okay? And the second thing is the fact that in Q1, if the inventories or raw materials continue to be priced the same, it would be within and without inventory valuation positive. Okay. Is it fair to assume that the earnings improvement you're guiding for that's primarily coming from the inventory evaluations, is that correct? Depends because end of the day, we do have inventory valuation effect, but like I answered Krishan, it's close to the mid-double-digit improvement, right? So -- but there is also an operational improvement coming from a Europe, which is basically at very low levels of destocking and which is gaining back in Q1. So I think the question could be answer more clearly in this way. You know that Brazil, Brazil is in the low season, so it will not be the normal support for the profitability of the company. But Europe is recovering in the sense that some headwinds that we have had during Q4, for example, the very low volumes or the very high impact of the energy are much lower. And on top, we have the inventory valuation. So fundamentally, the structural result of Europe will improve and the structural result also the service and solution will improve. All the other division will be in line with their normal seasonality. But Brazil is a fundamental piece in our story. So when you have Brazil, which is in low season, then this mechanically reduced the result of the company. Okay. That makes sense. Then I have another question on your balance sheet. On the balance sheet line where you have your trade receivable and payables that is ended the year with something like 23% of sales. Thinking directionally for the whole year of 2023, would that kind of level is sticky? Or would you expect that the level of inventory in the system are coming back to levels you have recorded maybe two or three years ago, which was more on the magnitude of 15%? Is that something that you can achieve within every year? Or is this something which is more like a multiyear story if at all? So, Rochus, this is a question I answered, Sandeep already, so I can repeat that, you have to keep in mind. No, no, that's fine, I'm glad to answer, because it's important to understand. See like there's three structural changes, compared to 2021 or two, three years ago what you mentioned. First is that there is a significant add in inventory and a net working capital just because of our recycling unit, which for net working capital purposes should be modeled like a trading unit. We've mentioned this before, a significant part of our business in our recycling business is six to eight-week rotation, scrap blending collection activity. So this is a significant add, right? So you remember that we guided when we acquired that inventory or net working capital there alone was EUR600 million. So that's a net working capital position you have to pull out of this if you're comparing to two, three years ago. Number two, is the fact that raw material prices and I did read out this especially nickel, ferrochrome and also capitalized raw material in form of inventory, sorry, electricity and energy cost effects have significantly jumped in. I'm talking about 30%, 50% and 80%, compared to those positions you're talking about comparables. And third and the last one is that if you're exactly taking two years ago, it was a COVID phase where we had a 19% reduction in market demand. So volumes back then and as a result net working capital had also been reduced. You know how quick we are and reacting to market changes in releasing net working capital. That's why we started releasing already in Q3 2022. So there is a volume effect also coming back to normal. See, we do tend to forget that although this destocking is bad, we are nowhere near the crash, but that happened when COVID happened. Those are the three effects, just to be clear, I don't know if I give you enough information to work on? Thank you, Rochus. It appears there is no further questions at this time. I'd like to turn the conference back to Mr. Tim for any additional or closing remarks. Thank you. Okay. Thank you very much. And thank you very much for your question and likely discussion as always. We have been able to convey you the message that we see the trough behind us. So the very bad situation that we have lived in 2022 at the second part, which was exactly the opposite of the fantastic situation that we have had in the first part. So all in all the years was good, but we are looking at a year with some challenges, but with a lot of possibility for us to demonstrate that our business model is resilient and will translate in a solid cash flow and earnings for our shareholders. So we will be on the road by March, and the preliminary schedule are very rich. So I'm happy that there is an interest for us. And I wish you a good weekend and see you soon around the Road Show. Thank you very much and bye-bye.

EarningCall_116

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ventas Fourth Quarter 2022 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to BJ Grant, Senior Vice President of Investor Relations. Please go ahead. Thanks, Regina. Good morning, everyone, and welcome to the Ventas fourth quarter financial results conference call. Yesterday, we issued our fourth quarter earnings release, supplemental investor package and presentation materials, which are available on the Ventas website at ir.ventasreit.com. As a reminder, remarks today may include forward-looking statements and other matters. Forward-looking statements are subject to risks and uncertainties, and a variety of factors may cause actual results to differ materially from those contemplated in such statements. For a more detailed discussion of those factors, please refer to our earnings release for this quarter and to our most recent SEC filings, all of which are available on the Ventas website. Certain non-GAAP financial measures will also be discussed on this call. And for a reconciliation of these measures to the most closely comparable GAAP measures, please refer to our supplemental posted on the Investor Relations website. Thanks, BJ, and good morning to all of our shareholders and other participants. Welcome to the Ventas fourth quarter and year-end 2022 earnings call. We are pleased to deliver a strong fourth quarter, which reflects the attractive operating and financial results of our diverse portfolio and the benefits of our key strategic initiatives. Fourth quarter normalized FFO was $0.73 per share, fueled by accelerating SHOP growth at 19%, record Medical Office Building performance and profitability from our third-party institutional capital management business, VIM. The demand fundamentals that support our business are strong and getting stronger across all Ventas asset classes, which are unified in serving the nation's large and growing aging population. After significant capital recycling and asset management actions, our diverse portfolio of high-quality senior living communities, Medical Office Buildings, R&I labs and other health care assets is well positioned to capitalize on these demand trends. In 2022, Ventas began what we believe will be a multiyear growth and recovery cycle led by SHOP and supported by favorable supply-demand fundamentals, actions we've taken in the portfolio and our post-pandemic rebound. In senior housing, there are compelling supply demand tailwinds. The over-80 population will grow at record levels in 2023. Yet, we continue to see construction as a percentage of inventory at its lowest level in five years and substantially better in Ventas markets. Over the last few years, we have taken decisive actions to position our SHOP portfolio to capitalize on this exciting demographically-led demand. We strengthened our team, enhanced our powerful analytic capabilities, rolled out the Ventas OI platform, sold, transitioned and acquired properties and invested capital in communities with strong market fundamentals, all to win the recovery. Benefiting from these trends and actions, we are well underway to recapturing the post-pandemic SHOP NOI opportunity. Our portfolio has already enjoyed significant occupancy and NOI growth from the COVID trough, and we see even more recapture potential ahead of us in the coming years as we first seek to reach 2019 performance levels and then hopefully exceed them. Bob also took significant steps to maintain our financial strength and flexibility and improve our balance sheet and liquidity. These actions garnered three positive credit rating moves in 2022 and reduced our 2023 maturities to a very manageable level. In 2022, we also continued our long history of value creation with $1.2 billion of new investments, often with key partners. These include the $425 million Atrium Health/Wake Forest University School of Medicine Development in Charlotte, North Carolina; $200 million in senior housing investments, including the acquisition of Mangrove Bay and a new development with Le Groupe Maurice, both in very attractive markets; and $300 million in MOB investments highlighted by the acquisition of an 18-property MOB portfolio leased to Ardent. Finally, we remain committed to our values, including our ESG leadership. We accelerated our progress in 2022 as we further diversified and elevated our Board and made a bold commitment to achieve net zero operational carbon emissions by 2040. These efforts will be advanced under the leadership of our General Counsel, Carey Roberts, who has the passion and experience to move us forward. Now, we enter 2023 with strong momentum. Today, we are pleased to introduce full year normalized FFO guidance representing 5% growth at the midpoint. We are projecting unprecedented organic growth in our portfolio, once again driven by SHOP, and complemented by the positive compounding contributions of our office business led by Pete. We also will continue to build out our VIM business, which already has over $5 billion in assets under management, and mine our non-property investments for value as evidenced by both the pending Ardent equity stake sale and our recently completed Atria Glennis software deal while we also seek to optimize the outcome in our Santerre loan. Finally, we will continue to invest capital wherever we find compelling opportunities to sustain and reinforce our new cycle of success. The macroeconomic assumptions underlying our forecast include some slowing of the economy, moderating inflation, softening labor conditions, and continued, albeit less aggressive Fed tightening. Against that backdrop and in many other likely scenarios, we believe our business is relatively advantaged because demographic demand for our assets is large, growing and resilient, we have demonstrated strong pricing power in SHOP and softening economic conditions should benefit our operations in multiple ways. One final note. In January, Justin assumed the additional role of Chief Investment Officer at Ventas. I know you want to join me in congratulating Justin, and I want to thank him for his continued leadership, which has been instrumental in our success and positive outlook. Working with our strong teams, Justin will use his experience and insights to create value by making good investments across our asset classes, enhancing the connection between our investment activity and business operations and deploying the powerful Ventas OI platform across our organization. And now I'm happy to turn the call over to the man himself. Justin? Thank you, Debbie. I'll start by noting how excited I am about the execution in our SHOP portfolio. Over the past few years, we have taken many actions to put ourselves in a position to achieve positive performance as we aim to recapture NOI in this multiyear growth and recovery cycle. We have been successful executing portfolio actions, which include over 50 triple-net communities converted to SHOP and over 130 transition to new operators. We've acquired over 100 new communities and executed 30 dispositions and 8 new developments. Finally, we have over 100 communities that are in the process of getting refreshed and are expected to complete during the key selling season. I am really proud of our tremendous team that supports our senior housing business and has executed Ventas OI, our approach to collaborative oversight where we leverage our operating expertise and best-in-class data analytics to the benefit of our operating partners to drive positive results, which has gained tremendous momentum. Our programmatic approach addresses two priorities in parallel: first, timely market, financial and operating insights to influence near-term performance and revenue-enhancing capital expenditures; second, tackling key strategic challenges that will deepen our competitive advantage and maximize the long-term value of our portfolio. Now I'll cover the fourth quarter SHOP results in our year-over-year same-store pool of 478 communities. Our SHOP portfolio continues to perform really well. The fourth quarter was ahead of our expectations while delivering excellent year-over-year growth due to pricing power, occupancy growth and moderating expenses. NOI in our Q4 year-over-year pool grew 19.1%, which is above the midpoint of our SHOP guidance range and includes 22.2% growth in the U.S., led by Sunrise and Atria, while Canada demonstrated positive growth again with 11.7% led by Le Groupe Maurice. I would like to thank all of our operating partners for their significant achievements delivering excellent services and care and financial results. We continue to benefit from operating leverage, even at this relatively low occupancy, resulting in margin improvement from 23% in Q3 to 23.6% in Q4. Same-store average occupancy grew year-over-year by 140 basis points to 82.5%. Revenue in the quarter grew ahead of expectations, increasing 8.3% year-over-year due to continued acceleration in RevPOR growth and positive trends in occupancy. Pricing power continues to impress. At 6.5% year-over-year growth, RevPOR is the strongest we've seen in the last 10 years, primarily driven by in-house rent and care increases and improving re-leasing spreads. As expected, expenses were $4.7 million per day. As a reminder, our year-over-year expense growth peaked in Q2 2022 at 11%. It reduced to 8% in Q3 and was lower again in Q4 at 6%. Leading indicators in the U.S. remain strong as we experience leads as a percentage of 2019 at 120%, move-ins at 101% and outs at 101%. Canada continues to deliver growth and high occupancy at 95%. Demand accelerated in January with move-ins at 104% over 2019 in the U.S. and 111% in Canada. Now I will cover 2023 SHOP guidance and our expanded same-store year-over-year pool, which includes 508 communities representative of 92% of our portfolio. There are three primary drivers of our positive outlook: occupancy growth, rate growth and moderating expenses. SHOP same-store cash NOI is expected to accelerate from 13.4% growth in 2022 to growth in the range of 15% to 21% year-over-year in 2023. The low and high end of the guidance range is driven by occupancy and expense performance. We expect margin expansion of 200 basis points at our midpoint. We anticipate year-over-year revenue growth of approximately 8% at the midpoint of the same-store cash NOI guidance range driven by continued strong rate growth and occupancy growth of 130 basis points to 170 basis points. With the deployment of our Ventas OI platform and excellent execution by our operators, we are able to achieve substantial rent increases this season of approximately 10%. This in combination with improved care pricing, rising street rates, and typical resident attrition results in about 6% expected RevPOR growth in 2023. It’s important to note that 80% of our revenue growth in 2023 will be driven by the RevPOR growth, much of which has already been realized as over half of our resident population have already received the rent increases. In regards to occupancy growth, we project that more residents will move into our communities in 2023 compared to prior year. We also project our net move-ins to be higher. However, we expect to return to more normal seasonal occupancy patterns, which include typical clinical conditions and slightly elevated financial move-outs in the first quarter. We expect a significant occupancy ramp throughout the year, supported by an accelerating aging demographic and muted new supply translating to about 150 basis points of year-over-year average occupancy improvements in 2023. We also expect moderating inflationary expense impacts and lower contract labor year-over-year, with overall expense growth expected to be around 5%. Through the execution of initiatives to improve employee recruitment and retention, we have had five consecutive quarters of net hiring, which are providing the tailwinds needed to stabilize the workforce and support the moderation of expenses. Moving on to investments. I'm really excited to work with our deeply experienced investments team in my newly expanded responsibilities. I am very pleased to step into a situation where I can work to continue our strong track record and expert capital allocation. We have a wealth of existing relationships across our targeted asset classes of senior housing, life science and R&I and medical office. I look forward to contributing to the ongoing success of our investment platform by combining the advantages embedded in the enterprise with my extensive network and investment experience to drive external growth. I look forward to expanding Ventas OI across the enterprise to drive portfolio optimization, external growth and refresh redev capital across our senior housing and office portfolios. We will continue to pick our spots in investments and work with our best-in-class partners on attractive opportunities. Moving forward, I am confident in the demand drivers of the business and believe we are well positioned to continue this positive trajectory. Bob? Thanks, Justin. I'm going to share some highlights on our fourth quarter performance, touch on our balance sheet and close with our 2023 outlook. To start, we are proud of the fourth quarter results. Throughout 2022, we were accurate in our forecasts and followed our mantra to do what we say. In the fourth quarter, normalized FFO was $0.73, at the higher end of our guidance range. Fourth quarter property growth was particularly strong, with total company and SHOP same-store cash NOI growth of 8.5% and 19.1%, respectively. I'd like to give a shout-out to Pete Bulgarelli and our Office team. Office had a great year, growing same-store cash NOI by 3.8% in fiscal year '22. And that Office result was led by our MOB business, which posted some outstanding metrics, including strong leasing performance with same-store year-end occupancy of 92%, the highest level since 2017. Tenant satisfaction measures exceeded 93% of all MOBs. Same-store operating expenses increased just 2.6% year-on-year, well below inflation. And as a result, full year '22 MOB same-store cash NOI grew 3.4%, the highest on record for the company. R&I also posted attractive organic performance, growing same-store cash NOI by 5.1% in the full year '22, led by leasing at higher rates and solid expense management. I'd highlight two other items in the fourth quarter. We earned our first promote approximating $0.02 per share as a general partner of the Ventas Fund, which was $0.01 better than our guidance. We're also eligible to earn further promotes in 2023. Second, we recognized a $20 million noncash CECL allowance on our $486 million mezzanine loan investment to Santerre Health Investors. Interest coverage on the loan has declined through year-end, but the loan remained fully current through January 2023 and full interest is expected in February. Next, a few comments on our balance sheet. Over the last two years, we enhanced our portfolio and strengthened our balance sheet through $1.3 billion in asset dispositions and loan repayments with proceeds used to reduce near-term debt. We also issued $2.7 billion of new debt in that period, extending duration at attractive pricing before the run-up in interest rates. As a result, we have just 4% of our consolidated debt or under $500 million coming due in 2023. And we've made good progress towards this refinancing, having locked in all-in cash rates of 4.2% on nearly 2/3 of this requirement. Consistent with our long-held risk management approach to maintain 10% to 20% in floating rate debt, 12% of our consolidated debt was floating in the fourth quarter. We have plans to issue $500 million in new secured fixed rate debt with proceeds designated to pay down floating rate debt in 2023, which would bring our floating rate debt to the lower end of our targeted range. We have significant liquidity of $2.4 billion at year-end 2022. And finally, our net debt to adjusted pro forma EBITDA improved by 30 basis points to 6.9x in the fourth quarter, with SHOP NOI growth steadily moving that ratio back toward our pre-pandemic target range. Last but not least, I'm extremely pleased to reintroduce full year 2023 guidance. This is tangible evidence that we are in a post-pandemic world, and our guidance demonstrates the exciting post-pandemic organic property growth opportunity for Ventas. The key components for our '23 guidance are as follows: net income attributable to common stockholders is estimated to range between $0.20 and $0.34 per fully diluted share. Normalized FFO is forecast to range from $2.90 to $3.04 per share. We expect our portfolio same-store cash NOI to grow 7.5% at the midpoint, led by SHOP same-store cash NOI growth of 18% at the midpoint. Our '23 FFO guidance at the midpoint of $2.97 represents growth year-over-year of 5% or $0.13 per share against the rebased 2022. The FFO bridge describing the $0.13 is straightforward with two main drivers: first, we expect $0.29 from outstanding year-over-year organic property growth in SHOP; and second and partially offsetting is a $0.16 reduction, principally from the impact of higher interest rates. A stronger U.S. dollar against the Canadian dollar and the pound is also a contributor. Other guidance items include receipt of over $300 million in capital recycling proceeds, no additional promote revenue, G&A approximating $151 million at the midpoint and 404 million weighted average fully diluted shares. The low and high end of our FFO guidance range are largely described by changes in the macro environment, including potential changes in inflation expectations and interest rates. A few thoughts on phasing of our normalized FFO through the year. We expect FFO in the first quarter of '23 to be roughly flat to the fourth quarter of '22 of $0.71 when adjusted for the $0.02 promote received in the fourth quarter, with the first quarter of '23 is the seasonal low point for SHOP. As the key selling season in SHOP kicks in and interest rates plateau, FFO growth is expected to pick up in the balance of '23. A more fulsome discussion of our '23 guidance can be found in the earnings and outlook presentation posted to our website. To close, we entered 2023 with momentum. The entire Ventas team is fully engaged and excited to deliver on our '23 plans and to reignite a new cycle of success for the company and our shareholders. And that concludes our prepared remarks. For Q&A, we ask each caller to stick to one question to be respectful to everyone on the line. I just want to ask about that Santerre Health Investors loan. Could you just provide more background why the allowance? And then, Debbie, I think you mentioned you're looking to optimize the outcome. So kind of just help us think through like the outcomes that you're expecting. Sure. The loan is part of our normal business. Over the last five years, I think we've collected about $1.7 billion in loans that we've made on health care properties or to health care operators. This particular loan took a $20 million allowance in the quarter. And we continue to be current in terms of interest, receipt of interest payments. And it's under some compression of coverage because some of the assets haven't recovered from COVID while interest rates have been increasing. And so it's really a timing issue if you want to think about it that way. And so we would expect to work through that, and we have a lot of experience and tools and rights at our disposal to do that. I just wanted to understand in your deck, you outlined potential CapEx investments, I guess, in SHOP and maybe triple-net to position the portfolio. I'm wondering, the CapEx was a little elevated in the fourth quarter. So I'm wondering if you can give us a sense of just like the magnitude of these investments over the next, call it, two or three years to achieve what you want with the portfolio and perhaps tie those CapEx to the bridge you've outlined in terms of the SHOP NOI growth. It's Justin. I'll start, and Bob you probably want to jump in. First of all, it is a large initiative. We have 100 communities that are in the process of being refreshed. We do believe that it will be impactful. It's about $1 million of pop. It should help improve performance. Certainly, we've considered that when we gave our guidance for 2023. And there's more to do. But at this stage, we picked our highest priorities and we've been executing aggressively. So we look forward to these projects coming online during the key selling season. I'd add, the $1 million of pop, we've mentioned 100 properties, that's obviously $100 million. The timing of that clearly isn't all in one quarter. It will be spread over the course of time. But these are NOI-generating opportunities. ROI-generating opportunities are indeed embedded in the forecast we've given you in terms of the NOI growth. And I believe top use of our cash, best use of our cash is to reinvest in these assets, given the backdrop of SHOP and in senior housing. And sorry, could you just clarify this $100 million, is that this year or is it spread out? I'm just trying to tie it back to ultimately the FAD growth coming through because if these are multiple years of $100 million, then maybe the FAD growth gets depressed. Well, first of all, we started this last year. So you mentioned the fourth quarter seeing some acceleration. That clearly is part of it. Second point to make is just in terms of classification of the CapEx spend. This is ROI generating a redev. So you'll see that acceleration in readout. At the same time, FAD CapEx will increase. Again, the top priority is investing behind our SHOP assets. So you'll see that increase at the same time. But it's a multiyear program. And it's a multiyear NOI impact as well we will see going forward. We'll be investing into this multiyear recovery in senior housing and the supply-demand fundamentals in our market. Just a quick two-parter. Thanks for the presentation. It was super helpful. Two things. The first was just the leading indicators and the lead generators being pretty strong, both in 4Q and January. Maybe just a little bit more color on what that's capturing conversion rates. Just thought that was really interesting. And then the second piece is, I think on the end of the presentation, you talked about sort of a $900 million SHOP NOI opportunity with all things said and done. If you take a step back, just curious how you guys are thinking about sort of the margin profile at that point versus pre COVID? Well, Ronald, we're glad you like the deck. We obviously pride ourselves on our analytics, but your old colleague, BJ Grant, is helping us put it in the best format for our external constituencies. So we're glad that you like it. And I'll turn it over to Justin to start to answer your question. Sure. So in regards to leading indicators, you've noted they're looking really good. We've had, we think, the highest fourth quarter lead volumes on record in terms of leads. Movements were solid. You noted the conversion rate. We had an operator that put in place a website upgrade intra month in December. It slowed down leads, a bit slowdown move-ins. Those move-ins have since recovered in January already, so no worries there. We expect to follow normal seasonal trends. And so you'll see move-outs be a little bit higher. We've had -- it's normal to have additional clinical move-outs. It's normal to have additional financial move-outs. And then so far in January, we're off to a strong start with move-ins at 104% of 2019 in the U.S., 111% in Canada. So all looking pretty good from a leading indicator standpoint. In regards to the margin question, there's 1 thing that we're all excited about. Obviously, Debbie noted it, I noted it, and that's the pricing power. That's really helped to accelerate our margin expansion. Occupancy growth does as well. So we do anticipate margins to continue to expand. And also, to Debbie's point, we're anticipating and hoping to get back to that 2019 level again. And margins will -- should settle out but also should continue to grow because of the strong demand for the senior housing sector. Just regarding to your SHOP same-store growth forecast. Is there a meaningful difference between the legacy same-store assets versus the new properties coming in, in terms of growth? I mean, I think that a lot of the new stuff being added from new seniors, so is the growth profile of the new senior assets different than the legacy same-store portfolio? Yes. Mike, I'd say, first off, all the pools, all of the operators are contributing really attractive growth across the board literally as you look at it. This is broad-based growth in recovery and improvement across the portfolio. And you mentioned new senior, new senior importantly part of that contribution. And when you look at the fourth quarter of '22, you'll see almost the same asset pool, and that growth in the fourth quarter reflects that broad-based strength. Yes. I mean, what I think you should like about it is we now have the vast majority of our SHOP business in the same-store pool. So that makes it more meaningful for investors to understand the performance of the business. Justin, I guess I was just hoping you could speak a little bit about the occupancy growth. You picked up, I think, 300 basis points in '22. Your forecast is for 150 at the midpoint this year. So I'm trying to figure out, was the 300 maybe picking up low-hanging fruit in the early parts of the recovery and the 150 is a more normalized pace? Or do you think the 150 is a bit of a slowdown as you have maybe got a bit of a cautious view towards the economy? I'm just trying to reconcile that with the leads and the move-ins that you sort of talked about. Yes, that's a great question. So let me start with describing the 300 basis points, and I want to relate it to seasonality. When we grew 300 basis points in 2022, we had two things helping that growth metric. One was that Q1 of '22 performed better than typical seasonality. So very strong start in '22. There really wasn't much clinical activity at all. And so that was helping us. It was also comparing to a prior year, Q1 of '21, that was pandemic impacted. So you have a stronger start in '22 and you have a favorable comparison. Moving ahead into '23, I mentioned in the prepared remarks that we're experiencing normal seasonality. So we have a lower starting point in Q1, so effectively Q1 has lower occupancy than Q4. It's in line with normal seasonality. Typically, you see about 100 basis points change downward from Q4 to Q1. And then what we'll see this year is an acceleration in growth. And as I said, we're expecting more move-ins. We're expecting more net move-ins. So in fact, the growth rate in '23 will be stronger. The effective growth rate is stronger, but the average overall is at the midpoint of 150 basis points of growth. I appreciate the full year guidance and the confidence in the seniors housing recovery that providing that outlook conveys. But I was hoping you could give us the SHOP NOI growth guidance breakdown between the U.S. and Canada. Canada seems to have been where some of the upside versus guidance came in the fourth quarter. But I know there are price restrictions and some providence is north of the border. I'd just that breakdown between the U.S. and Canada for this year would be helpful. It's Justin. Well, everything is included in the full year guidance in '23. And as Bob said, everyone is contributing. Canada is at a higher occupancy. It does tend to generate less growth overall, but it is contributing growth and we'd expect the U.S. to be on the higher end of the average of the guidance range, Canada a little bit on the lower side, but with everyone contributing to the growth. I would just -- I'd emphasize 95% occupancy in Canada and we delivered 12% growth in the fourth quarter. That business is performing well. But obviously, the U.S. is the engine driving the overall midpoint. Justin, in your conversations with your operating partners, can you give us a sense what the better performing partners are doing right on the labor side of the equation? And then conversely, for those that might be underperforming, what the plan is to bring them sort of up to snuff? And ultimately, if they're not performing, could you look to transition that maybe to some of your better partners? But any expansion there would be great. Sure. Well, first of all, really similar to how everyone is contributing to the NOI growth in '23, all of our operating partners are contributing to the improvement in managing the labor cost and it's done a few ways. One was to professionalize the recruitment of line staff where that had been a local priority. It's become a central priority for operators. That's done through automation. It's also done by gearing your recruitment professionals towards that person. There’s more emphasis on retention as well. There was wage increases at our competitors that were put in place all the way back starting in '21 and throughout '22 to help to be more competitive. And then just extra emphasis where you have -- the leading indicator is always agency which we probably noted in our numbers that’s been coming down. But the communities entering agency or markets entering agency, that’s an indicator to make, put additional focus on that locality. So really good execution. And there has been, I think, changes that have been made that will be lasting in terms of just process improvement. Just a question on FAD CapEx, maybe to piggyback off of Vikram’s question. Just curious I guess what the guide is for what we should be thinking about is in the '23 guide? And then as well as maybe little bit of color on what gets included in the ICE versus normal FAD CapEx. if I kind of add the two together and compare that to the average units for '22, it implies about $2,300, $2,400 per unit per year, which seems a little low given the inflation. So just curious on cap rate, kind of what we should be expecting for the year? Well, I mean start out with the principle that FAD CapEx is really routine recurring non-income producing kind of steady state activity. And then Bob will go further. The second premise is, ICE is really function of either transitioned or acquired assets, bringing up to market standard. And part of what you will see in '23 versus '22 is a reduction, significant reduction in ICE because -- simply because we haven’t had that activity in the last call it a year. So that flushes out of the system. Bringing you back to core CapEx in FAD, which I would expect to see some acceleration in, I mentioned that earlier. Again, our best use of cash to invest behind the properties, both front of house and back of house. So you will see an increase in that. And more meaningfully, the increase in redev, which is really these front-of-house refresh ROI projects, which we mentioned a $100 million number as a placeholder. So both will be going up. I think net-net-net, I would think about it in terms of the bottom line FAD contribution in 2023 also growing driven by the cash flows of the properties. A quick question on the guidance side. Again, very strong underlying fundamentals built in '23. I'm trying to understand a little bit more about some of the kind of the drags on the numbers, if I may use that word, that results in the guidance. And specifically on the interest and FX side, trying to understand the FX assumptions being made and quantitatively how much of a drag that is on earnings this year, in case FX becomes better than expected? And also trying to understand the assumptions around the $500 million of refinancing that's baked into the numbers, exactly what kind of rates are you expecting to refinance that at? Great. I'll take that. So Page 14 of the deck we posted yesterday is helpful here because it really focuses on the impact of rising interest rates. Of the $0.16 I noted in the bridge, the vast majority is interest rates. And the vast majority of that is really the curve on floating rate that we see and show in the deck. FX is a contributor but a small contributor. And in large part because we have, in Canada, Canadian debt, and that's a natural hedge to what is a stronger U.S. dollar, which is having translation impact on NOI. So that's the primary driver. In terms of the $500 million this year of refinancing, again, that's in Canada, principally. And we've been able to secure some attractive pricing on mortgages in Canada. That's going to be a key source of funds as well as some agency debt here in the U.S., which we're planning to issue, which we'll use to pay down floating rate debt. And those are really the two key drivers of the guidance in terms of refinancing. And specifically for the $500 million, could you give us a sense of what the new rate is going to be versus the old rate? I just also in terms of the guidance, a question on the $300 million of capital recycling proceeds that you're getting. If you could just give the breakdown on the loan repayments versus property dispositions in that number. And as a second on that would just be how we should think about your using those proceeds? I mean, are you earmarking for debt paydown, acquisitions or development? Any color there would be helpful. Nick, it's Debbie. On the $300 million, a couple of hundred million as we show in the deck, is based on office dispos, some of which are purchase option-driven. There's a -- we got full repayment on a Freddie Mac loan in January, that was $43 million, I think, at a double-digit interest rate. We got paid in full on that. And then the balance is other small items. So I want to talk about the supply side of the house. As some people may not remember, the senior housing business was not in a great spot prior to the pandemic because of oversupply. And I know that you trended down. It's trending down substantially as shown in Page 11 of your deck. But the rule of thumb for supply is, in my mind, is if you're anywhere over 2% of existing stock, it's on the table as a possible problem. So tell me why even though it's down substantially over the past five years, that, that comp year of five years ago was not a great fundamental period for the business. So tell me why this is a good thing beyond just the optics of it being down. And also what you think the window is for you to sort of see this ramp in demand that we're all seeing and expecting. And when you think supply starts to sort of muddle in the story again because it certainly will, particularly with development costs coming down now. So if you could comment more color on that, that would be great. Good. I mean, it all starts with the demand side, as you know, with the record 80-plus population growth in 2023. In terms of supply, I would analogize where we are to a little bit after the financial crisis because during those years, construction and development starts, obviously, were paused for a period of time because of the great financial crisis. And this is similar really to what we're seeing from kind of the pre-COVID period that you referenced but then also kind of during COVID and then continuing now because costs are still quite high, particularly capital costs. I mean, construction loans are extremely expensive now. And so the costs remain, for the time being, very high. And there's -- would tend to be because starts are really low in our markets, Justin can give you the specifics. But we believe we have a good multiyear window here where we know kind of the demand profile and can capture that while, at the same time, deliveries should remain muted, very muted because they'll be seeing the effects, again, much like we did after the financial crisis, where deliveries were low. And I think at that point, occupancies got up in and around the 92% level. And that's really where we want to be able to see if we can get back to that kind of 92% level in this nice window that we have and kind of that's the game plan. Yes. I mean, I think you summed it up perfectly. I would just point out again that the 80-plus population, what's different from that period is growing at record levels and will continue to for the next several years. So that's obviously very supportive on the demand side. Supply, most are supplemental, we have starts. In our top markets, it's like -- it's in the basis points. It's like 10 basis points, exceptionally low. And that supports the window that Debbie is describing over the next few years. And this is a sector that has tremendous demand fundamentals. So the capital we'll see through those and will bring supply eventually. But we do have a window that's formed that's really exciting and supportive of the recovery that we've been talking about. I'm curious for SHOP. Should the RevPOR growth moderate a lot in '24 and '25, just given the pace of how your expense growth has been moderating? So it's Justin. So I'm going to go back to what I was just talking about, which is demand. So another part of this is just affordability in our markets, which is very high and there's demand for the services. So you have the combination of people needing the service and people having the ability to pay. And with numbers that we've never seen before in terms of demand at the doorstep. So that should be supportive of pricing power moving forward. There's always some sensitivity relative to inflation and CPI. But what you're really working to do to generate earnings growth is to create a spread. And we've been effective in doing that in this cycle. And you would think as you take capacity out of the market through higher occupancies, that you may maintain some all or more of this pricing power. On SHOP OpEx release and specific to labor costs and agency, pre pandemic, I don't recall agency labor being material at all or even utilized outside of very special situations. So there's been improvement, no doubt. But how do you plan to get agency labor out of your centers? And can you achieve pre-pandemic levels of agency labor by year-end '23? It's Justin. You're absolutely right. Agency was close to zero pre-pandemic. Obviously, there's been big shifts in the labor market since then. And we've had it enter our sector as others. We've managed to bring it down, which you've noted. In our 2023 guidance, we assume lower agency than we did in '22 year-over-year. And so that's supportive of our moderating expenses. But we are, in fact, carrying that Q4 run rate, which is like 2% of revenue forward throughout the year. There is -- I mentioned in my prepared remarks the guidance range. It assumes lower expenses and more occupancy at the top end, works the other way on the bottom. So we've incorporated that into our thinking. But we're anticipating that agency remains relatively stable. And this is true across healthcare at large and is principally a function of the labor force participation rate and other kind of macro factors. And the key is really to take the actions at the hiring level that Justin mentioned about positive net hiring, where you're at least getting your fair share of that workforce. So just on the SHOP, you talked about the seasonality earlier. But on Slide 18 of the presentation, you talk about expecting normal historical seasonality in 1Q '23 versus 4Q '22. It's a little bit of a sensitive subject, but I guess to the extent that high flu prevalence historically leads to, let's call it, elevated levels of resident expirations, I thought that would have been a trend that maybe would hurt occupancy a little bit in the fourth quarter, just given the normal spike in flu happened so much earlier this season in the fourth quarter instead of 1Q. And then inversely, with flu really kind of falling off dramatically here in 1Q '23, I would have thought the historical downtick maybe would not really happen this year in 1Q. So hopefully, all that kind of makes sense. I just wanted to get your thoughts on the early flu potentially altering some of the normal seasonal trend. Yes. So great points or observations. I'll start with the clinical side. The clinical side, I would just describe as kind of normal. It's certainly wasn't representative of the headlines that they were around flu. It's very normal kind of typical seasonality in both December and so far in January. We have had financial move-outs, which is also typical around this time because I mentioned over half of our residents received their in-house rent increases. And we've also mentioned they're relatively high this year as well. So that's contributing to the move-out trend and which is normal. That's kind of the point I was trying to make, and we're -- in that regard, we're kind of back to normal trends. And then from a move-in expectation standpoint and net move-in expectation standpoint, we expect those to continue to improve due to the demand at the doorstep. So Justin, the SHOP guidance assumes a 6% RevPOR growth, which is kind of slowly -- slightly lower than the higher single digit and even 10% in-place rate increase that some senior housing operators have been talking about. So could you talk -- could you comment on the expectation on the moving rates in the current promotional activities? Are you still expecting the positive re-leasing spreads for 2023? And as a quick follow-up, on the Colony loan, how much of the $50 million annualized interest income did you take off the guidance? How about I'll start with the pricing question? There's a page in the deck for those that have it, Page 20, that addresses this. First, the contributors to RevPOR, strong in-house rent increases running around 10%; care pricing, 11%; and then street rates have increased as well. So really, everything is going up in that regards. One thing about care, it's adjustable throughout the year, represents about 15% of our RevPOR. And then there's just normal attrition, typical attrition. And so in other words, not every resident is receiving the full benefit of these increases throughout the whole year. So that's why you're seeing a 6% RevPOR rather than around 10%, which the numbers above might indicate. I just had a follow-up question on the mezzanine loan. Can you remind me what loan-to-value range your mezz tranche set out in the capital stack when you originated the loan? And then can you give us a sense for what magnitude of NOI increases are needed at these properties to fully service the debt? Because I believe the interest rate is LIBOR plus 640 bps and that's really, really painful for cash flows. And so just any thoughts on how you got comfortable about not taking a larger impairment would be helpful. Sure. I mean, I think again, as we said, there's a post-COVID impact on some of the assets and rates have increased. The full loan stack is really closer to [L plus 3], 330-ish, if you will, in the senior and the junior. And so the original underwriting was very conventional, kind of 75%, 80% LTV. And so it's just a timing mismatch, if you will. And the borrower, we believe, is taking actions on the portfolio side. And the rates are the rates, and so we value the collateral in making our decision at the 12/31 balance sheet and made reasonable, consistent assumptions about valuation. On the timing mismatch. If rates stay where they are, when will NOI operating income start to fully cover the loans? Probably for you, Justin. In terms of capital deployment this year, you guys put out, I think, $1.2 billion last year. Where are you seeing kind of the best opportunities today outside of the redevelopment, which you've mentioned earlier in the call? But are you seeing more opportunities commercially to put more money to work in life science or MOB? Or do you think it will continue to be in SHOP by bringing new portfolios on? I guess, what are the biggest dislocations today in your mind? And how much are you interested in taking advantage of those? Yes. So first of all, we're fortunate to have a wide variety of capital sources to further acquisitions. We'll prioritize our key asset classes, senior housing, obviously, is one of those, life science, Medical Office as well. The market itself is not normal. There's exceptions to this, but there tends to be fewer market participants right now. The deals that that we're seeing are getting repriced. Again, there's exceptions to that. Pricing could be unclear on the stabilized assets. But we remain very interested in expanding the portfolio and growing in our preferred asset classes. Thank you so much. I want to sincerely thank everyone for joining us on the call today. We really appreciate your interest in the company. We look forward to seeing you. We're all very optimistic and aligned around our 2023 momentum and opportunities and are ready to get after it. Thank you very much.

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Good day, and thank you for standing by. Welcome to the Qualys Fourth Quarter and Full year 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Good afternoon, and welcome to Qualys' fourth quarter 2022 earnings call. Joining me today to discuss our results are Sumedh Thakar, our President and CEO; and Joo Mi Kim, our CFO. Before we get started, I would like to remind you that our remarks today will include forward-looking statements that generally relate to future events or our future financial or operating performance. Actual results may differ materially from these statements. Factors that could cause results to differ materially are set forth in today's press release and our filings with the SEC, including our latest Form 10-Q and 10-K. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. And as a reminder, the press release, prepared remarks and investor presentation are all available on the Investor Relations section of our website. Thanks, Blair, and welcome, everyone, to our fourth quarter earnings call. We delivered another quarter of strong financial performance; reflecting a year of accelerated revenue growth and industry-leading profitability. In terms of innovation, 2022 was a strong year for Qualys as we expanded our platform and our market opportunity. We introduced Context XDR to enable high-fidelity detection and response capabilities for our customers. We released VMDR 2.0 with TruRisk to enable comprehensive risk scoring and ITSM integrations. We brought External Attack Surface Management into our CyberSecurity Asset Management application. We unified multiple context vectors around asset criticality, vulnerabilities and system misconfigurations with asset telemetry in a single agent and brought a unique EDR application to market. Further flexing the power of our platform, we introduced our cloud-native TotalCloud with FlexScan, which pairs agent and agentless zero-touch assessment options with comprehensive cloud posture management and container security. These innovations allow our customers to reduce complexity as they standardize on a trusted platform that delivers an immediate ROI and lower total cost of ownership relative to siloed and traditional detection only technologies. With CISOs increasingly focused on comprehensive risk management, we have upgraded our TruRisk platform capability to ingest third-party scans into the Qualys Cloud Platform, which we call Enterprise TruRisk Management and is now in preview with customers. Regardless of which vendor scans an organization’s environment, with this enhancement to our TruRisk application, Qualys is now providing enterprise customers with a holistic, enterprise-wide risk score based on asset criticality and our Cloud Threat database, which is a unified threat intelligence platform of over 25 threat feeds. What makes this capability so special is our ability to then reduce an organization’s enterprise risk score by leveraging Qualys' remediation applications with automated workflows through a unified dashboard. Additionally, TotalCloud, which is our cloud-native risk management solution for public clouds, is now GA, and since our acquisition of Blue Hexagon in October, we’ve already added a new Cloud Detection and Response module to our TotalCloud solution. As organizations increasingly prioritize moving workloads to hybrid and multi-cloud environments, we view this new ML/AI-based technology for zero-day threat hunting and response as another strong competitive differentiator in a rapidly evolving market. Looking forward, we will continue to seek out opportunistic acquisitions to further enhance our platform, accelerate our time to market and further expand our market opportunity. Now turning to our sales and marketing execution, in Q4, we continued to witness organizations broadly responding to the evolving macro by applying additional layers of scrutiny to spend and delaying project start dates. We believe that with this increased scrutiny comes increased opportunity as organizations standardize on trusted platforms to consolidate security stacks, leverage automation, and achieve expedient remediation of risk. Qualys has a unique, organically built platform to address this need. Nevertheless, to fully capitalize on this opportunity requires crisp go-to-market execution. Over the last year, while we’ve made some meaningful progress on several fronts in this regard, including successfully growing the sales and marketing team and investing in our sales enablement and operations functions, we still have work to do in our sales execution. This is particularly evident within the context of today’s market dynamics and persistent macro headwinds, which resulted in lower-than-expected bookings growth in Q4. Accordingly, I’d like to share a couple of planned personnel and alignment changes within our sales and marketing organization, which position us for forward success. Earlier today, we announced the upcoming departure of our Chief Revenue Officer, Allan Peters. We thank Allan for his contributions during his tenure at Qualys as we continued to grow and scale our sales organization. In the interim, I will be overseeing the sales team as we focus on product-led growth, inherent in Qualys. We’re fortunate to have a talented next-level team of regional sales leaders who are energized by our competitive position in the market, and I’m confident in our ability to effectively drive our business forward as we search for Allan’s successor. Additionally, I’m pleased to announce Pinkesh Shah, who joined Qualys in November of last year, was recently promoted to serve as our new Chief Product Officer, overseeing both Product as well as Marketing. Given Pinkesh’s strong background in product-led growth, we believe having both product and marketing under the same leadership will help increase return on our investments and drive operational efficiencies in our go-to-market motion. It’s great to have Pinkesh on the team, and we’re looking forward to his leadership in helping execute our long-term growth agenda. As we diligently address the challenges brought on by today’s market uncertainty, we remain confident in our long-term strategy and trajectory. I’ve met with over a hundred CISOs over the past few months, and their message is clear; they are looking to pivot to a platform-based solution to solve their complex security problems. In the face of an evolving macro, escalated threat environment and cyber security skills gap, organizations need to reduce complexity and costs while presenting measurable risk reduction initiatives to Boards and C-level executives. This was underscored at our recent Qualys Security Conference in Las Vegas, which brought together over 500 Qualys customers and partners. Several customers in attendance highlighted the ability to measure their organizations’ security posture by leveraging the Qualys Cloud Platform, while reducing risk and costs. One customer stated that through VMDR with Truist, they reduced risk and eliminated 60% of critical vulnerabilities in a very short amount of time without having to buy separate threat intelligence feeds. Against this backdrop, there were several positives in Q4. We continued to see the steady adoption of VMDR, which is now deployed by 48% of our customers worldwide. A few key seven-figure VMDR wins in the quarter included two Global 500 financial institutions who chose Qualys for its ability to replace traditional siloed security tools and enhance security posture on a unified platform, and a Global 50 insurance company that is leveraging VMDR to not only detect, but also remediate vulnerabilities in both on-prem environments and cloud workloads. Beyond these wins, I’ll take a moment now to share a couple of additional successes with customers, who are consolidating their security stack to optimize spend and reduce risk. First, a new logo Fortune 1000 web hosting company selected Cybersecurity Asset Management VMDR and NO Cost to risk and remediation application in a seven-figure competitive win replacing point solutions from three vendors with one platform. The ability for this customer, to significantly enhance its security program, with automating steps comprehensive internal and external risk criticality, a quick remediation CMDBs and alerting on a natively integrated platform, where all key differentiators compared to vulnerability detection only solutions in the market. In addition, in 2022, highlighting organization's strategic focus on high-quality real-time asset inventory, we expanded our engagement with an existing financial services customer, signing an over $800,000 upsell deal for Qualys Cybersecurity Asset Management solution. This customer is standardizing on our Cyber Security Asset Management solution, due to the rich asset context, end-of-life visibility and real-time inventory they are able to get out of the same agents and platform they have already deployed for VMDR This enabled them to enhance their investment in Qualys platform and consolidating solutions, which is important to customers in current macro environment. As more and more customers are beginning to perceive Qualys as a leading security platform, they have -- as a leading security platform, that they can leverage to solve their complex and difficult security problems, we are growing increasingly confident in our ability to drive growth and gain market share. This is evidenced by the continued growth in our large customer spend, with customers spending $500,000 or more with us growing to 116 in Q4 up 27%, from a year ago Turning now to our growth initiatives in SME/SMB market, where we have witnessed slower growth. We have introduced new product packaging VMDR TruRisk VMDR TruRisk FixIT with Patch Management and VMDR TruRisk protected with both Patch Management and multi-vector EDR. These new packages offer simple, easy to deploy all includes cybersecurity solutions to manage remediate and protect against continuously emerging cyber threats and reduce for the small customers. We believe that the convenient packaging and pricing of this offering, will help streamline the sales process for our partners reducing time to value, and further advance our value proposition in the SME/SMB market. In addition, we are pleased to share that in Q4, we expanded our partnership with Oracle. Oracle Cloud Infrastructure OCI began offering, a fully managed vulnerability scanning service that enables Qualys customers to leverage their vulnerability, management licenses to scan their OCI, compute virtual machines. I'm also pleased to note, that OCI has selected Qualys' vulnerability management solution to help scan their internal environment for vulnerability. This is a testament to the effectiveness of quality and security cloud infrastructure and advancing our partner ecosystem. Finally, I'm pleased to announce that Qualys recently received FedRAMP Ready status, at the high impact level on our newly introduced GovCloud platform. Currently this is the only FedRAMP high ready platform offering inventory, vulnerability management and patch management in a single unified workflow. With government agencies increasingly moving workloads from on-prem environments to the cloud, this marks the achievement of a key milestone and makes Qualys the only modern alternative, to legacy scanners for federal, local and state government agencies. Given the certification, our consolidated platform and our investment to establish a public sector presence, we believe we are now well positioned to address a new vertical that will help drive growth in the long term. In summary, the cybersecurity market is a mission-critical technology. We believe our natively integrated platform, that is quantifying, remediating and reducing risk, brings a highly differentiated value proposition to our customers as they get more security using less resources out of a single Qualys Cloud Platform. In 2023, we’ll continue our disruptive innovation and further enhance and advance our go-to-market investments to crisply execute our long-term strategic vision with an already proven approach to balanced growth and profitability. With this, I’ll turn the call over to Joo Mi to further discuss our fourth quarter results and outlook for the first quarter and full year 2023. Thanks, Sumedh, and good afternoon. Before I start, I’d like to note that, except for revenue, all financial figures are non-GAAP and growth rates are based on comparisons to the prior year period, unless stated otherwise. 2022 was another notable year of product innovation for Qualys as we continued our product leadership while growing revenues by 19%, maintaining our gross margin at 81% despite inflationary pressures, and generating EBITDA margin of 45%. While our profit margin was well-above our industry peers, 2022 was a year of investment for Qualys with both R&D and sales and marketing growing faster than revenues. In R&D, we invested in our security research and product management teams to further strengthen the value proposition of our products and assist in executing our go-to-market strategy. In sales and marketing, it was a mix of investments in headcount as well as trade shows and marketing campaigns. Having executed against our 2022 investment plan with over a 20% increase in sales and marketing headcount, we look forward to optimizing our investments in 2023 as we remain committed to driving long-term profitable growth. Now, let’s turn to fourth quarter results. Revenues in the fourth quarter grew 19% to $130.8 million, up from 16% in the year ago period. This includes a de minimis add from the Blue Hexagon acquisition, which contributed a few hundred thousand dollars to Q4 revenues. Revenues from channel partners grew 22%, outpacing direct, which grew 17%. Our revenue contribution mix has shifted slightly over the last year with direct making up 58% of total revenues versus 59% a year ago. We expect a similar trend to continue in 2023. By geo, growth in the US of 19% was in-line with our international business, which grew 20%. Looking ahead to 2023, we expect our US and international revenue mix to remain at roughly 60% and 40%, respectively. In Q4, we saw continued strength in customer dollar retention but lower performance in up-sell with our net dollar expansion rate on a constant currency basis at 109%, down from 111% last quarter but up from 108% last year. Where we saw room for improvement was primarily in smaller customers who spent less than $25,000 with us during the last year. We expect this segment to gain momentum with the launch of the new product packages that Sumedh just mentioned. In comparison, customers who spent $25,000 or more with us increased by approximately 20% both in count and revenue. In terms of new product contribution to bookings, we continued to see healthy demand for Patch Management and CyberSecurity Asset Management with the two combined making up 9% of LTM bookings and 15% of LTM new bookings in Q4. The increased adoption for these products resulted in 50% growth in Q4 on a combined basis. Adjusted EBITDA for the fourth quarter of 2022 was $55.1 million, representing a 42% margin compared to a 45% margin a year ago. Operating expenses in Q4 increased by 25% to $58.4 million, primarily driven by the growth in sales and marketing investments including higher headcount and related costs as well as spend on trade shows. EPS for the fourth quarter of 2022 was $1.01 and our free cash flow for the quarter – of fourth quarter of 2022 was $40.9 million representing a 31% margin compared to a 32% margin a year ago. In Q4, we continued to invest the cash we generated from operations back into Qualys including $3 million on capital expenditures and $104.5 million to repurchase $848,000 of our outstanding shares. At the end of the quarter, we had $154.5 million remaining in our share repurchase program. We are pleased to announce that our Board has authorized an additional $100 million share repurchase program bring the total available amount for share repurchases to $254.5 million. Now let us turn to our 2023 guidance. Starting with revenues for the full year 2023, our revenue guidance is $553 million to $557 million, which represents a growth rate of 13% to 14%. For the first quarter 2023, we expect revenues to be in the range of $130.2 million to $131 million representing a growth rate of 15% to 16%. This guidance is assuming no material revenue contribution from our newer products such as Context XDR and total cloud and continued unfavorable market dynamics throughout 2023 similar to what we witnessed in the fourth quarter of 2022. Given the growth opportunities ahead of us, we will continue to invest in operations, people and systems while recognizing the importance of optimization. As a result, we expect full year 2023 EBITDA margin to be in the low 40s roughly in line with the fourth quarter 2022 margins. We expect full year EPS to be in the range of 4.10 and 4.18 and for the first quarter of 2023 in the range of 0.95 and 0.97. Our planned capital expenditures in 2023 is expected to be in the range of $18 million to $25 million and for the first quarter of 2023 in the range of $4 million to $5 million. In 2023, we plan to align our product and marketing investments to focus on specific initiatives to drive more pipeline and support sales and respond to the current macro conditions, while at the same time maintaining a disciplined approach to unit economics. Throughout 2022, we accelerated the pace of hiring and broadened great talent across all functions of the company increasing the total employee base by 18%, while growing sales and marketing headcount by 22%. While we plan to continue to invest in 2023 given the environment we are in, we're planning to prioritize increase in investment in sales and marketing as well as related support functions and systems while largely maintaining our level of investment in engineering. As we [indiscernible] to sharpen our execution by focusing on sales and marketing enablement and productivity, we believe we will be able to drive Qualys share and long-term returns, while balancing growth and profitability. In conclusion in 2022, we delivered strong top-line growth and industry-leading profitability. We continue to lead with product innovation introducing Context XCR and Total cloud and adding true risk to VMDR. With these achievements, we remain confident in our ability to deliver on our growth opportunity long-term and we will continue to prioritize investments critical to advancing our platform and go-to-market scale, with a commitment to further elevate the areas of our business within our control and maximize shareholder value. [Operator Instructions] Our first question will come from the line of Dan Bergstrom from RBC Capital Markets. Your line is open. Yes. Thanks for taking our question. So, could you talk a little bit more about the buildup to guidance for calendar year 2023? What are you assuming from a macro perspective relative to what you saw in the fourth quarter? You said similar, but maybe more on -- is it the same getting worse, close rates? Just trying to better understand the level of conservatism in everyone's numbers here. Yes. I think, we really think that we saw the macro and -- from our perspective deteriorate in Q4 and that thing -- that was reflected in our softer than expected bookings, both on new and upsell. And, I think, we see opportunity for us to continue to work with our sales team, improve their execution. And I think those are some of the things that -- changes that we have put in place, that we are looking forward to. As we get into Q1 and for FY 2023, we've sort of not assumed any change in that macro or productivity or anything like that when we looked at the guidance. Great. Thanks. And then, looking through the PowerPoint, it looks like the penetration of Fortune 50 G2K customers increase versus previously and you called out an example in the prepared remarks there. Just curious about what's securing that business, what products did they adopt? And then, just to verify, is this the first real change in penetration there in some time? I think, the larger customers, what's really interesting is that, they have complex security problems that they need to solve and the combination of Cybersecurity Asset Management capability the vulnerability management and detection response and patch management, together are really helping them solve that. And what is happening is that, everybody is talking about security budgets and the layers being added and the scrutiny, but really it's a question of the spend that you're putting in security is that giving you meaningful outcomes from a risk reduction perspective and that's really the question that's being asked. If we're going to spend this money, are we getting a risk reduction. And that's where the TruRisk that we introduced last year and the enhancement that we have done now, it has resonated well with the CISOs, because now we're able to give them risk score and they're able to actually tie the spend that they're doing to bring that risk score down and really able to quantify how that investment is making sense. And I think that conversation has been quite exciting and that is where we see larger enterprises, like I gave that example of this company, that essentially bought just over $800,000 worth of just asset inventory product to add on to the VMDR in Q4 -- Q3, Q4 so that they could actually enhance their security program and get that outcome and reduce the speed at which they're able to address this threat. So it's not just the projects in security you're executing, but what is the outcome that you are bringing. And I think that's kind of what's resonating with our customers. One moment for our next question. And our next question comes from the line of Joshua Tilton from Wolfe Research. Your line is open. Hey, guys. Thanks for taking my question. Just one for me. The growth outlook range for next year is kind of ahead of the growth that you guys did in your current billings in the back half of 2022. So can you just help us understand that ramp or maybe that acceleration in new billings that you guys need in order to I wouldn't say meet, but maybe come in slightly ahead of the guidance that you laid out for 2023? Thanks. Yeah. If you take a look at the current billings growth for 2022 the 15%, I think that what we would need to beat our revenue guidance is probably do something around that range. And if you take a look at the guidance that we gave for 2023, the assumptions that we made are -- we thought that it would be prudent to take into consideration the current macroeconomic conditions as well as the trend that we're seeing right now. Q4 was a tough quarter for us. As Sumedh mentioned, it was lower-than-expected bookings performance. And what we've assumed in the 2023 guidance is that that condition continues. We will be actively looking to improve our sales execution as well as look at different opportunities both large and small across all our customer base in order to drive bookings growth. But with that said, we feel that the guidance is probably derisked at this point. Thank you. One moment for our next question. Our next question is come from the line of Joel Fishbein from Truist. Your line is open. Hi. Good afternoon. This is [indiscernible] for Joel Fishbein. I just had a question. I think you had mentioned -- I saw that your gross margin ticked down around 60 basis points quarter-over-quarter. And I think you might have mentioned some inflationary pressures. Could you talk about discounting? And did you see any pricing pressure additionally in Q4, especially as some of your existing customers were renewing your contracts? Yeah. I think as we went into Q4, we certainly saw more discounting pressure coming in from competition. And we review with case-by-case basis, but we have a lot of different capabilities that we can offer to bring more value to the customer for the same dollar they spend with us. And so yes, we do see the discounting pressure and we're essentially going back to them with the metal value prop with additional capabilities. And you see some of that in the packages that we have built for 2023, where we are adding patch management and EDR et cetera together in simple packages, which offer them a little discount, but actually make it much easy to reduce the friction of the buying process. One moment for our next question. Our next question will come from the line of Rob Owens from Piper Sandler. Your line is open. Great. Thanks for taking my question. As you guys look at your sales and marketing investment from a direct and channel standpoint. Are you leaning either direction as we look at that metric moving forward, might it skew one way or the other given it's been relatively static over the last couple of years? Thanks. Yeah. I would say at a high level that we've started the program for partners in May of last year. So I think we are excited to see some of the early traction that we are seeing in terms of the registration and the engagement that we are seeing with a number of partners, but I think we're -- it's so early days. And so as we progress through this year or so, we'll get a better idea of how the demand is coming from partners versus direct. And I think as that evolves we will have a better picture and some are not necessarily driving towards one way or the other. Thank you. One moment for next question. Our next question will come from the line of Brian Essex from JPMorgan. Your line is open. Hi. Good afternoon. Thanks for taking my question. I guess maybe for Sumedh. I think, Joo Mi mentioned that there was no real material contribution in the guidance from Contact XDR and total cloud, but maybe some early indications of what you're seeing there and maybe outside of those products other emerging products that might be showing signs for early contribution? And how might that drive levers for upside in 2023? Great question. So if you look at where in Q4, if you look at cybersecurity management, patch management, I think those continue to have good uptake. And if you see the contribution to the bookings, I think it's like 15% for the combination of those two. And so I think we are seeing more and more interest in those. I think total cloud is something that we're driving a lot of innovation in and the Blue Hexagon coming in. So as customers are looking for flexibility moving workloads from on-prem into cloud multi-cloud and back I think a combination of Qualys VMDR with total cloud licenses is something where we see initially they will look at being flexible with the licenses that they have and then adopt additional licenses as they grow into the cloud in the future. The feedback has been very positive because of the comprehensiveness of the scanning capability that we bring and sort of just focusing on a snap chart only scan or agent-only scan we're giving them the most flexible options. And so our large enterprises are excited about it instead of looking at cloud-only security solutions that only gives them a visibility near the cloud. Most companies applications have or hybrid some of it is in cloud some of it is in on-prem and they want to see the risk overall risk of a combination of everything. And so that feedback has been quite valuable and we have customers who are looking forward to starting to do evaluations of Coco Cloud. Now that it's gone and give us feedback and see how that they can adopt that in addition to the VMDR that they're using on their own brain systems. And then context SDR is still early days. We have a few customers that have started using it are giving us feedback. But the overall theme is the same that today instead of having multiple tools collecting parts of the data and then them having to build something to bring context. So while there are many tools that are just collecting logs and providing detections from those locks the context of the asset, whether it's running a database, or whether it has vulnerabilities all of those things are missing. And so on the Qualys platform, because we have so much real-time context of the asset when they're able to bring those logs in Qualys that's where they're seeing interesting use cases that they can satisfy. I think that's kind of how really customers are looking at it that the Qualys platform solves multiple use cases more than the individual product. It's the use case that they have how that is getting solved. So it's early days for these, but I think we are pretty excited about the more immediate term uptake that we're seeing in Cyber Security Asset Management and Patch Management and then we look forward to Context XDR and Total Cloud more in the future quarters. Got it. That's helpful. Maybe just a quick follow-up. Just on managed services penetration, I think you've talked about it in the past. But in the spirit of expanding outside of large enterprise and outside of the traction that you're seeing with partners. And any incremental traction there to note? No, I think we continue to bring MSSPs on board, as you work with them, but I think nothing to call out that is dramatically different. I think, as it was interesting to see as the macro also evolves from the partner perspective how they see the value of managing their bottom line to provide service to their customers by not having to go to 20 different tools to provide the service versus standardizing on a Qualys platform that is bringing everything from providing vulnerability management patching to EDR. And those are the congresses that we are having as partners are also looking into 2023, how they want to optimize what they provide, but like I said nothing material or very different to share right now. One moment for our next question. Our next question will come from the line of Rudy Kessinger from D.A. Davidson. Your line is open. Hey, guys. Thanks for taking my question. I guess I'm curious on the guidance it sounds like what you're saying is what's baked into the guide for 2023 and is an assumption that the conditions in Q4 continue but not necessarily get worse. I guess, I'm just curious why not go in that next step. I think most of your competitors and others in the broader cybersecurity space have gone that extra step to make an assumption that things deteriorate further and bake that into the 2023 guide. So, just curious what drove that decision there. Yeah. I think in terms of – look I think we are taking into account that what we saw in Q4 which for us was fairly different than what we have seen earlier and it was not in terms of productivity et cetera, was lower than what we had expected. So we're assuming that that's going to continue. And again we are continuing to invest in the sales and marketing side of the house to get more quota carriers and to be able to improve with the packages that we have, et cetera, to improve how we are looking at execution. So that's why we are just assuming the continuation of the Q4 macro that we are seeing. But again, it's – there is lumpiness that we understand, but that's kind of how we are looking at it. Yeah. And as I mentioned in Q4 what we saw was bookings came in lower than what we had anticipated, and so we felt that that macro impact in Q4 already. And so for us the way we look at it is because of the macro impact it had a it had a trickle down impact on the sales rep productivity and in the process and we're really looking into our sales execution and the momentum. And so with that said, we do see signs where like as an example we just launched a new product. There are some initiatives that are going on right now that, we feel like it's headed in the right direction. But the guidance actually is taking into consideration all these different elements including the personnel changes. So we feel that it is a cautious guidance from our perspective. Okay. And then secondly on the sales execution, you've mentioned that a couple of times I guess, where do you really need improvement? Is it more so your tenured reps are not selling really the whole package as affected is that your newer reps are taking longer to ramp and obviously, the macro could be impacting that. But any more tangible items you could call out on sales execution that you're looking to improve? Yes. I think we are overall. I think the investments we made in 2022. A lot of them have done well. I think we increased sales headcount as well. I think it's a little bit different in each segment like you saw the larger customers are doing well in terms of getting additional capabilities from Qualys, et cetera. And then of course there are some deals on the larger enterprises where because of the macro there are additional signature, additional layers of convincing the value and I think there is room for us to do better in those. We didn't quite in some of these deals actually stay ahead of ensuring that we were in front of the right people and showing the value. So I think that's a training that we are giving even our tenured reps to make sure that as we get into 2023, we're doing a better job of staying ahead of that. I think on the lower end of the customers, that's more about how do we reduce the friction in the buying process by not having to have them upsell individual modules and provide better packages and then just a matter of messaging for the SMB segment around value proposition as we call it MDR True Risk and then fix it that this is going to fix your things and this is going to protect you. So I think it's – on those two different segments I think it's right. And then overall of course we have a sales force we have been hiring last year and there is a room for us to provide better sales enablement for them. And that's why with Pinkesh now coming on board and aligning product marketing, product management, product market being and driving more product-led growth, we believe we can use our platform itself as a way to create more opportunities for our sellers to show the value prop much more quickly. And so it's a combination of those things that we are looking at. And just to add a little bit more color to it. The way we're looking at it is we've always been a product leader. We believe that we have a very differentiated cloud platform that works very well and serves our enterprise customers that are looking to solve very complex and difficult problems. And so that's why we've been successful in the last year in terms of our ability to grow both account and the dollar amount from larger organizations. With that said, where we've seen the lack of growth and the inefficiency if you will is on the SME and SMB space, where if you take a look at as an example, customers who spent less than $20,000 with us, the count really didn't grow that much and that's been a drag on our business. That's where we're really focused on right now with the new product and packaging, we knew that there was friction. And this is where we're very happy with the new product launch. And with that I am happy to accelerate and gain the momentum in that segment where we've seen more of the macro head, we believe that that will have an incremental revenue if you will that we'll be able to deliver probably in the second half of 2023. Thank you. One moment for our next question. Our next question will come from the line of Hamza Fodderwala from Morgan Stanley. Your line is open. Hi, good evening. Thank you for taking my question. Joo Mi, you talked a little bit about the personnel changes and how you're thinking about that. Just curious, how are you reflecting sort of the risk of additional sales disruption on the back of the CRO departure? Is that something that you really contemplated in your 2023 outlook? Yes. And this is why we believe our outlook is appropriately derisked from that perspective, because if you take the assumption that we made in addition to the -- assuming that the current macro continues is, no material improve or gain from the newer product. I mean we do see a huge upside to our guidance if our newer product happened to take off in the second half of this year. However, because of the personnel changes, we believe that the sales and productivity, even though it was lower in Q4, we're assuming that it continues as it is in 2023. Got it. And just so I guess, maybe our models are level set, because it is an important metric. I'm curious how you're thinking about growth for CCB throughout the year. I think in times where -- years where things have been slowing we've seen CCB kind of south of revenue growth by a few points. Should we expect CCB to grow like maybe close to 10% this year? Not necessarily, because if you think about revenue, it's a lag from the CCB, right? And so when I say the upside, the CCB could grow higher than the revenue and that's the uncertainty. In terms of our guidance for the revenue, however, it's more informed by what we were able to achieve in 2022. We believe we'll be achieving in the first half 2023. That will have a greater weight on the revenue for 2023. Thank you. I'm not showing any further questions in the queue. With that, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.

EarningCall_118

Greetings, and welcome to the Terex Fourth Quarter and Year End 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Good morning, and welcome to the Terex fourth quarter and year end 2022 earnings conference call. A copy of the press release and presentation slides are posted on our Investor Relations website at investors.terex.com. The replay and slide presentation will also be available on our website. We are joined by John Garrison, Chairman and Chief Executive Officer; and Julie Beck, Senior Vice President and Chief Financial Officer. Their prepared remarks will be followed by Q&A. Please turn to Slide 2 of the presentation, which reflects our Safe Harbor statement. Today's conference call contains forward-looking statements, which are subject to risks that could cause actual results to be materially different from those expressed or implied. In addition, we will be discussing non-GAAP information and performance measures we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP and performance measures can be found in the conference call materials. Thank you, Paretosh, and good morning. I would like to welcome everyone to our earnings call and appreciate your interest in Terex. We are proud of our team members' performance that delivered strong results in 2022. It was another year of addressing a challenging global operating environment, including inflationary pressures, production disruptions and COVID impacts. The Terex team members worldwide work tirelessly to improve our performance for our customers, dealers and shareholders. I would like to thank our team members for their continued commitment to our Zero Harm safety culture and Terex Way Values. Safety remains the top priority of the company, driven by think safe, work safe, home safe. Please turn to Slide 4 to review our financial results. The team delivered an excellent quarter. Sales of $1.2 billion were up 23% from last year and up 31% on an FX neutral basis. We ended 2022 with a backlog of $4.1 billion, up 22% from prior year, driven by strong global customer demand. Operating margins of 9.9% improved 290 basis points from the prior year, and EPS of $1.34 increased 63%, reflecting strong execution by our team members. Please turn to Slide 5. We significantly strengthened our business in 2022 through our Execute, innovate and grow strategy. We proactively managed supply chain disruptions and inflation to deliver a 28% increase in operating income, a 41% improvement in EPS, a return on invested capital of 21.3% and we achieved price cost neutrality for the year. We introduced the first and only all electric utility bucket truck. We expanded our concrete product offering with the acquisition of ProAll. We prioritized our focus on the circular economy by introducing new system solutions to our environmental and recycling customers. And through the acquisition of ZenRobotics. We invested in biotech and Acculon, which accelerated our product electrification strategy. This week, we announced an equity investment in electronics and entered into a co-development agreement to create potential robotic applications for Terex products. And we continued our investment in technology, new product development and our Mexico facility, which continues to progress on time and on budget. I am proud of our team members' accomplishments. Turning to Slide 6. In our recent Investor Day, we presented five key theme to our strategy that will drive our growth for the next several years. The first is, capitalizing on mega trends, which are driven by an increasing focus on sustainability. Our products are well positioned to benefit from electrification, waste recycling and infrastructure investments. We'll continue to grow our Materials Processing segment through innovation and by expanding into adjacent markets and categories. We will optimize Genie's performance through the cycle in sales growth and margin improvement. We see attractive opportunities for growth in our utilities business driven by electrification. And we have a strong and growing parts and service business, which not only offers us countercyclical growth, it also provides critical value to our customers. This year, we'll continue to make progress on our strategic growth priorities, including Genie's focus on continuous margin improvement. The Genie team is going to have a busy year. We anticipate moving multiple production lines throughout our global footprint and opening our new permanent facility in Monterrey, Mexico. The new facility and local Mexico supply chain are expected to improve our operating margins by 200 basis points when fully up and running in late 2024. But these moves will negatively impact production volumes and manufacturing efficiencies in 2023 and our outlook reflects this. Please turn to Slide 7. Our MP and AWP segments participate in diverse end markets globally, which is a strength providing many growth opportunities. We believe our growth will be further accelerated by global megatrends. At the center of these megatrends is sustainability. The increasing global focus on sustainability is driving a fundamental shift in how the world operates, providing additional opportunities for Terex. The global demand for waste recycling solutions is increasing, driven by regulatory and societal changes. Our MP brands including Ecotec, CBI and Terex washing systems were at the forefront of meeting demand for circular economy initiatives. The increase in reliance on electrification to reduce greenhouse gas emissions requires great capacity expansion. Terex utilities is well positioned to capitalize on the investments needed to enhance electrical grid infrastructure. Our Genie business will benefit from new product driving digitization and onshoring in the United States. All of our businesses will benefit from increased government sponsored infrastructure spending throughout the globe. As we discussed at our Investor Day, we see many growth opportunities by providing solutions that support our customers' ESG objectives. Please turn to Slide 8. Our innovative products are delivering sustainable solutions for our customers. Fuchs material handlers, part of our MP segment, are versatile machines capable of handling various materials. Importantly, Fuchs diversifying into port applications. You can see a Fuchs material handler, which is powered by the shift to battery hybrid system unloading bulk materials. As a result of our products, these ships' operations produced zero emissions and reduce noise levels in the harbor. Another example of Terex helping our customers in achieving their sustainability goals. Please turn to Slide 9. We are proud to report that in 2022, Newsweek recognized our commitment to sustainability, naming Terex one of America's most responsible companies. We recently published our 2022 ESG report, where we highlighted the results of our first ESG materiality assessment. Our products and our people were identified is among the most essential to our sustainability journey. Terex products help our customers meet their sustainability goals, and reduce negative impacts to the environment. At the end of 2022, approximately 60% of MP and 70% of Genie products offered electric or hybrid options. Terex Utilities was the first to market and continues to offer the only all-electric utility bucket truck. And MP will continue to expand its waste and recycling offerings. Additionally, we commenced energy audits at our sites, enabling us to identify and implement actions that are important for achieving our goal of a 15% reduction in both greenhouse gas and energy intensity by 2024. With respect to our team members, diversity, equity and inclusion continues to be embraced and driven throughout the organization. Our Affinity Groups further expanded in 2022 from eight to nine and participation rose two fold. In summary, Terex remains highly active in the ESG activities and we will provide updates throughout the year. Turning to Slide 10 to review our current macroeconomic environment. Our 2023 growth will continue to be constrained by supply chain issues. Supply on time delivery has improved sequentially, but remains well below historical norms. The team was able to reduce, but not eliminate the hospital inventory in the fourth quarter, which is a clear indication of the level of disruptions our teams continue to face. Although selected costs have improved in some markets, we continue to see overall cost increases from our suppliers as inflation works its way through the various tiers of the supply chain. I'm confident in the team's ability to continue to adapt and overcome the macroeconomic challenges that we have been facing. Thanks, John, and good morning, everyone. Let us take a look at our fourth quarter financial performance found on Slide 11. Terex team members continued their solid execution in a dynamic environment. Sales of $1.2 billion, were up 23% year-over-year on higher volume and improved price realization necessary to mitigate rising costs. Sales in constant currency were up 31% as foreign currency translation negatively impacted sales by $82 million or approximately 8% in the quarter as the euro and British pound weakened against the dollar. Gross margins in the quarter increased by 190 basis points over the prior year as volume, pricing, favorable mix and cost out initiatives offset cost increases and the negative impact of foreign exchange rates. Both of our segments increased our gross margins from last year and we were price cost neutral for the year. SG&A was in line with expectations, but up over the prior year as a result of inflation, incremental spend due to acquisitions and prudent investments in new technology and new product development. SG&A was 9.4% of sales and decreased by 90 basis points from the prior year as business investment was coupled with continued expense management. Income from operations of $121 million was up 73% year-over-year. Operating margin of 9.9% was up 290 basis points compared to the prior year. Interest and other expense of $15 million was higher than the fourth quarter of 2021 due to increased interest rates. The fourth quarter of 2021 benefited from a one-time $12 million gain associated with the Genie administrative office relocation. The fourth quarter global effective tax rate was approximately 13% due to onetime discrete items, including the reversal of a German valuation reserve. Fourth quarter earnings per share of $1.34 increased 63%, representing a $0.52 improvement over last year. This strong performance was driven by volume, price and discipline cost control. Current quarter results reflect an unfavorable EPS impact of $0.12 dollars per share from foreign currency and the fourth quarter of 2021 results included a $0.14 dollars gain due to the Genie administrative office relocation. Free cash flow for the quarter was $126 million. I will discuss free cash flow later in more detail. Let's look at our segment results, starting with our Materials Processing segment found on Slide 12. MP had yet another excellent quarter with strong operational execution resulting in sales of $550 million, up 21% compared to the fourth quarter of 2021 with robust customer demand for our products across multiple businesses. On foreign exchange neutral basis, sales were up 32%. The business ended the quarter with a total backlog of $1.2 billion, up 12% from a year ago. The strong backlog is approximately 3 times historical norms and supports our 2023 sales outlook. MP benefited from favorable regional and product mix and effectively overcame cost increases resulting in price cost neutrality. This drove an increased operating margin of 200 basis points to 15.8%, while integrating several acquisitions. Again this quarter and for the full year, MP represents approximately 60% of the overall Terex operating income and continued its strong and consistent revenue and operating margin performance. On Slide 13, see our aerial work platform segment financial results. AWP delivered sales of $672 million, up 26% compared to the prior year on higher demand and pricing. On a foreign exchange neutral basis, sales increased 32%. Total backlog at quarter end was $2.9 billion, a record, up 27% from the prior year. Customer demand continues to be strong due to high utilization rates, aging fleets and electrification projects. AWP more than doubled their operating profit and delivered operating margins of 8% in the quarter, up 320 basis points from last year. The improvement was a result of higher sales volume, favorable mix, cost reduction initiatives, strict expense management and disciplined pricing actions. Partially offset by product liability expenses in our utilities business. Turning to Slide 14 and full year 2022 financial highlights. Our performance in 2022 reflected strong improvement in the business and the extraordinary efforts of our team members. Earnings per share increased 41% from $3.07 to $4.32, $1.25 improvement, including a negative FX impact of $0.42 per share. $Sales of $4.4 billion were up 14% year-over-year, 20% on an FX neutral basis as end markets remain strong. Operating margin of 9.5% expanded 110 basis points, driven by prudent cost management as well as price realization. SG&A was 10.2% of sales and decreased by 80 basis points from the prior year, reflecting focused cost management. Free cash flow of $152 million was up 21% year-over-year, including additional inventory as supply chain disruptions continue. Please see Slide 15 for an overview of our disciplined capital allocation strategy. Our financial performance this year continued to strengthen our balance sheet and provides a financial flexibility. Our ROIC of 21.3% significantly exceeded our cost of capital. We returned $132 million to our shareholders in share repurchases and dividends. We prepaid the remaining $78 million of our term loan. We continue to invest in our business with capital expenditures of $110 million and we deployed $50 million on acquisitions and investments. We have no debt maturities until 2026 and 77% of our debt is at a fixed rate of 5% until the end of the decade. Our net leverage remains low at 1 time, which is well below our 2.5 times target through the cycle. We have ample liquidity of $727 million. Yesterday, we announced a 15% increase to our quarterly dividend to $0.15 per share. The increase reflects our continued confidence in the company's strong financial position and future prospects. In December, our Board expanded the size of our share repurchase program by $150 million, leaving us with approximately $193 million of remaining authorization to purchase shares. Terex is in an excellent position to run and grow the business. Please turn to Slide 16 to review our backlog. Consolidated 2022 bookings remained at healthy levels and were the second highest booking rate in recent history. Elevating customer fleet ages and historic loan dealer inventory levels continue to support robust demand. We had minimal cancellations and push outs. Our total backlog position is up 22% versus the prior year, demonstrating the strength of our end markets and giving us visibility into 2023. Now turning to Slide 17 to review our full year outlook. As we move into 2023, it is important to realize we are operating in a challenging supply chain environment with many variables such as high inflation, volatile exchange rates and geopolitical uncertainties, so results could change negatively or positively. With that said, this outlook represents our best estimate as of today. We anticipate earnings per share of $4.60 to $5 based on sales of $4.6 billion to $4.8 billion, which reflects progression towards our five year financial targets we reviewed with you at our Investor Day in December. Our sales outlook incorporates the latest dialogue with our suppliers and our current supply chain expectations. We anticipate higher volumes as customer demand remains strong and expect pricing actions to offset cost pressures. We expect the first half and the second half sales to be comparable with the second and third quarter sales modestly higher. SG&A of approximately 10.5% of sales reflects prudent investment in the business, including our team members, new product development engineering and digital initiatives and the full year impact of 2022 acquisitions. We expect Corporate and Other to be evenly spread throughout the year. We anticipate operating margin for the year to be in the range of 10% to 10.4% as we remain price cost neutral for the year. Based upon global tax laws, we expect a 2023 effective tax rate of approximately 21%. This is an increase from 2022 as discrete items are not expected to repeat. Unfavorable foreign exchange rates, higher interest and other expenses and the normalization of our income tax rate combined amount to a $0.35 per share unfavorable impact. We estimate free cash flow of $225 million to $275 million, including capital expenditures of approximately $135 million, with the largest component being our Genie Mexico facility. Let's review our segment outlook. MP sales of $2 billion to $2.1 billion and AWP sales of $2.6 billion to $2.7 billion reflects strong customer demand with continued supply chain constraints. MP's strong segment margins are expected to continue to increase to approximately 15.5% for the full year and are anticipated to be lower in the first quarter due to slightly reduced volumes and higher marketing costs and relatively balanced for the remainder of the year. The AWP segment continues to be impacted by supply shortages, AWP segment operating margins of approximately 9% are expected to be comparable in the first half and the second half with the second and third quarters being slightly higher. Operating margin expansion is expected due to price realization, increased volume, continued strict expense management, partially offset by unfavorable manufacturing efficiencies. As I mentioned earlier, our scheduled production line moves are expected to impact manufacturing efficiencies throughout the year. The Terex team will continue to demonstrate resiliency to deliver sales growth, operating margin expansion, increased free cash flow and higher earnings per share in 2023. Thanks, Julie. Turning to Slide 18 to conclude our prepared remarks. Terex is well positioned for growth to deliver long-term value for our stakeholders in 2023 because we participate in strong end markets, including infrastructure, electrification and environmental. We'll continue to execute our disciplined capital allocation strategy, while investing in new products and manufacturing capability, along with strategic inorganic growth. We have demonstrated resiliency and adaptability in an increasingly challenging environment and we have great team members, businesses, strong brands and strong market positions. Thanks, John. As a reminder, during the question-and-answer session, we ask you to limit your questions to one and a follow-up to ensure we answer as many questions as possible this morning. Thank you. [Operator Instructions] Our first question comes from Michael Feniger from Bank of America. Please go ahead. Your line is open. Hi, guys. Thanks for taking my questions. Just like to ask actually about materials processing. It keeps out the forming delivered a record high operating margin in the fourth quarter. Just what is underpinning that strength? Can that continue in 2023? And maybe just why only 20 bps margin expansion in the guide for next year? Thanks, Michael. And also thank you for recognizing the MP performance. MP continues to deliver consistent outstanding performance. As Julie indicated in her opening comments, represents more than 60% of our overall Terex operating margin. But the strength really comes from the global presence of the businesses. If we look at it, we've seen strong sales, healthy bookings, elevated backlogs. We've got almost 3 times the normal level of backlog in this business as we look forward into 2023. So healthy backlog, healthy bookings. And then if we look at our respective verticals that we compete in, in our aggregates business, the largest portion of the MP segment, again, similar story. The global healthy bookings and backlog I think it's important for investors to understand that this business caters not just a virgin aggregates, but it also caters to the recycling side. And when you see construction demolition waste, when you see changes in practices around the world, that creates opportunities for our aggregates business. So we're seeing good strength globally in our aggregates business. In our concrete business, advanced mixer, that we did see a good order activity, good backlog. We watch that very closely because that one is tied a little bit closer here in the states. It's a U.S. based business to residential construction. But the team just came back from World of Concrete, they had a good showing and they're anticipating good continued strong order growth and backlog there on the concrete side. ProAll the acquisition that we made in the middle of last year continues to see strength. That's more tied to infrastructure investment and continues to see strength in their bookings and backlog as well. In my comments, I mentioned Fuchs. Fuchs we did see that soften somewhat as we talked about last -- in our last earnings call, that principally was driven by conditions in Europe and the decline in scrap metal prices because they are levered to scrap metal. They're diversifying, as we indicated in the ports and other applications. And again, historically, pretty decent position from a backlog standpoint, but we did see a modest slowdown in bookings around Europe and our Fuchs business. Environmental continues to grow. Substantial increase year-over-year globally both in bookings and backlog associated with our environmental business. And then our RTs and tower businesses, again, more levered to Europe. We did see some weakness or slowdown in orders, but overall backlog against history still remains in a healthy position. But again, more levered to Europe there. So we did see some modest slowdown in our bookings in that segment of the business. And then finally, our Pick & Carry business down in Australia continued to show strong strength. I was in India last week at the CONEXPO bauma show and Indian market customers were strong. We just launched our [front-end] (ph) product there, met with several customers and dealers that had taken delivery of the product. So again, our pick and carry business remains strong. So overall, Michael, we're just seeing strong healthy bookings. The other important factor that we'll continue to report on because I think it's important given the level of backlog that we're experiencing is we're not seeing cancellations and push outs. That's the first sign for us. If we begin to see the backlog begin to move around with cancellations and push outs, and we're just not seeing that at this time. So that will be the first indication. We acknowledge there's macroeconomic uncertainty out there, but despite that, we're seeing strong bookings, great backlog, great visibility as we look into 2023 in the MP segment. And Michael, just to add on that, MP represents 60% of our operating income, and they had a terrific year in 2022. And we expect margin expansion to continue in 2023, and we expect them to continue to be price cost neutral for the year. They're operating in a disruptive environment, too. They have all of the supply chain disruptions and they've still been able to deliver a strong OP margins. And so, we expect them to expand, but we're also going to invest in this business. We're going to invest in new product development. We're going to invest in digitalization and we're going to invest in and people are traveling again and trade shows and things like that. And so there's going to be some marketing expenses in this business as well. And they also will have some unfavorable foreign exchange from the British pound to the U.S. dollar in 2023. So they've just done -- and they also will absorb some additional SG&A due to acquisitions that we did in 2022. So we're expecting continued strong financial performance from MP and expanded margins. Thank you. And just a follow-up on that. I mean, when you look at the material processing comps in the public market, Terex is trading at a notable discount. Is there anything structurally disadvantaged with your materials process unit compared to those peers. How do you try to close that valuation discount? Could you use your balance sheet to repurchase shares? Just any thoughts on that would be helpful. Thanks. Thanks, Mike. Some broad questions. I think part of our job is to better explain the great portfolio of businesses that we have in MP, we didn’t started doing that during our Investor Day, we'll continue because if you look at that portfolio, it’s consistently performed throughout time in terms of driving revenue growth and margin expansion. In terms of our disciplined capital allocation strategy, we're going to continue to invest in organic growth first and foremost, we're going to invest in dividend. We increased the dividend. I hope everybody saw that announcement of 15% increase in dividend. So we'll continue to do that. We have the ability to invest for M&A activity. So we'll look there that's a focus area. And then we did increase our share repurchase authorization and you can anticipate that being definitely to offset dilution associated with incentive comp is more of the focus right there for now. But we're always looking at ways to enhance stakeholder and shareholder value in the corporation, and we'll continue to do so much, Mike. Hi. Good morning, everyone. Thank you for the question. And congratulations. Quick question on the backlog, up 22%, at the same time, you guys are mentioning low dealer inventories in MP aged fleet and across the channel, really, do you think kind of what's in your backlog will have much of an impact on either replenishing dealer inventories or bringing down the fleet age in the coming year? And I guess it's kind of a way to say maybe some of that could spill over into 2024? So, thanks for your question, Stan. We do have historically high backlogs as we go into the year, if you just look at our coverage for 2023. And our backlog stand is already $700 million for delivery in 2024. A lot of that is associated with supply chain. So I do believe -- and again, on the MP side, dealer replenishment, dealer inventories are low, I think this is going to help, but they're seeing strong growth. And so, as soon as products come in, in that business, about 70% goes to the distribution channel, especially rental. They do a lot of rental purchase agreement type contracts. So it's being heavily utilized. The customers are converting it from the rent to ownership. And so, we are having a hard time replenishing the dealer inventory. So I think that's part of the strength there. And then on the AWP side, we can talk more about that. But clearly, with the constraints on the industry in terms of meeting the needs of the rental customers, the fleet replacement has been delayed and one of the benefits of 2023, and we think even beyond 2023 is that fleet age has increased, which is going to increase the replacement cycle as we go forward, specific -- that comment specific to the GE business, Stan. Perfect. I apologize if you touched on it at the first part of the call. But the robotics announcement from earlier this week, I thought was very interesting. Could you kind of talk high level how you think this will end up playing out from this co-investment that you've put together? Yes. Thanks, Stan, and I hope everybody had the opportunity to see that. It wasn't an equity investment in electronics that we made. But the biggest part for us is co-development of robotic technology and really is to provide our customers with solutions to help safely and efficiently conduct work. If you think about job sites, labor constraints, skilled labor trade constraints, there's an opportunity to enhance the outside productivity and safety through robotic technology. Electronics is on the forefront of that. So if you take their capabilities with our capabilities of our existing machines married the two together, you have the opportunity to potentially provide solutions to the end market customers to enhance, again, their productivity and safety. And that's the reason we made the investment. We view this as an investment in technology that enhances the solution offering that we provide our customers going forward. And so, we're excited about the investment we've made, very excited about the co-development agreement. And we're excited about what the potential opportunity of this going forward. Yes. It sounds like there will be a lot of opportunity I guess on the MP side from a sorting perspective. But thanks very much for the color. And congratulations and best of luck. Hi. Good morning, everybody. John, I just wanted to get a little bit more clarity around your comments around the Monterrey move and the disruption to, I guess, productivity and margin that you expect for 2023. I guess first question is, did that impact fourth quarter March, AWP margin? And just sort of how should we think about that flowing through the year? Does that -- do you exit 2023 at a fully operational level and then 2024 should reflect all these benefits? Or does this continue to bleed into 2024? Thanks. Yes. Thank you. I'll start Julie and then you can jump in on that longer-term margin side. So the disruption, it really doesn't start until first quarter. We began to move into the permanent facility, Seth, in the first quarter. And we had a significant number of product line moves. First GE has done this. They've got a detailed process for doing this. But in the environment we're in now, both sides of the transaction, i.e., the sending plant is going to have some disruption associated with the supply chain in the receiving plant. And in this case, Monterrey is going to have some disruption, which impacts manufacturing efficiencies. And so, we've factored that into our outlook. It will take place during 2023 and will continue into 2024. As we indicated in our remarks and as we spoke during Investor Day, it ultimately is going to add about 200 basis points of operating margin improvement when we're up fully and running as we really get closer to the back half of 2024. So that's our current outlook. And again, it's going to be a busy year for the team. They're excited. The construction has gone well. It's on time, it's on budget and now it's time to start moving the product lines in there and reaping the benefits of the investment that we're making. And Seth, just to follow-up on some of the Q4 margin commentary. The AWP, their margins were up 320 basis points from last year. So really nice results in higher sales volumes and they had strict expense management and cost reduction initiatives and disciplined pricing. And when we look at Q4, the margins were really as expected. We had talked about last time we had some fewer production days, less favorable geographic and product mix and unfavorable foreign exchange impacting AWP. And our utilities business continues to experience the supply disruptions due to chassis and bodies. And so they had unfavorable manufacturing efficiencies and some things that were maybe newer, I guess, that we had some weather-related shutdowns and product liability expenses in the utility business, as well as the change of facility with temporary shutdown due to COVID cases. But the Terex, the team did a really great job to more than double their operating profit and increase their margins by 320 points in the fourth quarter. So pretty much, we had some nice performance by the team. Yes. Okay. That's helpful color. Thank you. And then just a quick follow-up. John, I think you called out some softness in in Europe in the Fuchs business and the crane business, tower business. Is that -- are you seeing the pausing on European orders on the access business as well? Or is it really just the ones you called out? We did see a modest slowdown in orders on the AWP side in the quarter. But that said, we still have strong -- historically strong backlog. So a little bit of moderation on the booking level, but strong backlog as we go into 2023. Hi. Thank you for the time. With AWP for 2023, right? You've got 94% of the sales guide in the backlog that ships this year. So clearly, this is a year about, I mean, supply chain inefficiency, supply chain broadly as a gating factor -- factor, I should say. The question I have though is, the order books for 2024, how are we handling the out-year maybe differently than the past. And I want to go back to the Mexico risk of that transition. I know it's justified 200 basis points of margin improvements worthwhile. But I'm just trying to make sure we don't look up in a couple of quarters in Mexico in this challenging supply environment becomes more of a risk, more of a drag on that transition. So again, two questions there, 2024 AWP, how are we handling the order books versus history? And again, just how do we get more comfort that it's not the easiest time to be transitioning production? Thanks, David. So in terms of the order book, as we indicated, we've got about $700 million total company Terex wide of backlog into 2024. And it's -- more of that actually is utilities than the Genie business, where especially some of our highly customized units are booked well out into 2024 in that business. And then in terms of the Monterrey, Mexico, again, we just thought it was appropriate given the level of change to highlight it as part of the Genie plan for this year. Again, David, they've done this numerous times. The supply chain is -- remains the gating factor. We will closely manage this and ensure we've got the appropriate level of material on the sending plant, as well as the receiving plant to mitigate the disruption to the maximum extent possible. But given the level of magnitude of change, we thought it was important for us to at least highlight it, and that explains some of the margin or why it's taking time, why aren't you just getting 200 basis points of margin immediately? That's the why. It takes time to bring the plant up -- to get the plant up and operating, get the supply chain up and operating and stabilized and then over time, quite confident it's going to deliver that level of margin improvement for the Genie business. And can you touch on the order books, how you're handling 2024 or let's call it the out year differently than the past? How early the order -- I mean, opening the window up earlier [indiscernible] you don't usually start the year with 94% of your guidance. [Multiple Speakers] You're right, David. We don’t usually start the year with 90-plus percent book for the year. So yes, we are -- and again, we're working with our customers, frankly, in the AWP segment, right now, the customers are asking more than we -- more than we can currently deliver. So we're in constant dialogue with our customers if we see some improvement in supply chain by specific models, we let them know. And so we are taking orders into 2024. Again, most of that David is because of the supply chain, not that the customers necessarily are looking forward to 2024, but that’s when we're able to deliver the product is in 2024. Hi, Julie. Just maybe to continue the conversation that David just started. One more question on this backlog that extends to 2024. How are you guys handling the pricing aspect of that given all of the uncertainty around inflation? So in the call we're making our best estimate of what that is going to look like, and that's the answer. And we just make a best estimate. And we [Multiple Speakers] And there is a pricing -- there's a lot of price associated with that. It's not like the customer has to wait until pricing is confirmed at some point in the future. Okay. Understood. And then, to follow up, just with respect to what you guys are embedding for free cash in 2023. Can you talk a little bit about the expectation for working capital? Great question. Thanks, Nicole. So we are expecting our free cash flow to improve in 2023, it improves for two reasons: number one, improved earnings and net income. And then second, we had a significant investment in inventory in 2022. We expect additional working capital to support the additional volumes in an absolute dollar term in 2023 for the much less lower inventory build in 2023 than we had in 2022. So we'll be more working capital efficient going into 2023 than we experienced in 2022. Thanks. With supply chain being the limiting factor, how much revenue did you deduct from the 2023 range you provided? And can you just tell us what revenue level each segment could ship to unconstrained? So I'll take it, Steve. If you look at our revenue guide for the year and you think about 2022, we were between -- just at the macro level across Terex. We were between $1 billion and $1.1 billion and then stepped it up in the back half of the year to [$1.50 billion to $1.2] (ph) billion type of range. We're anticipating modest supply chain improvement, but not anywhere near historical performance. So if you kind of look at our fourth quarter run rate, we've kind of extended that into 2023. And again, that's based on the current estimates from suppliers and managing to the current constraints. The challenge is, this constraint continues to move around. And so we -- our guide is predicated, as you can see, based on our backlog and the coverage rates. The guide really is predicated on the supply chain. It's our best estimate in current conversations with suppliers in terms of what they can deliver to, and that's what we've built our 2023 outlook on. In terms of what could happen, you can go back years before, and we were significantly above those levels, especially in the AWP segment. But again, it's really -- the constraint gives the supply chain, and that's the governor for 2023 as of today. Julie? Yes. I just going to add that we have been running at $1 billion to $1.1 billion for consistently. And in fourth quarter, we were able to go up to $1.2 billion. And so our guidance for this next year is $1.1 billion to $1.2 billion, which is consistent with what our supply chain has been able to deliver. No, totally understandable. I guess what I'm trying to get to is, could you run comfortably above $5 billion in an unconstrained environment, given how you're thinking about capacity and the footprint shifts you've made? In the future, yes. Again, we -- and I think it's important, Monterrey, Mexico does add some incremental capacity, but what it fundamentally does is alter our competitive position from -- for being globally cost competitive as we go forward. So again, if you go back in time, we've definitely produce specialty in AWP segment, but as well in the MP segment, we've produced at higher levels. We would have that opportunity if the supply chain could support. There are some labor constraints in certain markets that we would have to navigate. The biggest labor constraint that we have is in our Redman area, we're leading that with our move in the Monterrey, Mexico. So yes, there is opportunity in the future to produce more, given our footprint it really is getting the supply chain to deliver consistently, both continuity and quantity. And I might add, there is a lot of work that we're doing with our supply chain now, not just on the continuity of supply, i.e., on-time delivery, but also with the suppliers about in terms of what we need in the future as we think about the future growth opportunities for the business, giving them those indications. So it's both continuity of supply [indiscernible] base as well as quantity, but the constraint in 2023 is the supply chain. And just to add to that, Steve, as we move from Redmond, some moves from Redmond, there'll still be production facilities in Redmond going forward. It's just a partial several lines moving down to help with some of the labor shortage we've experienced in Redmond. Got it. And then just one quick one. I watch the [Optronic] (ph) videos. It seems like interesting technology. And John, I hear you on enhancing safety and productivity, but can you be more specific about how you're imagining that embedded in the Terex projects? Yes. So as Stan mentioned, we did the ZenRobotics. So that was taking in sorting. There may be some overlap in terms of the two there. In terms of Optronic, think about were enhancing an operator a skilled trade on a scissor lift or on a boom lift or in a bucket truck, is the opportunity to enhance that, reduce the amount of labor instead of two skilled treatment or women in a boom lift can you cut back to one. And so we've got some ideas. We've got some concepts. They have some ideas and concepts, we put the two together, and there may be a real opportunity to bring some technological advancements into that construction center that -- and the EPC contractors will tell you, it's desperately needed because one of their biggest constraints is labor. So we're trying to provide labor productivity improvements and safety improvements. And we're excited. We'll see where it goes, but we think there's going to be some real opportunity there. Thanks. Good morning. I'm just trying to get a sense of the volume growth that you have embedded in your guidance for the Materials Processing segment for 2023. I know you mentioned, John, a lot about the strength of the bookings and the backlog. But revenues in the guidance are only up mid-single digits. So I guess presuming you do have some pricing, it doesn't seem like the volumes are up much unless there's a big FX drag on the revenue guide. So I don't know if it's maybe you're just taking orders that the supply chain won't allow it to deliver, but just how to think about the volumes embedded there for 2023? So [indiscernible] question, I would say that the MP business has been dynamic throughout the year and they've been price neutral throughout 2022. And so they've done a really nice job of managing that. And we expect that to continue into 2023. We would expect them to have more volume than price and being offset by a couple of percentage points of foreign exchange in 2023. Okay. That's helpful. And then on the AWP bookings year-over-year, I'm just curious, are we comparing apples to oranges there in the fourth quarter, meaning, I guess, to what extent are you restricting orders now versus maybe you weren't doing a year ago? Or is it a fair comparison that there's really no restriction on the bookings time frame at this point? It's a good question, Steve, really in both segments because of the extended backlog booking patterns have been disrupted. And so we have continuing ongoing discussions with our Genie customers, our utilities customers and our MP distributors as well. So in the case of MP, some of the order books weren't open and they'll open up. In the case of AWP, it's the ability to take the orders, be very clear with customers what we can commit to, what we can't commit to and the timing. And so it's a fair assessment that the historical booking patterns have been disrupted in both businesses. As a result of the strong order activities from backlog, it has disrupted the traditional flow. And in the case of Genie continuing ongoing discussions with our national accounts as we speak. Hi. How are you? So my first question is, can you remind us how much of your SG&A is fixed versus variable? Should you see some unexpected slowdown in demand, let's say, sometime in the near future? How quickly can you dial back on SG&A? So Tami, thank you for the question. I think we've done a really nice job of managing SG&A, and we will continue to manage SG&A going forward. And as you know, historically, the business over the last several years, particularly the AWP business has taken out significant costs in SG&A. So we have -- we, at this time, feel that it's appropriate to invest in the business in terms of product -- new product development, in terms of digitalization, in terms of those types of initiatives. There will be some increases, as I mentioned, just things like trade shows. We have three of them this first quarter and people are traveling some expenses that we didn't have in 2022 due to COVID. So we're making prudent investments, and we'll continue to prudently manage SG&A going forward. Got it. That's very helpful. And then going back to your price cost neutral assumption for the year, it seems like you have some pricing embedded in your top line, but raw material costs have come down notably from last year. So why wouldn't you be price-cost positive in 2023? So let's talk about -- first of all, thanks for the question. Let's talk about costs. So first of all, we are still seeing overall inflation in the supply chain. So our suppliers are still coming with increases. So even though there are certain things like an HRC still that may be coming down. Overall, it takes a while for the inflation to work through the various tiers of the supply chain. We're still seeing increased costs going into 2023 at this point in time. So we don't see prices coming down. We will offset. Our goal is to be priced cost neutral for the year, and we're pricing our products according to that and we're very transparent with our customers. Hi. Good morning and nice quarter. [indiscernible] One, on the utility side, understanding utility was a drag in -- on your AWP margins in 2022. Can you quantify that? And then does that continue to be a drag on margins in 2023? And then I guess my second question, understanding what you just said about price cost for the year, but is there anything to be cognizant of when we're thinking about the cadence of price cost throughout the quarters, first half versus second half? Thank you. Okay. Thanks, Jamie. First of all, yes, the utilities business was especially impacted by supply chain shortages this year. The bodies and chassis were really difficult. And so as we said, that the utilities margins have been below the segment average in 2022. Going into 2023, we expect the utilities margins to improve, along with the Genie margin. So we expect this overall segment margins to improve. In terms of price cost, et cetera, we're at this point in time at first half, second half, pretty much the same. We'll have -- the first half will have some pricing increases that we took later in like the second quarter that will come through into Q1. But from a cost perspective, we expect that to be relatively balanced throughout the year. Hi. Thanks, guys. Most of my questions have been answered. But John, I think you mentioned that 60% of MP and 70% of Genie product has sort of an electrical option. I'm curious what you're seeing in your backlog, given how long it goes. Are you seeing meaningful uptake of those electric units? And then I have a quick follow-up. In terms of the backlog, yes, we are seeing an improvement meaningful. I would say it's an improvement in the electrical options across the business, especially as we bring out some new products in both those categories. In the case of MP, it really is predicated on what application it's going into and is their grid or what they call main power available as to whether or not the machine goes out with ICE engine or goes out electric. But again, a lot of customer interest as we bring out new products as the industry brings out new product, I think you'll continue to see a transition to electrical side. And that was part of the investments that we made last year in biotech and Acculon were designed to help accelerate our electric offering as we go forward. So I think over time, I think we're going to see more of it in the current backlog, not substantially different than historical, but an increase in the electrical products. And I guess to follow on, over the next few years, presumably, there will be some transition. Do you think that's a margin accretive event for Terex or is it more a margin headwind because of sort of startup and development costs? So in terms of the start-up and development costs, those are really captured in our ongoing SG&A. We capture our R&D and development in our SG&A. So that's in there. One of the things that is occurring over time and it's part of the reason why the uptick hasn't been as strong is that, the electrical options are more costly than the internal combustion engine or a hybrid models. As we continue to move down that cost curve as more and more industries adopt the electrical technology, specifically around battery and battery technology. It will come down the cost curve, and we believe it will be more affordable. And from a margin standpoint, pretty much right now, our long-term assessment is margin neutral. But again, that does -- we are assuming that over time, which is happening that you see the cost of those units come down as the cost of the battery technology comes down the cost curve globally for those types of products. We are out of time for questions today. I would like to turn the call back over to John Garrison for closing remarks. Thank you, operator. If you have any additional questions, please follow up with Julie, John or Paretosh. Again, thank you for your interest in Terex. Please stay safe and stay healthy. And again, thank you for your interest in Terex, and we look forward to seeing you on the shows in the upcoming quarter. Thank you.

EarningCall_119

Thank you for standing by, and welcome to the AllianceBernstein Fourth Quarter 2022 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be question-and-answer session. And I will give instructions on how to ask questions at that time. As a reminder, this conference is being recorded, and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Mark Griffin. Please go ahead. Thank you, operator. Good morning, everyone and welcome to our fourth quarter 2022 earnings review. This conference call is being webcast and accompanied by a slide presentation that’s posted in the Investor Relations section of our website, www.alliancebernstein.com. With us today to discuss the company’s results for the quarter are Seth Bernstein, our President and CEO; Kate Burke, COO and CFO; and Onur Erzan, Head of Global Client Group and Private Wealth. Bill Siemers, Controller and Chief Accounting Officer, will join us for questions after our prepared remarks. Some of the information we will present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the Safe Harbor language beginning on slide 2 of our presentation. You can also find our Safe Harbor language in the MD&A of our 10-K, which we will file on Friday, February 10. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Good morning and thank you for joining us today. Despite a fourth quarter market rally 2022 was a challenging year for diversified investors, with equity and debt markets both down double-digits and fixed income markets posting their worst annual returns on record. Our financial results contracted along with markets with full year average AUM down 6%, revenues down 8%, and adjusted EPU down 24%. Nevertheless, I'm very proud of what our teams are able to accomplish. Our globally diversified platform grew our active assets organically for the fourth consecutive year, continuing to buck industry trends. Our effective fee rate improved for the second straight year due to a mix of organic growth and due to the CarVal acquisition. And we executed on multiple strategic transactions growing in private alternatives supported by equitable holdings and embarking on a promising growth opportunity for Bernstein Research. Let's get into specifics, starting with the firm-wide overview on slide 4. Fourth quarter gross sales of $30.9 billion, declined by $9 billion or 22% from a year ago. We saw slight firm-wide active net outflows in the quarter. For the full year, gross sales of $115.6 billion, were down 23% from the record prior year. And we posted full year active net flows of $900 million, our fourth consecutive year of active organic growth. Year-end assets under management of $646 billion declined 17% year-over-year. Fourth quarter average AUM of $636 billion, was down 16% versus the prior year, while full year average AUM of $686 billion declined by 6%. Slide 5 shows our quarterly flow trends by channel. Firm-wide fourth quarter net outflows were $1.9 billion, with net inflows in institutional offset by net outflows in retail and private wealth. Retail gross sales were $14.2 billion, with net outflows of $3.4 billion. Institutional sales were $12.6 billion supported by a $6.4 billion custom target date mandate, generating net inflows of $1.7 billion. In Private Wealth, gross sales were $4.1 billion, with slight net outflows of $200 million as we continue to grow engagement in the ultra-high net worth cohort, supported by a focus on pre-liquidity planning. Slide six shows annual net flow trends. In a challenging year for active managers, gross sales of $116 billion led to firm-wide net inflows of $900 million excluding AXA redemptions. Retail sales of $66 billion were 34% below last year's record levels. Net outflows of $9.5 billion ex-AXA were driven by taxable fixed income, offset by organic growth in active equities and municipals. Institutional sales increased to $32 billion, the highest level since 2008, driven by $16 billion in fundings related to two institutional custom target date mandates. We had our fourth consecutive year of organic growth in this channel with net inflows of $8.6 billion ex-AXA. And Private Wealth had gross sales of $17.5 billion with net inflows of $1.7 billion, the second straight year of organic growth in the fifth of the last seven. Investment performance is shown on slide seven. Starting with fixed income. Despite a fourth quarter rally, fixed income markets fell in tandem with equity markets in 2022, as central banks battled inflation. Interest rates soared and recession fears mounted. Longer-term yields in developed markets grew sharply leading global treasury turns to fall 10.8% during the year. All credit sectors were challenged relative to government bonds. Securitized assets outperformed other credit sectors, while emerging markets hard currency sovereign and corporate bonds trailed. In this environment, our fixed income performance lagged with 20% of our fixed income assets outperforming over the one-year period, while 53% and 70% of assets outperformed over the three and five-year periods respectively. As we said last quarter, our one-year underperformance reflected our positioning in global credit, as most of our retail fixed income strategies are broader based in just the US and our focus. The US outperformed last year making peer comparisons more challenged. Municipal performance was impacted by an overweight to mid-grade and lower-weighted municipals and by overall yield curve positioning. Encouragingly, in our retail channel, we've seen Asian investors, supported by our global financial institution partners, begin to rotate back into fixed income on the back of better valuations and a greater comfort with exposure to duration, now that the Fed appears to be nearing the end of the interest rate hiking cycle. Turning to equities. US equity markets advanced during the fourth quarter with the S&P 500 up 7.6%, lessening the full year's 18% loss. For the quarter and year, growth underperformed value as higher rates weighed on longer-duration stocks. The Russell 1000 Growth Index returned 2.2% for the quarter, bringing the year-to-date loss to 29.1%, versus the Russell 1000 Value Index's return of 12.4% for the quarter and negative 7.5% for the year. The majority of our equity assets outperformed, with 59% of AUM outperforming for the one and three-year periods and 77% for the five-year period. Our one-year performance improved sequentially, as our US large cap growth composite beat the Russell 1000 growth benchmark, aided by an overweight to health care sector and underweights to mega-cap technology. In this environment, we're maintaining discipline on identifying high-quality profitable companies with sustainable business models and large recurring revenue streams, all defensive characteristics, which can help buffer against spikes in market volatility. Quality companies with strong pricing power often demonstrate consistent profitability even in inflationary environments. Stable companies have cushioned on the downside, because they typically have lower beta or sensitivity to the broader market and traditional growth firms. Now, I'd like to review our client channels beginning with retail on slide 8. Fourth quarter sales were $14 billion, down $13 billion from last year's record fourth quarter, but up sequentially. Annual sales of $66 billion were down $34 billion from last year's record level. The annual redemption rate reached a historical low of 24%. Fourth quarter net outflows were $3.4 billion, contributing to full year net outflows of $11 billion, the latter driven primarily by taxable fixed income, a dynamic seen industry-wide. Despite the challenging environment, active equities grew organically for the sixth straight year. Our municipals grew organically for the 10th straight year. The latter led by our SMA tax aware and our SMA custom strategies. The bottom left graph shows that we are taking market share in both businesses with AB's net inflows clearly bucking the trend of industry wide outflows. From a regional perspective, US retail grew organically for its fourth consecutive year and Japan grew for the fifth straight year. Several flow rankings are shown on the bottom right. For the year, AB ranked 10 of 456 in US equity flow rankings with positive flows in the US led by large cap growth. A few words on flows. Our January 2023 AUM, which will be released today after market closes benefited from net inflows. In retail, we saw accelerating inflows into American Income, a fund that is ranked first in flows in the US dollar flexible bond category for the last two quarters. We also saw continued strength in muni SMAs. Turning to Institutional on slide 9. Fourth quarter gross sales of $12.6 billion included $6.4 billion from our previously disclosed low fee custom target date mandate. Full year sales were $32 billion, the highest since 2008 driven by $16 billion in fundings from two custom target date mandates. 2022 was the fourth straight year of net inflows in institutional, positive even net of AXA redemptions in each of the last three years. Net inflows were $6.3 billion in the year or $8.6 billion excluding AXA. Our effective fee rate continued to improve in the fourth quarter, driven by the 10th consecutive quarter of net inflows into alternatives and multi-asset. Our institutional pipeline declined to $13.2 billion at quarter end with $12 billion funded in the quarter, including $1.5 billion of AB carve-out fundings including Credit Value Fund V, CLO-8 and Clean Energy. Private alternatives comprise about half of the additions to the pipeline in the quarter, notably middle market lending and Eurocred. And the pipeline fee rate remains more than three times the channel average, driven by private alternatives, which comprise more than 80% of the annualized fee rate. In January, we received an additional $1.3 billion commitment for US Cred from Equitable. Part of their $10 billion permanent capital commitment to improve the returns while growing our higher fee longer duration private markets business, for which well-over half of the $10 billion has been deployed in our strategies at year-end. Thus far in 2023, we have seen an increase in institutional client inquiries, which are broad based and well-diversified by asset class style cap geography and client type. Moving to Private Wealth Management on slide 10. Fourth quarter gross sales declined by 21% year-over-year and increased slightly sequentially. Full year gross sales of $17.5 billion, declined just 4% versus a strong prior year, with productivity remaining historically elevated down 2% year-over-year. Full year redemption rates improved to 13%, down 160 basis points from last year. Despite slight net outflows in the fourth quarter, the full year saw net inflows of $1.7 billion the second year in a row of organic growth, in the fifth and the last seven. Our client mix continues to shift toward our ultra-high net worth $20 million and over clients, which remain our fastest-growing cohort. This cohort is a particular focus of our pre-liquidity event planning efforts, from which AUM generation in the fourth quarter well outpaced, an industry-wide M&A volume contraction of more than 50%. For the full year, commitments of $1.8 billion to private alternative products were up 10%, which included the launch of Bernstein Impact Alternatives, a new third-party partnership. Looking to 2023, we have a robust set of new product launches planned including, AB CarVal clean energy, credit value and transportation. Our proprietary direct indexing strategy grew by 62% year-over-year, and 11% sequentially while ESG AUM grew by 6% organically. I'll finish our business overview with the sell side on Slide 11. Fourth quarter Bernstein Research revenues of $100 million, decreased by 12% year-over-year and were up 10% sequentially. Full year revenues decreased by 8% year-over-year. The year was characterized by a stronger first half, followed by a weaker second half, as institutional trading volumes were constrained amidst global uncertainty. We continue to grow research checks, driven by high single-digit growth at Autonomous. In November, we announced the strategic decision to enhance growth opportunities for Bernstein Research Services, through contributing the business into a joint venture with Societe Generale's cash equities business. This announcement has been well received by our talented global research teams, who recognize the potential in adding our new partner's equity capital markets derivatives and prime brokerage capabilities. We continue to expect the transaction to close before the end of 2023, subject to regulatory consultation and approval in several countries and we anticipate disclosing financial details closer to that time. I'll now review progress against our growth initiatives on Slide 12. Our investment performance was mixed in 2022. While disappointing in fixed income, the majority of our equity assets outperformed. For the three- and five-year periods, performance was solid with 70% or more of both asset classes outperforming, over the five-year period. I'm proud of our teams, for driving active organic growth last year, for the fourth consecutive year, despite challenging financial market conditions. Robust growth in custom target-based solutions and private alts, led the way with active equities in munis, also contributing to retail. Our effective fee rate improved for the second straight year influenced by both the mix of organic growth and the strategic acquisition of CarVal. With the support of our strategic partner Equitable, we launched our active ETF business and closed on the CarVal transaction, which significantly enhanced diversification of our $56 billion private markets business, up 57% year-over-year. Financially contracting asset prices took their toll, as we posted a three-year rolling incremental margin of 35%, below our long-term target range of 45% to 50%. Full year adjusted operating margin of 28.4%, declined 520 basis points year-over-year, with adjusted earnings and unitholder distributions down 24%, versus the prior year. We entered 2023 facing pressures on our revenues and margins with AUM 17% lower year-over-year and we expect financial market conditions will remain volatile. Accordingly, we recently took measures to reduce headcount that affected a small portion of our global employee base. As I look forward, our team's accomplishments against our strategic initiatives in 2022, give me confidence for 2023. With continued diligence in managing compensation and other costs, we remain positioned to capitalize on growth opportunities ahead of us. These key initiatives include growing our active ETF offerings, investing in our insurance business to grow third-party clients, investing in technology and capabilities of our muni business and standing up an asset management business in China for which regulatory approval remains pending, while executing on AB CarVal opportunity and Bernstein Research's joint venture. Thanks, Seth. Let's start with the GAAP income statement on Slide 14. Fourth quarter GAAP net revenues of $1 billion decreased 22% from the prior year period. Operating income of $204 million decreased 48% and operating margin of 20% decreased by 1,080 basis points. GAAP EPU of $0.59 in the quarter decreased by 54% year-over-year. For the full year, GAAP net revenues of $4.1 billion decreased 9%, operating income of $815 million declined 33% and operating margin of 21.5% decreased by 580 basis points. Full year GAAP EPU of $2.69 decreased by 31% year-over-year. I'll focus my remarks from here on our adjusted results, which remove the effect of certain items that are not considered part of our core operating business. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and in our 10-K, the latter of which we expect to release on Friday, February 10. Our adjusted financial highlights are shown on Slide 15, which I'll touch on, as we walk through the P&L shown on Slide 16. On Slide 16 beginning with revenues. Fourth quarter net revenues of $802 million decreased 22% versus the prior year period. For the full year, net revenues of $3.3 billion were down 8%. Fourth quarter base fees decreased 12% versus the prior year period and for the full year period were down 3%. In both cases lower average AUM, driven by market declines were partially offset by higher fee rates. The fourth quarter fee rate of 41.3 basis points was up 5% year-over-year, driven by both higher fee rate AB carve-out base fees and by asset mix. The full year fee rate of 39.9 basis points rose by 3% year-over-year. Fourth quarter performance fees of $18 million declined by $116 million from the robust prior year quarter, primarily driven by lower fees of financial services opportunities, AB Arya partners and real estate equity. Full year performance fees of $91 million were down $131 million from the prior year, driven by lower fees of financial services opportunities US Select Equity Long/Short, AB Arya partners and private credit services. Although difficult to predict given market conditions, we expect full year 2023 performance fees to be roughly in line with 2022 levels. Fourth quarter revenues for Bernstein Research Services of $100 million decreased 12% from the prior year period driven by lower customer trading activity across all regions. Full year revenues of $416 million, declined by 8% reflecting lower trading activity in Europe and Asia due to local market conditions. Moving on to adjusted expenses. All-in our total fourth quarter operating expenses of $570 million decreased by 9% year-over-year, while full year operating expenses of $2.4 billion were flat with the prior year. Fourth quarter total compensation and benefits expenses declined by 13% from the prior year period, reflecting lower AUM-driven revenues and lower performance fees offset by a higher compensation ratio of 46.4% of adjusted net revenues as compared with 41.7% in the prior year period. Our fourth quarter compensation ratio of 46.4% came in lower than our expectations reflecting a disciplined compensation process along with the fourth quarter market rally. For the full year, compensation and benefits decreased by 3% driven by a 15% decline in incentive compensation, which offset a 6% increase in base compensation. The full year 2022 compensation ratio was 48.4% 190 basis points above the prior year reflecting lower revenues due to the market. Entering 2023 lower equity and fixed income values are driving year-over-year revenue headwinds and a corresponding shift in our asset mix. As Seth mentioned in this environment we have taken proactive actions impacting headcount across our global businesses, which will impact approximately 4% of our global employee base. Combined with other ongoing saving efforts these actions will help to offset some of these mix dynamics and importantly position us to continue to invest in our key priorities. As you know, we accrued compensation throughout the year and true up at year-end as revenues crystallize. Historically, our full year compensation to revenue ratio has ranged from 47% to 50%. Given market conditions, we believe we will be towards the higher end of this range in 2023. We plan to accrue at 49.5% compensation ratio in the first quarter of 2023 and may adjust throughout the year if market conditions change. Promotion and servicing costs decreased by 11% from the prior year period and were up 10% for the full year as higher T&E and sales and client-related meetings rebounded from depressed levels in the prior year period due to the pandemic offset by lower trade execution expenses and transfer fees. In 2023, we expect promotion and services spend to be up low single digits as the continued rebound in T&E is offset by lower spend elsewhere. G&A expenses decreased 2% in the fourth quarter versus the prior year period reflecting favorable foreign exchange partially offset by higher professional fees and technology-related expenses. For the full year, G&A rose 6% reflecting the addition of AB CarVal, higher technology and professional services spend and return earning growth and efficiency projects and inflation particularly in data services. Given the backdrop of challenging markets, we are focused on strong expense discipline. In 2023, we are managing G&A growth to be below inflation levels up low single-digits. Fourth quarter operating income of $232 million decreased by 41% versus the prior year period and full year 2022 operating income of $947 million decreased by 22% versus the prior year period. Fourth quarter operating margin of 28.9% was down 960 basis points year-on-year. Our full year 2022 operating margin of 28.4%, decreased 520 basis points from record levels in 2021. For the full year on a rolling three-year basis, we delivered incremental margin of 35%, below our long-term targeted 45% to 50% range. As outlined in the appendix of our presentation, fourth quarter earnings exclude certain items which are not part of our core business operations. In the fourth quarter, adjusted operating earnings were $28 million or $0.11 per unit above GAAP operating earnings due primarily to acquisition-related expenses. For the full year, adjusted operating income was $72 million or $0.25 per unit above GAAP also due to acquisition-related expenses. The full year 2022 effective tax rate was 4.9%, slightly better than expected, reflecting a one-time tax credit. We expect an effective tax rate for 2023 of approximately 5.5% to 6%, more in line with our historical run rate. As indicated earlier this year, we are providing annual updates on the savings associated with our Nashville relocation at year-end. For the full year 2022, expense savings of $43 million were greater than the transaction cost of $24 million, resulting in a $19 million contribution to operating income for a net increase of $0.07 per unit. Of the $19 million, approximately $38 million is compensation-related savings, offset by $19 million of increased occupancy costs. We expect the Nashville relocation to remain accretive growing to the range of $75 million to $80 million per year beginning in 2025 once the transition period is over. In sum, despite the market rally in January, we are prepared for 2023 to be another volatile and challenging year. We are very focused on maximizing the opportunity set with AB CarVal and completing the joint venture with SocGen and we'll continue to make investments in key areas such as China, ETFs, and insurance. Taking a step back, AB has a history of disciplined and balanced management of strategic priorities, balancing opportunities, and trade-offs. Looking forward, we have tremendous confidence in the positioning of our firm. We made meaningful progress in 2022 across a number of our strategic initiatives, positioning us well to take advantage of green shoots as their environment develops. Our employees continue to exhibit a strong sense of ownership, discipline and overall engagement, and are well-aligned with our priorities as we seek to drive the best outcome for our clients. Great. Thanks. Good morning everybody. Seth as usual maybe we'll get started with a question for you on fixed income. Very encouraging to get your comments on stronger flows in retail in the first quarter so far. Again it sounds like it's partially coming from the retail channel. Can you unpack that a little bit some of the regions where you're seeing the strength? And as you look out for the rest of the year, curious just to get your thoughts on sort of the differences between institutional demand for active fixed income versus retail as despite the fact that the performance numbers that you guys added are challenging it doesn't really seem to matter for retail flows given they are back in a pretty healthy way, but I wonder to what extent that might impact the institutional business? Alex, thank you very much. Let me give you some -- a bit of color on that point. We have been positive in taxable fixed income, in January principally from Asia, but we're seeing interest in Muni SMA here in the U.S. And so that seems to be on a better track. That of course presumes that the Fed is closer to the end, than to the beginning and -- but what I do think is clear is that people think it's a more interesting entry point at current yields than obviously they've done in the last several years which is a change for us. The flows aren't as robust as they had been in the prior cycle yet, but who knows how they will evolve. With regard to investment performance, our clients particularly in Asia understand we're more globally oriented than a number of the other competitors. That's not to say we didn't underperform we have, but they have to live with us. And understand the trials and tribulations, as we go through a cycle and are confident in our ability to recover. I would further say, to you that if you dig into a number of our institutional strategies, we do have quite competitive performance whether it's in emerging markets or U.S. high yield. And so we have seen some interest there. But let me hand it over to Onur, to give you some more color. Hi Alex. Yes, Seth summarized it well. The two things I would add are, on the institutional side if you look at the pipeline in the fourth quarter almost half of the additions came in from fixed income. So we saw that strength. And then, in January, again one month doesn't make a trend, but we have seen a couple of good wins in the international markets. And we are seeing a nice pre-pipeline development with emerging market debt high-yield as well as on the insurance investment grades which are critical priority areas for us. And on the retail side, the only other color I would add beyond the cyclical stuff is as you know the expansion of our Muni platform with the custom solutions is a priority. And in the fourth quarter, we launched our custom Muni solution set. And that's got onboarded to several very large top 10 U.S. intermediaries. So we're going to get some benefit of that expansion. And I expect us to gain market share. Hard to predict overall market volumes, but on a market share basis I feel relatively confident. Perfect. Thanks for that color. My second question is for, Kate. Great to hear sort of non-comp expenses in the low-single digit for G&A and promotional kind of in the upper-single digit range as well, so pretty well maintained there. I guess, as you think about the environment and I appreciate you guys are being cautious around kind of baking in robust market recovery despite obviously a good start of the year, but as we think about areas where some of these expenses could drift higher if markets remain more constructive where would it be? What would that look like? Or you see kind of a pretty good line of sight on sticking within these, kind of guidance ranges even if markets are a little bit stronger? And maybe just a clarification on G&A, you're talking -- I'm assuming, you're talking for the adjusted G&A number low-single digit growth, not the GAAP number? Yes, thanks for the question. You're correct that I was doing it off the adjusted GAAP number for G&A. Look, we -- in our forecast, we tend to be, I think, conservative in terms of looking at what the market trends would be. Where I would anticipate you could see some increase if we have stronger markets this year, is that you may see some increase on the T&E side where we would be looking to continue to support our robust sales efforts. That in and of itself is where we are going to see some higher expenses, but they are more than offset in other areas. Otherwise from a G&A perspective, I think, we feel pretty good that we used to be in sort of the up to low single digits area and we don't anticipate that that should be climbing higher even in a higher market environment. Okay. Thank you very much. Maybe just picking up on the expense discussion for a moment. So appreciate the moves reduced the headcount. Sort of a treat to hear you say, you still get it sort of an incremental $75 million to $80 million of annual run rate savings in 2025 as you sort of consolidate the headcount -- headquarters, excuse me. Is that mean you're bringing forward the timeline on that or is there still an incremental $75 million to $80 million beyond sort of the adjustments you're making pro forma into 2023? No. For 2023, there is -- Nashville is not impacting our 2023 forecast. The $75 million to $80 million you're talking about is really the final realization of the completion of the Nashville move when we exit our New York real estate holdings. And where we -- so we won't have that double counting of real estate expense. The Nashville we were accretive this year by about $0.07. We expect that continued accretion going forward. We will provide those updates annually, as we did this year and that's -- so that part of the program continues unabated. Separately was the headcount reduction actions that we took place -- that took place earlier this month. I mean that was really a result of us examining the environment that we're entering into here in 2023 and making sure that we're positioned competitively not only to take out costs where we saw opportunities to do so, but also free up some opportunities to continue to invest in areas that we find strategically attractive. And so our hope is that as the year continues that we will be able to increase that strategic investment based on market results, but the headcount reduction is independent of what we're doing related to Nashville. Okay. Thank you., And Seth may one for you. So you have a lot of good things going on in terms of flows. Maybe step back a little bit and truly give us a sense of as you look at your the private markets business and maybe alternatives at large what are the top two or three areas you sort of see the best opportunity in 2023? Well, again, let me start Bill and then I'm going to hand it over to Onur. Look, while there are some headwinds in the private market, we're still very excited about what we're doing with CarVal. CarVal they have a number of new strategies and newer vintage strategies that are up and launching fundraise this year, which we're seeing pretty good receptivity toward. Additionally, we continue to see opportunities for newly raised funds in our US CRED business in a less competitive marketplace. And we are seeing better structure terms in our middle market lending business. But Onur, why don't you give some additional color? Yes. No, thanks Seth. The things I would highlight are, one, we are very encouraged by the momentum with the Clean Energy Fund II at CarVal, which we're going to close this year. The second vintage will bring much more assets than the first vintage and that is our nice foray into the broader retail market as well. So that's one additional area I would highlight. As Seth mentioned on US real estate debt, we have been quite successful with the deployments in the second half of the year despite all the challenging market environment that's because we are sitting on pretty healthy level of dry powder. I mean given the market conditions, I think we have an advantaged dry powder position to be able to deploy at the attractive terms. So we like that space. And the demand for income driven credit strategies remained very strong in our private wealth channel. The realizations in terms of the income generation in 2022, has been very attractive for our clients despite all the challenges in the marketplace. So that should continue to have evergreen demand from our own proprietary private wealth channel. So those are a few things I would highlight. Thank you. And just I apologize my line got dropped. Seth, when you were answering Alex's first question, did you specify the dollar amount of flows in January? I apologize. So, I wanted to get another update for you on the potential rebalancing this year, and I wanted to see first, if you have any perspective if you think fixed income is going to be the big winner? And secondly, we saw passive really dominate the fixed income landscape last year. Do you think that continues if and when there is large rebalancing in the fixed income? Look, I think that this is a particularly difficult year to forecast just given all the uncertainties embedded in it. So take it with a boulder of salt. I think that there is a lot of pent up demand for income. And so, I think you'll continue to see appetite. But inflation expectations really matter Craig you know that. And to the extent that we see shockingly strong jobs data again, that could throw that off and so, I'm hesitant to have enormous confidence in it. But I think that there is really strong demand for -- we see it in tax exempt. We see it in taxable and we really see it offshore. So I think there's a big demand for it. With regard to the question on passive, look, I think we have to assume that passive will continue to gain share in liquid markets. Fixed income isn't excluded from it, which is why we've been automating, which is why we've been lowering our cost of execution. But we have to, like everyone else, have a value proposition where we beat net of fees in order to earn our place in a sophisticated clients portfolio. We think we have that opportunity. We think our clients understand our investment profile, which is to be generally long carry in our credit funds. And so we do underperform in those markets. But ultimately, we're very comfortable with the way we structure our portfolios. We try to avoid idiosyncratic exposures in credit. And I think, overall and over long periods of time we performed very well. But I don't think the secular trend has changed. The pace of that may slow. But I don't think that trend changes. And one other comment is obviously, some of it is the ETF trend. So there is a little bit of a vehicle overlay to the story. With the launch of our active ETFs, we are very encouraged by the early momentum we have. Obviously, we only have two fixed income ETFs. But we are encouraged that we were able to raise few $100 million in a very short amount of time and we believe we can participate in the ETF adoption in the fixed income space and we actually believe some of them will be active not only passive. So hence, we believe we are well covered given the structural trend. Great. And then just as my follow-up. We do have these large fixed income reallocations and a lot of it does go to passive but there is an active sleeve. How do you think your bond business is positioned for that? I know the one year numbers aren't great. The five year numbers are better. But also your taxable bond business hasn't really seen good organic growth for a while. It's actually your active equity business that has seen good organic growth over the last few years. But how do you think AB is positioned for that? Look I think that AB is building a much stronger domestic US retail presence, where we've always been underweight, understrength relative to a number of our key competitors. And so we've been always quite dependent on Asian flows. And we have seen very limited demand in fact selling over 30 odd month period. So I think we're better positioned than we were historically. We've had periods of underperformance before, where we – where that has not been a big issue for us outside the US and with respect to within the US, which may be more rating sensitive, while I suspect that would have a bigger impact in the US, I think our play is really in the tax exempt space, where we absolutely have high conviction that our distribution partners are moving aggressively into the SMA space and we have a differentiated product to capitalize upon that and I think the fact that we buck trends to do that helps. I think our US high yield capability is a competitive strength and there will be disruption in that marketplace. So I do think there are other elements of opportunity for us but it's a pretty mature market as you know. So I'd say given the stronger retail distribution footprint we're building and the success we've had early days, I'm optimistic but we have to prove that. Thanks. Good morning. My question is on just broadly retail gross sales obviously, down versus a pre – record 2021. But if you look back it was also below 2022 and 2019 levels. So trying to think just in terms of kind of assets in motion kind of momentum in sales, how you're thinking about normalization if this – if last year seemed abnormally low or if the other periods were just more outsized then how to think about it going forward? Thanks for the question. Onur again. You're absolutely right. 2021 was probably an outlier year. I think we should look at it more by region. From our perspective, we believe we will continue to experience growth in sales in US retail, given our investments and focus in that space, both on the sales side as well as on the expansion of products. We definitely are seeing a comeback as Seth mentioned on Asia taxable fixed income, particularly American income portfolio which has been a longstanding flagship product for us is coming back. Part of it is rates. Part of it is the opening of Asia and Hong Kong that definitely is an area -- region we are bullish about. Latin America, we are encouraged with some of the renewed appetite, when it comes to fixed income as well. It has been historically a big retail fixed income buyer for us, using the usage platform and we have been successful with some fixed maturity products lately. EMEA had a huge hit in 2022, obviously given the Russia Ukraine and proximity to the energy crisis and everything else. And we had a pretty material contraction there. So from a low base I see an upside. I think Japan is one reason we definitely will see some slowdown and that will be more driven by the movements in the Japanese Yen which will make the US denominated assets less attractive. So overall, I think probably I have more longs and shorts in terms of regions and we expect a healthy level of sales. And remember, we always focus on net flows and we're not going to hopefully have the same level of redemption that was also partially triggered by the tax loss harvesting which was quite unique for 2022. Great. That's very helpful. And then just a quick question on Private Wealth. Advisor productivity was down year-over-year I assume that was more environmental in terms of the backdrop. But you've put in a lot of initiatives in place to kind of increase productivity over the last couple of years. Can you maybe talk about what did occur in last year and how you're thinking about that in the wealth opportunity kind of as we think about 2023 and beyond? No. Thanks for the question. 2022 was only a small decline in productivity again from a very high peak 2021. If you look at the last kind of five years 2022 will stand out as a very strong productivity in terms of our average revenue production. The channel also delivered on an annual basis organic growth. That was the second consecutive year we achieved that. So we feel good about the momentum. Overall, in terms of the initiatives, we are trying to pivot more into ultra high net worth. And if you look at our organic growth rate with ultra high net worth versus other segments is 3x. So we are seeing a good trend line there in line with our strategy. And as you know we have been an early adopter of alternatives in our Private Wealth channel, where the penetration of alternatives is typically ahead of our competition given our history track record and the proprietary plus model and that continues with five or six products in the pipeline to be launched in our channel, both our private credits solutions that our proprietary as well as the next vintages of third party products. So all in all, I think it's healthy. The area obviously, we will work on is tuning back to financial advisor hiring, which we consciously slowed down given the economic outlook. Obviously, the new financial advisors are not as productive as the older ones. So once we accelerate that, and we have a February class coming in, you might see some change in the productivity just because the new advisors might come at lower production. But it's a high quality problem that we will discuss at the coming quarters. Good morning. You guys talked about in terms of the $10 billion from equitable being well past the halfway mark, any early thoughts on maybe the next phase of that relationship? And could we see kind of the next round bigger order of magnitude and maybe an acceleration of timing? Yeah. Let me start in that. Equitable continues to be critical to us in our strategic planning on how we attack the insurance industry generally and how we build our Private Alternatives capability in particular. And we are really focused on expanding our third-party, third-party insurance reach beyond Equitable important though they will continue to be critical, they will continue to be for us. And they are quite supportive of that endeavor. Our ability to expand further in private alts in Equitable general account is, directly related to the change in size of their GA over time. And so as it grows, if it grows we benefit from that. Conversely to the extent that, contracts there will be less capacity to expand. That being said, they continue to look at opportunities as do we, and so it will be more, I guess, opportunistic is probably a fair way to describe that in terms of growth. But there's continuing commitment to invest with us, where they need incremental yield on their general account portfolio. I don't know Onur, if you have anything to add to that. No. I mean, I think the only other thing is still there is another several billion dollars the other 50% to be deployed. Obviously, that will bring incremental revenue and we need to let them digest that. And that will open the way for brainstorming new ideas that's already underway. Hi. It's Kate here. We're still in early stages of the work around what the ultimate integration would look like. And so we'll give further guidance on that, as we get closer to the closing of the transaction. Okay, terrific. Thank you, Regina. Thanks everyone for participating in our conference call today. As always, feel free to reach back out to Investor Relations, with any additional questions and have a great day.

EarningCall_120

I would now like to pass the conference over to your host, Abby Motsinger, Vice President of Investor Relations. Thank you. You may proceed. Thank you, Joel, and good morning, everyone. Welcome to Duke Energy's Fourth Quarter 2022 Earnings Review and Business Update. Leading our call today is Lynn Good, Chair, President and CEO, along with Brian Savoy, Executive Vice President and CFO. Today's discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of securities laws. Actual results may be different than forward-looking statements, and those factors are outlined herein and disclosed in Duke Energy's SEC filings. The appendix of today's presentation includes supplemental information and disclosures, along with the reconciliation of non-GAAP financial measures. Abby. Thank you, and good morning, everyone. Today, we announced adjusted earnings per share of $5.27, closing out a successful 2022. We achieved results solidly within our updated guidance range while making significant progress on our strategic goals, responding to external pressures and delivering constructive outcomes across our jurisdictions. As a result, today, we're reaffirming our 2023 guidance range of $5.55 to $5.75 with a midpoint of $5.65. We're also reaffirming our 5% to 7% growth rate through 2027 off the midpoint of our 2023 range. This reflects the strength of our regulated businesses, our disciplined approach to cost management and a robust $65 billion capital plan that supports our thriving jurisdictions. Before I turn to our regulated utilities, let me provide a brief update on the sale of our Commercial Renewables business. The sales process continues to progress. But as with the sale of any large-scale business, the timing tends to evolve. We remain on track to exit both the utility scale and the distributed energy businesses and now anticipate proceeds in the second half of the year. We will continue to keep you updated along the way. Turning to Slide 5. We've reached a significant milestone in our clean energy transition. On December 30, the North Carolina Utilities Commission issued an order adopting an initial carbon plan. This constructive order is the culmination of years of work with policymakers and stakeholders to chart a responsible path for the energy transition. The order recognizes the value of an all-of-the-above approach to achieving carbon reduction targets in a manner that balances affordability and reliability for customers. The near-term action plan provides approval of 3,100 megawatts of solar and 1,600 megawatts of storage as well as transmission upgrades to support the integration of these renewable resources. The commission also approved limited development activities associated with longer lead time investments, including small modular nuclear reactors, pumped hydro and transmission related to offshore wind. And as part of an orderly transition out of coal by 2035, the commission supported planning for approximately 2,000 megawatts of new natural gas generation to maintain reliability. Through its order, the commission reinforced the importance of maintaining a diverse generation mix while conducting an orderly clean energy transition and was clear that ensuring replacement generation is available and online prior to the retirement of existing coal units is a shared priority. The carbon plant provides a constructive road map that delivers on our strategic priorities and supports the needs of our customers and communities today and into the future. It supports our capital plan and provides the clarity we need to advance critical near-term investments. We look forward to continuing our progress through our updated carbon plant filing in North Carolina later this year. Moving to Slide 6. We're making meaningful progress on our strategic initiatives in each of our jurisdictions. In North Carolina, we filed our first performance-based rate application for our Duke Energy Carolinas utility on January 19, which followed a similar filing for our DEP utility last fall. The request includes a multiyear rate plan to fund system improvements to meet the growing needs of our customer base, including $4.7 billion of capital projects that are expected to go into service over the 3-year period. These investments are primarily T&D-related projects that support the security and reliability of the grid as well as approximately $300 million of solar and storage investments consistent with the carbon plan order. Our request is mitigated by a reduction in operating costs since our last rate case, evidence of our continued ability to manage costs to keep customer rate increases down. Evidentiary hearings are expected to begin in the third quarter and consistent with past practice, we intend to implement temporary rates in September, subject to refund. If approved, we expect year 1 revised rates to be effective by early 2024. In South Carolina, we were very pleased to reach a comprehensive settlement in January with all parties in our Duke Energy Progress rate case. The settlement, which is subject to commission review and approval includes a 9.6% ROE, the continuation of deferrals for grid and coal ash spend and supports accelerated retirement dates for certain coal units. In fact, the settlement is on the commission's agenda for this afternoon. And if approved, new rates are expected to be implemented in April. We also plan to file an updated IRP in South Carolina later this year, which will take into account the carbon plan and the Inflation Reduction Act. Turning to Florida. On January 23, we filed a petition to adjust customer rates for deferred 2022 fuel costs, less the impact of lower forecasted fuel prices in 2023. We are also flowing back IRA tax savings to our Florida customers as of January 1. In Indiana, we're updating our IRP to reflect results of the 2022 RFP process, regional transmission operator requirements and the Inflation Reduction Act. We expect to begin filing for certificates of need for new power generation in the second quarter. In Ohio, the commission approved in full our electric rate case settlement in December, which supports the recovery of grid investments to improve reliability and service for our customers. In December, we also filed an electric rate case in Kentucky. The request reflects more than $300 million in investments we've made to strengthen the generation and delivery systems as well as updated retirement dates for our Kentucky fleet. As we advance our regulatory strategy, affordability remains top of mind. Brian will go into more detail on steps we're taking across our jurisdictions to lower costs for customers. Finally, I want to highlight a well-deserved recognition for our Piedmont Natural Gas team. In December, J.D. Power ranked Piedmont #1 in residential customer satisfaction for natural gas service in the Southeast. This is the first time Piedmont has received the #1 ranking and is a testament to the commitment to our customers. In summary, 2022 was an extraordinary year for Duke Energy as we made strong progress executing our strategy, responding to difficult external pressures and advancing our clean energy transformation. Our path forward remains clear. As we continue to navigate our energy transition, we will do so responsibly, preserving affordability and reliability for our customers and remaining good students -- stewards of communities. I'm confident that our strategy will continue to deliver consistent and lasting benefits to our customers, communities and investors. Thanks, Lynn, and good morning, everyone. Turning to Slide 7. 2022 marked a year of solid growth for our utilities. We achieved full year adjusted earnings per share of $5.27, above the midpoint of our updated guidance range. These adjusted results exclude our Commercial Renewables business, which was moved to discontinued operations in the fourth quarter. The classification of these assets as held for sale triggered a valuation adjustment of $1.3 billion, which is reflected in discontinued operations and GAAP reported results. This adjustment relates to the combined utility scale and distributed generation businesses and was within our planning range for the sales processes. Moving to our adjusted results for the year. In the Electric segment, earnings per share increased by $0.36 in 2022, primarily due to higher volumes, favorable weather and rate increases in North Carolina and Florida. Partially offsetting these or higher interest expense and storm costs. Absent storms, O&M was flat to prior year, which was in line with our guidance. In the Gas segment, earnings per share increased $0.07 and was primarily due to the Piedmont, North Carolina rate case and riders. Turning to Slide 8. We are reaffirming our $5.55 to $5.75 guidance range for 2023 with the midpoint of $5.65. Within Electric, we expect retail volume growth in 2023 of roughly 0.5%. We also entered the year with updated rates for Ohio and Florida already in effect and we'll see growth from 3 Carolinas rate cases as we move through the year. Additionally, we will continue to see growth from the grid investment riders in the Midwest and Florida, namely the Indiana TDISC and Florida SPP plans approved in 2022. Moving to cost mitigation. We've identified $300 million of savings in 2023, which is primarily related to rationalizing our corporate and business support cost structures. Examples include streamlining IT support and reducing our real estate footprint. These cost reductions will be realized ratably over 2023 with approximately 75% of the savings being sustainable into future years. Partially offsetting these favorable drivers are higher financing cost as well as depreciation and property taxes on a growing asset base. Within our Gas segment, growth drivers include the Ohio rate case currently underway, cost mitigation efforts and customer growth, partially offset by higher interest expense. Turning to retail electric volumes on Slide 9. In 2022, we saw load growth of 2.5%. These strong results were driven by residential customer growth of 1.8%, higher usage per customer from hybrid and remote work and a continuation of the post-COVID rebound in the commercial class. Our total retail load in 2022 was about 2% higher than 2019 pre-pandemic levels. This is equivalent to an average annual growth rate of around 0.5% when smoothing out the year-to-year fluctuations. In 2023, total retail load growth is projected to be roughly 0.5%. Based on 2022 U.S. Census Bureau data, 3 states within our regulated footprint were in the top 6 for net population migration. This illustrates the robust customer growth experienced in our territories, which we expect to continue in 2023. We expect load growth in the commercial class to moderate this year following 2 years of significant growth. But the upside in industrial as easing supply chain constraints fuel a continued rebound for certain large manufacturers. Longer term, we expect annual load growth to be about 0.5% through 2027. Turning to Slide 10. I'd like to provide an overview of our 5-year capital plan, which has increased to $65 billion. When compared to prior periods, the capital plan has steadily increased as we move further into the clean energy transition. This increase is net of removing almost $3 billion of commercial renewables capital, including the previous 5-year plan. This means that we've increased the regulated plan by approximately $5 billion, resulting in a 7.1% earnings-based CAGR through 2027. While the investment needs of our utilities continue to accelerate, customer affordability remains front and center. Affordability has consistently been a pillar that governs our planning, and we have several tools to help keep rates low and assist customers who are struggling to pay their bill. First, the benefits of our cost mitigation efforts go back to customers over time, easing bill impacts as we recover capital investments. As I mentioned, we expect 75% of our 2023 cost mitigation efforts to be sustainable. Additionally, we are targeting flat O&M from 2024 through 2027. Our long-term O&M trajectory is supported by smart capital investments within our plan, including modernized equipment and technology investments that will help reduce fuel and operating costs. Next, the Inflation Reduction Act provides substantial benefits for carbon-free resources, including nuclear and solar PTCs and other renewable tax credits. We are beginning to incorporate these benefits and updated resources plans and rate adjustments. Over the next decade, we will fully leverage IRA benefits across all of our jurisdictions in order to maintain low cost for customers as we execute our clean energy transition. Finally, assisting vulnerable customers has always been an area of focus. But since the pandemic, we worked even more closely with our communities and customers in need. For example, in 2021, we created a specialized team that partnered with agencies across our service territories and help connect customers to nearly $300 million in energy assistance funding over the 2 years. Moving to Slide 11. Our ability to execute our robust capital program is underpinned by a healthy balance sheet, and we remain committed to our current credit ratings. In December 2022, we received $1 billion in cash proceeds upon the closing of the second tranche of the Indiana minority stake sale. We expect to receive proceeds from the Commercial Renewables transactions later this year, which will be used for debt avoidance at the holding company. Turning to FFO to debt. We ended 2022 below our 14% target, largely due to deferred fuel balances. We have started recovering these amounts through established recovery mechanisms and we'll continue to file using mechanisms in place for the remaining balances. As we recover deferred fuel costs over the next 1 to 2 years, we expect FFO to debt to steadily improve and return to our long-term 14% target, demonstrating our commitment to our current credit ratings. As we look ahead, about 90% of the electric investments in our capital plan are eligible for modern recovery mechanisms, which is critical to maintaining a strong balance sheet, mitigating regulatory lag and smoothing rate impacts. With the steps we've taken to reposition our business and improve our cash flow profile in the years ahead, we are not planning to issue equity through 2027. Moving to Slide 12. Our robust capital plan, strong customer growth and constructive jurisdictions provide a compelling growth story. And our commitment to the dividend remains unchanged. We understand its importance to our shareholders and 2023 marks the 97th consecutive year of paying a quarterly cash dividend. We intend to keep growing the dividend balancing our targeted 65% to 75% payout ratio with the need to fund our capital. As we begin 2023, we are well positioned to tackle the challenges ahead and look forward to updating you on our progress throughout the year. So Lynn, just starting on the Commercial Renewables, it's good to see, obviously, you guys reiterated '23. Obviously, the range assumed midyear cash in the door. Just remind us on the EPS sensitivity per quarter from the delay. And I guess, where does this put you within the '23 range? Sure, we're continuing to target $5.65 and feel very confident with that. As you can expect, as we entered the year, we had a range of expectations around both timing and proceeds from the sale. And what I see now as being kind of a modest delay from midyear to later in the year, I don't see an impact. I think it's important to recognize that the growth is primarily driven by our regulated outcomes and the cost mitigation that's offsetting some of the external headwinds and those are on track as we expected and shared with you third quarter. So confident in the $5.65. Got it. And then just a follow-up on -- I know, obviously, the $1.3 billion charge you took for commercial, you're obviously not the only utility that's done this. We had a peer took a charge yesterday. Is there anything to read on the ultimate sale price for the assets? I mean, obviously, we noticed word robust "fell off " the slides. I guess how do we take that charge relative to the ultimate sale price? Shar, I appreciate the question. I also appreciate how closely you all read the slides. We weren't intending to signal anything with the word robust. We feel good about the process. There's strong interest in the portfolio and we're moving forward. I think the thing to recognize on an impairment charge, is this an accounting adjustment that's really driven by the earnings profile of renewables, where a lot of the profit that's in the early part of the life, you then depreciate it over a longer period of time. So when you make a decision to exit before the end of the useful life, you've kind of set yourself up for an impairment. So I would look at it that way. Got it. Perfect. And then just one quick one for Brian, if it's okay, on the credit side. Obviously, trying to -- the prior plan had a 14% FFO to debt over 5 years. And now you guys kind of stated over the "long term." '23 target is 13% to 14% from obviously the deferred fuel balances and 13% is a downgrade threshold. I guess can you just talk on how the rating agencies are treating these deferred fuel balances? And how you're thinking about future balances? I mean, could another event trigger a downgrade as we're thinking about the balance sheet capacity? We'll definitely hit that, Shar, and thanks for the question. We're working through the deferred fuel balances, through the regulatory mechanisms in place. And that's what the agencies are looking for. Looking to see, are you filing in line with the regulatory recovery that is established. Or are you making exceptions spreading that recovery longer. We've had really good success so far in North Carolina and South Carolina, and we have a couple more filings in front of us, both in Florida and Duke Energy Carolinas, North Carolina. But these are working. The regulators understand our need to recover this in a timely manner from a credit position and the rating agencies are liking what they're seeing in how we're executing these plans in accordance with the tools in place. And Shar, the only thing I would add to that is we look at this and the agencies look at this as a temporary issue because you can associate it completely with the deferred fuel. And the fact that we have been able to work constructively through recovery mechanisms, and we can actually forecast how that balance is going to decline over '23 into '24, it gives us a lot of confidence on the metrics. And of course, as you would expect, we're in conversations with the rating agencies every step of the way. This regulated portfolio that we have with the cash flows and constructive jurisdictions is really what underpins the credit ratings of the company, and nothing has changed around that risk profile. Thank you for the time and a pleasure chat. Just following -- so just with respect to the carbon plan here and obviously, the developments late in the year, you guys had -- you addressed it in part in the comments, but I'm just sort of curious, as you think about addressing some of the follow-up items here through the course of this year. Again, what is the flex in the capital plan? What exactly are you assuming today in some of the updates in the multiyear outlook? And specifically, as we've talked about before, how could the subsequent updates here impact probably more of the '24 outlook as you think about puts and takes in the CapEx budget? What could come out of this next [indiscernible] Sure. And thanks, Julien, for that. I regard the carbon plan order is a very constructive one that has given us real clarity on the near-term investments. So when you think about 3,100 megawatts of solar, 1,600 megawatts of battery storage, that capital plan is pretty well locked in for the Carolinas. We may see some marginal changes, but I would think about those as later in the 5-year period and really in connection with the next update. So I feel really good about the Carolinas. Florida is also on track with the 10-year site plan and SPP and grid modernization. I think where we have potential and even potential upside is in Indiana, where we are earlier in the clean energy transition, moving through that process. We have estimates in the capital plan, but we'll be filing for CPCN later this year, and have more advanced dialogue about timing and approach. So I'm very comfortable with the capital plan and if anything, see a bit of upside in Indiana as we continue our clean energy transition. Got it. Actually, since you mentioned it, just to probe a little bit. You said a moment ago, you assume a certain baseline in Indiana already in the latest plan. But as I heard you say a second ago, you're saying that there's more likely than not upside bias within that, but you have assumed something in the Indiana [indiscernible] Yes. We have an estimate. That's exactly right. We put an estimate in there, Julien, but we're filing an updated IRP later this month into March, then we're filing for CPCNs. So that will crystallize more specifically toward the end of this year into 2024, much in the way that the Carolinas has matured as we go through IRP filings. Now we have an order on the carbon plant. So that's the way I would characterize it. And if anything, I would say our estimate has been on the conservative side. Got it. All right. Excellent. And then any developments or any thoughts around South Carolina here as you think about the opportunities that may exist there? I know, obviously, carbon plan principally think about North Carolina here. Any crystallization of a further alignment here in South Carolina, if I can call it that at all? Well, it's a good question, Julien. And I guess I'd like to step back and just point for a moment to a very constructive and comprehensive settlement that we were able to reach on the South Carolina rate case. I think that's an indication of just the incredible work that we have been doing with the stake -- with the stakeholders to continue constructive dialogue about where the company is going and what we're trying to accomplish. And I appreciate your sensitivity on the word alignment because what we are trying to accomplish is giving both states the flexibility to put their fingerprints on an energy plan going forward. And we believe we're making progress on this. We actually had testimony in the carbon plan that laid out a structure that would allow states to opt in or opt out depending on their energy policy, and that is beginning to take some discussion in South Carolina, but that will progress over time. We believe we operate in an incredibly valuable system, and we'll work with both states on how to add resources to meet their needs, customer and policy needs going forward. So just a follow-up question on the Commercial Renewables impairment. The -- I think you announced it was for sale in the Q3 call. So is there a reason the impairment was not taken then and is being taken now? Is that because you have more information? Is that something else? So Steve, we actually made the decision -- final decision to sale in early November and announced it on the third quarter call. So that decision went through a governance process, Board approval, et cetera, in the fourth quarter. And as a result, the impairment goes in the fourth quarter. Okay. Okay. That's helpful. And -- but it does sound like the impairment -- the value that you have on now is consistent with the ranges that you've been expecting for the sale process. My other question is on the rate cases in North Carolina under the new law, the new multiyear rate plan, how are you thinking about whether you'd be able to settle those cases or that they likely need to -- because they are kind of the first under the law and need to go through a full litigated process most likely? Steve, I think it's too early to tell exactly. And you may -- if you think back on our history, we have, from time to time, entered into partial settlements where you feel like there are elements of this case that can be agreed and then there are others that the parties believe ought to be put in front of the commission. You should know we'll explore discussions with all intervening parties through this process. And as we get closer to dates when testimony gets -- is ready to be heard and testimonies been filed by all the parties, we'll begin those discussions. But it's too early to tell the shape that it will take. I guess one last thing. The $300 million of O&M reductions, I know that's, I think, a number that you've had before, the 75% sustained. Can you just remind me, is that the same that you said before? Or does that number get [indiscernible] Just on that topic of cost management, could you give your latest level of confidence in hitting the $300 million this year, what you're seeing in the backdrop in terms of it becoming more challenging, easing up of any of those inflationary pressures this year so far? That's a good question, David. This is Brian. When we looked at the opportunities across the board last year to really position 2023 in a good spot, we identified areas in our corporate costs and business support that we felt like we could really align service levels with work prioritization. And we did this across the board, but a good example is in IT, right? We have about 1,300 IT systems. Well, not all are mission-critical don't need to be -- have the same level of support as others. So we really stratified our support levels. And we did that across IT, HR, legal, finance, we looked at across the corporate areas and found really structural opportunities that will remain for the long term. And that's why we feel like a lot of the 75% of the $300 million is sustainable. And another area that was also very important to the cost reductions was our real estate footprint. In Uptown Charlotte, we're moving from 4 buildings into 1 new tower. That's reducing service costs on those assets as well as lease cost and depreciation. So inflationary pressures are not impacting our ability to hit that $300 million target. We've contemplated inflation in certain pockets in the portfolio as we look into the spin in 2023 in our planning horizon and feel good about the $5.65 target we have. Okay. Understood. That's helpful. And then I was wondering if you could just talk to -- what gave you the confidence in knocking up the CapEx plan for the '23 to '27 period. But then also on the rate base outlook, it looked like the 2027 rate base forecast had ticked up a decent amount versus the prior expectations. So I'm wondering if there are any other drivers behind that, too. David, as we come to capital planning every year, we take into account where we are with regulatory approval, where we are with integrated resource plans, et cetera. And so we have seen an increase in transmission and distribution investment. If you look at the carbon plant in particular, there's transmission that's been approved in order to open up more potential for renewables. And as we get out into '26, '27, those numbers also reflect what we expect to mature in subsequent IRP updates and subsequent regulatory approvals. So that's how I would answer. I don't know, Brian, would you add anything further? No, I think as we move deeper into the clean energy transition, we expect the capital plan to increase year after year as well. So this is in line with our expectations as we move through the '20s. And I think that's an important point. As we were talking -- thinking back to the generation transition day kind of showing those charts about the 10 years. As we get deeper into the plan, more generation investment begins to show up earlier in the plan, more transmission and distribution. So you're beginning to see that and you'll see more of it in '28, '29, '30. A lot of good questions so far. So I guess conceptually, Brian, when you updated this plan in the third quarter, we were kind of at the height of inflation, interest costs, gas costs, et cetera. And now we've obviously seen some of those things roll over here since you've given the 5% to 7%. Does that put you in a better spot in the range now, given that dynamic? I'm just thinking long term through the plan here? Any comment that you could give on that? Nick, it is a good question around long-term growth rate. And we feel good about our 5% to 7% growth. And we have a lot of things to figure out. I mean interest rates have moderated to some degree, but they're still moving up, right? The Fed is still moving it. Fuel costs have been on the downward trend, and we -- that's really good for our customers. But they could move up just as fast as they did in 2022. So right now, we're sticking to the 5% to 7% growth range and not signaling inside it anymore. I think the commodity price is coming down, Nick is a real positive for customers because you think about we still have deferred fuel to collect, but our estimates for cost of fuel in 2023 is coming off and that's a good thing. So we're pleased to see that. It's good for customers. It also takes a little pressure off of interest in financing. So we'll continue to take advantage of every bit of that. I appreciate that. And to your point on the deferred fuel, 80 bps hit to the FFO and the '23 time frame here, and I acknowledge you have a path to get back to the 14% long term. I guess my question is, do you see sufficient headroom in your metrics at this point for unforeseen events like storms? And just how should we kind of think about the ability for the current plan to just handle any more kind of transient credit hits here? We feel very comfortable. The fact that we've absorbed $4 billion of deferred fuel and $0.5 billion of hurricane in 2022 alone, I think, is a strong testament to where we are, our scale, our ability to manage resources, et cetera. So we feel comfortable with it. We care deeply about maintaining these credit ratings. We think they're important and at the right level for the degree of risk in the business, but this is an opportunity that presents itself with the size and scale of our company where we can manage our way through blips of this type. More than a blip actually, $4 billion. I just want to round out the Commercial Renewables conversation a little bit, if I could. If there's any additional color you could provide on the sale such as where book value stands right now, portfolio tax equity position, asset level debt. Just trying to fuse together more on our side. I appreciate that it's a sensitive time given that you're selling the assets, but wondering if you could share any more details, particularly as it relates to book value. Yes. And Jeremy, let me comment on -- we feel good about the process, strong interest in the portfolio. We're not going to talk any more specifically around valuation. I hope you can appreciate that given where we are in the process. And I don't know, Brian, if you want to add anything to... Yes. Jeremy, we referenced a $3 billion book value excluding the tax attributes mid-year and we had some projects we continue to invest in for the balance of the year and then took the $1.3 million write-down at the end of the year. So you can kind of walk it down that way if you want to think about book value. Got it. That's helpful. And then I just wanted to kind of pivot a little bit, you involved with a number of emerging technology partnerships, including Honeywell battery, [indiscernible] and TerraPower hydrogen pilot. Just wondering which technology here you're most excited about? And if you were going to move forward 10, 20 years down the road, which one do you think plays a larger part in the Duke portfolio at that time? Jeremy, it's a really good question. It's a really good question. And one of the reasons we are involved in so many different things is the obstacle for full-scale adoption has a lot to do with which technology can reach commercial scale with a supply chain that will support how much of it we need. I think about our path or climate report through 2050 has us a need of somewhere between 10,000 and 15,000 megawatts of what we call 0 emitting load following resources kind of in that late . So that could be hydrogen. It could be small modular reactors. It could be CCUS, it could be longer duration storage. So the key being, again, though, we're not going to invest until they're affordable for our customers, and we can invest at the commercial scale necessary to make a difference. The small module reactor is something we're spending time on, and you would expect us to. We are the largest regulated nuclear operator in the U.S. sitting in a part of the world that embraces nuclear as part of the solution. But we also joined with a collection of Southeastern utilities to pursue a hydrogen hub. Because with all that carbon-free generation and all the solar we're going to have in this area, we think that's something worth investing in, really, as part of maintaining and preserving the natural gas infrastructure that has been so important to this region. So I know it's a roundabout answer to the question, but we're not ready to put our finger on any specific technology as the solution, but we are advancing our work, piloting, advising, working as actively as we can to make sure these technologies are developing at pace so that when we do need them and are ready to invest, there will be something that makes sense for our customers. Just all my other questions have been answered. If I may, I just had a quick clarification on the tax leakage portion of the commercial renewables sale, Brian, does -- so the message on the Q3 call was tax leakage is manageable given your other tax losses. I'm thinking about with this write-down, does that impact your sort of tax basis? And are you still saying that -- is the message still that the tax leakage is manageable? Or does that -- does the impairment charge change that dynamic? Yes. There's no change to the tax position or a tax basis as a result of this impairment charge, so no change in message. We can manage it. Thank you. That's all the time we have for questions today. I would like to turn the call back over to Lynn Good for concluding remarks. Well, thank you all for joining and for your investment in Duke Energy. We appreciate that. We feel like we've had a strong finish to the year and excited about 2023. And as always, we're available, Investor Relations and the senior management team for any further questions. So thanks for joining today.

EarningCall_121

Thank you for standing by. This is the conference operator. Welcome to the Research Solutions' Second Quarter 2023 Earnings Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] Thank you, operator. Good afternoon, everyone and welcome to the Research Solutions' second quarter fiscal 2023 earnings call. On the call today are Roy Olivier, President and Chief Executive Officer; and Bill Nurthen, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the second quarter of fiscal 2023. The release is available on the company's website at researchsolutions.com. Before Roy and Bill begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Research Solutions' 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. Also on today’s call, management will reference certain non-GAAP financial measures which we believe provide useful information for investors. A reconciliation of those measures to GAAP measures are included in the earnings press release issued this afternoon. Finally, I would like to remind everyone this call is recorded and made available for replay via a link on the company’s website. Thank you, John and thanks to everyone joining us today. As I review and think about our Q2 results, I'm generally happy with the 30-plus percent year-over-year growth in our Platform revenue and the continued growth in our Transaction revenue and the cash flow and EBITDA performance versus the same period last year. We are experiencing some headwinds in terms of net ARR growth, in what we call, new bookings which is defined as a new platform and a new transaction customer. While our net renewal rates continue to be over 110%, we have seen some increase in churn in smaller customers related to the general economic conditions and uncertainty. The overall net ARR growth is behind where I'd like it to be but it is a big improvement over Q1 in terms of our new bookings. Transaction revenue growth was strong for the second consecutive quarter and does not include any revenue from the FIZ acquisition which will start to show up in Q3’s results. We’re very proud of the $1 million in EBITDA improvement and the $1.3 million in cash flow improvement in the first half of ‘23 versus the same period in 2022. I will provide some more detailed comments about the state of the business after Bill walks you through the results in more detail. Bill? Thank you, Roy and good afternoon, everyone. Total revenue for the second quarter of fiscal 2023 was $8.7 million, a 10.7% increase compared to the second quarter of fiscal 2022. As noted in our press release, this represents our second consecutive quarter of double-digit revenue growth. Platform revenue increased 31% to $2.1 million, primarily driven by a net increase of Platform deployments over the last 12 months, including 34 net new deployments in the second quarter and upselling of current Platform customers. Annual recurring revenue or ARR, at the end of the quarter stood at $8.8 million, up 5% sequentially and 28% year-over-year, reflecting our continued sales and upselling efforts and low churn of existing Platform customers. We also had 3 sales in the quarter related to our newly launched Curedatis product. Please see today's press release for our definition and use of annual recurring revenue and other non-GAAP items. As I turn to Transaction revenue, I comment that the numbers to follow do not include any impact from the FIZ transaction that was completed in our fiscal Q1. This customer acquisition will begin impacting transaction revenue in our fiscal Q3 and I will talk more about that later. Transaction revenue for the second quarter was $6.6 million compared to $6.3 million from the prior year quarter. This represents 5.4% growth year-over-year and is the second consecutive quarter of growth for the Transactions business. In the past, we had noted wanting to see 2 consecutive quarters of growth prior to saying that we could be well positioned for growth in this segment going forward. We are now seeing signs that, that trend can continue as we are seeing growth in both and academic paid Transaction counts. Transaction customer count for the quarter was 1,223 versus 1,179 in the second quarter of fiscal 2022. The increase was driven by an increase in corporate customers. Gross margin for the first quarter was 39%, a 300 basis point improvement over the second quarter of fiscal 2022. The increase is due to the revenue mix shift towards our higher-margin Platforms business which now constitutes 24% of the revenue and 55% of the business' gross profit. With some limited exceptions which I will note later in the call, we see no reason why the trend in improvement in corporate gross margin percentage cannot continue as the mix of Platform revenue continues to grow. The Platform business recorded gross margin of 88%, a 240 basis point increase from the prior year quarter due to proportionately lower labor and software costs. I expect that for the foreseeable future, we can continue to maintain Platform gross margin at 85% or above. Gross margin in our Transaction business was 23.4%, similar to the prior year quarter. Our expectation is that Transaction gross margin will continue to stay within a range of 23% to 24%. Total operating expenses in the quarter were $3.7 million compared to $3.3 million in the prior year quarter, due primarily to higher noncash stock-based compensation costs and higher discretionary sales and marketing spend. I want to take a moment here to explain the stock compensation expense as it is notably higher for this quarter. As many on the call are aware, starting with this fiscal year, we ended the prior Restricted Stock Program for executives and installed a new Long-Term Equity Bonus program. The fundamental change when we did this was to eliminate a program where executives received restricted stock as part of their quarterly bonus and replace it with a program designed to better align executive compensation with stockholder interests. This involved the granting of 1.8 million restricted shares across the executive team which vest in 20% increments when the stock attains and maintains price levels of $3, $3.75, $4.50, $5.25 and $6 per share within the next 5 years. If the stock prices are not attained, the shares do not vest. Conversely, if the stock fully vests at $6, this would imply an over $100 million market cap increase with the payout to executives being under 10% of that amount. Restricted stock grants such that these require a third-party valuation to determine how they are expensed. The high volatility of our stock drove the value of the grant upwards and it has been determined that the value of the grant is roughly $2.5 million to be spread over approximately 2.6 years. Thus, this is the amount that we will expense during that time. The net of all this is that from a stock compensation expense standpoint, we are presently dealing with the runoff expense from the old plan while effectively accelerating or pulling forward some of the expense associated with the new plan, as the expense for the new plan is weighted more earlier than the 2.6-year period and will eventually expense to 0 and not continue indefinitely. In addition, in Q2, we also had our annual Board Stock Option Grant which served to increase the compensation expense as well. For Q3 and Q4, I expect stock compensation expense to be approximately $500,000 for each quarter, $300,000 coming from the new plan and $200,000 coming from the runoff of the old plan. In fiscal year 2024, we should start to see the expense come down from these levels. I apologize for the long-winded explanation there but we thought it important to discuss it given the expense level in Q2 and also to reiterate the point that we believe the new plan over the long term will prove more beneficial for our shareholders. Turning back to profitability. Net loss for the quarter was $256,000 or $0.01 per share compared to a net loss of $482,000 or $0.02 per share in the prior year quarter. Removing the effects of the new restricted stock plan, our net income would have been roughly or close to breakeven from a GAAP perspective. Adjusted EBITDA was positive $201,000 compared to a loss of $165,000 in the year ago quarter. We have now generated over $600,000 of adjusted EBITDA in the first 6 months of the fiscal year compared to a loss of over $300,000 in the first 6 months of our prior fiscal year. Turning to our balance sheet and cash. The increase in adjusted EBITDA has been backed up by an increase in cash flow which I think speaks well to the quality of our earnings as they grow. Cash and cash equivalents as of December 31, 2022, were $11.3 million versus $10.6 million on June 30, 2022. We have now generated over $1 million of cash flow from operations in the first 6 months of our fiscal year. There were no outstanding borrowings under our $2.5 million revolving line of credit and we have no long-term debt or liabilities. As we look ahead, I wanted to make everyone aware of a few items. First, on January 1, we moved all of our employees in Mexico to a direct hire relationship. We expect this will result in approximately $400,000 of additional annualized cost and may cause a slight dip in gross margin in Q3, before it starts rising again. Second, commencing January 1, realizing revenue from Transactions related to our FIZ customer contract acquisition. It is too early to provide a projection of the impact of these new customers but we do think it gives us an opportunity to continue to push transaction growth upward, perhaps hitting double-digit growth rates in that segment. There are some unique expense items that will be hitting us in Q3. As a result, I expect our operating expense level to be at its highest level for the year in Q3 before coming back down again in Q4. Adjusted EBITDA for Q3 will likely be flat to down from Q2 but then showing upside in Q4, resulting in a very strong finish to our fiscal year. Thanks, Bill. In the next few minutes, I'll give you an overall update on how the business is working and how that will translate into long-term value creation. First, I'd like to discuss marketing and sales. As you know, we brought in a new Head of Marketing in 2022, who has built out a new team that is starting to execute around driving marketing qualified leads or MQLs. We have, for the first time, launched several programs around webinars, newsletters, product release notes and social media. These programs are driving more MQLs and are generating both new, new sales and upsells. While there's lots left to do, I'm very excited about the progress in this team in terms of driving activity in QLs and sales. Regarding sales, we showed an improvement in the new, new sales team for Q2 versus Q1 but we are still behind our internal plan. Upsells and existing sales continue to show strong results as reflected in our net renewal rate continuing to be over 110%. We've seen an uptick in churn primarily from businesses shutting down or being acquired. You may recall that our target for net ARR growth is over $500,000 a quarter and we are not at that level and I don't expect to be at that level in the second half of the year. That said, we are doing a lot of great things in the sales teams in terms of training, better materials, better products, more MQLs and upgrades to our business development teams that drive leads. I think in the long term, that will help drive more results as the economy continues to improve. We feel that we are well prepared to regain momentum and accelerate sales as the market recovers. From an operational perspective, we made many improvements to customer onboarding, technical support and transaction operations that are driving improvements across the organization. This is reflected in our NPS score remaining over 60 and the fact that we can deliver the increase in Transactions reflected in the year-over-year growth in that segment with no new headcount. Turning to product releases or reference manager products -- I'm sorry, turning to product releases, our Reference Manager products, specifically References and References Pro have had strong early adoption. We've upgraded over 125 accounts which has helped us maintain the high net renewal rates I referenced above. Curedatis' launch is going well and we are tracking with our rather conservative plan for '23 and have over 200 pipelines -- I'm sorry, have over 200 opportunities in the pipeline. We've also continued to see positive traction with our add-in products, specifically our outlook and word add-ins as well as our browser extensions. All of this has resulted in a nice uptick in active users. Our active users at the beginning of fiscal '23 ran in the $22,000 a month rate. Most recently, we are seeing almost 40,000 active users in the platform which helps explain some of the Transaction year-over-year growth. The Transaction business in Q2 improved primarily from significant year-over-year growth with the academic and government users. The FIZ implementations and customer onboarding is complete but not reflected in the Q2 numbers. Preliminary numbers indicate that we transferred almost 70% of the FIZ customer base which has resulted in early signs of strong revenue growth in January. In looking at the January numbers, we are seeing similar academic and government year-over-year growth as Q2 plus strong corporate growth based on FIZ and the aforementioned increase in active users. We continue to be very active in M&A opportunities and have walked away from 2 opportunities that were in the IOI or LOI stage. We continue to be very focused on improving our overall product value through integrating an AI, NLP or artificial intelligence, natural language processing solution into several points in the research and workflow. Getting the right deal done remains our highest priority. As I mentioned in my earlier remarks, I remain cautious about the outlook for the next couple of quarters in terms of net ARR growth. However, this does not change my view regarding long-term opportunity for our business. I'm more excited than ever about the activities that we are doing in sales, product, marketing and M&A and remain confident in the value of our products -- and the value that our products bring and will continue to bring to our customers. I think we are really well positioned to deliver shareholder value as the general economy and markets improved and we are poised to see growth on both our top and bottom lines. I know you guys are newer at the helm of the company. I’m curious if you know from the Board level, the chatting, what has the pattern been historically for macro pressure in churn? I would assume that in the short term, people can make decisions to kind of step back briefly but this seems central to what most of your customers do. So how quickly do they tend to come back afterwards, what sort of pattern should we think about there? Yes, this is Roy. I think that's a great question. And we did some research on public companies, specifically the publishers and what they went through in the last kind of economic downturn. And all of them remained pretty strong. They maintained maybe a few points below their previous growth rates and then they bounce back very quickly, because a lot of the organizations don't stop doing research and don't stop having a need in a down economy. And I think that is reflected in the churn that we are seeing are typically our smaller customers. They're very, very, very small. So when we look at logo count, it’s a little higher than we would like. And then the dollars are not even anywhere close to our average revenue per sale. So we are seeing a little bit of an uptick. We are concerned about it but it is not happening with larger, more established accounts. It’s primarily very small accounts. Anything you want to add, Bill? Yes. Just to add on to that, I think the larger accounts that have been with us for a long time, they do actually achieve and realize the savings associated with being on the Platform. So it's something where they're actually saving money by being on the Platform. And so I think we're less concerned about issues there and losing customers there. I think more of the pressure is just getting new customers to adopt the Platform in the environment. Then can you talk a little bit about the successes you’re starting to see early in the vigilance side. How is that working in the sales motion? Are you going to put dedicated people on that as you start to see the successes and have more referenceability? Can your existing group kind of handle both products at once? Yes. We think that the model we have now which is the existing group handles the products with the support of a product specialist is the right model. I think as we grow, we may get to a point where we want a dedicated sales team. But right now, certainly, our hunting and upsell teams of over a dozen people are good in terms of setting up appointments and getting interest. And then we have a product specialist that goes in, does the demo and watch the customer using the product. So I think that's certainly working at this point and I don't expect that to change between now and the end of the fiscal year. And then with the FIZ Karlsruhe type of acquisitions, partnerships, how do we think about what should happen with sort of active customer counts starting this year -- this calendar year and sort of the impact that could have on ARR going forward? Well, I think in the short term, it will have a very little impact on ARR because these are primarily transaction-only customers. So the -- 2 things are happening. Number one, we're onboarding them and they're starting to buy articles from us which I think will be reflected in a nice bump in year-over-year growth rates in the Transaction business. And the Transaction business, the incremental cost to deliver those is very, very low. We don't need to bring on any incremental headcount to do that. So I think that will nicely flow to the bottom line. On the ARR side, all of those customers, we look at as an opportunity to upsell into the full Platform. And when we think about what does that look like in the calendar year, probably very little impact. But over the next 1 to 2 years, I think we'll convert a percentage. I don't know what that percentage is but as a reminder, the company Research Solutions in general converted 60-plus percent of their existing transaction-only customers over 2.5 to 3 years. So we could, if we execute, convert a material percentage of them. The last thing would be the first half cash flow from ops has been pretty strong. Was there anything sort of unusual in that? Is there any seasonality we should be thinking about? And how do you think that plays out sort of in the second half? Yes. No, I think there's not much unusual in it. I think, again, there's a couple of things that we've done. One is that we had made prepayments to some of our publishers and they previously were occurring about 3x a year. So that was causing some lumpiness in the cash flow. We've redone those arrangements to make them 4 times a year in equal increments. And so that's helped to see things along. And I think while there's some variation in prior quarters, I think that's going to bring less variation as we move forward this fiscal year. We are getting a little more interest on our cash but that's not really contributing the vast majority of the gain. And I will say, usually, seasonally, the toughest quarter is Q1, because that is when we are paying out both year and sales bonuses for overachievement. And we sort of got through that in Q1, was not really applicable in Q2 and won't be applicable Q3 and Q4. So I think we could see still some seasonality over time. I think it will align, as I said, very closely with EBITDA but I don't see a reason why we can't continue to produce good cash flow for the rest of this fiscal year. Yes, that's a good question. Again, I think really, the vast majority of it at 85% gross margin, right? We don't need a lot of additional G&A type costs or support cost to support that additional dollar of ARR. So it is our quickest path to increased profitability is increasing the ARR dollars. We have shown that over time. And as we see that gross margin go up that we can support additional revenue there without a much more proportional increased cost. Is there any additional dollars that sort of dropped kind of below the gross margin line, it's just a question of are we reinvesting those or not. And if you really sort of look at the expenses, we are making some intentional uplifts in expense, not too material but some uplift but they're in the right areas. They're in sales and marketing. They're in product. It's not in G&A and things like that. And so -- so again, it's going to be sort of commensurate with those gross margin levels. Got it. And I heard -- I was a little confused on something. I heard that as you add new customers transactions, there’s very little cost to that. So a lot of it drops to the bottom line. But I thought that the Transaction gross margins were kind of you’re saying 24% to 25%. So could you explain what you meant by what you said? Yes. Just to clarify, I should have said the gross margin from the trend -- the incremental Transaction revenue we're bringing in will mostly drop to the bottom line because we're not bringing in any incremental headcount to handle the growth. It's being handled by the current staff and the team. Bill, I'm sorry, I interrupted with you. Yes. I would just say, keep in mind, a lot of that gross margin is influenced by the margin on the actual article itself which is a very tight margin. And so really, that gross margin could swing a little bit favorably to us because the labor component is -- that is needed to also process those is not growing. But again, you have to remember the vast majority of the costs associated in that business segment is the royalty back to the publisher. But all that said, from just a total EBITDA perspective, the more transactions grow, there's still many coming into that kind of margin range but more actual EBITDA dollars will flow to the bottom line. Okay. So the way to think of that is of the 70% of FIZ base business that you transferred over would follow those dynamics? Yes. So it's going to be similar gross margins. However, again, the more the Transactions grow, it's -- you're going to drop more dollars to the bottom line. I had a bunch of questions. One is the more housekeeping on the cash flow. It looks like you -- majority of that came from the lowering of the prepaid royalties. Is that more of the lumpiness? Or are you expecting that number to go down in general going forward? So that’s one. Yes, sure. So when you look at that, there's basically -- and the history there. You look -- there's 2 things that are causing the variation when you look year-over-year. And again, I think this is going to smooth out over time. But prior, we were making prepayments 3 times a year. So certain quarters, we didn't have a prepayment in and that those times were getting compared to other quarters where we had a prepayment. That has now changed. We're starting with this fiscal year, we're making our payments each year -- each quarter equally in each quarter. So that should help smooth some of the variability there. The other thing that is happening is those prepays are getting actually exhausted quicker than they had been in the past due to the Transaction growth. So as the Transaction grows, we exhaust those prepays. Those prepays go down. And really what you saw is that we had put a lot of prepays on the books coming into the year. And by the end of December here, had exhausted a lot of that prepay and that basically led to some of the cash flow gains from that perspective. But again, I think there's a lot of variability when you look last 6 months, in the next 6 months, I think you'll see less changes in those accounts as we move forward. Okay. And then I noticed that $300,000 asset purchase. What is that -- is that what the Transactions business that you were mentioning earlier? Okay. Roy, I got a question for you. So for some of us that have been here for a few years. A lot of the marketing stuff that you mentioned, webinars, social media, et cetera, if I remember, that was tried in 2017, 2018. Peter was experimenting with lots of those marketing things which was not a lot of success. So I’m curious what changed now that makes you guys so confident that these things will result in MQLs, I believe, et cetera? Yes. I think the biggest thing that changed is the team now is very metric dashboard oriented. So we literally have a live changes every day dashboard and our CRM system that shows here are the sources of these leads and we're able to attribute an investment back to an actual sale. So I was sitting through a marketing review in the last week and they were able to report, yes, on a year-to-date basis, x percent of our upsell revenue was contributed directly back to these programs, y percent of our new, new revenue was attributed directly back to these programs. And that's enabled us to make, I think, better decisions about, okay, let's double down investment in this program that's generating results, let's dial back investment in this program that's not generating a good return on that investment. So for me, I'm not -- I don't -- I obviously was not the CEO in 2017, so I did not see if we had those type of dashboards but we do now. I have made it clear to the marketing team, we're not going to invest discretionary investments and growth opportunities unless we can measure it back and they've done a nice job of building out workflow into CRM. And we also integrated the 2 CRMs we had into a single CRM that also includes the whole marketing engine product, so that we now can track this stuff and see if it works. So going forward, the objective is to invest in what's working and not invest in what doesn't work. Okay, great. And then, I was wondering if you could update us on -- the academic platforms product. I know you rolled it out a few quarters ago. And b, the -- we haven't heard about this in a few years but you did have Evidence Partners, I believe, partnership almost 3 years ago. So I'm just curious how that's worked out and whether that's making any progress. Yes, good question. On the Article Galaxy Scholar and as a reminder, we have both a free version of a paid version and the beginning of this year, we decided to really put a lot of emphasis on the free version to drive installs to generate transactional revenue in the short term and provide an upgrade ARR opportunity in the long term. That's working pretty well. We're in the high-30s in terms of installs this year. Some of those are paid. Some of those are free. And we’re seeing very significant year-over-year growth in the academic segment as a result of that strategy. I’m not crazy about the amount of ARR generating in the academic scholar space because it’s just a much tougher market and different from our corporate market but it’s generating some really nice incremental transactional revenue and we are able to at least get installs that we can upgrade to the premium version of AGS later. So anyway, I think generally, that strategy is working. The partnership opportunity that you mentioned, I think in general, we could do a better job in partnerships. We do have occasional wins based on the specific one you mentioned and others that we have around the world. We probably have 12 or 13 partnerships but none of them are driving huge amounts of revenue. The bulk of the heavy lifting around here in terms of upsells and new, new is our direct sales force. On the new products or Curedatis and on Reference Management, can you give us a little bit of an update on that? And specifically, I mean, how do you -- I mean the Reference Management seems to take a lot of update. So clearly, they seem to be a good product set there. Maybe can you comment on that and also on the product market at book here? Yes. In terms of References, as I mentioned, we have 125 or 126 upsells so far this year. It's been, I think, a pretty exciting product. A lot of people like it. It's completely integrated into the workflow instead of you having to do your search in 1 place and then get your document in 1 place and then store it in a different place. So people really like it and we continue to have a high number of demonstrations of the product. So I think that product is a really nice home run in some ways, maybe a triple but it's definitely driving new sales and upsells. In terms of Curedatis, Curedatis is on plan but we had a very, very conservative plan. I think the customers that have acquired it like it. The prospects we've showed it to really like it. I think we still need to figure out the sales model there. It's a little bit different and it's a different decision maker in many cases. So we're still tweaking kind of how we sell it, who we sell it to and what the messaging is. But generally, the users, the people that are actually doing the pharmacovigilance work inside of the corporations love what it does. So I think that product will gain momentum through the second half of the year. Great. The Curedatis is clearly the new product. The Reference Manager, are you replacing your existing products and other people’s products? How does that work? Yes, great question. We've got a couple of drivers of that business. We did have, I guess I would describe it, as a light Reference Manager application that we call Biblilogo. You may remember hearing that in previous calls or on our public filings or website. So References and References Pro ultimately will replace Biblilogo. So the number I mentioned are customers that are either upgrading from nothing or upgrading from Biblilogo into References, References Pro or are there new customers that we've sold and onboarded as a result of References. I think -- did you have another question or was that it? But what I'm wondering, my understanding is there are some companies in that state that had a big share of that space and that they were trying to expand sort of add functionality. And clearly, you have the Transaction and the Platform side and adding these apps and these features. Know exactly what my question there is, Roy but I’m trying to understand how you’re making progress replacing other people’s product. Yes, great question. I think there was a company in Europe that's been a competitor that was a Reference Manager application. They had a freemium premium model, so they would give away a free version that they would upgrade to a corporate enterprise version later and they were trying to move into the document delivery or doc delivery space that we're already in. We, on the other hand, of course, we're moving from doc delivery into References. We've had virtually no churn to that company. We have not lost competitive new deals of that company. I think that while they probably still have the edge on us in terms of features, I think we deliver 90% of their feature set and we do a much better job on the doc delivery side. So I think going forward, we’ll continue to narrow any feature gaps and we’ll compete well with them. That said, we’re not taking share from them. And we are competing on a number of deals to displace a current provider we have won a handful of smaller ones. We have not won any of the very large enterprise ones. I’ve sat through a couple of presentations that were 500-plus seat opportunities and those are typically long sales cycle, very long drawn out process. So we’ve not won any of those yet but we’re definitely engaged and fighting to displace some current providers and larger accounts. This concludes today's question-and-answer session. I would like to turn the conference back over to Roy Olivier for any closing remarks. Great. Thank you. A quick reminder. We will be participating in the ROTH Capital Partners Conference in March. For more information on that event, please feel free to contact your ROTH sales rep. And I appreciate everyone for joining us today and have a great afternoon.

EarningCall_122

Good day, ladies and gentlemen, and welcome to the Genasys Incorporated Fiscal First Quarter 2023 Conference Call. All lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. [Operator instructions]. At this time, it is my pleasure to turn the floor over to your host, Kim Rogers. Ma'am, the floor is yours. Thank you, Cath. Good afternoon and welcome to Genasys Incorporated fiscal 2023 first quarter financial results conference call. I'm Kim Rogers with Hayden IR, the Investor Relations firm for Genasys. With me on the call today are Richard Danforth, Chief Executive Officer; and Dennis Klahn, Chief Financial Officer. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook and future financial performance that involve certain risks and uncertainties. The company's results may differ materially from the projections described in these forward-looking statements. Factors that might cause such differences and other potential risks and uncertainties can be found in the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2022. Other than statements of historical facts, forward-looking statements made on this call are based only on information and management's expectations as of today. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We also discuss non-GAAP financial measures and operational metrics, including adjusted EBITDA, bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance. For a reconciliation of adjusted EBITDA to GAAP financial metrics, please see the table in the press release issued by the company at the close of the market today. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning. Bookings is an internal operational metric that measures the total dollar value of customer purchases orders executed in a given period regardless of the timing of the related revenue recognition. Backlog is a measure of purchase orders received that are scheduled to ship in the next 12 months. Finally, a replay of this call will be available in approximately four hours through the Investor Relations page on the company's website. At this time, it's my pleasure to turn the call over to Genasys' Chief Executive Officer, Richard Danforth. Please go ahead, Richard. If you look on our website, you'll see the earnings release as well as a press release that has been hung up on the wire service but likely come out during this call announcing the win of a large enterprise SaaS award to a company called Aramco, which happens to be the largest company in the world from a market cap basis. So with that, we are off to a strong start in fiscal ‘z23. With our largest SaaS booking quarter-to-date. Our software business continues to gain momentum, as evidenced by the 6.1 million in SaaS bookings in the first fiscal quarter of this year. The strong bookings include an enterprise award from as I mentioned a moment ago, Aramco, the largest market cap company in the world, and the California counties of San Diego, where they bought GEM, Riverside, where they bought Zonehaven. Subsequently, they had bought GEM and IMNS, San Mateo, which bought Zonehaven, and Monterey County which bought both Zonehaven and GEM. These results along with our rapidly growing SaaS pipeline, further reinforced our strategy of investing in software development, sales, marketing and customer support. The addition of the world's largest oil and gas company in large California counties to our global automobile manufacturing, and regional critical infrastructure customer base, elevates our SaaS profile and demonstrates our ability to successfully close, cross sell and support large enterprise and public safety clients. Our international results are also robust this quarter, as our strategy to rationalize business development by establishing sales offices in APAC, Europe and the Middle East have proven successful. During the first fiscal quarter, 50% of our bookings were international and APAC revenue more than doubled year-over-year as the entire region emerges from COVID related lockdowns. With the world economy picking up we are seeing pipeline growth across all of our international sales regions. We expect strong fiscal year bookings in APAC, Europe and the Middle East, driven primarily by hardware orders, as well as developing pipeline of SaaS opportunities. Total bookings for the quarter at 8.6 million up 23% year-over-year. Hardware bookings for the quarter were 2.5 million as pending orders moved into our fiscal second quarter. Fiscal second quarter hardware bookings through January are already 40% higher than the total first quarter hardware bookings. We expect fiscal 2023 bookings to follow our typical pattern with a large step up in fiscal Q3, driven by international hardware bookings in fiscal 2023 are expected to substantially exceed fiscal 2022 hardware bookings. In what is typically our slowest quarter, fiscal first quarter revenue was 10.5 million slightly lower than the prior year quarter and in line with our expectations. Following the usual pattern, we expect sequentially, quarterly revenue to increase in the fiscal second quarter and then strengthen in fiscal Q3 and four putting us on a solid footing for the seventh consecutive year of revenue growth. Inflation resulted in increased hardware component cost and product mix was a factor in the decreasing first quarter gross margin to 43.3%. We expect our gross margin to return to more normal levels in the second half of fiscal 23. As we discussed on our fiscal fourth quarter conference call continued investment in our SaaS business drove a 10.5% sequential quarterly increase in operating expenses in line with our expectations. Given the confidence in these investments to accelerate our SaaS business growth. We anticipate operating expenses in fiscal '23 to increase by approximately 5 million year-over-year. While SaaS bookings and revenue are growing, hardware continues to be a majority of our business, representing 90% of the total revenues in the fiscal first quarter. Our commanding competitive position as the de facto global supplier of Long Range Acoustic devices gives our hardware business a compelling economic profile. We continue to diligently manage and dedicate resources to growing our global hardware business. Recent attacks and increasing threats to critical infrastructure, particularly electrical substations, by generating large business opportunities for our remotely operated LRAD 950NXT system. The NXT uses a proprietary technology to identify and respond to potential threats. Since the NXTs launch last April, we have received orders from international navies and critical infrastructure orders for [indiscernible], data centers, ports, and electrical substations. Large NXT critical infrastructure and international defense sales are expected to be a major contributor to hardware revenue this fiscal year and beyond. Our hardware bookings are typically lumpy. We currently have a large number of hardware opportunities expected to close this fiscal year. The U.S. Army program of record and its international orders are anticipated to drive bookings growth and substantially lift hardware backlog in the second half. Hardware will continue to be the economic engine that powers the self-funding of our SaaS business development in the future. Our priority focus is fully integrating our SaaS solution and increasing the capabilities of a data driven protective communication platform. Our SaaS system suite is evolving with the integration of GEM, Zonehaven and IMNS into a seamless platform, expanding our capabilities and empowering Genasys to address a much larger scope of enterprise and public safety crisis. New platform features including flood and traffic modeling, continue to expand our platforms multi-hazard capabilities for use during hurricanes, storm surges, tsunamis, avalanches, flooding, debris flow, wildfires, chemical plumes, active shooter, and other natural and manmade disasters. Some of our new capabilities were deployed during the recent atmospheric river condition, the inundated Northern California. Our protective communication platform was used in many counties to communicate the location and extent of flooding, avalanches, debris flows, road closures, hazard condition and recovery resources. During the severe weather events, hundreds of 1000s of residents accessed the Genasys aware sites to check the evacuation status of their neighborhoods and for other lifesaving information. Our land and expand strategy continues to grow our footprint with government public safety customers. Increasing demand for our protective communication platform has 16 California jurisdictions now using multiple Genasys platform elements, with three counties using the entire platform. Riverside, one of California's largest and most populous counties, recently purchased zone haven to integrate with the previously purchased GEM services and IMNS installations. As we announced earlier this month, the city of Laguna Beach is a notable example of how to perform -- the performance of our IMNS network created another upselling opportunity. The successful use of IMNS during two wildfire last year, led the Laguna Beach City Council to prioritize the further expansion of its Genasys network. In Marin County, California, we have provided emergency warning services for the city of Mill Valley since 2019. And 2021, IMNS installation equipment was solar power and battery backup are positioned in other areas within the county. The follow-on order announced last week further expands the county's IMNS network. We have also expanded our footprint in Alameda County with UC Berkeley's purchase of IMNS which will be integrated with the city of Berkeley's Genasys network. As we announced last week, the extended network and the county's use of our Zonehaven evacuation platform will expand emergency warning coverage and notification channels during public safety threats for more than 45,000 students, staff and facility. We expect additional California jurisdiction to join Alameda, Marin and Riverside counties in adopting the full Genasys platform this fiscal year. In the enterprise market, the addition of Aramco, along with previously announced global auto manufacturers and critical infrastructure elevates our SaaS profile and demonstrates our ability to successfully close large enterprise customers. Extending the capabilities of our software platform further differentiates us and opens doors for new and follow on business opportunities. Our approach to the vast enterprise sector is to target key verticals where we can reference our proven execution. We have spoken before about our ongoing investment in the SaaS platform and SaaS sales growth. Since late 2021, we've expanded our software development sales, marketing and customer support teams and added new personnel with the skill set needed to achieve our revenue goals. To build brand awareness and accelerate platform growth. We have recently appointed as Avnita Gulati, as Vice President of Marketing. Avnita is a highly successful enterprise marketing executive with extensive experience leading revenue-based marketing organizations. She has implemented global go-to-market strategies and led customer acquisition programs for leading companies in the software, semiconductor, medical and financial markets. Avnita was a key addition to our leadership team who will help us drive scale and growth. The whole team here has energized and psyched by the increasing adoption of our software SaaS platform and the burgeoning opportunities fueling growth in our pipeline. Our pipeline of qualified SaaS opportunities is now 25% greater than it was just a few months ago. The SaaS bookings we delivered in the first quarter further validates the investments we are making in our protective communication platform, and we believe are a strong indicator of its potential. With Genasys software now in use in 23 states and seven countries soon to be eight with the addition of Aramco. We are gaining traction in new markets and building our software footprint globally. We are reiterating our expectations for continued revenue growth in '23. With strong international sales, continuing LRAD deliveries to U.S. military, and increased software services sales and significant SaaS revenue growth. Revenues for the fiscal 2023 first quarter were $10.5 million, 2% less than the prior year quarter, as compared to the same prior year period, LRAD revenue increased 19% to 9.3 million. Software revenue increased 39% to $903,000. However, this was offset by a $2.3 million decrease in IMNS revenue, which was $300,000 in this year's quarter. IMNS revenue throughout fiscal 2022 benefited significantly from a single $10 million order from the U.S. Army. Recurring SaaS revenue from North America increased 87% compared to last year's quarter. Gross profit margin was 43.3% this quarter compared to 48.2% in the prior year quarter. The gross margin percentage was impacted by inflationary pressures on product costs, the mix of revenue this year, and increased software costs to support software revenue growth. We expect the Q2 gross profit margin to be similar before improving to closer to our historical margins in the second half of this year. Operating expenses were $8 million, up from 6.5 million in the same period a year ago. The planned increase is largely due to greater sales, marketing, and related travel expense, plus additional compensation expense this year, including a 14% increase in our engineering staff. Net loss for the quarter was $3.5 million or $0.10 per share, compared to a net loss of 1.3 million or $0.04 per share in the fiscal '22 first quarter. The increased decreasing loss was largely due to the lower gross profit this year and the planned increase in operating expenses to support the software growth initiatives. Adjusted EBITDA for the fiscal '23 first quarter was a loss of 2.4 million compared with an adjusted EBITDA loss of 412,000 in the prior fiscal year first quarter. We believe this information in comparisons of adjusted EBITDA enhances the overall understanding and visibility of our business performance. To that effect, a reconciliation of our GAAP results to non-GAAP figures has been included in our earnings release. Cash, cash equivalents and marketable securities totaled $15.1 million as of December 31, 2022, compared with 19.9 million as of the prior year end. Working capital totaled 17.4 million at December 31, 22 compared to 20.7 million at September 30, 2022. Cash used in operating activities for the first three months of fiscal year 2023 was $4.9 million. This compares to cash used in operating activities of 2.7 million in the same period last year. The fluctuation primarily reflects the higher negative adjusted EBITDA in this year's quarter. Thank you. The floor is now open for questions. [Operator Instructions]. And our first question comes from Brian Colley from Stephens. Go ahead. Congratulations, first off on the Aramco deal. I'm curious if there's any numbers you could provide around that contract, or just any qualitative information you can provide us with, can help us size that up. It was the largest SaaS booking we've ever taken. By a lot, Brian, I think our largest one prior to that Dennis was Riverside at 1.20 million or 1.50 million. So this was substantially higher than that. I could give a little color on it. It was a competitive solicitation. There were competitors from the United States, from the U.K. and from Europe. And the selected Genesis, which was terrific, it's a testament to the team. We have got a team here in the United States and the team in Europe, and it's just a stunning win for us. We've mentioned in the last call Brian, we're going to begin to focus more on enterprise as well as continuous. And we were able to go out and win the largest enterprise in the world. So that was terrific. We have a lot of work to do between now and when we go live, but we're all very, very pleased. It was booked in Q1. We signed the contract in December 27, I think. It's been an extended period of approvals by releasing the press release which we received earlier today. The approvals finally. So they've had the process ongoing since early January. It's taken over a month to get their approval. But it surprised us that it showed up this morning. So we scrambled a little bit to make sure we could get it out there as quickly as possible. But we started saying go live. So internal -- the current plan is that they go live internally at the end of March but won't begin to use it in a public forum for about 60 days after that it just training and practice. It's all SaaS. It had an incumbent system, Brian, that was on-prem. So this is a big deal for Aramco. Holding the stuff up on the network. Was the incumbent provider? Was it one of the other large competitors like an Everbridge, or OnSolve, or any color you can provide there? Okay. I'm curious what you're seeing from your competitors more recently. I mean, by the looks of this deal, it seems like your win rates are improving. But obviously, Everbridge and OnSolve. kind of have some other stuff going on, at the companies. Everbridge is going through some restructuring. So I'm curious just if you're benefiting at all from, call it maybe some distractions or your competitors. I can't speak to that, Brian. I know we've picked up a handful of salespeople that have been laid off by those companies, particularly Everbridge. We booked $6.1 million in SaaS in our first quarter, which was the biggest we've ever done, and it obviously it's been driven by Aramco. But we also picked up several counties, again, here in California. I mentioned in my remarks, we're currently selling our software in 23 states in the union. And now, seven countries soon to be eight. And I also mentioned our pipeline has grown by 25% over the last handful of months. So it's behaving the way we expected it to. And with all due respect to the competitors here in the United States, they might struggle some -- they are still formidable competitors. Right. That makes sense. One, last one, and I'll see the floor here. But I'm curious, Dennis, if you could provide any color on kind of why the outsize is moving gross margins this quarter? And I guess in the back half, you're expecting them to get closer to 50% range, is that correct? Yes, we are. Quarter-over-quarter decrease, as we saw over the last half of last year's fiscal year, the margin has decreased last year as well. They picked up in the fourth quarter of last year, but that was because of the volume. If you take a look $16 million of revenue in the fourth quarter of last year versus 10.5 million in this quarter. You pick up several points of -- just from additional absorption based upon that volume of revenue. So once we get probably through, mostly through the second quarter, we should see that we'll have the orders that we'll be shipping will be based upon our chances that the orders that we have booked from the higher list prices of our products. We have repriced that it just takes time to get into the system and be part of the backlog. Congrats on strong fast bookings there. That's exciting news for sure. Just to be clear, is 6.1 million annual contract value or total contract value? Yes. Got it. And then, it doesn't seem like you guys have seen really any sort of macro effects on sales cycles or something like that. I mean, sounds like things are going on very strongly. But any -- have you seen any kind of elongation to the sales cycles in the enterprise market or public sector for that matter? I guess it doesn't really seem like it, but just want to check because so many other SaaS companies have seen that. I'd say no, from a SaaS perspective, from our hardware -- and I'd probably put a little color on that, Mike, given where we came from, with a very low number. We've been able to grow it very nicely. From our hardware perspective, the international was most affected bookings from a COVID kind of thing. APAC, Middle East and even Europe were terrible over the last three years. And frankly, they're coming down -- began coming down prior to that. So I'd say on a positive note, we see pipeline growth in all of our international markets. And we expect, as I mentioned in my remarks, significant uptick in international bookings this fiscal year. Yes. Okay, that's great. In terms of the Aramco win, which was competitive and a replacement. Are there one or two things that stand out here as to, why you won the deal from a technical perspective? I can't answer that. I have my own opinion. But I don't have the information from the Aramco folks. We're just getting started with them. Part of it, Mike is from a technical perspective, our team in Madrid has been working in putting working with network providers around the world since the early 2012 timeframe. So they're very comfortable with the large network providers. So we put a compelling technical case together. And they selected us, I'm sure we'll get more color from them as we continue to work with them over the coming months. Yes. And just last, it sounds like the pipeline growth has been great. If you look at that pipeline, is there a way to rank order the applications in terms of their representation in that pipeline? One clearly got a bigger chunk of the pipeline than another here among the three main ones, yes. Yes. Well, if you look at the three being GEM, Zonehaven and IMNS. IMNS by its nature will drive higher revenue but lower SaaS. And GEM and Zonehaven, as I mentioned in my remarks, they've been combined. And we've seen many counties now buy both. Have one and buy both. And as I mentioned, Monterey bought both to begin with. And that's significant for us from a Yes. Congratulations on the quarter. My question is on the increasing operating expenses of 5 million. How much of that is in sales and marketing versus development? And when can you really begin to leverage the revenue growth on your margins? I don't have it sitting here in front of me, what was more R&D or sales and marketing. Dennis to you. I don't. I can't give you a breakdown. My sense would be that it's more sales and marketing oriented than with strictly R&D development. We've added since a year ago, we now have our first chief revenue officer and as Richard announced we have Vice President of Marketing. So they're leading and building out their teams. So it's probably going to be -- we've added a substantial number of sales and marketing folks already this fiscal year. So it's more likely sales and marketing. And in terms of when the lever starts to hit, our revenue, Dennis remark, our revenue for Q1 was 900k up. How much? Yes. That's a significant percentage. But as we book [indiscernible], it's a curve that's sort of asymptotic. So that will begin to improve. Certainly, by the end of this year, I'd expect. Hey, thanks for taking my question. Actually, I have a couple of them. Just out of curiosity, what was the time since when you first started selling your marketing on the Aramco deal to the close? What was the chronological time on that? It was shockingly quick, for the Middle East, particularly. Just a rough order of magnitude, Chris. But our Dubai office became aware of the opportunity in the fall. There were multiple demonstrations and responses to RFIs. A proposal was submitted in December, I think. And the award was made on December 27. So that's shockingly fast for an enterprise of any size. Notwithstanding, this was the largest enterprise in the world. So they were determined to get it under contract. I think they have some issues with their existing system that was the impetus to sort of fast track this. But it was, again, a great team win. Yes. That's helpful. And that is for enterprise sale, that's a theodolite. One other question, just in terms of the overall business. You talk a lot about, the strength in APAC, Europe, Middle East. It kind of begs the question, did you see some weakness or a slow ramp or any kind of delay pattern in the U.S. where deals, maybe needed longer approvals? Or you cited all the other geos, except for the U.S. in terms of strength? So I'm just curious if we should be thinking about that, what were your observations are? International, I mentioned a moment ago has been poor for the last handful of years and most recently, driven by COVID shutdowns. So our bookings from international have been down substantially. So I see them returning to normal levels just beginning this year. Domestic orders have historically been somewhat lumpy, and they remained somewhat lumpy, where second half is typically substantially stronger than first half. And that's what we're seeing. So I think the U.S. is following the pattern it usually follows and international is approving a lot. Okay. And then, I had two questions on the technology side. One of them is, I know, we've talked a little bit in the past about kind of a unified product, category and name. Can you provide any kind of insight in, where that is on the priority spectrum? And what kind of timing there might be in terms of an upgraded unified product and branding around the software business? Sure. We are endeavoring to do that. I've mentioned in some of my remarks, the unified protective communication platform, that's what we're calling it. That will include all the functionality of GEM, Zonehaven and IMNS. We will be rolling out a campaign on this late spring, early summer. Okay. And then, one other question on the technology side, and I'll hop off, is, one of the bigger names in the space Everbridge, it's been around for a while. So, my question is about interoperability, like them, love them, they're failing, they're succeeding, whatever. They signed a lot of large sort of contracts with governments and states to provide sort of emergency notification. And I'm wondering, is there an opportunity for Genasys, on the interoperability side to come in and say, well, they won this award, you can't walk away from it, because it'd be embarrassing. But we could provide some of the functions that you need now in terms of evacuation and other sorts of deeper software and data services. What level of interoperability you have with them? And is that a legit opportunity? Or does it not really hit your radar screen? We have a handful of states in our -- we'll call it -- certainly not in our backlog yet. But we are pursuing multiple states across the union. But we still don't want to replace him. But our system can operate the Everbridge channel, the Everbridge mass notification channel. In many cases, we've installed our IMNS systems here in California and other states, and counties and cities may in fact have Everbridge or OnSolve. So it becomes a channel that's on the on the GEM platform. Thanks for taking the follow up. I'm curious if you could just talk about your visibility to returning to revenue growth from a hardware perspective in the second quarter through the fourth quarter? It seems like you have enough backlog to do that. But I'm just kind of curious how we should think about the growth trajectory of hardware. Second half higher than first half for sure. Our first quarter revenue, by the way, was the second largest in company history. IN my remarks I told I think Q2, Brian, will be higher than Q1. And then, recovering very nicely in the second half. Got it. And when you mentioned in the press release, like you expect continued growth? Does that include year-over-year like including 2Q, correct? Okay. Got it. I wanted to ask about just the go-to-market strategy for software. And maybe some of the initiatives that Dennis Walsh is working on? Are you looking more at kind of partnering with any type of resellers or channel partners to kind of help you extend your sales reach without needing to hire a bunch of additional sales reps, or just kind of curious, what you're doing from a channel perspective? And also what just any initiatives that Dennis has kind of put in place that might be working so far? International channels for sure. And domestically, we -- I think we have one. So it's not a big piece of anything we do right now. But it's something we certainly have looking to go to. In terms of strategy. from an enterprise perspective, it's narrowing it down. We've been frankly taking a shotgun approach, Brian, ongoing after everything. But necking that down to very specific verticals. I mentioned we've hired a VP of Marketing. So our marketing effort will be then more pinpointed at large manufacturing, for example, with the automobile wins we've had, and now Aramco. We will be focusing on a handful of verticals as opposed to everything. Got it. That's super helpful. And I wanted to ask lastly, just about Zonehaven, and the progress you're making just on expanding, first of all, just beyond California, but also internationally and then also the integration with GEM. I wanted to get an update on how that's going. The integration with GEM is ongoing. As I mentioned to the prior caller, it's an initiative that we've called protective communication. It says all the functionality of mass notification, and evacuation. We've recently released software feature sets that include flood modeling, and traffic modeling, which further enhances the platform and enables the first responders to determine how -- what zones they want to evacuate running the fire model when the fire will hit that. And then, how long is it going to take for all the cars in that community to get out? If the answer comes back that fire will be there in three hours, and it takes four hours to evacuate? That doesn't work. So we've continued to put the software feature sets that we think are very, very helpful to first responders in both the GEM in the Zonehaven platform, and we expect that platform to be combined and come out into the market as protective communication. Okay. Got it. Then just one last thing. I mean, for the Aramco deal, are there any like startup costs or anything? Any expenses, we should expect to hit the model over the next quarter or so, as that deal goes live? Or is it just kind of turning it on with SaaS? We're not hiring anybody else to prosecute the Aramco deal, but it will be a significant focus of our software development team for the next handful of months for sure. As part of the contract, there was a relatively small upfront fee that they pay us. But most of it'll be -- most of the upfront stuff will be done, as we typically do our SaaS stuff. I have got another question on Zonehaven, can you maybe outline a longer-term vision for Zonehaven and sales process? Do you think that it will be in futures sold more through as a feature of the GEM as opposed to a standalone software? The combined platform will be our go-to-market, Martin. It's a process to redefine what mass notification is. It's not just getting notifications, but it's also getting relevant information of where and when the threat is coming from whether it's from a hurricane, or river flooding or the disastrous things we've seen in California, with the atmospheric rivers. In that period of time recently at the atmospheric rivers, the communities were using it for warning people and evacuating people for avalanche for debris flow, for the location of sandbags, for the location of fresh water. The utility of the GEM and Zonehaven platform was on stage here in California during that horrific weather it took about two weeks. So the application of the combined platform is not just forest fires. It's any emergent situation where lots of people lives may be at risk. Got it. That's very clear. Thank you. Another question on account sales process where they are currently sold in different ways and supported by the same team, or do they have like slightly different sales process between Zonehaven and GEM? No, it's the same. So when the SaaS sales team goes out. They are demonstrating the combined platform. And in the case of Monterrey, they bought the combined value platform with both functions of GEM and Zonehaven. In Riverside as I mentioned, they bought everything but at three different times. So they have GEM, they have Zonehaven, they have IMNS. As I said in my remarks, I think we'll see more and more of that out the installed base as an upsell, cross sell opportunity. And if I showed you the picture of the State of California, you'll see that I think we're in 34 of the 58 counties. And four more in the contracting phase, so those counties that have Gem and not Zonehaven, and not IMNS, it's all an opportunity. And at this time, there are no further questions. I would now like to turn it back to management for any closing remarks. Thank you. We regularly discuss our business at Investor Conferences throughout the year. Later this month, we will be participating in the Winter Wonderland Best Ideas Virtual Investor Conference. Additional investor conference presentations are planned throughout this fiscal year. Thank you for participating in today's call. We look forward to speaking with you again next quarter, when we report fiscal second quarter 2023 results. Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

EarningCall_123

Hello and welcome Bioceres Crop Solutions Fiscal Second Quarter 2023 Financial Results Conference Call. My name is Drew, and I'll be your operator today. [Operator Instructions] Thank you. Good morning and welcome to everybody. Thank you for joining. Presenting today during the call will be Federico Trucco, our Chief Executive Officer; and Enrique Lopez Lecube, our Chief Financial Officer. Both will be available for the Q&A session. Before we proceed, I would like to make the following Safe Harbor statements. Today's call will contain forward-looking statements and I refer you to the forward-looking statements section of today's earnings release and presentation as well as the recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed circumstances. This conference call is being webcast and the webcast link is available at the Bioceres Crop Solutions Investor Relations website. Please turn to slide three from the deck for a quick overview of these period's business and financial highlights. As we have anticipated during our prior earnings call, our growth momentum has been momentarily interrupted by unusually severe drought conditions in Argentina that extended throughout the entire planting window for summer crops. Although we are flat when compared to last year's revenue for the quarter, we are down by 7% year-over-year for the period on a pro forma basis after including Pro Farm's operations. This circumstantial decline interrupts a run of seven consecutive quarters of topline growth and profitability expansion, which we expect to resume in the second half of the fiscal year as weather conditions have turned more favorable in our key commercial regions. On a less circumstantial and more permanent front, the severe drought conditions in Argentina have allowed us to put HB4 technology to the desk like never before. And the performance of HB4 wheat has been outstanding in all fronts. In environments yielding less than two tonnes per hectare, HB4 wheat was -- has outperformed commercial materials by an average yield improvement of 43%. HB4 soy contract despite unusually difficult planting conditions in Argentina, half of the current seed multiplication area was planted with new generation varieties, which will help us quickly rotate the existing portfolio and improve performance compared to the earlier materials. An important milestone on the HB4 soy front was the initiation of the multiplication program with farmers in Brazil, which we expect to give us enough seed for an initial 10,000 hectares in the upcoming season. We have closed our previously announced acquisition of wheat breeding assets in Australia, where we expect to expand on the HB4 opportunity after Latin America. We'll discuss all these highlights in greater detail throughout the presentation, but let us first better magnify the severity of the drought experienced in Argentina and for that please turn to the next slide. The past drought in Argentina was of historical proportions due to two main factors; its length, extending throughout the winter and pass the entire summer crop planting window; and its reach affecting a very large part of the agriculturally productive area of the country. Wheat output was slashed by 50% compared to the prior year, and the planting of summer crops displaced by 20 to 30% outside of the optimal planting window with an irreversible decline in total crop area and unexpected production decline well above 20% compared to the year before. Enrique will now describe, sort of, a financial implications of this drought, and then I will provide detailed information on HB4 performance, which obviously has experienced a unique year in terms of the severity of the weather event. Enrique? Thank you, Federico, and good morning to everyone on the call today. Federico indicated I'd like to dive further into our financial results and provide some insight on our expectations for the remainder of our 2023 fiscal year. As we have often mentioned in previous calls, geographical portfolio diversification are cornerstones to our long-term strategy, and once that drove decisions like investing into a new facility in Brazil, or even the merger with Pro Farm, both initiatives that we expect to deliver substantial revenue growth. Yes, Argentina remains an important and profitable end market to us. And, of course, the situation Federico just described presented a challenge for sales and profit of our baseline business in Argentina, as much as it offered a great opportunity to highlight the strong needs of technologies like HB4 in the context of challenging weather conditions. Before diving into discussing our financial performance, we must note here that all numbers referenced in this presentation include Pro Farm figures, and all year-over-year comparisons are made against pro forma numbers, which include Pro Farm historical figures this for easier comparison. As you can see on slide 4, the first half of our fiscal year started strong with a 26% increase in revenues. This performance is a contrast of two quarters. You will recall that we reported a 71% increase in revenues in the first quarter, which was driven by an outstanding performance of our crop protection and crop nutrition segments. In part as a result of our commercial teams looking in early sales in anticipation of what already looked like a dry season. While we anticipated drought conditions, the severity was beyond anyone's expectations, particularly in the most productive growing regions of Argentina. Our 7% decline in second quarter revenues reflected the slowdown in volumes as farmers minimize their investments due to a lack of rains in the planting season. An estimated $20 million to $25 million of potential sales were lost because of the weather during the quarter. Approximately, half of this total represents a permanent loss from products that would have been used in summer crops planting activities, such as seed treatment packs and fertilizers. Also, as I just pointed out, a portion of second quarter plant sales were realized in the first quarter of our fiscal year 2023 in anticipation of challenging weather conditions. On slide 5, we can see the segments most affected in the quarter and also the value of our diversification strategy that helped mitigate the revenue loss. Despite weather conditions during soybean planting being amongst the worst of the last two decades in Argentina, we recorded our first HB4 soybean revenues, and this supported the 7% growth in Seed & Integrated Products segment. HB4 sales were partially offset by the decrease in seed treatment packs. Importantly, during the second quarter, we launched the HB4 soy program with growers in Brazil, which we expect to ramp up significantly in the coming two seasons, helping us further diversify weather risk through geographic expansion. Crop Protection revenues declined by 5%, a thrive weather led to less pest pressure and decreased demand for fungicides, insecticides and adjuvants in Argentina. This product lines continued to deliver growth in other regions of Latin America. But the main contribution to partially offsetting the drop in Argentina was done by Pro Farm product sales in the US through increased adoption of our biological seed production products. Again, in terms of geographic diversification, it is comforting to see how all of this is playing out. Crop Nutrition saw the largest sales decline at 16%. mostly driven by lower microbeaded fertilizers sales in Argentina. Our farmers were reluctant to invest heavily on fertilizing crops that were planted beyond the optimal planting window and thus, less likely subject to lower yields. I would like to point out that improved rainfall during the month of January, we stored some soil moisture with generates expectations of an end to the drought. Normalization of rainfall would foster the use of crop protection products. But more importantly could trigger a meaningful increase in winter crops acreage if farmers intend to recover profitability loss from soybeans and corn through newly planted wheat and barley. Both these dynamics, the resuming crop protection sales and higher winter crops acreage would allow us to recover a portion of sales lost to drought in Argentina, and provide a favorable scenario for the rollout of HB4 wheat, putting us on track for our annual sales plans. Please turn to slide 6. For the first half of the year, we delivered a 5% increase in gross profit, which was driven by first quarter performance mostly. In the second quarter though, gross profit was down 28% due to a combination of price and product mix effects. Product mix played a role this quarter as sales contribution of higher margin products such as adjuvants and seed treatment packs sell relative to others. Both products are highly seasonal in the second quarter and were impacted by dry weather. In addition, there was some margin contraction across the portfolio in Argentina, particularly in the case of fertilizers, as the pricing strategy was adjusted to accommodate for the drought conditions, and mostly aimed at maintaining market share through customer proximity. For the full year, as rainfall in Argentina normalizes, we do expect our margins for sales in the country to trend back to normal and get us back on track with our annual goals. Please now refer to slide 7. Adjusted EBITDA for the second quarter was affected by the negative impact on sales and margins in Argentina. The corresponding decrease in gross profit was partially offset by lower operating expenses when excluding non-cash considerations and one-timers such as D&A transaction expenses and share-based incentives. This reduction was driven by good performance in the execution of cost synergies derived from the merger with Pro Farm. As we grow Pro Farm revenues and complete the integration process, we continue to believe we are on path for this acquisition to be adjusted EBITDA neutral for the full year. We saw good progress toward this goal in the quarter. Importantly, despite a tough second quarter adjusted EBITDA for the first half of the fiscal year 2023 reached almost $35 million, which represents a 13% improvement compared with the first half of the previous fiscal year on a pro forma basis. Finally, let's please look at the summary of our financial position shown on slide 8. Our higher debt position and the corresponding higher interest expenses are mainly explained by the execution of the agreements in connection to the merger with Pro Farm. The increase in short-term debt is explained in full by high working capital position from incorporating Pro Farm as well as progress in launching HB4. We remain at a very healthy run rate of interest expenses with an annualized average cost of debt of approximately 7%. Our cash position increased with a $50 million upfront payment from the Syngenta agreement and stood at roughly $87 million, leading to a net financial debt of $170 million on December 31st, 2022. Our net debt-to-adjusted EBITDA ratio was 3.13 times. And although our target is to keep our leverage ratio below returns, we are comfortable as the current metric is fully explained by a temporary drop in this quarter’s EBITDA. More importantly, we have a strong cash position and our working capital is well above our short-term debt obligations. After quarter close, we completed a $26.6 million public offering of corporate bonds in the Argentine market to support our local business in the country. These bonds mature in February 2025 and February 2026, and pay annual rates of 1.5% and 3.9% correspondingly. All the proceeds will be used to pay down short-term debt, thus improving the composition of short and long-term financial debt. Let me wrap up by saying that although this quarter breaks a two year streak of uninterrupted growth due to an exogenous weather shock, we are confident in the underlying fundamentals of our business. While weather may temporarily affect our quarterly results, from time-to-time, our long-term growth trajectory remains robust. Thanks, Enrique. And please turn to the next slide so that we dive into the HB4 wheat results. When we talk about the HB4 targeted region as an area or as areas where yields are expected to be below the two tons per hectare mark, we may think of these as a limited opportunity in normal years, when average yields are often above the three tons per hectare level. Now, in a crop year, like the one we just experienced, over 30% or close to 2 million hectares nationwide, were below this threshold. So to be able to improve yields consistently in these fields by more than 40% as shown in multiple seasons, it's quite outstanding. We are not longer talking about field trials, or limited number of fields. These are results from hundreds of growers, thousands of hectors, and multiple seasons, indeed, very compelling. But let's go slightly more scientific in our analysis and look at the isolated effect of the HB4 gene. As we turn to the next slide. What we did here in 20 different locations, or 34 locations, if we look at the past three years, was to ask farmers to compare twins, or what we call near isogenic lines that are varieties otherwise genetically identical except for the presence or absence of the HB4 gene. This is important because as you may well know by now, final performance of an HB4 varieties often compounded by its genetic background. So we talk about first generation materials, second generation materials, or even third generation materials, like we do in soil. Now, when we neutralize that background noise, what we see is that HB4 converted lines win in all environments, not just those with yields below two tonnes per hectare. HB4 is the true yielding with wind rates above 80%, ratifying the broad hectare opportunities resulting from this technology. So, as we improve background genetics and reduce the yield gap of the first generation materials in environment with yields above four tonnes per hectare, we can expand the HB4 opportunity to the entire wheat production area and this is what we are showing in the next slide with that close to 15% yield improvement observed in the highest yielding environments during the last season when compared – when comparing the data from last year, from first generation materials to what we observed with second generation materials in the current year. The good news is that, we should be able to cover up to one-third of next seasonal HB4 plantings with second generation materials, allowing us to replace first generation varieties, almost fully by fiscal year 2024 when we expect HB4 we do deliver between $15 million to $20 million in enterable EBITDA. Now, this technology is too important for it to be limited to Latin America and our ambition is to bring HB4 Wheat to farmers everywhere in the world where wheat relevant and droughts are prevalent. And the next stop in this route for us is Australia. So in line with these, we have closed the previously announced deal with S&W Genetics, acquiring for our subsidiary Trigall Genetics 80% ownership of their wheat breeding program. This is shown in the next slide. Australia will not become an immediate opportunity for HB4 Wheat since we have to still do regulatory working country. We have been clear from a food and feed perspective, but not yet from a production viewpoint. So that is expected to be done in the next two years, while we consolidate the breeding efforts locally and start developing the adapted HB4 lines. We believe that HB4 in Australia will become meaningful in about five years. And that is beyond sort of our peak penetration in Latin America. So, a good way to follow up on what we are currently doing in Argentina, Brazil, and the rest of the region. Finally, to close the earnings call, I'd like to provide a brief update on HB4 soy. HB4 soy see multiplication hectares were kept steady, despite very challenging planting conditions. As we commented earlier in the presentation, importantly, half of the multiplication area was planted with the newest varieties, nine new third generation materials that will allow us to quickly rotate the portfolio and improve performance for these crops. And inventory projections are on track to meet what we expect to fiscal '24 and meet the guidance that we provided for fiscal '25. As Enrique indicated, we are delighted to see HB4 advancing in Brazil with initial multiplications being done with farmers from using two varieties derived from the TMG program and hope hopefully, target about 10,000 hectares in the upcoming season. Thank you. We will now start today's Q&A session. [Operator Instructions] Our first question today comes from Ben Klieve from Lake Street Capital Markets. Your line is now open. All right. Thanks for taking my questions and congratulations on really solid first half despite the tough backdrop that you outlined. First question Enrique is for you. You note $20 million to $25 million revenue headwinds in the period due to weather. And I confused myself a little bit kind of breaking this down. So I want to clarify this, if possible. You suggested that half of it was a permanent loss. So, was the other half pulled forward into Q1, or was the other half you think can be pushed right into Q3? Hi, Ben. Thanks for the question and good to have you on the call. So, that is a good question. So, the half that was permanently lost was a mainly around fertilizers and seed treatment packs, both things that are heavily used on the planting window. And obviously, those are tasks that don't go back. So that's the part that we believe it's going to not come back. The remaining half, I would say then that has to do mostly with products that were pushed further down the road. So for example, in the case of adjuvants, if there is more rain, than obviously that would explain more spraying and more spraying resumes, sort of like our sales of adjuvants in the country. So there's a big part of that even with fertilizers. And that's why I highlighted the wheat acreage. We might recover some of our annual estimated sales of fertilizers in wheat. So what we lost in soil might be recovered in wheat. And there's obviously a part of that that got pulled into the first quarter, but mostly is what was lost to planting activities. That explains that half that was lost and the remaining is something that we do believe, that can be fully recovered through more adjuvant sales, maybe some insecticide sales, and most importantly, fertilizers for wheat planting in the winter crops planting season in late May, June. Okay, very helpful. Thank you. On the HB4 Soy, a lot of positive news here. Did you provide the revenue contribution for HB4 Soy in the quarter? If so, I missed it. And then do you expect 100% of HB4 Soy revenues this fiscal year to be in the second quarter, or do you think any of that is going to get pushed into Q3 for some reason? No, no, obviously, what's happened in HB4 Soy, already happened. So that's in the second quarter. All of that happens in the second quarter. The contribution was a $2.2 million. And this is something that I believe that it's also worth putting in context of the drought. I mean, obviously, farmers decide to spend less on technology as they see sort of like drought complications. And even though HB4 is a drought trade, is not something that allows to surpass planting difficulty. So if you don't have enough soil moisture, obviously, you're not going to be able to plant and it's not something that can be solved through HB4. So I think that we were expecting probably to see a little bit higher sales. And this situation with drought was a little bit complicated on that. I don't know, Federico, if you want to add something on that front? No. The reality is that we were targeting twice as much to be fully honest, and we lost many fields that were not planted. That probably doesn't explain a 100% of the situation, what we priorities, then was the multiplication of the new varieties. So that got all planted. So all the inventory we had, or third generation materials, which are very relevant from an inventory ramp up viewpoint, got done. The incremental revenues that come from second generation materials, or even that may be a first generation material that we were targeting to meet that revenue threshold is what we compromised, if you will, because of a situation described by Enrique. So from – from a strategic viewpoint or ability to rotate and have the inventory in place for the meaningful years, I think we're in good shape, even though we're below where we expected to be coming into the quarter. Got it. Got it. That makes sense and yes, very sensible. Okay, last one for me. And then I'll get back and queue. You noted that the cap contributions from the Syngenta agreement, you know now that operationally this is, you know, six months – six weeks old, something like that. Do you have any operational updates on how this agreement is proceeding here in the early days, or is it still too early to really make any comments there? No, I think we're making very good progress in terms of manning the agreement, having the people in place that can operate the sales that are required, so we are helping Syngenta on that front. And that has been fully accomplished, for instance, in Brazil, which is a very important geography for the objectives of the agreement. Remember that we are targeting on average $23 million of profits coming from this agreement on an annual basis, on top of the prepayment that we got. That is reported here. So I think that is moving as good as it can go. We believe that this is in a way the sort of the floor of the opportunity because we will see tremendous momentum for biological seed treatments globally, and hope that Syngenta can help us capture that in a way that is more meaningful that we would be able to do ourselves. And I think also like going back to what happened in the quarter with drought in Argentina to be able to have these 45 sources of revenues, no that are not dependent so much on whether or one particular geography, it speaks to sort of a type of multi-faceted strategy that we want to provide our investors to keep sort of a resilient business performance. Thank you. And thanks for taking my questions. I guess the first one is just can you elaborate a little bit on the Pro Farm impact? It's the top line. It sounds like you got some positive offsetting benefit care for revenue, but then also you're getting some integration, synergies, maybe carve that out a little bit for us, so we understand the magnitude? And thanks for the question. Hi. How are you doing? Look, I mean this -- from a sort of like from a magnitude perspective, it's something that was obviously helped was not something huge, but it didn't help. So we had allowed or we saw the main category that explained the offsetting from Pro Farm in the US has to do with the seed treatment, biological. The venerate product, that's the version of the 206, that will be replaced at some point with a 306. That mostly coming from two B2B partners. And we are glad to see that trending in a very good direction. Even I mean, we have these type of B2B agreements that provide some sort of like floor on sales. And we saw those floors being far surpassed by our partners, so good prospects on that end, but it was mostly around the seed treatment piece. We're still waiting to see how the whole situation in California rains will help us or not, we'll see in the coming quarter with the rest of the portfolio that is foliar applications in cash crops. So that is one part, and that might help provided a Bobby an additional $2 million to $3 million of additional revenues compared to last year. Then, I would say that on the cost front, this is also meaningful, as you might have seen in the EBITDA bridge, we had close to $2 million from cost synergies on a Pro Farm basis and most of this is coming from synergies with Pro Farm. So we're tracking well, to that regard. So I think that if we continue on this trend, seeing healthy growth on the top line, and if we continue sort of like keeping costs, at the level that we planned for, we will see Pro Farm turning into positive or neutral at the worst EBITDA for the full year when we look back in June 2023. Great, Thank you. And my next question is just about the fertilizer opportunity in wheat that we should be looking out for kind of late May and into June. Is that really dependent like -- are farmers basically, at this point, given what's happened so far this year, really focused on making up for it, when is their wheat programs, or is that kind of a done deal. And it's just all about the weather at this point. And so, we should just be watching, this abatement of [Indiscernible] and just, hoping that the weather continues to be on this positive trend. And then, the higher week plantings are just kind of a self fulfilling prophecy at that point, or there's still decisions being made, do you think? I think it's probably too early to tell now, because farmers are today 100% dedicated to making the most out of the current crops, the summer crops, which are the ones that are economically more meaningful to them. Now, as we indicated, their losses in the summer crops that are non reversible, so the expectation is for the overall crop to be 20% below a normal year. And this is happening after a very tough wheat campaign in the prior season. So revenues from wheat decline, revenues from summer crops will decline. So I think, if the weather is acceptable, and we have good moisture in the ground, there'll be a lot of wheat planted. And we don't anticipate wheat prices to sort of come down given sort of a shortage that not only Argentina, not in Latin America, probably we’ll see in other geographies around the globe. So I think, it is -- it will be highly dependent on the weather situation. We don't need it to be perfect. We just need it to be moist enough, so that farmers will go full force in trying to recover part of that loss revenue. Okay, great. And then, just one last one and maybe this is for you also Federico. The Corteva acquisition of Stoller and what that does to kind of the state of play in South America. Does that create more of a sense of urgency for Syngenta to kind of target Brazil with disagreements? You know, does this create bigger opportunities for bio Bioceres in the area? Look, I think, it's obviously evident by now that industry leaders have put a lot of energy and resources in to trying to have a strategy around biologicals. Stoller is a well known company, particularly in biostimulants and particularly in Brazil, that's where they excelled. And there is, I think, a consensus view today that, to be able to do the trick, you need specialized sales teams. So in part what we are doing with Syngenta with the inoculant agreement is holding hands, sort of using our platform and our capabilities to help them execute on these more technical sales was part what called [Indiscernible] into Stoller. And it's reflective of broader M&A in the space. There are a number of other deals that have been announced recently. So I think to be an industry leader in a space that is turning hotter, every minute, is obviously nice to see, because it that does create alternatives for us. And hopefully, in the future, we are at a position where we can materialize the leading position we're building today. Now in ways that can vary, depending on the scenarios. But I think there's a clear race to try to lead on the biological space, as industry leaders are recognizing that the only way they can build these businesses internally is through M&A. Thanks. Good morning. Just a real quick on data follow-up, you said on the on the debt that you would just the 26.6 million to you. Give us those interest rates again, in terms of like 1.5% to 3.9%, but I just want to make sure, that I got that correct. Hi, Brian. This is Enrique. Thanks for joining us and for the question. And, yeah, so it was an issuance of $26.6 million, of which 2021 were in the tranche of the 24 months maturity with 1.5% interest rate. And then, there was about $5.5 million that were in the tranche that matures in 36 months, and that tranche of the bonds base coupon of 3.9%. Thanks. I mean, it's like we will keep these as part of our financial strategy. I think that this goes hand-by-hand with our leverage ratio, in keeping sort of the short-term of our debts, well, beyond -- well below, and sort of like current assets. That's what we're looking for, as well as the strong cash position. So all of these three things go hand-by-hand and what's important to us to be able to sort of like bring down the short-term piece of our debt. Great, thank you and good morning. Just a couple of questions, first, there's reference to some transaction expenses in the quarter, which I think you mentioned, related to Marrone, which closed in July, what were those expenses that they would show up after closing? Hi, Kemp. This is Enrique, thanks again for joining and for the question. So those transaction expenses are related mostly to the two financial agreements that were finalized in connection with a merger with Pro Form right after the closing. So those transcended into the second quarter, as well as some other expenses that had not been accrued for the first quarter that were related to the merger itself. And all of those amount to $100,000. Okay, super. And then my other question relates to the performance of the HB4 products. And I'm trying to put your current comments in context to with what you had said, say, two years ago, when you were mainly referencing what would have been field trial data. And roughly, we were looking at increases in crop production of, I think, generally in the teens, whether it's 13%, 16%, or the like is probably less critical to the question. But when you step back from the data and look at it in aggregate, is the current performance for the current generation of crops consistent with that, or is it a little bit better, or how would you characterize it that way? Hi, Kemp, this is Federico, thanks for participating in the call. And thank you for the question. I think that it's kind of surprising, but the field data that we're collecting, it's turning out to be better than what we anticipated in the product development process, and the R&D, trialing, if you will, that was done with the technology, or the state where we were two years ago, even though we still allude to HB4 read has been at 20% yield improvement. And that is because we're trying to expand the targeted region to above the two tons per hectare, and not just be limited to lowest yielding areas where we can get these 43% averages. And what we are seeing in the field today, and what farmers are seeing in the field, which is far more relevant than what we see ourselves is better than that. So I think it's unusual, because it usually goes the other way, when you can take technology to the field, it tends to perform not as well as how it performs in control trials or even in greenhouse settings. So we were very pleased with the outcome. And, obviously, to have farmers generate this information themselves, gives us a level of awareness that I think we can profit from -- in the upcoming season. That's great. And just one related question. And that is, when you're -- as a farmer, do you really know in advance the likelihood of severe drought? I think this is one of the great uncertainties of that being a farmer, say, and where I'm going with this is if you're able to deliver something in this range, that even if you generally have good experience, that there's an incentive to go ahead and use an HB4 product just because it gives you somewhat higher level of certainty that you'll be able to have a decent harvest? Right, I think that's the right way to think about it. So almost like an insurance policy. And the one aspect of the technology that is critical in working that way is that we were able to uncouple, if you will, the benefit that is observed under drought, with any kind of yield drag under otherwise normal conditions. So there's -- and what we're even seeing is yield delivery in high yielding environments. And that's part of what we try to present today in the call. So obviously, like any other insurance policy, you don't want to use it, you rather have the high yield, and then you don't care about the incremental cost of a seed. But if for whatever reason, you're hit by a historical drought, and you're hurting because of the significant decline, to be able to outperform by 40% compared to conventional varieties, more than justifies the investment. So that is where we are today with wheat. I think this is one of the reasons why we think that technology can be adopted well beyond these drought prone regions, and become a true sort of broad acre opportunity in Latin America and potentially in other geographies around the globe. Thank you. There are no further questions at this time. I will now hand you back over to Federico Trucco CEO for closing remarks. Well, thanks everyone for joining. Obviously, we'd much rather like to report quarters where we grow sales by 70% and double our profitability. So be assured that we are our worst critics. And we'll identify ways by which we can improve. Even despite the historical drought conditions, there are always things that we can do to be slightly, slightly better. And so this is in a way also gentle warning to keep our business disciplined and control costs, particularly in geographies, where we might have become a little bit more lenient because of the growth and expansion. We've been observing over the last two years. So we like to win in everything we do everywhere. And that attitude, we will like to reiterate to investors in this call. I hope you're having a great week and we look forward to further communicating progress in our business in the months to come. Thank you very much. And I think this ends the call

EarningCall_124

Good morning. My name is Sherry and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors' Fourth Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question-and-answer period. Good morning, everyone, and welcome to our call to discuss Two Harbors' fourth quarter 2022 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer; Nick Letica, our Chief Investment Officer; and Mary Riskey, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website, as well as the Investor Relations page of our website at twoharborsinvestment.com. In our earnings release and presentation, we have provided a reconciliation of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on Page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, Two Harbors does not update forward-looking statements and disclaims any obligation to do so. Thank you, Maggie. Good morning, everyone and welcome to our fourth quarter earnings call. Before I begin, I would like to welcome back Maggie Carr as our Head of Investor Relations. Maggie worked with us from 2012 to 2020 before leaving to try something new, but she couldn't stay away and we are delighted to have her back on the team. This morning. I will provide color on the market environment and our performance as well as our outlook for 2023. Mary will provide information around our financial results and Nick will discuss our portfolio. Please turn to Slide three for an overview of our quarterly results. Our book value at December 31, was $17.72 per share representing a positive 11.6% total economic quarterly return. Our earnings available for distribution or EAD was $0.26 per share. As we've discussed on prior earnings calls, EAD is a complicated metric and does not necessarily reflect the earnings potential of our portfolio. To assist our investors and analysts when thinking about our earnings potential, this quarter, we are introducing a new metric called income, excluding market-driven value changes, which will provide more of a market value base view of our quarterly portfolio returns. In the fourth quarter, this number was $0.73 per share representing a 16.7% annualized return on average common equity. Mary will discuss EAD and income excluding market-driven value changes in further detail in her remarks. Post quarter end, we announced that our book value through the end of January was up 4% net of the preferred dividend accrual. Please turn to Slide four; too many superlatives have already been used to describe the market environment of 2022 and I will try not to add any more except to say that inflation fears and interest rate volatility consumed investors throughout the year. Although slow to act once in motion, the fed increased interest rates swiftly. Last week's fed meeting and Chairman Powell's comments provided additional clues about the magnitude and pace of continued fed rate hikes. While still retaining some caution, it seems to us that the Fed's actions may be working as inflation readings have come down for several consecutive quarters. Interest rate expectations have leveled off with the market anticipating a Fed funds rate settling in just under 5% by mid-year. However, mortgage spreads have continued to be quite volatile. As seen in figure one, after widening significantly in September and October, spreads on RMBS ratcheted tighter in November and again in January, so that along with July, we have seen three of the best months on record for excess returns of the Bloomberg US MBS Index in the last six months. Nominal and option adjusted spreads for current coupon RMBS tightened by 30 basis points and 37 basis points respectively during the quarter. Due to continuing high interest rate volatility, nominal spreads at 128 basis points are still at the 90th percentile of the 20-year history. On the other hand, option adjusted spreads at 30 basis points can no longer be considered cheap and are trading close to their long-term averages as seen in figure two. Finally, in figure three, you can see that the spreads on the coupon stack are displaying their typical downward sloping shape. We continue to believe that higher coupons offer more relative value, not only because of wider nominal and option adjusted spreads, but also because they have shorter duration sensitivities. At our core, we are an agency plus MSR REIT. When the mortgages underlying our MSR are near the current coupon, the MSR acts as a spread hedge relative to the mortgage basis, but MSR does not have to have large hedging benefits with RMBS for it to be an attractive part of our strategy. Today, with the note rates on our MSR hundreds of basis points out of the money, half of our capital is allocated to this low duration high cash flowing asset with very attractive returns. With prepayment speeds at historically low levels, we think there's further upside to our MSR returns. Looking ahead, we anticipate that the market volatility will follow inflation lower and provide a tailwind for RMBS and MSR. While this year saw both rich and cheap extremes in mortgage spreads, we actively managed our portfolio to adjust our exposures to benefit returns when market conditions became extraordinary. There are always surprises in the mortgage market and we stand ready to take advantage of the opportunities as they arise. With wide spreads in RMBS and slow speeds and MSR, we believe our portfolio is very well positioned for the current and expected market environment in 2023. Thank you, Bill, and good morning, everyone. Please turn to Slide five. For the fourth quarter, the company reported comprehensive income of $160.2 million or $1.85 per weighted average basic common share. Our book value was $17.72 per share at December 31, compared to $16.42 as September 30. Including the $0.60 common dividend, results in a quarterly economic return of positive 11.6%. Results primarily reflect the mortgage spread tightening as well as the repurchase of 2.9 million shares of preferred stock, which contributed approximately $0.26 to common book value and lowered our ratio of preferred stock to total equity from 34% to 30%. Before turning to Slide six, I'd like to call your attention to appendix Slide 27, where we have included the customary information on re-taxable income and the tax characterization of our dividend distributions. For additional information regarding the distributions and the tax treatment, please refer to the dividend information found in the Investor Relations section of our website. Moving to Slide six, as Bill mentioned, this quarter, we are introducing a new metric; income excluding market-driven value changes. This new metric is defined as total comprehensive income, excluding market-driven value changes on the aggregate portfolio, income taxes associated with market-driven value changes, non-recurring operating expenses, and the gain and the repurchase and retirement of preferred shares. This metric concludes the realization of portfolio cash flows, which incorporates actual prepayments, changes in portfolio accrued interest and servicing income, servicing expenses and price changes. Price changes are measured daily based on the assumption that spreads, interest rates and volatility, factored into the previous day ending fair value are unchanged. This applies to RMBS, MSR, and derivatives as applicable and is net of all recurring operating expenses and income taxes not associated with market-driven value changes. In essence, you can think of this new measure as being what EAD would be if we sold and rebought our portfolio every day. As you can see in the table on this page, this quarter, our income excluding market-driven value changes was $0.73 per share representing an annualized return of 16.7%. We are introducing this metric to better help our analysts and investors understand the current quarter return contributions excluding market-driven value changes, and we intend this metric to be complimentary to the return potential and outlook slide later in the deck, which reflects management's prospective view on returns. It is our hope that going forward as EAD deviates meaningfully from our earnings power, this new metric will be instructive on the return contributions of our portfolio in the current market environment. Please turn to Slide seven. Earnings available for distribution was $0.26 per share compared to $0.64 for the third quarter. As we communicated on our last earnings call, the decline in EAD this quarter was expected. EAD depends on the historical purchase price, the prepaid speed on the purchase date, another non-market based measures. EAD this quarter represents an annualized return of 5.9%, whereas we are seeing market returns in the low-to-mid double digits. In terms of the drivers of EAD this quarter, interest income increased by $4.9 million, primarily due to a higher rate on cash holdings, partially offset by a decrease in the size of our agency portfolio. Likewise, interest expense rose by $32.2 million on higher financing rates and higher average borrowing balances on MSR. This was partly offset by lower borrowing balances on RMBS. Net servicing revenue is higher as a result of increased MSR float income. However, we realized increased amortization that partially offset the higher servicing revenue due to the EAD calculation being based on original pricing yield. CBA dollar roll income declined by almost $22 million as a result of lower average notional balances as well as lower price drop. Losses on US Treasury futures favorably declined $10.2 million as a result to spread compression between the cost to deliver an implied refill. Finally, we realized higher servicing expenses due to de-boarding costs associated with transitioning MSR sub servicing to RoundPoint. In accordance with our previously articulated plan, we anticipate that these servicing expenses will be higher than average for the next several quarters as we continue to transition our servicing portfolio. We expect to achieve considerable expense savings once the acquisition of RoundPoint has closed and our MSR portfolio has fully transferred. Turning needs to Slide eight, the portfolio yield increased 31 basis points to 4.92%, driven primarily by sales of lower coupon agencies that had high amortized premiums and purchases of higher coupon agencies with lower unamortized premiums. We also experienced lower CPR on our agency securities and had a higher proportion of our total portfolio invested in higher yielding assets. Our net realized spread in the quarter narrowed by 80 basis points to 0.97% as compared to 1.77% in the prior quarter due to higher rates on financing. A reminder that portfolio yield calculations in this table also reflect the historical purchase price, the prepaid speed on the purchase date, and other non-market based measures. Please turn to Slide nine. Funding in the repo market remains liquid and well supported. Spreads on repurchase agreement financing for RMBS increased marginally from September 30 to December 31 to plus [ph] 11 basis points to 17 basis points with no signs of balance sheet stress. We maintained access to diverse funding sources for MSR with a total of approximately $700 million unused MSR financing capacity at quarter end. Please turn to Slide 10; before I hand out the call to Nick to discuss our portfolio, I'd like to note that our economic debt to equity declined to 6.3 times at December 31 from 7.5 times at the end of the third quarter. Average in the fourth quarter was 6.5 times compared to the third quarter average of 6.8 times. Thank you, Mary. As Bill noted earlier, after capturing much of the spread tightening in the fourth quarter, we moved into a more neutral position, reflected in the decline in our debt equity ratio. Continuing on Slide 10, our portfolio decreased to $14.7 billion over the quarter down to about 11% predominantly from the sales of specified pools. The decreased balance can be partially attributed to the purchase of 2.9 million shares of preferred stock, which as Mary noted, added about $0.26 to common book value. The fair value of our MSR portfolio was stable ending the quarter at $3 billion. Before turn into Slide 11, I wanted to point out that we moved our portfolio risk positioning metrics onto one page, which is Slide 16 in the appendix. The top section shows exposures across parallel and non-parallel interest rate shocks and as has historically been the case, our exposures are quite low. By virtue of reducing our leverage over the quarter, we also brought down our current coupon spread sensitivity into a more neutral range. Turning to Slide 11; figure two shows the performance of RMBS by coupon for both TBAs and specified pools. We benefited from having concentrated positions in fours through fives. We continue to rotate up in coupon both in TBA and pool positions, increasing the portfolio's nominal yield in OAS. We added to our specified pools in 4.5 to four 6s and in TBAs from 5 to 6s. As you can see in figure three, repayment speeds came down 35% in the quarter to an average speed of 5.9 CPR. The anticipated slowing of prepayment speeds is why we move the portfolio up in coupon throughout 2022. Higher coupon RMBS performed better in slow prepayment environments and provide more stable returns over a wide range of prepayment assumptions as we showed graphically on our last quarterly call. 30-year Fannie Mae speed slowed down by 6% in the last report and with the slowest seasonal months ahead, we anticipate even slower speeds over this coming quarter. The UPV of the MSR book as captured by Slide 12, finished at $206 billion with flow channel purchases and recapture of $2.7 billion, mostly offsetting portfolio runoff. The price multiple of the book was unchanged at 5.5 times. Notably, our prepayment speeds continued to decline. The three month prepayment rate of the MSR book declined to 4.6 CPR. Projected speeds in January are between three and three and a half CPR. These prepayment rates are historically slow levels, which provides a strong tailwind for the strategy. Regarding MSR Supply, it's worth noting that 2022 annual transaction volume set a record at just over $600 billion UPV, a 32% increase over the prior year. So far, 2023 volumes have already been strong with over $120 billion in supply. A very interesting supply and demand imbalance in the MSR market has developed. As rates have risen and origination volumes have slowed, many mortgage companies are motivated to sell MSR. At the same time, some large holders have publicly announced their decision to step back from the MSR market, focusing on customers with whom they have more than a single touch point. Given all this supply, we may look to opportunistically allocate some capital to bulk MSR purchases in the first half of 2023. Please turn to Slide 13. We introduced this slide last quarter to provide transparency around our capital allocation estimated return and portfolio composition for the primary components of our strategy on both a portfolio and a common equity basis. We estimate that about 53% of our capital is allocated to hedged MSR with a static return projection of 14 to 16%. The remaining capital is allocated to hedged or MBS with a static return estimate of 14% to 15%. The top half of this chart is meant to show what returns are available in the market, not merely specific to our portfolio. The lower section of this slide is specific to two harbors, with a focus on common equity and estimated returns per common share. With our portfolio allocation shown in the top half of the chart and after expenses, the static return estimate for our portfolio is between 10.7% to 12.1% before applying capital structural leverage to the portfolio. After giving effect to the convertible notes and preferred stock, we believe that the potential static return on common equity falls in the range of 12.9% to 15.1% or a prospective quarterly static return per share of $0.57 to $0.67. Please keep in mind that these estimates do not include any price changes and hence do not include any benefit due to potential spread tightening or any loss due to potential spread widening. These return estimates do not include any benefit from our team skilled asset management, including asset allocation, security selection, and hedging acumen. Finally, these estimates do not include any benefits arising from increased revenue or cost savings from the acquisition of RoundPoint and transfer of our MSR portfolio. In closing, we are excited about the opportunities ahead and we think our portfolio is very well positioned for the market environment in 2023. Thank you very much for joining us today and we will now be happy to take any questions you might have. Thank you. We will now conduct a question-and-answer session. [Operator instructions] Our first question is from Doug Harter with Credit Suisse. Please proceed. Thanks. Hoping you could help reconcile your new disclosure, the income ex market value changes and the return potential. This quarter you kind of over earned your return potential. Just I'm trying to understand what the difference is there and kind of how to think about that those two numbers going forward. Sure. Good morning, Doug. Thanks for the question. So there are many reasons why those numbers will be different. Slide 13 is a static look forward whereas this metric is calculated daily and includes position changes, daily spread changes, daily compounding interests and actual cash flows and prepayments. Okay. So, are they -- so I guess they're historic, I guess is that sort of a structural difference that could, will kind of always lead to differences or would over time would they kind of converge towards each other? And then along that lines how does management the board think about the importance of each of those two metrics in terms of setting a dividend level? So the Slide 13 is at point in time estimate. So we will have differences as portfolio changes, etcetera. With regards to the dividend, we set the dividend with more than one quarter in mind based on book value and return expectations. We believe the current dividend is sustainable at this level and it is supported by the range shown on Slide 13. As always, decisions on future dividends depend on many factors including the static level return estimates as well as redistribution requirements and sustainability and ultimately our board of directors makes that final decision. If I could add just one thing. Good morning, Doug. The number -- the metrics shown earlier -- the income excluding market driven value changes, is the calculation that Slide 13 would give if calculated every day. Right? So take Slide 13, calculate that every day. Buy and sell the portfolio every day with market changes, position changes and everything new spread changes and then do it again every day and string those together and compound them together. And that's what ends up with being the backward looking income excluding market driven value changes as compared with the forward looking, which is Slide 13, which is a static point in time, which by the way. so, if nothing were to happen in the portfolio or in the market for the next three months, then those two numbers would be the same and… And it would be -- and if we bought and sold our portfolio at the beginning of the quarter on the first day, then that number would also be the same as EAD. Hey, thanks. One, follow up on the new metric, the income excluding market value changes, I'm specifically curious about the operating expense line. I understand you were trying to exclude one-time items from that. So is the -- is the adjustment to the operating expense line there primarily due to the servicing transfer charges or is there anything else going on in that line that's a one-time item? No, the servicing transfers are included in recurring operating expenses. The non-recurring are certain acquisition related costs associated with RoundPoint as well as non-recurring legal fees. And I would just note that those items are the same that are excluded from EAD that operating and two measures are consistent. Sure. Okay. That makes sense. And then with respect to the recent capital offering can you talk about sort of how you -- how you're deploying that capital, pending any potential bulk MSR purchases and then if there are some sizable MSR portfolios that come up for sale, you maybe discuss generally how you'd think about the potential purchase of large pools and how much -- how high you'd be willing to take your capital allocation to MSRs. Thanks. Yeah, thanks very much for that question. That's a very good one. One of the main reasons for the capital raise was to be able to take advantage of what we think is a really interesting and exciting supply demand and balance, which is currently existing in the MSR market. Subsequent to the comments that we made surrounding the capital raise, we actually did sign a term sheet to acquire a portfolio of $11 billion UPB of MSR that at what we think are very attractive spreads and prices. The capital is essentially already deployed through a combination of that $11 billion, which of course we start earning the economic returns on trade date as well as we purchased some MBS as placeholders while we continue to look at MSR packages. There's lots of MSR available in the market today with packages. As Nick said, there's been more than $120 billion of UPB coming out in the market in January alone and we're seeing more all the time. So, we think there's some really interesting opportunities there. We're continuing to bid on some of those packages. If you look at Slide 13, you can sort of see how we allocate MSR with MBS. And so you can see how much additional MSR that capital raise were to support if we were to apply -- to deploy it all into MSR, which would be in the $300 million to $400 million range of market value. And of course, we could also redeploy some of our capital out of MBS into MSR if we thought that was really attractive to, which depending on the levels, we might actually do also. Hi, good morning. Thanks for taking my question. Just one more question on that new metric, the income excluding market driven value changes. Would it be fair to say that that since the income ex market-driven value changes is as you mentioned backwards looking, that's the static returns would still be a very good way to assess the potential dividend paying capacity or earnings power of new money yields going forward when we're trying to assess the, the dividend capacity there. We just wanted to get your thoughts on that. Thanks. Got you. Great. And then in terms of the -- in terms of the hedging strategy that you have, the lower sensitivity to spreads, are there any particular macro or market scenarios that you're looking to hedge against at this point? Thanks. Hey, Ken, thank you for the question. This is Nick Letica. No, we really -- we're trying to stay, as we noted in the call, we've taken our leverage to what we believe is a neutral position and the market while it's certainly been very supportive of the strategy and as Bill noted it has comments. We like the -- mortgages look good on a nominal basis, but look a little bit less attractive on an OAS basis. We are trying to stay, very balanced and as we typically do have hedged out of wide variety of scenarios in terms of interest rate and interest rate scenarios. So no, there's nothing, there's no scenario that we are looking for specifically right here. We think the market is still prone to some amount of volatility, as evidenced by the payroll report that came out last Friday that injected some, new uncertainty into the market but, we are well hedged across a variety of scenarios. Everyone, good morning. Just, wanted to go back one more on this Slide 6; so if you, I guess assume that means now if you're hedging with swaps versus futures, it doesn't really matter in terms of the returns data generate in that slide, is that right? So, okay. Great. And then your comment about being neutral on, in your positioning, does that suggest, so is most of the basis risk now being hedged through MSR and in other ways is that kind of what you're suggesting? No, thanks for the question Bose. As you -- as I think you know, the parent strategy that we have, the MSR and our MBS, naturally hedge each other to varying degrees over time. But, we manage that spread risk along with the other risk that we have and as also noted, we have kind of -- we've taken that risk down into what we think is a more historically neutral point to us in terms of our exposure between those two broad-based asset classes. I'll add a couple comments to that. Nick and Bose. With and I mentioned this in my prepared remarks with the mortgage rate on our MSR being 3.25, which is very far away from the current coupon, the number of mortgages, the amount of mortgages that are needed to hedge that position in current coupon terms is a low number, right? And so our portfolios in some ways now decoupled more than it has been in the past into two segments, which is why we show that on Slide 13 between the hedged MSR piece and the RMBS piece by itself. If you look on Slide 16, right, this is where we show our sensitivity the portfolio sensitivity book value sensitivity to changes in current coupon mortgage spread at the bottom half of the slide, where you see, up or down 6% depending on a 25 basis point move and if you see the components there relative to the two parts of the portfolio themselves. Sure. Thank you guys for taking my questions this morning. First, Mary, is there any chance you guys would consider publishing an historical look at the new earnings metric back perhaps at least two years by quarter, so that way we can sort of develop a run rate. We've got the fourth quarter number, but it would be really helpful to put things in historical context as well. That's a request and then in terms of actual question when we look at the MSR and the distribution of coupon and you guys are out in the market making acquisitions because of the selling I'm curious how you think about things like purchase of -- bulk purchase of legacy portfolios with lower coupons versus flow deals that might be out there today with higher coupons and potentially ultimately much higher prepayment risk. Good morning, Rick. Thanks for the questions. With regards to publishing a couple years backward looking of this measure, we did consider but determined that it just isn't feasible, but hopefully if we continue to produce this metric for you each quarter going forward, that will be helpful. Okay. And I can take your question about MSR, Rick. Good morning. Thanks for the question too. We're looking in the market today, there are packages of different coupons. As you know, much of this servicing, which has been produced over the last two years is of the low coupon variety, gross wax in the two and three quarters to three and a half range. Although we are starting to see some packages with higher wax, you suggest that maybe the higher was ones have more prepayment risk. I'm not sure I would agree with that. I'd say they have more prepaid sensitivity at this point in the market because they're closer to the money. But the difference between small changes in prepayment rates when the numbers are small is also meaningful. We do think, and I think the data is showing that this view is correct, that we're at -- we're in an environment with historically slow turnover speeds, historically slow prepayment speeds. As Nick said, our portfolio is experiencing between 3 and 3.5 CPR in January and we think that that's February could be even slower than that. So that's, that phenomenon is existing all through the low coupon MSR universe. The higher coupons, by the way, aren't paying much faster. Everything is between, four, five, six, seven, eight CPR. It's all very, very slow. And of course, the thing about MSR or mortgages in general is less about the speeds and more about whether the speeds are different from what you projected them to be. So even if you bought higher coupon MSR and you expect in an interest rate value to speed to go up, then all that's fine, as long as the speeds are within that range, right? So it's all about relative pricing, right, and which ones we think are more attractive and which ones offer most value. And we're open to, to purchasing any one of those. The $11 billion pool that we bought was of the higher coupon variety, not of the low coupon variety and we think that offered very attractive returns. Got it. And just to pull that thread a little bit more, look, I think we can imagine a scenario at some point in the next two years where there's a significant divergence in speeds for 2020, 2021, vintage loans or pools and 2022 and 2023 and again, we don't have the transparency on MSR pricing. What you're suggesting is that the market is appropriately pricing for that risk. How dramatic is the pricing differential, just to give us a sense, because again, from our seat, you imagine a world at some point in the future where it's sort of highly bifurcated in terms of coupon? Yeah. I'm not sure I understand the question exactly, but let me say a couple words. So on the one hand the oh, I know what I was going to say. So the difference you were saying between 2020, 2021 versus 2022 and forward is not just coupon, although that's part of it, but also HPA is an important part of that too, right? And so the loans which were created in 2020, 2021 have had the benefit of a significant run up in prices. And of course, I think it's well understood in the market these days that significant HPA leads to significantly faster turnover speeds and so that is again, understood and priced into the market, right? In terms of the coupon distribution of the things and the relative pricing again, that's understood. Generically, you see where our portfolio is marked for something with a 3.25 coupon. I'd say stuff with higher coupons, I always say as a rule of thumb, just depending on everything, as I like to say at the money servicing is oftentimes priced at around a four multiple, right? Just generically, right? And it depends on the pool, depends on the characteristics, depends on, as I said, everything, but that gives you the range of differences between where higher coupon pools are and where lower coupons are. Hey, thanks. Good morning. Maybe just going a little bit further on the MSR, can you talk about the control that you have around negotiating the recapture opportunity in the MSRs that you could acquire in this market? And then when you think about bidding on bulk MSRs, how do you think about the attractiveness relative to the cost and kind of availability of debt financing? Like, do you envision using sort of the full advance rate that's available to you with leverage whenever you acquire bulk packages, or are there scenarios where you wouldn't maybe look to lever the MSR as much? Thanks. Sure. Thanks Eric for that question. So the first question in terms of recapture and so forth, as I'm sure you're aware, and I'm sure you're alluding to, there are some portfolios out there in the market where there are restrictions on that ability for the purchaser to solicit the bars to recapture. That ability whether it's present or not, is of course part of the price of the asset. So, we have a very good history of looking backwards and seeing how much we think that capacity is worth to be able to be able to recapture loans in our portfolio. We have, had agreements with our sub-services to acquire recaptured loans. And so we know what that velocity is and we know how much money that's worth, and we can include that or not include that in the market price and I think most market participants are these days explicitly including or excluding those cash flows from the value of the surfacing. So that's just -- it's just part of the price, right? So we don't view it really positively or negatively other than just adjusting for it in the price negotiations. Your second question was about what I forgot, I'm sorry… Yeah. So, your question really amounts to how we manage our overall liquidity and risk to feel comfortable in the possibility of drawdowns of various kinds, either from an interest rate movement, from a spread movement and so forth. And so, when we think about the amount of capital that we have allocated to our strategy, whether it's RMBS hedged with rates or MSR hedged with RMBS and with financing on both sides, we consider how much extra cash we think we need to hold in order to adequately protect ourselves against those drawdowns. And so the question is, less easy to answer in terms of do we use the full financing as much as how much extra liquidity, how much extra cash capacity do we attach in our minds to that position after it's funded and in the portfolio? And you can see some of that on slide 13 based on how much equity we say we have allocated to each strategy. And you can see there how much assets we have and you can look elsewhere in our filing is about what our outstanding debt is and so forth and figure out what those numbers are. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Bill for closing comments. Thank you. This will concludes today's conference. You may disconnect your lines at this time and thank you for your participation.

EarningCall_125

Greetings, and welcome to the PetVivo Holdings Third Quarter of Fiscal Year 2023 Financial Results Conference Call. My name is John Dolan, the Chief Business Development Officer and General Counsel at PetVivo. Today's call is being webcast and will be posted on the company's website for playback. Before we begin, I would like to remind everyone that comments made during this conference call by PetVivo's executives may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement. PetVivo's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. PetVivo assumes no obligation to update any such forward-looking statements. PetVivo filed its earnings release and Form 10-Q with the SEC today, which provide a detailed discussion of our financial results. These documents can be found in the SEC website and the Investor Relations section of our website. I would like to now turn the call over to John Lai, the CEO and President of PetVivo. Please go ahead, John. Thank you, John, and welcome. Also joining me today will be Bob Folkes, our Chief Financial Officer. I would like to begin by discussing some highlights from last quarter then Bob will discuss our financial results in greater detail. I will conclude by sharing some additional thoughts on our business strategy, key focus areas for fiscal 2023 before we open the line up for questions. Our key highlights for the third quarter of fiscal 2023 were we reported revenues of $510,000 as compared to $51,000 in the third quarter of fiscal 2022. Revenues for the third quarter included net revenues of $457,000 from shipments of Spryng to MWI Animal Health subsidiary of AmerisourceBergen. They are our exclusive distribution partner which we signed June 2022. We continue to expand our national presence highlighted by our attendance at the American Association of Equine Practitioners' annual conference in November of 2022, which Dr. Manning, our senior technical veterinarian, did a theater presentation, actually two theater presentations, where we did get very good response, and we opened accounts in over 47 states. We are starting to see the results of the investments we have made in expanding the awareness and efficacy benefits of Spryng with Companion Animals. I would like to now turn the call over to Bob Folkes, our Chief Financial Officer, who will discuss our financial results. For the three months ended December 31, 2022, we reported revenues of $510,000 as compared to $51,000 in the prior year. And as John noted, this increase was driven by revenues of $457,000 related to shipments of Spryng to MWI. For the nine months ended December 31, 2022, we reported revenues of $792,000 as compared to $60,000 in the prior year period. This increase was driven by revenues of $575,000 related to shipments of Spryng to MWI. At December 31, 2022, the company had $375,000 in cash and working capital of $171,000. In January 2023, we raised approximately $1.4 million after dejecting transaction expenses from the sale of just over 610,000 shares of our common stock in a registered direct offering at a price of $2.32 per share. We also entered into a lease agreement for approximately 14,000 square feet of production and warehouse space. This new facility will include multiple clean rooms for large-scale production of Spryng as well other medical device and therapeutics in our product pipeline. We plan to move all of our production to this facility beginning in August of 2023. And just to conclude here, we continue to invest our resources to expand our sales and marketing efforts clinical studies and manufacturing capacity to gain vet acceptance and support increased revenues from the sale of Spryng. I would like to talk about our business strategy and key focus areas for fiscal 2023. The first one is to generate clinical evidence to support the equine and small animal markets. So we have a whole series of studies that we have commissioned last year or the year before that many of them are coming to conclusion. And for fiscal 2023, we expect quite a few of these to - become public through publications as well as presentations. We're also focused on hiring at least two additional territorial sales managers, business development managers, to focus our relationship with MWI expanding that relationship. Another focus was we talked about doing promotion awareness of Spryng at these major conferences. We kicked off the conference season at the Veterinary Medical Expo in Orlando. What we're seeing, because we had talked about focusing on getting more podium presentations, even though we didn't officially do a podium presentation at this event. A couple of the veterinary doctors that were doing presentations brought up our product and kind of talked about the success that we're having. So our booth got inundated with a bunch of veterinary doctors as well vet techs, substantially big numbers. As well as at the AAEP, when Dr. Manning did his theater presentations, both days, the theater was full of capacity which, in that place, is probably about 100 vets. We were standing room only in a lot of us. So we continue to invest in those presentations at the various trade shows and coming up in mid-March is our first small animal presentation by Ethos to one of the major organizations, the Veterinary Orthopedic Surgical Association. I think that one's mid-March. So we believe that will provide even more evidence and more podium presentations that will draw awareness in the marketplace. I would like to now turn the call over to John Dolan who will provide an update on our clinical studies, clinical data derived from these studies about the efficacy of Spryng and will be helpful to gain more acceptance from the veterinary doctors. We have a robust upcoming year when it comes to clinical trials. PetVivo has a total of seven clinical trials in progress at this time: five small animal clinical trials, i.e., canine and feline; and two equine clinical studies. We are fortunately working with a number of world-renowned research organizations such as Colorado State University, Ethos Veterinary Health and Inotiv Inc. We anticipate public disclosure of these clinical study results to begin in March 2023 and continue intermittently throughout the remainder of our next fiscal year. The company plans to organize and conduct more clinical studies in addition to the ones in progress in order to support our relationship with MWI and gain vet acceptance of Spryng. Thank you, John. I would like to now open it up to a Q&A session. Operator, will you please explain to the callers or people that are online what they need to do to ask a question. Hi John, [Joe Saldhani], John, that was great - I think it was a great start in the relationship with MWI. So congratulations to the takeoff. I was fortunate enough to visit you over at the World Equestrian Village and got a chance to talk to some of the MWI guys, and they tell me it's doing great. So congratulations. Hopefully - you'll see a very big ramp-up as they go throughout the distribution. Could you basically just talk about the size of the markets in terms number of animals in each of the markets, I guess, between the two small animals and also the horses, and the differentiation between the size of show horse market versus the pet market. So that way, people can get a better idea of number of number animals that MWI is going to be helping to get access to it and how many vets service all these people? So the MWI relationship is working out extremely well for both parties, and we're both very happy because what happens before every one of these shows. MWI does business with like 90% of the veterinary doctors in the United States where they have accounts. So they would do a promotional e-mail for us to the vets that they know or the vet techs that are coming to the show to kind of give them a little highlight about Spryng and they should drop by our booth. So that's a very good introductory approach for us. So the size of the market in terms of dogs in the United States, there's about 64 million dogs, 53 million cats and the numbers for horses range anywhere from 8 million to 14 million. It's just depending on the source because there are quite a bit of wild horses out there, too. Currently, I would say that the product mix or the revenues or majority of it are coming from the equine space just because the vets, they tend to see the horses a lot more often than if a small animal vet does the injection. They don't see them for a while and also the small animal side will pick up probably second half of 2023 on a calendar basis because, once those studies start coming out, the MWI reps now will have data to be able get to the smaller animal vets. The market is quite large in terms of OA lameness and potential rehab markets. I mean it is north of $4.8 billion a year in the United States. So I hope that answers the question. Yes, it does. Is there any other organic and basically organically derived products that are out in the marketplace, that are basically veterinarian medical devices right now or is this pretty much an open market you guys? So I feel our product is quite disruptive and unique in the sense that it deviates from what everyone else has been focused on. Our product is targeted at the root cause of osteoarthritis and other lameness issues while competitive products are focused at more treating the symptoms, while we're focused at actual disruption of friction between bone-on-bone contact. So I feel we're unique in that sense, and that's what becomes part of the educational process because when a veterinary doctor leaves vet school, they learn that it's a lifetime management of osteoarthritis. It's multimodal approach, you're using NSAIDs, then you move on nonorganic asset, then you go on to steroids and then and then eventually stem cells joint replacement. We're actually disrupting and changing that equation because we feel once the Spryng particles are injected into the joint, you're going to lead to a tremendous reduction in the need of NSAIDs or any the other materials or complete elimination of it, which helps reduce the side effects onto the horse. All these other items have long-term negative effects and side effects while ours is purely neutral, and that's how we got the veterinary device designation. Years ago, there was a company that that got involved with very early turned out to be a major [indiscernible] where they injected the hyaluronic acid into the actual cartilage that was already leaking. The problem with that is, obviously, it's like putting air into a leaking balloon, air seeps out. I mean it could be fair to say that this is like a cartilage-type material and actually acts differently than the hyaluronic, which is actually a well-known use for equine as well as humans essential. But the point is, isn't that a fair way of looking at it that, you're not facing the leakage that you would normally get with the hyaluronic acid coming out of the cartilage? Well, yes - but also duration, duration is the key here. So once our particle goes in, that our matrix particles start forming a staffing, which actually, in essence, over probably the next month or two, the joint actually improves while if you're using other products that are focused on symptoms. They tend to diminish after the initial injection. And each time you're using an HA product, you're probably diminishing the efficacy as well as the soft tissue, okay. I think you'll have the same type of luck, the same type of luck that Biomatrix had I think we could easily suppress that. Actually, you're exactly right. When you were talking about medical devices, there are a few products in the market that have been classified as medical device, polyglycan, for example, is one and the HA products, high risk and those type of products out there that you've already mentioned are also considered that. John has hit it on the head though. Many of the products that are out in the market are trying to address certain symptoms that end up taking place when you end up losing or having damaged cartilage. For example, lubrication of the joint, if you put HA into a joint, you're looking to lubricate that joint. The issue is, is you're exactly right also, within probably 48 hours, that HA is out of the joint. You may get some beneficial results for maybe a couple of months but then you end up losing the effectiveness of that particular medical device. Now John has hit it on the head. With our product, what we're doing is we're injecting a solid into the joint, a particulate that's sponge like, that fills in all the gaps in the cartilage. So when I say it's a particle, the nice thing about that is that it is large enough where it can't get by the synovial membrane. So it stays inside that joint, thereby filling in all the gaps. So in other words, as John had mentioned before, you're treating the affliction or you're addressing the affliction by recreating that cushion between the bones. Hi, [Dave Demi] congratulations, gentlemen, on an excellent quarter. Just had a question along the lines of from past investor presentations, you have a robust manufacturing facility with about 0.5 million unit capacity, $100 million in revenue estimated from that current production facility. Has anything changed as far that capacity capability or what has prompted the expansion into another facility at this point in time? Well, thanks for the question David. So the expansion, actually, if you look at it, has multiple clean room and potential for what we call current manufacturing practice, current good manufacturing practice certifications. It has the ability to scale at much higher volumes with the addition of automated equipment. Also, that clearly identifies future potential product pipelines to run through there. Because, if you're just using our current facility, you would have to shut down the manufacturing of Spryng for the next product pipeline and then rotate back forth. So there's tremendous efficiencies and scalability in this new facility. And you would see that it's probably 3.5 times the size of what we currently have from a production standpoint. So that's one way to answer it. So we're just really positioning for future growth, potential future rapid growth. Excellent, so what particular products would you have in mind then to be simultaneously scaling in a facility that can serve both of those end results? So we're not moving into the other facility until probably August. And as you see on our studies, everything is in equine, canine and feline. So we'll have those products out. The next year, we could have a couple of other products that we're ready - they're ready to roll out any time, we just have to have studies to support it. So we need to prep for that and have that place ready. Yes absolutely. And also a disaster recovery type potential situation. So we won't get disrupted in the Spryng aspect, no matter what. Well, I shouldn't say, you could have a major disaster where a lot of stuff gets taken out. But otherwise, we're doing the right thing to make sure we don't interrupt Spryng with the momentum we have going right now. Because we're seeing a lot of veterinary doctors now actually putting up videos of success stories of dogs and horses, some veterinary doctors are actually started to inject some cats and seen really good results. I mean those videos are very powerful when they're coming from the vets themselves to let the public and other veterinary doctors know how well the product is working. My name is [Elizabeth Cantordale] just wanted to call in real quick, less of a question, first off, congratulations on the great quarter? So I started using those, product back in October on a family friend race horse, this horse in the past, very expensive horse, so it’s a very, very well that ended up with a bad ankle. His ankle became the size of a softball. He just couldn't really run any more. So one injection, and he performed incredibly just a week later and then ended up winning quite a few races within the last past four months or five months. So we are five months out from injection now, and we were thinking that it would be time for another one, start wearing off. The results are just getting better. We feel that maybe that protein matrix has started to rebuild the joints. Very surprised I really thought we'd be ready for another injection. So but my father, as some of you know, is a very high-level veterinarian in the racing world, and he's just so impressed. He said he's never seen anything like this before. No we did it. It's such an incredible step-up from what we were using before. Cortisone, over time, as most of you know, degrades the joint which from what we understand about this is just not going to be the case, which is huge for longevity. You buy a $300,000 horse, you want it to last. Correct. So we say generally it lasts a year, it all varies. We have seen last well beyond a year. And we're comfortable saying a year because when we did the human studies on the human side, we track the humans for a year and we're able to identify the particle still in the body. So we have seen situations where in birth defect puppies, where they came of age, where everything is pretty grown in, we have done injections of defective hips where the particles have so far lasted eight years, which was really surprising. So and I talked about the improvement after the matrix is going into the joint, once that scaffolding starts to formulate, it tends to keep the joint functioning even better. So when you first did the injection in the horse, I kind of said you wanted to wait 10 days, but I guess the trainer and your dad said it was okay to let the horse run after a few days, which kind of surprised me, but the horse did extremely well. He did you, he ran incredibly. May I'd wanted to wait, but the trainer they, that's their livelihood. So he wanted the horse right back on the track. And what was it, gosh, a month or two ago, he went as fast as he ever had in the last two years in a five-degree weather just won the race for fun. I mean think there are 20 lengths between him and the rest of the pack. And it is absolutely incredible. Yes sorry. Thanks for the call. My question relates to if you could just go over again your burn rate. And then also your milestones, what are the milestones that are sort of in progress or that you see developing over the next 12 months? So we stated probably back in August of 2020, when we went on NASDAQ, if you look at the PowerPoint from back then, the milestones would get these studies out, because studies allow our regional sales reps to work with the MWI sales reps to point to specific data to the vets. And those mouse we believe there will be very good adoption for the canine side once that gets published. So John Dolan talked of seven them that are in process. So we feel there's, multiple milestones from that standpoint. So these papers we'll get published, so that will also help in the adoption. The burn rate, I think it's probably around $2 million per quarter. Bob, you can comment on that, if I'm not too far off, but I kind of recall looking at it, that was the type of number. Okay. And then - so timing on those clinical trials and studies, can you give any kind of time frame, timetable on how it will be released? No we completed the Ethos one which was on to cruise ships and dogs because we're focusing each study on a different joint so that one was completed at the end of October, the first cohort. And the clinician had requested to get it present at the Veterinary Orthopedic Surgical Annual Conference, which is mid-March, so that's coming right up. And I think it bodes well because we don't get to feed the results of study that they're actually getting to present there because that's all Board-certified surgeons. So it's a pretty prestigious organization. And once that gets presented, we'll have an abstract for the salespeople to use. And on top of that, Ethos is a very well-respected private research organization. They do work for Merck Animal Health, [Watson] and so on. They're owned by NVA, National Veterinary Association. The parent actually owns 2,000 small animal vet clinics. So I feel we'll give also an emphasis for the MWI sales reps to go into those clinics and start converting. So we're seeing MWI really make good inroads in getting to the veterinary doctors because recent rounds of ordering have been very small unit volumes. So you usually see a vet order one to three syringes on their first turn, then 45 days later or a little longer, they get reports back from the owners of dog and the horses as much quicker, then the next turn, we see a larger order and then eventually, it gets up into 40, 50 units a month. So we're seeing that kind of progression. We're also seeing very good adoption rate. And what I mean by adoption rate is once the vet tries it to hook on the product because they're seeing the benefits. Does that answer your question? Yes I think, no that is the last one I believe from [Axiom Capital]. Okay I think he logged out he now log back in. Okay, we'll give him a minute. Well, while we're waiting for them, I'll just expand a little bit more on the milestones. Right now, we're at a point, it's just basically providing clinical evidence for the salespeople to convert more and more of the veterinary doctors into the channel purchasing our product. And in the small animal side, it's all data-driven. So we feel pretty good with the seven studies we have that we have invested in from 2021 and 2022 that these will come to fruition here by the end of 2023 calendar. Do we have Axiom Capital back? It must be the Internet connect in New York. Sir, you are unmuted on our side, you'd like to ask a question. Well, if there are no more questions, we probably should - hold it, I got one coming being typed in. Hang on. No, we can't hear you. So I got the text message asking if they could hear me, I go no. I see some here in the chat box, if you'd like to address them. What was the dollar amount of the sell-through in Q3 at MWI? So if there are no more questions, we can end this call. For everyone, thank you for attending. And operator, please officially end the call.

EarningCall_126

Thank you for standing by. This is the conference operator. Welcome to the Cameco Corporation Fourth Quarter 2022 Conference Call. 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 Rachelle Girard, VP of Investor Relations, Treasury and Tax. Please go ahead. Thank you, operator, and good morning, everyone. Welcome to Cameco's fourth quarter conference call. I would like to acknowledge that we are speaking from our corporate office, which is on Treaty 6 territory, the traditional territory of Cree Peoples and the homeland of the Métis. With us today on the call are Tim Gitzel, President and CEO; Grant Isaac, Executive Vice President and CFO; Brian Reilly, Senior Vice President and Chief Operating Officer; Alice Wong, Senior Vice President and Chief Corporate Officer; and Sean Quinn, Senior Vice President, Chief Legal Officer and Corporate Secretary. I'm going to hand it over to Tim in just a moment to discuss how the improving growth outlook for nuclear power is translating into an improving growth outlook for Cameco. After, we will open it up for your questions. As always, our goal is to be open and transparent with our communications. Therefore, if you have detailed questions about our quarterly financial results or should your questions not be addressed on this call, we will be happy to follow up with you after the call. There are a few ways to contact us. You can reach out to the contacts provided in our news release. You can submit a question through the contact tab on our website or you can use the Ask a question form at the bottom of the webcast screen, and we will be happy to follow up after this call. If you join the conference call through our website event page, there are slides available, which will be displayed during the call. In addition, for your reference, our quarterly investor handout is available for download in a PDF file on our website at cameco.com. Today's conference call is open to all members of the investment community, including the media. During the Q&A session, please limit yourself to two questions and then return to the queue. Please note that this conference call will include forward-looking information, which is based on a number of assumptions, and actual results could differ materially. You should not place undue reliance on forward-looking statements. Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we may make today, except as required by law. Please refer to our most recent annual information form and MD&A for more information about the factors that could cause these different results and the assumptions we have made. Well, thank you, Rachelle, and welcome to everyone on the call today. We appreciate you taking the time to join us. I may be a bit late, but I want to wish all of you a Happy New Year, and I hope that you and your families are doing well. Over the holiday break, I spent some time reflecting on the past year at Cameco and of course, looking forward to the possibilities that lie ahead for 2023 and beyond. In terms of 2022, the one word that kept coming to mind was transformative. And as I think about 2023 and beyond the word that comes to mind is opportunity. In all my time leading Cameco and all my time in the industry, I'm not sure there has ever been a time when there has been more to be excited about. Starting at the company level. From returning to stable operations at Cigar Lake and in Port Hope after 2 long years of stops and starts due to the COVID-19 pandemic. Continuing with the acquisition of a greater share of Cigar Lake to the restart of production at McArthur River, Key Lake and the pending acquisition of a 49% interest in Westinghouse, 2022 was a busy and transformative year for Cameco. Also, let's not forget the 80 million pounds of long-term uranium contracts and the 17,000 tons of conversion services contracts added to the portfolio, making it one of the biggest contracting years we've ever had with a record number of contracts. This contracting success is expected to allow us to sustainably operate our assets and generate full cycle value for Cameco and therefore, provide our customers with access to the fuel they need to operate their reactors safely, cleanly, reliably and securely. And in 2023 and beyond, we expect these transformative changes will create new opportunities for Cameco and build an even stronger foundation for growth as we continue our transition back to a Tier 1 run rate. The announcement we just made about a major supply agreement with Energoatom is a great example of one of those growth opportunities. We've reached an agreement on key commercial contract terms that once finalized, could see Cameco provide sufficient volumes of uranium and conversion to meet all of Ukraine's nuclear fuel needs through 2035. We are incredibly proud of the pivotal role that we at Cameco will be able to play in helping Ukraine gain its energy independence. With the potential to supply about 67 million pounds 12 years, this contract could be the single largest supply contract in Cameco's history. I want to thank my friend, Energoatom, President, Petro Kotin and his team for their friendship and courage and for the trust they placed in Cameco. We are proud to be your partner. The supply agreement with Ukraine is a good reminder of why we believe that Cameco remains the best way to invest in the recovery in the uranium market. I'll come back to 2023 and our plans for the year and beyond in more detail later, but first, I want to take a look back from an industry perspective. At the industry level, 2022 started with a couple of stark reminders of the deepening the geopolitical and origin risk in our industry. In January, Kazakhstan experienced the most significant instability since it became independent, raising concerns about the security of more than 40% of global uranium supply. But sadly and undeniably, the most transformative events for both our industry and the world in 2022 from a supply and demand perspective was the Russian invasion of Ukraine at the end of February. It is set in motion what I believe is a geopolitical realignment, a realignment that is already transforming the way countries are planning for their future energy needs and that highlights the crucial role for nuclear power. More than ever, the world is looking for an energy solution that can solve three very significant challenges, the need to provide clean energy, the need to provide secure energy and the need to provide affordable energy. And if you still need convincing that there is no solution for tackling the global climate crisis and the energy crisis without nuclear energy, you might have dialed in to the wrong call. As you all know, nuclear energy provides safe, reliable, affordable carbon-free baseload electricity while also offering energy security and independence. As a result, in 2022, we saw what I believe are transformative tailwinds for our industry developing. And thanks to the strategic and deliberate decisions Cameco has made over the past decade and our conservative financial management, we believe the company is extraordinarily well positioned, well positioned for these tailwinds driven by the focus on clean energy, by an energy crisis and by the geopolitical realignment that is occurring. We also believe we are well protected from the current macroeconomic headwinds. We have a strong balance sheet, a growing durable contract portfolio and our customers' nuclear power plants are part of the critical infrastructure needed to guarantee the availability of 24 hour electricity to maintain essential services. But as always, we will take a balanced and disciplined approach. So as we begin 2023, we're excited about the opportunities for growth ahead of us with demand for safe, reliable, secure, affordable and carbon-free baseload electricity coming from across the globe. Today, there are 57 reactors under construction with nine units that could reach the start of commercial operation this year. I'm not going to tour you through country by country as I suspect you've already taken that tour, and that's why you're on the call today. Almost every day, there's an announcement supporting the prevention of early reactor retirements, life extensions of the current reactor fleet, the expansion of existing reactor programs or new reactor programs. We have highlighted many of these developments in our MD&A. Also around the world, we're seeing momentum building for small modular reactors and advanced reactors and for non-traditional commercial uses of nuclear power, uses such as hydrogen and ammonia production, district heating and nuclear powered shipping. There are numerous companies and countries pursuing projects in these areas. As a result, there is demand growth occurring for nuclear fuel supplies and services in the near, medium and long term. So it's easy to conclude that the demand outlook is durable and very bright. To meet this growing demand, we know that more supply will be needed, and therein lies the challenge. Low prices have led to growing supply concentration by origin and a growing primary supply gap. Along the way, these secondary supplies that have played such a crucial role in our industry have been drawn out of the market. And taking the challenge of filling that gap to a whole new level is a desire by utilities to reduce their reliance on Russian nuclear fuel supplies in the future. Currently, the global nuclear industry relies on Russia for the supply of approximately 14% of uranium concentrates, 27% of conversion and 39% of enrichment. Utilities are now considering and planning for a variety of potential scenarios ranging from an abrupt and to Russian supply to a gradual phase out. It's still early days and while supply uncertainty is not yet driving contracting at a replacement rate, we are getting closer. We're seeing utilities beginning to pivot toward procurement strategies that more carefully weigh the risk to supply, including the origin risk. As a result, the industry saw about 113 million pounds in long-term contracting in 2022. And we believe there is significant opportunity for Cameco to grow as we help our customers derisk their fuel supply needs. But what is really exciting for us is that we do not have to build new capacity to capture that growth. Our growth is expected to come from brownfield leverage, our existing suite of Tier 1 operating assets. We just need to turn up the assets we already have, a position we have not enjoyed in previous price cycles. We're also excited about our strategic partnership with Brookfield Renewable to jointly acquire Westinghouse Electric Company. Our excitement stems from being able to extend the base of our reach in the nuclear fuel cycle at a time when there's tremendous growth on the horizon for our industry. We are extending our reach with an investment in assets like ours that are strategic, that are proven, that are licensed and permitted and that are located in geopolitically attractive jurisdictions. Assets that we expect will be able to participate in the growing demand profile for nuclear energy from their existing footprint. And assets that we expect will augment the core of our business, expand our ability to compete for more business and offer more solutions to our customers across the nuclear fuel cycle. So with the continued improvements in the market and our growing long-term contract portfolio, it's time to revisit the production plans we laid out at the start of 2022. With approximately 180 million pounds of uranium and over 55,000 tons of conversion in long-term commitments, our customers are sending us clear signals that they recognize the significant challenges the supply side of our industry faces and that they see the value in securing access to Cameco's strategic proven Tier 1 assets that are in geopolitically attractive jurisdictions. The volume is almost 250 million pounds and over 80,000 tons of conversion if you include all potential Energoatom requirements. Therefore, we have decided to no longer make sense to target 15 million pounds of production on a 100% basis at McArthur River, Key Lake in 2024, but the plan for 18 million pounds of production. Also, we've decided not to pull back production to 13.5 million pounds on a 100% basis at Cigar Lake in 2024. We plan to continue to operate Cigar Lake at 18 million pounds per year. As a result, in 2023, we're planning for our share of production from McArthur River, Key Lake and Cigar Lake to be 20.3 million pounds with a target to increase that to 22.4 million pounds in 2024. But that's not the extent of our Tier 1 supply growth. We also maintain the ability to expand and extend production from our existing Tier 1 assets. With planned production of 18 million pounds per year and annual license capacity of 25 million pounds at McArthur River, Key Lake, there's an opportunity for further Tier 1 production growth. And we know there is additional uranium at Cigar Lake, but there is some work to do to determine the economics required to extend the mine life beyond its current reserve base. As well until the end of 2023, Inkai is expected to operate at 20% below its annual licensed production rate. However, its license allows for production at 20% above that rate or 12.5 million pounds a year, which would bring our share of its production to about 5 million pounds per year. So if we took advantage of all these opportunities, our annual share of Tier 1 uranium supply could be about 32 million pounds. And we have our Tier 2 assets, which we plan to keep on care and maintenance, unless we can secure long-term contracts that provide returns similar to what we can currently achieve on our Tier 1 assets. In addition to our plans to expand uranium production, we're also working on expanding production at our Port Hope UF6 conversion facility. To satisfy our growing book of long-term business at a time when conversion prices are at historic highs, we're targeting annual production of 12,000 tonnes by 2024. The improving market fundamentals, our growing contract portfolio for both uranium and fuel services and our plans for increased production set us on a path that provides line of sight to a significant improvement in our financial performance. Key to our ability to continue to align our production decisions with our portfolio of contract commitments and opportunities are the investments we have and will continue to make in digital and automation technologies. We expect these investments will allow us to operate our assets more safely, more efficiently and with more flexibility. We also expect they will help support the 30% reduction in greenhouse gas emissions we are targeting for 2030 compared to a 2015 baseline. With our experience operating in this industry, we understand that to create long-term value and provide supplier reliability for our customers, we must build a home for our production under a long-term contract before we pull it out of the ground. So we will continue to make strategic supply decisions in all segments of our business and in accordance with our customers' requirements. As an independent commercial supplier, we can provide our customers with access to proven and reliable productive capacity. With substantial Canadian productive capacity, our supply meets increasingly stringent ESG requirements. It can provide diversity from state-owned enterprises and help to alleviate utilities future supply from origin and trade policy risk. As you know, the financial aspect of our strategy is to ensure we have a solid balance sheet and the ability to self-manage risk. At the end of the year, including the proceeds from an equity issue to support our planned acquisition of a 49% share of Westinghouse, we had $2.3 billion in cash, $1 billion in long-term debt and $1 billion in an undrawn credit facility. And we expect to begin to see a significant improvement in our cash flow, thanks to the planned ramp-up in production at McArthur River, Key Lake and at the Port Hope UF6 conversion facility. As well, the higher prices that are being discovered in our currently improving market are expected to flow through our existing contract portfolio and further contribute to an improving financial performance. And with an inventory of unencumbered Tier 1 and Tier 2 pounds in the ground, rising prices will also create the opportunity to negotiate new long-term commitments with appropriate pricing mechanisms, commitments that will underpin the long-term operation of our productive capacity. So we're optimistic about the growth in demand for nuclear power, both traditional and non-traditional. We're optimistic about the growth in demand for nuclear fuel products and services, and we're optimistic about the opportunity for Cameco and capturing long-term value across the nuclear fuel value chain and supporting the transition to a net zero carbon economy. We will continue to do what we said we would do. Let me just remind you what we said we would do. We're aligning our production decisions with our contract portfolio and the market fundamentals. We're being strategically patient in our marketing activities, and we are conservatively managing our balance sheet to ensure that we can execute on our strategy and self-manage risk. This strategy has positioned us well to take advantage of the fundamentals I spoke of earlier. We have operating Tier 1 assets that are licensed, permanent, long-lived and our proven operations that have expansion capacity. We have fully permanent and proven Tier 2 assets that don't make sense at today's prices, but when you think about them in the context of a looming supply gap, there's a potential pathway for them to add value for us in the future, but we'll continue to be very disciplined in our evaluation on that front. Thanks to our disciplined contracting strategy, we have had a contract portfolio that has protected us well during the worst down cycle in our business. And as the uranium market improves further, we will continue to secure homes for our in-ground inventory that has not yet been committed. And we're more than just mining. Something we don't talk about much or even, in fact, to get much credit for is our advanced uranium projects and our exploration portfolio. We believe our portfolio of resources rivals any particularly when you consider the proximity of those resources to existing infrastructure. We expect these resources will add value well beyond the current price cycle. Then we have our investments across the nuclear fuel cycle in refining, in conversion and in CANDU fuel fabrication for heavy water reactors, where we are focused on continuing to lock in significant value for this segment of our business. Additionally, we are positioning Cameco to respond to the growing need for uranium fuel to generate safe, clean, reliable and affordable electricity by exploring new opportunities that we expect will further our participation in the nuclear fuel value chain. New opportunities like the pending acquisition of a share of Westinghouse. We expect the acquisition will augment our current suite of assets and allow us to better meet our customers' nuclear fuel cycle needs for light water reactors in areas where we have not previously participated. Through our fuel manufacturing capabilities and investment in global laser enrichment, we're exploring fuel fabrication of new fuels, including high assay, low-enriched uranium or HALEU. We're also planning to participate in the responsible cleanup of leftover byproducts from a previous generation of enrichment facilities no longer in operation. GLE has an agreement with the U.S. Department of Energy that would allow it to repurpose legacy waste by re-enriching depleted uranium tails into commercial source of uranium and conversion products to fuel nuclear reactors. And we are involved in developing the capability to produce commercial low-enriched uranium fuel using lasers for the world's existing and future fleet of light water reactors with what we believe will be greater efficiency and flexibility than current enrichment technologies. These opportunities align with our commitment to manage our business responsibly and sustainably and to increase our contribution to global climate change solutions. Our decisions are deliberate. We are a responsible, commercially motivated supplier with a diversified portfolio of assets, including a Tier 1 production portfolio that is among the best in the world. We're committed to operating sustainably by protecting, engaging and supporting the development of our people and their communities and to protecting the environment, something we've been doing for over 30 years. We have determined that our strategy of operational flexibility, supply discipline and financial discipline will allow us to achieve our vision of energizing a Clean Air world. And it is a strategy that we expect will deliver long-term value in a market where demand for safe, secure, reliable and affordable clean nuclear energy is growing. Before I conclude, I just want to recognize some changes to the executive team here at Cameco. Grant Isaac has been appointed Executive Vice President and remains our Chief Financial Officer. Joining the executive team from finance is Heidi Shockey, who will be our Senior Vice President and Deputy Chief Financial Officer. So I just want to congratulate both of them. Thank you. We will now begin the question-and-answer session. In the interest of time, we ask you limit your questions to one with one supplemental. If you have additional questions, you are welcome to rejoin the queue. [Operator Instructions] Our first question comes from Orest Wowkodaw of Scotiabank. Please go ahead. Hi, good morning. And congratulations on the continuing momentum in the business. I am curious on your portfolio approach now to the asset base. You're obviously bringing back McArthur River quicker to full nameplate and not taking down Cigar. I'm just wondering, what would it take to push McArthur to the 25 million pound license capacity with respect to time line and capital? Hi, Orest, good to talk to you. Thanks for the question. So yes, we - as we announced, we are not going to continue with our strict supply discipline. We indeed said that we had the contracts in place to increase production we would. So we're going to run it to 18 and 18, if you like, 18 at McArthur 18 at Cigar. You'll remember a few years ago, and it is a few years ago now, we were already at 20 million pounds in McArthur. They're over 20 million pounds in McArthur. So that's not a big stretch for us. We have licensed capacity, that license approval license approval to go up to 25 million pounds. That would require a small bit of capital and a bit of time to get the mill ready to go to that level, but it's certainly not anything that we couldn't manage. I don't have exact cost and time line for you. But Brian, do you want to comment on that? Yes. Look, in terms of the mine, we would have to revisit the workforce and mobile equipment. So there would be additional resources required at the mine to increase capacity. The mill [ph] a little more work, particularly on the back end of the circuits. So we've got a number of studies underway now to look at engineering design. And out of that, we'll be able to determine capital cost. But still early days, but we'll be able to report back on that sometime into the future. Yes. And maybe, Orest, let me just wrap it in a bit of a strategic comment. Remember, we do not plan production until we have the homes for it. So the most important narrative here is that we need to see continued market support in the form of long-term contracts. We remain in supply discipline even with this announced production increase. If you think about our Tier 1 asset base, even with what we're talking about today, we'll still be in about 75% supply discipline relative to the Tier 1 and 62% supply discipline relative to the Tier 2. So we are still in supply discipline mode because strategically, we need to see continued market improvement in the form of long-term contracts, we do not produce from these assets to dump into the spot market or to build an excess inventory, that does not create long-term value. And just following up on that, Grant, if -- assuming continued contract momentum here, where is the next source of production likely to come from, if you want to crank that up, is it likely going higher on McArthu? Or is it somewhere else in the asset base? First, we push our Tier 1 asset. So McArthur would be our first stop, obviously, you saw in our disclosure that we've got Rumainkai [ph] to move that forward as well. So those would be our first two stops. And we've got, as we say, a nice suite of Tier 2 projects that if someone is willing to look at those, Rabbit Lake ready to go and others. So - but we would definitely go with our Tier 1 assets. And from a value point of view, Orest, it really is critical to emphasize to everybody that we're talking about a base of assets already licensed, already permitted, already constructed. They will attract some sustaining capital, some replacement capital, a little bit of growth capital, but we are not talking about greenfield. So this truly is an extraordinary amount of brownfield leverage at a turn in the market. Good morning, Tim. Thanks for taking my questions. Two of them, if I may. First one is just on the Ukrainian contract with Energoatom, can you discuss a little bit, because you said in your commentary that this has the potential to be the single largest supply contract. What percentage of the contract book does that represent now? And how fast can we think about the amount of excess contracting that is available to Cameco over, say, the next 10 to 12 years. Are you sort of 50% occupied in terms of your production capability of that 32 million pounds? So I'll pass it over to Grant to talk about that. I'll tell you the cover is getting a little bit skinny for sure on our sales going forward. But I just want to say on that Energoatom, the Ukraine contract, that's a big deal for us. Big deal, obviously, in the delivery sense, financial sense, all of that stuff, but it's bigger than that. We've been working with them for - I think we went over there in 2018 and then 2020. And we met with them in - I remember in December 2021 and talk to them are getting close and then, of course, the events of 2022 February happened. And so it's more for us. It's almost more than just a financial or a supply transaction. We're standing shoulder to shoulder with them as they try to diversify their energy supply and their fuel sources and move away from the Russian. So this is a big ticket for us. You saw it's kind of two parts, the 9 reactors that they're operating now. We'll supply those over a 12-year period to '25. And AfrAsia [ph] units, we'll see what happens with those. I know the IAE is in there and working on that. So I just wanted to make that commentary. It's - this is a big piece for us. Grant, do you want to talk about what percentage it might work out to, I think you could do the math. Yes, a couple of comments from a market point of view on the Energoatom contract as well. It's indicative of several things. It's indicative of what we've been saying. There's a security of supply trend going through the market. This is a security of supply contract at its very core. It's indicative of our pipeline. When we tell folks that our pipeline is robust, you really have to believe us, and this is evidence of it. It's indicative of our competitive advantages as a proven, reliable, independent and integrated commercial supplier of nuclear fuel. This is possible because we're also a converter. Being just a uranium company wouldn't have afforded us the full fleet opportunity that we're enjoying here. It's indicative of the improving tenors, volumes and time frames that we've been talking about through 2022. So it's indicative of that. And it's indicative of the type of price exposure that we look for at this point in the cycle. When we see a security of supply cycle underway, we want price exposure from both our portfolio, committed sales that are market related. And then what you're referring to, which is the pipeline, the pounds we haven't sold yet. So what I can say is we are far from sold out. If you look at our price sensitivity table, we have, on average, 21 million pounds per year over the next 5 years, more heavily weighted to the near term, of course, our guidance, 29 million to 31 million pounds of sales in 2023, so sales going back up. And just a reminder to folks, those are committed sales. Those are not sales we have to yet make in 2023. These are nondiscretionary requirement sales that we will deliver into in 2023. And as the years go out, obviously, less exposure. So really, for us, it will be less than 10% of the overall portfolio as the sales number grows as more customers come into long-term contracting. And yet as we look out, we have a lot of price exposure to come from pounds that are still in the ground that we have not yet committed. Okay. Yes, that's helpful. I appreciate the context. As a follow-up, as the market has gradually gotten stronger and Chemical continues to maintain this disciplined approach, what's the risk that other players that are not as disciplined in holding back supply actually starts to impact the market. Are we insulated from those types of trends? Or is there still risks in the market that whether in existing entrants or new entrants can sort of suppress or elongate the time at which we actually have a price recovery in the term market. Yes. That's a terrific question, Ralph. The way we look at it is, of course, we build a portfolio that we think offers the best of all worlds to investors. We take quick moves that can happen in so-called commodity spaces. But we turn those into a long-tail cash flows and revenues through long-term contracts. We don't just ride up a tight spot dynamic and then ride it back down like we've seen other uranium producers do. And probably the best way to illustrate this is a lot of people these days are looking at that uncovered requirements which. And I think it's slide 9 to accompany Tim's comments. And what we see is it gets misinterpreted often in two ways. First of all, some people look at the uncovered requirements wedge. And if you look at it for '23, 2024 and 2025, utilities have very little discretionary demand. And some people incorrectly conclude that, that means there's not going to be a lot of demand coming to the market. Well, that's not right. Utilities will, by definition, be very well covered in year and next year. But that doesn't mean demand 2025, 2026 and beyond can't create price pressure today. So that curve will always look that way. So to your point, when you -- when we're in 2030, for example, there are some folks out there that are advocating that they're going to bring production into uranium, and they say, we don't have to worry about a contract portfolio today because look, demand is going to be 200 million pounds in 2030. Well, demand will be 200 million pounds, could even be more by 2030. But that wedge will look exactly the same. The uncovered portion will be very, very small in 2030, 2031. And let me just put it into perspective because I know a lot of people like to look at the spot market. In 2022, utilities bought 8 million pounds in the spot market. So term contracting is going up, spot market purchasing actually went down. They were 13% of the spot market. In weekly terms, utilities were putting 150 million pounds of demand per 150,000 pounds of uranium demand in the market per week. So if somebody comes along and says, well, I'm going to build a 5 million pound mine and sell it into the spot market, they got to sell 100,000 pounds per week in the spot market. That's foolish. If someone comes along and says, well, I'm going to build a 25 million pound mine, and I'm going to be spot exposed because I want to take advantage of all this price yet to come. They're going to be pushing 500,000 pounds through the spot market in a year where there's no requirements. So for us, it is about giving investors exposure under long-term contracts to rising price environment and protecting them from that kind of behavior in the market. And if you want to see the performance of our contract portfolio, just look at it post Fukushima. We outperformed the market in those years with our contract portfolio because we gave you upside participation and protected you from downside if we saw that kind of behavior. So could we see it again? Hopefully not. Hopefully, investors understand the market structure and they're not prepared to finance a project that has a silly spot market strategy to it. But if they do, Cameco's investors are protected from... Thank you. Grant and Tim, you've said in the past that contracting begets contracting. So I know the forecast from some of the forecasters were 100 million pounds again of contracting in 2023. But with this Ukraine contracts, I think that's off to a huge start. Do you think this is going to encourage more utilities coming to the market perhaps faster than they previously anticipated? Well, yes, Greg, we - it kind of goes back to that that pipeline conversation we keep having, we were amused here at Cameco just a couple of weeks ago when one of the trade reporters kind of characterized the market activity as being slow. And we've got a marketing team who just kind of sat around and looked at each other and said, which market is slow, like we are not seeing it at all. So perhaps we just have more of a view and a better view into the market than some of the trade reporters do. I think people could forgive me for saying it might start feeling like the summer of 2010 again, a big new entrant stepping into the market, tying up Western capacity, while others have not moved to fill those requirements. It could feel like that kind of catalyst when the Chinese stepped into the market for the first time in the term market for the first time in a big way in the summer of 2010. So it's off to a great start. And I would say that that the type of contracting volumes will be noticed by others who have needs out in the exact same window for both uranium and for conversion. Yes. And just a follow-up. On Cigar Lake, part of the rationale for curtailing production there was to give you more time to assess Phase 2 at Cigar Lake. So the fact that you're going to continue to run at 80 million pounds, I assume it means you're accelerating Phase 2 forward to some extent, given the limited life you have left at Phase 1? Yes, Greg. So you're right. We are working hard on that now. We're pretty excited. We've seen some of the potential there for the extension to Phase 1, as we now call it. So yes, we're working on that, and we think Cigar's going to continue to produce, hopefully, seamlessly into the 2030s. Thank you, operator. Good morning, Tim and Grant, Nice to hear from you both. And thanks for the update. I wanted to ask about - well, first of all, the fuel contract pricing. So the revenue guidance for '23 implies fuel contract pricing around US$26. So with spot conversion pricing approaching $40 per kilogram in both the EU and North America. Would it be reasonable to expect that some of these higher prices would start flowing through in future years? Yes, absolutely. You know that we have a trailing value capture approach to our on tracking. So as prices improve, in the spot market, we see that strengthening price, and we want to convert that into long-tail term contracts. So there is a bit of a lag effect. We don't match the spot market going up and then we don't go down with the spot market as we lock in that value over a longer period of time. So if you think about the uranium segment where more capacity is required, prices will have to go up to incent more supply. It is about price exposure. In the conversion side, where you have idle capacity that's going to come back, it is about price capture at this point. And then that gets baked into our contract portfolio and creates a longer tail of financial performance. And Lawson, maybe just remember to that price that we put in there, that's a combined price for all the products in our fuel services, not just U.S. VI. Absolutely. Thanks for both the comments. And then for my follow-up, I just wanted to ask about the latest expectations on the timing around the closing of the Westinghouse acquisition. And in particular, just your thoughts on the SAMR [ph] review. So the state administration for market regulation in China and whether or not you have any concerns about that particular review... Yes. Thanks for that, Lawson. I'm going to pass it over to Sean Quinn, who is all over that question. So John. Sure. Thanks, Lawson. I'll start with just a general overview of the regulatory approval process. To date, we haven't seen any showstoppers. We're working on our merger control, cost competition law approvals and various nuclear regulatory type control approval. And just for investment approvals, they all take time, of course, but we haven't seen any showstoppers, and we still think we're on track for the second half of this year. In terms of China itself, we have submitted what's called a simplified application. Don't have any feedback yet, but we are quite confident at this point that we'll be fine in China, but we don't have any feedback from the actual regulatory authorities there. Probably fair to say, Sean, that with respect to China, nothing will really have changed from a competitive supply point of view. Recall, Lawson, that what the Chinese have always wanted from Cameco is yellow cake. They're interested in doing all the fuel processing themselves, and that's what they would continue to get from Cameco. From Westinghouse, obviously, there were some initial reactor builds, but now China has its own version of the AP1000, which they build. And so Westinghouse's Wave two business is really around reactor services and some fabrication. So really, there's no change from a supply point of view. Cameco will be doing what it did before. Westinghouse will be doing what it did before. And there isn't any overlap. So we feel pretty confident about our position there. Thank you. I wanted to ask about the plans to increase the ramp-up at McArthur and sort of what that means on the ground in Saskatchewan in terms of workforce and capital both to get to 18 million pounds and then potentially to the full 25? Well, we're in good shape now. We started our ramp up over a year ago now. And so we're still working on a few of the kinks at the mill. But at the mine, they're in good shape. I think they've got something like 120 million or 122 million pounds behind freeze curtain, which is important for us for our mining. We've - we've ramped up the team there. We've hired hundreds of people, as you know, over the last year. So it's really a question of first getting to 15 and McArthur and Key and then into '18 and 2024. And as Grant said earlier, if we see the business, if we see the contracts come, then we'll think about dialing it up a little further. And as I said earlier, there's a bit of capital that has to go in not a whole lot. And maybe a few more people here and there. But we're - it's incremental, if you like, Alex. It's not a big push for us. Hi. This is Grace of Energy Intelligence. Nice to talk to you guys. So my question is just about [indiscernible] in China. And if Chemical would consider opening account there as they're trying to make it into a trading hub or if they would move uranium, if can go move uranium to China via... Yes. Thanks, Grace. We appreciate your question. Obviously, we're watching what's going on at [indiscernible] and whether that gets set up, and we are hearing it's moving. We have no intention at the moment of setting up an account there. We have our own facilities and accounts to look after. So we're watching it with great interest. But for now, we have our intention of opening an account at [indiscernible] Okay. Thank you. And then a follow-up question, sorry, is just does Cameco plan to continue exporting material from Kazakhstan to a trans casein [ph] trade route? And to what extent would that impact cost, if that's the case? Yes. We sure do. We were happy to get that first shipment through as we reported, and we're working on another one. And Sean, I know you've been - you were talking about it yesterday. So why don't you just give the latest update on the being route. Our second shipment relating to our 2022 purchases is through to the port of Courtney [ph] already and might even be loaded on the boat to make the trip across. And we are working towards making applications for our '23 shipments at this time through the trans casein. Thank you and congratulations on all the progress. Concerning the Kazakh contract, which is so significant since it's the seventh largest nuclear power generator in the world. With the e Zaporizhzhya tranche, clawback your spot sales first, if that falls back into sovereign control? And then second have you planned for the contingency if the Ukrainian government can't pay you. They seem to have some funding deficits. Do you have any assurances from Ottawa that if Ukraine don't pay the Ottawa would pick up the tab or the EU would pick up the tab given that the country appears very bankrupt. Thanks for the question, John. You're referring to the Ukraine contract. We - as you saw in our disclosure, we separated the two sets of units, the nine units that Ukraine is integral Energoatom is operating now and operating quite well. Listen, this isn't our first contract with Ukraine. We've been dealing with them for some years now, and they're one of our best customers and have paid every time. There's not an issue there. On the Zaporizhzhya units, yes, we're concerned about those. So is the IAEA, and they're over there with inspectors and others trying to get those under control and back under Ukraine control. And so that's why we separated the two tranches. We're very confident that Ukraine will indeed return to Zaporizhzhya and take control of those units, but we'll wait to see. So in the meantime, we've taken all of those contingencies and risks into consideration in this contract, and it's still just an outstanding contract, and we're proud to be partners with Energoatom. So if they were to be late paying you for the uranium units, would you consider - would you continue shipping - or how long would you continue shipping? Or would you just roll over to the spot market or a different customer? Well, John, we don't play on the spot market. That's not where our sales go. We've been absolutely crystal clear and consistent on that. We do not sell into an oversupplied spot market anytime. So we're very comfortable with the Ukraine. As I say, we've been dealing with them for years. We've had other contracts. They've always paid not a problem. If they have some issues, we'll deal with them then. But right now, that is not an issue for us. So as I say, we're proud to work with Energoatom. Thank you. I think this question is probably for Grant. I'm just wondering if you could comment on where you see the effective tax rate in 2023 and maybe 2024, if these minimum tax rate get past? We've been guiding towards an effective tax rate that approaches more statutory rates in Canada, more production from Canada, more sales through Canada is going to result in a statutory rate. But that is an income tax expense. It's not the same as cash tax because remember, we do have a very large deferred tax asset. So from a cash tax point of view, we do expect to chew through that asset over a period of time. But in general, yes, we do expect to approach more of a statutory rate with some efficiencies capable from our global structure. And Fay, I would just point out, too, just keep in mind that the earnings from the equity accounted come in to our earnings on a net tax basis. So that has an impact as well when you think about that. Okay. And just to clarify your getting closer. But for 2023, would it be somewhat still similar to 2022 on an effective basis for the income - net cash? I'll have to get back to you on that one, Fai.I don't have a specific number here in front of us. This concludes the question-and-answer session. I would like to turn the conference back over to Tim Gitzel for any closing remarks. Well, thanks very much, operator, and thanks to everybody who joined us on the call today. We appreciate your support. Obviously, exciting - pretty exciting times for Cameco in the future of nuclear power. We're excited about the fundamentals in the nuclear fuel market. We're certainly excited about the prospects for our company as we continue to ramp up production to satisfy our long-term supply commitments and invest in opportunities across the fuel cycle. You've heard us say this before, I'll say it again, we're a responsible commercial supplier with a strong balance sheet, long-lived Tier 1 assets and a proven operating track record and line of sight to return to our Tier 1 cost structure. We at Cameco are well positioned to respond to changing market dynamics and benefit from the long-term growth we see coming, driven by the need for safe, reliable, secure, affordable and carbon-free baseload electricity. We will continue to do what we said we would do, executing on our strategy and consistent with our values. We'll do so in a manner that we believe will make our business sustainable over the long term. And we will continue to make the health and safety of our workers, their families and their communities, our top priority. So thanks, everybody. Stay safe and healthy, and we'll talk to you again soon.

EarningCall_127

Thank you for standing by, and welcome to the Mesa Airlines' Q1 Fiscal Year 2023 Conference Call. All participants are in a listen-only mode until the question-and-answer session of today's call. [Operator Instructions] This call is being recorded. If you have any objections, disconnect at this time. I would now like to turn the call over to Doug Cooper, Head of Investor Relations. Mr. Cooper, you may now begin. Thank you, Christina and welcome everyone to Mesa's earnings conference call for its fiscal first quarter 2023 ended December 31st, 2022. On the call with me today are Jonathan Ornstein, Mesa's Chairman and Chief Executive Officer; Brad Rich, Executive Vice President and Chief Operating Officer; Michael Lotz, President; Torque Zubeck, Chief Financial Officer; and other members of the management team. Following our prepared remarks, there will be a question-and-answer session for the sell-side analysts. We also want to remind everyone on the call today that today's discussion contains forward-looking statements that are based on the company's current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that could cause actual results to differ materially from those reflected by the forward-looking statements, including the risk factors discussed in our reports on file with the SEC. We undertake no duty to update any forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items. Please refer to our fiscal first quarter earnings release, which is available on our website for the reconciliation of our non-Admeasures. Thank you, Doug, and thank you everyone for being on with us today. We're pleased to be speaking to you again after introducing several major developments at Mesa on our fourth quarter call six weeks ago. As you may know, we had a busy December quarter, negotiating and finalizing significant agreements with our airline partners and other key financial parties. We expect these new agreements will substantially enhance our operational performance and both our income statement and balance sheet. Since our last call, we have been working diligently as we prepare to wind down our loss-making operation with American Airlines and transition our CRJ-900 flying to United Airlines next month. For the quarter, we had an adjusted net loss of $4.3 million on revenue of $147.2 million. While traffic remained strong and our pilot pipeline has improved significantly, capacity remains constrained as we catchup with unprecedented attrition experienced as a result of the industry-wide pilot shortage. Here's a quick overview of what we have recently accomplished. First and foremost, we eliminated our loss-making operation at American Airlines effective April 3rd, 2023. Pursuant to that wind down, United agreed to add up to 40 CRJ-900s previously operated for American. To improve our balance sheet, we sold our remaining 8 CRJ-550s and agreed to sell down 11 CRJ-900s and 30 GE engines, reducing approximately $90 million of debt and generating approximately $70 million of cash. Additionally, United replaced our $16 million balance on our revolving credit line and provide an additional $25 million loan. We also restructured our RASPRO leases and EDC debt. Finally, we implemented new pay scales with our pilots and a new agreement with our flight attendants. Looking forward, the current quarter is all about a successful transition. Working closely with United, we intend to keep all the related crew domiciles and maintenance bases open. With our significant focus on operations, we believe the new United 900 flying will perform at levels similar to our existing E-Jet flying at United. In some good news on the pilot front, we continue to see strong levels of applications and reduced attrition. Currently, our monthly pilot attrition declined and has now stabilized approximately near pre-COVID levels. This week, we announced a direct entry captain position for qualified candidates. Highlights of the program include a 24-month flow to United Airlines and an industry-leading $110,000 sign-on bonus. Combined with our industry-leading pay rates, we believe this may be the best opportunity in the history of regional aviation for pilots to advance their careers. We are continuing to focus on pilot training, throughput, and have increased our resources around it. Brad will get into more detail on this later on. Last fall, we officially launched our Mesa Pilot Development or MPD program and recently welcomed our first graduates to the Mesa regional pilot ranks. As our -- with our significantly increased pay scale and participation in United Aviate program as well as our expanding training pipeline provided by MPD program and our new direct entry captain program, we believe Mesa provides a reliable and rapid path for pilots to join the regional industry and transition to United Airlines. We are pleased to be within the United ecosystem and are committed to training, retaining, and promoting pilots through to United. I'm also pleased to announce that we are adding a 737-800 freighter to our DHL operation. We have taken delivery of the aircraft and expect it to enter service in March. This brings our total cargo fleet to three 737-400s and one next-gen 737-800. At this point, I'd like to turn to highlights from the past few months that speak to the leadership position that Mesa is building in the future of regional aviation and the greater sustainability that we hope to help enable the industry in years ahead. The two electric flight partnerships we invested in with United, Archer and Heart recently achieved significant milestones. Archer unveiled its new five-seat eVTOL titled Midnight in November. Midnight is set to provide a sustainable form of aviation that can service short distance trips between regional airports and city centers. Heart Aerospace also continued to make progress, meaning a number of milestones and garnering additional commercial aircraft orders. We believe Mesa is the vanguard of innovation in eco-friendly electric aviation and will continue to assess opportunities going forward. Meanwhile, our European joint venture, FLYHT [ph], is on track to complete its operating certificate this spring, while initially operate regional jets, we believe FLYHT could also be a platform for us to expand new technology and eco-friendly flying in environmentally sensitive European markets. With that, I will hand it over to Brad Rich to go over more of the details of our operational performance this quarter. Thank you, Jonathan and good afternoon to everyone. I'd like to start by reviewing our quarterly operating results. In the December quarter, we flew 50,940 block hours, 9.6% below last quarter, roughly in line with our previous forecast. Our March quarter block hours are projected to be roughly flat versus the December quarter. Mesa, like many regional airlines, continues to contend with the challenges of the industry-wide pilot shortage on our block hour production. However, we finally have a line of sight to relief. As Jonathan mentioned, attrition has come down materially over the past few months, and our classes are filled with a combination of new hires and captain upgrades. Pilot production remains our highest priority. We continue to increase our in-house training capacity from the additional CRJ and E-Jet instructors that we have hired. We have also contracted with CAE to provide both instructors and more sim capacity this year. We remain focused on our transition to United and are continuing to work closely with their teams to prepare facilities, crews and maintenance efforts for CRJ-900 flying. The rollout that we outlined on last quarter's call remains unchanged. We expect to operate our current 24 lines of flying with American through February 28th before reducing flights throughout March and ceasing American operations on April 3rd. We will begin operating CRJ-900s for United on March 3rd and will transition all the flying by May. As previously mentioned, United is covering the expenses to reconfigure and rebrand the CRJ-900 aircraft. Thank you, Brad. I'll take this opportunity now to review our financial performance and our balance sheet. For the first quarter of fiscal year 2023, revenue was $147.2 million, relatively flat compared to $147.8 million in Q1 2022. Contract revenues fell by $8.4 million year-over-year, driven primarily by lower block hours, partially offset by increased block hour revenue for our new pilot pay scale. Pass-through and other revenue increased by $7.9 million, primarily due to E-Jet maintenance, faster revenue and deferred revenue. Mesa's Q1 2023 results include, per GAAP, the recognition of $5.3 million of previously deferred revenue versus the recognition of $4.2 million in Q1 2022. The remaining deferred revenue balance of $18.8 million will be recognized as flights are completed over the remaining terms of the contract. On the expense side, Mesa's overall operating expenses for Q1 2023 were $144.7 million, down $7 million versus Q1 2022. This decrease was driven by lower maintenance expense, which fell $10.7 million or 18.1%versus Q1 2022 to $48.3 million. It's primarily due to fewer seat checks than in the first quarter last year as well as lower aircraft rent, which fell by $5.5 million and depreciation and amortization expense, which fell by $5.8 million. The decline in depreciation and amortization expense is primarily due to reduced asset values as a result of assets held for sale and year-end impairments. These factors were partially offset by higher flat operational expense of $10.7 million due to increased training costs and the implementation of higher pilot pay scale as well as $3.7 million in intangible asset impairment. On the bottom-line, we reported a net loss of $9.1 million or $0.25 per diluted share compared to a net loss of $14.3 million or $0.40 per diluted share for Q1 2022. On an adjusted basis, Mesa reported a loss of $4.3 million or $0.12 per share compared to a net loss of $9.3 million or $0.26 per share a year ago. The adjusted loss of Q1 2023 excludes a $3.7 million impairment loss and another $1.7 million mark-to-market non-cash loss on our investments in equity securities. Adjusted results from Q1 2022 excludes a $6.5 million mark-to-market non-cash loss on our investments in equity securities. Next, let me turn to cash and liquidity. Cash for the quarter, excluding restricted cash, decreased by $1.6 million from the prior quarter ending September 30th, 2022, at $56.1 million, in line with the projection on our fourth quarter call. This amount excludes net proceeds from the sales that were not closed as of December period end, including our eight CRJ-550s, 11 900s, and the spared engines that Jonathan reviewed at the top of the call. Total debt at the end of the quarter was $701.3 million, up $86 million from the prior quarter. This amount includes $64.2 million corresponding to the GAAP reclassification from our operating lease to finance lease on 15 CRJ-900s. Additionally, we borrowed $25.5 million in the form of term loan from United, of which $15 million is forgivable upon the meeting of certain performance criteria. During the quarter, we also made scheduled debt payments of $17.5 million and finance lease payments of $3.5 million. As a reminder, we have $74 million of scheduled principal payments remaining in 2023 and after the repayment of debt associated with asset sales, we expect fiscal year 2023 year-end debt of approximately $535 million. This updated total from $435 million that we were expecting as of last quarter's call, primarily reflects the net impact of the reclassification of the RASPRO operating lease to a finance lease. With regard to fiscal full year 2023, given the ongoing major developments at Mesa that we will not be providing specific financial guidance at this time other than the block hours for the March quarter that was discussed by Brad earlier, and the total debt figure that I just mentioned. We would like to point out that this quarter had favorable adjustments of $7 million. Based on our transition with American, we expect our deferred revenue to decrease by $11 million next quarter. Additionally, given the United's equity stake in Mesa is 10%, our current share count is approximately 40 million. Thank you, Torque. In summary, our first fiscal quarter of 2023 was a critically important one for Mesa and one in which we believe we achieved a lot and made significant progress. That said, we have a lot of work ahead of us. We continue to focus on pilot development in order to increase our block hour production first and foremost. Hey, good afternoon everyone. Just as wondering, with this December quarter, you talked about losing about $5 million a month on the American contract. And in light of that, it seems like the earnings result is pretty good. Is that a function of some of that deferred revenues showing up? Or if this trend holds, why shouldn't we expect kind of profitability by kind of the June quarter? Yes, hey Savi, this is Torque. Yes, we recognized a fair amount of deferred revenue just given the change in the contract term with American Airlines. That's the biggest change in the quarter. Yes. So, just for the -- I guess, as we think about the core United earnings power here, should we think about it as take out the revenue recognition and maybe take out the $15 million in losses that will go away, and that's your core until you start building up your block hours? Is that how we should think about it? Yes, we have some tail with American Airlines, expenses that are covered for the next upcoming quarter. But yes, if you defer the -- or eliminate the deferred revenue, then yes, that would be close to what we would expect moving forward. Got it. And then if I might, on the pilot side, which is kind of good news. If kind of the attrition levels here hold at close to pre-pandemic levels, how long -- given your kind of increased trading throughput, how long do you think it will take to then be able to fly the full complement that you want to fly? Savi, this is Jonathan. It's really depend on, to some degree, the mix of aircraft. We are moving CRJs over. But I mean, I think our preference and United's preference should be to fly as many of the 175s as we can. And so we've got sort of two training pipelines going. I would suggest, depending on what you call maximum utilization, for example, if we could fly 11.5 hours, we'd probably be at the outside, call it, it could be as long as 18 months, and that would be conservative. However, in spite of the fact that we'd like to fly as much as possible, sometimes network is just not capable of getting that much time on every airplane. So, if we are around 10 hours, it could be probably 12 months, maybe a little better than that based on the current trends. But I do have to warrant everyone. I mean, these trends are very volatile. And we got a good jump with what we did in terms of the pay rates and some of the programs we put in place. We've got a really strong development program now with Mesa pilot development. But as you know, one of the problems that has been created by this legislation has been the fact that we've had this big attrition throughout the regional industry. And we're just running out of people to upgrade to captain and that is becoming an overwhelming issue where you're going to end up with trying to get people to 1,000 hours and get them to upgrade and not immediately get hired away by another carrier. Now, with the aviate program in place and with our pay structure, we think we will have addressed that to some degree. But there is definitely still a big log jam on the FOs that has been, again, another unforeseen consequence of this ill-conceived and ill-advised legislation. Thanks very operator and thanks for the time everybody this afternoon. So, just a couple of questions, and these are just kind of clarifying questions, Torque. On the investment loss in the quarter, can you just mention what that's related to? I mean there was a big improvement from September to December. And I'm just wondering how I should think about that from December to March? Yes. So Helane, this is one that I have been involved in, so I can answer quickly. If you want to be able to judge whether we're going to have investment gain or loss, you're just going to look at the price of Archer because that's really all it amounts to is just the price of Archer. We are currently long as part of our deal, about 2.2 million shares of Archer. We have more coming down the road. But that really -- and Torque, correct me, but I think that really is the entire mark-to-market is on Archer's stock. Okay. And then my other question is just, again, a clarification question as I -- and it's kind of what Savi asked, I think, just differently. As we think about the wind down of American, how am I thinking about the block hour, the revenue components? Is the increase that we saw from $10 million to $18 million because that's where the United reimbursements are showing up related to the pilots and the decrease from $137 million to $128 million is related to the block hour decline? I mean I know it means to be stupid, but obviously, I'm not getting it. So Helane, yeah, our block hours were down about 41% from the year-over-year piece. And so -- but our revenue was roughly flat. That's because we did get increase in -- for pilot pay from United as well as we had the deferred revenue that we recognized in the quarter. Those are the two big pieces that made the overall revenue about flat with last year. Does that help? So moving forward, we're obviously there's not a lot of deferred revenue to recognize that there'll be some that we'll recognize in other quarters. But moving forward, it will be -- we'll have compensation for the new pilot rates. But in this next quarter, we also -- we still have the American wind down that we aren't getting fully compensated for pilots in that just so you're aware. Hey, everyone, good afternoon. Similar line of questioning to the revenues, but on the cost line, when we take a look at kind of cost per block hour in the quarter, it seems like kind of reset around $1,100 per block hour getting 20% step-up from where you were kind of trending in the back half of last year. Is this a good sort of run rate going forward, any one-timers in that number? I'm just trying to think of a baseline here given the new pilot pay and I know a lot more training costs? Hey, this is Mike Lotz. Hi, Andrew. I think the $1,100 is the only thing that would change down the road from that is that we are on the maintenance side, probably a little lower than we would be on a normal run rate just because of the timing, we hit a peak last year and then we're on the lower side of that. And then offsetting that, I think, is the pilot cost because we have so many pilots in training, and we're hoping that, that -- the attrition kind of levels out and we catch up, then the pilot per block hour would start to come down, certainly not to where it used to because of the pay scale difference. But those are, I think, the two items that we need to continue to look at. Okay. Got it. And then maybe Jonathan, what is the risk that the CRJ flying for United just gets pushed out a little bit just in terms of like who's doing the retrofits for the planes? Is the space already locked in for this type of work? Just curious what you think the risk is there? I think it's a fair question. I mean, it took a little time for us to come up with a LOPA that would work for everyone. We went back and forth a few times, just to try to keep it as simple as possible. But I think we're able to do that. Now my understanding is the conversion -- well, now the -- excuse me, I take that back, that there had been some discussion about changing the seats. But now we position that we always recommended was that we just have them remain at 76 seats. And so there won't be a change there. We're sprucing up the cabins, we're taking out a bunch of it. Brad, why don't you go, because you -- Yeah. I mean, look, we don't expect any real delays or issues with the fleet itself. We've got a good transition plan. The plan is being executed. It involves, as Jonathan said, some refreshing of the cabin in some cases, not extensive, but I'd just call them more refreshes and then exterior paint. We've got all that lined out and scheduled, and I don't expect any delays relative to the fleet. Yeah, I think it's fair to say, and I think understandably that obviously, both American -- excuse me, United and Mesa, we're taking a reasonably cautious approach. We're not going to just throw 38 airplanes into service. I think we're going to just schedule them in overtime and just make sure that everything goes smoothly. And so far, the schedules that we've been receiving have been excellent, have been very productive. I think it's going to keep all of our pilots in place. We do plan on opening up a new base in Denver, which is going to be very popular with our crews. And so we think the transition will go well. And again, the biggest variable, and I hate to keep saying this, but it's just -- it's not going to be equipment, it's not going to be our maintenance capability. It really boils down to pilots and attrition and our ability to continue to put out a good number of pilots through our training program, which we have worked really hard on expanding. And I think we've done a decent job, and we're starting to see some of those results. Oh, yeah. Hey, a good afternoon, everyone. Jonathan, just the 38 CRJ-900s, how do we think about them sort of longer term? Are they more of a stop gap measure once you start to staff up the Embraers that are currently parked? Like if we were to fast forward two or three years from now, is it 38 CRJ-900s or is it maybe a dozen? Is it 20 or is it going to be a core fleet? I'm just sort of thinking about it within the context of some of the restrictions out there within your partners' contracts, et cetera? Yeah. No. Obviously, what will come into play here is the scope restrictions. And just to be clear, I mean, we are well within the scope. We're not going to -- that's not going to be an issue, obviously. But with that, I think the ultimate goal would be to us to operate all 80 of our E-Jets. So from that standpoint, there may not be room for 900s. Now that being said, there are a lot of other operators that may or may not be able to operate the 7060 aircraft that they have. There may be a way to consolidate a lot of the flying on to fewer shelves. So I think that the 900s may go to 70 seats and fill in. So I think the idea, and I feel pretty confident and I would agree on this is we have training capability, and we've got almost 300 pilots flying the 900s. We're not going to just turn around and tell them we don't need them anymore. I'm pretty sure we're on our way to keep everybody fully utilized. It's going to take a while for the industry to recover from this. And so I think there'll be room for those airplanes for a while. And I think for a while, I'm not saying for 10 years, but I would think that we'd be operating the airplanes in two years down the road. I don't think everyone will recover by then, and we'll still have room for those aircraft within the existing scope. Jonathan, on that, on that mark, is it is it still true that the CRJ-900s are potentially the lowest cost 76 or 76 cedars in the market today, that those costs, as I recall, you really had a pretty meaningful advantage there historically, with the new pay rates is that still the case? And what is the differential in cost between maybe the E-175 with 76 seats and the CRJ-900 with 76 seats with the new LOPA? Is it a 10% better advantage on a block hour basis, 20%? Any color on that? Because as I recall, that was one of the unique competitive advantages of that shelf. Yeah. Well, look, the benefit on the 900s is clearly on fuel burn. It's about 8% more fuel effective, right? However, when you look at regional aircraft, and it's just so outsized that you have to take it into account, it really depends on where you are on your engines and what aircraft? I mean, you can normalize your engines, but the fact of the matter is there's probably aircraft out there that will come to an LLP event, which is up to almost $5 million event, and it just will never be done. And so if you take that expense out over the lifetime of the aircraft, that makes whatever aircraft it is going to be very inexpensive. So everything really revolves around engine management and how you look at owning engines or leasing engines. We had been five years ago, when I look back and clearly, given where we are, I don't think anyone would argue that we haven't made mistakes. But the one thing that we did do was make a lot investment in engines. And we just realized that these engines would be strong assets. And we went out and literally started buying every engine, we could get a hold of, use knew it didn't matter. I mean, we had 51 extra engines, and we just sold 30 to United, and we'll net somewhere between $50 million and $60 million net of the debt. And we still have another 21 engines that we own. So, I mean, I think that it really revolves around where you are in the engine cycle. But pound-for-pound, the 900 is definitely a more fuel efficient, faster, lower cost alternatives than Embraer 175. Now, that being said, on a shorter haul flight, it doesn't make as much of a difference. And there's no doubt that the get benefits of the cabin, on the 175 is, obviously is very attractive. And the major carriers have no problems putting 175 into very highly traveled business routes, shuttle markets, for example, that I don't think they would put a CRJ into. So, there is offsetting benefits that newer to the 175 in terms of passenger comfort, acceptance and the satisfaction. And on that just last point, if I could just sneak in one more about capability, as I recall, that at least the CRJ-700, the capability that they had to go into some of the ski destinations, which is obviously a very important market for United. Can the CRJ-900 go into those same ski, you know, the mountain destinations in whether it's Aspen, for example, the ones where I don't think you can fly an E175, and an Aspen fully loaded. I could be wrong on that, too. But the CRJ-900 have that same capability or they just too heavy versus the 700? Well, you're right about the 175. There have been ongoing discussions regarding the 900s in terms of their capability, depending on who you ask, but I think our view here is that in all probability, the 900 would not work in places like Aspen or Telluride. Hey, thanks for the follow-up. I just wanted to kind of come back to that cargo announcement that you made that you have one more aircraft that you'll be flying there. I think the previously was that -- you had three aircraft, but maybe the third was a kind of a backup aircraft. And just if you can just provide an update on, what you think cargo blockers are going to be doing and how that program is progressing? Yes. So on the third aircraft is a 737-400. We haven't been particularly pleased with the aircraft and ongoing conversations with DHL to potentially replace that aircraft, maybe with a newer 800, and we're adding this 800, which I personally feel that it really puts us in a sweet spot with DHL. I was just on the phone with them today, they've been very complimentary about our operation. They actually made a comment about how our people have really worked well with their people. And it's just good to hear that there'll be opportunity. That being said, it's obviously taken a long time, and we've been patient. And given the downturn recently in cargo activity, it's probably going to be a little bit slower than we'd hoped for. But we are going to add the fourth airplane, we'll look to figure out what we're going to do with 708, which is the third 737, which came into service, but that aircraft was in fact flying a full line. So we will now move from three line full lines of flying to four full lines of flying. And Brad correct me if I'm wrong, but they do between like 100 and 120 hours a month, about 100, 120 hours a month in utilization. So you can work the math from that. That's super helpful. And is that so -- is it still kind of a mildly profitable business would you say or is it kind of still you need more scale to really drive profits there? No, we were fortunate that like the other major carriers DHL appreciate the fact that things have been difficult and so we've made the transaction structured so that our feeling is on a run rate basis going forward. We've been at break, no worse than breakeven. And again, we put a lot of money into the operation to start. So, obviously, we have a way to go to recoup our investment. But we now in the 737 business, we have a nice cargo business. And I think that over time, particularly now that we have 800s on certificate, it could be an opportunity for us going forward to grow that business, as cargo recovers, because there's no doubt that things have slowed down right now. It makes sense. And if I might on the European JV, any updates on that? I know, it's been six weeks probably not a lot new there, but just curious on how that's progressing. March or April. And then we looked at place a couple of regional jets out there, and we're talking to a number of carriers about operating those aircraft. I think the feeling that we have is, I mean, it's a very long-term project in that. We think that this could be a platform, for example, for us operate electric aircraft, which we think will be really in high demand in Europe, just given the direction things are going towards sort of environmentally friendly alternatives. And I think that we can continue to find a home for some of the regional jets out there that have been made excess sort of post COVID. And, particularly in the CRJ-900, or in Europe CRJ-1000, it's just a matter of finding the right customer to make that happen. So we continue to plug along, I think that we feel that it's just going to be good to have an operating certificate. And to be frank, I mean, the backstop always was just the fact that we have a certificate is valuable for what we have invested in it, we think we can easily get, frankly, a multiple of that back, if we wanted, if we just were going to sell the certificate. So we've always used -- utilize that method as a backstop. But we have wonderful partners over there, guys who have a tremendous amount of experience in Europe, who really is why we made the investment, because we had so much confidence in them. And I think, over time, we'll be as well positioned to take advantage of opportunities that will develop in Europe, in particularly, given the gaps that have now occurred as a result of so many bankruptcies in the regional business over there. And how it's -- the regional business is much different there than it is here in terms of a lot of small carriers flying multiple pieces of equipment, different types of equipment. I think that our approach will find some opportunity with some of the flag carriers to provide capacity purchase services over the long-term. Okay, well, thank you, everybody. I think, it's fair to say that, we clearly had gone through a rough patch. We had a lot of work to do in terms of putting together multiple agreements all at the same time. We barely mentioned some of the things like the RASPRO agreement, the EDC agreement, obviously -- the Treasury, we made a significant modifications with Treasury, who by the way was very helpful. And now we just have to put it together operationally, we are very focused on pilot production since clearly, that makes a big, big difference. For the last couple of months, we've been on the plus side. In other words, we're putting out more pilots than we're losing. We want to see that number continue to increase. We've added, sims, we've added instructors, we've employed CAE. So I'm hoping, and I think we believe that over time, we'll start to see the benefit of all this, and it will all come together in terms of a much more stable operating platform, and renewed profitability. And also, it would be remiss not to mention the fact that through the wind down, we've been working very closely with American and maintain really good relationship with them. And I think that since we began to wind down, I think we've canceled two flights. We really want to do a good job right to the last day with American. We appreciate their understanding of our situation. And certainly, United is really stepped up and helped us and it's a good thing to know so many people that we have over there, the support that we've gotten from United has been fantastic. And we're on the phone with them literally on the phone every day. And I have to tell you, we've been really appreciative of what they were able to do to help us work through this difficult period. So with that, I'd like to thank everybody for joining us. We continue to work hard, get the company turned around, and we look forward to talking to you next quarter.

EarningCall_128

Welcome to Dynatronics' Second Quarter Fiscal Year 2023 Earnings Call. My name is Jenny and I will be your operator for today's call. As a reminder this conference call is being recorded for replay purposes. Following today's presentation, there will be a question-and-answer session with analysts. At this time, all participants are in a listen-only mode. It is now my pleasure to turn the floor over to your host Mr. John Krier, the company's President, Chief Executive Officer and Chief Financial Officer. John the floor is yours. Before we begin, I will call your attention to our safe harbor statement. I remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the company's most recent filings with the SEC. We caution you not to place undue reliance on forward-looking statements we may make this morning. We undertake no obligation to update or revise forward-looking statements. During our prepared remarks, we will be referring to slides that are available for viewing in the webcast and posted on our Investor Center page at dynatronics.com. On today's call, we will cover the highlights and achievements of the second quarter of fiscal year 2023, as well as provide commentary on the financials. And then we will have the operator open the phone lines for questions from our analysts. Slide 3 highlight a few of our recent accomplishments as we continue our journey to exceed market revenue growth rates and establish a sustainable business that generates consistent profitability. Three key takeaways for our second quarter. I will begin at the highest level to briefly speak to the macroeconomic environment we are seeing. We, like our competitors and other industries, continue to face inflationary pressures, supply chain challenges and inconsistent utilization, all of which work to somewhat dampen our quarterly results. We are happy to report, however, that despite these headwinds, we continued to stabilize and improve our gross margin profile. Our Q2 gross margin was 28.1% or an increase of 8.4% from the prior fiscal year. Though the macroeconomic headwinds prevented us from achieving quarter-over-quarter margin expansion. We expect raw material availability, inflationary pressures and freight volatility to improve throughout calendar 2023 and remain confident in the business outlook and in our differentiated strategy. And we'll maintain our net sales guidance of $45 million to $48 million for fiscal year 2023. And finally, our commercial execution delivered the 7th consecutive quarter of organic revenue growth above the baseline we set in April 2021 and at/or above market growth rates. We are executing with a clean balance sheet, managing our inventory balances to appropriate levels, all while handling the increased demand for our products amidst the backdrop of new product innovations. Moving to slide 4. As a reminder, the full income statement and management discussion and analysis can be found in the 10-Q. I will summarize some of the key financials here. Net sales were $10.9 million for the second quarter of fiscal year 2023. That compares to net sales of $10.5 million in the prior year period, representing an organic growth rate of 3.3%. Gross profit for the quarter was $3.1 million or as I noted earlier, 28.1% of net sales compared to $2.1 million or 19.8% of net sales in the same period the prior year. The increase in gross profit as a percentage of net sales was driven by a combination of net price realization and better overall product mix. While we have seen a slowing of cost increases during Q2 of fiscal year 2023 in both freight and raw materials specifically inbound freight, we remain cautious and have modeled cost pressures to continue for the remainder of calendar 2023. Selling, general and administrative expenses increased $0.4 million or 10.9% to $3.9 million for the quarter ended December 31, 2022 compared to $3.5 million for the quarter ended December 31, 2021. Investments in marketing and marketing programs were the primary drivers of the increase. Net loss for Q2 fiscal year 2023 was $0.8 million. That compares to a net loss of $1.4 million in the same period of fiscal year 2022. Separately, the company completed its reverse stock split on February 1, 2023. And additional details will be provided later in today's presentation. Outstanding shares will increase approximately 75,000 per quarter depending on our share price. The approximately 75,000 shares per quarter is based on a reverse stock split adjusted share price of $2.25 per share. The net cash balance was approximately $0.7 million on December 31, 2022. The same as on June 30, 2022. We reduced our inventory balance to $10.7 million with a reduction of approximately $1.4 million from the balance on June 30, 2022. We will continue to strategically optimize our inventory, while preparing for new product introductions and seasonal growth in our fiscal fourth quarter. Cash generated by operating activities was $0.3 million for the first six months of our fiscal year 2023, which compares to cash used by operating activities of $2.4 million in the same six months of the prior year. This concludes our summary of the financial and operating results. Turning to slide 5. We will continue to provide guidance on metrics that we are confident with. And we are affirming our expectation that net sales in fiscal year 2023 be in the range of $45 million to $48 million. The midpoint of this sales guidance represents a 5% organic growth rate relative to the $44.3 million annual net sales in fiscal year 2022. The company expects the distribution of net sales in fiscal year 2023 across the quarters to align with historical trends. Highest in the first quarter, lower in the second and third quarters with higher growth again in the fourth quarter. Our second quarter continued this historical seasonal trend. Moving to slide 6. As we have stated in earlier calls, gross margin expansion remains a key focus. Gross margin increased to 28.1% in Q2 an 8.4% increase from the prior-year gross margin of 19.8%. Sequentially, the decrease in gross margin of 2.1% from Q1 reflects seasonality coupled with macroeconomic supply chain challenges. As a company, we are executing on a six-point gross margin plan. Number one, price rationalization, an example is our tiered pricing strategy which rewards customer loyalty. This strategy is being tested with recent competitive acquisitions in our rehabilitation market. However, our dealer network has remained strongly aligned to our strategy. We remain committed to rewarding those dealers who demonstrate loyalty to our brands. And we remain 100% a dealer-centric organization in our rehabilitation product categories. Number two, rationalized product. In addition to the major shift in April 2021, we routinely execute on streamlining our product offering. Internally, we simply say, we must grow over the disruption. This is routine product lifecycle maintenance. Our disciplined execution in this area is a key to longer-term margin expansion. Number three new product introductions. In the past quarter, we exceeded one million in Mammoth table sales orders after less than a year on the market. The remaining three opportunities in our six-point plan are number four manufacturing efficiencies; number five, revenue scale; and number six, mergers and acquisitions. We continue to explore all options to drive these three additional elements of our plan. My team and I are committed to execute our strategy and move us from the current approximate 30% year-to-date gross margin performance to our future potential based on the six-point plan. Slide 7 reaffirms Dynatronics' fiscal year 2023 guidance details. Net Sales are expected to be in the range of $45 million to $48 million. The midpoint of this range $46.5 million represent 5% organic revenue growth. Given the persistent inflationary pressure, macroeconomic impacts and supply chain challenges, we are deferring providing gross margin guidance. We do expect fiscal year 2023 to continue the expansion towards our longer-term target of 40%. Year-to-date, we have improved gross margin by 4.1%. We anticipate selling, general and administrative expenses of 30% to 35% of net sales in the fiscal year 2023. As we gain revenue scale, we expect to continually leverage our SG&A cost base. Year-to-date, selling, general and administrative expenses are 34.8% of net sales. And we expect this to slightly improve and fall firmly within the range we anticipate. We understand what it takes to build a scalable platform to grow our customer and sales base to be a much larger company in our markets, drive margin expansion and consistently deliver strong cash flow from operations to create value for shareholders. We will continue to focus on further improving all our financial metrics. This guidance is based on our current operations and it's subject to the risk factors and other forward-looking statements and uncertainties contained in this presentation and in our filings with the SEC. Turning to Slide 9. The Dynatronics differentiated growth platform targets initiatives in each of these strategic priorities. Momentum has been building on our gross margin expansion and as we move into Q3 and Q4 of our fiscal 2023. While we acknowledge the year-over-year improvement, we are not satisfied with our progress. New, targeted and innovative product releases are the third pillar of our gross margin improvement plan. And we plan to continue to improve our performance in this area. Let's move to Slide 9. Healthy med tech companies, depending on industry or subspecialty, routinely drive 15% to 20% of revenue from products released in the past three years. The best companies often raise this bar to 30%-plus of net sales. The Dynatronics team has now reached approximately 6% of revenue coming from products released in the past three years. And this was launched from a standing start at the end of calendar 2020. I'm incredibly proud of our marketing, engineering, supply chain and operations teams for helping initiate this growth culture. And there's more to come. Please turn to Slide 10 on winning market share. We strive to be an organization that consistently demonstrates execution to its plan. Not just words but solid execution to simple principles. We win market share through number one, superior commercial execution. Make the dealers' and customers' lives as easy as possible and make it simpler to do business with us. And two, favorable mix shift to product innovations. We remain focused on driving improvement in our dealer and end-customer experience, offering volume-tiered pricing that rewards customer loyalty and delivering product innovations that give dealers reasons to continue moving their end-customers to Dynatronics. Dynatronics' management team is focused on methodical execution and continually seeking a strong, differentiated understanding of the commercial landscape in the product categories we compete in. Before I close with the investment highlights of Dynatronics, I want to share additional details of the recently completed reverse stock split as shown on Slide 11. As background, our shareholders authorized the Board of Directors to affect this split to ensure Nasdaq compliance with the $1 minimum bid requirement. The reverse stock split was effective at 5 p.m. Eastern Time on Wednesday February 1, 2023. The 1-for-5 split was authorized and approved at the annual shareholder meeting on November 17, 2022. Key reverse stock split execution points. Outstanding common shares were reduced from approximately 19.6 million shares to approximately 3.9 million shares. Preferred shares remain unchanged. However, the conversion feature was reduced in the same 1-for-5 ratio from 335,1000 shares to 670,200 shares. Additional comparative details are available in the appendix of today's presentation. Slide 12 shows the investment highlights for Dynatronics. The markets we serve rehabilitation and bracing have stable growth profiles. Our sales and share growth have been driven by customer and dealer reaction to our business transformation. Sales have exceeded the market or our baseline expectation for seven consecutive quarters now. We target improvement in gross margin in fiscal year 2023 despite the macroeconomic environment. We have approximately $0.7 million of cash and $10.7 million of inventory on the balance sheet at the end of December with no debt. Dynatronics has not borrowed against its asset base of inventory or accounts receivable since July 2020 representing 10 consecutive quarters of no debt. We are demonstrating progress against each of our strategic goals with more to come. The investment community is actively listening to our story and we will continue to share our progress and update as we move through our fiscal year 2023. Thank you John. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Your first question is coming from Brooks O'Neil of Lake Street Capital. Brooks your line is live. Thank you. Good morning everyone. John I'm hoping you could just tell us a little bit about how you sense the end-customer demand and operating environment is and whether you see a distressed end-customer environment or whether you're beginning to see some improvement out there? Good morning Brooks. I would say what we're seeing more than anything is just inconsistent utilization due to the factors that others are reporting such as staffing levels and such. I think we're not seeing maybe this crazy growth or this crazy decline just inconsistent utilization and a stable market. We haven't seen anything different than that. I think that's consistent with the med tech space that we've all been around for quite some time. Sure. Secondly, I don't know if you feel in a position or want to talk at all about specifics related to pending or future new products. Can you give us any color at all in terms of areas of interest and opportunity that you see, or any specifics will be helpful. Absolutely. The first thing I would say is I'm incredibly proud of our team for going from 0% of revenue of new product sales in three years to 6% over really the last call it 24 months 18 to 24 months with nine new releases. So, think about that to get a product a med tech product up and through development and approved and commercialized in that period of time. And at 6% on a $46.5 million projected midpoint of a range that's $3 million of new revenue in a very short period of time. So, that is a key part of not only our organic revenue plan but also our gross margin plan. So, what I would tell you is this we're going to have a consistent cadence going forward. I suspect that the next releases will happen more in the turn of Q4. And so the benefit of those is not going to be felt really until our next fiscal year. But there's a lot of factors that go into those releases. As it relates to the categories you see when you look at our slide on page nine and you see some of our products the majority of the releases so far have been in our rehabilitation space. And it's one of the reasons when you look at the rehabilitation product category revenue you can see this significant growth. I mean that category alone was up 17% in Q2. And so you can see that new product releases were a very important part of that. We need to expand it. We need to also innovate in our other product categories such as bracing and supports to match that, but you'll see it in both categories and you're going to see it towards the tail end of this fiscal year and again growing into next year. Great. Let me just ask one more. Obviously SG&A was up a little bit. I assume that's just the tight labor market and whatnot. But would you anticipate that staying elevated during the balance of the fiscal year? Is there anything you can do to kind of tamp that down a little bit? That investment in SG&A was very specific in marketing, $400,000 in marketing and marketing programs. And that's consistent with our new product introductions and our expectations of new product introductions coming forward. So I would say, if you look at it to the first six months of the fiscal year, we're running 34.8% of net sales. That's at the higher end of our range of 30% to 35%. So you can expect that to slightly come down in the upcoming quarters and land squarely in the midpoint of our range by the end of the year. Just a couple of questions from our end. So, it sounds like, you're not going to provide any specific guidance on the margin front. However, based on your slide six, it looks like you anticipate that that will make some further increases in the back half of the year from 30.2% in the first quarter and 28.1% in the second quarter. Is that an accurate assessment? That's an accurate assessment. I can give a little bit of color too on the Q1 versus Q2. So if you look at Q1, in an ideal world, we'd be able to continue to show sequential expansion, but the macroeconomic headwinds kept us back. Typically, when we look back historically, say fiscal 2018, 2019, '20, where we had the same collection of assets, pre-COVID impact, our Q2 historically dropped about two percentage points in gross margin, almost exactly what it did here. Except that we're operating in a much different macroeconomic environment of freight and labor. So it means that we are expanding and improving the underlying core operations, but we couldn't outrun the headwinds. So I think that that trend will continue. And it's one of the reasons we're deferring guidance. But we'll expect it to come back a little bit in Q4 as our seasonality kicks in. Perfect. Got it. And then secondly for us, could you comment a little bit, I mean on one hand nice job of bringing the inventory levels down to $10.75 million for the quarter. On the other hand, I guess, could you talk about current inventory and the freshness of inventory and if we would anticipate that that would continue to decrease? Is that inventory level being filled with new products or higher margins with kind of the more historic products still sitting there at lower margins, or could you talk about the inventory a little bit please? Absolutely. Our expectation would be that, it come down further. We are targeting some additional strategic reductions. As I mentioned before, finishing last fiscal year at $12.1 million in inventory is too high, $6.5 million the year before too low. And so the answer is somewhere in between. The wildcard for us is, we're adding new products related to our product releases. So we're building inventory in advance of those releases. You're seeing that with the releases that you see contained in the materials on slide nine today, while we move out in end-of-life certain other products to improve our gross margin mix. So long story short, I expect it to come down. I can't tell you exactly where it's going to land, because it's going to really depend on, how quickly we can get new product launches out, but it's a key driver of just running a fiscally healthy company is to use and have a good inventory level. Thank you, very much. There are no further questions in the queue. I would now like to turn the floor back over to John for any closing comments. Thank you, operator. And thank you for your interest in Dynatronics. We are actively sharing our story with the investment community as we move forward in our markets. We hope to meet with you at upcoming investor events. Notable upcoming events include the Canaccord Musculoskeletal Conference on March 7, 2023, Roth Investor Conference, March 12 through the 14, 2023, and the Virtual Investor Summit on March 29, 2023. If you have any further questions, please direct them to ir@dynatronics.com. Have a great day. And operator you may end the call. Thank you, John. This does conclude today's conference call and you may disconnect your phone lines at this time. Thank you for your participation.

EarningCall_129

Good afternoon and thank you for standing by. Welcome to Forrester's Fourth Quarter and Full Year 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. Thank you, and hello, everyone. Thanks for joining today's call. Earlier this afternoon, we issued our press release for the fourth quarter and full year 2022. If you need a copy, you can find one on our website in the Investors section. Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, believes, anticipates, intends, plans, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on the company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission and the company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, further events, or otherwise. Lastly, consistent with our previous calls, today we will be discussing our performance on an adjusted basis, which excludes items affecting comparability. While reporting on an adjusted basis is not in accordance with GAAP, we believe that reporting numbers on this adjusted basis provides a meaningful comparison and an appropriate basis for our discussion. You can find a detailed list of items excluded from these adjusted results in our press release. Thanks, Tyson. And welcome to Forrester's fourth quarter and full year 2022 investor call. Following my update, Chris Finn, Forrester's CFO will give a financial review of the quarter and full year. At the end of the call, I'll ask Nate Swan, Forrester's new Chief Sales Officer to give a few remarks. We will then move on to the Q&A portion of the call joined by Carrie Johnson, our Chief Product Officer. In the fourth quarter 2022, Forrester's revenue increased 2% with adjusted operating margin at 9.4% and EPS at $0.45. Total CV increased 3% in the fourth quarter, down 4 points from Q3. Wallet retention was 94%. For the full year revenue increased 9%, adjusted operating margin was 13%, and EPS grew 18%. These results were driven by healthy bookings in the first half of 2022, as well as continued close management of our cost structure in the second half of the year. 2022 was a tale of two cities. In the first half of the year the company was focused on hiring employees as we look to expand contract value at rates aligned with our fast 2021 pace. At mid-year, we recognized the three factors were impacting our progress. One, funding and budget pressure on our smaller technology clients. Two, the impact of inflation, geopolitical uncertainty, and the turbulent economy. And three, the complexity of transitioning our clients out of legacy research products and into our new platform Forrester Decisions. While we had hired aggressively and built new systems to enable the company to sustain double-digit CV growth, these moves were not enough to enable us to outrun the three intervening factors. Subsequently, we did not achieve our bookings plans in the second half of the year, and this impacted CV growth, deferred revenue, wallet retention, and ultimately revenue growth. That said, we did make progress in parts of the business that will be important drivers of growth beyond 2022, specifically Forrester Decisions. As you all know, Forrester Decisions was launched in 2021 as our power research platform integrating Forrester and SiriusDecisions Research in one offering. It delivers vision research, strategy research, and operational research to over a dozen different executive personas across technology, marketing, sales, product, customer experience, and digital. To be clear, Forrester Decisions is the future of the company. In 2022, we achieved our goal of moving approximately one-third of our CV to Forrester Decisions. While our overall research retained at 74%, Forrester Decisions renewed in 2022 at 89%. Client engagement is considerably higher with Forrester Decisions, on average Forrester Decisions users visit our site 50% more than users of our legacy research. And finally, clients enrich Forrester Decisions at significantly higher rates than our legacy products. In Q4, the platform had 101% wallet retention, as compared to total wallet retention of 94%. In our Customer Experience Index, Forrester Decisions is the top-performing Forrester product, and here are a few client testimonials. From the Chief Revenue Officer of a large tech company, organizations such as ours tend to have a variety of priorities across leadership. The Forrester team provides a North Star for everyone and shows us where change is needed. From an enterprise architecture, a large financial services company, in the face of budget cuts, I chose Forrester, because I found them more biased, more engaging, enable to provide insights I can act on. I double down on Forrester to better my ROI. And finally from the Chief Enterprise Architect at a workforce management services company, our sister company is using Forrester Decisions for a strategic initiative to enter new industries, worth hundreds of billions of dollars. Forrester is definitely a major player in our success by providing market analysis, frameworks for organizations, tech recommendations, and helping us avoid the wrong sub-segments. Forrester Decisions uniquely aligns technology and business leaders to accelerate growth. As examples, we closed a number of substantial deals in Q4, including a $760,000 contract with a large European bank, spending both technology and marketing services within Forrester Decisions. We also closed a multi-year $850,000 deal with a personal care company, encompassing our technology executive, technology architecture and delivery, security and risk, and digital business and strategy services. In addition to Forrester Decisions, 2022 was a successful year for our events business. As COVID restrictions were lifted, we hosted 11 events across the course of the year with over 5,300 paid attendees, 850 of those being C-level executives. All of these events were hosted in-person via our digital platform, enabling us to reach a wider more global audience. In the fourth quarter, we hosted five events with over 1,500 paid attendees. Our events business grew 139% in 2022. Let me turn now to our outlook and thoughts on 2023. As Chris will outline in a few moments, we anticipate that 2023 like 2022 will be a tale of two halves. We expect pressure on our key metrics in the first half, driving declines on both the top and bottom lines, before returning to growth in the second half of the year. For the full year, we expect slight declines on our top and bottom lines. Now, as I've outlined on previous calls, we are engaged in building a contract value growth engine. This engine expands CV which grows cash flow, which we then invest in product, sales and acquisitions. Through those investments, we further increased CV and the model propels the company forward at double-digit growth rates. Accordingly, we will pursue three initiatives in 2023, all pointed at driving CV growth. We will focus on improving and enhancing Forrester Decisions as the year progresses. This will include the creation of deeper research on how executives across customer-facing functions like marketing, customer experience, and digital can all align. Companies that achieve alignment grow revenue 2.4 times faster and profit two times faster than non-aligned organizations. Our second initiative is to increase the effectiveness of our sales force. We are entering 2023 with 436 salespeople, 89% fully ramped, and these are some of the highest levels for both in the history of the company. Nate Swan, our newly hired Chief Sales Officer is focused on three priorities. Selling higher in our client organizations, cross-selling Forrester Decisions into new buying centers, and expanding our new business team. We are very happy to have Nate leading sales and he is already executing his plan to create a high-performance selling team. Nate brings decades of sales experience in the research industry, with deep knowledge of building data-driven, repeatable, scalable, selling motions. And I'll let Nate introduce himself in a few minutes. Our third initiative is to continue to optimize our consulting and events businesses to be more potent drivers of CV. Much of this work will center on ensuring that our consulting and events are augmenting and stimulating new research contracts. We are laser-focused on these three initiatives. By year-end, we anticipate that approximately two-thirds of our CV will be transitioned to the new product. As we progress through the year, we will provide updates on our client migration. In summary, while 2022 was not the year that anyone planned for, we remain resolute in our mission of transitioning our clients to Forrester Decisions, the platform which will enable the company to consistently grow contract value at double-digit rates. We remain a highly cash-generative company with a healthy balance sheet, over 2,700 clients including nearly half of the Fortune 500, and a trusted global brand. The business world remains highly dynamic and when you overlay technology into that world, smart companies need research to understand, to compete, to grow, and to differentiate, that is the long-standing and long-term megatrend that fuels our business model and drives demand in our $78 billion TAM or total available market. As George discussed, our fourth quarter results were mixed. We were in line with our guide on the topline, while we exceeded our guidance for adjusted operating margins and EPS. At the same time, we continue to see a few of our key metrics decline compared to the previous quarter. Before getting into our detailed fourth quarter and full year results for 2022, I'd like to take a step back and discuss a few of the important decisions we made over the course of the past year. As we've talked about on our recent calls, we along with the broader market we're faced with a lot of uncertainty, global inflation, war in Europe, FX headwinds, lingering impacts from COVID, and the possibility of a recession in the U.S. Unfortunately, most of these headwinds have not abated. Fortunately, though, we have taken actions to weather what's ahead and manage our P&L, and drive CV growth as we exit 2023. To this end, there are two specific areas I will highlight, our cost management and the accelerated transition to Forrester Decisions. Regarding cost management, as George noted, we began to tightly manage our cost structure going into the second half of the year. This culminated in a difficult decision in early 2023 to reduce approximately 4% of our workforce. This along with ongoing prudent management across our cost base allows us to remain agile for the year we see ahead. Further, we made the decision in mid-2022 to accelerate our CV transition to our new research platform, Forrester Decisions, and announced the sunsetting of our remaining legacy products. While this has created some churn within our smaller clients, the decision to pivot more quickly on the migration efforts have begun to pay off. I'm happy to report that we exited the fourth quarter with approximately one-third of our CV on the Forrester Decisions platform representing over $113 million in contribution. Further, client and wallet retention within the Forrester Decisions platform were both strong, which I'll highlight later in my comments. Given the metrics, we exited 2022 with combined with the strong client acceptance of this new platform, we have confidence in our goal of converting approximately two-thirds of CV into Forrester Decisions by year-end 2023. We still have work to do, but by managing our cost and driving the transition to Forrester Decisions, we are building a strong base on which we can grow in the years ahead. Said another way, we continue to manage what is within our control and at the same time create a foundation of the business that can navigate the uncertainty in the market over the next few quarters. I will provide additional details when I discuss guidance in a moment, but let me now turn to our results for the fourth quarter and full year 2022. As you look at the fourth quarter, as anticipated, we continue to see our key metrics decline. Specifically, CV growth was 3% in the fourth quarter, which was down from 7% growth in the prior quarter. In addition, overall wallet retention was 94% and client retention was 74%, down 3 point to 1 point respectively from the prior quarter. While we're not happy with these numbers as we expressed in our third quarter call, they were not unexpected. The bright spot here though is within the Forrester Decisions platform, where these metrics were significantly higher. Specifically, wallet retention for Forrester Decisions in the fourth quarter was 101%, 7 points higher than the total portfolio number and client retention for Forrester Decisions in the fourth quarter was 89%, 15 points higher than the total portfolio number. As we continue to migrate our legacy clients and drive additional cross-sell and up-sell opportunities into the Forrester Decisions base along with new acquisition sales in the platform, we expect our metrics to improve as Forrester Decisions continues to make up a larger percentage of the portfolio. In terms of sales headcount through the fourth quarter of 2022, we were up 11% versus the previous year with a record number of quota carriers going into the calendar year. As our sales force continues to gain experience selling Forrester Decisions, we expect productivity to accelerate in the back half of the year. This coupled with the success of Forrester Decisions since our launch, as evidenced by the strong metrics we reported today, allowing new sales leadership is a large part of what gives us confidence in our ability to drive future growth. Moving now to the P&L. As previously mentioned, we delivered CV growth of 3% in the fourth quarter. This combined with a decline in consulting growth for the period resulted in overall revenue growth in Q4 of 2%. For the full year, we delivered 9% revenue growth, which was fueled in part by strong CV growth in 2021 and a rebound during 2022 in our Events business, due to the hybrid model we continue to execute. Specifically for the total company, we generated $136.9 million of revenue in the fourth quarter compared to $133.7 million in the prior year period. For the full year, revenue was $537.8 million compared to $494.3 million in 2021. These results include an approximately one point headwind from FX in both the fourth quarter and for the full year. Research revenues increased 3% in the fourth quarter of 2022 and 9% for the full year. As expected, client retention and wallet retention continued to decline quarter-over-quarter as previously noted. Regarding these declines, which we continue to expect to the first half of 2023, there are three specific areas to call out. One, our sales headcount continues to build. As we mentioned on our last call, we had our highest number of ramping reps in the second half of 2022. The majority of these reps are now fully ramped, which we expect to drive growth as the year unfolds. Two, we continue to transition clients to Forrester Decisions, and this creates some churn in our legacy base. As we've discussed before, the clients we transition to the new platform spend more with us. Three, macroeconomic issues continue to remain a headwind as they are for many other companies. Turning now to our Consulting business, which posted revenues of $37.5 million in the fourth quarter of 2022 and $152.6 million for the full year, representing declines of 4% and 2% respectively versus the prior year periods. As we've stated before, these declines continued to be driven by a combination of our analysts shifting a portion of their focus to delivering on our CV business and the overall effects of the macroeconomic environment. And finally, our events business grew 43% in the fourth quarter to $7.2 million. For the full year, the segment was up nearly 140% to $30.7 million, driven by strong demand from attendees and sponsors, and our continued hybrid approach to in-person events. As George noted, we held 11 events with over 5,300 paid attendees. We expect to host similarly sized events in 2023, but I acknowledge there may be some growth challenges based on potential reductions in corporate-related travel budgets, due to the ongoing macroeconomic environment. Continuing down our P&L on an adjusted basis, operating expenses for the fourth quarter increased by 7%, largely driven by higher headcount costs. Specifically on headcount, for the fourth quarter, we were up 14% compared to the same period in 2021. On a full year basis, operating expenses increased 9%, also largely driven by headcount. These headcount increases were materially related to our investments in our go-to-market engine and research, as well as infrastructure projects to drive efficiencies in the business. These are now largely behind us. Operating income in the fourth quarter decreased by 28% to $12.9 million or 9.4% of revenue in the current quarter compared to $17.8 million or 13.3% of revenue in the fourth quarter of 2021. On a full year basis, operating income increased by 9% to $69.7 million or 13% of revenue, compared with $64.2 million or 13% of revenue in 2021. Interest expense for the fourth quarter of 2022 was $0.7 million as compared to $1 million in the same period of 2021. On a full year basis, interest expense was $2.5 million compared to $4.2 million in 2021. This reduction was driven by lower outstanding debt. Finally, net income decreased 25% to $8.5 million in the fourth quarter of 2022, compared to $11.3 million in the previous year's period. EPS decreased 24% in the fourth quarter to $0.45 compared to $0.59 in the year ago quarter. On a full year basis, net income increased 17% to $47.2 million and EPS increased 18% to $2.46. Looking at our capital structure, year-to-date cash flow from operating activities reached $39.4 million and capital expenditures were $5.7 million, resulting in $123.3 million of cash and investments on hand as we exited the fourth quarter. There were no debt payments or stock buybacks this quarter, leaving us with $50 million of outstanding debt and approximately $75 million of our stock repurchase authorization intact. Let me now walk you through how we expect 2023 to unfold. While the macroeconomic outlook remains challenging, we have incorporated the following assumptions into the guidance we're providing today. Specifically, one, uncertainty in the tech sector will continue to affect us, while we have a great sales team in place and a new leadership that we're confident in, and believe we can manage through what is ahead, the turnover in the technology industry remains a challenge. Two, we continue to anticipate macro headwinds, including the likelihood of recession in the first half with some improvement in the back half of the year, going into 2024. Three, as we continue to transition clients to Forrester Decisions and sunset our legacy products, we expect ongoing churn with smaller clients. This will cause some of our key metrics such as client and wallet retention to remain under pressure over the next quarter or two. But we fully expect these to rebound later this year as we continue to grow our Forrester Decisions platform. Putting all this together, we expect our CV growth to continue to decline through the first half of the year and begin to rebound in the second half of the year to mid-to-high single-digits as we progress through our Forrester Decisions transition. As such revenue growth should follow a similar trajectory, down in the first half of the year and returning to low single-digit growth in the back half. Finally, as a reminder from our third quarter call, starting this year we will only provide guidance on a full year basis, where we see appropriate we will give color around the timing of various metrics over the course of the year, but at the end of the day, we're managing the business for the long term. And we believe that providing guidance on a yearly basis aligns with that philosophy. We'll continue to provide an update on our annual outlook during our quarterly calls. Turning to guidance, starting with the topline, for 2023, we expect revenue to be $518 million to $538 million or down 4% to flat growth versus 2022. This guidance assumes a low single-digit decline to flat growth over the course of the year in our research business, with ramping in the back half of the year, as well as modest growth in events. We expect consulting to be down slightly for the year, given the reasons I outlined previously. Given the actions we've taken to control costs, we would expect our operating margins to be in the range of 12% to 13% for 2023. Interest expense is expected to be $2.5 million for the year, and we are guiding to a full year tax rate of approximately 29%. Taking all this into account, we would expect EPS to be in the range of $2.25 to $2.45 for the full year. We have incorporated an appropriate level of caution into our outlook, ensuring we have taken all factors whether external or internal into account. To the extent of the tech environment can rebound from where it is, and the macro environment plays out less severe than currently forecasted there could be upside to this guidance. In summary, we continue to believe that 2023 will be another challenging year. But as we demonstrated in 2022, we have confidence in the team's ability to navigate these challenges. While we anticipate the year to be mixed with a slow start and then growth ramping in the back half, we have the right strategy and team in place to face these challenges. We continue to be excited about the ongoing migration of Forrester Decisions and the value brings to our clients, and the growth that will bring to the company in the long-term. To summarize today's comments, the tech slowdown, economic conditions, and the transition to our new research platform dampened our growth in 2022. But we remain laser-focused on rolling on Forrester Decisions, which is fast growing, renewing at high rates, with high client engagement. We expect 2023 to start slowly, with improving performance in the second half of the year. Now before we head off to Q&A, I wanted to turn the call over to Nate Swan, our new Chief Sales Officer. Nate? I'd like to spend a few moments talking about what attracted me to Forrester, as well as provide a high level view of my philosophy and approach that I'm bringing to the sales organization. As both George and Chris have outlined, the launch of Forrester Decisions in 2021 has proven to be a great success. This platform is still in the early innings and I look forward to leading the sales force and driving this product to the next level. But it wasn't just the product portfolio that attracted me to Forrester, it was the people. Forrester has strong leadership team in place, as well as employees across the organization who are motivated and capable of delivering growth. Regarding my philosophy, I firmly believe that in order to be a successful growth company, we need to ensure we have high performing sales culture with coaching and collaboration to drive better outcomes for our customers, the business and each other. Creating a culture of high performance happens by having a clear customer-obsessed go-to-market strategy, which includes enablement, coaching, and development plans. Teaching leaders have to be great coaches with laser-focused on developing and helping them win. Ensuring our sales leaders are focused on controllables, specifically the inputs that are going to make our reps successful with the goal to always achieve and beat plan. Enabling our salesforce to call high in organizations and focus on the outcomes of executives and the companies they represent, and giving opportunities to everyone in the sales organization to grow their careers where they want to go, driving the biggest impact for themselves and the company. If they aren't successful, we won't be successful. The team at Forrester has shown that we have a unique value proposition and go-to-market plan that has positive results for our clients. That unique value proposition has been incredible total addressable market, giving us no shortage of opportunity. As I see it, it's about understanding why we're successful and replicating those best practices around the business until they become standard practices that scale. In summary, Forrester's value to positively impact our customer is unique. We have untapped market opportunities to bring in new customers, as well as the ability to upsell and cross-sell within our current clients. While there is work to do, the future at Forrester is bright. I'm so happy to join all Forresterites on this path forward. [Operator Instructions] And I show our first question comes from the line of Andrew Nicholas from William Blair. Please go ahead. Hi, good afternoon. First question I wanted to ask was on how 2022 played out. George, I think you mentioned twice the three factors that are impacting progress between funding pressure on smaller tech clients, the economy, inflation, and then the transition onto the FD platform, I'm just kind of wondering relative to where we stood six months ago, which of those three buckets have deteriorated if any or if those factors are largely consistent with kind of how you expected them to play out, just trying to get a sense for what ultimately unfolded over the past couple of quarters versus maybe what you expected six months ago? So, I think that -- look, nobody is paying for anything in 2022, it was a very unexpected year. It's [indiscernible] we get deeper into the fourth quarter, Europe is actually beginning to improve. So I think the economic signals remain mixed but maybe a little more positive as the year-ended. I think there's -- I think tech was degrading faster of those three factors in Q3 and Q4, we saw that in the layoffs. Got it. And then, in terms of capital allocation, I apologize if I missed it in the prepared remarks, but just kind of wondering how you're viewing that for '23, looks like you still have about $50 million of debt, not sure if you have any plans to pay that down at any point, if you have prioritization of share repurchases or just kind of an update there would be great? Thank you. Yes, sure. I'll take that one. So, we generated a lot of cash, as you know, currently we have over $120 million of cash and investments on hand. Our priorities remain the same going forward from a capital allocation standpoint. One is reinvesting in the business; two, being opportunistic and looking at value-creating acquisitions as we move forward; and then the third is paying down debt. We're going to be a little bit more opportunistic about share buybacks, not really in the plan at this juncture, but really our priorities kind of remain the same. And to the end of -- around value-creation acquisitions, we just hired a new Head of Corporate Development, that's an area that we're going to definitely search or look harder at as we go forward certainly with values being where they are in the sector. And we do have $50 million of debt outstanding as you noted and approximately $75 million share buyback authorization intact as we go forward here. Hi, thank you for taking my questions. I'm just curious for -- you mentioned a couple of drivers for the year to drive the second half there, but you didn't mention anything about new products or offerings, what can we expect in terms of that and how does that play into your forecast for the year? Sure. Hi, it's Carrie. As George said and we heard in the comments, Forrester Decisions is still our venue product offering. We're focusing all Forrester innovation in that platform, in the research and the product itself, and the value that we're driving for customers, expected to not launch many new products as we look to primarily migrate our existing customer base to Forrester Decisions. Chris mentioned that would be two-thirds by the end of the year and focusing all of our efforts there. Remember one of our major priority is enhancing that product. So we expect to put two or three very big new features into that product every year. Okay, thank you. And I understand that you are cutting some of your workforce, but how does that help the sales team, are you still hiring and expanding there or are you just taking a step now and focusing on what you have? Yes, so from a sales force perspective, we are definitely focused on hiring the sales [liquidation]. We were up approximately 11% last year, so a double-digit growth in the salesforce as George noted. We've got a record number of quota-carrying reps coming into this year, and our plan is to expand quite double-digits more like mid-single digit rates and we're really looking very hard at productivity enhancements as we go through the year, in-line with our planned growth. So the question -- it didn't really - under the reduction in force really did not impact the quota-carrying adjust not at all. Yes, thanks for taking my questions. George, could you give us more color on the complexities involved in the transitions. I suppose, some things that had happened that were unexpected. Any color would help? Yes. We decided when we launched Forrester Decisions that we would continue likely products on for -- going to end up in three years. And the complexity is primarily, as I mentioned in my remarks that, this complexity was really around the smaller tech vendors, and their -- they were not as prone to make the transition as we had predicted and put in our models. So it's really our intention that you have to appreciate the problems in the tech industry generally, as in terms of funding and also venture money because much tighter is the Europe, as the Europe pushed onwards. So that's my answer, Carrie even give you another answer that's the primary complexity that we saw in 2022. You have answer here? No, I had the same answer. Although the goal and the design of Forrester Decisions needs to go a bit higher in both our target audience and target customer base, in terms of places where we would have the opportunity to sell the new products, and also cross-sell and enrich on that existing products. So we did expect some long vendor churn as a result of that, but I think the macroeconomic conditions contributed more to some of the complexity than we expected. I think the good news is that many of the large tech vendors are more than 50% migrated to Forrester Decisions and those are actually very complex conversations with the -- you can imagine the Microsoft's of the world, who have been buying from us, using our research in a certain way and now Forrester Decisions is a little bit, 50-degree pivot there. But the good news on that those conversations are going well, and we're -- again we're 50% through those. And when you -- I assume you're trying to attract new clients obviously with the FD approach, so to speak, so, are you seeing -- did you hit your expectations in the quarter of signing up new FD clients, what does that look like? Sure. It's Carrie. We did, I mean, as you suspect the majority of Forrester Decisions sales do come from our existing base, that's by design, but we're very pleased with our new business results over half of our new business bookings in the year or to the new platform. Very pleased with that progress as well. So we're happy with both new business and the renewable side of it. Okay. And I'd add one thing too Vince is that, remember from the sunsetting discussions that we've had this year, we are only selling new FD. So there no longer new sales of legacy business. So we have a laser focus on new business sectors are for sure. Yes. And this maybe too much information for you but -- remember that Forrester Decisions -- I'll just look at large tech here for a moment. We are selling not -- we are selling new products into those companies primarily to our CMOs, CLOs, having customer experience. So we're attracting -- this is our, of course, our largest vertical. But again of companies, we're attracting a whole set of new executives so that's helping our business deal as well. Thank you. I'm showing no further questions in the queue at this time, I'd like to turn the call back over to management for closing remarks. Thank you everyone for joining us this evening. The IR team, Mr. Tyson will be around this evening and tomorrow and the weeks ahead for any follow-up questions. Please feel free to reach out to us. Thank you for joining.

EarningCall_130

Good day and thank you for standing by. Welcome to the Shutterstock Inc. Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Suh, VP, Investor Relations and Corporate Development. Please go ahead. Thanks Mitchell. Good morning, everyone and thank you for joining us for Shutterstock’s fourth quarter 2022 earnings call. Joining us today is Paul Hennessy, Shutterstock’s Chief Executive Officer; and Jarrod Yahes, Shutterstock’s Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, the long-term effects of investments in our business, the future success and financial impact of new and existing product offerings, our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations, our future growth, margins and profitability, our long-term strategy and our performance targets including 2022 guidance. Actual results or trends could differ materially from our forecast. For more information, please refer to today’s press release on the reports we file with the SEC from time-to-time, including the risk factors discussed in our Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on this call. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, revenue growth, including by distribution channel on a constant currency basis, billings and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included in our press release and in our 10-Q. Thanks Chris, and good morning everyone. Thank you for joining us today. Today, we'll be discussing Shutterstock's 2022 results and 2023 outlook. We'd also like to provide an update on some of the exciting developments in our end-to-end creative platform across both our E-commerce and enterprise channels. Shutterstock closed out 2022 with $828 million in revenue, and $218 million in EBITDA, well ahead of our expectations and guidance. Overall, despite growth in North America and rest of world, we saw weakness in Europe, where growth was negative 4% for the year. This weakness in Europe was most evident in our E-commerce channel. Overall, our E-commerce channel was up 2% in 2022, with revenue growth in North America offset by a decline in Europe and rest of world. Meanwhile, our enterprise channel grew 15% in 2022, a second consecutive year of double-digit growth. This growth reflects continued momentum driven by our multi-asset and multi-touchpoint relationships with large enterprises across North America, Europe and rest of world, as well as continued innovation in our product offerings. Looking ahead to 2023, our team is excited to capitalize on our strengths. As an end-to-end Creative Partner, Shutterstock is well-positioned to ultimately offer more value to our customers and to achieve sustained growth. Since joining as CEO last year, I've been talking about our content library, our Creative Flow platform, our enterprise capabilities, and our highly engaged team is the key drivers of differentiation and value creation at Shutterstock. This quarter, we leverage these strengths to bring differentiated value to our customers. Today, I want to talk about how Shutterstock is not only embracing AI, but also commercializing it for the benefit of both our E-commerce customers within our Creative Flow suite, and our enterprise customers with our Computer Vision offering. Furthermore, I'd like to provide a few examples of how our broader end-to-end Creative platform has really resonated with our enterprise customers. In January, we formally launched our AI image generation platform to all of our customers across both our E-commerce and enterprise channels. Shutterstock AI image generator allows anyone to create high quality visuals ready in seconds, simply by describing what they're looking for. There are there are three truly unique differentiators which set Shutterstock apart in terms of bringing this innovative capability to our customers, namely ease and quality, convenience, and confidence. Ease and quality. Our image generator has been designed for creative use cases to produce unique, varied and high quality images from just a single word input or short simple phrases. We have built into the user interface and intuitive style picker, and integrated support for over 20 languages. We offer the ability to discover and licensed stock content and generative content in the same platform with a single plan, which is a unique capability in the market today. Convenience. We have immediately integrated this capability and put it into the hands of existing customers, making generative available in all our subscriptions, path products, and enterprise offerings. Confidence. Customers have peace of mind when it comes to licensing content that's created on our generative AI platform by virtue of being powered by properly commercially licensed training data. Also, our customers know that we're paying creators and have uniquely structured our contributor fund to compensate artists for the revenue generated by Shutterstock in connection with the licensing of generative AI content, and of our training data. In short, we believe that Shutterstock's AI image generation platform is uniquely positioned at the intersection of creativity, and productivity. I now like to turn your attention to our E-commerce channels specifically. Beyond the ease of use and peace of mind I described just now, we also have integrated our generative -- generative AI platform with Creative Flow for E-commerce customers. As a result, AI image generation is a seamless part of our customer's creative journey. To illustrate, after creating a generative AI image, a customer can edit it in our Creative app, tag, store and search for them in catalog and amplify them on various social channels using our calendar in plan. We are encouraged by the engagement we've seen in the short period of time. Our early reads that we're seeing about 75% of the generative AI traffic come from potential new customers, and 25% from existing customers engaging with the new technology. And users have already created over 3 million generative assets in just the past two weeks since launch. While we're excited by this large scale and early engagement, we're currently focused on incremental monetization opportunities. Also on the E-commerce front, I'm very excited about the newest addition to our leadership team with John Kane joining us last week as the Global Head of E-commerce. John is the seasoned executive with a proven track record of successfully leading E-commerce businesses. He was most recently at NerdWallet in Broome, and he has almost 10 years of experience @priceline.com. John will be focused on driving growth in our E-commerce channel, and as such, we'll be partnering closely with our product marketing and business operations team. With its unique combination of workflow applications and content, including now generative AI content, Shutterstock has a solid foundation upon wish to continue building and evolving and we look forward to John's contributions. I'd now like to provide an update on our enterprise channel. We continue to see sustained growth in our enterprise channel underpinned by, one, extremely strong customer retention, which is now in the mid 90s. Two, solid growth in our subscription bookings, which were up 27% for the year, and three, an acceleration and large enterprise deals valued at more than $100,000, which grew 24% for the year. We're also investing in high profile branding events such as Con [ph], Sundance and South by Southwest to drive awareness and demand for our enterprise offering. Clearly, our performance in enterprise in 2022, and in the fourth quarter was exceptionally strong, and our end-to-end creative platform is resonating with our enterprise clients. I'd like to provide a few examples of how our products and offerings are being applied in increasingly diverse use cases. Amazon Web Services wanted to showcase some of the ways in which its customers and partners are using AWS. To that end, Shutterstock studios produced a collection of 32nd animated videos to highlight how these customers and partners use AWS to solve business challenges. Shutterstock partnered with Allergan in its initiative to promote inclusion and aesthetic medicine, by producing a collection of images that includes a range of people of varying gender, color, race, age and abilities. This diverse gallery is available for download and is a great example of how Shutterstock is embracing inclusive representation. On the editorial front, Shutterstock provides must have content in connection with breaking news and celebrity entertainment news, often on an exclusive basis. Since our acquisition of splashed news, we're seeing increased demand for our content and coverage from the global media companies like The Daily Mail, News UK in Ireland and the New York Post, and TMZ. With Pond5, we continue to see demand from large streaming platforms, and TV and film production studios. Companies like Netflix, Disney, and Discovery Channel, all rely on Pond5 as their source for the critical ingredient that goes into their creative endeavors. Our enterprise business has also been finding Computer Vision partnerships by leveraging Shutterstock AI and our massive pool of licensable metadata. Subsequent to establishing our partnership with open AI and LG, which I discussed last quarter, we've been announced an additional partnership with Meta, in which our data content library and associated metadata is being licensed to train their generative AI models into enhance their machine learning capabilities. Today Shutterstock AI content library that we use for model training consists of 600 million images, 45 million videos, 2 million music tracks and over a million 3D models. It is massive, diverse and transparently licensable. Looking ahead, we believe we can leverage our leading position as the licensing partner to commercialize our data across more use cases that go beyond generative AI applications. In closing, as this management teams drives the business forward, we're striking a prudent balance between investing for growth during this time of massive innovation in AI in our industry, and remaining nimble in the event of continued economic challenges. Looking ahead, I'm excited for what's in store in 2023 as we continue to deliver value to our customers with the content, tools and data in our end-to-end Creative platform, spanning generative AI Computer Vision, and much more. And I look forward to seeing many of you in person at our Investor Day here in New York at the Empire State Building in a few weeks. Thank you, Paul, and good morning, everyone. We're extremely pleased to have ended the year with revenues of $828 million significantly above our previous expectations. For the full year 2022, our revenue growth was 7% or 11% on a constant currency basis, with our E-commerce channel growing 2% and our enterprise channel growing a robust 15%. In the fourth quarter, E-commerce revenue was down 5% on a reported basis, and down 2% on a constant currency basis. The growth rate in our E-commerce channel continues to be meaningfully impacted by ongoing weakness in Europe, where macro uncertainty is having a more pronounced impact with weak new customer demand exacerbated by FX pressure. To give investors a sense of the weakness in Europe, our E-commerce business in North America grew 4% in the quarter. By contrast, our E-commerce business in Europe and the rest of the world combined was down 12% or a 16% differential relative to North America. It's clear that Europe has gotten worse from the third to the fourth quarter, whereas North America has remained stable. Turning to our enterprise channel in the fourth quarter. Enterprise grew 25% on a reported basis, or 30% on a constant currency basis. Performance in our enterprise channel exceeded our expectations with revenue growing across all regions including Europe. Enterprise growth in the fourth quarter was driven by growth in our multi-asset flex product offerings, multiple Computer Vision deals, strong momentum and studios and editorial and the contributions from our acquisitions of Pond5 and Splash. These products and business lines in enterprise are gaining scale and growing in excess of 20% with some closer to 60% growth. And therefore powering our enterprise channel growth in a balanced manner. Our investments in enterprise are paying off. Turning to our income statement. For both the full year and the fourth quarter gross margins were flat excluding non cash M&A, amortization. Sales and marketing expense in the fourth quarter was 22% of revenue compared to 30% in the fourth quarter of 2021, which included over $6 million of linear television ad spend. For the full year, sales and marketing expense was 25% of revenue, compared to 26% in 2021. The decrease largely related to our TV brand spin campaign in 2021. Product development was 8% of revenue, flat with the fourth quarter of 2021, reflecting continued investment in our product offering and the integration of our acquisitions. For the full year, product development increased 8% of revenue from 7% in 2021, GNA expenses were 18% of revenue, compared to 17% in the fourth quarter of 2021, driven by an increase in bad debt expense. However, for the full year G&A expenses decreased to 16% from 17% in 2021. We are continuing to see operating leverage in our business, per our expectations, and that's manifesting itself in the G&A line. With the difficult macro economic backdrop, we are sharply focused on cost and margins, and our results are showcasing that profitability focus. We are keeping a close eye on our headcount engaging in process automation, and rightsizing our physical office footprint. As part of rightsizing our office footprint, in the fourth quarter, we recognize the non-cash impairment charge related to lease and related assets of $18.7 million associated with our decision to close or consolidate certain office spaces that have been underutilized. We expect this charge to benefit go forward lease operating expenses by more than $2 million per year in 2023 and beyond. In the fourth quarter, adjusted EBITDA was a record of $58 million. Shutterstock grew EBITDA by 13% this year from $193 million to $218 million, and EBITDA margins meaningfully exceeded our target for margin expansion, increasing 138 basis points to 26.3% from 25% in 2021. This is the third consecutive year we've driven significant margin expansion. And as a result, our EBITDA has more than doubled over the course of the past three years. Turning to our balance sheet, we had $115 million of cash at the end of the quarter, and exhibited strong cash flow generation. As of December 31, we had $50 million drawn on a revolver. However, we've now fully repaid this balance and have zero debt on the balance sheet. On January 31, we announced a 13% increase in our quarterly dividend to $0.27 per share, which will be paid on March 16. This increase was attributable to the strengthen our cash flows, zero debt on the balance sheet and our competence in the business for 2023. During 2022, we repurchased 984,000 shares for $73 million and completed the $100 million repurchase authorization. As a result, our shares outstanding decreased by 588,000 shares compared to 2021. Our deferred revenue balance was $187 million, an increased $13 million from the third quarter of 2022, primarily due to growth in enterprise. On our key operating metrics for the quarter, subscriber count was 586,000 from 343,000 last year, driven by the inclusion of Creative Flow Plus and PicMonkey subscribers. Subscriber revenue increased by 9% to $88.8 million. Average revenue per customer decreased to $341 driven by the inclusion of smaller ARPU subscribers. Paid downloads were down 5.6% and revenue per download increased to $4.49 per download. Consistent with what we're seeing in our revenues, paid downloads were up in our enterprise channel and down in E-commerce largely due to weakness in Europe. Finally, turning to our guidance. Our expectations for the full year 2023 are as follows. Revenue of $836 million to $853 million, representing 1% to 3% annual revenue growth, adjusted EBITDA of $220 million to $228 million, with margins ranging from flat to up 50 basis points and adjusted earnings per share between $3.90 to $4.05 per share. Our revenue guidance is based on recent spot rates for the euro and pound and FX is expected to be a 1% headwind to revenue growth, while the additional months contribution of Pond5 adds 2% to revenue growth. Our guidance is reflective of the ongoing macro challenges we're seeing in Europe and a cautious approach to overall customer demand. We expect revenue growth to be first half loaded with faster growth in the first half of 2023. We are not factoring into our guidance, any upside from the rollout of generative AI, or from additional Computer Vision partnerships beyond the deals we've already signed. We are bullish on both of these opportunities and our pipeline and our prospects. But until deals are signed, or we see significant revenue incrementality, we prefer to keep them out of our forecast. From a margin perspective, we are targeting up to 50 basis points of EBITDA margin expansion in 2023, driven by operating leverage in G&A, and our ongoing focused on cost management. Other modeling assumptions include stock-based compensation of %55 million, depreciation and amortization expense of $68 million, capital expenditures of $45 million and an effective tax rate percentage in the high-teens. Before opening up for questions, I'd like to formally invite everyone on the call to our Investor Day to be held in the Empire State Building on February 28. We plan to have an immersive extended reality experience for investors, including deep dives into Generative AI and Creative Flow and multiple other business opportunities. [Operator Instructions] Our first question comes from the line of Andrew Boone with JMP Securities. Your line is open. Please go ahead. Hi, guys. Thanks so much for taking my questions. Can we start on the enterprise side of the business? You talked about strength within multi-asset flex, Computer Vision deals editorial Pond5 and Slash while contributing. But there was just a significant step up from 3Q to 4Q. Can you just break that down and help us better understand the drivers there? And then, you talked about just not including the pipeline of Computer Vision assets for 2023. Can you just talk about the pipeline and what that looks like, right? You seem to have added open AI embedded Meta. What else is out there as you think about that? And just as kind of an extension of that. You talked about earlier licensing beyond Generative AI. Can you just flush that out? So three questions for you. Thanks so much. Thanks so much, Andrew. We'll try and remember all those three questions to the best of our ability, but you may have to get us back on track if we lose focus. So look, turning to our enterprise business, we turned in a spectacular year. The business grew 15%. Paul gave some of the, really compelling metrics around how we grew our subscription bookings, which were up 27%, the acceleration, the large deals, which grew 24%, and the strong customer retention, which was in the mid 90s. So all of those, fundamentally, when you think of the core of the enterprise business, we're moving up into the right. There are multiple business lines in our enterprise business, which don't comprise 10% of the revenues of the business. So that would include studios, that would include editorial that would include Computer Vision. Those businesses are growing somewhere between 20% and 60% a year. So we've got these engines of growth that are an enterprise sort of rolling the boat forward. And they're performing particularly well. We don't break out the quarterly or annual contribution of those individual business lines, but there are a number of different pockets of growth, and it resulted in fantastic growth for the year, and great growth for the quarter. I think your next question was really just pertaining to Generational AI. Andrew, are you most interested in sort of the incrementality around it? Or what was sort of the specific key area you were honing in on? So, two points. One of which is just how do we think about these contracts on a go-forward basis? Is the step up there now on a go-forward basis, is it based on usage? Is it kind of an ongoing subscription type revenue period that we should be able to just simply model like going forward? Like, how do we think about the step up in 4Q then extending into 2023? And then additionally, earlier on, I think, Paul, you mentioned licensing beyond Generative AI, and so the second half of that question is just can you flesh out what is the -- what do you guys see beyond Generative AI? Sure. And Andrew, I'll answer the first part of that. And then and then pass it over to Paul. So, in terms of the Computer Vision deals that we signed, these are large partnerships. Those partnerships positively impacted the fourth quarter, they will positively impact 2023. And these are long-term deals that will continue to benefit our business into 2024 and beyond. These deals do have somewhat of an upfront revenue composition, but they're also tells of revenue that continue on through the long life of the contract. And moreover, we believe that there's a variety of ways that we can add value to these relationships and grow these relationships over time. So we don't view these as discrete deals with companies rather partnerships that we expand into and grow off of. And internally, we've really proven our ability to use these as leverage points to develop larger and more multi prong relationships with the clients. So, we're starting to really have strategic level engagements with customers and enterprise in a way that we never have before. And they're becoming much more multifaceted and long-term and recurring in nature. Thank you. And we'll move on to our next question. Next question comes from a line of Bernie McTernan with Needham & Co. Your line is open. Please go ahead. Great. Good morning. Thanks for the questions. Maybe just to start, the 75% of traffic from new customers that are using generative AI and Creative Flow. Are these paying customers or trials? And then also any insight you can provide in terms of if it's like a new vertical that's using generative AI or kind of what you're seeing from the composition of clients? Ladies and gentlemen, please remain on your line your conference will resume shortly. I think we are experiencing technical difficulties. We do have Bernie McTernan with Needham & Company in the queue to ask a question. Bernie, please go ahead. Hey, guys. Thanks. So, you mentioned in the prepared remarks, 75% of traffic for new customers, are new to the platform. Any just more detail you can provide on the verticals that these customers are paying or not. Just trying to get a sense of the composition of people who are using generative AI? Yes. We tried to give you as much as we could in the few days since launch. As I mentioned, we're seeing lots of good engagement. We gave the mix of customers. We don't know if that's a sustainable mix or representative of what that will be four weeks out, eight weeks out, and six months out. So we just tried to do our best to expose exactly what's happening on the platform today. And then over time, as we have insights into the monetization of that behavior, we'll be back out and discussing that. Understood. And we saw the customer count ticked down sequentially. Was there anything that we should -- anything to call out that draw [ph] that? Bernie, I think the biggest piece is, you've seen some of the weakness in our E-commerce business. The customer count is really driven by the E-commerce business. Our enterprise customer count is very steady and a much smaller number as compared to the sort of aggregate customer count that we publish externally. So, it's really a function of the weakness in E-commerce, which really is driven primarily by that significant differential in the performance of Europe as compared to the rest of the world and the U.S. Got it. And then, lastly for me. If I just take paid downloads and multiply by revenue per download, and look at that relative to 3Q. It seems like there was like a, call it $13 million step up in ancillary. That's the right way to think about how much Computer Vision generated in the quarter? Yes. I think Bernie, we don't consider that ancillary revenue, it's not the right way to think about it. Unfortunately, we have a number of different businesses that fall into that area. So I would call out studios as impacting that. I would call out our asset assurance business as impacting that. I would call out Computer Vision business as acting that, and there are multiple other revenue streams that sort of encompass that, so. Thank you. And one moment for our next question. And our next question comes from a line of Youssef Squali with Truist. Your line is open. Please go ahead. Hi, guys. Thank you for taking the question. So, I have two here. Just going back to the E-commerce. comments you guys have? I know, you have a new Global Head of that Division, John, just joined recently. Can you maybe be a little more prescriptive in how -- what you're doing to revenue [ph] growth there? Clearly, that's still the biggest piece of the business. And for it to be still down year-on-year is obviously waiting on the whole business. And just kind of how do you think about, how long will it take you feel for us to start seeing maybe positive growth there? And then, back to this AI relationships, can you help us maybe understand how the money flows from deals like OpenAI or Meta, for instance, beyond just the upfront piece, I think Jarrod, you talked about the residual annual revenue there. Is it based on usage of just continual training of the AI? Or is it based on literally the sale of AI created images, even on third-party sites, leveraging your contents through DALL-E 2 or something like that? Just trying to get a better feel, better understand how the money flows there. Great. Youssef, I'll start and then Jarrod can answer your second part question. Hopefully what you're seeing and it's very apparent of what we're doing with E-commerce is we're getting very, very busy. We are focused on everything from process improvement, product development, tool set delivery for our customers, additional content to lift conversion, and we're bringing in as we mentioned, more resources to focus on a very strategic part of our business called E-commerce. And I'd say at the same time, we're laser like focused on being customer centric, so that we're listening to exactly what our customers needs, building products and services for them and bringing content to bear, so that they can find what they're looking for and action their business objectives. So, we're going to continue to do that. We've had a history of doing that. It's kind of in the DNA. And we're going to continue to focus our business on that. We've also aligned our entire workforce to be very, very strategic on the work that we do. So, we expect to be better executors as we move forward. And you asked about the win in this market with the current backdrop that we're operating. I can tell you that by June 1 or September 1, there's going to be a magic event that suddenly E-commerce is going to magically start growing at the rates that we would be excited about. But what I can tell you is, we've gotten a lot of minds and hands working on that opportunity. And we're feeling pretty good about our chances of strong execution there. And that's reflected in our guidance. And as Jarrod said, we believe that there's some potential upside to that guidance, because of the things we did put in and we didn't put in. And Youssef, to the second part of your question just on the money flow is pertaining to our Computer Vision partnerships. Ultimately, we have a massive pool of content and metadata. And when our partners train their AI machine learning models using our metadata, as we confer that data, that is used for model training, and the money would flow. We would build an invoice of those clients, they would pay us. We also receive 30 million to 40 million new content assets each and every year. And so, it is imperative to continue to train AI and machine learning models. And so that's an extremely valuable source of incremental metadata for our partners. And so, effectively, they're contracting for a long-term period to continue to ingest and pay for that metadata and that content. We have typically leverage those partnerships to also get some access to some technology, which we've done in the case of an LG or an OpenAI. And we think that's an intrinsic part of us working collaboratively with our strategic partners. But what we haven't done thus far as we don't have effectively a Rev share on the end products that those partners are going off and creating in their core businesses. So for example, OpenAI, we do not have a Rev share with all the deals that OpenAI is going to do in the growth of their business. We're effectively monetizing our data and our content with those customers. What we are able to do though is, as we access the technology, we're able to monetize on our site. So we're able to monetize the core metadata, plus we're able to charge within our core subscription impact products for generative AI, which we hope will have incrementality associated with the revenue growth in our business. And as Paul mentioned, the early engagement is quite strong, and we're really excited about what we're seeing thus far. And Jarrod, did you quantify the organic growth that you guys had for the quarter beyond the 6% and 9% growth rate that you gave for report in FX adjusted? What was the organic number when you adjust for Pond5? Sure, Youssef. So for the fourth quarter of 2022, the organic growth excluding Pond5 was 3.3% on a constant currency basis, and flat on a reported basis, excluding Pond5. If you were to include Pond5 on a constant currency basis, the growth was 9.5% for the fourth quarter. Thank you. And one moment for our next question, please. And our next question comes on line of Lauren Schenk with Morgan Stanley. Your line is open. Please go ahead. Great. Thanks. I wanted to ask a few more about the AI partnerships if I can. First, just wanted to confirm the upfront Meta and LG partnership revenue was booked in the fourth quarter. And then you said there were multiple Computer Vision deals in the fourth quarter. Just wanted to ask if there are any others besides those two in the quarter? And then just lastly, anything you can share around your visibility or the range of potential outcomes for those new partnerships heading into 2023? Thank you. Sure, Lauren. So, the good news is that the LG and the Meta partnership deals did positively impact the fourth quarter. They will positively impact the first quarter of 2023, the second, third and the fourth quarter of 2023, and into 2024 and beyond. So, this is something where we are seeing an immediate contribution, but we're also going to be seeing a positive contribution in the quarters to come from these deals. I can also confirm that these are the deals that we put out press releases around, and we've put out -- we've had public permission to put up the names around. But there are 20 plus other customers that we've been working with in this area, some of which are extremely large companies, the names of which, we see around us each and every day, but we've not disclosed those partnerships. And so, there's a lot of momentum in this business. There's a fairly sizable number of deals that we've signed, and we feel quite good about the pipeline. So, we're enthusiastic, because these can be large deals though, and this is a new nascent business for us, that's sort of coming to us in real time. We're not yet at a place where we're baking large deals into our guidance and into our probability weighted pipeline. As and when these large deals land, we'll update the investor community. There's a great pipeline, but this is all really so new and sort of happening to us in real time, so we're going to be a little bit more cautious from a guidance and forecasting perspective on this one. Thank you. And one moment for our next question. And our next question comes from a line of Nat Schindler with Bank of America. Your line is open. Please go ahead. Yes. Hi, guys. Everybody's asking about deals in the light of generative AI more. Can you just talk more broadly about how generative AI is going to change the industry and how it's going to be used? Kind of both near medium and potentially long-term, what you see that -- how you see this evolving? And what are going to be the impacts upon both parties, as well as on marketplaces like yourself? Nat, I'll take that one. And I'll open with one of my standard answers. I don't know. But what I would tell you is that we are doing everything in our power to make sure that we are among the first to figure out all of the use cases for AI. You see the level of engagement that we've described in two weeks, and that tells us that we are fishing in the right pond in terms of our development, by listening to our customers and reading the tea leaves of which way this industry is going. We see, obviously, the most basic things, people are creating images for their use. We're using our underlying metadata to train models. And we believe that this is just scratching the surface of use cases for AI, where our minds go in a world where we are fine tuning search queries, to be able to generate content on behalf of our customers, that depending on the level of detail of those search queries, you start to enhance and maybe even replace some of the existing tool sets that are out there that are doing some of the basic editing and modification of images, because customers can actually create the very specific thing they're looking for. It's early days on all of those things, but there's a lot of avenues that we're exploring, and when you can leverage our platform, and I know, I think I dropped off when -- to answer the end of Andrew's part three of his question, when you build a platform like we have, assembled the content, breadth and depth that we have, layer on the product innovation, leverage our contributors, and by the way, our employees and many of which are best-in-class sales force that are sitting in the offices of our small, medium and large scale clients, innovation happens, new products happen and new opportunities happen. So, it's still the first pitch of the first inning for AI and its use cases. But we believe that the Shutterstock platform, and the company broadly is well-positioned to be first movers in whatever way this goes. Great. Thank you. And I love that you used I don't know, as an answer, because that's the only honest one. Thank you. And one moment for our next question. And our next question comes from the line of Nick Deflas with Red Burn. Your line is open. Please go ahead. Yes. Thanks very much indeed. Just a quick question, two actually. As we think about the impact Pond5 on enterprise and E-commerce, then if you can give us any stare on that? Thanks very much for the organic figure. It's one of the questions earlier. And the second question is just on the subscriber numbers being down a little bit versus Q3. You took around that and how you expect to return or what timeframe you expect to return E-commerce to growth? Thanks very much. Sure. So just with respect to Pond5. Pond5 at the time of the acquisition would have been about 3% of the revenue of the business. So that's sort of the annual contribution. That business is a little bit more heavily tilted towards E-com, than enterprise from a revenue distribution. So, a simple back of the envelope way to think about it would be a 2% contribution to the E-commerce business and a 1% contribution to the enterprise business. I'm sorry, what was the second part of your question? The second part of the question was just on subscribers. So 586 in the fourth quarter, I think the figure in the third quarter was 607. So, what's going on there in terms of the decline? And when do you think you'll be turning that around? Yes. I think, the subscriber decline is really -- the year-over-year, there's obviously very significant sequential -- year-over-year, very significant subscriber growth. There is a quarterly sequential subscriber decline, the subscriber count is largely driven by our E-commerce business. And so, some of the weakness that we've seen in Europe has really been the impetus for the subscriber decline. But one of the things you'll also notice is, if you look at subscriber revenues, subscriber revenues were up 9%, year-over-year, and the subscriber revenue number also takes into account the subscribers we have in our enterprise business. And the subscriber bookings and our enterprise business were up more than 20% year-on-year. And so, you have an interesting phenomenon where you have smaller subscribers, that were sequentially as a result of Europe, but you also have subscriber revenues that have been very, very strong. And that's really as a result of some of the larger subscribers that exist in our enterprise business. So an interesting disparity between the two reporting channels, vis-à-vis our subscribers. Do you think that do you have a timeframe, you think that this has an economic impact in Europe particularly, that will turn around in the second half of the year? How do you think about that? So, we're being conservative at this point in time. I think, as Paul mentioned, we're not baking into our guidance any kind of a return to growth in our E-commerce business this year itself. We'd rather take a bit of a wait and see attitude on that. Seemed multiple months of trends moving in the right direction, in particular, in Europe, to sort of to make that call. But things certainly did deteriorate from the third quarter to the fourth quarter. And so, we're sort of baking that in and carrying that forward. And we're going to continue to focus on doing what we can do in terms of improving the value for our customers, and growing our E-commerce platform. We're bringing in the right talent, the right tools, and really taking the right marketing strategies to be able to grow that business. Great. Thanks. We want to express our gratitude to our customers, contributors, and especially our employees. For those of you on the call, thanks for joining. This ends all the content for today's call.

EarningCall_131

Good morning. Thank you for standing by. Welcome to Sylvamo's Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, you will have the opportunity to ask questions. [Operator Instructions] As a reminder, your conference is being recorded. Our speakers this morning are Jean-Michel Ribieras, Chairman and Chief Executive Officer; and John Sims, Senior Vice President and Chief Financial Officer. Slides 2 and 3 contain important information, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. We will also present certain non-U.S. GAAP financial information. Reconciliations of those figures to U.S. GAAP financial measures are available in the appendix. Our website also contains copies of the fourth quarter 2022 earnings press release as well as today's presentation. In 2022, we delivered significant accomplishment as we executed our three-pronged strategy of commercial excellence, operational excellence and financial discipline. We worked hard to be the uncoated freesheet supplier of choice, which resulted in our outperforming industry shipments in all three regions. We improved our safety performance and defined our ideal culture, which would help us become the company in which employees care, trust and grow and succeed together. We delivered strong earnings and free cash flow despite global supply chain challenges and unprecedented input cost inflation. We reduced our geopolitical risk and uncertainty by divesting our Russian business and agreeing to acquire the Nymolla mill in Sweden. We achieved a 30% return on invested capital, strengthened our balance sheet by repaying more than $370 million in debt and returned $90 million in cash to shareowners. I'm proud of our team and their accomplishment over the last year. Slide 5 highlights our 2022 full key performance metrics. We increased net sales by 28% to $3.6 billion. We achieved an adjusted EBITDA of $721 million, a 62% increase over 2021, and our adjusted EBITDA margin was 20%. We generated $269 million in free cash flow, which was more than $6.00 per share. I would like to point out that our 2021 free cash flow only included one quarter worth of cash taxes and interest. Our adjusted operating earnings increased by 72% to $7.84 per share. As we enter 2023, we are confident in our ability to continue to create value for our customers and shareowners. Slide 6 highlights our key performance metrics for the fourth quarter. Net sales were $927 million, a 19% increase versus the fourth quarter of 2021. Adjusted EBITDA was $170 million, up 38% versus 2021, with a margin of 18%. We generated $84 million in free cash flow, and adjusted operating earnings of $1.97 per share, which was more than double the adjusted EPS in the fourth quarter of 2021. These strong performances demonstrate our ability to continue to deliver on our investment thesis. Let's review our fourth quarter adjusted EBITDA versus the third quarter. In the fourth quarter, price and mix improved by $31 million as we realized higher price increases in all regions. This improvement was in line with our outlook. Volume decreased by $20 million. In addition to the unusual seasonal -- in addition to the usual seasonal slowdowns in Europe and North America, volume in North America was also impacted by channel destocking in the commercial printing segment, which I will discuss in more detail later. Operations and costs increased by $42 million, which was near the high end of our outlook. 25% of this was in operations, and this was largely due to seasonally higher cost in Europe and North America. The remaining 75% was in other costs. These include an incremental incentive compensation accruals, unfavorable Brazilian foreign exchange and unfavorable year-end LIFO. Input and transportation costs improved by $6 million with favorable energy and distribution costs, even after unfavorable impact of $5 million due to the winter storms in the Southeast U.S. in December. Let's look at the 2022 uncoated freesheet industry fundamentals on Slide 8. Demand in Latin America and North America continued to rebound from pandemic levels, while demand in Western Europe declined slightly. In the first half of 2022, customers in Europe and North America could not get enough paper from domestic suppliers, so they turned to importers, primarily Indonesian mills. The deliveries of these imports began to show up in the third quarter and during the fourth quarter. They caused channel inventories to build especially in the North America commercial printing segment. At this point, commercial printers began to reduce their paper orders to rebalance inventories. It is important to note that the underlying demand for commercial printing in North America has declined slightly, but in line with the slowdown of the economic activity. With the reopening of the Chinese economy, we expect increasing paper demand in China, which should absorb some of the Indonesian mills' production that has been imported into our regions. Importantly, uncoated freesheet industry capacity in our region is down 10% to 20% relative to pre-pandemic levels, which will continue to help the supply and demand balance. In sum, the demand is up in our largest regions, capacity is down in all regions, and we are confident in our positions with key customers. I'm on Slide 9. At the beginning of January, we welcomed our Nymolla colleagues to Sylvamo. These photos are from our day 1 celebration. The Nymolla mill sits well with our three-pronged strategy of commercial and operational excellence and financial discipline. It is one of Europe's largest integrated uncoated freesheet facilities and generates 85% of its energy from carbon neutral renewable biomass residuals. And the majority of its purchased energy is produced without fossil fuels. The mill has a strong customer-focused culture and shares many of our values. The Nymolla team maintains strategic channel partnership in a complementary geographic mix. It also has an excellent environmental position and is aligned with our environmental stewardship and social responsibility strategies. On Slide 10, you can see Nymolla new oxygen delinification plant, which was part of the $40 million pulp mill modernization project that was completed and started up prior to our acquisition. The project included a new softwood digester, increasing softwood pulp capacity by 15%, which will allow us to reduce the use of more expensive hardwood. The mill is on its way to realizing the expected annual earnings benefit of $8 million. We are thrilled to have the Nymolla mill and their talented team as part of Sylvamo and have integrated Nymolla into our commercial and operational processes. In the first quarter, we expect to deliver adjusted EBITDA of $200 million to $215 million. This table shows the quarter-over-quarter changes without the impact of Nymolla. And we provide a $15 million to $20 million outlook for the Nymolla mill contribution. Price and mix are projected to decrease by $15 million to $20 million, primarily reflecting a seasonal mix shift in Latin America. We expect volume to decrease slightly by $5 million to $10 million, reflecting seasonally weaker volume in Latin America and continued inventory corrections in Europe and North America. Operations and costs are projected to improve by $10 million to $15 million as the unfavorable fourth quarter items will not repeat. We also expect input and transportation costs to improve by $5 million to $10 million, largely unfavorable trends and costs for natural gas and transportation. Maintenance outage expenses are projected to decrease by $29 million, as we will not conduct any maintenance outages in the first quarter. This will be a good time to point out that while Jean-Michel will provide a full year outlook for free cash flow, we expect the 2023 free cash flow to be weighted more heavily to the second and third quarters of the year. But we are confident in our full year free cash flow forecast. Please turn to Slide 12. Here you will see the three prongs of our capital allocation framework. This depicts how we think about allocating cash to drive shareowner value. At the time of the spin off, we prioritized using cash to reduce debt. We also began to return non-discretionary capital spending to the appropriate level to maintain our low-cost assets. Now that we have achieved a much stronger financial position with less than $1 billion of gross debt, we are putting greater emphasis on returning cash to shareowners and reinvesting in our business to grow our earnings and generate cash. We remain a cash flow story. We will leverage our strength to drive high returns on invested capital and generate free cash flow. And we will use that cash to increase shareowner value by maintaining a strong financial position, returning more cash to shareowners and reinvesting in our business. Let's move to Slide 13 to review our fortified financial position. Since the spin off, we have reduced our debt by more than $500 million. At the end of January, our gross debt to adjusted EBITDA ratio was 1.4x, and our net debt to adjusted EBITDA ratio was 1.2x. Pension funds remain well funded at or above 95%. We do not have any significant debt payments due until 2027. Let's move to Slide 14. We will continue to reinvest in our business and maintain our low-cost assets and will fund high return projects to increase our earnings and cash flow. Our 2023 capital spending outlook includes $175 million to $190 million for non-discretionary spending and $35 million to $45 million for high return projects and to integrate Nymolla and achieve the synergies there. Our maintenance and regulatory spending plan includes [$80 million] (ph) for our Nymolla mill, as well as spending plan for 2022 that was delayed due to supply chain challenges. Our maintenance and regulatory plan also includes an incremental $10 million due to inflation. We will also invest $30 million to $35 million in Brazil forestry, about a 10% year-over-year increase, to ensure long-term availability of sufficient volumes of low-cost wood, which are a critical component of our competitive advantage in Latin America. I'm now on Slide 15. We have created substantial shareowner value in the 16 months since the spin off. We fortified our financial position, reduced debt by more than 35% and achieved $1 billion gross debt target. Returning cash to shareowners is a core component of our investment thesis. We have returned $111 million in cash to shareowners, with $21 million in dividends and $90 million of share repurchases. Since the spin off, we have repurchased 1.8 million shares. Also, we more than doubled our quarterly dividend to $0.25 per share, effective this quarter. We'll continue to reinvest in our business to remain the supplier of choice, to maintain our assets and competitive cost position, and to increase cash flow. Let's turn to Slide 16 to review our 2023 full year outlook. In 2023, we expect to generate $760 million to $840 million in adjusted EBITDA, and $300 million to $330 million in free cash flow. Our adjusted EBITDA outlook assumes slightly favorable price and mix against input costs, and relatively stable volume, since we expect channel inventory correction to be resolved in the first half of this year. Our planned maintenance outage expense would be about $20 million higher this year than last, with outages in Saillat and Nymolla. We're expecting favorable trends in energy, input and transportation costs. Our free cash flow outlook reflects an increase in earnings, reduced interest expenses and the elimination of foreign tax credits on our Latin American earnings. It also reflects the increase in capital spending that John reviewed. Let's wrap up our comments on Slide 17. We remain committed to our investment thesis. We strive to remain the employer, supplier, investment of choice. We are grateful for our talented and engaged colleagues and their dedication to working safely, delivering on customer commitments and creating value for our shareowners. We're also grateful for our customers. Without their continued support and partnership, we could not succeed. Executing our three-pronged strategy of commercial excellence, operational excellence and financial discipline will enable us continue to create long-term value for our shareowners. We will continue to leverage our strength to drive high returns on invested capital and generate cash. And we will allocate capital to maximize shareholder value. Increasing cash returns to shareowners is one of our key objectives. With that in mind, we are considering alternatives regarding the current limits on restricted payments. We remain committed to creating value for all of our stakeholders, as we build our desired culture one in which we care, we trust, we grow and succeed together. My first two questions will be around volume. And so, Jean-Michel, I think you said in your prepared remarks at the end that you expect stable volumes. And I'm just trying to determine whether that's underlying demand that you're referring to or your own shipments when considering the fact that I think you said channel destocking is still going to be occurring through the first half. Relatedly, and my second question, so you talked about the impact of imports and what triggered that, and that was very helpful. Recognizing there is a lag on this data, the imports continue to rise at least in North America. What do you attribute that to the extent that you can comment? And what is embedded in your forecast for '23 about the impact of imports in North America, but certainly anywhere else you care to discuss? Thank you. Thanks, John -- George. Two separate questions. I'll start with the volume. I'm talking about our volume. I think, when we look at the full year and what we are winning with customers, I feel comfortable we would have a great year. I -- even if you take [indiscernible], despite the inventory correction, were full in Latin America. It's a little less in North America and in Europe, but it really depends on segments already. If you take the commercial printing segment, it is weak, and that's probably where the inventory is the highest. If you take the cut size segment, it's quite good. Concerning demand, we're still seeing strong demand growth in Brazil. Brazilian cut size is back to above pre-COVID. The demand in North America, it's difficult to forecast. But I would say, maybe not as strong than last year where imports impacted, but still good. Europe, we have the trending slight decrease, which is normal. Your question on inventory, here is my understanding on inventory, and it comes mostly from the inputs -- imports, sorry, well I'm -- import, sorry about that. The question on imports and it comes from a lot of discussion recently actually we have -- personally had with customers. In first half last year, as you remember, there was a little bit of a panic, I would call it, in the markets. And this is true in North America and in Europe, where our customers had a lot of work. And from a supply standpoint, we were still tight because of the demand. And also, we were still getting out of the COVID and probably not efficient like in a normal timing. So, this is when a lot of this import was ordered. And it didn't come on the first half of the year, as it would have been expected by this customer. It mostly came in third quarter and fourth quarter, which, by the way, if you look at the statistics in North America, you can see the increase in the import is mostly during third and fourth quarter. I think there was the pipeline defect that's because supply chain was very difficult in first half. So -- and cost of sending paper from Asia to North America or Europe was 10x what it is today, so it was extremely high. So that has created clearly an issue in the inventory that even our customers were not expecting to be so strong. So, I think that's one-time big impact. We will still have imports in Europe or in the U.S. I expect it to be like the trends we've had up to now between 10% to 15% maximum, but not between 15% and 20%, which we had on fourth quarter. So, I think this is -- once the destocking will have happened, we will be back to more traditional long-term trends. Jean-Michel, [I'll turn it over] (ph), but those ratios you mean as a percentage of consumption or year-on-year growth? Just one point of clarification there. Yes, thanks very much. Good morning, guys. Just a question on -- I understand the CapEx is up this year, because it looks like you missed about $30 million of spend last year. But maybe you could give us some examples of where you're spending the $30 million to $35 million on high-return projects? And whether you expect this higher level of CapEx to stay up in -- at this level in '24? Yes. Hi, Paul. It's John Sims. So, our capital spending for this year is higher than last year. And as you said, some of that is attributed to carryover, so the things that we had planned to execute in 2022, because the supply chain got pushed into 2023. The additional spending also is due to the Nymolla mill, which we highlighted here, so the [$80 million] (ph). I think we gave a guidance for the maintenance and regulatory somewhere between $130 million to $150 million is what we would be spending for maintenance, regulatory and reforestation. The number is now between $180 million -- $175 million and $190 million, I think, is probably a good number to go forward. And what that does include is the additional Nymolla spending, probably around $15 million to $20 million. And also, we have the impact of inflation. We kind of highlighted that, but inflation impacted not just input cost, but labor as well as capital. And we're expecting that to go forward. So -- and I think your second part of your question is around the high-return cost reduction capital, where do we expect to spend that. So that's a planning number right now. We do have a pipeline of projects that are going to be approved. And what we do is we make sure that we're spending that money to get high-return projects and our most competitive mills, so we can get long-term benefit from that. And we'll be sharing that as those projects get approved going forward. Okay. And then, if I could just switch over to free cash flow, pretty robust guide at $300 million to $330 million, just your restrictions -- if you could remind us your restrictions on share buybacks and what you're doing to try to alleviate some of the limits on returning that cash? So, we -- in the fourth quarter, we were able to increase the restricted payment covenants that we had from $75 million to $90 million. And that's what, as you know, we fully utilized that and returned $90 million back to shareowners in either in form of dividend and also in terms of share buybacks. What we did last year, $10 million in dividend and $80 million in share buybacks. We're still limited to the $90 million right now as we speak, and this is one of the things that Jean-Michel alluded to, it is a priority for us. As you rightly say, our free cash flow, we're projecting -- we feel very confident about that, it's expected to increase this year versus next year. And so, we're working on different options that we'll be reviewing with the Board and we're going to be -- our intent is to get flexibility, so that we could increase what we can return back to shareowners above the $90 million. Hey, thanks for taking my question, and congrats on the good quarter. My first one was just on some of your comments right at start on what seems like some outperformance in shipments in the quarter versus peers. Just want to get your thoughts on, is that taking share within the market? Or, I guess, just more details on what you're doing to kind of be the go-to uncoated freesheet provider? Yes, that -- hi, Ed, thanks for joining the call. We've been a long-term partner in this business. And Sylvamo, especially, with its focus to uncoated freesheet, is very well aligned with the key winning customers worldwide. This is true in North America, but this is true in Europe and Latin America also. So, as a result, we usually grew more than the market, our volume. And this is not new. It's been happening for multiple years. But we can see it very well today where it's a very good fit with our customers, they're very aligned with us, and we're growing. And we're growing on long-term partnership and with brands, with a complete offering, with the best partners in the channels, and that makes a difference. So, we want to continue to win in this market. We think we have the right -- the key player. Got it. My next question, just on M&A. The Swedish mill sounds like a pretty good acquisition. It seems like just in the space, the consolidation could be a way to control what seems to be a declining uncoated freesheet market just in general and control capacity there. So, just want to get your thoughts on more M&A, if you're looking at other another acquisitions in the size you'd be willing to do that, primarily in the context of your restrictions that you do have on share repurchases and the excess cash you'll likely have in 2023 with the $300 million free cash flow? So, Ed, M&A is not our priority. We are satisfied with our core mills and what we have today. It will be purely opportunistic. But returning more of cash is clearly our priority. So, this is more what we're going to spend our time than looking M&A. Nymolla was a unique, very opportunistic, great opportunity. And we're going to continue allocating our capital more to a strong financial position. The return, as I said, to cash to shareholders and great reinvestment in our business, that's going to be our priority. Yes. And I'll just -- this is John. I'll just add that the Nymolla was while it was a great opportunity for us, core to our strategy is a focus on uncoated freesheet, which also is one of the reasons why we tend to outperform the market, because customers know that we're in it for the long run. But we want assets that are low cost, that have a competitive advantage in the marketplace, so that we can continue to serve the uncoated freesheet, possibly generate a lot of cash for a long time. And that's where the Nymolla mill just really fit right into the wheelhouse that we were looking for. There's not a lot of opportunities for that, but that's what we mean by opportunistic is kind of fit with our strategy. It's got to be a low-cost, strong asset, and that's where the Nymolla mill is. Thanks. Hi, everybody. Again, two more questions more on volume, although I've got other stuff I do want to get to as well. So, I'll come back. But Jean-Michel and John, so if you assume that imports are going to drop from 15% to 20% of consumption to 10% to 15% of consumption and the market consumption probably is going to be down because that's the normal trend, that would suggest a fairly sizable drop in imports for this year in '23 versus '22. Am I missing something there in terms of how you're evaluating it? And anything that's giving you comfort, any sort of green shoot commentary from DCs or your customers that that's happening? So that's question number one. Question number two, again, on volume and trade flow. Yes, China was locked down last year, but one of the things that, that also did, this is more on the freight side, is it prevented exports from China and from Southeast Asia. Now maybe we're now seeing, with the reopening, those imports coming into North America, coming into Europe, but could there be further problems, if you will, from -- and really relate what your customers are saying, from the opening of supply chains and what it might mean for supply that comes into markets that were, as you pointed out, really tight last year in Europe and North America, which was a good thing for you? Yes, George, I'm going to start off and then I know Jean-Michel probably want to weigh in. But when you look at the year for the full year for '22 imports into North America represented 13% of demand. But most of that was the increase as we talked about in the second half of that year. So, when we look at our projections, and there's a lot of moving parts on this. I mean, when we're talking about somewhere between the 10% to 15%, we're still seeing and projecting a potential increase of imports year-over-year into North America. Now be mindful that it is true that the cost of shipping from Asia into the U.S. has actually backed down to pre-pandemic levels. But there's still extensive duties that are applied to both the Indonesia and the Chinese suppliers. And as open -- it backs up, the Chinese market opens back up, when you look at it from a pricing perspective, net pricing perspective, it's still probably more advantageous for them to ship into China. The other thing we didn't talk about a little bit, but some of the imports also came in from Europe. The European freight costs continue to be extremely high. So, I think when we look at our outlook and how we're thinking about it, we do see and we're projecting that we're going to see some increase of imports into the U.S. But like, I think, we're trying to allude to, it's not going to be out of the norm than what we've seen before, and it's manageable. Okay. If I could sneak one in, just in terms of your guidance. So, the first quarter is well over $200 million in terms of EBITDA. Look, recognizing there's lots of seasonality and certainly maintenance outages are lumpy, if I just annualize that, I would wind up with an EBITDA outlook that's probably above your full year range. So, are you just trying to create or give yourself some cushion against the unknowables that occur in any year? Were there some specific things that you want us to remember in terms of the cadence of your EBITDA, the rest of the year? Thank you, guys. I think there's two things on that, George. One is there's no outages in the first quarter. So, I do -- there's a page in the appendix that shows our outage and the two highest outage quarters is the second and the fourth quarter. So that's -- you got to factor that into it. But we -- I will say that there is a lot of economic uncertainty that our outlook, we've taken into account. That's why we do have the range we're confident in it given that what we're projecting both the good and the bad. I mean there are some things that we think -- we just talked about it potentially imports in North America, could be in Western Europe. But then there's the positives where an example would be China opening up that could have a positive impact on us. The other thing that we didn't mention is -- but Jean-Michel alluded to it, is we're really seeing really strong demand in Brazil. In fact, Brazil's uncoated freesheet demand is now above pandemic levels. And I think your year-over-year increase is almost 19%. We're seeing cut size to be very strong as offices -- we're starting to see reports that the U.S., where returning to the office now at 50%, as that continues to increase, that's supportive. Yes, thanks. I just wanted to follow up on this new priority of returning cash to shareholders that you've got and just talk about some of the alternative solutions you've got on trying to [remove] (ph) some of the restrictions from your payment basket to shareholders. Well, Paul, I'd love to be able to share that with you, but I think on -- because some of these options could involve confidential information, we really can't discuss it right now. And we -- also, we need to make sure we've got -- our Board has approved it. But suffice to say, we're looking at all options -- yes, we're looking at a high level. And I would say that we also are confident that we're going to be able to do something about increase to $90 million this year. Hi, thanks for taking my call. I just had -- most of your questions I had were covered. But in terms of your debt stack, right now, you're about 1x levered roughly. Is there any reason why you would need to go below that or would want to in terms of cash deployment? No, I think the short answer to your question, Adam, is that we're really comfortable with where we are. I mean, we've set the target of $1 billion, and that's gross debt, because we want to be able to have the financial flexibility through the cycle to invest in our business, either in high-return projects or what not. And so that's where we are. Now, could we reduce our debt? We may, but not because of the payment restrictions that we have, but that's not the plan right now. Right. Unless -- until you get the payment restrictions lifted, the cash is going to build, but ultimately, right, you don't want to have too little debt. Got it. The other question I had relates to Europe. I know in the past, you said about, I think, it was 25% of Europe's capacity is not fully integrated. I'm not that close to the markets as you guys are, but are there any other mills in Europe or capacity reductions or potential consolidations that you guys have heard about or rumored to further consolidate the European markets? I think we cannot really answer that question. We don't comment on rumors. So -- but your numbers in terms of non-integrated capacity and which means less competitive for Europe of about 25% is correct. Hi, thanks for taking my question. It'll be my last one, guys, I promise. So, when we look at the CapEx this year, and you've done a good job of outlining why there's an increase, nonetheless, when we look back over time and certainly, priorities have changed, the market has changed, your relative positioning has changed probably for -- in a good way. It's still a pretty sizable jump up in CapEx. Could you remind us what you think a more normalized, which suggests that maybe '23 isn't normalized or maybe it is, but what you think a normalized level of CapEx could be for the company incorporating return projects, making sure everything is functioning at the level you want? And when you do your indexing, do you think you're spending at least as much, if not more, than what you see overall within the industry? Because my view would be you're probably spending at a very healthy level, and it's working out. Your performance has been very good. What do you think normalized is? And do you think you are at least spending as much, if not, more, per mill or per ton versus averages in the industry? Thanks, guys, and good luck in the quarter. Yes. Thank you, George. And I think when we -- our focus is as we keep saying is to generate cash. And so, we want to be very judicious in the capital that we spend, but also the engine of our cash is our low-cost assets, as well as our customer relationships and our people, of course, but this is a key focus. Now if you look at the average of our capital when we do this, we'd really go back to pre-2016, because it was '16, after that '17, '18, '19, capital was pulled back. And we would say that we -- that was underinvested in the paper business -- in our business during that time period. Both in the forest, we saw it down in Brazil, and also in our facilities. But if you look at the period prior to 2016, we're spending essentially pretty much on average what we've spent back then on per facility basis, with the exception of inflation. You have to -- in 2016 dollars, you have to inflate it and there was quite a bit of inflation, the last two years that we've seen in the maintenance spending. So, I guess the short answer to your question is, yes, I think the range that we talked about earlier the $175 million to $190 million for maintenance, regulatory and forestry is probably -- what we feel is the appropriate number going forward. We didn't mention this, but -- so I'm going to -- George, I'm going take a little extra time. But I think it's good to point out why we are increasing spending in forestry down in Brazil. So, we are increasing by 10%. And it's really because of what I said earlier, back in 2019, '20 and '21, we underinvested in our forestry in Brazil. And then, we also -- which means that we typically have 80% of our wood that we consume is our own forest, and 20%, we have to go out in much more expensive outside market to get the wood, because we underinvested. Not only that, but we also -- there were forest fires. There was some insect damage. We are now probably approaching 70%, and that actually 10% is a big deal from a cost perspective for us. And so, we're going to be investing more in the forestry to replant land that we have, that we own or through our partnerships that we've been -- we hadn't been adequately sustaining, and so we're spending that to go forward. But again, because of the rotations of the wood, six to seven years, we really won't see the benefit of that until out in the future, but that's the other reason why we're increasing our spending. Yes, that makes sense, and certainly is consistent with a lot of the things that the LatAm folks talk about. And it's a low-cost source of wood, so you are seeing investing in conversion of that fiber as well, so you've got to keep your base. Thank you, John. Thank you for joining us today. We appreciate your interest in Sylvamo. I'm going to ask Jean-Michel to give a quick summary of the call today. I just want to remember maybe what's our key message is. In 2023, we expect to increase our earnings and free cash flow versus 2022. We expect -- and it's a clear objective of us to return more cash to shareholders. And in terms of capital allocation, we want to keep a strong financial position, return cash to shareholders and reinvest in our business. I'm sure '23 has a lot of uncertainty, but we've got the right strategy and the right people to execute it. So, we feel confident in this outlook.

EarningCall_132

Ladies and gentlemen, thank you for standing by, and welcome to Cabot's First Quarter 2023 Earnings Conference Call. After the speaker's presentation, there will be a question-and-answer session, instructions will be given at that time. Please be advised that today's conference may be recorded. I would now like to turn the conference over to your speaker host, Steve Delahunt, Vice President, Treasury and Investor Relations. Please go ahead. Thank you, Michelle, and good morning. I would like to welcome you to the Cabot Corporation earnings teleconference. With me today are Sean Keohane, CEO and President; and Erica McLaughlin, Executive Vice President and CFO. Last night, we released results for our first quarter of fiscal 2023, copies of which are posted in the Investor Relations section of our website. The slide deck that accompanies this call is also available on the Investor Relations portion of our website and will be available in conjunction with the replay of the call. During this conference call, we will make forward-looking statements about our expected future operational and financial performance. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the press release we issued last night and in our 10-K for the fiscal year ended September 30, 2022, and in subsequent filings we made by the SEC, all of which are also available on the company's website. In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. The non-GAAP results -- non-GAAP financial measures referenced on this call reconcile to the most directly comparable GAAP financial measure in a table at the end of our earnings release issued last night and available in the Investors section of our website. I will now turn the call over to Sean, who will discuss the first quarter highlights, some recent recognition we received with respect to our leadership in ESG and our progress in the area of Battery Materials. Erica will review the company and business segment results, along with some corporate financial details. Following this, Sean will provide closing comments and open the floor to questions. Sean? Thank you, Steve, and good morning, ladies and gentlemen. Welcome to our call today. I'm pleased with our first quarter results as they were in line with our expectations and the strategic developments that informed our full year guide in November remain on track. As a result, we remain confident in our full year outlook and are reaffirming our guidance range of adjusted earnings per share of $6.25 to $6.75. In the first fiscal quarter, we delivered adjusted earnings per share of $0.98, despite significant headwinds, including lower demand in China due to significant levels of COVID outbreak, elevated levels of customer destocking across most value chains and softness in key end markets in Performance Chemicals. EBIT and Reinforcement Materials was up 11% year-over-year, demonstrating the structural improvements we've made in recent years to the business and the resilience of the replacement tire market. We also concluded our entire customer contracts with better pricing than we originally forecasted back in November, underscoring Cabot's value proposition of supplier liability, quality and sustainability. Further on the strategic front, Battery Materials continues to outperform the market with year-over-year volume growth of 63%. Overall, we are very pleased with our strategic progress, and we believe the company is well positioned for another year of earnings growth. Our leadership in ESG continued to be recognized in the quarter. First, we were named by Newsweek as one of America's most responsible companies. This is the fourth consecutive year that we've been included on Newsweek's list which recognizes our strong performance in the areas of environmental, social and governance, and we're very proud of this recognition. Second, we were named by Investor's Business Daily as one of the 100 best ESG companies in 2022. The list recognizes companies with superior ESG ratings in addition to strong fundamental and technical stock performance. And finally, we recently have been named one of America's Great Workplaces for Diversity 2023 by Newsweek and Plant-A Insights Group. This newly established list recognizes the top 1,000 companies in the U.S. that not only celebrate diversity would implement policies that cultivate inclusive workplaces. Cabot received a 5-star diversity score, the highest recognition available. This recognition is a testament to our efforts to promote and encourage diversity in all its forms. We look forward to continuing to advance our goals of fostering inclusion and supporting employee development as well as increasing diverse representation across our company. Leadership in the space of sustainability is central to our strategy in these forms of external recognition acknowledge our progress and our source of motivation for our employees. I look forward to updating you on further developments as we progress on our ESG journey. I've talked quite a bit about the growth in Battery Materials over the last few quarters, as I believe it represents a transformational opportunity for Cabot, driven by growth in the demand for electric vehicles and lithium ion batteries. Global demand for critical battery materials such as our conductive carbon additives is expected to grow in the range of 20% to 30% annually over the next decade. Growth potential in the U.S. is expected to outpace global growth as penetration of EVs accelerates from what is a small fraction of car sales today. The U.S. growth is aided by recent U.S. government announcements targeted to accelerate the build-out of a domestic EV battery supply chain. As part of these efforts, federal and state governments have implemented a variety of programs in the form of grants, loans and tax incentives. To meet the growth expectations of our customers, we recently announced plans to add conductive carbon additives capacity in the United States. This investment located at our existing facility in Tampa, Texas is part of an approximately $200 million planned investment program over the next 5 years. In addition to the Pampa [ph] conductive carbons expansion, we also intend to invest in a new CNT dispersion capacity in the U.S., which will bring together the powerful combination of conductive carbons, carbon nanotubes and blends, offering our customers optimal performance and formulation flexibility. These capacity investments will also support the critical need of our customers for domestic supply. During Investor Day in December of 2021, we outlined the capacity investment program that would add approximately 30,000 metric tons of CCA capacity through 2024. These projects are all on track for completion by 2024 and support our communicated growth target of 50% plus for Battery Materials through 2024. The Tampa expansion will add an additional approximately 15,000 metric tons of conductive carbon capacity, thereby driving growth from 2025 and beyond. At Cabot, we've been building out our Battery Materials CCA product line for several years and have been extending our leadership position in this transformational space. We currently have established CCA capacity for Battery Materials in the U.S., Europe and Asia, which provides our customers with security of supply but also gives Cabot an advantage over many competitors, which are largely operating in the Asia region. Our global footprint gives us the opportunity to expand capacity quickly to meet the expected sharp ramp in demand from our customers. At Cabot, we have the flexibility to either expand on existing sites or upgrade current assets to produce Battery Materials products as we're currently doing in Tianjin, China. Our ability and track record to quickly scale up capacity additions is something that our customer’s value at Cabot and this directly supports their imperative to regionalize the material supply chain. We believe our broad offering of CCAs along with our existing network of plants and the talent of our people uniquely positions Cabot to support the growth expectations of our customers here in the U.S. The planned investments are another step in our strategy to capitalize on the fundamental transition from internal combustion engines to electric vehicles. Our planned investments will help support the electric vehicle transition and solidify Cabot as a global leader in Battery Materials. Thanks, Sean. I will start with discussing results for the company and then review the segment results. Adjusted earnings per share for the first quarter of fiscal 2023 was $0.98 and compared to $1.29 in the first quarter of fiscal '22, with growth in the Reinforcement Materials segment offset by declines in the Performance Chemicals segment. The quarter was also impacted by higher net interest expense of $7 million year-over-year and unfavorable foreign exchange impact of $13 million. The current full year impact from foreign currency exchange is now estimated to be just above $20 million with the majority of the year-over-year unfavorable comparison expected to be in the first half of the fiscal year. Our expectation of net interest for the year is unchanged from last quarter, and we expect $20 million higher year-over-year net expense. Discretionary free cash flow in the quarter was $63 million, and we ended the quarter with $190 million of cash. Working capital in the quarter was a use of cash of $34 million. And looking ahead, based on the forward curve for oil prices, we expect working capital to be a source of cash of approximately $100 million over the remaining three quarters of the fiscal year. Capital expenditures in the quarter was $35 million and we expect full year CapEx to be approximately $300 million. The balance sheet remains strong with total liquidity of $1.1 billion, and net debt-to-EBITDA of 1.8 times as of December 31, 2022. Our operating tax rate was 25% for the quarter, and we anticipate the fiscal year rate will be between 24% and 26%. Now moving to Reinforcement Materials. During the first quarter, EBIT for Reinforcement Materials increased by $9 million as compared to the same period in the prior year. The increase was driven by improved unit margins from higher pricing and product mix in our 2022 calendar year customer agreements, partially offset by 5% lower volumes and a $5 million unfavorable foreign currency impact in the quarter. Globally, volumes were down in all regions in the first quarter as compared to the same period of the prior year, with declines of 5% in the Americas, 5% in Europe and 6% in Asia. Lower volumes were largely due to year-end destocking in excess of the normal seasonal effect in all regions and the impacts from COVID-19 outbreaks in China. Looking to the second quarter of fiscal 2023, we expect the Reinforcement Materials EBIT to improve both year-over-year and sequentially due to the outcome of our calendar year 2023 customer agreements. The net year-over-year benefit from contract pricing and product mix improvement is now expected to be a net benefit of approximately $25 million per quarter. Based on the finalization of customer agreements, and updates to the offsetting cost factors such as inflation, energy center revenues and foreign currency impacts. This results in a $100 million annualized benefit, of which we expect to see approximately $75 million over the three quarters in our fiscal 2023. Offsetting the benefit from the pricing and product mix in the second quarter, we expect an unfavorable impact on volumes and margins in China on the COVID-19 outbreaks. As you may recall, China represents approximately 25% of total segment volumes, and we estimate the impact in China in the second quarter to be in the range of $10 million to $15 million. We anticipate volumes to recover in China after the Lunar New Year holiday and to return to more normalized levels in the second half of the fiscal year. We expect volumes to increase sequentially in the second quarter in Europe and the Americas, and we see this recovery having already started in January. Overall, we expect results in this segment will deliver another impressive year of double-digit percentage growth. Now turning to Performance Chemicals. EBIT decreased by $23 million in the first fiscal quarter as compared to the same period in fiscal 2022. The decrease was principally due to lower volumes, higher fixed costs from new capacity adds and an unfavorable foreign currency impact in the quarter. Year-over-year segment volumes in the first quarter decreased by 8%. Volumes in our specialty carbons and compounds and fumed oxide [ph] product lines declined by 10% to 15%, largely due to elevated levels of year-end destocking, softness in key end markets and the impact from the COVID-19 outbreak in China. These volume declines were partially offset by another quarter of strong volume growth in battery materials with volumes up 63% year-over-year. Fixed costs increased by $8 million in the quarter driven by our new capacity adds, including the new specialty carbons plant in Xuzhou, China and the newly acquired plant for Battery Materials in Tianjin, China. And our specialty compounds plant came back online in Belgium. In addition, the translation impact of the stronger U.S. dollar was unfavorable by $4 million year-over-year in the quarter. Looking ahead to the second quarter of fiscal 2023, we expect volumes to improve sequentially across our larger product lines as destocking comes to an end and our key end markets begin to recover. We have seen improvement in the month of January across our product lines from the levels experienced in the first quarter. However, we expect volumes to continue to be lower on a year-over-year basis in the second quarter largely due to lingering effects from the COVID outbreaks in China, partially offset by another strong quarter of volume growth in Battery Materials. EBIT in the second quarter is also expected to be impacted from the higher costs year-over-year related to increased capacity and growth investments and the unfavorable impact of foreign currency translation. In addition, we do not expect to see the same benefit from price increases ahead of raw materials in our fumed metal oxide product line that we realized in the second quarter of fiscal 2022. These items are expected to be a headwind of approximately $10 million each for a total of $30 million on a year-over-year basis in the second quarter. As we move to the second half of the year, we expect volumes across our larger product lines to continue to improve each quarter with the second half of fiscal 2023 back to more normalized levels. We also anticipate that our growth vectors will contribute substantially to the earnings as the demand profile for battery materials and inkjet packaging step up in the second half of the fiscal year. Overall, the segment is expected to see lower EBIT year-over-year in the first half of the year from the weaker volume profile. As volumes improve across the larger product lines and the momentum continues in our growth vectors, we anticipate EBIT to be stronger year-over-year in the second half of the year. Thanks, Erica. Moving to our 2023 outlook. As I mentioned in my opening remarks, we feel very good about the strategic growth drivers of Cabot and are reaffirming our outlook for adjusted earnings per share in the range of $6.25 to $6.75, which is up 4% at the midpoint year-over-year. Looking more closely at the full year guide to achieve the midpoint of the outlook implies a rate of EPS growth year-over-year in the last three quarters of 11%, which would reflect another structural step-up in the earnings power of the company. In terms of the key assumptions that underpin our outlook, Erica has covered these in her remarks. As we think about the quarter, we shape of earnings, the second quarter results are expected to be up sequentially but down year-over-year with EBIT accelerating as we move through the year. We expect that the second half of the fiscal year will deliver higher year-on-year adjusted earnings per share. At a strategic level, the key drivers of earnings growth are continuing to develop as we expected. We had a tremendous outcome to our calendar year 2023 Reinforcement Materials customer agreements, reflecting the tight regional supply-demand dynamics and the importance of both quality and sustainability to our customers. This will drive our expectation for another year of strong double-digit EBIT growth in the Reinforcement Materials segment. In Battery Materials, we continue to expect EBITDA for fiscal year 2023 to be in the range of $45 million to $50 million, up from $29 million in fiscal year 2022. We are investing behind this strong secular growth trend and are excited by the transformational potential that the shift to EVs presents for Cabot. And while Performance Chemicals is impacted by external demand environment in the first half of the fiscal year, we expect our growth investments will enable a strong recovery in the second half of the year as demand normalizes and then grows over the longer term. Overall, I'm very pleased with how the company is positioned today, and I'm confident in the outlook for the year. We are executing very well against our Creating for Tomorrow strategy, and this strategy is built to grow, transform and reshape the valuation potential of Cabot. Thank you very much for joining us today. And I will now turn the call over for our Q&A session. Michelle, I think we're ready for that now. Good morning. What are you guys seeing right now in China in terms of reopening post the Chinese Lunar New Year? Yeah. Well, as you know well, David, certainly the China policy on COVID was quite an abrupt change in the December period, and that really had a chilling effect on just consumer activity and demand and the like. But as a result, I think COVID has burned through pretty fast in China. And so as we on the ground kind of see what's happening coming out of Chinese New Year, first of all, there was a lot of activity in China, a very high level of domestic travel in China, which was, I think, a positive sign. And then it seems that the consumer activity has picked up and is quite strong. People are out and about and I think that's what we're hearing from our team on the ground, and I think that's positive. So as we progress through the quarter here, certainly, the January month was weak because of the COVID infections and the Chinese New Year holiday falling in January this year. But I think the expectation is that, that will progress as we move through the quarter here and early signs just in terms of consumer activity certainly support that. So that's our expectation, and then things will normalize in the back half of the year, we'll see volumes be more at our normal level. And I think that lines up with what most folks, most economists are expecting. I think there's a pretty - there's a growing level of confidence around the expected GDP for the year in the 5-plus percent range. I think the stimulus actions are in place and now with COVID having burned through pretty quickly, and I think a lot of pent-up frustration and pent-up demand from a very long and difficult COVID period there in China, I think that speaks to probably a bounce. That seems to be the prevailing view. But that's what we're seeing right now, David. Very good. And just on Battery Materials, given the strong start of your volumes up, I guess, 63%. Is there some upside to your EBITDA forecast this year of 45 to 50? I would say the 45 to 50 is obviously a pretty strong number, up from the 29 that we posted. So I think that guide we've given, we feel very good about, but it's a pretty strong number and higher than the 50-plus percent that we communicated at Investor Day. So I think that's a very strong result, and we're continuing to invest behind this one. And I think the value proposition from our customers is really showing through, not only the product quality, the range of CCAs that we have, the ability to blend conductive carbons and CNTs and then our ability to support them with regional capacity expansions. I think that will be the theme here over the next couple of years. So we feel very good about it, David. Hey, guys. This is James Cannon on for Josh. I was just wondering about with the disruption you've seen in China, has that had any impact on the carbon black spreads you're seeing? I see. Okay. Well, as Erica commented, we are expecting in Q2 to be impacted to the range of $10 million to $15 million in China from the impacts of the COVID outbreaks. That's a combination of both some volume and margin impact. So as volumes are weaker and as people are holding some inventories, naturally, there's some pressure on the pricing. But as the demand begins to pick up here as we come out of Chinese New Year, we would expect then the unit margins would move back to a more traditional level. But the range we're expecting in the quarter from both the demand and margin impacts would be in that $10 million to $15 million range that Erica had referenced. Okay. Thanks. And then just as a quick follow-up. Just if we think about moving into next year, you have pretty strong reinforcement pricing gains this year. How should we think about the durability of those? Can you hold on to them? Is there a potential for even more pricing? Yes. So I think the way to think about that is to come back to the structural dynamics in the business. And so the business in Reinforcement Materials is principally a regional business. And so the regional supply-demand dynamics are very important. And what's been happening over the last number of years is a continued tightening there with - especially in the West with the more mature regions with effectively no capacity additions. And I think the rising cost of sustainability, which is important to our customers. So I think that supply-demand tightness, the commitment to sustainability. These trends are quite structural. And therefore, we feel very good about the place that we're in right now in terms of pricing and margins. And difficult to comment beyond this year other than to re-communicate that in the negotiating period that we had this year, we did have some customers that closed multiyear agreements and those agreements included price increases again for 2024. So I think that's a sign that would be consistent with the structural setup that we see in the industry. Hi. Your SG&A expense was down year-over-year in the first quarter. What's that about? And should SG&A expense grow year-over-year or shrink? So in Q1 of '21, just a reminder that Purification Solutions was still in the numbers. So while a zero EBIT impact, you'll see it in revenue, cost of sales and SG&A. And some of the main reason you see the decline from '21 to '22 is Purification Solutions not being included in that number when you're looking at the GAAP financial statement. And so - and then your second part of the question on will SG&A grow? I think, yes would be the answer. I think, in reasonable amount, it would. We are making some investments in the growth vectors, particularly Battery Materials. And then as you would expect, there is cost of living adjustments on the salaries that would also impact the number. Can you talk about Russia exports in carbon black in calendar 2022? In the end, did much less carbon black get to the West or the amount that they usually produce? And how do you see 2023 playing out for Russia, Ukraine and the annual [ph] production there? Yes. Yes, I'll take that one, Jeff. So the picture, I think, very clearly, our customers, particularly in Europe, who are the biggest consumers of the Russian material have decidedly moved away from that, I think, for obvious reasons, both security of supply, but also the reputational impacts here. So I think that trend is very clear. Now Russia did continue to produce and material was exported. It seems to be - it's difficult to exactly trace where it's going, but I think we can conclude that it's not having any material impact in Europe. There's materially a net shortage in Europe that's been creating even further tightness there and supported the recent negotiations. So I think that picture is pretty clear to us where exactly the material is flowing is a little more difficult. My sense is that some of it might flow to places like Turkey and other out into smaller markets. And - but that would not have much impact on the overall dynamics. And I think the way our negotiations played out, I think that's - that would be consistent with that view. Your volumes in Reinforcement Materials were negative 5 for the quarter, and you said that there are still issues going on in China. So I assume that volumes will again be negative in the second quarter. So in rough terms, do you expect your carbon black in your reinforcement volumes to be about flat for the year? Yes. I think on the volume picture, Jeff, I think that's a reasonable view. I think we'd expect full year volumes and reinforcement to be probably up modestly, which would be in line with expectations for tire production from LMC. LMC right now is projecting about plus 1% or something like that. And we would expect our volumes to be in line with that. Obviously, the shape of the year is a little bit different because of the China COVID impact. But I think that high level takeaway that you have, Jeff, is a reasonable one, up modestly is kind of the bottom line we would expect. And then lastly, in what's going on in the silicones and siloxanes market? I would have thought that there would have been a large inventory destock in the December quarter and maybe meaningful destock in the March quarter. So is that another one where volumes will be negative in the first half? And maybe you can get back to flat, maybe you can't for the year? Yes. So let me comment on the PC segment, Performance Chemicals. So we would expect the full year volumes to be up in the fiscal year in the low single digits with positive year-over-year comps in the second half. And then more specifically, of course, in Battery Materials, we'd expect the volumes to be in that 50% plus that we communicated at Investor Day. But if you roll all of Performance Chemicals together, we'd expect to be up in the low single digits. But again, the shape impacted by destocking across Q1 and some into Q2 and the China effect in our Q2 with then comps turning positive in the second half to then blend into a full year growth in the low single digits. That's a reasonable way to think about the Performance Chemicals segment. Yes. Yes. So definitely, silicones, you're definitely seeing some pressure and some destocking. And as a result, the same flows through into silica [ph] and I think that's because there's a certain amount of the siloxanes and silica that goes into markets like construction and those are weaker for sure. So there's some destocking to reflect the weaker demand outlook in construction. And then you've also got the China impact. China makes about half of the world's silicones and about half of the world is silica. And so you've got the China phenomenon playing out with COVID in our - in December and into our Q2.\ So I think the shape in silica and silicones will be similar. You'll see it be weaker in the first half and then beginning to improve and normalize in our back half of the year. So that's what we see, Jeff. Good morning. It's Dan Rizzo on for Laurence. Thank you for taking my question. With the new capacity that you have coming online in CCA, and elsewhere within Battery Materials, is that already contracted to customers? So when the new capacity comes online and you already have it sold? Or is this something you're going to go to the market with? Hi, Dan. So I would say the way to think about that is we're selling to most of the major battery producers in the world today. So I think I've commented in the past that the top eight, it's a pretty concentrated industry. So the top eight makeup eight players make up close to 90% of the market, and we're currently selling to six of the top eight with development programs to the - with the remaining two. So I think we're on a good path here. And so with already established commercial arrangements and volumes, then our new capacity would really be in place to serve their growth. So it's really - that's the way to think about it. Now the new capacity that we recently announced is capacity that will come online and have impacts after 2024. So we already have enough capacity and between existing and what projects have already been underway to support our Investor Day growth objectives that we communicated. So this is really an investment that's sort of funding the next wave of growth with a particular focus on the U.S. as there's a real build up in momentum to establish a supply chain here in the U.S. Okay. And then - I don't know if I missed this or not, but do you expect any new capacity in Specialty Black or Rubber Black or meaningful new capacity in the next 2 to 3 years industry-wide? And I guess what are you guys also planning yourselves? Yeah. So in terms of our capacity in specialty carbons, we did bring on a new a new plant in Xuzhou, China. So in Erica's comments, she mentioned that the cost of that came online in the quarter. But of course, the volumes aren't feeling yet because of the weak China environment. But that will give us growth over the next number of years. So we feel very good about the capacity investments for specialty carbons in the next couple of years. Don't see the need for further investment beyond that. We think that will support the growth in the business nicely. And so that's with respect to specialty carbons. In Reinforcement Materials, we continue to have a philosophy of trying to support our customers here by creating capacity through improvements in overall equipment effectiveness or OEE looking next at low-cost debottlenecks and then being very disciplined and strategic as it relates to new units. And so the one place where we envision a new unit of capacity would be in the highest growth region of the world, which is in ASEAN in Indonesia, specifically for us. If I just kind of - so that's what we are contemplating. But if I just pull it up to the industry level and Reinforcement Materials, we have not seen any announcements in Reinforcement Materials in the mature markets other than Orion [ph] had a tranche of capacity that came on in Europe that I think is probably primarily sold at this stage. I think the market is pretty snug and expected to be in the next few years just based on the fact that there haven't been any new announcements and you think about kind of a 3-year runway to build something like permit and build, it takes some time. So that's how we would see the kind of overall industry view. Yeah, good morning. I had a question on the upside that you referred to in your Reinforcement Materials for the calendar year '23. And I know you mentioned pricing and mix were drivers there. But I'm curious if volumes - we're also positive volumes relative to prior expectations. We're also an outcome of the balance of those contract negotiations. Just asking because you have this downdraft in China affecting at least the first quarter of calendar '23. So curious if the better volumes in other regions are contributing to the upside there. And if consequent, unit variances are part of the lift? Yeah. So it's principally price and mix, Chris, as we closed out. So in that $25 million number, net number that Erica commented on that increment versus what we had communicated in our last call of $5 million is principally price and mix. And so as we closed out final agreements, of course, given the structural dynamics in the industry, there was more and more competition for the remaining capacity. And so the last group of agreements closed in a stronger place than we had anticipated at the point when we last communicated in November. So there's not a volume in that $25 million net number that Erica commented on. Got it. That's helpful. And then just in the Performance Chemicals and just wondering, you mentioned the destocking in fumed metal oxide, in silica. Just wondering about where else you're seeing that softness or destocking? Is it pronounced in the silicas as well as the master batches [ph] Or is it kind of across specialty? Just where is it most acute [ph] and in what regions? That would be helpful. Thank you. Yes, sure. So in terms of destocking, Performance Chemicals typically experiences deeper destocking and restocking cycle than, say, Reinforcement Materials because the value chains are longer here, there could be three, four, five people in a chain all the way to the end product, whereas in a business like Reinforcement, it's more shallow of the value chain and us to the tire producers to the customer. So that's a dynamic - that's part of the industry, so just a reminder on that. Now we see that destocking seems to be coming to an end as we move out of Q1 and into the early part of Q2 here. And so that's a positive sign. Commodity prices have come off from their peak, which is good. Normally, what you see when commodity prices, whether you're talking about oil or polymers or energy prices when those start dropping, people want to pull back on inventories because they don't want to be caught with high-cost inventory. And so you have a bit of this destocking phenomenon, I think with those having come off their peak, I think that supports kind of stabilizing around this destocking phenomenon. So that's what we're seeing here. There are certain - and I would say that's consistent across the major product lines in Performance Chemicals. So carbons, in silica and specialty compounds, I would say they're seeing at a high level, a similar dynamic here, Chris. Got it. And then one last one on Battery Materials because it's obviously a good story and a nice growth driver for you guys. And through the lens of me following lithium companies, you see a lot of concerns downstream in that value chain from battery - cathode battery OEs about security of supply and just given constraints on the supply of Battery Materials. So just wondering, is that something that's surfacing in your discussions and relationships with your customers' concerns about security of supply? And how is that manifesting in terms of your supply agreements? Thank you. Yes. Thanks, Chris. So for sure, the security of supply of materials, the chemistry that's essential to the batteries for sure, that is getting a lot of attention. I think what gets the most attention, of course, are the large volume materials. So the lithium, the graphite, the large volume materials, which are heavily concentrated in China. And so as you were - as you're seeing the regional build-out of battery plants in the U.S. and Europe and the growing tensions with China, I think it's amplifying the importance of supply security. And I think that is generally true, I would say, in the space where we play in conductive carbon additives. Again, it doesn't get the headline at the very large volume material concerns would get. But I think customers clearly understand and want regional supply. And when they look at Cabot, they see a value proposition that I think is compelling to them because of the product suite that we have, the capacity that we have around the world, our commitment to expand around the world and our ability to do it and scale up in a way that supports their needs. I think that value proposition is really showing through. And I think it is one of the drivers of why our volumes are outperforming the market growth rate and have been for - consistently for some time here. So we probably won't read about it on the front page of the paper like some of the other materials, but that dynamic is important in our materials as well. Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Sean Keohane for any closing remarks. Great. Thank you, Michelle. And thank you, everyone, for joining today. Thank you for your continued support of Cabot, and we look forward to speaking with you again next quarter. Take care.

EarningCall_133

Good afternoon. Thank you for attending today's Yelp Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Megan, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to James Miln, Senior Vice President of Finance and Investor Relations. James, please go ahead. Good afternoon everyone, and thanks for joining us on Yelp's fourth quarter and full year 2022 earnings conference call. Joining me today are Yelp's Chief Executive Officer, Jeremy Stoppelman; Chief Financial Officer; David Schwarzbach; and Chief Operating Officer, Jed Nachman. We published a shareholder letter on our Investor Relations website and with the SEC and hope everyone had a chance to read it. We'll provide some brief opening comments and then turn to your questions. Now I'll read our safe harbor statement. We'll make certain statements today that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. In addition, we are subject to a number of risks that may significantly impact our business and financial results. Please refer to our SEC filings as well as our shareholder letter for a more detailed description of the risk factors that may affect our results. During our call today, we'll discuss adjusted EBITDA and adjusted EBITDA margin which are non-GAAP financial measures. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with Generally Accepted Accounting Principles. In our shareholder letter released this afternoon and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, as well as historical reconciliations of GAAP net income to both adjusted EBITDA and adjusted EBITDA margin. Thanks James, and welcome everyone. Yelp delivered one of the strongest revenue growth performances among our advertising and marketplace peers in 2022. Our performance ad products and high intent audience generated robust advertiser demand across a broad range of categories, both on and off Yelp. Net revenue increased by 16% year-over-year to a record $1.2 billion in 2022. We delivered this performance with net income of $36 million and adjusted EBITDA of $270 million. These results demonstrate the strength and durability of Yelp's ad platform and the ability of our team to execute under a range of difficult conditions to deliver excellent results. Underlying our record top line our product led strategy drove a number of other record results in 2022. We achieved record paying advertising locations and average revenue per location for the year. In services, we succeeded in differentiating the product experience and increasing monetization and lead quality resulting in greater value to service growth. We believe Yelp gained market share in 2022 as advertising revenue from services businesses grew 14% year-over-year to a record $694 million. The home services category was particularly strong, with year-over-year growth of approximately 20%. Since 2019, revenue from this category has compounded at an annual growth rate of nearly 20%. Advertising revenue for Restaurants, Retail & Other businesses increased by 17% year-over-year to $441 million, driven by growth in paying advertising locations. We continue to deliver value to advertisers in these categories by enhancing our suite of ad products designed to deliver high intent clicks, both up and down in the funnel and on/off Yelp. On the consumer side of our business, traffic remained below pre-pandemic levels as the macro environment contributed to softer consumer demand. App unique devices of $33 million were flat compared to 2021. Despite this backdrop, we made early progress on the consumer focused initiative we announced at the beginning of 2022. We reduced friction from the rewriting process, which helped our trustworthy content grow by 21 million new reviews in 2022. This resulted in more than 265 million cumulative reviews as of December 31, up 9% from 2021. In addition, our early work with large language models suggest there are a number of near-term applications that we can leverage to enhance the consumer experience on Yelp. We deliver value to our advertisers through our sophisticated ad system. This best-in-class technology is able to respond dynamically to changes in supply and demand to efficiently match consumers with advertisers. While ad clicks for the year declined by 8% from 2021, a year that had benefited from reopening tailwind and elevated consumer spending, advertiser demand remained robust as we executed against our roadmap of ad system improvements and average CPC increased by 27% year-over-year. We also made progress on our initiative to drive sales through the most efficient channels. Self-serve and Multi-location channels each grew approximately 25% year-over-year to record levels in 2022. Together, these channels represented approximately 48% of advertising revenue in 2022, up four percentage points from 2021. Looking back over the last year, the Yelp team has made tremendous progress across all of our strategic initiatives. Our investments in product have not only delivered record revenue, but also strengthened Yelp's position as a leader in local with trusted content sophisticated ad time. As a result, we plan to expand upon each of our initiatives to drive profitable growth in 2023 and over the long-term by continuing to invest in, growing quality leads and monetization and services, driving sales through the most efficient channels, delivering more value to advertisers and enhancing the consumer experience. After a quarter, these initiatives aim to continue to differentiate Yelp from peers in bringing increased value to local consumers and advertisers. We believe that our consistent execution in these areas in 2022 has positioned Yelp better than ever to drive long-term profitable growth. Fourth quarter net revenue increased by 13% year-over-year to $309 million, near the high end of our outlook range. Net income decreased by 13% year-over-year to $20 million, largely due to a significant increase in our effective GAAP tax rate. Adjusted EBITDA grew by 18% year-over-year to $80 million, which is at the midpoint of our outlook range. Paying advertising locations increased by 3% year-over-year to $545,000 in the fourth quarter, while average revenue per location reached a quarterly record. Advertising revenue from services businesses increased by 13% year-over-year to $178 million in the fourth quarter. Our efforts to drive high-quality leads to service pros have clearly resonated with advertisers in these categories. Average revenue per location and services reached a record and increased for the 10th quarter in a row. Advertising revenue from Restaurants, Retail & Other businesses increased by 11% year-over-year to $116 million. As anticipated in our fourth quarter business outlook, advertiser demand was more muted in the 2022 holiday season than in prior years, particularly among Multi-location advertisers. This contributed to softer year-over-year growth in paying advertising locations in these categories. Turning to expenses. Since significantly decrease in our headcount in 2020, we have made prudent investments in our product-led strategy to drive profitable growth over the long-term. We have increased the size of our product development and Multi-location sales organizations, while holding local sales headcount relatively flat. As a result, we ended the year with a total headcount of approximately 4,800 people, representing an increase of 11% year-over-year, but still 18% below 2019, while full year net revenue increased by 16% and 18% over the same periods. We are pleased with this progress and currently plan to maintain approximately the same total headcount in 2023. We believe our sales channel mix shift, product-led strategy and reduced real estate footprint will be sources of leverage and margin improvement over the long-term. In addition, we are committed to reducing stock-based compensation as a percentage of revenue. In 2022, we decreased this percentage by approximately two percentage points and expect to drive an additional decrease of one percentage point in 2023. Looking ahead, we believe we can lower stock-based compensation to less than 8% of revenue by the end of 2025, driven by revenue growth as well as by continuing to optimize our location and compensation mix, particularly within product development. Returning capital to shareholders through share repurchases remains an important element of our overall capital allocation strategy. In 2022, we repurchased $200 million worth of shares at average purchase price of $32.28. At the end of the year, we had $282 million remaining on our existing repurchase authorization. We plan to continue repurchasing shares in 2023, subject to market and economic conditions. Turning to our outlook. As we enter 2023, we continue to believe in the significant long-term opportunities ahead and our team's ability to capture them. However, the macro environment remains challenging. We expect net revenue will be in the range of $300 million to $310 million for the first quarter, reflecting typical seasonality. For the full year, we expect net revenue to be in the range of $1.29 billion to $1.31 billion as our initiatives continue to drive growth against the backdrop of ongoing macro uncertainties. Turning to margin. We expect expenses to increase from the fourth quarter to the first quarter, reflecting our hiring efforts in 2022 as well as a seasonal increase in expense, primarily driven by payroll taxes. As a result, we anticipate first quarter adjusted EBITDA to be in the range of $40 million to $50 million. For the full year, we expect expenses to increase modestly year-over-year as we maintain approximately the same total headcount compared to the end of 2022. As such, we anticipate adjusted EBITDA to be in the range of $290 million to $310 million for the full year. We also currently expect our effective GAAP tax rate for 2023 to be in the range of 32% to 38%, largely due to the requirement to amortize certain research and development expenses under the 2017 U.S. Tax Cuts and Jobs Act. In closing, Yelp delivered one of the strongest revenue growth performances among our advertising and marketplace peers in 2022. Our broad-based local ad platform has proven its durability and our team has continued to execute against our initiatives driving excellent results. While the macro environment remains uncertain, we've built a strong foundation for the future and are confident in Yelp's path to deliver profitable growth along with shareholder value over the long-term. Great. Thanks. Good afternoon. Thanks for taking my questions. I guess two for me. First, regarding some of the expense outlook. I think keeping product development roughly flattish, adding headcount to sales. Just curious about the thought process behind that. It sounds like you have what you need from a product development or a product developer standpoint, but just a little more detail on the sales strategy? And then secondly, I mean given the strength you saw during the year, just curious in terms of how we should think about -- you talked about the roadmap, but continuing growth beyond this year. Pricing is -- the ad pricing is still going up, clicks down, maybe there's a flip there where it shifts more to more ad click growth. Just curious on some of the metrics, how you see that playing out. Thank you. Thanks for the question, Colin. With regard to headcount on the expense side, just to clarify, in 2022, we added to product and engineering. We also added to our Multi-location sales team. And our local sales headcount, which is still down substantially from 2020 -- from 2019 was modestly higher, but in line with what we've shared with you in the past about being in the range of about half of what it had previously been. That’s really around 2022. For 2023, we plan to keep headcount overall approximately flat. And that's true across all of the functional areas, whether it's product and engineering, sales and marketing or general and administrative. So, no shift in mix expected in terms of headcount in 2023. And Colin, this is Jeremy. I'll take the second question there, thinking about the roadmap for the year and beyond. We feel really great. Despite all of the macro uncertainty, the team's execution on the product and engineering side, the rest of the company too, but specifically on the product and engineering side, it's been really clean. We continue to have a deep portfolio of projects leading into ads continuing to improve. Our ad tech stack that are matching, request-a-quote driving up both the number of projects as well as the quality of leads, obviously it makes a difference. We turn towards -- more towards the consumer. Recently in 2022, we started that pivot. We're starting to see some benefits there. You may have noticed reviews grew 3% year-over-year to starting to see some of those wins stack up. And then from a go-to-market perspective, we've been leaning into Self-serve and Multi-location continues to go well, continues -- we continue to see really great progress there. And then for further afield, we've started to try and share a little bit more color about why we have conviction that we can grow for a considerable amount of time into the future. One example that we cite in the latter is looking at CM [ph] for services traffic. There's a big pool of quality leads out there, and we currently don't participate in that area really at all. And so, if you go and you look back at what we've built with request-a-quote, nearby jobs, matching technology, like we've been slowly assembling the pieces necessary to play uniquely in that space. And I think if you look at the strength of Yelp's brand and also its value to consumers beyond a single job, I think that gives you some sense of like why we think we can take considerable share in that space over time. We haven't baked anything into this year. It's really -- this year is about product development and experimentation in that area. But I think in the out years, that's a really interesting area. And then I would just point you to off Yelp as just another area of investment and opportunity for us. It wasn't that long ago that Yelp syndication and Yelp audiences didn't really exist. That's been innovation that we've built in-house and now it's a rapidly growing considerable business for us. It's taking a very unique down funnel intent that we see from consumers on Yelp and then it's reaching out to those consumers as they travel across the web, providing even more value to our advertisers. So, if you look across the whole host of portfolio, you get, as we do, high confident that there's growth opportunities in the future and over the long-term. Thank you for taking my questions. I have a couple, please. So, you talked about services revenue and you gained share in the industry versus peers. It sounds like you want to maintain the 25% model, at least based on the shareholder letter. Would you specifically double-click on what your plans are for the year in terms of driving quality of leads and improving the experience to drive services revenue growth? That's question one. And the second question is, David, if you could please talk about the cadence of EBITDA. So sequentially, you had some comments in the prepared remarks as well as in the letter. But how should we think about cadence of EBITDA for the rest of the year to get to your full year guide? Thank you. Hi, Shweta. This is Jeremy. I can touch on maybe the first one within services and monetize leads. Really happy to see the growth there, particularly the growth in home services, I believe that was 20% year-over-year. Great to see all of that activity happening on Yelp. We have a whole host of continued improvements within request-a-quote. One project in particular launching soon will really leverage Yelp's brand to help give consumers the confidence to engage with request-a-quote in particular. So, we do see really healthy -- a really healthy portfolio within our product development there. On the monetized leads question, 25% on [indiscernible] had come up a lot over the years. We do think, obviously, there's considerable headroom to keep making improvements there. But there's tradeoffs like we could certainly move that number up, but if the quality isn't there from a lead perspective, then that value isn't felt on the advertiser side. And given the really high demand from advertisers right now, we want to make sure that they're getting a lead that is actionable that works for them, where they feel like there's an opportunity to drive ROI. So, we're not rushing to drive that number up immediately. We're focused on quality as we were last year, but we do believe that over time, that will continue to go up. Shweta, just addressing your question on the cadence of EBITDA through the year. Once again, in the first quarter, we do see significantly higher expense due to payroll taxes. There's also a bit of layering in the additional expense of headcount that we hired in the first half of 2022. So, we would expect EBITDA to increase over the course of the year, and for expenses to moderate down from the first quarter as we also move through the year. So that's the profile that we expect from -- in order to deliver the $300 million to $310 million for -- excuse me -- yeah, the $290 million to $310 million for 2023. Okay. Thanks David. Thanks Jeremy. Just a quick follow-up though. So, David, any help with just for modeling for wanting purposes, but in terms of seasonality, should we follow a particular year? Is it more representative of 2019 versus perhaps 2022? Any thoughts there. Shweta, I don't, off the top of my head, have a thought in terms of that seasonality for a year to compare to. So, we'll go back and take a look at that. What I can say, again, is Q1 is meaningfully higher because of this payroll tax and that we do actually expect for expenses to moderate down as we move through the year in order to deliver the overall adjusted EBITDA for the year. But let us take a look and see what we think is accountable year in terms of profile. As you know, things have changed considerably through 2019, 2020 and 2021. It makes it a little harder to do comparisons. And the other thing I would just point out is we are not seeing large movements in headcount in 2023 or we don't anticipate large movements in headcount in 2023. So that's also just a very different profile compared to prior years. Thanks so much for taking the questions. Maybe two, if I can. Coming back to the comments on the macro, I would love to get as much detail as you're willing to give them out. What sort of headwind that might have created to Q4, the beginning of Q1, just so we could better size out. Ex the macro, how are you thinking about the underlying the business of things within your control versus outside of your control? And then coming back to the mix shift towards Self-serve and Multi-location, are there any elements you can give us in terms of targets or frameworks or thinking about mix shift towards those elements of the ad business as we move through 2023 and think about an exit velocity into 2024. Thanks so much. Hi, Eric. This is Jed. I can take both questions. In terms of the Q4 revenue and macro visibility, we remain really pleased with the overall resilience of the business thus far. We've, in the past, experienced periods of uncertainty and the business has remained solid. We have a diverse and really high-quality revenue base by both channel and category down funnel performance based ads. Our most efficient channels, as you mentioned, Self-serve and Multi-loc, both grew at a 25% rate year-over-year in 2022. And at the edges, we did see some increased caution from the Multi-locations advertisers in Q4, which resulted in a more muted holiday spend than in previous years. These businesses have obviously been dealing with a number of macro issues from labor supply to rising input cost. But our relationship with the Multi-loc business remain really, really strong. And we believe that Multi-location channel has room to run. On the SMB side, our advertiser base is comprised of really high-quality local SMBs, which has demonstrated that resilience in the past. We're focused on what's in our control right now and executing against those initiatives. And in terms of the mix between Self-serve and Multi-location. We've increased four points year-over-year in terms of the total out of those two channels between Self-serve and Multi-location, up to 48% of our revenue. And you have over -- approximately 50% of our revenue growing at 25% clip. So, we're really pleased with those two channels. We've continued to make improvements on the Multi-location product portfolio, spotlight ads, Yelp audiences, sponsored collections, which are really resonating in the marketplace. And on the Self-serve side, you continue to make improvements in terms of what we're giving our local advertisers in terms of customer insights and improved message center and really matching the most important leads with our advertisers. So, from a mix shift perspective, we're going to continue to lean into both of those channels and believe they both have had room to run. Hey, thank you. I have two. A question, I want to more on macro. Just maybe more specifically, have you seen improvement in the Multi-location advertiser base coming out of the holiday season? Or would you characterize it as kind of staying steady perhaps at those lower levels? And then secondly, on the consumer demand, I think, Jeremy, you mentioned that it remains a little below pre-pandemic levels. Curious what you attribute that to? And then you called out unique devices are lower, but what about engagement per user and how that's trending? Thank you. I can take another shot at the macro in terms of Multi-location trends. Obviously, we saw that muted spend in the fourth quarter, but we were really pleased with the way we were able to kind of continued conversations with all those Multi-location advertisers and we feel like we're really well positioned going into 2023. Ultimately, in this type of environment, we have a really down funnel lead and are strong from -- in times of macro uncertainty, folks want to spend their money in a place where they think they're yielding ROI and based -- and we have attribution solutions as an example that are able to really, really prove that out. And whether it's our YSP which is our first party data derived from Yelp and/or third parties that we use in order to kind of showcase that attribution. That's in a really good spot right now. Of course, there are macro uncertainties that are out of our control, but we feel well-positioned relative to the competition as we head into 2023 there. And so that's what I would say on the Multi-location side. Hi, Cory. Jeremy, again. Talking about consumer engagement and looking at the app, it got flat year-over-year, I think a contributing factor, obviously macro and how much consumers are getting out there and transacting. But we're not just kind of sitting around. We have pivoted a lot of resources towards consumer. We did see contributions rise 3% year-over-year. So, I think that's early signs of success from the efforts there. We have a deep roadmap that we'll be executing on in 2023 that's focused on some of these things you mentioned, improving the Android experience, like improving engagement. We've got a new home fee that we're going to keep iterating on. You may have also noticed there's new technology out there. Large language models in regards to book their first win within search from leveraging LOM. So, I think, there's a lot of opportunity. We're just gearing up. Last year was kind of our first effort starting to stack wins. And so, I think we'll see that continue. Also worth noting, mobile web was up as well. And so, with the product and engineering investment that is now quite significant, I think we feel confident. And then also return to marketing spend, one of the things we pulled back on, especially during the early pandemic timeframe, was installs and driving installs from a pay perspective. And so that's something that we've returned to and so that provides some audience upside as well. And maybe one more, if I can just for Jed. If I was interesting you call out local sales projects, new customer acquisition is the best you've seen in two years. Curious what you attribute that to if there's something maybe specifically that you've changed or that you're doing that you would call out working well. Thank you. Yeah. Thanks for the question. We have been really pleased with our local channel, both includes -- which includes both kind of the Self-serve as well as our rep sold business. From a salesforce perspective, certainly we feel there are benefits in our remote past year and being able to retain our top performing reps who are now distributed across the country, and that's been a real boon for us in terms of making sure that we have the right people in the seats. And as that salesforce ages, you're going to get more productivity out of them. And ultimately, we're also giving them a product to sell too, which is really, really important as you watch the product portfolio evolve over the past few years and the confidence level with which they can talk to local businesses, we know we're delivering more value than we ever have and that's been really an important part of the success on the local sales team. Hi. This is Chris Suchecki on for John. Thanks for taking the question. So, we think we picked up on an uptick in ad loads across the Yelp app, particularly in the services category. Was this just some testing we picked up on? Or are you able to talk about if you've made a permanent adjustment to the services ad load? And then maybe just some comments on how you're thinking about greater ad load could impact consumer experience and then lead monetization. Thank you. Hi, Chris. This is Jeremy. We're constantly running experiments that are very good the search experience. And so, nothing to report there as far as something massively different than historical. I do think a lot of the activity within services, it's important to note within request-a-quote. And so a lot of what's happening within the request-a-quote is fully or near fully monetized. And it's a great consumer experience. Because you're telling us more about your project and you're hearing from people that can actually fulfill that and ideally within a reasonable timeframe. So, we see it as kind of a win all around in that the progress, valuable leads and opportunity to engage with the consumer. The consumer gets responsive businesses and Yelp facilitate that and gets paid. So that's where a lot of the focus is and a lot of the value is within services. Hi, guys. Thanks for taking the question. Last quarter, you guys called out some interesting, almost countercyclical trends in services. I think it was room first maybe increasing ad spend even if they saw demand cool. So, you noted home services was up 20% year-over-year this quarter. So, maybe it looks like that trend continued. Curious if there's anything else you can call out there or any other services categories, especially weak or strong. Hi, Brian. This is Jeremy. I don't remember the specific on recruits. I'm not sure about that. But yeah, we did -- we have seen services demand from advertisers remain robust and home services even more so. What's going on there, I think, hard to fully unpack given the strange, call it, macro environment. But I think part of it is as business has slowed down, is a great boom time year of 2021. Businesses did have -- continue to have to spend on keeping their trucks rolling and keeping themselves busy. And so, they're looking for reliable channels in which to invest and get a return on their investment from a leads perspective. And I think that's why so many have turned to Yelp is because we're a reliable source of high-quality leads. And it's also very convenient. They can turn it on and off as needed. They can test it out and see for themselves whether we're delivering. And from our perspective, we just -- we've been working really hard on making request-a-quote work for these businesses, driving quality needs. Quality over quantity was a big theme last year. We're focused on driving up the percentage of monetize. We're really focused on that lead quality. I think that's coming through. And then, if you look at the opportunity of the Yelp, we're taking that consumer demand when someone comes to us with one of these longer tail infrequent service requests, we're able to reach them when they hit maybe the New York Times or somewhere else on the web through Yelp syndication. And so that's a powerful tool as well. So, I think everything is coming together to deliver valuable leads to these local businesses and they're continuing to spend with us, which is great. Thank you. There are no additional questions waiting at this time. So, I will now conclude the Yelp fourth quarter and full year 2022 earnings conference call. Thank you for your participation. You have a wonderful day.

EarningCall_134

Good day, and welcome to the Equity Residential Fourth Quarter 2022 Earnings Conference Call and Webcast. Today’s call is being recorded. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer. Alec Brackenridge, our Chief Investment Officer is here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The Company assumes no obligation to update or supplement these statements that become untrue, because of subsequent events. Thanks Marty. Good morning and thank you all for joining us today to discuss our fourth quarter and full year results and our outlook for 2023. 2022 was a terrific year for Equity Residential. We finished the year, as we expected, producing same-store revenue growth of 10.6%. We continued to see good demand during the fourth quarter, but certainly saw a return of seasonality to the business. Our strong 2022 same-store revenue growth combined with modest expense growth of 3.6% resulted in same-store net operating income growth for the full year of 14.1%. With continuing positive financial leverage, this led to a 17.7% increase in year-over-year normalized FFO. I want to take a moment, thank all my colleagues across Equity Residential for their hard work and dedication in delivering these terrific results. In a moment, Michael Manelis will take you through our 2022 highlights and how we expect 2023 to shape up on the revenue side; and Bob Garechana will comment on bad debt and review our 2022 expense results and 2023 expense expectations, as well as recent balance sheet activities and then we will take your questions. We have provided guidance for same-store revenue growth at a midpoint of 5.25%, which would make 2023 another good year for Equity Residential and produce same-store revenue growth well above our long-term average. We do admit to finding 2023 harder to predict than usual. On the positive side, we go into the year, expecting a benefit from embedded growth of about 4.2% from leases written in 2022 and we also carry into the year and above average loss to lease, both of which will contribute to positive momentum for us, particularly in the first half of 2023. We also feel good about the employability and earnings power of our affluent renter customer. There still appears to be plentiful employment opportunities for the highly skilled workers that formed the bulk of our residents as evidenced by last week’s blowout January employment and job openings reports. We saw big increases in employment in the professional and business services category, a smaller gain in financial activities and only a modest decline in information services, all big employment categories for our residents. So far the announced layoffs at tech and some financial firms while certainly creating a negative environment have not manifested themselves much in the government’s reported numbers, or thus far in our internal numbers. We’ve only seen a handful of residents terminating leases early due to job loss. Possibly the impact is delayed due to severance and other factors. But it is at least equally possible that the workers in these categories are being quickly reabsorbed into the job market. Our renter demographic has proven resilient in the past, and we expect them to continue to be highly employable. As to renter incomes, according to the Atlanta Fed wage tracker, college graduates wages accelerated in the fourth quarter, outpacing wage gains achieved by hourly workers despite the higher base. Looking at competition from home ownership and new apartment supply in 2023, we also generally see a favorable picture. Homeownership costs and down-payment requirements remain high in our markets, especially relative to rents, making our product to better value. According to the National Association of Realtors, for their affordability index to return to pre-COVID levels, one of three things will need to occur: The 30-year mortgage rate will need to decline to 2.6%; home prices to fall by 1/3, our family incomes to increase by 50%. This is all very consistent with our internal data, which shows the percentage of residents leaving us to purchase a home fell to 9.4% in the fourth quarter from 15.8% a year ago. On the apartment supply side, we expect 2023 national new supply to run at record levels. But we generally feel good about the direct level of competition that we will face given our market mix and importantly, the location of supply within markets relative to our properties. The Sunbelt markets, including the Dallas Fort Worth, Austin and Atlanta markets, in which we are increasingly investing and Denver, will see higher relative supply numbers in our coastal established markets and likely more impact, especially if that’s coupled with a job slowdown. In terms of supply in our coastal established markets, where we still have 95% of our properties. Our internal research indicates that new apartments delivered near to our properties create significantly more short-term pressure on our results. As we look at 2023’s expected deliveries through that lens, new supply within close proximity to our properties in our coastal established markets is actually forecasted to be below pre-pandemic levels with only the Washington D.C. and Orange County market screening as delivering above average supply close to our properties relative to these pre-pandemic supply averages. And over the next decade, the significant net deficit of housing across the country sets us up for good long-term demand. We do, however, fully acknowledge that despite what was good GDP growth in the fourth quarter and full year and continuing strong employment reports, the Federal Reserve’s rate actions are likely to pressure job growth and economic growth as 2023 progresses. We took this into account in our guidance by assuming a lower rate of rental rate growth during 2023 than usual and a decline in occupancy. But whether there is or isn’t a technical recession is of considerably less importance to us than whether job growth substantially declines and if so when. A decline at the beginning of our spring leasing season will be considerably more impactful than a slowdown later in the year. We also now expect that the elevated post-pandemic level of bad debt in some of our California markets does improve in ‘23 but at a slower rate than we previously hoped, as poor public policies encouraging delinquency continue. Bob will discuss all this in a moment. In sum, we make no prediction about a recession but have assumed some impact to our 2023 results from a job slowdown and flawed government policy and evictions, while continuing to see sources of strength in our business in the form of modest forward competition from home purchases and new apartment supply, the high employment ability of our residents even if the job market deteriorates from its current lofty levels, and the positive forward momentum from our strong 2022 results. On the transaction front, there was not much activity in 2022 for us. We only purchased one deal and we sold three others, two in New York City and one in Washington D.C. We did start a handful of new developments. These were mostly in our Toll joint venture structure. As we head into 2023, the transaction markets remain unsettled, but we see higher than usual supply in the Sunbelt and Denver markets in which we wish to expand as hopefully creating buying opportunities for us later in the year. For now, our guidance does not assume any acquisition or disposition activity, but remain committed to our strategy of shifting capital out of California, New York and Washington D.C., and into our expansion markets of Denver, Dallas Fort Worth, Austin and Atlanta, as well as the suburbs and markets like Seattle and Boston, assuming appropriate opportunities present themselves. Thanks, Mark, and thanks to everybody for joining us today. This morning, I will review key takeaways from our fourth quarter 2022 performance, expectations for 2023 and provide some color on the markets before I turn it over to Bob to walk through our financial guidance. 2022 same-store revenue growth of 10.6% was the best in EQR’s history of nearly 30 years as a public company. Reported turnover for both the full year and the fourth quarter was the lowest in the Company’s history, reflecting great demand that produced high occupancy and significant pricing power. In most of our markets, we had a supercharged spring leasing season with more robust pricing power that started earlier than usual in the year. Rents peaked in August, which is typical and then started to seasonally moderate, which is also typical. The seasonal moderation was a little more pronounced than we originally expected and likely due to a combination of rents reaching such a high peak, along with less pricing power than expected as we ended the year. Given current uncertainty about the economy, including increasing layoff announcements, this moderation isn’t surprising, though the January employment report that Mark just mentioned was very encouraging. Sitting here today, we have good occupancy with solid demand across our markets. Our dashboards and current leasing momentum continue to signal a normal spring. Let me take a minute and walk through the building blocks of our guidance range of 4.5% to 6% revenue growth. This is an updated look to what we provided in our third quarter management presentation. So first, we start with an embedded growth of 4.2% for 2023. This is slightly below the midpoint of the range we talked about in the third quarter of 4% to 5%, but mostly consistent with expectations and takes into account the additional concessions used in the fourth quarter. Next, we expect strong occupancy for 2023 at 96.2% which includes a continuation of low resident turnover but is 20 basis points lower than that of 2022. Finally, we’re assuming blended rates in 2023 will average approximately 4% for the full year. This assumption incorporates capturing our 1.5% loss to lease along with approximately 2.5% intraperiod growth in rates. This intraperiod growth assumes a positive impact from less overall pressure from competitive new supply and acknowledges some potential headwinds for a softening economy. For your reference, in a normal non-recessionary year, we would expect intraperiod growth to be about 3% to 3.5% with us capturing about half of that gain in same-store revenue. The first half of 2023 will benefit from the momentum we had last year, while the back half of the year faces tougher comps and could feel the impact of the economy, as the year progresses. The contribution of this blended rate growth to revenue will be approximately half, as we capture it over the 2023 leasing season. Add all of that up and the implication is revenue growth over 6%, which would be exceptional after a remarkable 2022. The midpoint of our guidance range however is 5.25%, which is lower because we do not expect bad debt net to return to pre-pandemic levels in 2023, and it continues to work against us this year, due to a lack of expected government rental assistance and the extension of the eviction moratoriums in both LA and Alameda counties. Bob will go into more detail on bad debt net, including our assumption in his prepared remarks. The outlook I just described is based on a belief that, while the economy may be slowing, our business continues to demonstrate a number of favorable drivers and resiliency. As we have often said in the past, we focus on our dashboards while also acknowledging the headlines. While keeping in mind that this is very early in the year, when we look at our dashboards today, the portfolio is demonstrating sequential improvement in both pricing trends and application volume, as we would expect, which by all indications is a typical pre-pandemic setup for the spring leasing season. New York and Boston will be two of our top performers in 2023, after delivering strong results in 2022. In San Francisco and Seattle, we are seeing good demand and sequential improvement in pricing with slight reductions in both the quantity and value of concessions being offered since the beginning of the year. Even with this modest improvement, the overall level of concessions are still elevated, resulting in weaker-than-anticipated pricing power. San Francisco and Seattle have been slower to recover than the other markets, but both posted really good revenue growth in 2022. Both cities have been balancing a combination of quality of life issues in their downtown, which are getting better and a delayed return to the office from large tech employers. In addition, there have been some layoff announcements from companies based in these two cities. These layoffs are a direct result of excessive hiring during the pandemic. This excess was spread across multiple markets and countries, not just Seattle and San Francisco. The remote nature of work in tech during the pandemic along with these hiring sprees, likely means that the layoffs are more geographically dispersed than in prior periods. Both of these cities remain hubs of the tech industry and share an entrepreneurial spirit that will continue to incubate the next big idea, be it AI or other innovations we find changing our lives a decade from now. The midpoint of our guidance range assumes that these markets continue to improve modestly as we get into the spring leasing season but overall weakness persists, which is why our intraperiod growth assumptions for the company overall are somewhat lower than the typical 3% to 3.5% range. If San Francisco and Seattle get some traction this year, that could have a significant positive impact on our same-store revenue growth as could a more rapid improvement in bad debt net, leading us to the higher end of our range. Reaching the bottom end of our range would require either rate growth to slow much earlier in the year than expected or occupancy to dip to the mid-95% range for a sustained period of time. And lastly, before I turn it over to Bob to discuss our guidance, I want to spend a minute on our focus on innovation. On the revenue side, we will continue to focus on other income items like Wi-Fi, parking and amenity rate optimization. We will also leverage data and analytics to create opportunities to expand our operating margin. We have been a sector leader in limiting same store expense growth, and this is attributable to our team’s willingness to embrace innovation and initiatives focused on centralized activities. We are driven to get the most out of the portfolio and continue to have great success in creating efficiencies in our sales and office functions. In 2023, we will complete the centralization of onsite activities such as application processing, and our move-out and collection process. On the service side, we will continue to leverage our mobile platform to create more opportunities to share our resources across multiple properties. I want to give a shout out for our amazing teams across our platform for their continued dedication to the residents and focus on delivering these terrific operating results. Thanks, Michael. Let me start with bad debt, which should round out our thought process on same-store revenue guidance, followed up with a little commentary on same-store expenses, normalized FFO and the balance sheet. As Michael mentioned, the midpoint of our same-store revenue guidance assumes a 90 basis-point reduction in revenue growth due to the impact of bad debt. As we mentioned during last quarter’s call, the biggest driver of this drag is the lack of rental relief payments in 2023 relative to 2022. Specifically, we received a little over $32 million in rent relief in 2022 that isn’t in the numbers in 2023. And while we ended last year with more residents paying their rent than when we started the year, a trend that we would expect to continue, our forecast doesn’t assume this will be significant enough to offset this lack of rental assistance. Unfortunately, recent delays in lifting eviction moratoriums and slow processing within the courts led us to this more cautious forecast that reflects a more modest improvement coming later in the year than we had initially hoped for. We’re hopeful that this caution might be unwarranted, in which case we could achieve the top end of our guidance range. But for now, we still expect delinquency to return to pre-pandemic levels, but more likely in 2024 than in 2023. Turning to expenses, I’m proud to report that in 2022, we once again continued to execute on our strategy of using technology and centralization to reduce exposure to labor pressures. Same-store payroll expense growth was negative for the second year in a row, and even when combining payroll with repairs and maintenance, a line item with significant labor exposure and product inflation, growth was below 3% for the second year in a row again. Combine that with low real estate taxes and we were able to deliver industry low expense growth. For 2023, the midpoint of our same-store expense guidance is 4.5%. This forecasted growth rate is about 100 basis points higher than what I just described for 2022 but well below both inflation and our revenue guidance, meaning we expect 2023 to be another year of operating margin expansion for the Company. Of the four major categories of expenses, repairs and maintenance and utilities should grow at a pace slower than 2022, while real estate taxes and payroll should be faster. These latter two categories face challenging comparable periods given 2022’s remarkable performance in addition to the following drivers: For real estate taxes, we expect municipalities will recognize the great strong income performance for multifamily in 2022 and as a result take a more aggressive approach to assess values and rates. Total tax growth should be around 4%, up from 1% in 2022 with California continuing to benefit from Prop 13 at the low end of growth and expansion markets like Colorado, Texas and Georgia towards the higher end. These expansion markets are a small part of our same-store portfolio and the expected growth is consistent with what we underwrote on acquisition. For payroll, we expect 2023 growth to be around 3.5%, up from the decline of 2% that I just mentioned in 2022 and still well below typical wage inflation. We believe we can achieve this target through our continued discipline around staffing and optimization of our workflow. Turning to normalized FFO, page 2 of the release provides a detailed reconciliation of our forecasted contributors to NFFO growth. Our midpoint of $3.75 per share includes a $0.01 of forecasted casualty losses from the California rainstorms that we mentioned in the release, and results in over 6% year-over-year NFFO growth, a very solid year for the Company. Finally, some comments on our planned financing activity for 2023 and the balance sheet. We mentioned in the past that we have an $800 million secured debt pool coming due, most of which needs to be refinanced in the secured market later this year. The current rate on the pool is 4.21% and the maturity is in November. The pool is very financeable, given it is roughly 50% levered and covers debt service nearly 2 times. We have favorably hedged more than half the treasury risk on the financing and would expect to be able to refinance later in the year at a 5% rate or better, which is also incorporated in our guidance. After that, the Company has no maturities to speak of until June of 2025. We have low floating rate exposure, the lowest leverage in our history, significant debt capacity and ample liquidity supported by our recently recast revolver that will support our future capital allocation activities. Thank you. You talked about the innovation impact and the benefits to potential margin expansion. Can you quantify the impact of those programs, both on same-store revenue and expenses in 2023? Yes. Hey Nick, this is Michael. So first, I guess, I would say back in the November management presentation, we highlighted this whole technology evolution of our platform. That really has been focused on creating this mobility and efficiency in the operating model. And clearly, for the last couple of years, it’s been more expense-focused and that shows up in the numbers that we just talked about. Specific to 2023, I think we’ve included just over $10 million in the guidance with still about two-thirds of that benefit on the expense front, and that’s spread out across a couple of various accounts in repair and maintenance, along with the payroll accounts. And the revenue impact is several million dollars in ‘23. But for us, it’s probably going to kick in more in the back half of the year and really start to show up in 2024 as a lot of these initiatives we have don’t get put into place until kind of the middle of the year. We got a lot of different pilots going on right now with like short-term and common area rentals, the property wide Wi-Fi. We’ve got another 25,000 units being installed with the smart home. And again, most of this is going to contribute probably to the other income line. And I think you see about 20 or 30 basis-point growth in that number for 2023. And I’ll tell you, we’re excited about all of this stuff. We’re going to continue to kind of look at the way we’ve been doing this in the past, which is areas that are capital intensive. And the technology is like first gen. We’re -- that signals to us that it’s okay to be a fast follower in that area, similar to like how we approach the smart home installations and for us, we just want to make sure that we’re going to get the appropriate return on this stuff. So, I think right now, the foundation is almost in place. By the middle of the year, we’ll have kind of most of the operating platform where we need it to be to capture that benefit. And I think you should expect the $30 million to $35 million that we outlined in that presentation really to start shifting more towards that revenue front in ‘24 and ‘25. But at the end of the day, the reality is you’re never done with this pursuit of operational excellence, and it’s something that’s clearly wired into the DNA of our company. Thank you. That’s very helpful. And then just maybe on supply, as you see new supply coming on, what’s the concessionary environment today for those lease-ups? And maybe you can touch on concessions on stabilized properties as well in the market, if there are some. And then, what are the expectations for the concessionary environment in ‘23 for that new supply coming on? Yes. So again, for us, we’re very focused, right, on this proximity of the supply, when are the first units going to hit the market. And specific to the ‘23 deliveries, it’s pretty clear to us across our portfolio that we’re going to feel less overall direct pressure like from it. What we’ve been watching is in the fourth quarter, which is really a bad time to watch for concession change because you typically see concessions inch up but in many of the markets, you’re seeing that the new supply did absolutely grow their concessions compared to the third quarter and tend to be in that 6- to 8-week range. What’s promising for us right now is that we did see, just like in the stabilized portfolio, starting the year in January, starting to see these concessions kind of fall back a little bit in the volume of the concessions that are being issued as well as the value of them. So for us right now, I’ll tell you that we’re still focused in San Francisco and Seattle is where we see the heaviest concentration of supply of concessions being used. And it’s about 25% of our applications in San Francisco are receiving about two weeks. And then in Seattle, we have about 40% of applications receiving one month. And if you put kind of all of that into the blender and you think about like 2023 and our expectations, right now in our portfolio, we kind of normalize concessions to the 2022 level, so we expect to continue to see some elevated concessions in the shoulder periods. And it’s hard to say what’s going to happen with the new supply across the market. It’s clearly something we’re going to be watching. So Nick, just from a financial standpoint, like Michael mentioned, concessions are kind of flat, so no contribution to revenue growth or decline to revenue growth, ‘22 to ‘23. Alec, a question for you on the transaction market. I know things are pretty frozen right now. But from the trends you’re seeing in terms of buyer and seller behavior, which one or two of your markets do you think is mispriced right now in the private market, either cheap or expensive? Hey John, yes, it’s Alec. It’s hard to say that any one is mispriced right now because there’s so little transaction activity. The activity that we have seen is typically, say, 1031 buyer who has to place money or maybe a seller who for whatever reason has to move a property. But that’s been really hard to -- and few and far between. It’s very hard to pick market and say any one of them is more opportunistic than the other. I would say though that looking forward, markets that have a lot of supply coming are -- typically it’s coming from merchant builders who are not capitalized to own the property in the long run. And so, I expect to see some opportunities there, new product coming from merchant builders that really want to move it. And other areas of opportunity are -- I’m sure you’ve read about the private REITs that have the redemption requests that they need to fulfill. Not all of that product is a great fit for us, but some of that might be an opportunity. And then, you have the guys who took on floating rate debt that have caps that are expiring. So, it’s been really slow, but I think that there’s going to be more opportunity in the next six to nine months and more capitulation probably coming from sellers than buyers given how the financing market has been pretty choppy. Okay. That makes sense. Just a follow-up there. You mentioned the private REITs, merchant builders and then variable rate debt, those kind of sources of potential distress. How would you rank the level of distress or capitulation among those sources right now, 1 to 10, 10 being the worst, 1 being no problems at all? Well, the merchant builders really just -- it’s just not their game to do that, with rates being high -- I don’t know how to put a number on that, to be honest with you. But I think that there will be some trades there. Obviously, some of the private REITs have found alternate sources of capital. So maybe they’re able to mitigate that a little bit. And clearly, these caps are probably the highest among the three. And because they’re so much higher than they -- I think they’re 8 to 10x what they used to cost. So that clearly is an area that’s going to be very challenging. Hey John, it’s Mark. Just to contribute to that, because it’s hard to number order it, like you said, but it’s easy to think about what it costs to wait. So that option a seller has is costly because SOFR, which is now the new index rate is 4.5%. So you figure -- if you have a development loan, you’re 2.5 to 3.5 percentage points above that. So you’re somewhere at 7% to 8%, 8.5%, that’s expensive debt to be sitting around hoping for an improvement. Meantime, the preferential rate on your equity is likely something like 8% as well. So I do think, as Alec said, unlike in the past, that option cost of waiting is more expensive for the seller than it’s typically been. And these caps -- again, a lot of these caps were struck at 4% or 5%, they’re deeply in the money now. So I mean, clearly, the price of a cap that a lender would require you to get is going to be very expensive. So, I think those are significant pressures. The private REITs are out there. We see product. And again, not all of it’s suited to us. They have other levers they can pull as well. But I think you’ll see more from them through the year as well. But we don’t see a panic sale market at all. We just expect people to sort of capitulate and just say it isn’t going all the way back to 3.5 cap rates in the next six months, so we’re going to go and sell at the market price, whether that’s high-4s, low-5s, medium-5s will -- yet to be determined. Just talking about Seattle and San Francisco a little bit, you guys talked about quality of living as an issue. Are you seeing any dispersion across property types in those markets, downtown versus the rest? And then, are there any signs of slowdown beyond the central business district that you’re seeing in your numbers, in your databases at the moment? Yes. Hi Chandni, this is Michael. So, I think in both of those areas, clearly, you saw more of the concession use in the fourth quarter concentrated into those urban cores of those markets. The demand is there across urban, suburban across all of the submarkets. It just got a little bit more price sensitivity to it. And clearly, I think the urban still has more pronounced price sensitivity than the suburban areas. And we haven’t really seen any change. Like in the demand profile coming in, we haven’t seen any shifts like going urban or suburban in those markets, the profile seems very similar to what we are typically used to kind of seeing in the market. And right now, I guess I would tell you, when we look at these January stats and we think about the sequential improvement that we’re seeing over kind of the December numbers, those urban markets are actually kind of growing at a pace a little bit faster than the suburban and probably because we’re pulling back on the concession, right? So, when we think about that, you can see you pull back a couple of weeks on a concession, that’s like a 4% change in pricing right off the bat. So, no real signals yet to any significant change other than what we have felt, which is the urban cores, which by the way, do feel better from a quality of life. You could see the efforts that are being placed in both of these cities right now on it. You can feel the improvement there. But you still just have more pronounced price sensitivity in those urban areas. That’s very helpful. Thank you. And this one for my follow-up, I’m not sure if you guys look at it that way. I know you guys do a lot of bottom-up stuff. But as you think about different markets, what’s your overall job growth assumption? And then, what’s your sort of top market versus bottom market as you think about job growth forecast in there, how much delta are we looking at? Are you still in positive territory on the West Coast? Any color there would be appreciated. And I completely understand if that is not something that you guys look at that level of detail. Yes. Hey Chandni, it’s Mark. We don’t look at job forecast -- national job forecast, especially as particularly relevant to our numbers. We do focus a little more on the bottom up. We do spend time and we’ve done the regression analysis and a lot of the work to try and understand how different variables, job growth, like foremost and household income among them, impact our numbers in the near term. And so we do kind of gut check what comes out of the bottom-up process with our perspective from the top down, both in terms of numbers that your firm and others put out there as potential forecast. But we don’t have a model that we would rely on that would spit out numbers. I think there’s just too many variables. We back tested lots of those models. And I’ll tell you, we don’t have confidence than that system being a better one than looking at it from the bottom up, feeling your market, understanding local drivers of employment, local supply and sort of thinking about your business that way, has proven to us to be much more reliable. So, we feel really good, though, about job growth in our markets generally. I mean, the employment report last week was terrific. Our residents, as I said in my remarks, they found work when they’ve lost their positions. And it’s been a very small number of people, literally handfuls that have handed us their keys. So, this is -- if this is a recession, it’s the best one we’ve ever been to. And it’s going pretty well for us so far. So, I don’t have anything to share with you in terms of top-down job forecast inputs. Mark, to stay on that question and your comments about sort of getting the keys back. Is it concentrated in any one market and are there other discussions where maybe people haven’t given you the keys back, but there’s conversations with managers and people are a bit more on edge about finding kind of work in the tech markets? Or just how would you handicap that? Yes. So Steve, this is Michael. So I guess, I would say that we started this back in kind of the end of the third quarter or early fourth quarter, just really kind of tracking that like going deeper on reasons for move out, if people said job change, to understand it. And we are talking like less than a dozen. And when you say concentrated, I mean, it’s such a small number, but it really is spread only in the Seattle and San Francisco market. And I think the teams, if you went across the country would say we always have one or two that come in and say that they lost their job and they’re leaving, and that’s why. So we really haven’t seen anything. And clearly, there’s some conversations when you get into the renewals with some folks that they tell us that they’re changing jobs or that they lost their job. But in the concentrations of Seattle and San Francisco, it doesn’t feel like they’re overly concerned that they’re not going to be gainfully employed, quickly. And Steve, it’s Mark. Just to supplement on that just a bit. Our transfers are low, too. So sometimes you’ll see people going down to a cheaper unit and things like that that can also be an indicator of stress. We don’t see that in any meaningful size. And we did a little research, I want to share. We asked our folks in markets like San Francisco, Seattle, New York. When a local firm announces a layoff, then tracking that either using the filings, and I believe you do something similar, using the various governmental filings or some of the layoffs, dot, whatever websites and what we’re seeing is just like these tech jobs and a lot of these financial jobs were spread over the whole country of late, these layoffs are spread over the whole country. So generally, we’ve seen a Bay Area company or a Seattle company announced layoffs, 20% to 30% of those are in that home market and the rest are spread all over the country. So I think what you and I, right, recall from ‘01 where if you had a tech layoff in San Francisco, that person was definitively in San Francisco, I think it’s much more diffused now, and it’s just a different sort of employment picture than it was in the past. Great. Thanks for that color. And then, maybe just circling back on the transaction market for either you or for Alec. How have you guys changed your underwriting, whether it’d be IRRs or kind of growth? And kind of where do you think the market is today for both acquisitions and for you guys to start any new development projects? Hey Steve, this is Alec. Yes. So, our cost of debt is somewhere around 5%. We would expect a cap rate to be close to that or above that. Longer-term, we’d look at an unleveraged IRR of about 8%. And that’s really hard to find in today’s market. There are a few opportunities here and there, but largely, sellers are still hanging on to a 4.5% to 4.75%, which is just hard to make the numbers work. And as I said before, I think there might be a little movement on that end. Harder still is the development yield. And if you’re thinking that stabilized properties are pricing at around of 5, then development really should be around 6, and it’s hard to get to that number with costs continuing to escalate, not as fast as they had been,, whereas they used to be escalating at say, 1% a month, now probably closer to 0.5% a month, but they’re still going up and getting from a 5 to 6 is a pretty heavy lift. And most deals prior to the rate hikes were price -- development deals pricing out to about 5% to 5.25%, and that was a nice spread when cap rates were below 4%. Obviously, that’s not the case anymore. So getting to a 6% is a heavy lift. And there’s just so much that can come out of the price of the land because land is typically, say, 10% to 15% of the entire deal. So it’s a heavy lift to get to there. On the subject of bad debt, given the resident relief funds are likely not going to be there as much this year. Can you just clarify what your bad debt was in 2022 on a gross basis versus where you think it is going to be this year? We calculate it at 2.3 going to 1.9, but I’m sure there’s other factors in there. So I just wanted to clarify that with you. Hey John, it’s Bob. No, your math is actually pretty accurate. So page 13 kind of gives you a perspective. We were 1% net. When you add back the $32 million that is -- and the math that you probably did to the bad debt, that does work out to, I would have said, 2.25% as a percentage of revenue. And then when you move forward based on the drag on same store, we get to like around 1.90, a little bit closer to 1.85 as a percentage of revenue on that. So you guys have got it triangulated correctly. Minor miracle. So, where do you see it going in ‘24? Are you saying it’s normalizing, where does it go back to normal levels? Can you remind us what that is? Yes. So, normal would have been around 50 basis points, would have been kind of typical. And we still do think that that is given the quality of our resident base, et cetera, that that is the likely long-term outcome. And as I mentioned in my remarks, just to be fair, too, it is very difficult to forecast kind of the projection of how fast this improvement that we have seen even outside of rental relief will come. We’re hopeful that it’s faster than what we put in the numbers, and that could get us there quicker and closer to that 50 basis points faster than what are in the numbers, but you’re correct as to as to -- it is not only a minor miracle, but it is great when math works. So your math works perfectly in that specific numbers. Just one quick follow-up. You said on the $800 million debt maturity this year that it needs to be refinanced in secured market. Can you just clarify on that comment? Is that because the pricing is better, or are there other factors? No, it’s structural. It’s a structural kind of tax protection component. It’s a piece of debt that actually was financed related to the Archstone acquisition. So, there are certain partners that were in the old Archstone structure that had tax protection. So, we have obligations to maintain some secured debt, a portion of that in secured, and that’s why. As you think about the -- so it has nothing to do with kind of anything about that structural piece. When you do look at kind of the secured debt markets relative to the unsecured, the unsecured has come in a little bit. So, it’s slightly more favorable than the secured, but they’re all pricing in that, call it, high-4s range, especially for really low levered product in the secured like we had -- like we have in this pool. So it’s not a market decision choice. It’s more of a structural choice. Hey guys. Yes. Thanks for taking the question. I appreciate it. Look, I just wanted to ask a little bit about kind of the January commentary. Maybe it’s the seasonality commentary in the release. Look, Mike, I think you kind of -- you mentioned, right, maybe a little bit worse than seasonal in the fourth quarter. But at the same time, right, I think January, new lease I mean is strongest among the group, still kind of positive 140 basis points. So, maybe just kind of trying to tie or square these different things together, right, the occupancy loss, strong new lease and kind of the seasonality comments and try to kind of tie or blend all those things together in terms of kind of what’s happening right now with fundamentals. Yes. Hey Adam, it’s Michael. So, I think what I would look to is one, the sequential comment I was referring to is December to January, not like when you’re looking into the release, the fourth quarter to January numbers. So, when you think about occupancy, our occupancy actually held flat, right? We were, I think, 95.8% in December; we’re 95.8% or 95.9% for January. And so, I look at that and say, as you think about returning to normal seasonality, it is very common for occupancy to trade down into that fourth quarter. So what we saw is that pattern kind of emerge. And outside of some of the pricing pressure that I described, some of the additional concessions, the way that the rents moderated is very consistent with what you would expect. That being said, you turn the corner and you get into January, what we normally would see in January is right after that new year, you see sequential improvement every week in application volume and rents ticking up and we got a little bit of an accelerant, like I said, in the urban because we started pulling back concessions when we saw that inbound demand doing what you would expect it to do. Now, what’s interesting is like the cold weather climates like Boston and New York, they kind of tend to stall in February. You get a little bit of a boost in Jan and then it stalls and then you hit March and then you’re kind of off to the races for the spring leasing season. So, I think my commentary was just pointing to you if I went back and looked at ‘18, ‘19, any of these years, the trends that we’re seeing today, and again, we’re five weeks into the year or something like that is very consistent with a normal year, which would tell us you would expect a normal spring leasing season. Great. That’s super helpful. Thanks for all that color, Michael. Just maybe switching gears a little bit to development. If I’m not mistaken, I don’t think it was mentioned much in kind of the opening comments. I know it’s -- obviously not kind of your biggest part of your business, but you probably do a little bit more development than some of your peers. I’m just wondering kind of what the thoughts are there? Are there going to be starts in ‘23 or is that kind of more on the back burner now kind of given some of the uncertainties in the environment? Yes. Thanks for that question, Adam. We have a terrific development team, both the in-house team that started and built $400 million towers as well as much smaller projects. And then we’ve got the JV with Toll and others. So, we think development is a nice complement to our acquisitions, particularly in these expansion markets. The instruction that Alec and I have sort of given both our outside partners as well as our internal teams is find things that you can work on for the next few months that we can start late this year and sometime next. Maybe the capital will be a little more reasonable, maybe the underwriting will be a little bit better, maybe the cost structure will make a little more sense. And so, let’s be thoughtful about starting a lot right now where you really feel like your opportunity is likely to be in the acquisition market. But we’d love to tactically start. We’ve got a few things already in the sort of inventory we’d like to do, but it’s just got to make sense. I mean, we’re just not going to plow ahead and put our shareholders’ money into a development deal if acquisition is a cheaper alternative or if just the costs and the risks involved are too significant. So to answer your question about development, it’s very important to us. We don’t have any starts really in the budget for this year. But just like acquisitions, we don’t have any of those either. But we’re happy to do plenty of them. Bob commented on the balance sheet strength. I think the debt markets would support a big EQR issuance to fund either of those, if we thought that was a good idea. So, we’ll just keep watching it closely. And if there’s something that comes there on the development side, like I said, we got the internal team, we got the Toll folks, we’ve got others. I mean we can put that into gear. But we’re happy to have it at zero, too, if that’s the right decision for the shareholders. Hey. I just want to follow up on that last question a bit first. So understanding that this early season pickup maybe in line with the historical trends as you mentioned. I guess, I’m more curious on your comments about expectations for normal spring leasing season and what that would imply near term for new lease rates. So maybe can you give some more color on how that normal trend has played out historically, what that could mean for new lease rates here into the spring season? Thanks. Yes. Hey. This is Michael. So I think the way to think about the modeling of what a normal curve would look like is what we will see right now is new lease change will start to sequentially grow and typically will max out somewhere in that third quarter and then will seasonally moderate as you get to the year. For our assumption of this blended rate of 4, we basically are assuming about 2 -- a little over like 2.25% in new lease change across the whole year but it is -- it’s kind of like a bell curve. We’re going to work our way through the spring and keep building it and then we’re going to let it moderate. When you think about renewals right now, on capturing some of the loss to lease, we have some pretty good numbers at a 6.9% achieved renewal increase in January. Our expectation, and I’ve got these quotes out for the next 90 days, we’re going to stay somewhere in this 5% to 6% range in this first half of the year. And then I would expect that number to moderate like it would normally do into like a 4% to 5% range in the back half of the year. So, on a full like likely guidance model that puts renewals somewhere just north of 5% and when you put those two together and you think about the retention factor, it winds up getting you to that blended rate of about 4%. That’s really helpful. I appreciate that color. Maybe some color on your expectations between some of the stronger East Coast markets, New York, Boston, D.C., in contrast to some of the weaker West Coast, San Francisco, Seattle, curious how the spread between those two -- or what do you thinking you’re expecting for the spread between those two regions this year? Thanks. Yes. Well, maybe I’ll just kind of bucket the markets around. So I think I said in the prepared remarks, I mean, New York, we expect it to be our best performing market followed very closely by Boston and then really close by San Diego and Orange County as well. I’m going to put aside L.A. and San Francisco for a moment because of the bad debt implications. But if you really looked at all of our other markets, you could almost bucket them in this 4.5% to 5% kind of revenue growth range for 2023. And then you get into the San Francisco and L.A. that has the bad debt impact. Without it, both of those markets would be in this 4.5% to 5% range as well. But with it, San Francisco, right now, we’re forecasting around just under a 3.5% growth and L.A. is just north of a 1.5% growth. Just wanted to talk a little bit more, Mark, about your comments, and I totally understand the uncertainty on the macro, our econ team has once again pushed out its recession forecast for the second half of ‘23. So, I guess, just thinking about macro versus what your revenue management systems are telling you as the weeks go by, how will you be operating through the start of peak leasing into peak leasing and if things do look like -- again, if it looks like it’s going to shift to the second half, how does that make a difference to how you’re approaching the peak leasing? Hey Jeff, it’s Mark. I’m going to start. I’m going to turn it over to Michael. I mean, we’re lucky to have a very experienced team here and -- both here in Chicago and then across the country, and a great system for feeling the markets. So, when we start seeing a market improve, when we start seeing a market deteriorate, we can react -- or frankly, a submarket or an asset, we react in real time. We don’t wait for macroeconomic data. So, we’re certainly aware of what’s going on. We watch all those employment reports keenly. But I think we’re ahead of that. I think we feel that in our leasing in advance. Because again, if someone lost the job and they immediately got a new one, the government’s data may take some time to show that. The unemployment reports have been really good. So I guess I would say, as we go through the year, we’re going to depend on Michael and his team, and he can elaborate on that in a minute. I have a great revenue management process, great communication on site to sort of see what’s going on in real time and adjust in real time. Yes. And I think, Jeff, the only thing I would add to that is clearly, you’re going to try to maximize rate and you’re going to see whether or not you’re getting that corresponding closing rate or the application volume that you need based on how many units you have to sell. And that’s typically what we’re looking at week in, week out, which is that ratio, and then we’re making decisions whether or not we’re leaning in on rate or kind of letting the rates soften a little bit and kind of position ourselves differently. But, on top of just that feel that you have, we’re watching these demographic changes, the income ratios, I think Mark alluded to before, we’re hyper focused on transfer activity, are they moving up in size, down in size, what are they doing, roommate activity. And then, of course, we’re watching that new supply in these markets. And that concession volume that they’re issuing is a signal to us whether or not they’re getting the velocity they need because that absorption rate of that supply is going to tell us whether we’re going to feel more or less pressure from it. Yes. Just to add one last thought. It’s Mark again. I mean, we do think about overarching themes. I mean, Michael has been running the business ever since the economy started to feel a little shakier, with a focus on occupancy and retention. He’s opened up some of his renewal ranges. So, we do -- macroeconomics and what we feel in the general U.S. economy does inform some of these leans but we’re quick to learn from what’s going on on-site, and that’s more important to us than any set of numbers coming from anywhere else. So I’ll also tell you in places like New York and Boston, we feel so good about the supply picture and heretofore the jobs picture that those markets are places where our lean will be more aggressive than a place where we might have more anxiety like downtown San Francisco or downtown Seattle. So, we do inform some of those decisions, Jeff, with the big picture. But again, we like to watch what’s going on property by property. Thank you. That’s really helpful. So I guess, just to confirm then, as we think about the guidance and the upper half of the range, if this recession is pushed out to the second half, is that kind of the upper end of the guidance range scenario? Again, where’s the recession and what part of the economy? And I guess, I’d say if we get through the bulk of the leasing season into July and August and the job numbers are still pretty good and unemployment claims are still pretty low, then I’m very much of the mindset that we’ll have a really good year. If you start to feel those numbers roll over in March, then the year for us and everybody else in the apartment industry is going to feel a little different. Thanks. First question, maybe for you, Mark, is how you guys are thinking about potential for stock buybacks? I mean, you’re not -- not as much acquisitions planned now, harder to pencil as you’ve talked about, you do have a fair amount of free cash flow after the dividend. So, -- low leverage balance sheet. So I’m just trying to understand at some point the stock buybacks become compelling? Do you need asset sales to fund that, or did the balance sheet already set up in a way to handle stock buybacks? Yes. Thanks for that question, Nick. I mean, we’ve had versions of this conversation before. The unique thing about a stock buyback versus some of the other investments we make is it has both a capital allocation and a capital structure impact. I mean, we don’t retain a whole heck of a lot of cash flow after CapEx because we’re a REIT, and we have to distribute all our income. So, we look at it, it’s either incurring a whole -- I mean to make a meaningful impact on a company our size, you have to incur a meaningful amount of debt and go out there. And we can do that. We’ve got space for that right now. But you can only do that one time before you’ve affected your ratings, you’ve affected your multiple. We all learned in business school, riskier businesses with more debt, have less multiples, lower multiples. So, the debt side is possible, but it has offsets and is risk. And I also tell you on your asset sales, I mean, Alec and his team have bought well over the years. We’ve done a lot of 1031s. So, there’s a lot of embedded gains. You might sell an asset for $100 million and have $75 million, $80 million of gain to deal with. And so, not a lot of cash flow there either after needed distributions. So, I’ll tell you, Nick, when we see our stock price when it’s trading at such a material discount to NAV like it is now as, is a signal not to use the equity markets to fund growth. That’s what we see it as. And that’s very clear to us. But we do talk to the Board about buybacks periodically, and it’s not like sort of categorically off the table. But again, it’s more of a financial maneuver. And if you don’t do it in size, it’s not terribly meaningful. And the last comment is I’ve watched a lot of REITs buy back meaningful amounts of stock usually away from our sector. And it hasn’t proven to have turned out all that well. I think it’s better used as an indicator of when not to issue equity than it is to go whole hog on some giant share buyback. Okay. I appreciate your thoughts there, Mark. Second question is just, I think -- if I think about multifamily, your company, the whole sector right now, I think there’s, at some point, this worry that it’s not so much a 2023 issue relative to guidance. But at some point, if we have a recession over the next year or so, there’s going to be an impact, right? And it’s going to impact the rents and occupancy and revenue. And so, what I’m trying to figure out is, last two recessions were very unusual in terms of the impacts we had to multifamily. How are you guys thinking about -- is there any way -- this is a tough question, but is there any way to think about a downside impact to your company in what is a maybe more normalized recession and sort of an order of magnitude of -- or how much rents could correct or how much revenue or NOI could correct? Yes. I guess I’d just make a few comments on that. Obviously, my crystal ball is as blurry as yours. I mean, a lot of these other recent recessions, there were huge excesses in the economy or like the pandemic, just a panic, as you mentioned, that just made the whole thing very unusual. I don’t feel like we’re terribly out of whack. So, it feels to me like any recession that occurs, it will be more like a slowdown in jobs as opposed to some, we are putting out negative 400,000 jobs a month type numbers. So I feel like if 2024 comes around, the business will perform relatively well and certainly better than the last downturn or so. I also think you got to compare it to what else is going on in the economy. We’ve typically been a pretty good inflation hedge. We put materials in our book about that. So, if you think you’re going to have a slowdown in the economy, and you’re going to continue to have some inflation, I mean typically, our business has been able to raise rents in excess of the inflation rate in our kind of business. And Michael and his team do a great job of managing expenses. So, I look at it and I think in a slow growth economy, maybe with a little bit of inflation, I think we can still do on a relative basis really well at our company because, again, we manage expenses well. I think the next recession, if there is one late this year or next is I do agree likely to be less about excesses and dramatic type downturns and a little more gradual. And I think our numbers will reflect that. But boy, it’s really hard to predict, and nobody knows for sure, right? Mark, definitely seems like between the bookies making bets on the Super Bowl, we could have the same bet here on whether or not this recession has been affected summer leasing. So certainly a topic we’re all watching. Two questions here. The first question is a lot of regulatory focus recently, the White House, obviously, on fee income, President mentioned it as far as hotels go in the State of the Union. But more importantly, apartments are under a lot of regulations already. So, as you guys think about your fee income that you charge, your new lease fees, the pet fees and all that stuff, as you guys look through all that, do you feel comfortable with where you are? And you’re like, look, we already abide by all the regulations, all the stuff is covered, or is there a concern that the regulators could push harder on some of these line items? Well, I’m going to split that question up. If you’re asking whether we think we comply with the law right now, we think we do. We’ve done extensive reviews on that because we feel like you do, there’s more regulatory sensitivity. A lot of these rules, by the way, are very complex or very judgmental. They may say you can’t charge unfair fees and things like that that are harder for us to peg. But the legal team has worked really hard with operations to make sure what we’re doing right now makes a ton of sense. Either Michael or Bob could talk about what percent of total revenues are the kinds of fees you’re talking about. I think it’s 3% in that neighborhood. So it’s meaningful, and it can grow faster than the remainder of the portfolio. But if we had to moderate it, we’ll deal with it. But again, things like pet fees, I mean, pets create real cost to the property. I mean the cleaning costs are much higher. So in some cases, these are profit and in some cases, these are just additional costs that will come into the system one way or another. So on the regulatory front, we’re just going to have good conversations with all these regulators about all this stuff. A lot of this is not thoughtful and it’s going to discourage capital going into residential and isn’t going to help with the shortage of affordable housing. So, we’re going to push that line more and more and keep having that kind of conversation. But on the fee side, it’s really that material to us, it’s just not a good idea. It’s another one of those sort of why shouldn’t the cost of someone’s pet be borne by the pet owner as opposed to borne by the entire complex, for example. Okay. No, makes sense. And then second question is, the recent L.A. good cause eviction, one of the items, if I read it correctly, was that basically a tenant cannot pay a month and be fine and not be deemed to be in arrears or anything. Is this the correct understanding? And if so, is that -- does that mean that in L.A. county and hopefully -- not hopefully, and unfortunately, if other markets adopt this, that bad debt could now seem to be the sort of elevated thing versus historic? Or is there a way for landlords to make sure that someone just isn’t getting a free month for no reason other than they can get a free month? Yes. Thanks for that question. I don’t have that right in front of me. I did read the sort of general idea that there is a permissible amount of default -- defaulted debt that a resident could have. But again, our rents on average approach $3,000, in that market a little bit lower, but they’re significant. So if it was a dollar limit -- gosh, I thought, Alex, it was a dollar limit, not a month’s rent limit, but I’d have to look into that, we’d have to have another conversation. But I think the theme here is the more you regulate things like this, the less capital that will go into the industry, to renovate properties or to create more housing. And it’s just a bad idea, and we’ve got a really good team that’s pushing this. And people hear us. When you talked about the administration, I mean, the Biden administration’s Build Back Better Act had some terrific stuff about zoning flexibility and encouraging at localities. The Governor of California and the Governor of New York have been pushing supply and more units being built and trying to work with the industry, both on the for sale and rental side. So I think there are people listening to us. It’s just we got to keep it up because a lot of the ideas you mentioned are just not constructive. Hi guys. I’m on for Tayo today. Thank you for keeping the cal going. So, I know -- I think it was one of my former colleagues that asked about, I guess, the supply pressure. But can you remind us how you guys go about judging the threat from new competition and how that kind of -- and how that factors into portfolio exposure? Because just from our end, it’s really hard to see that. So kind of understanding your qualitative or quantitative metrics to frame out how you guys judge that threat factor would be interesting to hear from our standpoint. Hey Sam, it’s Alec. And yes, we do spend a lot of time looking at supply, and as Michael mentioned earlier, focusing on the proximity of the supply to our properties. And we find that’s where we’ve really gotten the pressure on our ability to grow rents. And it depends where we are. In Manhattan, proximate supply is a lot tighter than, say, in California. So we adjust for that. And what we’ve seen going from -- and again, this is our property and proximity -- our portfolio and proximity to our properties is in 2022, there was supply that was proximate to us like 110,000 units, and it’s going down quite a bit from there. And the average in the past was around -- I’m sorry, 86,000 units are going down quite a bit from there. So we’re seeing a lot less immediate supply, and the way we measure it has more to do with that proximity than that market level as a whole. Yes. I think the one thing I’d add -- this is Michael. I could just add one thing. In like markets like D.C., we have found that because there’s such good transit, like that mile radius doesn’t hold as well. So we would say that we’re going to cast a much wider net and assume that people will move between markets, between some markets just because of that transit. So, every market has like a rule of thumb that we use, and then we drill in and go deep with the investment officers doing their drive buys and given their input, and then the property management team is weighing in, and we ultimately get to this consensus view. And we’ve been doing this way for a long time, and it seems to really hold true. What we have found like in ‘21 and ‘22 that even with elevated supply right on top of us, if the inbound demand is so strong, it doesn’t matter. So, that’s why that absorption rate matters. That’s really helpful color. And then, one more for me. You touched on overall concession still being pretty elevated. So, I know all recessions are not created equal. But from a historical context, how have concession strategies looked during spring leasing season during a recession? And whether we can draw any lessons from the past to imply what could happen if things go sour? Thank you. Yes. So, this is Michael. That’s -- I don’t know if I have that in front of me to look at what the concession dollars were back across the previous recession periods or by quarter to understand the seasonality of them. I guess, what I would look at is just -- it’s very common to see concessions in the stabilized portfolios in the shoulder period that are used in a very strategic basis to really hold up base rent. And when you see it spread where -- like we’ve seen in some of the urban cores of Seattle and San Francisco, where 60%, 70% of the properties that we compete against are offering some form of concession, that is a signal, right, of something in that market. Now, the good news, like I said, is we’re seeing it dial back. And clearly, we’re seeing demand softening. You wouldn’t feel a dial back in that concession amount. So, how you would frame the spring? Right now, I guess I would tell you, I would expect concessions will continue to dial back, both in volume and dollars. But obviously, if you hit like a pretty significant recession period, maybe they sustain and hold at this level. It’s hard for me to say that. Thanks. The first round of requirements for compliance with the Local Law 97 in New York City are scheduled to take effect in 2024. Do you have any estimates on the impact for your portfolio? Hi Ami, it’s Alec. We’ve looked at that, and we don’t have an impact right now. We can reach those thresholds. It gets challenging, as you know, over time and ‘23 is another benchmark year, and we’re working towards that as well. So, so far so good, but it’s certainly to get more owners over time. Well, we’re excited, as you can tell from the call about our 2023 prospects, the Company’s long-term positioning, and we’re looking forward to delivering a really good 2023. So, thank you all for your time today and your interest in Equity Residential.

EarningCall_135

Greetings. Welcome to the NGL Energy Partners LP 3Q '23 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. Thank you. Good afternoon, and thank you to everyone for joining us on the call this afternoon. After the market closed today, we issued an earnings release, investor presentation and filed our Q. Comments today will include plans, forecasts and estimates that are forward-looking statements under the U.S. securities law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from the forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. Let's get into the quarterly results. With three quarters in the books, fiscal '23 is coming to fruition, and we are extremely happy with what we are seeing. The plan that Mike outlined to employees in the spring of '22 and communicated externally on the fourth quarter call of fiscal '22 is becoming a reality. As we enter the home stretch of this fiscal year, I want to thank all of our employees for their hard work and tenacity to get us to this very exciting spot for the company. We're increasing our Water Solutions adjusted EBITDA guidance from over $430 million to over $440 million for fiscal '23. This strong performance out of Water and the return of working capital has us to lean into the repurchasing of our '23 unsecured notes over the last few quarters. We started this fiscal year with an outstanding balance of $476 million on the '23 notes. At the end of the third quarter, the balance in the '23 notes was $302 million, and during the first few weeks of January, we retired an additional $100 million of the '23 notes, leaving a current balance of $203 million. This is a significant progress in reducing the balance on these notes, and our plan is to fully retire the remaining balance no later than June 30 while maintaining our strong liquidity position to run all of our businesses. From a balance sheet perspective, we have reported total liquidity at the end of the third fiscal quarter of approximately $280 million and borrowings on the ABL facility of $156 million. As a reminder, we are entering the liquidation phase of the propane season, and we would expect to see the ABL balance decrease over the fourth fiscal quarter. At the beginning of February, we started the process with our bank group to extend the $100 million accordion feature within our ABL that will allow us to have an ABL commitment of $600 million. This process should be completed by mid-February. With our strong trailing 12-month adjusted EBITDA and the reduction of the '23 notes, our total leverage should be below 4.75x at the end of this fiscal year. This is a very important milestone, but we will not rest as we continue our laser focus on strengthening the balance sheet over the next fiscal year. As I mentioned earlier, our Water Solutions business continues to see strong growth. Water Solutions is benefiting from owning and operating the largest integrated network of large diameter-produced Water pipelines and disposal wells in the Delaware Basin. Our Water disposal volumes have grown approximately 32% this quarter over the same quarter a year ago and 7% versus last quarter. Our Delaware system experienced three days of sub-2 million barrels of oncoming Water due to cold weather in December. But with our fully integrated system, we were able to quickly recover and take advantage of unexpected volumes from non-contracted customers to achieve record volumes of over 2.7 million barrels for several days. Our third quarter EBITDA for Water was not impacted by weather, thanks to our excellent field staff efforts. The Water team has continued to focus on reducing operating costs in the face of inflationary pressures while maintaining rapid growth. Operating costs were $0.25 per barrel in the quarter versus $0.27 per barrel in the second quarter. As volumes continue to grow, there is an opportunity to further lower our per barrel operating cost. All of this positions our Water segment for continued EBITDA growth. It's important to note that Water's strong financial performance has not been driven by $100-plus crude oil on our skim oil barrels. We hedged our skim oil in the first half of the year, and our average realized price for fiscal '23 is approximately $80, which is about where the market is today. The Grand Mesa pipeline continues to be negatively impacted by producer permitting delays in the DJ Basin. Grand Mesa averaged approximately 77,000 barrels per day compared to approximately 83,000 barrels per day in the third quarter last year. We are closely monitoring the basin activity. And as the permitting issues get resolved, we are encouraged that we could see more production out of the basin in the future. And if so, Grand Mesa is well positioned to capture its fair share of those volumes. Our rack marketing and biodiesel businesses have benefited from the tight gasoline and diesel market to capture higher margins and in the case of biodiesel has benefited from cheaper additional supply driving their strong financial performance. Our butane margins excluding the impact of derivatives, were lower as product purchased earlier in the blending season continues to compete with product purchased in a currently discounted market. Recall that the majority of the EBITDA from our wholesale propane business occurs in the months of December through March. Propane results for the quarter were below expectations, partially due to an overall warmer than normal winter so far. I would like to summarize the significant growth in our Water disposal volumes a little bit here. If you remember, a year ago, we thought we would have 10% a year growth, and we were way off. This first year, our Water volumes grew 30%. In the first quarter, we saw disposal volumes grow 12% in one quarter versus the fourth quarter last year. In the second quarter versus first, we grew another 5%. And then this quarter, versus second, we saw a 7% growth rate, and we'll see some additional growth in the fourth quarter. So a 30% growth rate in Water in just one year is really incredible and kudos to our guys for being able to accomplish that. But a lot of it is we're dependable, and the producers know that they give us the water, we will get rid of it. This impressive growth is the driver for why we increased adjusted EBITDA guidance from $430 million to $440 million for this year. Recently, a couple of our largest customers indicated publicly they are increasing their activity in the Delaware. This gives us confidence that Water Solutions volumes and EBITDA will continue growing in 2024. And again, our costs at $0.25 a barrel is pretty incredible with the inflation we hear about every day. Maybe a little perspective. We're at - I think, $331 million EBITDA for the nine months. Third quarter was $121.7 million. So if we were to duplicate that in the fourth quarter, we'd be at $453 million, above the $440 million-plus guidance. We are trying to be a little conservative and make sure that we beat our numbers. Now I'd like to focus - discuss our strategic focus in short-term and intermediate goal strategy. So first, our key focus has been addressing the '23 unsecured notes. As Brad mentioned, we've made a lot of progress, current balance, $203 million, and we will pay the rest off by June 30. I think this is well before most folks anticipated, and we'll see if we can do better than that. So we get the immediate debt hurdle out of the way, get us some breathing room. Second, regardless of when we pay off the '23s, we think by the end of this fiscal year, March 31, our leverage will be at or below 4.75x. Again, I think that's well in advance of any of the estimates I've read on the Street. And contrast that with our leverage in the third quarter, fiscal '22, 7.2x. So just within 4 quarters, we have reduced total leverage by approximately 2 full turns and possibly 2.5 turns by March 31. This is remarkable progress. Third, our 26 secured notes mature in February of '26. So they will become a current liability February of '25. That is only two years away. We do not want to get into the same situation with these that we did with the '23s. Therefore, we will continue to drive down leverage in our absolute debt to position the partnership to roll and extend all remaining maturities with the best possible terms. And then fourth, we will also address the preferred dividend arrearages and thereafter the preferred dividend at the appropriate time. They're certainly on our radar. Now that we've talked about increased Water Solutions guidance and debt reductions, I'd like to point out that these debt reductions achieved in these first nine months year-to-date were accomplished without any significant asset sales. We continue to make progress on several noncore asset sales, which we hope to sign and close in the fourth quarter. If these are completed, the proceeds will go directly to the balance sheet and drive leverage even lower by the end of the year, giving us even more financial flexibility. Hi, thanks for taking the questions. So could you provide any help on the $29.5 million charge that was, I guess, reversed in the quarter? This is Brad. I think what we can do is point you to the Q on that one. There's language in the Q with respect to that. That's about all I can really say. Kurston McMurray, our General Counsel is on the call as well. Kurston, I don't know if you want to elaborate on that? Yes. Sure. Sure, Brad. Yes. What we can say is what's in the Q. And is this a legal matter, so we appreciate your respect to our need to be confidential. Thank you. Okay. All right. In terms of the Water segment, obviously, very strong results there. One of your competitors actually came out and said that they had to lower their guidance because of the winter storms. Obviously, your volumes look great, but were they actually tamped down a little bit by the winter weather that impacted the region in December? I'm going to let Doug answer but in my prepared comments, we talked about three days or so that were sub $2 million, and then we had a handful of days that were over 2.7%. So I think if you average across those handful of days, it's probably right in line with where Doug's average was for the quarter. Doug, anything to add there? In terms of your fourth quarter, usually you see a working capital release, and you've paid down $100 million. Is that - do you expect a significant working capital release in the fourth quarter? Or did you use the revolver balance to take out the $100 million of additional bonds since the quarter end? Now the bond reduction was done with working capital release, and we would expect further working capital release as we move through the rest of our propane season. From where we are at the end of the third quarter, I think it's fair to say that the ABL balance could be there might be $40 million to $50 million on it at the end of the fiscal year. Assuming no more retirement than this point forward. Okay. That's great. In terms of the NGL segment, any - like I think at the start of the year, you guys said that you would kind of be flat this year in the Liquids Logistics, and you're trending not so close to flat, implying a big fourth quarter. Is that still your expectation? Or is kind of this year been a little bit worse than you expected because of the warm weather? Yes. I think the weather, the lack of weather, I would say, up in our key areas has been a driver. We do expect a nice fourth quarter from the team, but I think for the year, down relative to expectations across the full Liquids Logistics business. The biodiesel in our rack marketing group and the butane blending have done well, but wholesale propane a little bit lighter than we would have liked to see it at this point in the year. I think we'll still see a strong fourth quarter from them, but probably under what our expectations were for the full year. Good afternoon, gentlemen. On the Water business, the performance was particularly impressive - and I just want to sort of get a sense of some of the drivers there of how you're able to continue to reduce costs in that business. Yes, sir. One of the important factors in our per barrel metric on OpEx certainly is the fixed cost. Every barrel that we add as we grow, and as we grew the volumes so ratably this year, it's really reduced our fixed cost per barrel. We're always working to reduce any expense that we can, but on a total basis, our variable costs are higher on a cumulative basis, but we've held them very steady on a per barrel basis. But the large amount of volumes that we see today and going forward, it really, really washes out and reduces the fixed cost. We're doing as much and more water as we did in the past, but our employee headcount has not increased. That's an example. We look at what the cost to run the business, and we really focus on those fixed costs and keeping those down. Those are ones that we can certainly control. And then on the variable cost side, like we've mentioned many times, we were fortunate to hedge our power costs in Texas at extremely low natural gas prices, and those go through 2028. So that's a big, big help. So every barrel we bring on, and we're able to apply these low cost, too, our per barrel metric continues to get better. And then - and I know you can't say much about it, but on the $29.5 million onetime gain, is it fair to say that the matter is closed at this point? Thank you. And then you touched on potential for further asset sales on a noncore basis. Any sense you can give us kind of the size or nature of kind of the assets we should be thinking about would be helpful. Fair enough, Mike. I mean I get paid to ask the question, you get paid not to answer it. And I guess just last one for me, and I'll get back in the queue. As you think about sort of your '24 and beyond, just love to get your sense of kind of how much additional capital it will take to keep the Water system growing at the - I know you can't sort of repeat the incredible rate you're at right now, but sort of at the rates you're targeting over time? I think the guidance we've given in the past is that we had fully really built out our system after this year where we had a couple of big new pipelines. I would have Doug comment after me, but we were thinking more in the, I'll say, $40 million to $50 million range going forward. I think that's going to increase because of the new opportunities. But we haven't budgeted yet, so we don't have a number. Do you have anything, Doug? Yes. It's important to note, we took this quarter as well, this third quarter, and we amended and extended some of our term contracts, acreage dedications, and we picked up a few new contracts there long term that have added to our acreage dedications. And then we're working on a couple of another couple of 10-year dedications currently. They're very close to being signed. Those all include additional acreage. So - the other - and then the other important thing to note is the super majors, you can see it in their public comments, they're really planning to ramp up in the Delaware, and certainly within our footprint. So we're going to do everything we can to take every barrel of Water and do it from a very smart and contracted basis and not overbuild our system, but be there to capture these great margins. Good afternoon, guys. Just - you had very strong volume growth this quarter. I'm just curious, was there any benefit from the seismic activity leading to some of your competitors not being able to inject in their deeper water wells, and is that something that you can quantify and talk about how that - how you may benefit from that going forward? That's a question where we knock-on wood to answer that one. We have been very fortunate that our footprint has not been materially affected by the seismic review areas. Certainly, it maintains as a risk to our business, but we feel like both the OCD in New Mexico, the Railroad Commission in Texas have taken really large steps toward remediating that risk or reducing that risk, which is good. That's very positive. We have certainly benefited from this system that we have that all these years in Hillstone, [indiscernible] we've spent the money to fully integrate. We have benefited greatly from that due to seismicity, but we certainly aren't out of the woods yet as an industry, but I believe everyone is working together and along with the regulatory agencies to reduce the future risk. No, I would say it's material from a volumetric basis, approximately 150,000 barrels a day to 200,000 barrels a day. That would be an estimate I would give that comes our direction due to reductions or limitations on others. Great. And just one more for you. You highlighted two of your producers in your operating area highlighted increased rig activity. Have they indicated to you timing on when you would potentially see those volumes? Or are you just looking at the rate announcements and interpreting from there that there's activity coming? Hi, good evening. Thanks for taking the questions. Mike, you touched a little on capital allocation after you get to the 4.75x leverage target maybe next quarter. But could you elaborate a little bit more on how you think about allocating between further debt reductions. As you noted, maybe the 2026s and the payment of preferred distributions in years. Yes. We really haven't discussed that with our Board yet. We're mindful of the arrearage. So it's really balancing - your balance sheet needs to be in a certain condition to be able to roll out your debt, right? So it's 4.75x is too high leverage to be able to do that. So we'll be talking with our bankers, figure out, is it 4.0x, 4.25x, what is it that allows us to launch, and then we push out the debt, so we don't have to worry about that anymore. And then we'd address the press. Got it. And then on your corporate initiatives, just curious why we haven't seen an announcement yet. Is it a function of lower demand and the lower bids in the current environment? Is it complexity of the transactions you're trying to finalize or maybe something else. Whatever color you could provide would be helpful. Yes, it's - they're all a little different. One is requiring consent from I'll say - I'll say, third parties and those are - they take longer to receive. Others took - I'd say, we wanted to sell into the strength of the market. So we waited until the market was much stronger. And then we launched and I think we'll end up with a more attractive price. So it wasn't a fire sale. We were very thoughtful about timing, and I think one was pushed back some from like the third quarter to the fourth quarter, one we've we have signed and now we have to go get consent. Another one, the buyer was having difficulty getting financing, and it appears that they've been able to secure financing. So different reasons, but we didn't want to push because you're right, if you do that, then you're going to get a lower price. Got it. Appreciate that. And then maybe can you just remind me what the remaining contract average term on Grand Mesa? Hi guys. Thanks so much. Most of my questions have been answered, but just a quick follow-up on the asset sales. If possible, can you confirm that those asset sales are outside of the Water business or may they include some? Yes, they're - well, I can't confirm that. There is a small one that's in the Water side that's a no growth asset and the other two are outside. The other two are larger. But it's - I call it kind of pruning if there's a no-growth asset then you basically just have an annuity. And then if it's - that's a good one because you're not really giving up any future growth. The other ones are in areas where we can get multiples over 10x. Okay. We have reached the end of the question-and-answer session. I would now like to turn the call back to management for any closing remarks. Yes. Thanks, everyone, for your participation today. As you've heard, we're excited about our progress this fiscal year. We look forward to speaking with you this summer when we discuss our fourth quarter and full year results. Have a good day.

EarningCall_136

[Operator Instructions] It’s now my pleasure, and I would now like to turn the conference over to Daniel Fairclough, Vice President, Investor Relations. Please go ahead, sir. Thank you, Francie. Hi and good afternoon everybody. This as Francie said is Daniel Fairclough from the ArcelorMittal Investor Relations team. I'd like to welcome everybody to the Fourth Quarter and Full Year ’22 Analyst and Investor Call. I'm joined on this call today by our Executive Chairman, Mr. Mittal; our CEO, Aditya Mittal and our CFO, Genuino Christino. Before I hand over to Mr. Mittal and Aditya, I would like to remind everybody of a few housekeeping items. Firstly, I want to refer everybody to the disclaimers that you can find on slide two of the results presentation we published on our website this morning. I'd also like to remind everybody that this call today is being recorded, and it's scheduled to last up to 45 minutes. And finally, to repeat Francie’s instructions [Operator Instructions]. Thank you, Daniel. Good day, everyone. Thank you for joining today's call. I hope you are all keeping safe and well. I'll be very quick in my remarks. I would characterize 2022 as another year of progress for our ArcelorMittal. The results we have published today demonstrate the greater resilience of ArcelorMittal when facing more challenging market environments, and I believe the worst conditions of this cycle have passed. As a company we have achieved significant progress on many strategic fronts over the past 12 month. Advancing our decarbonization plans, progressing with our investments to grow EBITDA and at the same time buying back over 10% of all equity. The progress is gratifying, and it's down to the hard work, commitment and dedication of all our people. I expect 2023 to be another good year for the company and all our stakeholders. Adit? Thank you, and welcome everyone. In 2022 we have made clear progress in our three strategic priorities: The decarbonization of our footprint; the growth and development of our business; and capital returns to shareholders. On decarbonization we had completed the acquisition of the HBI plant in Texas, allowing us to utilize low-carbon metallics and creating significant optionality for the future. We have acquired four scrap processors in Europe with a total capacity at 1.2 million tons. We have commissioned our €200 million CCU bioethanol project in Ghent Belgium. We are progressing on our DRIEA [ph] plant in five countries and a 1 gigawatt renewable project in India is advancing. On growth, we have now received [inaudible] approval for the CSP acquisition, which we’ll complete this quarter, adding highest quality capacity at the bottom of the cost curve, with the added benefit of access to growing sources of competitive renewables and hydrogen. We're also progressing our strong pipeline of higher return strategic CapEx projects, including the newly announced Electrical Steels project in France. In total, these projects add $1.3 billion to a normalized earnings power. That assumes long term steel spreads and long term iron ore prices well below today's levels. So at today's levels, the impact on profitability would be even greater. We're making progress to realize the potential of our JVs, including the announcement of a major investment to double our capacity in India, which is also supported by the recently acquired port and power assets. Our capital allocation and return policy is working very well. We're growing the earnings power of the business. We bought back 30% of our equities in September 2020 and ended the year with record loan net debt. In terms of outlook, we've seen some positive signs recently that suggests we have passed the bottom of the current destock cycle. The customer destock that we spoke of the last quarter has eased, and we've seen improvement in steel spreads from the unsustainable lows of the fourth quarter last year. We are forecasting apparent demand growth in all our core markets. We're well placed to generate positive cash flow and will continue to progress our decarbonization and growth agendas and capital returns program. Thank you, Aditya. In terms of our financial performance, 2022 was very much a year of two halves. For the first half we operated in strong market conditions and delivered very strong levels of profitability. The second half of the year brought several challenges and saw a marked downturn in the market environment and naturally affected our profitability levels. Full year EBITDA was $14.1 billion, of which $10.2 billion was generated in the first half and $3.9 billion in the second. But our results demonstrate clear resilience. At $100 per ton, the EBITDA in the fourth quarter was double the levels of the previous crises environment. Considering the challenges posed by destocking and relatively high energy costs, this reevaluates the actions we have taken and the improvements we have made to our portfolio in recent periods. Free cash flow has also been very consistent. Over the past two years we have generated $13 billion in free cash flow. It is this consistence that is allowing us to progress our strategy agenda and as Aditya mentioned, we expect to continue to generate quick levels of free cash flow in the year ahead. Thank you, Genuino. Thank you, Aditya. Thank you, Mr. Mittal. We have a queue of questions and we will take the first in the queue, which is Alain from Morgan Stanley. Please go ahead. Yes, thank you, gentlemen and I have two questions from my side. The first one is on capital returns. I understand that your framework stipulates that only $100 million of buybacks are needed to meet your 50% of the cash flow target for capital returns. But your net debt has come in far below market expectations for Q4 and you still have an authorization to buy back almost 19 million shares. Any reason why you have decided against maintaining the buyback at full steam given where your share price is today? That’s my first question. Yes, thank you for the question. I'm glad you asked the question, because you should clarify, there is no change in our buyback policy or the speed at which we're implementing. We still have 19 million shares to acquire and which we will do. I think all we were highlighting in the results is that the $100 million belongs to 2022, because that's 50% of free cash flow that we have actually bought in January, and the remainder will apply to the 2023 capital return policy. Okay, thank you, that's very clear. And my second question is on your EBITDA progression going forward into Q1 and Q2 in terms of the key moving parts. Can you give us some pointers around that? And you stated that we have pasted the bottom of the current destock cycle. Is it fair to assume that we are also past the bottom when it comes to quarterly EBITDA in Q4 last year. Thanks. Let me take this one. So yeah, I think as we’re discussing at the time of our Q3 results, and so we were expecting a very severe level of destock in quarter four. That's exactly what we saw. Really strong destock happening. It's hard really to say that the destock is over, but clearly not going to be as significantly as it was in Q4. We got to see certain levels of normalization, and our expectation as we move forward that the appearance to consumption will be closer to the real demand. In 2022, I think it’s important to put that into context. In Europe, if you look at Europe, the real demand was actually okay. So the real demand at the end of the year was – we were close to breakeven, slightly positive. So really the destock that we started to see in Q3 and again classified in Q4 put a lot of pressure on the apparent steel consumption in the second half of 2022. So that should normalize, and we should see apparent steel consumption getting much closer now than to be real demand, that we expect to continue to be moving sideways, so that's one. I think another very important element that we can point out is the energy costs in Europe continue to come down, continue to normalize. So as a result our order books are improving. We see that and again that’s going to the non-occurrence of the very strong destock of Q4. So trying to put all this together, I would maybe start with shipment. So our expectation is see shipments improving in Q1, in most – in all of our regions. Appliances as you know, because prices continue to decline during quarter four and because of lands, our prices, we expect will continue to be affected in quarter one. But as we know, prices have since started to move up quite significantly, so that it looks good for our second quarter. So prices, we discussed volumes up. Cost, we expect costs to continue to come down, even though we are seeing more recently of course – I don't know price, the coal price is moving up. We will not see so much of an impact in quarter one because of the weighted average costing. So those are the moving parts. So I think as we start the year, I think we are cautiously optimistic. We have guided for apparent steel consumption for the year to be up 2% to 3% and we are guiding for 5% improvements in our shipments for the year. Thank you, Genuino. Maybe just a few quick points to add. So I think Genuino went into a lot of details, so I appreciate that. Overall, I know you asked, do you see the worst behind us and I think we do. So when we look forward, we think fourth quarter was the lowest point in the current cycle. So we expect Q1 and going forward, the business to perform better. The apparent steel consumption numbers match, almost the real demand numbers of the forecast in the core markets. So there's also a good development on the real demand side. Thank you. Yes hi! Thank you for taking my question. Maybe if you could shed some light under the full year volume guidance. You mentioned that the guidance implied no change in Ukraine. So could you give us a sense of the current output levels at the moment? And is it fair to assume that this is the base case scenario in which your free cash flow guidance is based on. Thank you for the question. We have not really provided free cash flow guidance. We have provided shipment guidance, and we expect our shipments to build 5% year-on-year, and this obviously includes Ukraine. In terms of Ukraine, I think first of all, I must say that our people have been absolutely heroic. They had been maintaining the operation. They had been defending themselves and are on our facility, and we are all extremely proud of them, and we really applaud everything that they are doing on a daily basis. The focus of our people has been to maintain, maintain our assets, maintain its integrity. We are in fact in critical – the critical implication of that is that we are maintaining our opportunity to produce steel in the future. Today, the operating levels are roughly 15% to 20% for steel and 20% to 25% for iron ore mines. And as you know that the facility in Ukraine has vertically integrated. It has its iron ore mines connected to our steel making and makes long products. So clearly can participate in the reconstruction, redevelopment of Ukraine when there is peace. Okay, that's very helpful. And maybe just a quick follow up on the volume guidance. In Europe, you have a couple of blast furnaces that have been idle at the moment, and I think only one has been restarted so far. Does your volume guidance include some additional restructure in the region. And is there some possibility, when you look at certain blast furnace being idle that some are now called idol or some close to the end of life. And this is context of the decarburization, maybe some of those blast furnaces will not restart. Is that a fair possibility? Thank you. Yeah, let me report on that Tri. Yeah, so I think we are bringing production back as we see improvement to our order book, right? So and that's where we have been also very consistent on that. So we will always match supply to the demand that we see. So we are not bringing capacity back. Anticipation of an improvement is really responding to the dynamics, the order books that we have in front of us. So at this point in time we have some of the finance debt we brought down during Q4. As you know they were for maintenance, we are up and running. We have made all the announcement, so some older furnaces are up today. So we only have one furnace in [Inaudible] that is a small furnace that is down, that is close to end of life, that we may or may not bring back, but that remains available to the group. So all of our capacity remains available for the group. Good day, and thank you for the opportunity. I wanted to ask just how you're thinking about the other 50% of free cash flow, which for the strategic acquisitions. So I mean, when you look at your current footprint, you know with the big acquisitions that are being replaced with HBI, CSP and the recycling businesses. Is that how we should think about going forward that you'll look for bolt-on, and I suppose low carbon feedstock or basically how are you thinking about it, going forward? Yes, thank you, that’s a great question. Yeah, I think you're right from an industry. I’ll just add a little bit more color to your question. So we continue to be focused on how we can effectively deploy our strategic capital. We are looking at opportunities which help us decarbonize, that they will be further or create advantages for us as we decarbonize. We're looking for low cost, higher margin assets and clearly, the real fundamental decision making is how much value do we create, right. What are the trends in these projects and then include it, and how do we continue to grow and develop the business keeping all of these factors in mind. So I think in 2022 we did a great job, right. We deployed our strategic capital appropriately, Texas, Brazil, scrap processors, renewable investment in India, XCarb fund deployment in different and new technologies, and we managed to return a lot of cash to shareholders, buying back 11% of the company, and as you saw this morning we also increased our base dividend. So I think you should expect more of the same, i.e., a balanced approach in terms of growing and developing the business, but also returning cash and value to shareholders. Hi! Thanks for taking my question. I have two questions. The first one on working capital. Given the initiatives that you have for 2023, could you maybe just talk to us about how you are thinking about the normalized working capital levels for maybe 2023 and maybe even long term. And then second question, again really interested in your comments on you know the destocking cycle. Could you maybe just maybe drill into a little bit on the U.S. How you see the U.S. playing out in current markets. Thank you very much. Yeah, maybe I'll start with the working capital question Dominic. So as you know we have invested significantly in 2021, 2022. We had of course, a good release already in quarter four, and we can see now we released that our expectation is to continue to release working capital in 2023. We are not quantifying that, but what gives us confidence that we should be able to see that, in fact that the cost of our inventory, the cost of our metal stock is still impacted by the high raw materials that we bought in the first half of 2023, that's one. Second, the energy costs also that were very high, especially in Europe up to Q3, also is due to some extent sits in our inventory. So as cost is normalized, then naturally we would see our requirements for working capital to come down, so that's one aspect. And typically as we, we stopped ourselves in Q4, you see also an impact in payables, and as we start also procurement of raw materials, then you recover that support from suppliers as well. So that was – that really gave us confidence of course, and then the dynamics, the working capital dynamics we know will be really much – pretty much impacted by what happens in the last three, four, five months of the year. So that's our expectation, that's what we can see today. In terms of the destocking, I think the dynamics that we see, they are relatively similar in U.S. We also saw in the second half a significant biz stock, especially in flats, much more than in some of the other segments, loans [ph] and tubular. So our expectation is that we should start to see that normalizing as well. So the dynamics are the same, although the levels, the intensity of the destocking in Europe, they were greater. Yes, thanks for taking the question. Yeah, let me go back to your volume guidance. I think the 5% you're expecting to grow this year is I guess quite a constructive number, particularly as we're still you know dealing with kind of a recessionary environment. What I'd like to understand is what your kind of real demand assumption is behind. Are we talking about kind of a flex demand you're seeing for the whole of ‘23, and in times of the dynamics of whether we end up in a software and hardware scenario for the rest of the world, in your guidance have you baked in kind of a similar real demand that was in the second half compared to H1 or is there any nature valuation to that for the second half. So maybe I will just start with the macro and if we need to provide you further details, I’m sure Genuino can supplement. I think we started with the call by saying we have a constructive outlook, so it's predicated on few elements. The first is that we feel that the destock has peaked and there's lot of evidence of that just based on how our customers are ordering and what we've seen in terms of real demand and the pan demand. The second I would add is that energy costs, even though they are still very elevated had eased relative to the second half, particularly relative to the fourth quarter and clearly that's positive momentum as we enter 2023 and is also positive in terms of real demand, right, because the energy complex is not just impacting us from [inaudible] impacts. All European industry and impacts, the European consumer as we’re all well aware. In terms of the things that remain outstanding. I mean, first and foremost is Ukraine, where we don't have a resolution of peace, but the immediate direct economic impact of energy has eased, and we also have a tightening monetary condition environment, right, and that's offsetting the inflationary pressures that we have seen in 2022. So those headwinds remain. China, we still have to see how China comes out of the holiday season and what type of demand environment, but we're also constructive in China, and that is why ensuring all of these factors, that the overall, the destock has peaked, we see that the energy complex has – the pricing has eased and that's a positive headwind, but yes there are typing monetary conditions, but perhaps not to the same degree that you would have forecasted a few months ago. Relatively good news throughout of China allows us to have a constructive apparent state assumption outlook. And interestingly enough, in almost all markets, you know whatever numbers we have posted in our presentation, matches the real demand environment, real steel consumption environment. So it's not that we are forecasting an inventory build into 2023. What we're forecasting is real demand improvement relative to 2022. Okay, understood. Maybe on CSP, can you give us an update of when in Q1 you’re expected to close the transaction and giving us any update nonetheless in terms of what CSP is actually shipping and maybe also any hint on what the EBITDA performance is at the moment? The transaction should close now, end of the month, right, and I think we will update you in Q1 in terms of performance. Of course, at this point in time the level of information that we have is limited. We believe we have evidence that the company continues to do quite well. So we are encouraged by that, and I think the whole thing in this year is they are excited to – waiting for the transaction to close and I'm sure we will have the opportunity to update you on performance expectations for that plant as we made in quarter one, but the transaction closes end of this month. Hey! Good afternoon. So I have this first question on the SIS, because in your press release you used some good questions on the evolution of the region this year. But given the extent of company specific issues you faced last year, could we expect a better performance for your own operations. And perhaps can you give a sense of all things we developed doing in South Africa because you're adding a number of officials to next year, and should we expect a rebound to there, to reference the question. Yeah, yeah, sure. Well, as you know we have guided for plant two consumption to be up by about 2% to 3% and we are guiding for 5%, so that implies that we expect to do – to be doing a little bit better than the appearance to consumption overall. And some of the reasons, you mentioned.one of them, South Africa. South Africa had a number of operational issues in 2022, not all of them under control of our unit. As you know, the country is facing significant challenges in terms of energy availability and rate availability. So we hope that the country and us will be the providers and we're going to be making some progress, and our expectation is to see an improvement over there. So and then in the other regions we do expect to be following the apparent steel consumption guidance that we are providing. We do expect to do better in some of the regions. In Brazil, a little bit better. We also expect to do a little bit better in Africa. So that's why we are taking a target to 5% instead of the 2% to 3%. Okay, thank you. And the second question is on your Carb initiatives, [inaudible]. So you got a green light in Canada recently, but the projects in Europe are still somewhat standing. So could you give us a sense of the timeline of timing there, when you can get a final go ahead in Europe and potentially launch those projects. Yeah, sure, thank you. So you're right. In Canada we have received the government support for our decarbon initiatives at the Dofasco facility. In Europe, we're still waiting. We have four applications or four major projects that are sitting with the European Union, that’s been a while. But for them to grant us the approval, but from what we understand, the approval should be granted shortly. When I mean shortly, in the next few months. Okay, that's good news. And we will take a decision for the four initiatives combined or will it be an individual decision for each of them. It's a very good question. For what we understand, it’s an individual decision making process. Maybe two out of the four will be done first, and then the other two later on. Hey! Thanks very much. Question on the NAFTA segment. How is the ramp of the Mexican hot strip mill. Maybe you can give us capacity utilization of what’s the progression there and an update on your plans of support, Calvert with a look at EAF. Yeah Phil. So I’ll take this one. So we have – we are quite pleased with the evolution of the hot strip mill in New Mexico. So we have end of the year with run rate of about 50% of the capacity. So we had a record in December. So the team is quite excited about the progress over there. So it’s about 50% and that’s our run rate today. We will continue to ramp up the hot strip mill. The focus here has also moved a little bit now, to more towards also product development and motivation with customers so that we can enlarge the customer base. So I think it's progressing well, and we have actually in our release provided the contribution of the hot strip mill. So we are already at a run rate of about a $100 million of additional EBITDA, which is in line with what we had anticipated before. After the full ramp up should be generating about $250 million of contribution. So I think we are moving in the right direction there. In Calvert, we had to [inaudible] well also with the EAF. So expecting to – our expected completion date is end of the year, and then we will take it from there. And I think it works well. I mean, once we start the Arc Furn in Calvert then we should also be making progress with the ramp up of the hot strip mill in Mexico. So I think it's a good balance. This last data today being transferred to Mexico, and be rolled and sold domestically in Mexico. Thank you, and just to follow up if I could. Any update on what's your automotive customers are telling you? In Africa and Europe and in terms of how they expect the year to play out or anything there in terms of what you're seeing along the order book, I appreciate it. Yeah. I think we saw the second half of last year ended relatively well, right. Especially in Europe, we had a very bad first half and things slow improved in the second half. So I think we ended the year with a little bit of an improvement in terms of production, and we had also similar production increases in after. And we believe that the demand for automotive, the backlog, the low level of investment should continue to support our production. So our expectations that we will continue to see progress and increase in production, automotive production 2023. So that should be and I think at this point in time, I think we are looking at something in the range of 5% increase for 2023. Hi! Thanks for taking the questions. Just a follow-up on the detail plans. Can you just remind us of what you were expecting from those potential subsidiary. I think you took back as you – if you turn to the CapEx coming from, potentially coming from government sources, what exactly are you asking for? Can you remind us what the expected sort of CapEx would likely to be on those four DRI pumps and how much do you think should could come from government source? Sure, thank you. So we have not specifically broken down the CapEx for that project, but I would refer to our climate action report. In the climate action report, we talked about reducing our overall carbon footprint by 25% by 2030 and 35% in our European footprint. We outline the CapEx $10 billion to achieve that, and we suggested that governing grants would be approximately 50%, so we can do the net CapEx to us is about $5 billion. That remains the plan, and as these projects get approved and finalized in terms of engineering design and scope, and they are mature, we will be updating you on all the questions that you have asked. Yeah, thanks Daniel and good afternoon all. My question is on the regulatory side and see them specifically, and I think we just had the results from the European parliament today, and could you please give us your view on the outcome on the trial, of the trial of meeting in December. Is this really good enough. What else needs to be addressed to shape the regulatory environment in a way that it makes it suitable for you to get the get the decarbonization done. Thank you. Sorry, could you just repeat the last bit of your question. What do we need done, it wasn’t clear Andrew – Bastian, Basically, it’s where will you have to see them. Maybe have some color on the funding support. We were obviously discussing CapEx earlier, but I guess outside maybe the CBAMand what is decided here so far. What else – if you need it to be done to basically give you enough confidence that he can go ahead with the decarbonization and make these projects actually a call for [inaudible] and not just a biggest one. Yeah, okay, great. That's very clear, thank you. So look, you highlighted a lot of it already, and I will just, I’ll do a little bit more detail. So the first thing is the previous questioner asked the same. We're expecting planning and support from the European Union, the United European Union, and the various countries are actually providing that funding support. So if you have a project in Germany, it's actually the German government, etc. etc. So that's the first, that's CapEx support. The second, the CBAM is important to create a level playing field. Because in Europe as you know there is a ETS system, the Emissions Trading System, which imposes costs on people who admit CO2 and steel coming into the country, should have equivalent cost. The same in terms of exports, we need some export relief. So there is a CBAM legislation, and there's going to do trial. And I think that’s a great development, because it's good to see the trial. We will all learn and develop from it, and there'll be more clarity on the CBAM, and I think it's clear that the intent is to make it effective. Clearly, the trial and the details will go long way in determining how effective it actually is. The third things is, really the IRA in the United States. So you can see there is a active dialogue in the European Union to ensure that the EU remains globally cost competitive. Whether it is the cost of energy or the cost of hydrogen or the cost of CCS and I say that's another very important element, because the change since we have announced all of these projects has been the build in the United States, which creates a very favorable climate in North America. So trying to bring some of those advantages into Europe is also very important. Having said that, I would just add that one of the strengths of ArcelorMittal is the fact that it is global. We have assets in the US, we have assets in Europe, we have assets in uh in Brazil. And these are all centers which have access to and not necessary Europe, but we are assessing the locations which have access to our low cost energy or can benefit from those like the IRA. So the Texas HBI acquisition that we've made in Corpus Christi is a great example. Because there are a lot of CCS projects, a lot of hydrogen projects, it is really the basin of energy, and so we have a very good strategic asset there which we can grow and develop to supply low carbon metallics on a global basis. Your question was on returns, and clearly that is the most important. As we decarbonize our business, we have to generate an adequate return. We have to make sure the business is stronger and not weaker post this investment. And as we implement these investments and getting back to the previous question, providing details on the CapEx where it's been executed, first. What is the level of government support? We will provide a, we will provide you a clarity on what is the return profile. Just like what we've done with our strategic CapEx, where we talked about $4.2 billion of CapEx, $1.3 billion of EBITDA, in my opening remarks. You must have heard the highlight that this is based on long term steel spreads, long term iron ore prices, which are much lower than what we're seeing in the market today. So we provide you with that framework, as we embark on these large scale decarb projects in our facility. Thanks. Thanks for detail for that color. Maybe just a very quick follow up on the IRA of your – I guess your strategic analog is basically at least on that side unchanged here ahead of the project in France, at least versus the IRA, it is unchanged while offering. Potentially at least the IRA does give you some potential for other projects maybe to also tap those funds. Is there anything which you're working on and which you have in mind or do you actually see the IRA more as a case where it's actually going to drive your demand and support it nicely. But you're not really going to go out there and try to develop the larger scale project to take advantage of that. Yeah. So, Bastian that’s a good question. So we all see the demand impact. I think that that's something that has been widely discussed. I mean, there's always a by American provision and the impact that can that can have and have that in the U.S. steel industry. I would say there is an investment opportunity that is absolutely clear. I think the – it depends on it, on those investment opportunities are two-fold. There will be some investment ideas, and that's where the strategic capital comes into play, which are great on the standalone North American perspective and others, which are global. And I think for that, we have to have clarity on the IRA rules. So the IRA has been, passed as a law, but the actual detail and the rules will be decided the summer of this year. And I think they, and soon after there would be a similar exercise in Europe. I think post that clarity, you could make the appropriate investment decisions. At this point in time there's nothing imminent, but clearly something that we are looking at very actively, Okay, great. So let's conclude. Thank you very much, everyone. I think we have covered a lot of ground on the call today. If you need anything more, any more clarifications, please do reach out to Daniel and his team. They are always available. With that, we will conclude the call. Stay safe and keep those around you safe as well. Thank you and all the best.

EarningCall_137

Good afternoon, and welcome to the Applied DNA Sciences’ First Quarter Fiscal 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sanjay Hurry, Head of Investor Relations and Corporate Communications. Please go ahead. Thank you, Gary. Good afternoon, everyone, and welcome to Applied DNA's conference call to discuss our first quarter fiscal 2023 financial results. You can access the press release that was issued after market closed today, as well as the slide presentation accompanying this call on the Investor Relations section of our corporate website. Speaking on the call today are Dr. James Hayward, our Chairman, President and CEO; and Beth Jantzen, our CFO. Judy Murrah, our COO; and Clay Shorrock, our Chief Legal Officer and Head of Business Development, will also be available to answer questions on the Q&A portion of this call. Before we begin, please note that some of the information you will hear today during our discussion may consist of forward-looking statements. I refer you to Slide 2 of the presentation and to our Form 10-Q filed a short while ago for important risk factors that could cause the Company's actual performance and results to differ materially from those expressed or implied in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements or other information provided on this call as a result of new information or future results or developments. Thank you, Sanjay. Good afternoon, everyone. Thank you for joining us on our fiscal first quarter investor call. I will start this afternoon with an overview of our results for the quarter ended December 31, 2022. I will then turn the call over to Dr. James Hayward, our President and CEO, who will discuss progress against our strategic initiatives. We will then open the line for questions from our analysts and institutional investors. Before I begin my review, and as a reminder, we now report segment data that reflects the results of operations for our three reporting segments. The executive management team uses this data to manage the company's performance on a segment basis, assess expected future cash flows and make more informed decisions about each segment going forward. We provide this data to investors as a measure of transparency into our management of these segments. Our three reporting segments are therapeutic DNA production, identified as LineaRx, our majority-owned biotherapeutic subsidiary; MDx or molecular diagnostic testing services, which is our ADCL Clinical Laboratory; and DNA tagging and security products, which is our supply chain traceability segment. To begin, we are pleased to report a solid start to the fiscal year with both sequential and year-over-year revenue growth. Our revenue performance in Q1 was driven primarily by ADCL and its COVID-19 testing service. Orders for linearDNA and deferred cotton tagging revenues also contributed to the quarter's topline performance. Turning to our consolidated results for the quarter. Total revenue in Q1 was $5.3 million, an increase of 26% from $4.2 million in the prior fiscal period. On a sequential basis, Q1 revenues increased 48% from $3.6 million. The $1.1 million increase in Q1 revenues was due to an increase in COVID-19 testing revenues associated with a key client. Notable in Q1's revenues were orders for research and development quantities of linearDNA by first-time biopharma customers for their mRNA development efforts, as well as a recurring commercial order from an existing biotherapeutic customer. The increase in revenues was offset by a decline in product revenues of $310,000 that was primarily attributable to a decrease in sales of our MDx test kits and supplies. Our key COVID-19 testing client is an academic institution. And as such, testing demand is subject to lull due to semester breaks and school holidays. The current quarter, fiscal Q2, testing levels includes approximately three weeks of winter break, during which testing levels were muted. With the start of the spring semester, testing levels are ramping up. Gross profit was $2.4 million or 45% compared to $1.1 million or 27% in the prior fiscal year period. The improvement in gross margin was the result of an improved gross margin at ADCL. Higher testing levels, coupled with cost management efforts for our testing contracts where we also provide and staff test collection centers were the main contributors to the improved gross profit. To a lesser extent, the improvement in gross margin for the current period was due to the prior fiscal year period having high COVID-19 positivity rate, which resulted in a reduction in pooling size that had a negative impact on gross margin due to higher consumable costs per sample. Our total operating expenses declined by $2.2 million or 38% in Q1 to $3.6 million from $5.8 million in the prior fiscal period. The decline was primarily attributable to lower stock-based compensation expense of $1.6 million. The balance of the decrease is related to a decrease in bad debt expense of $300,000 for the collection of an outstanding receivable balance that was previously fully reserved for. Our operating loss for Q1 was $1.2 million compared to an operating loss of $4.7 million in the prior fiscal period. Given the unrealized change in fair value of the warrant liabilities included in our net loss, we highlight loss from operations to be the best representation of the company's operations. Net loss for Q1 decreased to $3.8 million or $0.30 per share versus a net loss of $4.7 million or $0.53 per share in the prior period. Excluding non-cash expenses, consolidated adjusted EBITDA for Q1 was negative $1.1 million compared to negative $2.7 million in the year-ago period. Turning to our balance sheet. Cash and cash equivalents totaled $12.9 million on December 31. As of December 31, accounts receivable stood at $4.1 million. We expect to collect the bulk of this amount in the current quarter. For Q1, our average monthly burn stood at $779,000 and was essentially flat with average monthly burn for the prior fiscal period. Our current warrants outstanding balance on December 31, 2022, remain unchanged at $7.3 million as our share price did not reach warrant exercise prices during the quarter. Approximately 2.2 million of the 7.3 million warrants have exercise prices ranging from $2.80 to $2.84 per warrant share, which if exercised could result in exercise proceeds to the company of approximately $6.3 million. 5.1 million of these warrants have an exercise price of $4 per warrant share, which if exercised, could result in total exercise proceeds of approximately $20.3 million. Of the 5.1 million warrants, 2.1 million expired September 2023, which if exercised would total proceeds of $8.4 million. Our cash position on January 31 was approximately $10.8 million. Before I turn the call over to Jim, earlier this afternoon, the State of New York and the Empire State Development Corporation announced our receipt of an Excelsior Jobs Program award valued at up to $1.5 million. The reward, which was announced on the State of New York website, could result in refundable tax credit for qualifying net new job creation over a benefit period of 10 years. We intend to use the award to support linearDNA's platform development path for use in the manufacture of nucleic acid-based therapies. Jim's remarks will go into greater detail on progress by this business segment and why we are excited about its future prospects. This concludes my prepared remarks. Thank you for joining us today. Okay. Thank you, Beth, and good afternoon, everyone. Thank you for joining us on our quarterly investor call. Our performance in the first quarter was one of improving execution. At the same time, we achieved progress on strategic initiatives focused on laying the foundation for a compelling biotherapeutic story supported by two PCR enabled businesses with the potential for growth and future cash flows. On prior quarterly calls, I've identified the biotherapeutic application of our PCR expertise as the company's chief creator of shareholder value. I've discussed that DNA underpins most nucleic acid pipelines, either in the manufacturer of the therapy as in the case with messenger RNA or with DNA as the direct therapeutic itself. The demand for DNA is expected to grow going forward. And the plasmid DNA, which is the industry's incumbent DNA production technology, suffers from long lead times, high complexity and high capital and labor costs as it moves to scale to support the growing number of nucleic acid-based therapies under development. Plasmid DNA's scalability and related cost and process issues are negatively impacting developers in real time. It's common today for a developer to encounter delays for a manufacturing slot up to 12 to 18 months out. A delay of this magnitude for an industry that's reliant on development milestones and clinical data, can alter cash runways, prospects for strategic partnerships and paths to commercialization. The industry requires an alternative to plasmid DNA, and it is actively seeking it out. The industry acknowledges non-plasmid DNA's potential for enabling companies across the nucleic acid-based therapy sector to simplify and accelerate DNA manufacturing. The ability to iterate R&D faster via enzymatically produced DNA to bring product to the clinic and to market faster confers a valuable advantage to a sector where therapy development has historically taken a decade or more and at considerable cost. But so much has changed. Interest from major pharmaceutical players in non-plasmid DNA manufacturing is rapidly increasing. With two enzymatic DNA manufacturing companies being acquired in the last 18 months, one by Merck, and the second last month by Moderna. In addition, Pfizer last summer inked a licensing agreement with a third enzymatic DNA manufacturing company. Unlike those companies, we are a relative newcomer with a differentiated PCR-based technology platform that excels at manufacturing the specific DNA needed to empower next-generation mRNA workflows. In light of the favorable macro environments for both enzymatic DNA manufacturing and mRNA therapies, we believe the timing is right to find long-term strategic partners to assist Applied DNA in its broad-scale commercialization of the platform. Now my prepared remarks today will focus on why we believe we are in the right place at the right time with the right expertise to be integral to the future of nucleic acid-based therapies as a direct alternative to plasmid DNA. I'll also touch on ADCL, our Molecular Diagnostics Clinical Lab and our DNA tagging business, also beneficiaries of our PCR expertise. I'll update you on recent developments as we position them for long-term profitable growth and positive cash flows. Our ability to make enzymatic DNA for nucleic acid-based therapies is based on very, very large-scale PCR which is grounded in our 15 years plus of development experience. Our LineaRx subsidy produces DNA enzymatically, which we have branded linearDNA. We view linearDNA as a direct alternative to plasmid DNA with improved safety and efficacy and performance, all with reduced manufacturing times. Since forming LineaRx four years ago, we've made tremendous strides in developing our linearDNA platform. DNA is therapy agnostic. Therefore, linearDNA's relevance to nucleic acid-based therapies is at least equally broad. And to name just a few of those applications; mRNA uses DNA as an in vitro transcription template or an IVT template. DNA is used to make the viral vectors that empower gene therapies. DNA is also used to reprogram cells into CAR T cells used in the treatment of certain cancers. And of course, DNA itself can be used as a direct therapeutic agent in the form of DNA vaccines targeting a wide range of indications from infectious disease to cancer. To date, we have cultivated an enviable roster of biopharma companies that have used linearDNA for R&D purposes to inform the therapy pipelines. And as Beth noted in her remarks, we acquired a pair of first-time linearDNA customers during the first quarter that are engaged in mRNA therapy development. Given that linearDNA's relevance to nucleic acid-based therapies is so broad, we have carefully examined the market and have deliberately chosen to focus on two near-term opportunities that we believe offer the nearest term revenues and can serve as a jumping off point for applying our platform to the broader genetic medicines opportunities. I'll spend a few minutes speaking to each in turn. And they are, firstly, in vitro transcription templates, known as IVT templates, for mRNA production, and DNA therapeutics. We have spent the last 12 months optimizing the linearDNA platform for the enzymatic production of linearDNA IVT mRNA templates. This was not an easy task as conventional PCR is not really an option due to the unique homopolymer sequences that are found in IVT templates. Specifically, the poly(T) in the DNA template that is transcribed into poly(A) in the mRNA. Nevertheless, by using the many tools in our particular PCR toolbox, we overcame these challenges and developed a workflow that utilizes specialized PCR primers in the PCR process to achieve highly homogeneous IVT templates, thus creating a differentiated production platform with many advantages over plasmid DNA manufacturing. Now we launched our IVT template service this past summer, and the response from industry has been overwhelmingly positive. Our IVT templating workflow, as shown in this slide, is a simple five-step process. We take a DNA template, which can be a plasmid, a linear amplicon or any type of synthetic DNA. In step two, we optimize it for yield and fidelity. It then goes through our production platform, which is step 3. This step conducts the amplification of the optimized template by means of our PCR production platform, which in the case of our current R&D stage customer produces small-scale orders that can be easily scaled up for production for recurring larger orders. Through this reaction, we can deliver a high-quality enzymatically produced template, complete with long and homogeneous poly(T) tails. It then goes through purification and quality control, as indicated in step four. And batch released to the customer is step five. For customers with existing DNA templates, this entire process can currently be completed in under two weeks for a milligram scale. With faster turnaround times and scale are part of our platform roadmap. Our end product is pure. It only produces the gene of interest. And in doing that, we eliminate endotoxin risks and the risk of including genes responsible for ampicillin resistance. It is efficient. You can use less quantity of linearDNA to drive similar or higher yields than the equivalent of plasmid DNA. It offers unparalleled flexibility. We provide a suite of IVT template modification options for specific performance requirements, such as chemical modifications and the addition of precise poly(T) sequences. These poly(T) sequences are highly homogeneous in the DNA sequence, including the length of these repeat homopolymer sequences, all necessary for optimal function. It is scalable in a facility that is a fraction of the cost and a footprint – and a fraction of the footprint of a plasmid DNA facility. In addition, by providing an IVT template that is already linear inform, we estimate that our linearDNA IVT templates can eliminate about 35% of the process steps required by conventional plasmid DNA-based mRNA production workflows. Moreover, unlike plasmid DNA templates that require expensive restriction enzymes to linearize the DNA, our linear template has no such requirement, thus eliminating expensive input materials from an RNA manufacturing workflow. The combination of all of these advantages forms a compelling use case for our customers. Now our second term focus is on DNA therapeutics and veterinary biologics within this field. The veterinary market is now beginning to grow based on advances in human therapies. The veterinary biologics market goes through USDA and has a lower regulatory threshold via conditional approval and offers a path to commercialization has substantially lower cost compared to FDA. The veterinary market is also a greenfield for nucleic acid-based therapies and can serve as a proving ground for linearDNA's eventual application to human health. Now in the past year, we've demonstrated that linearDNA can be used as a direct therapeutic. With this capacity established, our first entree is with a direct therapeutic targeting the veterinary immuno-oncology market. There are currently no veterinary lymphoma immunotherapy treatments being marketed. Now we've taken a de-risked approach by in-licensing a canine lymphoma immunotherapy from a close partner whose data from a plasmid DNA version of this therapy showed a threefold increase in treated dogs' survival times. Now these data are compelling. However, USDA declined their request for conditional approval based in part on the therapies use of plasmid DNA. Given the host of drawbacks associated with plasmids, antibiotic resistance, the origin of replication chief among them, USDA did not want the therapy used on companion animals. Our partner also faced manufacturing challenges due to their therapies, plasmid DNA and an adenovirus composition. Our linearDNA version of the same therapy has demonstrated a similar immune response to the plasmid version of the therapy, but incurs none of the plasmid drawbacks. LinearDNA is well suited for the economics of veterinary biologics because we can manufacture DNA cost effectively. We are also investigating the use of off-patent inexpensive lipid nanoparticles, or LNPs, as the delivery mechanism for lymphoma therapy. This would give us an integrated offering across the veterinary cancerous therapy value chain. We have concluded our initial screening studies on numerous LNP formulations that have resulted in promising results in vitro. In addition, early studies have shown that the LNP linearDNA compositions are highly stable at four degrees Celsius, which gives us a large commercial advantage over the LNP mRNA formulations that require an extremely cold chain. We plan to share our important findings in the coming months. Our plan is to now take our most promising LNP formulation into animal studies to arrive at a final formulation. Once complete, we will use the optimized LNP linearDNA formulation to empower our canine lymphoma immunotherapy and seek U.S. conditional approval via a small canine clinical trial. Upon conditional approval, there is a well-established commercial path of out-licensing the therapeutic to an animal health company that would secure a final regulatory approval and take the product to commerce. So looking ahead, where are we today? LinearDNA really stands at an inflection point. We have proven the platform to be an attractive and viable alternative to plasmid DNA. We've cultivated a marquee biopharma customer base, and we are constantly optimizing and improving our workflows, supporting genetic medicines. The gating factor for us has never been the ability to produce DNA at scale. Instead, it's been the ability to make linearDNA at a cGMP grade required to take a customer's therapy into the clinic. And in fact, it's really been a question of funding. Our capital raise this past August served as the funding basis for establishing a small-scale cGMP production capacity by the end of this calendar year. This capacity was tasked to the manufacturer of DNA products to support customers from early-stage drug discovery through late phase clinical trials, subject to necessary regulatory approvals. Now our time line to cGMP is unaltered. In recent weeks, we've been offered space adjacent to our corporate footprint that was already fit for purpose. We have opportunistically secured this space that, too, though smaller than the standalone space initially planned, is more cost efficient and adequately sized to manufacture cGMP-grade mRNA-based starting materials at quantities necessary to support early and mid-stage clinical obligations. We expect to have the space that we've allocated and ready for cGMP production of IVT templates by calendar year-end. We expect to complete this space without the need for additional CapEx relative to our allocation for fiscal 2023. We expect this new space postpones our need for a stand-alone capacity by 12 to 24 months, while allowing us to pilot our manufacturing processes that will be integral to expanding our production roadmap. In addition to meeting current demand, we believe bringing to market cGMP product as soon as possible will facilitate the opportunity to secure strategic partners who are seeking enzymatic DNA production to inform their therapy pipelines. In addition, we are not standing still on the development of our platform and we're focusing on two platform improvements. First, we're currently working to increase our platform manufacturing speed by leveraging one of PCR's biggest advantages, the ability to use de novo synthesized DNA as a starting material. This would enable us to go from digital DNA sequence received in an e-mail to milligrams or grams of DNA in a very short period of time. This is made possible by the fact that our PCR-based platform does not require a plasmid DNA template. Leveraging the unique power of PCR, our goal is a completely plasmid-free high-speed IVT template production workflow capable of going from digital DNA sequences to large quantities of IVT template in only 14 days. We are currently working with our input materials partners and believe that this goal is achievable. Second, and again, leveraging the unique attributes of PCR, we are also investigating the use of chemically modified IVT templates via PCR to enable a next generation of RNA polymerase to increase IVT yields and reduce double-stranded RNA production. Data from our early studies with a partner company have been very promising, with large increases in RNA yield and decreased double-stranded RNA production as compared to conventional IVT. And we look forward to providing more information on these exciting improvements in the near future. Now let me update you on our activities in ADCL and our DNA tagging business before opening the call to questions. We have successfully completed our clinical validation and data analysis for our pharmacogenomics, or PGx, testing panel and have secured partners to enable an end-to-end order to result workflow. We plan to file our validation package with the New York State Department of Health in the near future for approval as a laboratory developed test. Approval will allow us to initiate a PGx testing service here in New York and allow us to receive samples collected nationally from states that conform to New York's Clinical Laboratory Evaluation Program or CLEP. We believe we have set up our PGx service for success for two primary reasons. First, we've taken a differentiated approach to this testing service. Our business model is predicated on servicing enterprise scale customers, similar to what we did in our COVID testing model, which worked very well. Under this model, we contract with large organizations to analyze their populations, conferring a benefit to both the enterprise and the constitutive individuals. This model allows us to charge a single entity for testing, thus eliminating the need to seek out reimbursement on an individual patient basis, simplifying our services and removing the need to employ a large billing reimbursement department, such as you would find at a typical clinical lab. Second, we've been speaking with prospective customers in the marketplace for many months to cultivate interest in our service. Their feedback has helped us shape our commercial strategy. We're targeting regional health systems and large self-insured entities in the New York operating area, enterprises where the return on investment of PGx testing is not only measured in its clinical utilities and improved patient outcomes and improved standards of care, but also its economic value in terms of cost savings to the enterprise customer by reducing direct and indirect health care costs for the overall population. I also note that unlike COVID-19 testing, where turnaround times are measured in hours. PGx testing has no such imperative. With this – without this constraint, we can move to commercialize the panel nationally from our laboratory here at Stony Brook. We anticipate the state's review of our validation package will take several months and are targeting a service launch shortly thereafter. Based on feedback from our prospective customers, it is likely that a commercial scale testing contract will be preceded by a soft launch to ensure optimized workflow for any customer-specific processes. The prospective customers we are currently speaking to represent individual cohorts of over 50,000 potential patient samples each. Our submission to the state for approval comes on the heels of an unexpected cessation of the COVID or rather of an expected cessation of the COVID-19 public health emergency by the Biden Administration this coming May. PGx testing compared with COVID-19 will roll out at much lower testing levels, but with a higher anticipated gross margin per test. At this time, COVID-19 testing customers have not indicated how they will respond to the end of the public health emergency. Finally, as for our supply chain traceability segment, we are heartened to see that the recently enacted federal Omnibus spending bill includes funds that support a sizable increase in Customs and Border Protection personnel. And for the development of technology, the agency uses to support forced labor enforcement efforts. As you will recall, CBP recognizes isotopic abundance testing and DNA tagging as two technologies that are able to deliver compliance with the Uyghur Forced Labor [Protection] Act. In total, the bill provides $101 million to support efforts to prevent imports of goods produced with forced labor in fiscal 2023. That's on top of the $51 million that CBP received for forced labor enforcement in fiscal 2022. The increase in funding dovetails with the volume of goods and anticipated scale of petitions of compliance that CBC expects in fiscal 2023 as it enforces the Uyghur Forced Labor Protection Act. During the first quarter, we added several new customers for CertainT isotopic analysis testing, which serves as a complementary diagnostic to tagging for customers in our cotton pipeline. So I've provided a lot of commentary today, and let me offer a brief recap. Our linearDNA sits at the intersection of the expansion of nucleic acid-based therapies and the industry's movement toward enzymatic DNA manufacturing platforms that are faster, less complex to operate and less investment intensive. We are maintaining our timeline to cGMP. But now with the deployment of a more cost-efficient space so as to capitalize on interest from customers, platform development partners and even strategic partners. At ADCL our PGx platform is incredibly well positioned to leverage the population health platform we built during the pandemic to propel the subsidiary into the genetic testing marketplace of the future. PGx is anticipated to be realized at a higher margin and lower testing volumes than COVID. And finally, the Omnibus spending bill put some real teeth behind implementation and compliance with the Uyghur Forced Labor Protection Act. More customers and border protection staff means more capacity to interrogate shipments, which increases the value proposition of our CertainT platform. Now before I open the call to questions, on behalf of Applied DNA, its Board of Directors, the executive management and staff I'd like to thank Governor Hochul and the Empire State Development team for their award under the Excelsior Jobs Program and the support from our county and town governments. In the context of my prepared remarks this afternoon and the opportunities we are pursuing in the life sciences sector, this award is timely and will help us achieve our goals here on Long Island, in New York, and to the benefit of all. This concludes my prepared remarks. Operator, please open the call to questions. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jason McCarthy with Maxim Group. Please go ahead. Hey, James. Thanks for taking the question. Can you talk a little bit about – you had mentioned earlier in your remarks that there were two linear or enzymatic-based DNA manufacturing groups that were acquired by Moderna just recently in January, and then one by Merck, and then Pfizer did something with Touchlight. Can you talk a little bit about what those acquisitions or licensing agreements bring to those companies in light of all the things going on with mRNA and how does Applied DNA kind of measure up to those types of groups? Sure. It's a great question. So first of all, it makes clear that the manufacturing environment for mRNA is a dynamic one and is in the midst of change. Pfizer had announced that they would prefer to walk away from plasmid-based operations. They licensed in a kind of try-it-and-see license with Touchlight from the U.K., which uses a rolling circle platform that requires additional enzymes and purification and costs compared to our own. And we'll have to see how that evaluation goes. Moderna acquired a Japanese company that is not as well known in the U.S., but that – we'll have to see how their evaluation turns out. We feel that by comparison, our technology is much more flexible, much simpler, and we feel we're on the path to very shortened development times and greater efficiencies in manufacture. The fact that we are just about the only company last on the dance floor puts us, I think, in a strong position because we have big plans and to execute on them, we're going to need partners. And I think this will allow us to attract partners over the coming year or two. Well, that's an interesting point. If Moderna took OriCiro and Pfizer is doing it’s thing with Touchlight, I forgot who Merck picked up and when that was. But if Applied or LineaRx is kind of the only game left in town, how can you leverage that you're saying through partnerships? Because now everybody else has nowhere to go, right? If there's nobody else in the space doing enzymatic DNA amplification? So we're looking at opportunities for JVs to improve our enzymes, for example, and to accelerate our workflow. Given the number of nucleic acid therapies in the U.S. pipeline, speed and efficiency are going to be critical. And we think we can speak to those key issues. How many of your customers are – let me rephrase, are more of your customers, new customers that are coming on board, for the linearDNA skewed towards the mRNA or RNA space, given all the momentum we've seen around that category? Yes, absolutely. I think that will begin to diversify over time. And I think the nearly 5,000 of these therapies that are heading toward clinical trials will begin to whittle down. And the other applications will become clearer and clearer. And as we gain experience with the use of linearDNA, not just as a template for mRNA, but as a direct therapeutic itself, linearDNA is much more stable than messenger RNA, and it's much easier to manufacture. The key issue will be proving to FDA that integration does not take place. And all of our evidence so far is that it does not. So I think that our opportunities on the back end of growing our IVT business will be for direct use of linearDNA as well. Okay. Just jumping over to the canine linear immune therapy opportunity. You had said you're moving soon – or relatively soon, I think, into small animal study to finalize your formulation. Can you just help us understand a little bit about, one, the time to get there? And two, what is the development path for canine immune therapy? Is one small trial enough? Or do you need to go through several phases like you would in human development? Sure. Clay, if you'd like to speak to the issue of the time frame and the size of the trial necessary to get preliminary approval from USDA? But it's a simple trial, and it's really life extension. When it comes to older dogs, many of them get lymphoma. And their prognosis typically is measured in months. And so I think impacting that prognosis with a longer lifetime will be the hallmark of success for the therapy. Thanks, Jim. Hey, Jason. Yes, so it's going through USDA, right? So it's not going through FDA. So it's veterinary biologics. Most of the data points we have for trial size and trial time are coming out of the onco drugs going through FDA, right, so your chemotherapy. Those getting approval are quite small trial sizes, well under 50, in terms of big canines enrolled. And as Jim said, the endpoints are not that at high. It's really just increasing the life expectancy. What we've seen from USDA for conditional approval, right? So we're not going for full approval. Our goal here is conditional approval. We’ve seen trial sizes the smallest, probably 20. And again, that end point is pretty permissive. So we think it's a very reachable endpoint with the product that we're looking to develop. And then once we get that conditional approval, we would attempt to off license. Who on the larger pharma side has the most attractive veterinary arms in their portfolio that you might look towards for a potential partnering for something like this? As far Pfizer was and then they weren't, I'm not sure if they're still in the vet space? Yes. I mean, Jim, I don't know how you feel, but right now, the plan is to really target the next-generation chemotherapy drug companies in the veterinary space, right? There's been a couple of new approvals in the chemo space for canine lymphoma and this therapy act as a companion therapy to those. So it’s the logical choice for us is to run those in our trial and then seek out them as a companion therapy. Yes. That's exactly that this is a companion approach to increase the efficacy of chemotherapy for which there are, I believe, right now, two in the market. Thank you for taking my question. Could you comment on when the current contract with the big customer for COVID-19 test end? And whether the customer will renew that contract depending on the government's official emergency status for COVID? Thank you. Sure. I can tell you that the customer has given us no commentary about their plans after the summer. But I can tell you that they have been remarkably conservative in terms of the care of their population. And they've shown their willingness to go to great ends to do so. Okay. So with respect to PGx testing, so you mentioned that you will file your validation package with New York State Department of Health. How much revenue should we expect to see later this fiscal year coming from PGx testing panel? Yes. So PGx testing has the capacity to roughly replace our COVID testing one-to-one. That's a function of what capacity we build to. But increasing scale is relatively simple. It's just a matter of more equipment. It really will be a function of depending on when we get the PGx up and running and have more progress on the cGMP and the LRx front. But mostly in that time frame more soon thereafter. Okay. So the package filing, is it going to occur in the current quarter or in the first half of this calendar year? I am. Our clinical validation E, wound up in December. We’ve pulled the data facts together. It looks good. We're just in the process of finalizing the package check file. [Operator Instructions] Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Hayward for any closing remarks. Yes, we'd like to thank you all for participating in today's dialogue, and we look forward to speaking with you again at the end of the current quarter. Thank you.

EarningCall_138

I would now like to turn the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead. Thank you, Dave. Hello, everybody, and welcome to our call. Before we discuss our fourth quarter and full year 2022 results and our initial guidance for 2023, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, February 9, 2023. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also on the call today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management. Thank you, Art, and thank you all for joining us today. The First Industrial team delivered another excellent performance in 2022. We ended the year with in-service occupancy of 98.8%, and achieved an annual cash rental rate increase of 26.7% on our 2022 commencements, both our First Industrial records. The end result was an FR record-setting annual increase in cash same-store NOI of 10.1% that Scott will discuss further in his remarks. Fundamentals in the industrial real estate market continue to support further market rent growth in our target markets and within our portfolio. According to CBRE EA, industrial vacancy was 3% at year-end. Fourth quarter completion of 113 million square feet exceeded net absorption of 91 million square feet. And for the full year, net absorption was 412 million square feet versus completions of 370 million. Given this backdrop, we are off to a strong start, signing leases that commenced in 2023 at very healthy increases. As of last night, we are through 50% of this year's lease expirations at a cash rental rate increase of 33%, which is already ahead of our 2022 pace. With 4 of the 5 largest remaining lease expirations by net rent in the Inland Empire, our current outlook for cash rental rate changes for the full year 2023 is 40% to 50%. Moving to our new development activity. In Orlando, at our first loop project, we signed 2 leases totaling 126,000 square feet to bring that project to 49% leased. At First Park Miami, we also leased the remaining 66,000 square feet at Buildings 9 and 11, bringing those 2 buildings totaling 333,000 square feet to 100% occupied. We continue to see good activity in both of these Florida markets. During the year, we placed in service 4.1 million square feet of development, representing a total investment of $448 million, all 100% leased at a cash yield of 6.6%. We have one new start to announce. Our first Stockton logistics center in the Central Valley of Northern California, the prime location for large format buildings. There, we are building a 1 million square foot distribution center to serve the San Francisco and East Bay markets where the supply of large buildings is constrained. Our estimated investment is $126 million with a projected cash yield of 6.3%. Including this start, our developments in process totaled 3.6 million square feet with an investment of $556 million. The projected cash yield for these investments is 7.3%, which represents an expected overall development margin of 75%. With respect to dispositions, in the fourth quarter, we sold a 581,000 square foot facility in Minneapolis for $54 million at a stabilized cap rate of 5.3%. As part of our continual portfolio management efforts, our sales guidance for 2023 is $50 million to $150 million. The guidance range is a bit wider than in the past, which reflects the continued price discovery dynamic in the investment sales market. Before turning it over to Scott, given our performance and outlook for growth, our Board of Directors has declared a dividend of $0.32 per share for the first quarter of 2023. This represents an 8.5% increase from the prior rate and a payout ratio of approximately 70% based on our anticipated AFFO for 2023 as defined in our supplemental. Thanks, Peter. Let me recap our results for the quarter. NAREIT funds from operations were $0.60 per fully diluted share compared to $0.52 per share in the fourth quarter of 2021. For the full year, NAREIT FFO per share was $2.28 versus $1.97 in 2021. Our fourth quarter and full year 2022 results include income related to the final settlement of insurance claims for damaged properties. Excluding the approximate $0.01 per share impact related to these claims, fourth quarter and full year 2022 FFO per share was $0.59 and $2.27, respectively. As Peter noted, we finished the quarter with in-service occupancy of 98.8%, up 70 basis points compared to the year ago quarter. Our cash same-store NOI growth for the quarter, excluding termination fees and the income related to the final settlement of insurance claims that I previously discussed, was 7.6%. This was driven by higher average occupancy, increases in rental rates and rental rate bumps, slightly offset by an increase in free rent. As Peter mentioned, our 10.1% cash same-store NOI growth for the full year, calculated under the same methodology was a company record. Summarizing our leasing activity during the fourth quarter, approximately 2.1 million square feet of leases commenced. Of these, 700,000 were new, 1.2 million were renewals and 300,000 were for developments and acquisitions with lease-up. Tenant retention by square footage was 81%. Moving on to the capital side. On November 1, we drew down all $300 million of the term loan that we closed in August. We were successful in putting in place swaps to fix the all-in interest rate at 4.88% beginning in December. So once again, our only variable rate debt is our line of credit. Before I move on to our initial 2023 FFO guidance, I would like to comment on a topic that we've been asked about recently by the investor and analyst communities. The parent company of one of our tenants has been in the news recently. As of the fourth quarter, ADESA, a leading auto auction and related services provider accounted for 1.8% of our rental income. ADESA was acquired by Carvana last year, and Carvana has been facing some challenges in its retail segment. For those newer to the FR story, we did a sale-leaseback transaction with ADESA about 14 years ago, for 7 valuable locations critical to their operations. These are leased until 2028, after which they have 2 additional 10-year renewal options. Let me also add that ADESA is current on its rent obligations. It is helpful for you to know that we believe that our basis in this land and current rents are both well below market and that the majority of these sites can be developed at significantly high margins. Moving on to our initial 2023 guidance for our earnings release last evening. Our guidance for NAREIT FFO per share is $2.29 to $2.39 with a midpoint of $2.34. Our 2023 FFO guidance is impacted by an additional $0.02 per share in real estate taxes in one of our markets that we will accrue in 2023, but will not be recoverable from our tenants until the taxes are paid in 2024. Without the impact of this item, our FFO midpoint guidance would be $2.36 per share. Key assumptions for guidance are as follows: average quarter-end in-service occupancy of 97.75% to 98.75%. Cash same-store NOI growth before termination fees of 7.5% to 8.5%. Please note, our cash same-store guidance excludes $1.4 million of income of 2022 related to the final settlement of insurance claims for damaged properties I discussed earlier. Annual bad debt expense of $1 million, which assumes that ADESA stays current on its rent obligation. Guidance includes the anticipated 2023 costs related to our completed and under construction developments at December 31. For these projects, we expect to capitalize about $0.08 per share of interest. Our G&A expense guidance range is $34 million to $35 million. Other than previously discussed, our guidance does not reflect the impact of any other future sales, acquisitions or new development starts, the impact of any future debt issuances, debt repurchases or repayments and guidance also excludes the potential issuance of equity. Thank you, Scott, and thank you again to the First Industrial team for a job well done. Our sector continues to exhibit the best fundamentals in memory. However, we, like all of you, are keeping a watchful eye on the economic and geopolitical landscape, and we are prepared for whatever challenges or opportunities the immediate future may bring. As you've heard us say, we operate, acquire, build and fund ourselves to outperform through the cycle. Our portfolio, land holdings and balance sheet are well positioned for cash flow and value generation across a range of operating environments. I guess can we first start off with the development pipeline. Can you provide some just high-level commentary on what this total pipeline could look like in '23 in terms of starts? And maybe reasons why the capitalized interest is kind of coming down. Ki Bin, it's Peter. With respect to the development pipeline for '23, clearly, given that we are operating essentially at the cap, it's going to be heavily dependent upon our new development lease-up. Just as a reminder, we do assume in our underwriting 12 months of downtime, and yes, over the past few years, we've done better than that. We certainly hope we'll continue on that pace. So I can't really give you, and we don't guide on starts anyway. But we do expect to have additional starts this year. And we expect those starts would be certainly in high barrier markets on the East and West Coast. Yes. Ki Bin, it's Scott. I think Peter hit right on the head. Our guidance assumes a 12-month lease-up on respective elements. We've been doing better than that. I think we've been 6 months or better. To the extent we can do better than that, and we have new starts, our capitalized interest number will go up. But again, I think it's just a function of how we guide and that we don't include any new development starts in our guidance. So that number could increase as the year goes on, if we lease up the portfolio quicker than 6 months, and we start new developments. And on the first Stockton development, how are you thinking about I guess, the total project, is it a single user you're going after? Is that multitenant? What does the demand kind of profile look like as of today? Yes. Thank you. There is significant demand for large users that is the tightest submarket right now. Stop like the IE to L.A. and it serves the Bay Area and the East Bay corridor. So the demand right now is for a large format buildings. And this is just the right out of the interchange. Scott, how much pressure are you seeing on the same-store expense side? And what are you factoring into your '23 guidance? Yes, Rob, we're not going to see much pressure on there. Expenses, I know in the fourth quarter, the same-store were up a little bit, but that was really seasonal. That was snow removal and some utility costs and all those costs are recoverable 100%, so. Yes. But I'd say, Robert, in '23, you're seeing increases in taxes. We touched upon the -- one of our markets, which was Denver that's seeing increase of taxes. That's more of a timing difference. But keep in mind, the vast, vast majority of our leases are net leases. So the expenses are recoverable. And we are at a 98.5%, 98.8% interest rate, even if expenses do rise the leakages pretty minimal at that occupancy rate. Okay. All right. And then you guys did about $60 million of acquisitions in the second half of the year, right around the 3 cap rate, including this fourth quarter one in the Inland Empire. Is there something incremental that you plan on doing there? Or what's the rationale of spending 3 cap rate on that type of money versus land or incremental development at this point? Sure. Yes, let me address the acquisition of the 47,000 square foot building. That's a 5.5 acre parcel that we're going to just adjacent to roughly a 14-acre site that we own that has a building on it. So our plan here is actually more land-focused and building focus. We're going to basically join those 2 parcels and develop over 400,000 square foot Class A building in IE. That's the plan... Do you need to knock down the 47,000-foot building? Or is this going to be an addition to the 47,000 building? No, we're going to basically knock down. Our plan is to knock down our existing building plus this building and develop a 400,000 square foot really Class A high clearance nice building. So right now, it is under entitlement. Again, you know what entitlement takes anywhere from 18 months to 24 months. But you know what, we've been doing better than that. So I'll let you know once we're ready to start that building. This is Greg McGinniss on with Nick. Peter, in the opening remarks, you touched on the continued price discovery dynamic in the investment sales market. Could you expand on that a bit more? What types of trends are you seeing in cap rates, how far apart? Sellers from where you want to buy? And are you starting to see land prices fall at all. I'll give some thoughts on that, and then I'll invite Peter and Jojo to comment. Certainly, cap rates have moved. Again, as you know, last year, we built in about a 100 basis point increase. There aren't a lot of data points. There aren't a lot of transactions to really set, I can't go market by market and tell you cap rates. You really don't know what you're going to get until you go to the market. Clearly, it's helpful when the buyers are motivated by 1031s or their users and as we've said in the past, a lot of the sales that we execute on do go to users. But the availability of debt is also going to drive this. And the cost of that debt -- so that's why I kind of commented the way I did, we gave a bit wider range. We're just not going to know until we get deep into these discussions. If we're going to like the pricing, this is good real estate. It's a 100% leased. And so we're going to proceed based on what the market feedback is. Yes, yes. And it's just a contract of increasing the pro forma returns. Of course, the variables, the land, construction costs is not a variable, so land takes the hit. So we've adjusted our investment criteria to reflect that in terms of our increased return requirements. Okay. And then in terms of like supply chain considerations with construction and development, are you seeing alleviation there in terms of getting materials and build time? Any color would be appreciated. Sure. So yes, we're seeing certain components improved. There's more certainty around delivery dates and the delivery dates have come in some. The notable exceptions to that would be switchgear electrical components, rooftop units are still taking about a year or so and that is certainly a critical element. On the costs, the trajectory of cost is coming down from where it's been. We're seeing costs come in on a couple of components. Others are still going up a little bit. First question, I just wanted to see if you could talk a little bit about some of the moving pieces, I guess, looking at same-store NOI growth and the FFO growth that contemplated with the guidance, which is expected to be a little bit more muted around 2% at the midpoint or I guess, 3% excluding the insurance claims, but that compares to the 7.5% to 8.5% same-store NOI growth forecast. I realize there are some moving pieces, but just curious if you can help us bridge the gap there and talk about what else might be having an impact on FFO... Sure, Todd. It's Scott. I think we're coming up with a 4% increase. We compare the 236, taking out the impact of the taxes compared to the 227 in '22 before the insurance came. But I get your point, and I would say there could be a couple of pieces there. I would say one is on the development lease-up side. We talked about it earlier with Ki Bin's question. We're assuming 12 months lease-up on our spec development. Historically, we've been 6 months or less over the last 3 years. If we were to lease up, the spec portfolio that we have in place now, we can pick up about $0.08 per share. So that's a big piece of it right there. We hope we can do better. But our underwriting is 12 months, and that's what we go with our guidance. I think the other thing, Todd, you should look at is interest expense. We did incur more indebtedness last year to fund the investments our developments. So we're getting a full year impact of that this year. And then the last thing I think you need to look at is just the impact of rising interest rates, and I'll give an example on our line of credit. That's our only floating rate debt that we have outstanding. The weighted average rate on that last year was about 2.9%. And we're modeling high 5% in our model this year. So the interest rate is almost doubling in our line of credit borrowings. So I think those are the couple of things that would impact that your question. Okay. Yes, that's helpful. And then on the -- with regard to the development leasing and the 2.1 million square feet that's completed not in service. How are leasing discussions progressing and for those assets? And what are you seeing for the potential to kind of hit that 6 months target today? How are those conversations? I'll just make a comment there, and then Peter and Jojo can discuss the various projects. You look at those projects, they are just completing or have just completed. So we haven't really had much time pass in terms of leasing discussions. Having said that, we are having very active discussions across a number of those projects. And Peter, you can give a little color on what's going on with the... Sure. So Todd, the projects in Pennsylvania, Denver, Nashville and Florida that are in that population that you mentioned, active proposals and prospects for all or a portion of all of those buildings. And I would say we've actually seen an increase in new prospects just in the last couple of weeks. So it continues to be encouraging there. And in most of these cases, tenants continue to have very few choices. Jojo? Yes, for the buildings in Seattle and Chicago. They've been complete now for 6 weeks, and we have active proposals and active interest from a broad range of users, 3PLs, consumer goods and food and beverage. Okay. Great. That's helpful. And just one last one, and sorry if I missed this. But any update on Old Post Road that was previously expected to be leased in the first quarter. Is that buttoned up? Or is there any update that you can share and also talk about what's included in the guidance for that? Sure, Todd. It's Peter Schultz. So the update is this. Our primary prospect for the full building is a third-party logistics company who's servicing a long-term contract with the federal government. That lease has been fully negotiated for a while. The contract was awarded to this group and protested by the runner up, not once but on 2 separate occasions, which has delayed that moving forward. Given that this is with the federal government, a little hard to handicap quite when that gets done, although it certainly feels given it's been through a couple of rounds, it's probably more when, not if. And we continue to engage with other prospects for the building. In terms of guidance, given some of the uncertainty around that process and where we are with other interest, it's forecast to lease in the third quarter of this year. I guess another question on the leasing environment. You mentioned that you're in active discussions with tenants on the development pipeline. Has the kind of the tenor of the competition has changed in the past few weeks versus last quarter, are tenants just being a bit more cautious on taking space or do they continue to be kind of opportunistic and aggressive at taking space? And any changes in the types of tenants you're seeing coming through the total space? It's Peter. The number of prospects for new spaces are down a little bit. I would say we're looking at what I'd call a normalization of demand, probably back to 2019 days. You recall that '17, '18 and '19 were the best of times back then. So we're coming off of, call it, some disruption in '20 and '21 from COVID and inflation, et cetera. And I think what's happening here is that those who are responsible in the C-suite are taking some time to absorb everything they're seeing to figure out what exactly their needs are going to be for sure, they have growth needs. They have to catch up. Many of them did not invest in their supply chains in '20 and '21. So the demand is there. We're hearing also from the brokerage community that there's going to be significant demand. So we're bullish on what's going to happen. We think it's going to be a pretty active market. But I would say in terms of sense of urgency, you're seeing more of a normalization. Peter, you have anything else. Sure. The other thing I would add to that is the smaller spaces continue to move a little faster to Peter's comments about some of the users being more deliberate in circumspect in their decision-making. That's where we're seeing it take a little bit longer. But we continue to see solid and broad-based demand across the country and as I said a couple of minutes ago, activity is up in the last several weeks from where it was in the fourth quarter. Got it. And I guess on development starts. If you have some more room under the cap, if you get some of these development projects we stop, what are the sources of financing outside of the physicians? How do you -- how you looking at debt and equity to fund potential new starts if you have the ability to do more. Sure. This is Scott. We're in really good shape from a liquidity point of view. Let's just talk about what we have in process as far as development. It's about $225 million, that will be funded by excess cash flow after our dividend of $75 million. Peter talked about some sales we're going to do this year. Midpoint is $100 million. And then we have $600 million of liquidity on our line of credit. So we're set up pretty good. And let me say, if you give us credit for extension options in our line of credit, $300 million term loan, we don't have any maturities until 2026. So we're set up from a good standpoint there. If we start with development starts, I think the benefit that we have is we already own the land. It's not like we have to go out and buy it and expend dollars. So my take is that if we do additional development starts. Most likely, that's just going to be funded on the line of credit or potentially could be new sales as well. So that's... And new starts just by the dynamic that we have now of meeting now to lease up these newly completed assets, it's going to be largely back-ended. So the dollars that we will have to put out this year are not that significant. Yes, under development, you're probably paying over a 12-, 14-month term, probably not paying your first right at 2 to 3 months after the start date. So you start -- as Peter mentioned, if you put in place new starts in the back half of the year, you're probably not putting out a lot of additional cash flow. Just first one, you talked about the 40% to 50% rent spreads you're anticipating, but can you just maybe walk us through your expectations or forecasts for market rent growth across the portfolio, in particular, maybe call out where you're seeing accelerating trends versus decelerating trends in market rent growth? National, 5% to 10% across the nation. And higher end towards the 10% will be the coastal markets. And then on the lower end of 5%, which is still good is more of the Midwest market. Okay. And then just on the bad debt that you've built in, maybe 2 specific questions around that. One, any impacts you're seeing from housing-related tenants you may have, particularly in some of the Sunbelt markets like Phoenix. And then second, can you -- is there any other tenants on the watch list that you're monitoring. One in particular, I've been reading about. I think it's -- were your top second or third tenant, Boohoo plc, they appear to be having some operational issues. I'm not saying that means their warehouse implications, but just wondering if they're on a watch list. Okay. This is Scott. I would say no material tenants on the watch list other than our comments regarding ADESA that we spoke about earlier. Boohoo is -- they're timely on their payments as well. And Peter will talk a little bit about the lease structure that we entered into them with -- in 2022. Yes. The Boohoo lease has been in effect since September of -- last August, September last year. they're getting ready to start operating in the building after completing their work. We did structure credit enhancement on that deal we have, and we are comfortable with that. As Scott said, all good at the moment. In terms of Phoenix, the economy has been doing pretty well. Absorption levels have actually been record absorption. A couple of things happen in Phoenix. They got the huge investment from TSMC. Not that it's going to affect whole economy there, but it's going to be a positive because that's going to generate a lot of jobs. And also, there's a lot of data center investment in the Phoenix area, one of the biggest investment in the country. So that should add more good economic growth to the market. Maybe Jojo, for you on the rent growth. I guess I wanted to talk about new supply as well. Obviously, this is the year of new supply we've been waiting for, maybe not waiting for depending on your perspective. But I think that you talked about 5% to 10% market rent growth, how does that trend throughout the year? And when do you get hit with the most amount of competitive supply do you think? I guess I'm worried about market rent growth kind of really slowing maybe in third and fourth quarter when we see that supply. How do you see that playing out? Sure, sure. Right now, the whole market is about 3% vacancy, and we see continued demand. So landlords still has a pricing power here. In terms of what could affect that. In terms of under construction, if you look at where we've developed, most of the construction are coming into the submarkets we're not invested in, so for example, on the developments under construction, 85% of our developments under construction are either in Florida, Northern California or Southern California, which I would deem this is one of the top five markets in the U.S. where we expect further rent growth because of its infill nature and kind of the lack of supply. So we feel good about in terms of our competitive positioning and our development. We feel like I've said, because they're 3% vacancy, and we don't see the demand falling off. We still be landlords, being a driver seat in terms of rent pricing. Appreciate that color. Maybe this goes to Peter next is I think you had a 550,000 square foot tenant move out end of the year. Have you commented on kind of backfill for that downtime, et cetera? Dave, I'm not sure which talk -- which tenant you're talking about, nobody that in that size range moved out at the end of the year. Okay. That's fair. And last question, Scott, for you. You mentioned an answer earlier, $0.08 per share of development income. And it sounded like that, that could be maybe upside to the guidance or maybe that was what was embedded in guidance. Can you clarify that comment around the development relative to I guess, leasing and how that could progress throughout the year? Yes, David, we assume 12 months lease-up in the guidance. And what I was just illustrating there is if we were to cut that in half if we were to get superior execution and that came in at 6 months. Just to give people an idea that would be an additional $0.08 per share. So that's not in guidance. I would say that's aspirational if we're able to do better. And again, over the last several years, we've been leasing up 6 months or less. Peter? I was just going to add, Dave, of the projects we've completed with our 12-month downtime assumption, only 3 of those projects would generate some revenue this year and that wouldn't be until the fourth quarter. So there's not a lot there. So when you back that assumption from 12 to 6 months, which perhaps some people do, we don't. Then you introduced the opportunity to generate a lot more revenue this year from those completions and that's why you have the difference of $0.08. Two quick ones. First, on the projected 40% to 50% leasing spreads. Can you just -- stripping out some of the outliers, just what's the general band we should be thinking of in terms of coastal versus more of the Midwest markets, just how those spreads can range. And then on the leasing for last year, what was the average escalator that you baked into the leases? Yes. So your two questions on the 40% to 50% rental rate increase, certainly in our Southern California markets, that number is higher. If you look at our remaining 2022 rollovers about 40% is from Southern California. So we're certainly going to get higher rental rate increases there. As far as our escalators, right now, currently, the entire portfolio in place is about 2.9%. If you look at our 2023 commencements signed to date, that number is about 3.6%. So that number is certainly trending upwards. Okay. Great. My headset has been on and off. Jojo, can you repeat what you said about land values being down earlier in the call. I think I misheard you, but I just want to make sure before I ask the question. Sure. So Peter answered a part of the question. And basically, in terms of land values, they've come down year-over-year. And the reason for it, everyone, including us, increased our pro forma returns like Peter Baccile have said, it's about 100 basis point change cap rate. So we've increased our returns to 150% -- 150 basis points. So when you do that, what happens is the construct -- construction costs pretty remain the same with escalations and the variables land. So if you look at the range of changes, they're in the 20% to 45% -- 20% to 45% decline. And the decline is more in the Midwest cities because land there represents a bigger component of the total investment. And therefore, if that's the variable, it takes a bigger hit. So how do you look at your own land bank of $1.6 billion on your balance sheet as of December? And how does that compare? And how has it changed relative to market in terms of its value relative... Sure. We've looked at it, and we've actually provided FMBs for those land sites. Basically, what you've seen is there is overall less -- very little change, but that's a function of the grid basis, we've acquired a lot of our properties in the coastal cities and then offset a little bit by the adjustment of the cities in the interior Midwest and noncoastal markets. So when you put it all in, it's a minor adjustment. Look, there haven't been a lot of trades to evidence this. But clearly, with debt costs being up a couple of hundred basis points, construction that, in particular, being very difficult to come by. That strong bid by the merchant builder has now weakened or gone away. So land values have come down for lack of that opportunity there. The land that we own, we're referring to values. It's in some of the best submarkets in the country, County, Broward County, Lehigh Valley, Inland Empire. I can go on and on. It's our holdings are very, very strongly located. So we're excited about the opportunity. And remember, a lot of our -- a big portion of land values in the IE, where we've acquired a lot of those on assemblages and unentitled land. So we've created a lot of value to empowerment. And what you have is reflected. Let me just clarify one item. I think you said the fair value of our land was in $1.6 billion, if I'm not -- it's $840 million roughly. That's Page 25 of the supplemental, you can get that information. Yes. Just looking at the balance sheet back of the envelope -- back of the hand look, sorry about that. On ADESA, you mentioned your rents and land are well below market. I was curious, you mentioned land being below market. Is that an asset that if you got it back, it would be something you would redevelop or completely tear down and start over. I'm just curious with the quality of the asset. Yes. If we -- basically, if we got them back, we would develop on the majority of the portfolio. And we would look at developing in those assets in Seattle, in Nordic, California and in Houston and in Atlanta. We believe our -- given our view of SMB, that would comprise about 86% of our currently leased portfolio to ADESA. Rick, I'll just add something here. There's minimal build-out on those sites. There's no infrastructure, really no associated square footage in our portfolio. So they're pretty raw, ready to work. They're storing cars and running auctions on infrastructure and improvements they've made over time. Okay. Understood. I understand better now. Last question is on Old Post. You mentioned you're expecting third quarter for it to be leased. What's the sensitivity to earnings if that gets pushed back a couple of quarters. Is there any material impact on earnings as a result of that? This concludes our question-and-answer session. I would like to turn the conference back over to Peter Bacilli for any closing remarks. Thank you, operator, and thanks to everyone for participating on our call today. We look forward to connecting with many of you in person during the year. Be well.

EarningCall_139

Greetings, and welcome to the Byrna Technologies Fourth Quarter 2022 Earnings Conference Call and Webcast. As a reminder, this conference call is being recorded and all participants are in a listen-only mode. Before turning the call over to Bryan Ganz, Byrna Technologies' Chief Executive Officer, I will read the Safe Harbor statement. Some discussions made today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Byrna's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events or otherwise. As this call will include references to non-GAAP, please see the press release in the Investors Section of our website ir.bynra.com. For further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. Thank you. Good morning, everyone, and thank you for joining us for Byrna's fiscal 2022 fourth quarter earnings call. David North, our CFO and I will be discussing our Q4 and full year 2022 results. And I will provide some additional color on both the quarter and the year and discuss recent developments. We'd like to start by turning the call over to David so that he can discuss the Q4 and full year full year results and financial performance. David and I will be taking questions at the conclusion of the presentation. Let's start with a review of the financial results for the fiscal fourth quarter. Revenues for the fourth quarter of 2022 were $16.0 million that's a 43.5% increase over the $11.0 for last year's fourth quarter. Gross profit increased by 52.0% to $8.7 from $5.7 in last year's fourth quarter while gross margin improved to 54.1% of net revenue from 51.1% in last year's fourth quarter. The improvement in gross margin was driven by a reduced dependence on air freight and an improved product mix with higher margin ammo sales representing a greater percentage of overall sales. Operating expenses remained relatively flat at $8.7 million in the fourth quarter of 2022 compared to $8.8 million in the fourth quarter of last year. The combination of higher revenue and a higher gross margin percentage coupled with flat operating expenses resulted in improved profitability. Net loss for the fourth quarter was near breakeven at $0.1 million or $0.01 per share compared to a net loss of $3.2 million or $0.14 per share in the fourth quarter of fiscal 2021. Excluding long-term stock-based compensation and one-time severance costs, our non-GAAP adjusted EBITDA was $1.4 million for this year making this a second sequential fiscal quarter with positive non-GAAP adjusted EBITDA. Taking a look now at the full year financial results, revenues for the full year increased by 13.8% to $48.0 million compared to $42.2 million in the prior year. In 2022, the company saw increases in international sales, dealer sales and Amazon sales specifically, international sales increased by $5.7 million or 164%, dealer sales rose by $1.6 million or 28.4% and Amazon's sales grew by $4.6 million or 522.5%. This more than offset the decline in Byrna website sales of $6.6 million or 20.9%. 2022 website sales were lower than in 2021 because 2021 benefited from a one-time $9 million spike in sales attributable to an unsolicited endorsement from Sean Hannity in April of that year. Higher sales drove an increase in gross profit of $3.4 million to $26.3 million in fiscal 2022 as compared to gross profit of $22.9 million in fiscal 2021. Gross margin percentage of the full year for fiscal 2022 remained relatively consistent at 54.7% compared to 54.3% in fiscal '21 as the increase and the proportion of lower margin international and dealer sales was offset by lower freight costs and an improved product mix. Operating expenses rose by $7.5 million to $33.7 million in 2022 from $26.2 million in fiscal 2021 due primarily to increased spending on marketing, which increased by $3.3 million. Non-cash stock compensation expense was up by $2.3 million and variable selling expenses increased by $1.2 million due to the higher sales volume. Net loss for this fiscal year was $7.9 million compared to a net loss of $3.3 million in fiscal year 2021. Non GAAP adjusted EBITDA loss was a loss of $1.0 million versus a profit of $1.3 million in fiscal '21. Finally, a look at our balance sheet and financial position. We ended the fiscal year with $20.1 million of cash on the balance sheet. Obviously, this is significantly lower than the $56.4 in the balance sheet at the end of 2021 after having raised $56 million from the sale of 2.8 million shares of common stock in the third quarter of that year at $21 per share. In 2022, we used $17.5 million of cash to buy back 2.2 million of those shares at an average price of $8.08. The other main use of cash was to increase working capital levels. We increased inventory levels by $8.8 million from $6.6 million at the end of 2021 to $15.5 million at the end of 2022. That's allowed us a cut our reliance on exorbitant air freight for raw materials and to move to slower, but far less expensive ocean freights. Our accounts receivable balance of $5.9 million was $4.3 million higher than the prior year end balance, mainly due to large international sales in the fourth quarter. We also used $1.9 million of cash to enter the Self Defense spray market with the acquisition of Fox Labs in May of 2022. At year end, there was no current or long-term debt. As David said, the fourth quarter was a record quarter for the company, the second in a row and the third consecutive quarter of sequential top line growth. Q4 was also the second consecutive quarter of profitability on an adjusted EBITDA basis. The improving profitability is due to improving operating leverage. Sales last quarter grew by 43% in comparison to the fourth quarter of 2022, while operating expenses were actually down slightly, down 1% compared to the same quarter last year. Well, our sales growth for the full year of 2022 was a disappointing 14%. Over the last two quarters of the year, Byrna experienced year-over-year revenue growth of 43%. Full year sales growth was dragged down by the 14% decline in the first half sales of 2022. And as David mentioned, this decline in the first half the sales of 2022 was due to the $9 million spike in sales in the first half of 2021 resulting from an unexpected and frankly unsolicited endorsement from Sean Hannity on live television in April of 2021. If we back out the $9 million of Hannity effect sales that occurred in the second quarter of 2021, sales in the first half of 2022 would have been up 47% year-over-year and full year 2022 sales would have been up 45% year-over-year more in keeping with Byrna's long-term growth trajectory. In fact, over the last four years, Byrna has experienced compound annual growth rate of 272%. This significant top line growth for Byrna has been driven by both growing brand awareness and an overall increase in the demand for less lethal alternatives to traditional firearms. Byrna specifically and the less lethal industry generally is benefiting from two societal trends that while on their face may seem to be countervailing when taken together they create a tailwind for the less lethal industry. First, as we all know, there is an overall sense of unease driven by a spike in violent crime and growing civil unrest. This is a global phenomenon as people around the world are becoming increasingly concerned for their safety and the safety of their families. At the same time, there is growing outrage over the level of gun violence. Again, this is a global phenomenon and is resulting in tougher gun laws. Just a few months ago, Canada essentially banned the sale of handguns. This had an immediate effect on Byrna as we saw sales in Canada more than triple after the ban went into effect. Even in the U.S. an increasing number of states such as Oregon are adopting more stringent gun laws. We believe that this is the beginning of a longer term trend that will greatly benefit Byrna. These tailwinds can be seen in the increased interest in Byrna's line of less lethal personal self-defense products. In 2022, web sessions on Byrna.com grew by 32% year-over-year. If we include Amazon DTC sessions, total visitors grew by 75% year-over-year to more than 11 million visitors with more than half of the traffic being new to Byrna. At the same time, we are seeing an increase in repeat customers. In fiscal year '22 47% of Byrna sales on Byrna.com were to repeat customers compared to 40% in 2021 and 24% in 2022. This supports our thesis that Byrna benefits from a razor/razorblade model. As our installed user base grows, we are seeing an increase in sales of higher margin ammo accessories and other products such as pepper spray, body armor and less lethal rifles to our existing customer base. In fact, as of the end of the year, our top 250 customers on Byrna.com have each purchased more than $4,200 of Byrna products. Two months ago, we said that we would be introducing several new products at SHOT Show. SHOT Show is the premier trade show for the shooting sports, hunting, law enforcement, and firearms industries. SHOT Show which takes place in Las Vegas every January was back in full swing this year as worries over the pandemic subsided. I am pleased to report that the show this year was an amazing success for Byrna. We debuted our new good-better-best pistol strategy with the introduction of the price point Byrna EP and the all-new, much more powerful Byrna LE or law enforcement edition. Consumers, representatives of the media and industry insiders had the chance to test fire these weapons at both the industry range day, which takes place the day before SHOT Show and at the grand opening of Byrna's Las Vegas retail center. We also introduced Byrna's new 12-gauge round at SHOT Show and the response was overwhelming. With a 100 foot effective range, no recoil and tremendous stopping power Byrna's new less-lethal 12-gauge Kinetic round was a smashing success. It was named one of the four best new product a SHOT Show by Police1 magazine and made the list of best Personal Defense World's top picks for 2023. Most importantly, our first production run of 250,000 rounds, 25,000 boxes is completely spoken for based on the demand at SHOT Show. Based on the strong demand that we have already seen, we have commissioned additional 12-gauge molds that will allow us to double our production of the Kinetic 12-gauge round by June of this coming year. Until then, we will allocate all production to our Byrna Authorized Stocking Dealers. The first shipments to dealers will begin later this month. We will roll this product out to our online customers once we have taken care of our dealers, we expect that to be sometime in April. We plan to release the payload rounds later this year. These rounds will carry the same chemical irritant formulations as the 68-caliber projectiles used by our range of less-lethal launchers. Accordingly, we will be introducing the Byrna Pepper 12-gauge round, the Byrna Max 12-gauge round and the Byrna Pro-training 12-gauge round. We are also developing a dedicated launcher our Pump Action Launcher that will be able to shoot the .61-caliber fin-tail projectiles that are fired from our 12-gauge rounds without the need for the 12-gauge shotgun and the need for a casing, wad and protective clamshell. For 2023, while we remain bullish on the long-term prospects for less-lethal industry and while we expect to maintain our leadership position in the Consumer segments of the less-lethal industry, we do not expect to see sales continue to grow by 40% this year. Rather, we are forecasting revenue growth for fiscal year '23 of approximately 20% and accordingly, we are providing revenue guidance of $55 million to $60 million for the full year of 2023. The reason that we have dampened our growth expectations somewhat for this coming year is because we believe that 2023 will be a more difficult economic environment than 2022 for consumer products companies. Whether or not the U. S. is technically in a recession and whether or not the Fed has engineered a soft landing, rising prices and higher interest rates have reduced demand for high priced discretionary consumer goods. In coming up with this guidance, we also took into account the uncertainty associated with rolling out three brand new products with no sales history and opening all new production facility in South America. For this reason, we did not think it would be prudent to provide precise earnings guidance at this time. However, we do expect to be solidly profitable for full year 2023 on an adjusted EBITDA basis and we expect to be cash flow positive this year. The improvement in profitability is a result of the operating leverage that comes from growing sales, improving profit margins and stable operating expenses. For 2023, we expect to be able to hold the line on operating expenses other than variable expenses that track with sales and expenses at our South American Byrna LATAM joint venture. We also believe that we will see a minimum 5% improvement in gross profit margins for the full year of 2023 due to a continued transition from air freight to ocean freight and an improving product mix. In addition, for 2023, we are significantly reducing our reliance on discounts and special pricing to move our products on Byrna.com. During much of 2022, Byrna relied heavily on discount and special pricing to drive DTC sales. This had the negative effect of conditioning our customers to expect discounts and to wait for discounts. It also undermined our dealer sales effort and the constant discounting depressed margins. For 2023, Byrna is committed to maintaining price integrity prices will only be discounted on special pre-planned MAP holidays and these MAP holidays will be shared with our dealers well in advance. The first such MAP holiday for 2023 will be the four-day period over Presidents' Day weekend. Understandably reinstating pricing integrity may negatively impact sales for a period of time as our customers adjust to our new pricing policy. We believe, however, that this short-term pain is well worth the long-term gain. Already during the first six weeks of Q1, gross profit margins companywide have come in at 62% a full 8 percentage points higher than the 54% we reported for Q4 of 2022. 2023 should be a very exciting year for Byrna as we rollout these new products and we begin production - at our new Argentinean production facility. While there are always hiccups with any new product launch or the opening of any new subsidiary or facility, we expect that the combination of new products and a production facility dedicated to the South American market will open significant new markets and new opportunities for Byrna. Once the Argentinean facility is in full swing and once we have better visibility on the sell-through of the new products, we should be able to better refine our guidance both top line and bottom line. In conclusion, we've made excellent progress this year in terms of both growing the top line and controlling expenses. As I said in our last earnings call, we have reached the point in terms of operating leverage that will allow us to consistently generate positive cash flow and strong year-over-year revenue growth. Thank you. [Operator Instructions] Our first question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question. Hi, good morning, everyone. First, let me say congratulations on the [indiscernible] launch. Great to see that among other new product launches. So multipart questions here, so appreciate you guys bearing with me on the. Wondering if you could speak a little bit more about what you saw in projectile sales in Q4, maybe any sense you can give us of concentration of overall revenues and call it ammo And then with the launch of the [indiscernible], just wondering what you're seeing out there in early days realize it is very early. And then maybe remind us of the margin on the shotgun projectiles and that will that change when you have your own launcher and the projectiles change? And then also, maybe you could just touch on the payload shotgun projectiles. I guess, what needs to happen to get those completed and ready to launch and any timeframe there? Sorry, I know there's a lot in that? All right, well, at least Jeff, they're all sort of ammo-based question. So let's focus on the 12-gauge first because I think that that is the more important product. All of the initial production was spoken for by our Byrna Authorized Stocking Dealers. So the large chain stores that carry Byrna. And frankly, most of our dealers were interested in carrying the 12-gauge. We made a commitment to the dealers at SHOT Show that we would not start selling to the consumer so long as there were open orders and that we would give their refill orders priority. And the reason for this is pretty simple. We want to make sure that if they're giving us shelf space that we don't let it sit empty. So we've told them that we will not offer it online until we feel that we have adequate stock to fulfill their restocking orders and also to sell online. So initially we expect the margins on 12-gauge to be lower because a 100% of the sales will be through retailers and our margins through retailers are right around 50%. Our margins when we go to sell this online are going to of course, be much higher, again, closer to 70% gross profit margins. We don't again we don't know whether we're at the right price point on this product. We're selling a 10 count box of rounds for $50. We didn't seem to get any pushback at all on this if we have difficulty maintaining production to keep up with demand. We could consider raising the price, but I think a $50 price for a box of 10 rounds is a fair price. And gives us adequate margin and again, the most important thing here is that we get them out into the market. We allow consumers to use these rounds. When we were trying to understand the TAM for 12-gauge, our research told us that there's about 100 million shotguns in the U.S. and probably somewhere between 30 million and 50 million shotgun owners in the U.S. If we can get 10% of that market over the next five years, that's 5 million people. If all they do is buy one box of rounds that's $250 million in revenues. So we think getting this into the market developing this market with shotgun owners getting the word of mouth out there is extremely important. In terms of the payload rounds, the payload rounds are significantly more complicated to produce because not only do they require us to create the 61-caliber round ball payload projectile, but we then have to fill the tail fin and weld that into the tail fin. So it's requiring some very, very expensive equipment to be able to do that. We expect that equipment to be in the factory in South Africa sometime in June. Right now, we're going through basic testing of this process. But I'm not sure how important the payload rounds will be because the Kinetic grounds have tremendous stopping power. So with the Byrna SD, we didn't really advertise the kinetic rounds as being a self-defense round. We advertise the Kinetic rounds really as being a training round a round to be used for target practice, because out of the SD, the joules energy of these rounds is about 10 joules. With the introduction of the Byrna LE, which is a much more powerful launcher, the joules energy is up to 16 joules. These rounds become a legitimate self-defense rounded at 16 joules and as we go to the 12-gauge that climbs to 20 joules of energy. We did a lot of human effects testing and we sure - having to pay people, of course, to take the rounds and we were paying people $100 a round. And we had a lot of tough guys say, I'll take five rounds. Nobody took more than two before they said no more. So we know the Kinetic rounds, has a lot of stopping power. So, again we're committed to the payload rounds, but we're not sure at twice the price whether they're going to be a significant portion of our overall sales or not. David, I'm going to turn it over to you to talk about the product mix of the ammo? Yes, ammo in the fourth quarter was - the mix of ammo and accessories has traditionally been around 25% in the fourth quarter. It was closer to 30% and that's up from -- it was lower than that in the fourth quarter of last year. So we're seeing a gradual increase in that as a total percentage. And keep in mind, what we're seeing is a couple of things with the increase in returning customers. So this year as our returning customers went from 40% to 47% of sales, we obviously saw an increase in ammo sales, a slightly lower average order value. We went from $345 average order value in 2021 to a $320 average order value in 2022. But we saw improving margins. So we think that over time ammo and accessory sales will get closer to 45% of overall sales. And again, I don't know if that's in five years or 10 years, but that's the line that we will probably end up trending to and we base that on what we've seen with other less-lethal companies, including Mission Less Lethal, which we purchased and one of our direct competitors as we have several employees that were former employees and a competitor. And it seems that that 45% range for ammo is where you end up with when you stop growing at double-digit rates of return. It wasn't a lot of questions. A few more questions in my next question, but I guess if we can just touch a little bit more on - it sounds like you're putting the dealers first with a 12-gauge allocation at least. Maybe you could just speak a little more about production plans when will the Pump Action Launcher be introduced? And then also with the new Latin American facility, the factory in Argentina, how much of your production do you expect to move there? And also does that include the shotgun rounds in Argentina? Yes. The shotgun rounds, the plastic pieces that make up the shotgun rounds are going to be made at one factory. But each factory, the U.S., South America, the Argentinean factory and South Africa will each put in the propulsion. So it doesn't become ammo or a, pyrotechnic ammo until we put the propulsion into it. So that will all happen in the local markets. And it's just easier for us to ship. I wanted to weigh in on this question because the question implies kind of a misunderstanding about what we're doing in our Latin American joint venture. We asked how much of production will be moved there? The reason for the Latin American joint venture is not to move production there. It is not to take advantage of a lower cost production location. It is to take advantage of the two giant South American markets in Argentina and Brazil. That's much to take advantage, but to get access to them. And to get access to them, with local content manufacturing within the tariff boundaries of Mercosur, which has a 20% tariff surrounding those countries. So we're able now to sell our products into those markets at a profit. And pay that 20% tariff. But by moving in there and putting production there, we're able to get all of that profit margin for the investors and to have direct access to those markets. So it's really moving inside the castle walls is what we're doing. I think that's a very good point. And in fact what drove this home was the last shipment that we sent to Argentina we ended up having to pay $37 a launcher in freight and another $38 a launcher in duty. So we had $75 in freight and duty. The bill of materials for that launcher is $82. So basically by moving inside the moat, inside Mercosur, the bill of materials is essentially free because we're getting rid of the very expensive freight and duty getting into the Mercosur region. And the other thing that happens is that that becomes a barrier to entry to competition. So in my career, I've worked in several multinational manufacturers. And the way you get access to those markets and take the market share is you put your production there. Okay, good. That's really helpful to understand that. I'll let somebody else jump in, if I ask you too many questions already. Hey, guys. Thanks for taking my question. Actually, sorry to do this, but I have a couple more on the 12-gauge round. It's really interesting to us. I just wanted to clarify. So you've seen demand across all of your dealers or is it concentrated just within a few? How's that spread across your customer base? It's been pretty universal. Obviously, we've got some very large dealers that are taking thousands of boxes, tens of thousands of rounds, but we've got a lot of dealers that are taking 10 boxes, 100 rounds. So it's pretty universal. I think that the dealers like us are very anxious to see what the sell through is. We will know a lot more three months from now. So we need to get it on the shelf and we need to see how quickly it moves off the shelf. So the one good thing is this is a relatively easy market to reach shotgun owners. There are very specific magazines for us to advertise in. This product is being written up by a lot of various magazines lauded by places like Police1 and the Personal Defense World. So we should see what the consumer demand is, but frankly, we need to get it on the shelves first. And we felt that dealers were important to this because we don't actually know what percentage, of our current Byrna customers own a shotgun. My guess is its well under 50% I mean it may be only 10% that actually own a shotgun and that's the reason they're buying at Byrna. By going after these customers through the brick and mortar dealer base that we have, we're doing two things one, as I said I mean, we see this as potentially being a several hundred million dollars market in and of itself. But just as importantly, we are going to get people to now come to our website. So a guy that has a shotgun and may buy a box of non-lethal or less-lethal ammo for it will then see, oh look, they've got a Byrna Shield for my elementary school age child. And maybe my wife would like this Byrna SD or Byrna LE. So we're hoping that this is a very inexpensive way to get them into the Byrna ecosystem. So right now, the most important thing is just to get these into market and as widely disseminated as possible. And that was the reason we chose the brick and mortar route. I think that this also - it also may give us access to more dealers that we might not already have, because you've got a gun dealer who's selling 12-gauge shotgun ammunition. He might not have been interested at the beginning in a CO2 launcher. But now he is interested in this product. So it expands our relationships as well with the brick and mortar. But in all of this, we're early in the game. And this is why Bryan said that this is one of the variables that we don't have any history on the product. We know that there's a great big installed base of 12-gauge shotguns out there in the country, but we don't know what the overall demand will be. We don't know what the dealer sell-through will be. We're at very early stages. And frankly, we're also seeing interest in from dealers that are not selling our Byrna. So there's been a number of dealers that we've spoken to that we've been unable to get our foot in the door that we've made several presentations who have now reached out to us and said that we'd like to start with the 12-gauge and then we'll see how it goes from there. Okay, all right that's great. So just last one on the 12-gauge. The pump launcher for the fin tail project, just want to clarify that, that won't be considered. I know your fin tail project out can be shot out of the firearm. But your pump launch will not be a firearm? Correct. So no, interestingly, fin tail projectile was originally developed to be fired out of this Pump Action Launcher. So they were sort of developed in tandem. And we came up with the idea of putting that little projectile in a 12-gauge casing. And the reason for that is the Pump Action Launcher is going to be $1,000 launcher. So while there is a market for us, it's not a market in the millions. There aren't millions of people that are going to buy $1,000 launcher to shoot these projectiles. But there are 10s of millions of people that have a 12-gauge. And for them, the entry is not $1,000, dollars it's $50, dollars. So, we sort of pivoted, we didn't stop the development of the Pump Action Launcher and frankly it is very, very far down the road. We have working prototypes of that currently. It's an amazing technological tour to force. But we don't think it will have anywhere near the commercial impact that putting that same projectile in a 12-gauge casing. Well and we started off initially just thinking that we would drop it in an existing 12-gauge casing that we would buy a casing from [indiscernible] or from one of the big ammo companies. Because of the shortage of ammunition, we were unable to get at with casings from any of these ammo manufacturers which turned out to be a blessing in disguise because it forced us to go develop plastic casing ourselves. And by having a plastic casing, we're able to do a couple of things. One, we have a round that does not look at all like a normal shotgun round. And this was a big concern, particularly from law enforcement, they didn't want rounds that could be confused where somebody thought they had a less-lethal round in their shotgun, but in fact had a lethal round. So with the plastic casing, we don't look anything like a normal 12-gauge that has a brass casing. Secondly, we're now in control of our own destiny. We're not limited to buying these from [Fieokie]. So the next time there's a shortage of 12-gauge casings, we can't sell our 12-gauge. We manufacture every single piece of this other than the primer. So we really have complete control over this situation with the 12-gauge. Great okay, that's helpful thanks. So I guess, so jump into the 2023 guide. I know there is a lot of moving parts. The new products your Amazon relationship is maturing. How are you thinking about the season seasonality of '23 relative to '22 and should we expect a similar pattern or is there anything different that might stray from what we saw in 2022? No, we think 2022 is pretty indicative of what we should see. Q1 is always soft because it comes on the heels of our big Christmas shopping season in Q4. The summer months are a little slower, but what we saw in - 2022 with the constant build, I think is probably what we should see in '23. 2020 and 2021 both had an endorsement from Sean Hannity, which made the sales very lumpy and made quarter-over-quarter, year-over-year comparisons very difficult. This is the first time in 2023 that we will be comparing ourselves to a year that did not have it exogenous event. Yes, I think the overall seasonality, we all agree, should stay there. The main thing in forecasting as I think is difficult for this year is just figuring out what were the effects of the macroeconomic factors that we've seen due to the pandemic and that sort of thing, particularly on the fourth quarter. So it's hard to say in the past two fourth quarters what were the effects of what was going on in the macroeconomic environment and how will that affect '23. And it looks like we have reached the end of question-and-session. I'll turn the call back over to Bryan Ganz for closing remarks. Great, thank you very much. Once again, I just want to thank everyone for joining us today and for your interest in Byrna. If anyone would like to set up a one-on-one call with either me or David, please reach out to Erol Girgin at Stonegate. His email is erol@stonegateinc.com and he will make an arrangement for a one-on-one conversation. Once again, thank you very much and we'll be signing off.

EarningCall_140

Welcome to the XPO Fourth Quarter 2022 Earnings Conference Call and Webcast. My name is Melissa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable 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 projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, except to the extent required by law. During this call, the company may also refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and in the related financial tables or on its website. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section on the company's website. Good morning, everyone. Thanks for joining our call. We're excited to talk about our simplified business model following the spin-off of RXO and how it focuses our resources on growing the value of our LTL network. I am here in Greenwich with Carl Anderson, our CFO, who will cover the fourth quarter and full year results. And we also have Ali Faghri with us for Q&A. Ali is our new Chief Strategy Officer, and he's a great addition to the executive team. Yesterday, you saw us report a solid quarter of growth in a soft macro environment. That statement is true for the company as a whole and also for our 2 reportable segments, North American LTL and European Transportation. Company-wide, we generated revenue of $1.8 billion, reflecting year-over-year growth of 3% and we grew adjusted EBITDA year-over-year by 38%, which far outpaced our revenue growth and beat consensus for the 11th straight quarter. For the full year, we generated over $1 billion of adjusted EBITDA in our LTL business. This exceeded a major target we had set for 2022. Looking at the business by segment, I want to focus on LTL and some key results that tie directly to our growth plan. In the fourth quarter, the LTL industry in North America saw a year-over-year decline in shipment volumes due to macro pressure. But at XPO, we grew our shipment count and tonnage. Our positive tonnage growth ties back to the plan we call LTL 2.0, which is to invest in capacity ahead of demand and earn profitable market share by providing best-in-class service. We continue to have great success on boarding new business, including volumes from blue-chip customers who are either signing up with us for the first time or giving us more of their business. This drove a strategic change in our mix in the quarter, and our tonnage ended up more than typical seasonality. We also had a high-margin local base, and these customers give us more shipments per day. However, the weight per shipment declined in the softer macro. As a result, our yield came in at the lower end of our outlook. Our mix should become a tailwind for us to both volume and yield as the macro recovers. The second reason we're outperforming is service, and I'll give you an example. In the fourth quarter, we improved our damage frequency by 66% year-over-year to the lowest damage frequency in 6 years. There's no doubt that our intense focus on service is helping us secure more tonnage, especially as we're hearing from new customers that we rank as one of their top LTL carriers for quality of service. Customer feedback like this has a ripple effect on our entire organization. Employee satisfaction is up sharply, which is an indication of the pride our team is taking in our service standards. In our year-end survey, employee satisfaction, including drivers and dock workers was the highest in more than a decade. For the full year 2022, from an operating ratio perspective, there were a lot of puts and takes, including the softer macro. We improved our adjusted operating ratio excluding real estate gains, by 40 basis points for the year, which was short of our target range. Strategically, we made good progress in setting up the network to capitalize when volumes rebound, and we like our positioning. We're executing on the growth levels in our plan, like the 369 net new doors we added with 6 new terminal openings. In the next 90 days, we expect to open another 167 net new doors in Salt Lake City, Atlanta and Dallas. We're also following the unique levers we have within our company to help drive our expansion. In 2022, we increased our line haul fleet by over 10% by manufacturing more than 4,700 trailers in-house. We also trained over 1,700 truck drivers last year at our driver training schools. These are tangible advantages we have in the execution of our long-term plan for LTL 2.0 and they're gaining ground. Turning to Europe. This business continues to perform ahead of expectations with solid organic growth, particularly in the U.K. and Spain. In constant currency, fourth quarter revenue in Europe increased year-over-year by 9%. Our pricing in Europe was up year-over-year in Q4, and we're continuing to win business with new and existing customers. Despite the macro uncertainty there, our sales pipeline continues to be very robust. I want to wrap up my remarks by summarizing the exciting trajectory with creative going into 2023. We successfully completed the spinoff of RXO in November, which simplified our business model. We now have 2 highly focused business segments with strong value propositions in the customer market they know best. In North America, we drove above-industry tonnage growth in LTL in Q4, and we ended the year with over $1 billion of adjusted EBITDA, making good on the targets we set 5 years earlier. We're winning LTL market share with our service quality and also through our investment in network capacity. We're on track to open the remainder of the 900 net new doors we projected in our growth plan. And in Europe, our business is performing above expectations. This is the momentum we're carrying into 2023, and we intend to continue to invest in growth. We're confident that we'll deliver on the 3 targets we set for our LTL business; a revenue CAGR of 6% to 8%, an adjusted EBITDA CAGR of 11% to 13% and an adjusted operating ratio improvement of at least 600 basis points. These targets covered the period from 2021 through 2027. And as we move toward them, we'll focus on being world-class in every aspect of our business. We know that this combination of financial and operational excellence is the most sustainable way to deliver outsized shareholder value. Now I'm going to hand it over to Carl to discuss our results and our balance sheet. Carl, over to you. Thank you, Mario, and good morning, everyone. Today, I'll discuss our fourth quarter and full year results, balance sheet and liquidity. I'll start with the fourth quarter, where we delivered strong year-over-year growth in adjusted EBITDA and adjusted diluted earnings per share. Revenue in the quarter was $1.8 billion, up 3% year-over-year. Organic revenue growth for the quarter was 2%, and the net impact of fuel prices and FX contributed an additional point of growth. We grew adjusted EBITDA by 38% year-over-year to $262 million. This was primarily driven by our North American LTL business, which increased adjusted EBITDA by $42 million or 20% year-over-year. This includes a real estate gain of $55 million, which was up $20 million from a year ago. Additionally, we had a $30 million reduction in corporate expense as we continue to rationalize our overhead after the spin-off. Our adjusted EBITDA margin was 14.3%, representing a year-over-year improvement of 350 basis points. In the LTL segment, our fourth quarter operating ratio was 84.2%. Our adjusted operating ratio, excluding gains on real estate sales, was 87.1%, which is a 60-basis point improvement from a year ago. Our European business also continued its solid performance with revenue up year-over-year 9% on a constant currency basis. Please note that we won't be addressing a potential sale of our European business on this call. We reported a net loss from continuing operations of $36 million in the fourth quarter, representing a diluted loss per share of $0.31. This compares to income of $47 million and earnings of $0.40 per share a year ago. The fourth quarter 2022 net loss includes 3 impacts primarily incurred in connection with the RXO spin-off completed in November. First, we had a $64 million non-cash goodwill impairment charge related to a change in our segment structure following the spin-off. Prior to that, the European Transportation business was a single reporting unit and goodwill was evaluated for impairment at that level. Following the spin, the European Transportation business is comprised of 4 reporting units and impairment testing is required to be performed on a disaggregated basis for each of the new units, resulting in the charge this quarter. The second impact related to the spin was the $42 million of transaction and integration costs. And finally, we had $35 million of restructuring charges, mostly due to the planned step-down in corporate costs. On an adjusted basis, our adjusted earnings per diluted share for the quarter was $0.98, which was up 53% from a year ago. This increase was primarily driven by higher adjusted EBITDA and a lower effective tax rate. We generated $196 million of cash flow from continuing operations, spent $167 million on gross CapEx and received $78 million of proceeds from asset sales. Gross CapEx was up $77 million year-over-year driven by our planned investments in expanding our LTL network. This resulted in strong free cash flow of $107 million. Turning to the full year 2022. We delivered revenue of $7.7 billion, reflecting a year-over-year increase of 7%. Adjusted EBITDA was $997 million in 2022, up from $812 million a year ago. This was primarily driven by a 12% increase in adjusted EBITDA in our LTL business and a $75 million reduction in corporate expense. Adjusted diluted earnings per share from continuing operations increased by 82%, coming in at $3.53 per share this year. We generated cash flow from operating activities of $824 million for 2022 and free cash flow of $391 million, which was up 11% from the prior year. Our CapEx investments of $521 million almost doubled from a year ago as we accelerated our investments in the business to support our long-term growth targets. Our LTL adjusted operating ratio, excluding real estate, improved by 40 basis points from the prior year to 83.9%. Moving to the balance sheet. We ended the quarter with $460 million of cash. This cash, combined with available borrowing capacity under committed borrowing facilities gave us $930 million of liquidity at year-end. We had no borrowings outstanding under our ABL facility and our net debt leverage at year-end was 2.1x adjusted EBITDA, down from 2.7x a year ago on a previously reported basis prior to the RXO spin-off. This week, we extended our ABL maturity to 2026. And we recently received a credit upgrade from S&P from BB to BB+. Turning to the first quarter 2023. We expect the company to generate year-over-year growth in adjusted EBITDA in the low double digits. This anticipates $5 million to $10 million of unallocated corporate costs in the quarter. We expect to wind down these costs over the course of the year. And finally, a reminder that starting with the current quarter, our adjusted operating ratio will include the allocation of incremental corporate costs and exclude pension income. You'll find a historical reconciliation for this in our investor presentation. In addition, we're providing assumptions for the full year 2023 to help with your planning. These are gross CapEx of $500 million to $600 million, interest expense of $185 million to $195 million, pension income of approximately $20 million, an effective tax rate of 24% to 26% and a diluted share count of 117 million shares. Overall, we're pleased with our results in 2022 and are excited about our growth prospects as we move forward. We'll now take your questions. To start out, I was hoping -- could you provide a little bit more color in terms of how you're thinking about the first quarter for LTL? And in particular, how you're thinking about pricing which does not -- which now appears to be kind of in that low single-digit range where a lot of your peers are more mid to high? Any color there would be helpful. Well, we expect company-wide adjusted EBITDA for the first quarter to be up low double digits, as Carl mentioned earlier. For LTL specifically, we expect adjusted EBITDA to either be slightly down or slightly up depending on what happens in the demand environment in the month of March, which, as you know, is a big driver for the first quarter for us. From an OR perspective, we expect it to be better than typical seasonality in the first quarter, typically, seasonality for us is a 50-basis point deterioration from the fourth quarter going into the first quarter. Now that said, we're off to a great start here in the month of January. Our tonnage is up and better than typical seasonality and our yield ex fuel is in line with the fourth quarter [on a year-over-year basis as well] (added by company after the call). Now we are cautiously optimistic about the demand environment. So when we look at the back half of the quarter, based on what we're seeing in our results today, we are seeing a pickup and more strength from a volume perspective. But obviously, we'll see what the rest of the quarter will do. But hopefully, this gives you color on all of -- on the entire fourth quarter. Yes, sure. On the -- in the first quarter, we expect yield to be in line with the fourth quarter [on a year-over-year basis] (added by the company after the call), here in the month of January, that was the case. We did take a GRI for our local accounts in the month of January as opposed to what we did last year in the fourth quarter. But we will continue to be impacted by some of the mix dynamics we mentioned in some of our prepared remarks in the first quarter, but we continue to see the pricing environment being rational. Understood. And then just kind of more on the modeling question. Could you provide a bit more color on corporate expenses in the fourth quarter and what it should look like, again, kind of in the first quarter and then moving forward throughout the year? Stephanie, it's Carl Anderson. I can -- I'll take that. So if you look at the fourth quarter, our corporate expense was $29 million. And as we begin 2023, $20 million of that will be allocated to LTL starting in the first quarter. So it really leaves about $9 million left as far as the pure corporate expense. And as I said in the prepared remarks, we expect our corporate expense in the first quarter to range around $5 million to $10 million, in line with what we saw with you make that adjustment. And importantly, we expect that to wind down throughout the course of the year. Could you talk to tonnage trends in the quarter, just kind of puts and takes versus your internal expectations of what occurred? And then I'll follow up on that. Sure, Scott. So in the fourth quarter, tonnage came in on the lower end of our outlook, but we obviously bucked industry trends in terms of our tonnage being up and our shipment counts also being higher than our tonnage. Our tonnage came in roughly at plus 1% for the quarter. Now in terms of the trends within the quarter, December was the soft month of the quarter, which was impacted by weather in the back half of December. So that was more of a softer than what we saw for the remainder of the quarter. Now as I mentioned earlier though, January is up better than the fourth quarter numbers and it's better than typical seasonality as well. And we're seeing -- we saw a strong demand from our customers especially a lot of the new customers we onboarded through the course of 2022. I appreciate that. And then with regard to the operating ratio in the fourth quarter, sounds like weather was an impact there. Could you kind of hit on the main items that were impactful in the fourth quarter versus your internal expectations? And thanks for the guidance just provided. I appreciate that. So just kind of focusing on fourth quarter and what occurred tax? Yes, you got it. So predominantly for the fourth quarter came in short of our expectation, driven by the tonnage outcome in the month of December. So if you take out the impact of weather in the back half of December, we would have exceeded our expectation on OR improvement for the fourth quarter. Yes. Not outside what we had discussed on the last call, which was more driven by elevated cost inflation. When you think about labor expenses and maintenance costs were higher than expected but we already had factors for that when we got together on the last earnings call. Got it. It sounds fairly isolated to the fourth quarter, what was impacting that. Those other factors has just cost inflation, is that in solid shape as you enter the coming -- in 2023 with your pricing and other strategies? Yes. So as we head into 2023, obviously, we're seeing inflation starting to taper off in terms of overall cost. When you look at the fourth quarter for us, the 2 big categories of costs are labor and purchase transportation. And for our wages, these were up 10% on a year-on-year basis in the fourth quarter. And roughly 2/3 of that was based on wage inflation, additional wages we have given our folks in the field and the other 1/3 was to support the 1.5% shipment growth that we had in the fourth quarter. On the purchase transportation cost, that was down 10% in the fourth quarter. That was -- but also -- and appreciate that fuel as part of that line for the third-party providers. So effectively, the rates were actually down more than that in the fourth quarter. Now as we head into 2023, that stronger cost inflation we saw in 2022 is starting to subside, especially on the purchase transportation side that will become a tailwind through the course of the year. And same thing on wages, we expect them, obviously, to be up but not as up as they were in 2022. Maybe starting on the strategy around your local customers versus some of the national accounts on the LTL side. So I guess maybe I just wanted to maybe better understand that. And then do you -- I guess, over the course of the last several years post the Con-way integration, I think there was a strong effort to kind of go through the customer base in the right size and make sure you're dealing with the best, most profitable customers and obviously, the operating ratio improved over the course of that period of time. So I guess I'm kind of curious how much work is left to do? And what does the strategy sort of really entail? And maybe ultimately, what do you think the potential benefit to your operating ratio or profitability, broadly speaking, can be? If you take a step back and you look at the channel mix dynamic in the fourth quarter, and so I'll walk you through that, and then we'll talk about 2023 and beyond. But when you think about the fourth quarter, we did have a channel mix impact on our yield, but that was driven by onboarding larger strategic national accounts in the back half of 2022, which we have discussed on prior calls as well. And these were important to build density in lanes in our network. Now on the local channel side, these are typically smaller accounts that are higher yielding freight for that type of business. And we have also taken market share in that particular segment where our shipment count in the fourth quarter was up mid-single digit, but tonnage was down and that's driven predominantly through the softness in the macro where these customers were shipping -- again, we gained more customers, however, they were shipping lower weight on a per shipment basis. So as the macro recovers, those local accounts would have higher weight per shipment that would drive tonnage up commensurate with the volume of shipments we're seeing in the network and that becomes both a tailwind for tonnage and for yield for us moving forward. So that's the dynamic between national and local. And in terms of how you think that, that might impact the -- I mean, in fact, the operating ratio, and I guess, making sure I understand what's sort of different now versus what you've been doing because I thought you're were trying to optimize sort of the customer mix over the course of the last several years? Yes. So overall, it's still a similar strategy. But as we switch to LTL 2.0, the strategy is also around gaining market share. And again, when you look at national accounts from a mix perspective, in an LTL network, they create density on a lane per lane basis, which is very important. And we use the metric internally called a lane balance factor in our operation which as you get closer to a stronger lane balance that's overall accretive for your margins. So when we onboard the national accounts and we say that a good fit for the network, they are improving the lane balance and using available capacity that we have in the network. Now over time, in the current market, we -- obviously, there is softer freight demand but as that recovers and you see that pickup in that local channel as well as the nationals we onboarded, that would be a tailwind for both volume and yield. Now in terms of the impact on OR, obviously, that will depend on many factors because OR will include the combination of volume, yield and cost management as well. So all of these lead to an outcome. But obviously, our goal is by 2027 to have improved our operating ratio by at least 600 basis points, and we're confident we're going to deliver on that. Okay. That's helpful. And then just a real quick clarification. For the first quarter, adjusted EBITDA up double digits. Can you give us a clean number of what you're comparing that to, obviously, given the breakup of the business, I want to make sure I understand what the base is for that. And then your guidance around the LTL adjusted EBITDA as well. That includes $5 million to $10 million of unallocated costs when you're thinking about being flat or up or down a little bit. Yes. So Chris, it's -- if you think about comparing it to Q1 of a year ago, that base is $184 million. And then as far as the corporate cost, as I referenced, in that range, $5 million to $10 million, that will still be in that corporate bucket. It will not be part of LTL. LTL will have the additional $20 million approximately that we previously said we would be allocating it. At your Analyst Day, you talked about technology and implementation to help with dynamic pricing, line haul, reducing other costs like PT. Can you maybe give an update on that? And how it's shaping up versus your expectations? Thanks, Jordan. We're making great progress on the rollout of our proprietary technology. As we have discussed in our Investor Day. There are number of initiatives and proprietary pieces power tech that helps us drive results. Starting with pricing. This year, we made great progress in upgrading our discussions on the last call, our cost modeling and how we allocate cost of shipments and how we price more efficiently. So in this environment, we are investing more than our sales force, and we've had record numbers of RFPs that we are driving through the system, and having a platform that makes it very easy for our pricing analysts to price that business and have a quick turnaround with the sales team is essential and our technology is enabling these things. A similar things, as you mentioned on dynamic pricing, our platform is enabling us on the spot business side to be able to onboard more business and being able to react more quickly to the environment. On the cost management side, we've made great progress in our linehaul technology platform and how we optimize linehaul runs similarly on the pickup and delivery platform for both our planners and dispatchers. And then finally, for dock efficiency, our solutions with the smart labor platform enables us to improve how we operate our dock ships and make them commensurate with the volume we are getting. So great progress across the board with our tech. [indiscernible] That may be helpful. We can just let here because it's so between allocation to perform adjusted EBITDA. Could you just help us like what was comparable margins from 2022 to 2021 and the LTL network. It does is appropriate just for [indiscernible] Brandon, you're coming in very choppy. We couldn't hear you well. But let me try to ask your question, that you're asking about the baseline of 2021, 2022 and how corporate expenses are layering and moving forward as well? Yes. I think, Brandon, as you look, we did include in the investor presentation, a pretty detailed historical reconciliation on Page 27, specifically for the LTL segment that kind of walks the differences on a year-over-year basis and by quarter for all of '22 as well as full year '21. Yes. [indiscernible] So I guess looking since this for 1Q because I think you guys have said LTL adjusted EBITDA either the down slightly, is that correct? That's correct. For LTL EBITDA, we expect it to either be down slightly or up slightly, depending on the demand environment in the month of March. I'm sorry, I know you have the numbers in the presentation, but what is that EBITDA when comparing to 1Q '22? Yes. So for Q1 of 2022, now that we've allocated $20 million, it's going to be $186 million would be the LTL EBITDA for Q1 of '22. So relative to the newly adjusted 1Q -- OR of 89% 1Q a year ago, how are you thinking about OR in Q1 this year? And any thoughts on full year operating ratio for LTL? Yes. So what -- first, I'll start on the full year. So when you look -- because obviously, we had the old definition last year, Scott, that was updated with, as Carl mentioned earlier on with the corporate allocations and the removal of pension income. So last year's OR, the number was 83.9%. And when you account for the allocation of corporate and the exclusion of pension income that would have been in 86% and changed OR. Now for the full year of 2023, we're obviously not guiding for the full year, given where things are this year, but there is a path to improve OR this year, but it will depend on the macro. We feel cautiously optimistic about the demand outlook, as I mentioned earlier. And based on what we're seeing today and our results, again, volume is up, it's better than seasonality, and we're seeing stronger demand from customers. And we're hearing optimism from our customers as you head into the spring and the back half of the year. But obviously, we're watching the macro like everybody else is. Now specifically in the demand environment, the segments are different retail has been -- had sequential declines in the fourth quarter, but the feedback we hear now that the retailers have gone through that inventories and now that we're going to see more normal seasonal buying patterns in 2023. And the industrial, we're seeing short-term softness, but we've seen some strength in some of the areas like auto, machinery, short-cycle manufacturing where they're outlining a more robust 2023. So depending on what that environment does for the rest of the year would dictate what OR would do. And obviously, there are dynamics at our yield, and there are a lot of company-specific initiatives we're driving on the cost side like in-sourcing linehaul. And all of these variables would lead to the outcome for 2023 on OR. But again, there is a path to improve OR in 2023, but all of these variables will dictate that outcome. For the first quarter, as I mentioned earlier, we expect OR seasonally to be better than typical seasonality from the fourth quarter to the first quarter. And typically, that's a 50-basis points deterioration is what we see from Q4 to Q1, and we expect to do better than that. And I think we're all just a little confused because we don't -- there's new numbers now, so we're not really sure with the seasonality. So just to be clear, you did -- on the new methodology, you did a 90.3% OR in Q4, 83.9% in Q1 of '22, and you're saying it should be -- typically, it's 50 basis points worse Q4 to Q1, but maybe it's going to be something better than that? Correct. And on the high end of the range, if you think of an EBITDA improvement for the first quarter, Scott, that would be an OR improvement for the quarter. Year-over-year, on the low end of the range in terms of EBITDA being slightly down, that would be a year-on-year deterioration but better than seasonality on the high end of the range where EBITDA improved slightly in the first quarter, that would be an OR improvement on a year-on-year basis. Okay. And then just bigger picture, right? If I take a step back in the model, it looks like you're really outperforming everybody on tonnage. You're really underperforming on yield. So it seems like maybe sacrificing some price to get volume. Is that what's happening here is what it looks like in the model, but just -- is that what we're doing here? No, we're not sacrificing price to buy volume with price. There were a few dynamics in the fourth quarter that impacted us. The first one, Scott, is that we were lapping a early GRI we took in Q4 of last year. While this year, we took that in the month of January, which is usually our customary time line. And I mentioned the yield dynamic on the mix channel earlier on. So we onboarded those national accounts that are strategic for our network, yet the higher-yielding local accounts, again, their shipment count is up mid-single digits, so we're taking market share. However, we've seen a weight per shipment decline in that channel that caused the overall weight to be down. So that dynamic is what effectively impacted yield. And then finally, life of haul was down 1.3% for the quarter, where we onboarded more next day and 2-day lanes shipments to our network. And we also saw less outbound California freight coming through lesser imports in the fourth quarter, which has a direct correlation to yield. Now if you take a step back, our contract renewals in the quarter were up roughly 7%. That's for existing business. And we continue to see from us in the overall industry, very rational pricing in how we price the business. Just wanted to talk about the CapEx for the year. If you can maybe break that down a little bit more. And then in terms of the new door adds, maybe talk to, I would say, relative capacity available today with how you're thinking about the investment as we go through the year in terms of discipline around that? Thanks, Allison. Yes, if you look at 2022, our total CapEx, the company is about $521 million. About 85% of that relates to the LTL business. And as you can see from our guide for our planning assumptions for 2023, we do expect CapEx at the midpoint to be up over what it was last year. So -- and again, I think that same percentage mix between LTL and Europe is how you should think about it. And on the lower side, so we -- obviously, when we started the LTL 2.0 plan, our goal was to open up 900 new doors. And these were based on areas where we have line of sight on demand from customers. So a lot of the markets that we go after, we already know that we need capacity and we're seeing that demand come from customers. So over the next 90 days, we're going to be opening up additional doors, 167 net new doors in Salt Lake City, in Atlanta and in Dallas, Texas as well. And we have a plan through the remainder of the year to open up more doors in those markets where we need that capacity. For example, Houston is a great market for us. Florida is a great market for us, where we need more capacity that we're going to be looking to add. But we're being very disciplined in how we open up those stores and all the terminals we've opened up have been operating better than expectations. Got it. And then just a follow-up on the shipment cost inflation. Should we be assuming sort of up mid-single digit for this year? Or is it lower or higher than that? Just any color. This is -- it would be in the ZIP code of mid-single digit, but it will depend on what the truck for us because we have roughly around 1/4 of our linehaul miles are outsourced it will depend on what the truckload rates do for the balance of the year. We expect this to be a good tailwind for us here in the first half of the year, but it depends on the demand environment in the back half and how that translates. On the weightage side, we expect it to be in the sub mid-single digits, but in that territory. Mario, I know you've had some questions on price a bit. I was wondering if you could tell us a bit more just in terms of the broader strategy, what type of freight are you trying to bring on? What -- I guess, what's the if you push harder on price versus tonnage kind of what's the overall strategy for what you're trying to build that's going to be OR accretive in terms of kind of price mix and how much tonnage matters relative to that? Sure. So first, starting with the type of freight that we look for. We look for freight that can build density in our network. So effectively, these are 48x48 skids that are -- that fit well in an LTL network, typically going dock-to-dock in terms of B2B-type shipments is the primary type of freight that we're going after. We also look to go after freight that creates density around our terminals. So we think about pickups that are in proximity to our terminals is another way we think about the quality of the freight and the -- how it relates to our network as well. Now in terms of channel mix, we are looking to build density, both international channel and the local channel. As I mentioned earlier, in the local channel, we're making great strides and onboarding new customers. This year, we ended the year with 27,000 customers, which was up 2,000 from our prior number of 25,000 customers, and a lot of these were new local accounts we are onboarding. And with having that success in sales, it's driven by 2 main areas of focus. One, our service is up and to the right, and we're hearing great feedback from customers on the quality of service; and two, is the investments we are making in capacity to be able to handle that business. And we want to grow in both of these channels with the type of freight and the type of profile I just mentioned. So I guess, it's the primary driver of the more moderate growth in revenue per hundredweight versus peers. Is that really just the emphasis on -- or the greater growth with national accounts? And then I guess just from kind of a forward look, would you think that your revenue per hundredweight would accelerate a bit as you look forward? Or would you think it remains kind of low single digit, given that mix effect with the national account tonnage? So Tom, it's a combination of all the things I mentioned earlier on. So the mix of channels is one component. And obviously, the local being down on weight but shipments being up, that's going to become a tailwind. But it's also the other items that our GRI and on length of haul as well. And a lot of these things would recover as the macro -- as the freight demand environment recovers through the course of 2023. Now going back to the local channel, the fact that shipments are up as the macro recovers, you would see that wafer shipments start to go up and then the overall tonnage we're getting in that channel would go up, which would be a lift for yield. And for our national accounts, we're looking at these as longer-term strategic relationship. Just to give you an example, the average tenure of our top 10 customer today is 60 years. So these are customers that we're going to be fine-tuning the business we do with them over time. So again, overall, we expect yield to remain positive, and we expect our strategy to pay dividends as the macro recovered and the freight environment gets stronger. And we like our positioning. I'll just throw it out there. I think a lot of discussion here. I think I've rebuilt this model 4 times this year alone and it sounds like with another reallocation and other ones coming next year. So looking forward to the consistency, they're going forward. But just the base level understand this, you're now at a 90% OR in the fourth quarter at LTL, I think full year just about 87%. You were at, what, 93% at Con-way before you bought it and you're talking about another 600 basis points in a few years. Maybe talk about how you get there? And it sounds like the strategy is shifting a little bit to now re-adding national accounts, which I know you've talked a little bit about, but it sounded like that was a key move to get away from because that was a key driver of improving OR. So maybe to start with that. And then, Carl, just a clarification on EBITDA. I know you've included in the adjustments to the $20 million and $15 million on OR. But did you leave the $15 million out of EBITDA? Is that the way we should think about that to get to that $185 million? Yes. On the $20 million, I kind of walked you through that, Ken. On the $15 million, I guess, I'm not understanding the question. Well, I guess, to get to the adjusted operating income, you take out both the $20 million and re-add the $15 million of income -- pension income, but you don't do that on EBITDA, right? You just take out the $20 million of corporate costs? Well, no. I mean, as we go forward pension -- as we think about income, pension will be excluded. Overall EBITDA, though, has pension income. So -- and as we said in the planning assumptions, we kind of showed you what the expectations were for 2023 as far as pension income being approximately $20 million for the full year. And Ken, going back to your question on OR definition. So we closed last year with an OR of 83.9%, which obviously Con-way had more than one line of business, and they had a corporate structure as well. So they had the warehousing business, which was the former Menlo business. They had the truckload business and they had LTL business. Now what do you think on a -- and we haven't changed that definition since we acquired the business back in 2015. And on that reporting basis, the OR was 83.9% at year-end 2022. Now moving forward, and we just substituting our Investor Day, as we become a stand-alone LTL company, we are taking back the corporate cost and putting them in LTL effectively. What Carl mentioned earlier on, there are the $5 million to $10 million of unallocated costs that would be in the third quarter that would wind down for the course of the year as we rationalize the corporate structure. And this is where that new definition kicks into place. Now with the new definition in 2022 with 86.8% from an OR perspective. And obviously, as we move forward, I would go to improve by at least 600 basis points by the time we get through 2027. Yes. Just to clarify, I was talking about just the LTL section of Con-way, which had all the allocations. So it was like-to-like, I believe, having followed Con-way for 15 years before that. So just maybe then can you follow up, Mario, on that strategic mix? I know you've talked a little bit about going the national accounts. Maybe I just want to understand now with your focus is on returning to more national accounts, doesn't that serve as a detriment to -- I believe Matt Fassler used to talk a lot about moving more toward local accounts because that's where you needed to get better pricing and thus better margins and not just chase density. When we listen to other LTLs, it sounds like it's not a desire just to fill the network and fill density, but to do so with a profitable focus, it sounds like -- again, help us understand because I think a lot of the questions are coming at you because we're all really struggling to understand how just chasing that density at a lower price, optically, maybe it's just optics, but that typically historically has been at a detriment to the OR. So maybe just fill us in because I think that's where some of the misunderstanding from the markets may come. Sure. I think Ken, we're actually doing both. So when you think about our sales efforts, I mean, again, when you think about the investments we have made in capacity and the improvements in service and the investments in our sales force, the goal is to grow profitable national accounts and very profitable local account business as well. So when you look at the fourth quarter, as an example, with the local accounts, shipment count is up mid-single digit. So we are actually going after both. And for the national accounts, we remain very disciplined with the type of freight we are getting into the network. I mentioned earlier on one of the metrics we look at internally is the balance -- is a lane balance factor and we are onboarding business that enables us to improve that factor and which will make the local accounts more profitable over time as well. But you need a combination of both to be able to drive higher margins over time. I want to go back and talk about the network maybe through a different lens. And I want to think back about 18, 19 months ago, when GXO was spun out. And we had that quarter where the LTL network struggled with service because of that purchase -- we were in-sourcing transportation and a number of customers, as you mentioned, your average customer tenure 16 years, kind of steered freight away from the network for a couple of quarters. You guys are in the penalty box until service has improved and you got driver staffing at appropriate levels. If I look at where the network is today, versus where we were in that aftermath, not a year ago but, say, 18 months ago, I'm just kind of curious where has the network improved? I know Mario, you were talking about the damage frequency was one of the best ever. But kind of talk about where service levels are relative to maybe where you were pre that issue 18 months ago. And in terms of the customer business, it got steered away from you. In the aftermath of that, you didn't lose customers so much. They just didn't give you as much freight. Have you gained all that back? Is there still some of that customer freight that's out there that we're looking to bring back in the network now that the service metrics are better? Just kind of -- I want to look at it through a slightly different lens and understand what's where it needs to be, what is not yet where it needs to be and how you've recovered relative to where you were? Yes, Jeff. So when you look at our service levels, I mentioned this in my opening remarks, our damage frequency has improved 66% year-on-year in the fourth quarter, and it's the best it's been in 6 years -- of any quarter in 6 years. So when you look at it from that perspective, obviously, not only really covered from the 18 months ago, but we're now on a path to get back to company records in terms of the quality that we offer to our customers. And similarly, our on-time service was up 14 points on a year-on-year basis in the fourth quarter. Now we do surveys with our customers on a weekly basis, and these are live shipping customers. And the customer satisfaction in the fourth quarter, exiting the month of December was a company record when we started doing this a couple of years ago in terms of taking that satisfaction. So the improvement has been dramatic and the improvement has been very effective, and we hear it from our customers. Now going back to your question on the customers, that we could have lost. Obviously, when we onboard business, some of it is existing customers who we are expanding the amount of business that we do with. To give you an example, recently, I mentioned last quarter, we onboarded a new top 10 customer. That was a customer that was doing a small amount of revenue with us prior, and now the amount of revenue is multiple. I mean we're talking more than 10x the amount of volume that they used to do with us pre those improvements. So we see a direct correlation between the improvements we're making in service and customers wanting to give us a bigger share of wallet and giving us more business as well. If I could follow up on that just for a second. About early 2022, I mean, there's always been a gap between the year-on-year yield improvement, XPO versus the peer group. And it feels like that gap is closing a little bit the last few quarters. And I remember early '22, it was, " Oh, we can't really push price with customer because the service is still healing." Are you past that? And are there gains that you can still make on a relative basis, like maybe relative to peer group now that the service is at these levels, is that something we should see in '23? Yes, we are past that in terms of service. And again, when I talk to our large customers, we've onboarded, I consistently get the feedback that we are one of the top carriers in terms of service quality. Now obviously, with some of the existing customers that could have left us due to service issues in the past, these as they come back, that takes time to be able to grow that -- the share of wallet with them as well. But generally, when we think about the impact of service, currently, we are providing close to best-in-class service, and we are on a up and to the right trajectory of continuous improvement and focus on it. Maybe just for Carl to follow up on the CapEx. Can you give a breakdown in terms of the 85% or so percent that's LTL. What's real estate? What's tractors and trailers? Can you give us a sense of what terminals are leased versus owned? I know we'll see that in the 10-K before too long. And then can you just wrap that into maybe a range of expectations for free cash flow for the year? Yes, sure. So if you look at kind of the breakdown, about 70% of the CapEx that we're planning for really is between tractors and trailers, and it's weighted pretty much equally. The remaining amount is kind of split between other things. There's a little bit in there for real estate as well, which probably adds another 15%. And if you think about the mix between purchase and lease about 40% -- or excuse me, between owned and leased, 40% is owned. Yes, I mean I think as we look at -- yes, it's a fair question. As we look at the first quarter, we are planning to really accelerate our CapEx expenditures. And it's really going to be based off of the availability of getting new trucks in. So there's a chance we can have -- up to 50% of our CapEx spend could occur in the first quarter, obviously subject to the availability of what we're seeing right now. I think additionally, as far as cash flow, a couple of other points we should, kind of point one, we are not planning for any real estate sales in the -- in 2023. And two, we do expect to have higher cash interest costs as well that would factor into your free cash flow numbers for us. Got it. And then just a follow-up on one of the other variables we'll be looking at this year, the impact of fuel. So you can look at fuel surcharge at more than expense. Obviously, Mario mentioned there's purchase transportation component on that. But if the fuel curve stays where it is, how does that affect LTL, OR and EBIT as we go throughout the year? When you look at fuel, it's always been part of the economics of an LTL carrier. So when customers pay us our services, they have a price that is inclusive of fuel and similar to all carriers. Now when you look at the price of diesel today, last year, we -- on a full year basis, the price per gallon was roughly in the upwards of $5 per gallon while currently it's in that $4.6 range. So if the level stays at current levels, that will most likely be some pressure related to that. And obviously, the positive side though of fuel being lower is going to simulate more economic activity and also would have more yield ex-fuel type strength associated with that as well. But obviously, we'll see how the year does. We are focused from our perspective on the levers that we can control, obviously and few -- we'll see what the year looks like as the year develops. I wanted to get back to the pricing in yield side. I don't think I heard this. Can you talk about what you're pricing new contracts at the quarter? Okay. All right. So maybe you could help me out here about your comments about sequential yields from 4Q to 1Q. Mario, I believe you said they were going to be about flat. And I'm assuming that was an ex-fuel commentary. Okay. So why is it going to be flat when you're repricing at 7% in the quarter, your GRI also moved to January. I would assume that would drive it up or is there just another massive mix shift going to happen again in 1Q? When you look at for the first -- yes. Sequential, when you look at the first quarter, we expect the year-on-year to be up similar to what we've seen in the fourth quarter ex fuel. And this is what we have seen in the month of January. Now some of the dynamics that impacted our yield in the fourth quarter are sell-through for the first quarter which includes the mix change between national and local. And the local weight per shipment, it still has a similar dynamic of what we saw in the fourth quarter so far here in the -- at the beginning of the first quarter. So that dynamic and mix change has not changed from the fourth quarter. The only change is the GRI that we took in the month of January. Now typically, our local accounts are roughly the 1/4 of our business. So obviously, that's about a 1% flow-through on -- call it, 1% to 2% flow-through on yield -- on total system yield associated with the GRI we took in January. But again, there's the same dynamics for national to local ship and dynamic for length of haul are still impactful in the first quarter as well. Okay. And all right. So I guess I'll just take this offline because when I look at weight per shipment, all other things being equal, should help yield going down at least. Questions about the network here. You had some nice damage rates in the quarter's best numbers in 6 years. That's fantastic. You have a 14% -- 14-point on-time improvement. Could you compare the on-time improvement sort of where you've been historically? So you gave the year-over-year. What does that put you on a historic on-time performance level versus your old numbers? So we are back to pre-COVID levels on these numbers for quality, which is the damage frequency piece, we are back to the best in 6 years. And on time and another metric we use internally is what we call network fluidity, we're back to what we were in pre-COVID today. And where when you look at your network right now, and I know you're adding terminals and everything. So how much excess capacity is in the network? And is that going to increase as you add terminals and then you just eventually take that down? So in terms of overall capacity in the network, we're roughly in the 20% available capacity across the network. However, in some markets, we already tapped out on capacity. I mentioned earlier on, for example, the markets we're opening up in. When we opened up in Atlanta, a terminal over -- through the course of 2022, we've seen volume in that market uptick considerably because we had the customers, we had the demand and we needed more physical space. Now when you look at our plan of adding 900 net new doors through the course of the 2 years since we started our LTL 2.0 plan, that's roughly around 3% per year and it is in markets where we already were tapped out on capacity and we're adding more capacity to handle more volume for our customers. Okay. Great. I appreciate it. I guess, maybe kind of going back to an earlier line of questioning on just sort of the network and network investments. I mean, Mario, when I kind of think about the last 3 years, your EBIT and LTL is up 25% or so. Your peers in LTL are up on average about 200% over that time frame. So I guess, conceptually and strategically, why does the network deserve to be able to invest more capital into expansion when you haven't sort of been able to justify the capital that's already in place? I would think the idea would be to really improve the performance of the existing network, improve price, improve lean balance. Why are we adding capacity when we're not getting an appropriate return on the capacity already in place? Jack, it's Carl. So if we look at just from a return on invested capital perspective, we are actually getting a very sizable return. It's -- if we look at what we did, it's running probably 34% as far as on a return-on-investment capital. So reinvesting into the network, obviously, is very -- is a pretty big benefit as it relates to what we're getting for those investments. Yes. When we look overall I mean and we discussed this quite a bit Jack in the past. A lot of it went back to capacity we had into the network. So on pre-COVID all the way through end of 2021, the amount of capital we invested into the business was based on a maintenance amount of CapEx to refresh equipment but not to add capacity so we can handle more volume. And obviously, we have discussed quite a bit what happened back in 2021. And these were the dynamics. Now moving forward, we're solving for all of these things. So we are investing capital in capacity so we can say yes more often to the customer and ahead of demand. We are very focused on continuous improvements in service to be best in class in the service we offer our customers. And these over time, will pay dividends both in terms of margin expansion and higher returns through our plans to 2027. Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Harik for any final comments. Thank you, everyone, for joining us this morning, and I'm proud that we delivered solid results across the business, and I want to thank our 38,000 team members not just for the progress we've made, but also for the momentum they've created. In North America, this will be our first full year as a pure-play LTL carrier, and we have a strong organization who's bringing high energy to all 3 parts of our growth strategy, investing in network capacity ahead of demand, providing best-in-class service to earn market share and optimizing pricing and operations through our technology. We're confident that we'll make more progress this year with all 3 of these objectives, and we look forward to seeing you at the upcoming conferences.

EarningCall_141

Good day ladies and gentlemen, and welcome to the Rogers Sugar First Quarter 2023 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, February 9, 2023 at 8:00 a.m. Eastern time. Thank you, operator and good morning everyone. Joining me for today's call is Jean-Sebastien Couillard, VP Finance and CFO. During today's call, I will review the first quarter results of 2023 and trends in our industry. Please be reminded that today's call may include forward looking statements regarding our future operations and expectations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. Please also note that we may refer to some non-GAAP measures in our call. Please refer to the forward-looking disclaimers and non-GAAP measure definitions included in our public filings with the Securities Commission for more information on these items. A replay of this call will be available later today. The replay numbers and passcodes have been provided in our press release, and an archived recording of this call will also be available on our website. Now turning to our first quarter results. We began fiscal 2023 with a strong quarter that saw the continuation of trends established in the second half of the last fiscal year. In the quarter, higher sales volume and improved pricing in our Sugar segment drove an overall strong performance in the business. The Sugar segment performance in the strength of the quarter showcases the continued strong demand for sugar and sugar containing products. We are very proud of the fact that our Q1 adjusted EBITDA performance was better than any previous quarter. In the current period our Maple business began to see the evidence of some improved pricing with higher revenues. While the business continues to face high inflationary pressures and reduced global demand, we expect the impact of higher pricing to mitigate the impact of higher costs, especially as inflationary impacts received. Now turning to the results in the quarter. In sugar, volumes reached almost 193,000 metric tonnes in sales, which is an increase of over 7% from the previous year. During the quarter, we saw growth in all three of our domestic segments, including notable growth in industrial, which more than offset the planned decline in exports. Our industrial segments increased by almost 12,000 metric tonnes compared to the same quarter last year, driven by continued strong demand for sugar containing products in the domestic market and the United States. Our consumer business increased by 1200 metric tonnes in the quarter from strong sales in Eastern Canada. Consumer demand appears to have largely returned to pre-COVID level on an annualized basis. Adjusted gross margin in the quarter improved as a result of higher average pricing for refined sugar products and strong demand when compared to the same period last year. This was partly offset by inflationary pressures on operating costs, which is an area our team is very focused on and has been managing well. Turning now to our Taber beet crop, as I mentioned in last quarter, unfavorable weather conditions in the latter stage of the growing period have reduced the expected sugar content from the beets. As a result, we expect to produce approximately 105,000 metric tonnes of sugar for the 2022 campaign below last year's production of 120,000 metric tonnes. While this is lower beet sugar production than we anticipated, Taber sugar production is within a good range for the business. It is important to remember that the Taber crop is not yet finished and next month is a key period for our beet processing. We will have a final number in the Taber crop by the end of February, which we will provide in our Q2 results. We have also updated our sugar sales guidance to reflect the favorable North American market dynamics. We increased fiscal 2023 volume expectations by 15,000 metric tonnes to our record volume of approximately 805,000 metric tonnes due to the continued strong demand in the Canadian domestic market. A majority of the additional volumes will be coming from our industrial segments. However, the full benefit of this growth will be partly offset by the lower contribution from beet sugar production. With anticipated beet sugar volumes down slightly, we will continue to leverage our unique operational flexibility to meet customer's needs by moving sugar east from our western operations and prioritizing domestic sales. In addition, over the holiday period, we upgraded operations that are Montreal plants, improving efficiency and streamlining processes which has improved performance. Our Montreal plant is operating well and is expected to continue to run smoothly. Finally, we would like to share an update on our Montreal expansion project. We are advancing the design and planning aspects of the project and the detailed engineering study is expected to be completed during the third quarter. During this stage of the project, we are proactively engaging with major providers and stakeholders and we look forward to providing updates over the months ahead. Now turning to our Maple segments. In Maple, adjusted EBITDA lowered in the first quarter largely due to lower sales volumes from existing customers and increased operating costs. It is worth noting that the revenue increased in the quarter as the impact of an improvement in pricing more than offset lower volumes. Sales volume lowered in the first quarter driven by lower demand from existing retail customers, competitiveness in the market as well as the timing of shipments. We remain committed to the Maple business and are encouraged by the recovery and pricing we have begun to see. Our order book is healthy and we continue to focus on maintaining our share of the global market. Adjusted gross margin was slightly lower than the comparable period as we continue to be negatively impacted by lower volumes, less favorable customer mix and higher costs partially offset by improved average selling price. Before leaving Maple, I would like to briefly discuss Maple pricing and the 2023 Maple crop. This year, PPAQ set a price increase for the upcoming crop which comes into effect on March 1 of this year. While it is a fairly large increase, we are confident in our ability to recover the higher commodity price through customer pricing. All participants in the Maple business are faced with similar cost pressures, and we expect most Maple sellers to pass this increase through to their customers. In regards to the size of the Maple crop itself, we don't have much visibility into the crop as it finishes in the end of April. We expect to be able to provide an update with our next quarter results. Additionally, we are undertaking automation projects with two of our Maple plants. Both will come online during the second quarter and will help the streamline operations and reduce variable costs. We will continue to monitor our operations and pursue automation projects where we see opportunities for further improvement. Finally, I want to say thank you to our employees who have helped start the year off strongly. Their hard work and dedication are key to our success. We still have three quarters to go but we are off to a great start to the year. Over to you J.S. In the first quarter of 2023, our adjusted EBITDA was $33.5 million, an increase of $7.4 million from the same quarter last year. As Mike mentioned, we saw a continuation of the trends experience in fiscal 2022 and our higher adjusted EBITDA in the quarter was again driven by the strong performance of our Sugar segment, which was partially offset by softer result in our Maple segment. We anticipate the Sugar segment will continue to perform well in 2023 as demand remains strong for sugar containing products. Overall, we expect to continue to deliver strong and stable financial results in 2023, despite inflationary pressures across both of our business segments, challenging market dynamics in our Maple segments, and lower expected beet sugar volumes produced at our Taber facility. Let's start by remarks with a review of the Sugar segment. Adjusted EBITDA in the Sugar segment was $30.7 million in the first quarter up 36% from the same quarter last year. A combination of increased volumes largely from our industrial segment, and improved average pricing drove higher adjusted gross margin. Sugar pricing increases were largely driven by continued strong demand in the Canadian domestic sugar market in particular from industrial customers producing sugar containing products. On average, the pricing increases more than offset the market based inflationary pressures on costs seen over the last few months. Adjusted gross margin increased in the quarter by $6.3 million or 17% from the same quarter last year. On a per unit basis, adjusted gross margin increased by $21 to $195 per metric tonne. Distribution costs increased slightly in the first quarter due to higher freight costs and additional logistical costs incurred to support our supply chain as we continue to move sugar produced in the West to Eastern Canada to meet customer demand. We anticipate this trend is likely to continue throughout 2023 and 2024. We hope to address permanently the challenges of moving sugar from the West to the East with our proposed expansion project. Administration and selling expenditures decreased by $2.5 million from the prior year quarter, mainly because of lower share-based compensation expenditure. Our outlook for the Sugar segment remains positive as we move through fiscal 2023. Underlying North American demand remains strong across all our customer segments, and we expect our increased pricing to continue to support our financial results and largely mitigate the ongoing inflationary pressures. As Mike mentioned, sales volume in 2023 are now expected to reach 805,000 metric tonnes, an increase of 10,000 metric tonnes over our fiscal 2022 volume. This is an improvement from our original forecast for 2023, driven mainly by the strength of our key industrial segment. Overall, we anticipate that the domestic market demand will increase by more than 3% in 2023 as compared to 2022. Conversely, and as expected, export volume should decrease by approximately 15% as we continue to focus our sales efforts on meeting the growing domestic demand and capturing the strong economics available in the Canadian market. I will now move to our Maple segment. Similar to the conditions we saw in fiscal 2022, our overall Maple results were weaker than the same quarter last year as inflationary pressures continue to negatively impact our business. As a result, adjusted EBITDA in the first quarter was down $0.6 million as lower sales volume and higher costs more than offset the benefit of recent pricing increases. In the first quarter, the benefit of recently negotiated contract and higher pricing began to flow through our results, leading to an increase in revenue of $1.3 million despite volume decreasing by GBP 0.5 million. However, inflationary pressures continue to affect our operating costs, particularly as it relates to packaging, energy and labor. As a result, adjusted gross margin was 7.7% in the quarter, slightly lower than last year's figure of 8.2%. Moving forward, we continue to expect our Maple segment to show improvement as we progress through fiscal 2023. Building on the increases in revenue and average selling price this quarter, we believe the unfavorable financial and operating pressures will begin to improve likely in the second half of the year. As the year progresses, we expect Maple to recover and to deliver slightly improved financial performance over 2022, driven by the receiving inflationary pressures and price increases on recently negotiated agreements. Before closing, I would like to highlight a few other related financial items. Our adjusted net earnings for the fourth quarter were $15.3 million or $0.15 per share compared to $11 million or $0.11 per share for the comparable period last year. Free cash flow for the last 12 months was $58 million, an increase of $16.9 million compared to the same period last year. The increase was mainly due to higher adjusted EBITDA, excluding noncash impact. Our capital expenditures for fiscal 2022 are expected to be similar to last year, with spending mainly related to improvement of our current facilities and development of improved business processes to increase efficiency. For 2023, we expect our capital expenditures to be approximately $25 million on various capital projects in sugar and $1 million to $2 million in Maple. This estimate does not include our Montreal capacity expansion project. As Mike mentioned, this exciting growth opportunity is progressing as expected, and we will provide future updates when it is appropriate. Today, we are also announcing that the Board of Directors approved a payment of a $0.09 per share dividend in relation to the results of the first quarter and consistent with the dividend paid in previous quarters for the last several years. Overall, the first quarter of 2023 has continued with the same trends we saw in 2022. Ongoing strength in our sugar business is continuing to drive a strong and stable financial performance. A firm need for sugar-containing products across North America is providing strong demand for our sugar products and providing us with resilience to manage the preventing high inflationary pressure. We are committed to our Maple segment, and we will continue to manage this business closely, including experiencing challenging market dynamics. As inflationary pressures begin to receive, hopefully, in the second half of the year, we expect to see some improvement in our results. Thanks. Good morning, everybody. Congrats on the results. I just want to talk a little bit about the sustainability of the strong gross margins at Sugar kind of as we go through the year. Any comment there maybe any one-timers that we should maybe comment this quarter? Sorry. It's J.S. here. Well, the margin was strong. I think over recent quarters, as contracts are being negotiated. I think we have seen some improvement in pricing. I think we don't see this as changing anytime soon as we move forward, though, there's always a bit of seasonality, the first quarter is usually a quarter where we have some of the product mix is favorizing a bit of a greater margin. Okay. Thanks. And I just wanted to -- I know we're fully hedged, but I just want to talk about maybe any implications we're seeing at all to our business maybe from the higher global sugar prices. Do you want to call out? Yes. I mean we -- our hedging program is fairly cumbersome. So we haven't -- for us, we don't believe it's going to have an impact on our financial results. Price have been difficult to predict at times. And if you look through a long, long period of time, they've been going up and down. We haven't seen any impact on customer demand right now. It's been -- it's actually been the opposite -- demand for sugar in Canada is actually very healthy. And so we don't expect having any impact of significance because of the high price of sugar right now. And Doumet, if I can add to that, as you know, most of our pricing is a flow-through agreement, and that's what makes Canada so attractive is the ability to use the number 11. So the volatility and number 11s have virtually no impact to our EBITDA. Okay. Thanks for that. And just one last one on Maple. Can you quantify the price increases that you expect for this year? Yes, that would be hard to put a number to that, George. The PPAQ price is out and some of those pricing changes will come over time as contracts come up for renewal, but the PPAQ price is to all buyers, all bottlers of Maple segment and so everybody's got the same price increase to deal with, and I don't think there's any choice but for it to be passed through to the customers. Thanks. And congrats on the solid results. I just want to start on the -- continue on the Maple and then we'll go back to the Sugar, but can you just remind me the size of the PPAQ increase and the timing and when it kicks in? Okay. So, what's the, I guess, the process for you to get that passed on. And when does it start, I know that growth is usually require three months on a lot of their increases. Is it different in your case, if it's a commodity-based pass-through? That's a great observation, Michael. It is a commodity-based pass-through in most of the agreements. And it starts with the new crop. So most packers and especially ourselves, as we said, we bought a lot of syrup off the field last year. So we're holding syrup from last year's crop. So we'll have that time to be able to transition to new cost of PPAQ as contracts come up for renewal with our customers. Okay, so we shouldn't really - it sounds like you have some inventory to get you through a quarter or so before you can pass through the price is at a good summer? Yes, Michael, we held the inventory for the contracts we have in place until they come up for renewal. And mostly, it's never a perfect matchup, of course, but that is our strategy always has been to get us through when we commit pricing that has syrup on hand to manage those costs. Just like any other business staggered based on customer needs and timings to the market, but a lot of them will come up after the crop is finished, which most retailers like to wait until the crops done and see what the size of the crop is because it influences availability of syrup. So through April to September, we'll see - we'll manage most of those new agreements. Okay. And then once you get through passing on the cost and catching up to some of these inflationary pressures? Do you still see an environment where you can get back to double-digit gross margins maybe by the second half of the year? Hi Michael, it's J.S. here? I think double-digit gross margin is obviously our long-term goal. I think there's a lot of things right now, including inflation and pressure on cost that will dictate that. I think, that would be probably a bit of a stretch in the short-term this year. But I think, when we look more into, a two to five years extended period, that's definitely where we believe this business is going to go. Okay. And then just finally on maple, I can't recall if I saw volume guidance for the year, but I think you were expecting volumes to increase for the year. Is that still the case and yes you talk about protecting your global market share. But the volumes are, are down year-over-year? So are you losing share, because you're being more, strict on passing through your cost increases then maybe some of your peers or is that or is just low weak demand in general? Yes, Michael, we're seeing a weakening in demand because of food inflation globally maple's tends to be seen as a luxury product. So we've mentioned that in previous discussions that we expected some erosion in global demand. We've seen that in some large markets, United States and Europe early in the year. And that - those realities were looked at in our when we put our business plans together for 2023 and they were envisioned and reflected in how we're running the business. Okay. So is that so back to the volume growth expectations, should we expect it should be to be down then for the year? Yes, I think - the reasonable expectation when we looked at it, it's not because we're losing market share. It's really more because of global demand that is a bit softer than what we could had - that's what we had last year for the reason Mike just explained. I think it's a fair assumption, Michael. Okay. And then on to the sugar side, it was a very impressive gross margin number. How did mix come into play there because exports can be both high and low margin. I just assume that the product that you're - the volume reduction in export is likely due to the lower volume business being pulled back or whatever, but the liquid and industrial were also stronger than consumer. So how do you - how much was mix a factor and where else - and is the rest simply just passing on cost inflation? Well, I think there's, a few things here and you hit on a few. There are obviously inflation that were passed through in some of our costs. But I think the main driver of our gross margin is demand. Demand is strong, and it's been for, I think, for three or four quarters in a row. I think starting in the second quarter last year. We saw a significant increase in demand. And I think we've been navigating this in a very positive way. If you look at the economics of sugar are still favoring Canada. And if you look at the sugar-containing products is coming from our industrial and our industrial sector, the demand has been very, very strong. And so it puts us in a position where the demand is strong in the market, then obviously, there's impact on pricing. So I think that's where I think that we would attribute this - the increase in gross margin. We've seen - Canada, Michael, as you know, has always been a competitive market, and we're not new to this. We've been in the business for more than 135 years, and we have a great track record of service. We've seen the sugar industry, evolve with innovation, making new competitors, changes in consumer preferences, expert opportunities. And we see new entrants in both large and small and to the market over time. And as we've reported, and I spoke in my comments, we're addressing the continued growing demand for sugar with our capacity expansion in Montreal, we feel confident in our ability to respond to the evolving market. Rogers is - given the breadth in the 135 years in business, we're positioned to continue to successfully grow in the Canadian market, and we're committed to it. Yes, good morning. Thanks taking my questions and congrats on a good quarter. I'll continue to my first one - on the sugar, I'll continue with that. And in terms of the question is more kind of how much visibility do you have into the special industrial market being strong in Canada and for how long, right? Like how do you see this demand evolving, but especially when it comes to the end consumer? I mean there's, reports out there that saying that demand will drop at the end consumer for sugar containing product just because the prices are so high? Yes, Andrew thanks for your question. And that's always an interesting question for us as we look at the business. And as you know, I've been with Atlantic for over 40 years, I've seen some of these trends come and go. The difference is it's not consumption the sugar - the market we're servicing isn't all the sugar being consumed in Canada only about 50% of it is consumed in Canada. The rest of it goes in the sugar containing products to a market that is 10 times the size of ours in the United States. So it's very durable and the sugar economics favor the production of goods in Canada for shipment export markets. And that's why you're seeing other news releases that we've all seen publicly about manufacturers, global manufacturers, adding capacity and in fact, building new plants in Canada to take advantage of these number 11 sugar values. That's great and thanks for the color, Mike. The other question is a bit more administrative. But on the - well, on the admin cost, especially sugar I mean they were down quite a bit from last year on stock on share comp. And you mentioned that you expect them stable. I just wanted for 2022, I just wanted to clarify stable versus what we saw in Q1 or stable as an overall cost in '23 versus '22? That's a good observation. It's JS here, Andrew. We expect the overall admin costs to be stable in comparison to last year with the exception of share-based compensation, which is -- which could be a bit volatile in the sense that there's a cycle right now that going to end at this year. And it's - the financial markets are difficult to predict, and this cycle is directly based - is directly calculated with the stock price. So as stock price moves and - with the market, then it hasn't - it could have an impact on share-based compensation and hence on our administrative costs, but the other part of our administrative costs are expected to be stable. Okay, thank you. And another question and I'm not sure if you want to touch for this - at this point, but for the expansion that you plan in Montreal and in Toronto. I think again, there are some reports in the media that you're looking for a loan from Quebec institutions around $65 million in debt. Can you talk about - that process, number one, how is it going and number two, if you can give us any color on the rest of that - of the cost for that expansion? Good question. We are in the midst of doing the detail engineering process, on finalizing all the plan for the expansion and that will drive the final amount of capital that we're going to need to invest. And we're looking at different options for financing this project, but the main objective is not to overstretch our balance sheet. One of the items that has been discussed and has been discussed in the media is the discussion we've had with [Investia Quebec] for support in regards to the project. The discussions have been very positive. We're quite happy with the way the discussion and the reception we have been given. I think everybody acknowledged that Atlantic, the Montreal plant is a significant - it's part of the tissue of the East Montreal manufacturing factor - and also people understand that sugar is at the center of the global food chain. So there's sugar in a lot of products and for our customers to continue to grow, I think they need access to sugar. So this was all considered in some of those discussions. We will come out with a formal financing plan when we are - when we're ready to launch the project. But I think from those discussions that we're in the media, they are true. We have been working with IQ in order to get support from the government for this important project. Good morning, thanks guys. You have Nevan sitting in for Steve today. On the Sugar segment, I wanted to confirm, was there any lingering positive impact this quarter from the competitor challenges that you guys called out in Q4? Yes, no, there was no hangover from that at all. This is a clean quarter, and - that's the result of our own business activities. Okay, great. And then on the Maple segment, it sounds like all of the improvement you're expecting this year is going to be margin driven, just wondering if you can quantify that. Are you guys expecting to get back to 2021 EBITDA margins this year and then longer term, when could we expect to see margins returning to 8% to 9% range? Well, I think a lot of it is based on global economics and especially pressure on cost. I think - we are expecting those to recede in the second part of the year. So I think if you look at our third and fourth quarter, we would expect them to be more aligned with what we've seen in previous year in 2021. But overall, I think considering the pressure on cost and what Mike was talking about earlier about pressure on demand for a good like maple syrup. I think the outlook might take a couple more quarters to go back to the type of run rate or margin that we had in 2021. But in the longer term, as I mentioned earlier, from two to five years, this is definitely a goal that we expect is achievable. Yes, Michael, we had the hail event, if you recall, back in the fall and the early part of or - during the start of the spring and the early planting that defoliated about 5,000 acres of beets, and so they were slow to recover in the sugar content in those particular beets as well. But overall, we're seeing lower sugar content in beets pretty much in North America this year. It's just the phenomena of nature in growing. And we're managing it well. The plant is still running it's too early to call a final number, but we've taken a different approach in processing the beets to make sure we get every grand sugar out of them that we can. And the team in Taber is doing an excellent job in dealing with that this year. Okay great. And then just in terms of the contract for beets going forward. I think you've got this last year, if I'm not mistaken of planting and then you got to come up then you have another contract that we negotiated. Is that correct? Okay. Is there any concerns that they want to cut back, I mean I've seen some farmers in the U.S. cutting back on the number of acreage, the acres they allocate to sugar beets. Are the economics different in Canada than the U.S. for sugar beets? That's a good question. I've seen those articles as well. It's definitely not been brought up in the discussion we've had with the growers in Alberta. Thanks good morning. Most of my questions have been answered, but maybe digging a bit deeper on the cost inflation side in maple and your outlook there. Maybe just curious on which bucket in terms of cost, you'd expect some inflation easing in Q3 and Q4? Are we talking mainly packaging or labor and sort of just what gives you confidence in that easing outlook for inflation? Is it based on signed agreements for packaging or maybe any detail there would be helpful? Thanks. It's a good question, because everybody is looking at inflation trying to figure how - it's going to ease up first half. One of the two areas, mainly, I think, when we look at this. I think packaging is one. I mean, packaging costs for us are - in maple are obviously significant and the pressure has been there. The - and there's two-ways attack this, there's a way through automation. I think it forced us that the increase in costs - but actually forced us to look at automating some of our process. We're in the midst of doing that in our Granby and also our Dégelis facility and these things will kick in, in the second half of the year. The other area that - for us is important is on distribution, carrier fees and fuel charge and things like that. So we have seen a bit of a relief on gas price. And obviously, I'm not going to speculate here on where fuel price is going to move. But I think we've seen the peak that we've seen in last year is starting to go down, and we're expecting to be able to benefit from some of those in the second half of the year and going into 2024. And Fred, I can add to that. We're seeing the global supply chain challenges ease up. So we're getting more availability, better timing on inbound goods like packaging and freight coming in and more predictability, enable to ship finished goods out with especially overseas shipments. As you know, most of our product is in export. And the one thing that hangs out there is I said earlier, the PPAC price increase of $0.20 a pound on new crop, that pricing that cost and that pricing will have to be passed on immediately to customers in all negotiations. And that's the challenge that the whole industry is facing right now, and I frankly don't believe there's any choice, but to do that, and that's what we're working towards. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and I ask that you please disconnect your lines.

EarningCall_142

Good morning, ladies and gentlemen, and welcome to Patrick Industries' Fourth Quarter 2022 Earnings Conference Call. My name is Latanya, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to Mr. Steve O'Hara, Vice President of Investor Relations. Mr. O'Hara, you may begin. Good morning, everyone, and welcome to our call this morning. I'm joined on the call today by Andy Nemeth, CEO; Jeff Rodino, President; and Jake Petkovich, CFO. Certain statements made in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the securities laws. There are a number of factors, many of which are beyond the company's control, which could cause the actual results and events to differ materially from those described in the forward-looking statements. These factors are identified in our press releases, our Form 10-K for the year ended 2021 and then in our other filings with the Securities and Exchange Commission. We undertake no obligation to update these statements to reflect circumstances or events that occur after the date the forward-looking statements are made. I would now like to turn the call over to Andy Nemeth. Thank you, Steve. Good morning, ladies and gentlemen, and thank you for joining us on the call today. As we reflect on another year of record operating results and financial performance in 2022, we want to, first and foremost, recognize our team's incredible dedication and tireless commitment to manage our business and serve our customers in-light of some of the most dynamic market conditions across each of our end markets in recent memory. Fiscal 2022 was the tale of two halves, as we'll talk about, and we see the third and fourth quarters and full-year 2022 is proof that our plan to build a stronger and more diversified company is working and driving margin and operating resilience. In the first half of 2022, demand trends across all end markets were solid, although economic headwinds were building. In the second half, we began to see these trends shift in the RV industry with a significant decline in RV production as the OEMs pulled back in recognition of balanced dealer inventories. Our RV OEM customers further evidenced their tremendous scalability, reducing output by 48% versus the prior six-month period to address slowing retail demand. During the same period, we continue to drive [content] [ph] and our marine and housing businesses remained resilient, bolstering our margins while we scaled our RV business in alignment with our revenues. It was the second half of the year that we believe proof tested the Patrick model and the strategies we've been executing over the last several years, namely the strategic diversification of our portfolio and intentional and opportunistic capital allocation strategy and investments in automation and infrastructure while maintaining a strong balance sheet. The strength and success of the Patrick model can be demonstrated by comparing 2022 to 2017, where shipments in 2017 were 505,000 units. And this year, we finished at 493,000 units. Over the past five years, our RV sales as a percent of total Patrick revenue went from 69% in 2017, down to 53% last year, and our marine revenues went from 7% of our sales to 21% during the same period. Our net sales grew 198% from 1.6 billion in fiscal year 2017 to 4.9 billion for fiscal year 2022. Our gross margin widened 460 basis points going from 17.1% to 21.7%, and our operating cash flow quadrupled from 99 million to 412 million in 2022. Our adjusted EBITDA went from 165 million to 643 million and our adjusted EBITDA margin went from 10.1% to 13.2%. Despite the challenges we faced in 2022, it was a great year for Patrick, and we are proud of the results that our team produced. In 2023, we will continue leveraging our investment and diversification strategy and expect these investments to add durable value to our portfolio of businesses. Our liquidity profile remains strong as we close 2022. We strategically increased our access to capital through the expansion of our revolver in the third quarter, and we are monetizing working capital and generating solid free cash flow, which gives us ample resources to continue to execute on our capital allocation strategy and allows us to better navigate the headwinds we may face in the coming year. Our confidence in the future is reflected in our decision to increase our quarterly dividend and share repurchase authorization in the fourth quarter. We are prepared for 2023 to be just as or even more dynamic than 2022 and stand ready from a position of strength to take advantage of the opportunities that present themselves and to face whatever challenges the year brings and navigate the myriad of scenarios we may see in the new year. Macroeconomic factors, as Jeff will discuss, will likely continue to impact consumers in 2023. However, we are committed to maintaining and leveraging the [nimbleness] [ph] of our structure, effectively balancing the ability to efficiently meet our customers' needs, while maintaining a healthy balance sheet with strong liquidity. And finally, highlighting our financials. Our fourth quarter revenues of 952 million decreased 17% or 196 million. Our net income for the quarter declined 34% to 40 million, and we earned $1.68 per diluted share. Our full-year revenue was 4.9 billion, notching an increase of 20% or $804 million. Net income for the full-year increased 46% to 328 million, and we earned $13.49 per diluted share. This represents a 40% improvement year-over-year despite the noncash reduction of $1.15 per share for the accounting treatment of our convertible notes. I'll now turn the call over to Jeff Rodino, who will highlight the quarter and provide more detail into our end markets. Thanks, Andy, and good morning, everyone. In general, there are a few overarching themes to our leisure lifestyle and housing end markets. Rising interest rates continue to prevail as economically sensitive consumers are being impacted. Alternatively, general unemployment remains low and higher-end products across markets are proving resilient. Inventories across our end markets are either in balance with estimated new normal levels or not sufficient to meet demand and therefore, providing runway for the long-term. We believe that the end consumer of our products will ultimately recalibrate to new norms and continue to invest in leisure lifestyle and housing markets. As expected, conditions in the RV industry continued to soften from third quarter into the fourth quarter as OEMs scale their businesses. Our fourth quarter RV revenues decreased 39% to 411 million, representing 43% of consolidated sales. RV wholesale unit shipments of approximately 78,000 decreased 47% as OEMs continue to adjust output in an effort to better manage dealer inventories in alignment with the estimated reduced new normal levels. The drop in shipments was driven by an estimated 23% decline in RV retail demand in the quarter, which not only faced challenging macroeconomic headwinds, but also a tough comparison to a record-breaking RV market in the fourth quarter of 2021. From a dealer inventory perspective, the metrics we have outlined imply a net increase of approximately 7,900 units in the quarter, our estimates indicate that TTM dealer inventory weeks on hand at the end of the fourth quarter were approximately 19 weeks to 21 weeks, up slightly from 18 weeks to 20 weeks from our estimates at the end of the third quarter and below historical pre-COVID levels of approximately 26 weeks to 30 weeks. The long-term prognosis for the RV industry is favorable supported by consumer interest in the leisure lifestyle and by the favorable shift in RV buyer demographics towards younger buyers. Our investments in infrastructure and automation over the past 30 months have improved and stabilized our operating model in an effort to provide manufacturing flexibility for our customers, while maintaining a strong financial profile. On the Marine side of our business, OEMs continue to work towards replenishing depleted inventory levels. Our marine revenues increased 35% to 255 million and represented 27% of our fourth quarter consolidated sales. Market share gains, acquisitions, and pricing all contributed to the strong performance. We estimate industry wholesale unit shipments increased 11%, while retail unit shipments declined an estimated [23 to 25] [ph] driven by a combination of economic headwinds and inadequate inventories of certain units on dealer lots. Restocking efforts are ongoing in marine and dealers continue to make progress on improving their inventory health. We estimate overall marine dealer inventories are 14 weeks to 16 weeks on-hand increased from the third quarter but levels well below historical pre-pandemic averages of 35 weeks to 40 weeks. Macroeconomic headwinds similar to those in the RV market appear to be impacting marine demand, particularly on lower-end units, but below historical normal dealer inventory should help bolster OEM production throughout most of 2023. We believe high-end fiberglass, ski and wake, and saltwater boats which our [Technical Difficulty] mix is more oriented towards and we have higher content in have slightly more favorable dealer inventory replenishment profile than some other segments of the industry. Revenues in our housing market sector, primarily tied to MH and single and multifamily residential housing were essentially flat at 285 million, represented 30% of our consolidated sales in the fourth quarter. MH estimated wholesale unit shipments decreased 12%. While MH consumers tend to be more economically sensitive, we believe the affordable housing value proposition remains a viable and cost-effective long-term alternative to site-built housing. Total residential housing starts for the fourth quarter decreased 16% with single-family starts down approximately 26% and multifamily starts up 8%. Interest rates are impacting housing markets currently across all sectors. However, consistent with our marine business, there remains a shortage of housing inventory in the country. And further, we see MH and multifamily development as an important piece to help solve our country's affordable housing shortage. We want to highlight some of the examples of our continuous improvement initiatives and investments that allow us to become even more nimble, while creating high-value products. For example, we've been identifying plans to improve potentially and [equated] [ph] processes and easy wins within our existing operations. This includes the adoption of advanced [putty] [ph] and take manufacturing equipment in some of our facilities to increase capacity potential while providing higher-quality products and improving manufacturing efficiencies. Another example is the installation of the automated in-feed and out-feed on some of our older lamination and wrapping equipment to increase operational flexibility in order to quickly address OEM production fluctuations and schedule changes. In addition, we continue to drive synergies and increased collaboration across our business units, helping to harmonize opportunities and provide new and innovative products and a better customer experience. Collaborative strategic sourcing between our business units has and will continue to pay dividends without inhibiting the integrity of our independent brand model and the value it provides to our customers, driving unique engineering, innovation, and customer service. In 2022, we continue to focus on automation and adjacent technologies that will help drive our business towards the future. We are cultivating relationships with robotic solutions providers that are pioneering the robot as a service space. This partnership has been deployed in two local manufacturing divisions utilizing autonomous scan and sand technology for surface finishing and treatment. We're using this solution to solve high-mix manufacturing challenges and an intentional step to proactively adapt to increased skilled labor shortages and grow our advanced manufacturing capabilities for the future. In the fourth quarter, we added Transhield to our portfolio, which manufactures protective coverage and shrinkable protective packaging. Transhield is a strategic fit that offers expansion into new markets, while growing our marine and aftermarket presence. We continue to be active in the deal exploration and see M&A as an important component of our capital allocation and growth strategy even in periods of transition. In December, we released our inaugural responsibility and sustainability report, showcasing our new and growing framework in sustainability reporting and many initiatives we have implemented throughout the year that betters our company and community. Thanks, Jeff, and good morning everyone. Our consolidated net sales for the fourth quarter decreased 17% to $952 million, driven by a 39% decrease in RV revenue and partially offset by a 35% increase in Marine revenue. For the full-year, net sales increased 20% to $4.9 billion, driven by growth in all end markets. Our combined RV and Marine revenue increased 18% to $3.6 billion for the fiscal year. Full-year Marine revenue increased 56% to $1 billion, while RV revenue increased 8% to $2.6 billion. RV content per unit increased 31% to $5,257, and we increased Marine content per unit by 45% to $5,281 for the full-year 2022. We've gained market share as a result of our team's incredible dedication and flexibility by helping our customers manage supply chain difficulties and bring innovative products to the market. In our housing business, which is comprised of our MH and industrial end markets, our revenue remained flat at $285 million for the fourth quarter and increased 24% to $1.3 billion for the year. MH revenue for the fourth quarter grew 3% to $155 million and 29% to $705 million for the year. MH content per unit grew 21% to $6,243 for the fiscal year. Our industrial revenue increased 18% for the full-year and fell 2% for the fourth quarter as housing starts decreased 3% for the full-year and 16% for the fourth quarter. Gross margin in the fourth quarter increased 130 basis points from the fourth quarter of 2021 to 21.1% resulting from the realization of our production efficiency initiatives and synergies, the contribution from our acquisitions and the flexibility of our highly variable cost base in response to the planned production reduction in our RV-focused businesses. Gross margin for the year increased by 210 basis points to 21.7%. Warehouse and delivery expenses increased 60 basis points as a percentage of sales for the quarter, but decreased 10 basis points as a percentage of sales for the year as the scale of our operations benefited from an increase in the volume of activity and the associated leveraging of fixed costs. Operating expenses for the quarter were 14% of sales, compared to 11.5% in the fourth quarter of 2021, primarily attributable to an increase in SG&A expenses and amortization of intangible assets and the diversification of our business model and portfolio. These increased costs reflect the incremental impact of higher costs related to our acquisitions, as well as increased incentive compensation to reward our team as a result of our performance in addition to investments in process and continuous improvement in our human capital management initiatives. The full-year operating expenses were 11.5% of sales, compared to 11% in 2021. Fourth quarter operating income decreased 29% to $68 million. For the year, operating income increased 41% and operating margin increased 160 basis points to 10.2%. For the full-year, growth in our leisure lifestyle markets and a move to higher engineered value-added products helped offset the investments in infrastructure and human capital we have made. Net income in the fourth quarter was $40 million or $1.68 per diluted share, compared with $2.62 per diluted share last year. 2022 diluted EPS was $13.49, an increase of 40% over 2021. Adjusting for the impact of the accounting treatment for our convertible notes effective in 2022, our adjusted diluted net income per share was $1.82 for the fourth quarter, representing a 31% decrease from 2021 and $14.64 for the full-year 2022, representing an increase of 52% over 2021. Our overall effective tax rate was 22.5% for the fourth quarter and 24.6% for the full-year. We expect our overall effective tax rate for 2023 to be approximately 25% to 26%. Moving to cash flows. Our fourth quarter operating cash flow grew 74% to $182 million. Similar to the dynamics of the environment in 2021, our teams work diligently to partner with customers and prudently manage our investments in inventory and working capital, which helped drive this improvement in cash flow. For the full-year, our operating cash flow increased 63% to $412 million. Working capital was a source of cash in the second half of 2022 as we continue to manage inventory while ensuring we had adequate levels to support customer requirements. This remains a priority for our team, and we expect to continue to monetize our working capital into 2023. Capital expenditures were $16 million for the fourth quarter and $80 million for the year. We have and will continue to prioritize investments to drive scalability and operational efficiencies through automation and technological improvements. For 2023, we remain dedicated to the notion of driving continued operational excellence initiatives and anticipate investing $65 million to $75 million in capital expenditures. M&A has been a key initiative of our ongoing strategy to diversify our end-market exposure and increase our aftermarket presence. For the full-year, we spent $249 million on strategic acquisitions that have further embedded our value proposition with our customers, improve the durability of our revenue enhanced our margin and earnings. In early 2023, we made another move to strengthen our balance sheet and reduced potentially diluted shares as we redeemed our $172.5 million 2023 convertible notes that were due in February of this year. This also improves liquidity by removing a $202.5 million reserve against our revolving credit facility that was in place while these notes were a near-term maturity. This removes approximately 2 million shares from our diluted share count beginning February 1, with the net benefit to EPS, partially offset by an increase in interest expense. The incremental noncash accounting treatment impact of these shares in 2022 was $1.15 per share. We repurchased approximately 516,922 shares for a total cost of approximately $30 million in the quarter and returned $10 million to shareholders in the form of our quarterly dividend. For the full-year of 2022, we have repurchased $77 million in shares and paid $33 million in dividends, resulting in $110 million in total cash returned to our shareholders. In December, our Board increased the authorized amount of our share repurchase program to $100 million. During the same month, our Board of Directors voted to increase our quarterly dividend by 36% to $0.45 per share. These actions remain part of our balanced capital allocation strategy and reflects the confidence we have in our ability to generate sufficient free cash flow, our optimism in our long-term growth outlook and our commitment to drive shareholder value. We expect to continue targeting strategic share repurchases in 2023 as market conditions evolve while driving returns for our shareholders and on our investments. We ended the year with approximately $508 million of total net liquidity comprised of $23 million cash on hand and unused capacity on our revolving credit facility of $485 million. This unused capacity on our revolving credit facility includes the impact of a $202.5 million reserve for the settlement of our convertible notes due February 2023, which we repaid in full on February 1, 2023. Our total net leverage ratio was 1.9x at year-end. We have built a strong balance sheet with ample liquidity to help us navigate the current RV downturn and macroeconomic headwinds we are experiencing. The solid financial foundation we have built will help carry us through the challenging demand environments, while also providing flexibility to make strategic investments to improve overall robustness of our operations, enhancing our agility, which are critical components to best serve our markets. Before providing our current end-market estimates for 2023, I want to emphasize that the outlook for the coming year remains uncertain, dynamic, and subject to change. As we embark on our 2023 journey, retail trends suggest that we currently estimate full-year RV retail shipments to be down approximately 15% to 20%, implying approximately 360,000 to 380,000 units. The [indiscernible] current dealer weeks on hand levels remain consistent, as Jeff discussed, this would imply based on our estimates, full-year 2023 RV wholesale unit shipments to be down approximately 30% to 35% to a range of 325,000 to 350,000 units. We believe that dealers currently maintain comfortable levels of inventory and that their purchasing decisions will be guided by retail shipment velocity and expectations for broader macroeconomic activity. The OEMs are nimble and highly scalable and have the ability to quickly adjust production levels up or down. We estimate that wholesale shipments will likely be second half weighted when compared to historical seasonality trends. In our Marine market, we currently estimate 2023 wholesale shipments to be down low double digits and marine retail to be down high single digits to low double digits. Given this outlook, combined with several years of persistent supply-demand imbalance, we expect to experience continued lean, but slightly improving dealer inventories in 2023, reducing the risk of dramatic production cuts and therefore, not replicating what we experience in our RV-related businesses. We further believe that we are well indexed towards water craft categories that include higher-end units such as fiberglass, ski and wake, and saltwater boats where inventory weeks on hand remain lower than historical levels and typical consumers who have historically tended to be less sensitive to interest rate volatility and economic softness. On the housing side of the business, we currently expect MH wholesale shipments to be down low double digits for 2023 with retail sales absorbing available wholesale production on a real-time basis. In our residential housing and market, we expect 2023 new housing starts to be down low double digits. Although we do not provide annual guidance, we think it is prudent to discuss our margin outlook given the significant decline we currently expect to see in our RV end market this year. With RV end market wholesale shipments anticipated to be down 30% to 35%, our diversification strategy is expected to bolster our margins from historically experienced declines of this scale. Our non-RV businesses are expected to partially offset declines due to the RV shipment rebalancing, we point to the $1 billion Marine business we have built over the last several years, which has had a durable resilience to our margins. Therefore, based on the assumptions we have modeled out, we currently expect our full-year 2023 operating margin to be within a range of 7.5% and 8.5% at current estimates and subject to change as noted based on the factors discussed. Post-2023, we currently expect to resume our historical operating margin growth cadence of 30 basis points to 50 basis points annually. In December, some of the OEMs started to shutter production for some of their brands on the RV side, of course, and it's the reports that, that's continuing to today. What are you hearing from the OEMs, and what are you looking for, for a production environment for the first quarter? Yes, Scott, this is Jeff. So, I don't – I'll say this. I don't know that they've shuttered brands because that's a little bit different than actually slowing production and taking, kind of days and weeks off. We continue to see that through the holiday shutdown, some may be a little bit longer extended than we've seen in the past. However, the manufacturers are starting to come back online and have over the last several weeks. I will tell you that we still see the three-day weeks and the occasional week off, but ultimately, we're seeing, kind of a similar activity that we saw pre-holiday production levels. Got it. And then if I heard you correct, in talking about your expectations for wholesale and retail, I guess, retail 360 plus in wholesale in that 325 to 350. That's the first time that a lot of us are hearing that there'll be a divergence between wholesale and retail this year. Can you maybe talk about what's going on as far as inventory, if you still feel that there's far too much inventory, particularly lower-priced units for 2022 in the channel? Scott, this is Jake. Inventory still feels pretty healthy as measured by total units, weeks on hand, some of those additional measures that we've used and talked about in days past, but it still feels like there's a – at least from an anecdotal perspective and our connectivity with the dealer networks that there's a desire to, kind of continue to rebalance the types of units they have from maybe the lower end travel trailers to the higher end fifth wheels and motorized where there's a little more velocity these days. But also as they think about clearing out some of the 2022 models, which we also heard a little bit at the Tampa show that they may be a little heavier on the 2022 models than they'd like to be at this time of the year. But also, generally speaking, thinking about, continuing to work on that retail-driven, kind of philosophy and how we use the analytics to build our model out, which is what leads us to that 325 to 350. And we think about where retail has been, and we use that as, kind of the starting place, and if you think about this from second half 2021 to second half 2022 or fourth quarter to fourth quarter, we're down about 20%, and that kind of guides where we are for at least the very base of building the models that we use for these analytics. Then we start to work in and holding our constant weeks on-hand. And as Jeff mentioned in his remarks, said that 19 weeks to 21 weeks, we think that's where people are generally comfortable and where that rebalancing activity will take place. And we use that plus the visibility that we have from our boots on the ground and operational perspective to build out the rest of our model where wholesale comes. And that gets us some of that into that position of that, kind of higher retail, lower range bound of wholesale, what we presented this morning. But ultimately, [indiscernible] we've talked a lot about I would say over the last four quarters has been this desire to achieve the one-to-one retail wholesale kind of equilibrium and velocity. And we've seen a couple of months where retail exceeds wholesale, we've seen months over the past two quarters where wholesale has exceeded retail, but I think that is principally how that pendulum is going to swing, and when we put that together in that philosophy with the analytics as we look at them today and as we assess third and fourth quarter, certainly acknowledging some of the shutdown activity around the holidays that we saw in the Thanksgiving and Christmas, we arrive at those numbers. But back to your original question, we think there's still going to be some good action around the inventory levels. And we fully expect, as we stated here today, that the retail will slightly exceed our range of where wholesale will be and continue to stay at these kind of what we consider to be healthy levels of inventory, vintage of inventory and velocity of inventory. Got it. And then last question on pricing, inputs, logistics are all improving. Could you talk about how much of that you put back or given back to the OEMs? Yes. That's a great point, Scott. And we've seen that through the year. As you can see, the major commodity indices have stabilized for us after some pretty significant periods of run-up. And everything from the price of the commodities, the availability of the commodities and the speed with which we can obtain them have all kind of normalized. It's a little bit of a mixed bag depending on which of our end markets, but ultimately, you can say that we're starting to in third and fourth quarter pass through some of these pricing decreases that we're seeing. We're certainly keeping an eye on our inventory levels, which we're decisively engaged in our working capital initiatives, as we've spoken about in the past couple of quarters, and ensuring that we're partnering up with our OEM customers as they execute on the discipline of their production levels. Hey guys, good morning. Maybe Jake, can you help us think about just in the quarter, the organic growth or contribution from M&A and then maybe pricing and share just some of the moving parts to the revenue decline in the quarter. Sure, Mike. This is Jake. Happy to do so. So, as you've seen and we've stated, we're down 17% revenue quarter-over-quarter for fourth quarter, and there as we transition our third and the fourth quarter, we still continue to see some of the benefits of our strategic diversification initiatives. If you think back to fourth – rather third quarter where we were down, I think the RV market was down 40% sequentially and year-over-year, but as a business, we were up 5% from a consolidated perspective. Consolidated this quarter, down 17%, led by an industry reading that's down 31%, led by RV as the major component of that reduction. Organic growth, up 1%, pricing is up 8%, and that's happened, kind of throughout the year and it varies by our end market, but the first half of the year is the only place we saw some action on RV pricing. And as we mentioned here in the last question, we – this third and fourth quarter, we've been giving back some as we start to see that mitigation and the run-up in commodities. And from an acquisition perspective, up 5%. So, down 17% for the company, down 31% on industry, up 1% on organic, update 8% on pricing, up 5% on acquisitions. Okay. Great. That's helpful. And then just a question. I think you had mentioned 2023 is going to be more of a year of improving cash flow and working through some of the higher inventory levels you maintain in the past year or two. Is there any way to think about maybe where you're targeting inventory levels to be by the end of the year, i.e., how much cash we should generate from that liquidation over the course of the next 12 months or so? Yes, Mike. Happy to answer that. This is Jake again. So, I'd back up a little bit to our third quarter discussion where we turned in an inventory number on our balance sheet of about $734 million. And as you can see, over the past quarter, we've been able to work on that pretty effectively getting down into the $666 million area. We continue to work on that and expect to see some pretty positive returns as we transition through 2023. You also can see that, as we mentioned today, $412 million of operating cash flow, but as you think about the outlook that I provided here in my remarks, the prepared remarks, that is, we have an expectation of some softness across the majority of our end markets here. So, while we'll see net income come down, we expect to see that enhanced margin profile we have really delivered some good free cash flow conversion. We continue to work on that working capital. I think from a combined basis on those two primary factors, we expect to be about $400 million in operating cash flow for the full-year 2023. Okay. So, earnings down year-over-year for cash flow working – operating cash flow fairly steady is the way to read that, I guess? Yes, pretty flat, made up as we lose some net income just in dollars basis, but we see the benefit of the margin shift as we wait. You can see where the impact on our end markets are heavily weighted towards RV, we [weighed back] [ph] towards our – the marine businesses. And as we spoke in this typically enjoy a little bit higher margin, as well as a higher free cash flow conversion. So, we'll see – as we lose net income, we'll still see some pretty good monetization and conversion there. The rest will come from that working capital monetization as we get down to targets that are better aligned with the production activity that's out there for the year. Got you. And then just one final one for me. Just on thinking about incremental margins. I mean I didn't do the math offhand with your comments on your margin expectations for the year. But I guess how should we think about incremental margin this year maybe relative to historic? And then how to think about that going forward in a lot of the automation, the efficiency initiatives that you've undertaken, has that incremental margin math changed pretty significantly? Yes. Thanks, Mike. It's Jake again. And I would tell you it's a theme we've certainly spent a lot of time, and we, as a group on this call, have spoken about over the last couple of quarters some of the primary contributors to our margin expansion, which has been significant this year, has been a couple of things and it's the pricing, but certainly to be sure, as well as some absorption that we've seen on the higher production levels. But where we've spoken a lot in the last few quarters about the durability of that margin and where that comes from. And that's – we still believe in that 100 basis points to 125 basis points of durable improvements, structural improvements to our business, [50 to 75-plus basis points] [ph] of that is coming from the acquisitions, which are smaller in their addition to the revenue, but certainly bring an outsized margin profile to us. And we think that contribution is the durability of that new product, higher value-added, higher fabrication. And certainly, as you know, weighted towards the marine side of the business. The rest comes – of that 100 basis points to 125 basis points really comes from efficiency, automation, and human capital initiatives that we've engaged upon. And we see that as we think back a little bit in time, to your point about some previous readings, Andy mentioned a few of those in his initial remarks where we had some comparison between 2017 and 2022, but as you think about – maybe you go back in time and you can go way back to the great recession, but not a great comparable for our company is that was – I think we were $200 million, $300 million company at the time with a very different margin profile and product set. If you just think back to 2018, 2019, which was some overstocking and rebalancing in the RV business, which is the principal part of our business. Back in 2018, we're only about 7% to 8% of our business was comprised of marine versus the 27% of this today. If you go back to 2018, 2019, where RV wholesale was down about 16%, which took it down to that 400,000 level, we lost about 130 basis points of margin and took us down in the mid-6% area. We think about that durable improvement, plus the starting point where we are at the 10.2% operating margin that we've worked very hard to achieve. We put that all together, we think about where the buoyancy in our portfolio comes, particularly as our mix starts to shift through these next year or so. With those improvements we've made both from a product perspective and structural, and that gets us into that may be down anywhere from $160 million to $270 million as we lose absorption and lose some pricing, but still maintain the value of all the improvements that we've worked very diligently to install over the past 24 months to 36 months. Good morning. Start with the, kind of near-term outlook, from a content perspective, should we think about that being maybe a little bit lower given mix and some correction in raw material input costs in the near-term or can you hold that – the gains that you've had over the course of 2022 to pretty steady here near term? Well, mix, when we think about mix, Dan, we expect our mix next year as you think about where we see the impact on our end markets being a little more severe and continue with the RV market versus Marine markets. So, I would tell you, we expect to maintain a lot of the content from the Marine perspective. The model year turnover happens at the midyear, and that's where you'd most likely see any change in pricing that's probably the greatest influence to what content per unit would be for marine. But again, you wouldn't get a full-year impact of that. But at the same time, we feel pretty good about our value proposition to our Marine customers. The RV side, probably the greatest risk of content certainly comes from pricing, as Jeff mentioned, and I mentioned in our comments here today. We expect to continue to gain share there. And really, we've seen the benefits as we've spoken about in quarters past of leveraging our scale and availability to drive that market share gains that we've had. But certainly, pricing could be a toggle for us as something that could really be the primary influence of any reduction that we'd see from a content perspective. But overall, we expect to take share. And as I mentioned in my comments about our liquidity is our ability to be nimble when others maybe cannot be quite so much. Very helpful, Jake. And then just thinking about lower wholesale productions, combined with, kind of expectations for shipments being a bit back-end loaded, how should we think about overall revenue and gross margin for Q1 relative to Q4 and operating margin-wise, likely to start out, kind of at the lower-end of the range, maybe even a little below before taking back higher? Just thinking about the cadence? Any help there would be great. Dan, this is Andy. I think that that's probably accurate, probably a little bit lower in the end of the range, just given the tremendous discipline we've seen in the space as it relates to the OEMs matching up with retail and really maintaining that balance of dealer inventory. And so I think as we head into the spring selling season, we would expect Q2 and Q3 to rebound above and beyond those levels from Q1. So, just from an overall seasonality perspective, Q1 is going to be a little bit lighter, but picking up certainly and making up that difference to get us to the 7.5% to 8.5% that Jake talked about on the op margin side by the end of the year. Very helpful, Andy. Last one, and I'll jump back. But maybe just a little bit more about Transhield in terms of revenue and EPS contribution and what you see them bring into the table? Thanks. Sure. Transhield, Dan, this is Andy. It's about a $50 million business without question, you know one of the things that we look forward in our acquisition model is accretive margins and the opportunity for increased share and growth out of the business. And so, we fully expect to be able to drive that business. There's a ton of organic opportunity out there, a ton of synergies across the space and the markets that we serve today to be able to execute not only on the organic growth that Transhield expects to achieve, but with things that we can do with Transhield Shield inside our portfolio. The team is phenomenal. We're excited to partner with them, and we think that the growth trajectory is significant, as well as driving accretive margins. Okay, good morning. Thanks for taking my questions. That's been a very helpful call so far. Just wanted to follow-up on the content per unit question. If I look in the RV space, historically, that tends to grow sequentially, and that's true even from like Q4 to Q1, but I understand the comments you made about pricing trends and whatnot. I'm just curious if you think in Q1, we can see a flat to up content per unit metric. And then for the full-year, do you think if it was [indiscernible] I think in Q4, will we be lower than that for the full-year 2023 ex-acquisitions? Craig, this is Andy. I think as we look at content, as Jake mentioned, the biggest risk to content today is the pricing piece. That being said, we've got a tremendous amount of opportunity, as Jake mentioned also, as it relates to the organic opportunity that's been created in partnership with our customers over the last 12 months to 18 months, due to our size and scale and our ability to be able to deliver on products. So, we've been very, very excited about the growth potential that's come, the customer partnership that we've experienced and the opportunity for new business. And so, our goal would be to achieve a flat balance in Q1, let's call it, and then continue to be able to grow our market share as we head throughout the year. There is some pricing risk as we look at things in commodities, but we've been giving some of that back as well in Q3 and Q4. So, it's not like the pricing is just starting in Q1 of 2023, it's been happening over the course of the last couple of quarters, and we've been really working with our customers to make sure that we maintain that partnership. So, our goal is to be able to deliver above and beyond with a little bit of pricing risk in there, but other than that, we expect to take organic share net of pricing. Got it. That's super helpful. And just working down the income statement. Jake, a question for you. Just you've made so many changes to the balance sheet, you returned capital to shareholders, the share count is changing. Just as a plug for our models, what's the right assumption for your quarterly interest expense going forward now that you've paid off the convert? Well, I think from a net basis, Craig, I would take a 100 basis points at $172.5 million out of the calculation and replace that with SOFR plus [125] [ph] on that same amount. Is the way to think about it. So, we've refinanced it to our revolver, which gives us a lot of flexibility in how we address that in the future, whether pay it off, penalty free or refinance it out to other markets. But there is a negative arbitrage in the interest expense there to the tune of about 3%. And the remainder of our – and then if you think about the remainder of our balance sheet is fixed rate debt that we would not prepay given the penalties. Yes. And then given all the share buybacks and everything you've done since the end of the year, like what do you think is the fair share count – diluted share count for investors to use in your EPS calculation for [2023]? Okay. That's really helpful. And then lastly, just on the M&A environment. You've got the balance sheet and the dry power to pursue it. Curious what you're seeing there and whether it's a good time to buy or whether you maybe expectations have to come down on – as these markets slow. Craig, this is Andy. I think as we look at M&A and we look at the strength of our balance sheet, we're pretty optimistic about the opportunities that we think are going to come our way here, especially as it relates to the inventory buildup that a lot of suppliers have seen over the course of the last 18 months. And as things have slowed down, certainly, in certain markets, we think that we're in a great position to be able to execute on M&A. We're going to stay disciplined. We're going to stay thoughtful. We're going to watch trends, I'd say as it relates to multiples. Multiples definitely have come down from where they were at the beginning of last year, let's call it. And certainly, with the expectation on centering around where 2023 is going to land from a run rate perspective. So, we're in a great position to be able to execute on M&A. We're currently evaluating deals. And – but we're going to stay disciplined and thoughtful about it, and we're going to, kind of watch what happens. But overall, I really like where we're at. Hi, good morning. Thank you for taking my questions. The first one, I just wanted to follow-up on some of the comments on commodities and pricing. Can you just first remind us, kind of where you have the largest exposure in terms of commodities, like the mix has changed in your business like RV or some other categories. So, what are the biggest commodity exposures that you have right now? And has it changed? Yes, Ray, this is Jeff. Plywood and particleboard in kind of different wood paneling is probably one of our biggest exposures out there in the market. We certainly deal quite a bit in the aluminum space and different resin-related products and copper. But certainly, by far, wood is probably the biggest commodity that we look at. And then how should we think about the timing lag of raw material inflation or deflation? And how long it takes to flow through your P&L, compared to when it changes the pricing to your customers? Right, this is Jeff again. It really is dependent on the specific commodity and within those commodity ranges, specific product lines. Certainly, we're flowing those through to the customer as we are certainly able to with the inventory levels that we may or may not have in queue at the time. But ultimately, especially when we're looking at wood, we're passing below those long real time. There are some different commodities that we are a little bit heavier on coming out of 2022 and into 2023, but we're very mindful of getting through those quickly and passing those decreases alone. Yes, that's correct. We don't – with customers, we're not doing a lot of index pricing or things of that nature, we're really pricing along with where we are at with our inventory levels. And pushing those through as quickly as we can to make sure that we're at or as close to the market pricing as we can be. Got it. So, but I mean some of those materials, obviously, there was a lot of deflation in the second half of last year, but we've seen them bounce a bit although some have come back a little bit, but like on the lumber side, for example, that's up quite a bit since December. Like, would you start passing that through, what's your expectation on something like that or is that something where you have to see more of an increase before you would push that pricing through? Well, it really depends on where we're at with our inventory levels at the time of when those prices go up. And if we're able to hold off a little bit, we will and try to see where it ultimately changes. We don't – we try to keep with where our inventory levels are and don't really knee-jerk react to the commodities immediately based on, kind of it going up. Maybe it's just going to be a temporary pop-up or even a temporary slight down. And we communicate that through to our customers on a regular basis with where commodities are at and what we're doing with our pricing to make sure that we're all on the same page. Rafe, this is Andy. We really look at our inventories and partner with our customers, both on the upside and downside of pricing, if you will, as pricing increases and decreases. And so, as Jeff mentioned, we really want to make sure that that's in place and that we're working with our customers in alignment with where our inventories are at. So, we don't have these significant lags or either way. And so, that's really, kind of how we focus our model from an inventory perspective. Okay. That's very helpful. And then just on the – you obviously really appreciate you giving an industry outlook across all of your end markets for 2023 and understand in difficult environment to do that in. Just as you look across each of those three end markets, like how do you think about share gains relative to industry growth? Would you expect like across the board to continue to drive share gains, like just how do we think about your growth versus the industry in 2023? Yes, our expectation is that we're going to drive share gains regardless of where the shipment levels are in the industry. And we continue to focus on that. I think we continue a number of things within our value proposition to make sure that we're partnering with our customers to be able to identify those opportunities and really take advantage of organic growth opportunities as they exist. So, we expect – absolutely expect to take share. Yes. Could you guys talk about the [aftermarket] [ph], how it performed in the quarter and maybe by type, whether it was the off-road vehicle or Marine side? Yes. Scott, it's Jake. So, aftermarket was down a little bit for us. It was as much our exposure to maybe some of the installer network out there from a retail perspective to the consumer, the actual direct-to-consumer kind of model. As it feels like some folks had done the work, there's a little seasonality in there, particularly regionally based, where focus aren't working on their cars. They're changing their speakers on their trucks, for example, in the winter times. But little bit down. But ultimately, we feel a little bit – that's – I would call that more on the audio side of the business of our aftermarket on the more traditional Marine side, a little bit of softness there, too. That's more of a front half of the year, weighted type of exercise as folks are getting ready for the seasons. But ultimately, we feel very strongly about our investments in the aftermarket and our exposure to the boat park or the auto park out there, and we'll continue to evaluate investments there. Yes, Scott, this is Andy. I want to just add a little bit there as well. I think as we look at some potential softening as it relates to just overall wholesale units, we would expect the aftermarket to kick back in a little bit as consumers continue to spend on upgrades and things like that. So, we're optimistic about where the aftermarket is going to head for 2023, given the strength that we saw in the first half of 2022, a little bit of lag in the back half of 2022, but into 2023 coupled with that decline, let's call it, in just wholesale units as a whole, we would expect aftermarket to perform better. Thank you. I want to conclude our call by recognizing the outstanding contributions of the Patrick team. While market dynamics have changed over the last 12 months, the performance and dedication of our team members has not wavered. United behind our core values, our team demonstrates the power of our better together culture. As we enter 2023, we are confident in our team's ability to navigate the challenges ahead and execute on our strategy in [division] [ph]. Thank you for joining us today.

EarningCall_143

Ladies and gentlemen, thank you for standing by and welcome to Global Payments Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] And as a reminder, today’s conference will be recorded. At this time, I would like to turn the call over to your host, Senior Vice President, Investor Relations, Winnie Smith. Please go ahead. Good morning and welcome to Global Payments fourth quarter and full year 2022 conference call. Our earnings release and the slides that accompany this call can be found on the Investor Relations area of our website at www.globalpayments.com. Before we begin, I’d like to remind you that some of the comments made by management during today’s conference call contain forward-looking statements about, among other matters, expected operating and financial results and the proposed transaction between Global Payments and EVO Payments. These statements are subject to risks, uncertainties and other factors, including the impact of economic conditions on our future operations that could cause actual results to differ materially from expectations. Certain risk factors inherent in our business are set forth in filings with the SEC, including our most recent 10-K and subsequent filings. We caution you not to place undue reliance on these statements. Forward-looking statements during this call speak only as of the date of this call and we undertake no obligation to update them. We will also be referring to several non-GAAP financial measures, which we believe are more reflective of our ongoing performance. For a full reconciliation of the non-GAAP financial measures discussed in this call to the most comparable GAAP measure in accordance with SEC regulations, please see our press release furnished as an exhibit to our Form 8-K filed this morning and our supplemental materials available on the Investor Relations section of our website. Joining me on the call are Jeff Sloan, CEO; Cameron Bready, President and COO; and Josh Whipple, Senior Executive Vice President and CFO. Now I will turn the call over to Jeff. Thanks, Winnie. We delivered strong results for the fourth quarter and calendar 2022 in what was an unprecedented year by nearly any measure with heightened worldwide macroeconomic uncertainties caused by persistent inflation, dramatically rising interest rates, significant foreign exchange volatility, a war in Europe and lingering impacts from the pandemic early in the period. Yet the consumer remained resilient throughout the year and we enabled a record over 64 billion transactions, culminating in a successful holiday season with multiple all-time high peak days. We delivered record results for 2022. While it’s certainly in the New Year, internal metrics indicate more of the same. Where we have seen any discernible change, it is in some macro weakness in limited geographies like the United Kingdom and parts of Asia-Pacific. Having said that, those items already are reflected in our fourth quarter results and our guidance assumes no meaningful change in operating environments for 2023. We are pleased with our preliminary January results. For the fourth quarter, our Merchant business delivered 9% adjusted net revenue growth excluding dispositions and our Issuer segment achieved 5% adjusted net revenue growth, each on a foreign exchange neutral basis. Importantly, our core Issuer business again generated sequential financial and operating improvement, consistent with our expectations and the best performance since our merger with TSYS in 2019. For the full year, our performance was consistent with our September 2021 cycle guidance despite multiple black swan disruptions that emerged in 2022. Our Merchant business delivered 13% adjusted net revenue growth, excluding dispositions and our Issuer business generated 5% growth, each on a constant currency basis. For calendar 2022, we produced 10% total adjusted net revenue growth, again excluding dispositions, expanded margins by 200 basis points and generated 17% adjusted earnings per share growth on an FX-neutral basis, all right lined with our raised cycle guidance from 18 months ago despite all the incremental challenges of the macroeconomic environment. At our investor conference, we outlined our four-pillar strategy and focus on a simpler model more geared toward our corporate customers with enhanced growth and margin prospects. We detailed our capital allocation priorities that balance building the leading technology-enabled, software-driven payments business worldwide with efficient return of capital. And we highlighted our commitment to advancing our strategic partnerships with leading global technology companies, investors and share gaining financial institutions to further expand our competitive moat. We anticipate closing the acquisition of EVO Payments no later than the end of this quarter. With EVO, we have reinforced our position as a preeminent payments technology company with extensive scale and unmatched global reach. EVO enhances our target addressable markets, increases our leadership in integrated payments, expands our presence in new and provides further scale in existing geographies and augments our B2B software and payments solutions. We look forward to welcoming EVO’s valued team members to the Global Payments family. We also remain on track to close the divestiture of Netspend’s Consumer portfolio by the end of the current quarter, a key element of our strategic pivot. We believe that this transaction will best position Netspend’s Consumer business for future success and we wish its team members the best of luck in the future. Additionally, we have reached an agreement to sell our Gaming Solutions business to Parthenon Capital Partners for $415 million. This transaction, much like the sale of Netspend B2C is consistent with our efforts to refine our portfolio toward our core corporate customers in a way from consumer-centric businesses. These three transactions further our strategic objectives, simplify our businesses and provide us with enhanced confidence in our growth and margin targets. We expect each of them to close by the end of March, providing us with core businesses from which to grow for many years to come. Our unique ability to provide differentiated vertical market software, payments and other technology solutions continues to resonate with customers. Our vertical market segment again delivered low double-digit growth in the fourth quarter with our QSR and School Solutions businesses, notable standouts. We are delighted to announce today that both the Atlanta Hawks and the Atlanta Braves have chosen Global Payments to serve as their official commerce technology provider for State Farm Arena and Truist Park. The Hawks and the Braves ranked comprehensive RFPs to select their partner for the future. And they chose Global Payments because of our ability to deliver distinctive cloud-based software and payment solutions to create enhanced frictionless experiences that increase fan engagement, drive loyalty, provide cloud-based data and improve operational efficiency. We are proud to be the commerce technology partner for all of Georgia’s major professional sports and entertainment venues. And our pipeline in this channel remains robust. In addition to the Hawks and the Braves takeaways, Xenial produced record revenue in the fourth quarter of 2022. Recent wins also include A&W Restaurants, Jack in the Box and Panda Express. What do these new customers all have in common such that they chose us in recent competitive takeaways? In short, consumer expectations for the sports and entertainment and QSR channels are high and the pace of technological change in those markets plays uniquely to our competitive strengths. Our technologies are winning everyday in the marketplace with more than 51,000 restaurants in over 65 countries choosing our purpose-built ecosystems to deliver positive experiences back to their customers. Other standouts in our Merchant business for the fourth quarter include our integrated and worldwide e-commerce and omnichannel businesses, which both again delivered mid-teens growth in the period. We are excited to combine the best of these businesses with EVO as our integration activities commenced in the near-term. In addition, we are now live with our acquiring relationship with Google across North America on the heels of the success of our initial launch in Asia-Pacific in 2021. Turning to our Issuer business, we produced the best performance we have experienced since the TSYS merger in 2019 in the fourth quarter of 2022. We ended last year with a record 816 million traditional accounts on file, an increase of 15 million AOS sequentially, driven by double-digit account growth with industry-leading customers as our strategy of aligning with market share winners, shows gains. Our commercial card business continued to perform well, with transactions growing 20% in the fourth quarter as cross-border and domestic corporate travel continued its recovery trajectory. We lead in the issuer market with cutting-edge technologies, worldwide scale, terrific customer service and a partnership mentality. While the issuing business has always been and we expect will always remain highly competitive, those partners seeking to compete digitally know where they need to invest to be competitive in the marketplace. Much like in the Merchant business, issuing businesses in growth challenged markets without the wherewithal to make cloud-centric technology investments for the digital future will be increasingly challenged to compete. Thankfully, that’s not our target market. We are very pleased to announce that TSYS signed a multiyear extension with Bank of America, one of our largest customers and relationship that spans consumer and commercial card portfolios in North America and the United Kingdom. We also extended our successful partnership with Deutsche Bank, our largest client in the DACH region into the next decade as TSYS remains their partner of choice for scheme branded card portfolios across international brands, including Deutsche Bank and Postbank, also good timing in light of our pending entry into the acquiring business in Germany through EVO. Other recent multiyear extensions with longstanding customers include P&C for its commercial business. Our durable relationships with some of the most complex and sophisticated institutions globally speak to our competitiveness well into the remainder of this decade. We currently have 9 letters of intent with institutions worldwide, nearly all of which were achieved through a competitive RFP process. This includes a recent LOI for new business with TSYS in Mexico, well timed in relation to EVO and a competitive takeaway conducted via RFP. Another 12 of our recent LOIs, including 5 competitive takeaways, have gone to contract since the beginning of 2022, providing further future growth opportunities. We recently entered the Swedish market through a contract we executed with Entercard during the quarter spanning both its consumer and commercial portfolios. And we have got a contract with Scotia Chile portfolio, which is being added to our agreement with Scotiabank, a partnership that spans multiple markets across the Americas. This marks our second win in Chile, following the long-term agreement we reached with market leading retailer, Cencosud, signed earlier this year. Our issuer conversion pipeline stands at a record post-merger of over 75 million accounts, providing further confidence of our growth trajectory well into the future. We are pleased to report that we have now reached business agreement on ahead of terms with CaixaBank, one of the largest issuing institutions across Europe. Post implementation, we expect to become one of the largest debit technology providers in Europe. We are the beneficiaries of technological innovation, continued share shift and market share gains is just one example while we have been providing market-leading technologies for buy now, pay later initiatives for decades. We continue to innovate and deliver installment products as BNPL demand grows. This includes launching a successful BNPL program with one of our longstanding partners, NatWest, to aid customers with longer term purchases and special events. This product was designed to enable payments to be easily tracked and incorporates the robust fraud protections provided by FCA-regulated purchases. Other issuer highlights include a new partnership with Mastercard, leveraging Ethoca consumer clarity to improve the dispute resolution process and digital experiences for more than 25 million car owners in the U.S. and the UK. We also are collaborating with fintech software-as-a-service platform, Mondu, to provide next-generation capabilities for financial services customers across a number of strategic use cases, including credit cards BNPL, prepaid cards and a range of deposits and lending solutions. Finally, we have now combined the TSYS commercial card business, MineralTree and Netspend’s B2B assets into a single unified B2B organization within the Issuer Solutions business as we focus on driving cross-selling opportunities. Across MineralTree and our core TSYS virtual card capabilities, total spend grew more than 50% in 2022 over the prior year as we remain focused on bringing the industry’s best virtual card capabilities to our FIs, enabling B2B transactions, mobile wallet provisioning and online travel capabilities. MineralTree had a terrific fourth quarter of 2022 with growth in excess of 30%, and it is well positioned for gains heading into 2023. Josh? Thanks, Jeff. We are pleased with our strong financial performance in the fourth quarter and for the full year, which highlights the durability of our business model. Starting with the results for the full year 2022, we delivered adjusted net revenue of $8.09 billion, an increase of 7% from the prior year on a constant currency basis. Excluding the impact of dispositions, adjusted net revenue increased 10% on a constant currency basis. Adjusted operating margin for the full year improved 190 basis points to 43.7%. The net result was adjusted earnings per share of $9.32, an increase of 17% on a constant currency basis compared to the full year 2021, which includes the impact of the exit of our Russia business during the second quarter. These results were consistent with our guidance expectations and with our September 2021 cycle guidance from our investor conference despite all the challenges Jeff highlighted earlier. Moving to the fourth quarter results, we delivered adjusted net revenue of $2.02 billion, an increase of 4.4% from the same period in the prior year on a constant currency basis. Excluding the impact of dispositions, adjusted net revenue increased 7% on a constant currency basis. Adjusted operating margin for the quarter increased 240 basis points to 44.4%. The net result was adjusted earnings per share of $2.42, an increase of 17% on a constant currency basis compared to the same period in 2021. Taking a closer look at performance by segment, Merchant Solutions achieved adjusted net revenue of $1.41 billion for the fourth quarter, reflecting constant currency growth of 9% excluding dispositions. This performance was led by the ongoing strength of our U.S. and technology-enabled businesses. We delivered an adjusted operating margin of 48.4% in the segment, an increase of 20 basis points year-on-year as we continue to benefit from the underlying strength of our business mix. We saw double-digit growth across a number of our U.S. businesses in the quarter, including our integrated channel, vertical markets portfolio, POS solutions and HCM and payroll businesses, while our worldwide e-commerce and omnichannel businesses also delivered growth in the mid-teens on a constant currency basis this quarter. This strength was partially offset by ongoing headwinds from adverse foreign currency exchange rates along with macro softness in limited geographies like the UK and continued COVID-related restrictions in parts of Asia-Pacific. We are pleased with the fundamental performance of our Issuer Solutions business in the fourth quarter. Notably, core Issuer grew 5% this quarter, excluding the impact of FX, which was an 80 basis point acceleration sequentially and positions us well heading into 2023. As Jeff highlighted, traditional accounts on file increased by 15 million sequentially, driven primarily by strong account growth from our major consumer portfolio customers. Transactions also grew high single-digits compared to the fourth quarter of 2021 with strong contributions coming from commercial card transactions, which were up roughly 20% for the quarter. Our total Issuer business including B2B delivered $501 million in adjusted net revenue, also a 5% improvement on a constant currency basis for the same period in 2021. Excluding the impact of our PayCard business, which faced headwinds from both employment trends due to the macro environment and the lapping of pandemic subsidies, Issuer Solutions grew 5.3% on a constant currency basis. Finally, we delivered adjusted operating margins of 48.3%, an increase of 560 basis points from the prior year, fueled by our accelerated growth and focus on driving efficiencies in the business. From a cash flow standpoint, we produced strong adjusted free cash flow for the quarter of $723 million and $2.3 billion for the year, consistent with our target to convert roughly 100% of adjusted earnings into available cash, excluding the impact of the expired federal research and development tax credit. We invested $152 million in capital expenditures during the quarter and $616 million for the year in line with our expectations. Further, this quarter, we repurchased approximately 7.3 million of our shares for approximately $790 million. And for the full year, we repurchased 23.3 million shares for $2.9 billion or approximately 8% of our shares outstanding. Our balance sheet remains healthy and our leverage position was 3.2x on a net debt basis at quarter end. We made further progress on our strategic priorities during the fourth quarter and remain on track to close our acquisition of EVO Payments and the divestiture of Netspend’s Consumer assets by the end of the quarter. As Jeff mentioned, we also reached an agreement to sell our Gaming business to Parthenon Capital Partners. We are pleased to have received HSR approval for this transaction and have submitted all other required regulatory filings. We also expect to close the Gaming Solutions divestiture by the end of this quarter. As a result, our business mix as of April 1 of this year will reflect our future state composition for three quarters of 2023 and beyond. We have ample financial flexibility, including our $5.75 billion revolving credit facility, which is currently undrawn. And following the completion of all of these transactions, we expect our net leverage to be approximately 3.75x, below our prior estimates. We continue to expect to return to current leverage levels by year-end 2023 while maintaining existing investment-grade ratings. We are pleased with how our business is positioned as we enter 2023 and the resulting financial outlook for the year. We currently expect reported adjusted net revenue to range from $8.575 billion to $8.675 billion, reflecting growth of 6% to 7% over 2022. We are forecasting annual adjusted operating margin to expand by up to 120 basis points for 2023. This is above our cycle guidance for margin expansion of 50 to 75 basis points annually, driven by benefits to our business mix from our ongoing shift towards technology enablement and the divestiture of Netspend, partially offset by the lower margin profile of EVO prior to full synergy realization. To provide color at the segment level, we expect our Merchant segment to report adjusted net revenue growth of roughly 15% to 16% for the full year. This includes growth of approximately 9% to 10%, excluding the impact of the acquisition of EVO Payments and dispositions. We expect the EVO Payments acquisition to contribute approximately $475 million of adjusted net revenue in calendar 2023, which assumes the transaction closes at the end of the current quarter. We expect more than 100 basis points of adjusted operating margin expansion from the existing Global Payments Merchant business, excluding dispositions in 2023, ahead of our cycle guide. This expansion will be more than offset beginning in the second quarter with the absorption of the lower margin profile of EVO Payments. We expect this impact will be mitigated by synergy realization as the year progresses. As a result, we are forecasting margin expansion in Q1, contraction in the middle of the year and then margin expansion in Q4 as synergies ramp for our Merchant business. The net result will be a modest decline in our total Merchant business reported adjusted operating margin for the year. Moving to Issuer Solutions. We expect to deliver adjusted net revenue growth in the 5% range, including Netspend’s B2B assets for the full year compared to 2022 as we benefit from our strongest conversion pipeline since the TSYS merger. Specifically, we expect core Issuer to grow roughly 5% and for MineralTree and Netspend’s B2B businesses to grow low double digits. We anticipate adjusted operating margin for the Issuer business to expand up to 60 basis points as we continue to benefit from operating leverage in the business as growth continues to accelerate, offset somewhat by faster growth in our lower-margin B2B businesses. Finally, while the disposition of our Consumer Solutions business is naturally expected to be a headwind for the full year, this transaction enhances the overall growth and adjusted operating margin profile of the business going forward. In terms of quarterly phasing, there are several items to note. First, while we expect foreign exchange rates to be roughly neutral for the full year, we anticipate the currency headwind to adjusted net revenue of up to 200 basis points in the first quarter and a headwind of up to 100 basis points in the second quarter. Second, we expect the timing of our EVO Payments acquisition and the dispositions of Netspend Consumer and Gaming to naturally impact quarterly growth rates during the year. We anticipate the impact of the disposition of the Netspend Consumer business to be offset for the most part by the addition of EVO, which we expect to close at the end of the first quarter. Given the impacts of acquisitions and divestitures as well as foreign exchange rates, on our expectations for 2023, we have provided greater detail regarding our adjusted net revenue, adjusted operating margin and adjusted earnings per share assumptions for the year and by quarter in our slides posted today on our website. Moving to a couple of non-operating items. We currently expect net interest expense to be roughly $540 million and for adjusted effective tax rate to be in the range of 19% to 19.5% for the full year. We also expect our capital expenditures to be around $630 million in 2023, consistent with our long-term targets. We anticipate adjusted free cash flow to again be in a comparable range of 100% of adjusted earnings per share in 2023. For modeling purposes, we have assumed excess cash is used to pay down indebtedness in 2023 until we return to our current leverage levels towards the end of the year with minimal share repurchases until then. Putting it all together, we expect adjusted earnings per share for the full year to be in the range of $10.25 to $10.37, reflecting growth of 10% to 11% over 2022. Excluding dispositions, adjusted earnings per share growth would have been 15% to 16% for 2023. Finally, we anticipate and assume a stable worldwide macro backdrop throughout the calendar year in 2023, reflecting the current environment. Thanks, Josh. I could not be more proud of all that we accomplished in 2022 despite the incremental challenges we faced throughout the year. These achievements have given us increased confidence in the accelerated growth trajectory we outlined at our investor conference. Simply put, we built a better, a more durable business model. Our expectations for 2023 are for a return to normalcy with businesses across our markets delivering a typical financial and operating levels. The consumer remains resilient with anticipated spending patterns reflected in our recent results and our guidance. The imminent closing of the acquisition of EVO and the sales of Netspend B2C and Gaming mean that three quarters of calendar 2023 will reflect results of the businesses that we intend to manage well into the future. We’ve completed the strategic pivot set forth in September 2021, and we are very much the better for it. Thank you. [Operator Instructions] Our first question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question. Guys, thanks. Nice results. But look, just still a lot of moving parts. So Jeff, my first question would just be if you can help us understand, when you look past all these – the Gaming divestiture, the EVO deal, in the Merchant business, number one, I guess, if you can give us a sense of what the – some of the main moving parts were in the quarter again in terms of the – some of the verticals you’re operating in, in the software-centric businesses, the tech-enabled areas, a little bit more granularity. But more importantly, when you look beyond this, what is this growth profile of this business, again, including EVO, including the divestiture of Gaming? And how do we think about Merchant going forward for the next year or 2? Darrin, it’s Jeff. I’ll start, and I’ll ask Cameron to jump in, too. So I think we’ve described that over the last number of calls. We’re going to end up with – in the aggregate, if you step back, a Merchant business is three quarters of the revenue of the company and an Issuer in B2B business that’s 25% of the revenue of the company. That’s reflected in our September ‘21 cycle guidance expectations, and if anything, makes us feel better about achieving those expectations. That was covered in our press release in our prepared remarks this morning where, excluding dispositions on an FX-neutral basis, we actually hit those targets despite all the incremental challenges and uncertainties in a lot of the markets that we’re in. I’d also say that we expect all the transactions that we’ve announced previously and now Gaming today that closed by the end of this quarter, So three quarters of 2023, as I said in my prepared remarks, I expect to reflect the businesses that we will have for many years in the future and the future to come. I also touched on – I’ll turn to Cameron in a second, but I also touched on some of the pieces that have generated fantastic growth, the 9% that we announced this morning in Merchant, the 13% for the year, 9% for the quarter, the 9% volume growth I announced in my prepared remarks. Some of the pieces that added into that namely our integrated business, which again grew into the mid-teens, our e-comm and omni businesses. which again grew into the mid-teens meaningfully in excess of the Visa, Mastercard kind of e-com reporting, and of course, meaningfully in excess of what PayPal announced last night in terms of their volumes and the like. So I think those growth drivers that we’ve described historically at our last investor conference in probably the last 4 or 5 years of calls in our Merchant business, I expect to continue to drive the business forward. Cameron, do you want to provide more detail on merchant to take it? Yes, Darrin, I’m happy to. Maybe I’ll start with the quarter and then I’ll spend a little bit of time on the outlook as well. So for the quarter, as Jeff highlighted, I think we’re pretty pleased with the overall growth we saw in the business. Obviously, that was led by the U.S. business, which again produced double-digit growth in the quarter. Jeff highlighted a couple of, I think, the outstanding businesses from a performance perspective. But I’d also note, our point-of-sale, ATM and payroll businesses also grew in the double digits. Our vertical market business grew in the double digits. So our U.S. business overall was double digits for the quarter. North America in total, including Canada, was right at 10%, exactly what we did in Q3. So again, I think good strength across kind of the U.S. and North American businesses. Where we saw a little bit of headwind was from our Asian and European businesses. We do see some macro headwinds in the UK. I think we talked about that in our prepared remarks. And Asia continues to be impacted by COVID-related restrictions, although as we get early into 2023, we’re starting to see those lift, and January results obviously reflect a lifting of those restrictions, which is encouraging to see heading into the year. So really, our performance in Q4 was largely the same as Q3, but for international businesses. They were a point of tailwind in Q3, and there were a point of headwind in Q4. I think when you look at the business overall, fundamentally, 9% constant currency volume growth, I think, compares very favorably against what you saw from Visa, Mastercard, PayPal, Fiserv. So I think we feel very good about the momentum and the underlying fundamental performance of the Merchant business as we head into 2023. As we talked about this morning, our highlights for 2023 from a growth perspective start with Global Payments sort of core business at 9% to 10%, again, relatively consistent with the cycle guidance that we provided for that business reflecting a macro environment that we expect to be largely consistent with kind of what we’ve seen exiting 2022. So fundamentally, I think we feel really good about how the business is performing and the component parts in the technology-enabled aspects of the business that we expect to drive growth are continuing to do just that. Yes. And we see that trend, as I said, just to finish off on that point from Cameron, Darrin. As I said in the prepared remarks, we saw the same trends continue into January. So really with the preliminary results that we have for January, we are pleased with the metrics that we have into January and into February. So we really haven’t seen – as Cameron just alluded to, really haven’t seen much of a change. Bank of America came out this morning with some comments about a healthy consumer. So we continue to be pleased with where we are. That’s great, that’s great. One quick follow-up on the Issuer side. You obviously have – you showed the acceleration we hoped for, for the fourth quarter, which is great. Think you have 75 million accounts on file that are scheduled to be able to come on over the course of the year and more maybe in ‘24 with Caixa, if I remember correctly. And so just thinking about the guidance for Issuer, it seems like it’s roughly – I think it was 4.5% to 5.5%, if I’m not mistaken. Between all the tailwinds, could it have been a little higher? Is that conservative? Can you just touch on that? Thanks, guys. Thanks, Darrin. Yes. So look, I think we’re really pleased with where the Issuer business is, and it’s really issuer and B2B now. So look, I would tell you that in the back half of calendar 2022, for Issuer in particular, we exceeded our expectations almost every month and certainly for the two quarters. So we’ve got our fingers crossed that we will do better and what that it will accelerate further. As I mentioned a minute ago, the metrics to January – preliminary results in January and metrics and issuance of February also look very healthy. So look, we’re hopeful we can do better than that. I would say though that the fourth quarter of ‘22 itself represented 80 basis points of sequential acceleration in core Issuer just from Q3, Darrin, into Q4 sequentially in terms of revenue. So look, I’m hopeful we can all look back and say that was a low bar, but you’re talking about a business that had its best performance in the month of December that adds since the merger expect performance in the quarter that it had since the merger, Darrin, be delighted to talk to you in May about how good the performance is in the first quarter if that will continue. But I think we’ve got multiple tailwinds in that business. We’re really excited about where it is. Obviously, part of our goal is to get B2B larger. So as Josh said in his prepared remarks, B2BX Paycard added about 60, 70 basis points to the growth rate. We’d obviously like to get that bigger and that’s part of our plan to get to mid to high over time single-digits in that business, but that’s reflected in our guide today, up to 5.5% growth. So I think we’ve got every avenue of opportunity available to continue to build on the sequential acceleration that we saw in calendar 2022. And hopefully, Darrin, can look back later in the year and laugh about how easy it was. Great. Thanks. I wanted to touch quickly on the expense side and expectations for margin expansion. I wonder if you can just give a little more detail there, particularly around like labor. And just wondering if wage pressures have largely subsided at this point? And is that part of what you’re expecting to help contribute to margin expansion? Yes, James, it’s Jeff. I’ll start and I’ll ask Josh to jump in too kind of at a macro level. I wanted to give you a little bit more of the micro detail. So look, our job is to manage the business. Wage inflation, rent inflation, that’s part of the operating company. Our job is not to blame that for misses. Our job is to absorb that and move on. And I think that’s what we’ve been able to do, not just in the fourth quarter or the guide but over the last number of years. I certainly would say, just speaking for us, that the employment market has changed. I would say, as you’ve seen the tech layoffs come from other folks around the country and around the world, there is no doubt there is been a change in perspective. I wouldn’t say though that’s changed the wage inflation expectations of people in our company or in the market, more broadly valued team members our value team members. And we need to be and we are market competitive. The last time I looked, which admittedly, James was probably a little bit ago, I think headcount and tech in our company was up 10% versus ‘19, and comp was up similarly or even a little bit more. As I mentioned a minute ago, our job is to manage those numbers, absorb them and still move on, which is kind of what we’ve done. So, ongoing wage inflation is reflected in our expectations for margin expansion this year. It was reflected in our actual results for margin expansion last year. And obviously, we offset that with good growth, we offset it with leverage and everything else. Josh, you want to be more specific on some of the margin stuff? Yes, absolutely. So James, as I said in my prepared remarks that we expect margins to expand approximately 120 basis points in 2023, which is if you think about our cycle guide at 50 to 75 basis points, that is ahead of our cycle guide. And we expect to see outsized margin expansion in Q1 of approximately 200 basis points, which is similar to the levels that we saw in Q4, and then we expect to see more normalized expansion of 100 basis points to the balance of the year. And I would say that the primary driver of the benefits of this margin expansion is really a business mix shift towards technology enablement and the divestiture of Netspend, which we had talked about, which we expect to be partially offset by the lower margin profile of EVO before we start to go ahead and realize synergies. So that’s a little bit more color as it relates to margin outlook for 2023. Really appreciate that. And then you guys are obviously basing your outlook on kind of relatively stable macro environment. I guess I wouldn’t be doing my job if I didn’t try to pressure test that a little bit. If we look at some of the segments, whether – in your exposure, whether it be the SMB and e-commerce, I’ve heard kind of mixed feedback recently from other companies in the space. Can you just give a little bit of insight into what you’re seeing in SMB? Are you seeing points of weakness, etcetera, similarly on e-commerce? Thanks. Yes. I’ll start, James, and then I’ll ask Cameron to give more detail. So I would just say, as we said in our prepared remarks, look, the fourth quarter and Cameron said this, in certain of our markets, United Kingdom, Asia Pacific, they moved from a tailwind to a headwind. And I think a lot of that is macroeconomic-related. Some of that obviously is COVID, as Cameron alluded to, kind of coming in and out. I mentioned before that January preliminary results are favorable and that we see those metrics kind of trending and continuing, so that doesn’t appear shifted from the fourth quarter. But the point I was trying to make in my prepared remarks, James, is whatever macro disruption we’ve kind of seen from higher rates, FX, COVID, whatever you want to call it, UK, already in our results from the fourth quarter and certainly our annual results from January and guide our expectations. So I would say that’s kind of early in the cake, so to speak, as we think about kind of where we are. Cameron, you want to be a little bit more detailed on SMB and mix? Yes, I’m happy to. I mean I think what we’re seeing right now is relative stability across the SMB markets that we target in our vertical market businesses and our Merchant business overall. And the best example I can probably provide is just where we stand as it relates to booking and new sales trends kind of exiting 2022, heading into 2023 because I think that’s a good barometer as to where we see the health of that overall market. Believe it or not, we had our best sales month of the year in our U.S. Merchant business in December. And it was our second best all time. So I think from that perspective, we’re seeing very good momentum across new sales, which I think is a good – obviously, a good canary in the coal mine for what we anticipate in 2023. We had a record payroll sales month in December, and we continue to see near 20% bookings growth in our vertical market businesses, again, all targeted largely towards the SMB segments of the market here in the U.S., by and large. E-comm and omni continues to produce really good results. As we highlighted on the call, mid-teens growth again yet this quarter, we continue to benefit, I think from digitization trends that obviously help blend the physical and virtual world. But I think again, we are uniquely positioned to solve this complexity for our merchant customers, and we see great adoption of those capabilities from our merchants in virtually all markets around the globe in which we are operating today. So, look, I think we are fairly confident as we head into 2023 to the guide that we provided today. Obviously, macro can evolve over the course of the year. I don’t think we are assuming perfect macro. We didn’t see perfect macro in Q4, as Jeff highlighted. So, I think some of that is obviously reflected in the guide today. I think the guide doesn’t assume it gets meaningfully worse nor does it assume it gets meaningfully better from where we are. And I think again, we feel confident in our ability to deliver on the results that we forecasted in our call earlier this morning. Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed with your question. Good morning guys. Thanks. So, we are talking about 9% to 10% organic growth in merchant, 4.5% to 5.5% in issuer. I just wonder if I try to understand Slide 10, where you pulled together some of the pieces here. I see the divestiture adjustment there, but I don’t see anything explicitly talking about the EVO acquisition. So, you showed 8% to 9% here. So, that, I guess is essentially the organic overall? I don’t know, I am still confused that we don’t see the adjustment for EVO? Yes. Jason, it’s Jeff. So, I will start. So, we will start with our GAAP guide, which is the first row, and then we have got our normal GAAP adjustments, which is the second row, the home adjustments to get adjusted net revenue. That’s what we report, the 6% to 7%. We said currency was roughly neutral. The truth is it’s a 20 basis point headwind. We are just going to absorb that. We didn’t think calling that out and trying to back out 20 basis points based on what we know is really worth anyone’s time. Our job is to manage those things. The reason we call it net divestiture, if that’s net of EVO. So, as I mentioned a minute ago, Netspend B2C and EVO are roughly similar in size. They are going to close, our expectation, is on around the same day. So, there is no timing discontinuity of those things. Those offset more or less, I would say there is a little bit of leakage. So, there might be something like 50 basis points, 60 basis points of leakage on the sale of Netspend Consumer relative to the acquisition of EVO. But then remember, we were forced to exit the Russia business April 29th, Jason, of last year, so we have overlap there for a period. And then we obviously also announced today from a revenue point the sale of gaming, which is earnings-neutral, but obviously revenue-dilutive. So, the net effect of that is minus 1.7%. If you get the lot together, the acquisition of EVO, the sale of Netspend Consumer, the forced divestiture of Russia, the sale of gaming does net to minus 1.7%. So, if you add back currency and get back the net effect, which is why it says net there on Slide 10, you get to the 8% to 9%, which to your point, and we call it core here. That’s our view of what the core business is really doing. If you want to take that to earnings, and Josh actually put this in his quote in press release. If you back out the divestiture because it’s not our – our cycle guide doesn’t include divestitures. If you back that out, core earnings growth would have been 15% to 16%. That’s not what we were guiding to, because that’s not what we are going to report. But the 8% to 9% correlates to the 15% to 16%. Then if you say, well, what about EVO’s run rate of expense synergies because we only get 1 point or 2 points of accretion this year because we only own it for nine-twelfth of the year. But if you look at our guide from August 1st, there is another 3% of accretion to EPS at full run rate – incremental free at full run rate phase in full expense synergies, which is from August 1st of last year. You put that in, and we are actually at 17% to 20% earnings guide. So, the way we think about it, Jason, is 8% to 9% is the run rate of what the quarter is doing. We are not guiding to that because we are going to report which is what Pages 7, 8, 9 do, what our press release does. We don’t want to have any confusion. But for those who are interested in what’s really going on, what’s the core revenue growth rate of the company, whatever it is, it’s 8% to 9%. What’s the core earnings growth of your company, it’s 15% to 16% and with full phase in EVO synergies, it’s 17% to 20%. So, right on top again – and Josh already said, it’s 120 on the margin, so right on top again of our cycle guide despite all the uncertainties of the world. Okay. Understood. And then just as a follow-up, I know the primary use of balance sheet this year is to pay down debt, but do you potentially see room to do deals if something particularly interesting pops up? And then just a quick housekeeping thing, can you just clarify how much interest income benefit you expect this year from the solid financing on the Netspend side? Thanks guys. Yes, absolutely. So, our primary focus this year is to go ahead and pay down debt. And so we are currently 3.25x levered. Today, with the – once we close, EVO will be about 3.75x levered. And then we will focus on paying down debt for the balance of the year, and we expect to get back to our current leverage levels at the end of the year. If you think about interest income, it’s approximately $75 million for the year. Hi guys. Good morning and congrats on the solid results. Jeff, I wanted to ask about yields. A lot of chatter on looking at the merchant side. If you look at your volumes, they look very favorably versus peers. On yields, you guys are about flat. Others are showing large increases. Can you just give some comments on how you think about yields and yields going forward in the merchant business? Yes. Bryan, it’s Cameron. Maybe I will jump in, and I will ask Jeff to add any other additional comments if he would like to. So, look, I would just say our philosophy around pricing really hasn’t changed very much. We do want to ensure we are getting paid fairly and appropriately for the level of service and capabilities we are providing to our customers and our pricing strategies, I will say, are generally aligned with this. We are not really positioning ourselves to be the low-cost provider in the market. I think we are price competitive. But obviously, we strive to differentiate ourselves based on our capabilities and the service that we deliver to the customers that we have the benefit of serving in the marketplace. So, like everybody else, as we talked about earlier on this call, I mean we have inflationary pressures that we have to absorb around wage, goods, services, etcetera. Obviously, we have reflected that in pricing plans kind of accordingly. But I would say, to your point, our volume growth continues to track relatively consistently with our overall revenue growth. And our spreads have remained relatively consistent. I would say, over time, we continue to expect to see spreads overall increase as we continue to pivot towards more technology enablement in the business, as we continue to scale our point-of-sale business, our vertical market businesses continue to grow, e-comm and omni continues to be a tailwind for the growth. All those businesses generally have higher spreads because we are selling more technology, obviously, than sort of traditional merchant acquiring in general. So, I think there is a lot of tailwinds around our spreads as we move forward in time. But we have been fairly I would say, sanguine as it relates to our pricing strategies as we have been able to generate good revenue growth in the business on the back of really solid fundamental volume growth across the globe. Got it. Great. And just on some of the renewals, the larger renewals. I guess the worry always is on a renewal basis, you will have to take significant kind of discounts to renew those businesses in a competitive environment. Jeff or Cameron, obviously, could you just talk a little bit about the renewal cycle because it sounded like with BofA and others, you have signed quite a bit of business, just thinking about pricing there. Thanks. Yes. Thanks Bryan. I think what you said is accurate. So, look, BofA is one of our largest customers. They just renewed for a multiyear period. That renewal started January 1st, this year and it’s in our guidance, right. So, our 5% at the midpoint, 4.5% to 5.5% on the page reflects all that. So, we are growing, and I would say generally growing right through those things. So, I think that really hasn’t changed. What has changed in the issuer business, right, somewhat Cameron described, I think in response to Jason’s comment is we are leading with technology, right. So, if it’s not – most of the RFPs we get now are cloud centric. And I think if you don’t have a cloud-centric cloud-native solution, then I don’t think all the pricing in the world is not really going to move the needle there. So, we think that’s what we announced today with BofA, Deutsche Bank, Deutsche Post. Deutsche Post, that was a takeaway in Europe, double the size – it doubles the size of our business in Germany. Well timed with EVO, which obviously that closing is imminent, but they are in Germany on the acquiring side. And of course, we announced I think TSYS is already in Mexico, but probably our biggest new customer in Mexico and LOI. That was the competitive takeaway from one of our peers. We are very excited about that too. Those are RFPs, those are all competitive takeaways. So, you have to be competitive on price. But I would say leading technology in the issuer business has become table stakes. So, if you are not cloud-centric, you have a partner like we do in AWS, I think it’s very difficult to compete. So, I think the answer to your question at the end of the day, Bryan, is, yes, BofA, P&C, all these other things is Citi renewal from a year ago on the commercial side, the recent win in Mexico and everything else we are seeing is in the fact that we accelerated 80 basis points sequentially in the fourth quarter versus the third quarter. And our expectation is for more growth and more acceleration in 2023. And the way our math works and issuer is the way it’s worked forever. In the merchant business, if you give an x percent discount over a 5-year term, you are pretty much with volume growth surpassed that within the first 18 months of doing it in the first place. And that’s been our experience in merchant, predates me and can go back 30 years. So, maybe it’s – I can’t speak in the 70s and 80s that predates me and merchant. And certainly, that’s been my experience on the issuer side. Cameron, do you want to comment on merchant? No, the only thing I was going to add to that, Bryan, as it relates to renewals and issuer. It’s a little bit like the merchant business and that we are not trying to be all things to all people. We target very specific segments of the market, and we are really targeting winners in the market. Those issuers who are growing, they are acquiring more portfolios, they see good organic growth from a card deployment perspective in their business today. So, you can afford to give, to some degree, those discounts on renewals because you are going to grow through them over a short period of time, to Jeff’s point. So, it speaks to a little bit around how we position the issuer business in the marketplace, the target market for us from a growth perspective. And again, the organizations we like to partner with, those that are winning in the marketplace and give us the opportunity to grow through any sort of discount we may have to provide on a renewal over time. Look, it sounds like the Braves, the Hawks, the Falcons, stuff we announced today, with the states, like those are all RFPs, too. Those are RFPs with the existing providers. Those are RFPs with new fintech entrants. We are winning those too. Some of those guys know how to run RFPs at the NFL, the NBA, MLS right, etcetera. So, I would say what we are leading with is technology and that’s not cells. If you don’t care about the quality of tech and the quality of the service that quality support, as Cameron said, you would probably go look elsewhere. Hi. Thanks for taking my question. My first question is just on the macro and the EVO business. I guess could you talk a little bit about the defensiveness of the book of business that you are acquiring with EVO? And to the extent macro does slowdown, how would your outlook on the accretion change there, if at all? Vasu, it’s Cameron. I will start and I will ask Jeff to jump in. I think what we like about the EVO portfolio overall is their exposure to faster growth markets around the globe. So, obviously, I think EVO, part of the strategy that they have pursued and it’s one that’s consistent with us is to have those exposures to geographies with strong secular growth trends. Obviously, where we see good favorable macro environment as it relates to card adoption, in digitization of payments over time, notwithstanding what the underlying macro environment in those markets may be. So, I think we feel, obviously, that our guide for EVO today – that we provided today, which is around $475 million for 2023 for three quarters of the year, which run rates to about 630, 635, something like that. Obviously, I think it reflects a pretty consistent view of the macro environment globally that we have here at Global Payments, but obviously does, to some degree, benefit from the fact that they are in secular growth markets. That obviously create tailwinds and good opportunities for us to continue to grow over longer periods of time. So, yes, you may see a little bit of macro softness in some of these markets. But again, the strong underlying secular growth trends more than offset that and I think as leave us well positioned to see good growth in EVO business year-over-year, apples-to-apples for 2023 as well as kind of the years beyond. Yes. I mean at that point, Vasu, as Josh in his prepared remarks, that 430ish, 435 number, which is like 630, whatever the math is, for the full year reflects double-digit growth over EVO period-over-period. So, that’s the number ready. Then on your earnings question, what we showed today was consistent with what we said on August 1st is really no change. That 1% to 2% of accretion for nine-twelfth of the year for EVO, if you fully phased in, as I said, as a response I think to James’ question, you fully phased in the synergies for EVO. You would get to 4% to 5%, which basically offsets completely the Netspend B2C Consumer disposition. That’s what we guided to in August 1st of ‘22. Vasu, we said, nothing has changed. Thank you very much. And just my quick follow-up was on issuer. I know you got a lot of questions on that already. But just high level, if you think about what’s your medium-term guide or cycle guide for that business was sort of in the mid-single digits. And it seems we are trending towards the low end now for a couple of years. Can you help us think visit the commercial portfolio that’s still weighing on it or something beyond that? And is this sort of a more sustainable growth rate going forward? Yes. I will take that Vasu and Josh can jump in. So, look, our cycle guide for that business has been, I think TSYS was 2%, 4% to 6%. The good news is in our guide, we go up to 5.5%, right, today. So, we have 4.5% to 5.5%. Obviously, 5% in the midpoint, 5% is the midpoint of 4% to 6% also. But notice the 4.5% to 5.5% relative to the 4% to 6% historical cycle guide. So, I think that’s good news. I think the difference in that business is really twofold. One, as I mentioned in response to Bryan’s question, I think the cloud-centricity and the advent of new technology business, look, we wouldn’t have won the deal in Mexico. I don’t think we would have won – I know we would have won CaixaBank and the other things we described, if we weren’t cloud-centric and cloud native in that business, which is obviously what we have been working on since our announcement in August of 2020 with AWS. So, the first thing I think it’s changed is what people are buying, which is really technology and look, price is always an issue, but I think as I mentioned a minute ago and Cameron too, I think we are always price competitive. That’s kind of point number one. Point number two, obviously, is the mix with B2B assets that we made the pivot on with MineralTree in September of 2021 and now with elements of Netspend B2B. And I think what we said in the back half of last year, Vasu, is that should over time, and now I am talking about including B2B, right, that’s kind of a new item. That takes you from the 4% to 6% and it’s going to take you higher to this x as B2B becomes a bigger point. As I think Josh said in his prepared remarks today, excluding Paycard, which is more macro sensitive and had lot of COVID subsidies in it. For employment, if you back that out, B2B added 60 bps to the core. So, if the quarter is growing 5%, I think we just said it was growing 5% in the fourth quarter. If the quarter is growing 5% and you are adding 60 bps, now you are close to 6%. And as those mixes change and as we burn through the pipeline, you are going to get to that mid to mid to high, which obviously is an enhancement with B2B over the traditional 4% to 6%. So, the high end of our guide right now is 5.5%. That’s higher than 5%. We hope, obviously, that continues over time. But the business is in a very healthy place. As I said in my prepared remarks, we had record after record during the peak in particular, in our issuer business. And I don’t see any signs currently of our expectations changing. Thank you. Ladies and gentlemen, our last question this morning will come from the line of Will Nance with Goldman Sachs. Please proceed with your question. Hey guys. I appreciate you taking the question. Jeff, I just wanted to ask a follow-up on the earlier question on kind of the run rate growth as you guys are exiting in the year. I mean, I am kind of looking at Slide 9 at the 7% to 8% growth or on a segment basis kind of 9% to 10% standalone GPN and/or standalone merchant and mid-single digits on issuer. I guess just how do you kind of bridge what the sum product of those two growth rates gets you towards sort of the low-double digit cycle guide on top line? And kind of what needs to improve from here to kind of get to those numbers? Thanks. Yes. So, what I would say is our cycle guide, I would like to start with that Will and just work in reverse. So, our cycle guide of low-double digits includes M&A in it. For example, on the revenue side as well as the expense side, capital deployment has always been a part. And what we have said historically, Will, even before ‘21, probably going back to ‘15, ‘18, is that M&A, for example, can add up to a couple of hundred basis points of revenue in any given period. And capital deployment generally gets 2 to 3 points kind of earnings growth and has historically for a company, whether it’s buybacks or M&A or anything else. So, that’s the overall generality. Then if you go to your question, on Pages 9 and 10. So, what we are trying to get at is we only have three quarters of EVO in 2023. Obviously, we have a disposition coming in 2023, where our cycle guide doesn’t assume we are selling 10% of the revenue of the company, which is what’s in the disposition. So, we tried to back that out to give you a better sense of the 8% to 9%. And then obviously, the exit period also has a currency assumption, as I mentioned a minute ago, and there is a bit of a currency headwind over the year. So, I think the answer to your question is as we accelerate merger integration with EVO, we expect to see revenue acceleration, 125, Will, is just an expense number. So, as we integrate EVO towards the end of the year, as we look at revenue opportunities when it closes beyond expense opportunities, if you add those 1 to 2 points, which is back to our cycle guide over the last number of cycles, you are exiting the year at 8% to 9% on Page 9. Obviously, it’s a bit of a currency thing there, 7% to 8%, add 1 to 2 points, just on EVO alone, and you are going to get to double digits of revenue. I mentioned a minute ago in response to Jason’s question that on earnings ex dispositions this year were 15% to 16%, and EVO were 17% to 19%. So, I think we are kind of at the earnings number with a full year effect of EVO ex the disposition. And I think we are within sharing distance on the revenue side. Then lastly, I would say, we kind of alluded to this in the investor conference, the shifting business mix on the issuer business towards more B2B, I just mentioned a minute ago in response to Vasu’s question, our 4.5% to 5.5% of 5% in the middle, I think it’s right in line with what we said historically. But obviously, that 5.5% is towards the high end of 6%. So, it’s still like we would have said 4% to 6%, like here it is 5.5%. And obviously, it was a lower number in ‘21 and for most of ‘22 to end up the year at 5%. As that mix continues to shift, we see another 50 basis points, 60 basis points coming from B2B as the wins continue to roll in from things like CaixaBank, etcetera. That business should accelerate. Now, you are on top of 10% to 11%, which is our cycle guide with M&A in it. So, I think Will, exiting this year, we are kind of right on track to be where we would like to be from a cycle guide point of view. I would also say, as we said both in the press release and our prepared remarks today, we hit the sight for calendar ‘22, let’s not lose sight of that, constant currency neutral and ex dispositions. So, I think we are right, we are at we want to be despite all the uncertainties in the current macro environment. Got it. Appreciate all the detail there. So, I guess that’s M&A mix shift towards B2B and maybe some core acceleration in the issuer business, that’s very helpful. I appreciate all the details on the slide deck, by the way, very clear. I have a very quick follow-up. On the gaming business, could you just provide any details on the contribution of that business to 2022 results, just so we have a clean number there? Yes. I can give you a little bit of color there, Will. It’s Cameron. The gaming business got about $100 million a year or so. And I think we sold that business at around kind of an 8x multiple level, 7.5x, 8x. Can give you a sense of sort of the EBITDA contribution that it would deliver. So, as we look at 2023, we will have one-quarter of the business, so about $25 million of revenue. You can see that highlighted on Page 9 of our disclosures today. And then we will lose about $75-ish million plus of revenue kind of relative to what we had in 2022 from that business.

EarningCall_144

Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. [Operator Instructions] Thanks, Audra, and thank you for joining us today for CleanSpark's Fiscal First Quarter Financial Results Call covering the period October 1, 2022, through December 31, 2022. Our press release was issued about 30 minutes ago and is available on our website at www.cleanspark.com/investors. Today's call is also being webcast, and a replay and transcript will be available on our website. I'm here with Zach Bradford, our Chief Executive Officer; and Gary Vecchiarelli, our Chief Financial Officer. Keep in mind that some of the statements we make today are forward-looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, those elements may change as the world changes. We will also discuss certain non-GAAP financial measures about our performance during today's call. You can find the reconciliation of GAAP financial measures in our press release, which is available on our website. Thanks, Isaac. Good afternoon, and thank you for joining our call. The last time we spoke with you, we shared the results of our first fiscal year-end 2022. Today, we will discuss the results of our first fiscal quarter, which, as Isaac mentioned, covers the period of October through December 2022. During that time, our industry, in particular, and the economy more broadly faced significant macro headwinds. Even in the face of these headwinds, we persisted and we grew. Our average hashrate rapidly increased, outpacing global hashrate, resulting in significantly increased bitcoin production for the quarter and the subsequent month. The number of machine hashing grew by over 20,000. We added a new mining campus to our portfolio. The growth in work from those dark winter days has since resulted in our highest bitcoin production ever, last month, which was nearly 700 bitcoin. We also grew our Board, welcoming Amanda Cavaleri, who is an expert in bitcoin policy. No matter the measure, no matter how difficult the quarter we grew, and we are just seeing the majority of the benefits of this growth today and beyond. In fact, we outpaced all of our peers, every single one of them. Data recently published by the Minor mag, a research and data portal focused on institutional bitcoin miners placed us first amongst public miners in terms of percentage hashrate growth. As you can see from the visual, the network hashrate average grew by 46% since January 2022, while we grew over 200%. Not only did we outpace global hashrate, we did so at a tremendous clip. We started the quarter with a hashrate of 4.2 exahash per second. And by the end of the year, it had grown to 6.2 exahash per second for a 48% increase for the quarter. Since then, we've continued to grow, and our hashrate now stands at 6.6 exahash per second. We had 63,700 machine hashing as of December 31. Our fleet was running at an average efficiency of about 31 watts per terahash. For perspective, we understand some of our peers come in at over 40 watts per terahash. Our fleet is tremendously efficient. Most of our machines come from Bitmain S-19 series, and we have started to acquire more XPs. The quality of the machine tells only part of the story. Our Immersion Cool facility has allowed us to test the limits of over and under clocking as we leverage software and firmware to optimize performance. We are also testing additional software optimization techniques for our air cooled fleet, which we expect to allow us to bring under and overclocking capabilities to all of our campuses. This optimization will prepare us to stay ahead of the curve when happing [ph] occurs in 2024. We mined a record number of bitcoin for the quarter, a total of 1,531 bitcoins. For comparison, in the first quarter of our last fiscal year, we mined 660 bitcoins. This represents an increase of 131%, well outpacing global hashrate. We also increased production quarter-over-quarter by 25%. We have reliably grown as we execute on our operational strategy that we believe makes us one of the fastest-growing, most reliable and most efficient publicly traded bitcoin miners in North America. The secret to our growth has been our proprietary mining model. There are many different mining models out there from asset-light on one side through proprietary mining on the other. In the asset-light model, machines are owned by the company, but cared for and run by hosting companies that also take a cut of the profits. This model introduces less control over a company's destiny via the company is exposed to the risks and uncertainties of third parties, their ability to build facilities, procure power, operate the machinery and importantly, stay solvent. We believe higher returns are consistently generated by actively participating in the mining process. Contrast that with proprietary mining, miners like CleanSpark that operate almost exclusively as proprietary miners can exercise significant greater control over their own destinies. We believe this gives us a significant edge. First, it provides investors with predictability. Out of the various business models for bitcoin miners, our proprietary mining model minimizes the impacts of unforeseen events. We can plan and react to the unexpected in real time, giving us greater optionality, even during difficult market conditions. We also have multiple sites in different jurisdictions that we own and operate with complete control. Second, it makes us more reliable. Last month, we had our highest uptime ever, over 98%. We believe we have one of the highest uptimes among publicly traded mining companies. We own our infrastructure, develop the teams and culture necessary to staff and run our campuses and execute in very remarkable ways on our operational strategy. We exercise maximum control over time lines. Now I want to underscore the 98% uptime only happens when you have a team of dedicated people who believe in the work and what we are doing and who share in the rewards of our successes. Third, our proprietary mining model introduces lower production cost. Many factors go into production costs, including staffing costs, power cost and the cost of assets. But directly owning the infrastructure and other assets involved in producing bitcoin means lower operating costs in the long run. We make long-term investments for long-term benefits. And those long-term benefits accrue to our shareholders directly rather than being dispersed amongst a variety of service providers or third parties. We are very proud of these facilities and take every opportunity to open them up to the communities we operate in. Seeing our mining campuses has a transformational effect on bitcoin enthusiasts and skeptics alike. We see our owned and operated facilities not only a competitive advantage in the bitcoin mining industry, but it's the key to winning the hearts and minds of the people and communities we work with. One of the newest communities to be brought into the CleanSpark team is the city of Sandersville, Georgia, home to our most recent acquisition, an 80-megawatt facility that we closed in mid-October. And we've quickly ramped up our hashrate there, allowing us to exceed our 2022 calendar year-end guidance not just once, but twice. We are well into planning the expansion of the Sandersville facility and expect to add an additional 150 megawatts to the site by the end of 2023 for a total of 230 megawatts supporting over 7 exahash in total. Subsequent to the quarter, we also broke ground on our 50-megawatt expansion in Washington. I'm particularly proud of our teams and partners that are working tirelessly day in and day out to complete this buildup. As an example, our teams were working long before the sun came up last Saturday to start pouring the concrete pads for the buildings. Construction is proceeding according to time lines. We expect all four buildings, each of which will house 12.5 megawatts of miners to be completed with all miners racked and ready by the end of May. Energization is then expected to take a few weeks more being completed sometime in late June. We receive regular updates from our construction partners and the utility provider, and we will share relevant information in a timely way. I can also tell you that the city of Washington is glad to have this building in the community. The construction provides jobs and keeps resources in the community. We are very proud to have found great partners in the city of Washington. Allow me to transition to the future and share with you how we plan to continue the rapid growth we've witnessed over the past year that has allowed us to triple our hashrate from January 2021 to January 2023. Our past performance should be viewed as the best indicator of our future performance. During our last earnings call, we shared with you our guidance of 16 exahash per second by the end of calendar year 2023. I'd now like to take a few moments to talk about how we plan to meet the expectations by talking in greater detail about our growth strategy and the financial strategy that backs it, essentially, how we plan to build it and pay for it. First, I'd like to talk about how we plan to build it. We have 6.6 exahash per second operating now, and we expect to squeeze out a bit more efficiency in the coming months, which will allow us to incrementally increase the hashrate. As I mentioned, the Washington expansion is underway, which will result in rack space for over 15,000 miners. We are finalizing the plan on the miner mix and based on the latest plans, we expect the site to ultimately increase our hashrate by 1.9 exahash per second. This expansion brings us to 8.5 exahash in June, leaving 7.5 exahash per second to meet our year-end target. The Sandersville expansion will commence in the coming months with a target completion date of November 2023. This time line is dependent on the completion of a substation that is being constructed by our utility partners. We intend to align our construction schedules to have our site complete in advance of the power hand off day [ph] with the expectation that we have our facility built and the miners racked so that when we go live - so that we can go live as soon as the power is handed over. We expect the Sandersville expansion to add approximately 5.5 exahash per second, bringing our total portfolio to 14 exahash per second. Now this leaves us with a 2 exahash per second gap to fill over the next 11 months. We are confident in our ability to do so. We are currently evaluating several greenfield and acquisition targets to fill the 2 exahash per second gap and expect to source or acquire an additional 50 to 75 megawatts of new opportunities. We have multiple candidates in the pipeline, and we'll provide additional details as appropriate. Lastly, I've recently been asked about Lancium. At this time, we do not have any further updates other then we still hold the contractual rights to the power when completed. We are currently not expecting any of it to come online in 2023. And as soon as we have more information about the 2024 outlook and beyond, we'll let you know. Now how do we plan to secure all the miners to fill these shelves? Over the last few months, we have sourced brand-new inbox, latest generation miners at bottom dollar prices. We've gone to the spot market for the majority of these purchases. The spot market continues to be full of opportunities, and we expect to rely on the spot market for at least a portion of our miners. We also expect to shift our strategy when the time is right and look towards future contracts once again for opportunities. We believe the tides are starting to shift and locking in prices for large orders will begin to be part of our strategy in the coming months. Lastly, let me share a few thoughts about how we plan to pay for it. Central to achieving our guidance is a path premised on accretive growth. That means we issue shares for growth. For assets that quickly generate free cash flow. This is why at our upcoming annual meeting, we have proposed to increase the number of shares authorized for issuance from 100 million shares to 300 million shares. It is important to note that these shares are simply authorized, and it is not required that we ever issue them. Rather, this proposal gives us the flexibility to use equity for targeted growth. We believe these shares would provide us the flexibility to not only maintain market share but to substantially grow market share just as we have in the past. To continue to scale, we need full access to capital markets, increasing our authorized shares provides that. I want to thank our shareholders for trusting us and taking this journey with us. I want to thank our teams for all their hard work this quarter, which has allowed us to move forward even in these challenging times. As I said in our last call, bitcoin is a technological and financial advancement that grows year after year. Markets rise and fall, but bitcoin adoption just keeps rising. It just keeps growing and price. Well, we strongly believe we'll recover. We are seeing indications that some of that is starting to happen. And as I remind my colleagues all the time, and I'd like to remind you, as our shareholders, we are just at the beginning. Thank you for choosing to invest in CleanSpark. I do not take likely to trust you as shareholders place in us. Thank you for your support. I'd now like to give the floor to Gary, our Chief Financial Officer, to discuss our financial results. Thank you, Zach. Diving into the numbers for the first quarter of our 2023 fiscal year, I want to draw your attention to the orange bar chart on this page. You will note that our bitcoin production increased 130% over the same quarter of the prior year as we mined over 1,500 bitcoin. This was due to the rapid growth we experienced over the past 12 months, deploying an additional 45,000 miners in that period. However, you will see that we recognized about $10 million less in revenue compared to that same period. This is strictly due to the steep decline in bitcoin price. For reference, the price of bitcoin was over $46,000 at December 31, 2021, and bitcoin was just over 16,000 at the end of our most recent quarter. Looking at the immediate prior fourth quarter, you'll see a similar story as we mined approximately 25% more bitcoin between the quarters, yet only saw 6% greater revenue. This is also due to the decline in bitcoin prices as the price of bitcoin was approximately $19,000 at September 30, 2022. This bar chart puts into context how far we have come as a company despite headwinds of bitcoin prices. Turning to gross profit on the right-hand side of the slide, our gross profit was $7.4 million, was declined from over $31 million in the same quarter of last year. This decline was directly attributable to the decline in bicorn prices. When compared to the immediate prior fourth quarter, we saw a decline in gross profit despite seeing incremental revenue growth between the periods. This shows how profitable our business model can be when bitcoin prices are just slightly elevated, which they were in the fourth quarter. Moving on to the next slide. We recognized a GAAP net loss of $29 million compared to net income of $14.5 million in Q1 of last year. Again, the high margins due to record bitcoin prices in the prior year, mostly dropped to the bottom line. In the current quarter, we recognized a large net loss primarily due to two non-cash items. Depreciation and amortization was approximately $19 million and stock-based compensation was $5.9 million. These two items comprise almost $25 million of the $29 million net loss in the current period. I want to point out that with respect to depreciation, we have recognized depreciation of miners with acquisition costs as high as $107 a terahash. Additionally, as I've mentioned in previous quarters, our stock-based compensation was expected to come down as this number was relatively flat compared to the stock-based compensation expense in Q1 of last year and decreased from $14 million in the immediately preceding fourth quarter. Regarding the fourth quarter, you will see our net loss decreased from over $42 million, which was partly attributed to the significant reduction in stock-based compensation and non-cash charge related to goodwill, which is recognized in the fourth quarter. Looking at adjusted EBITDA, you'll see we recognized a slightly negative adjusted EBITDA of $1.4 million. This was indicative of how challenging of a quarter was, as lower bitcoin prices resulted in compressed margins. And while our operations team did a fantastic job operating on a profitable basis and forecasting in advance high energy prices during December, we still recognize negative adjusted EBITDA due to corporate overhead. While we're printing negative adjusted EBITDA this quarter, I feel very comfortable in saying that this is not a trend we expect to continue into the second quarter. As you are aware, bitcoin prices increased almost 30% since the end of our first quarter, and that increase in price has expanded our margins significantly. While we can't predict where bitcoin prices will go in the future, I will say that we are operating comfortably at a profit in the second quarter as energy prices are some of the lowest prices we've seen in a long time. So we expect the second quarter numbers to be much better. So as long as bitcoin prices cooperate and our operations teams maintain extremely high uptimes. Looking at the balance sheet. We have over $2 million of cash on hand at December 31 and 228 bitcoin. That brought our total liquidity to $6 million. We also have over $6 million in assets held for sale. I want to point out that this week, we closed a deal with a third party to sell almost $5 million of our legacy energy assets. This is further described in the subsequent event footnote for Form 10-Q, which will be filed today. On a final note, our total debt is less than $20 million. During the first quarter, we paid down $1.6 million of our debt, which is approximately 8% of the total balance. Many of our peers have higher debt balances, however, I'm happy to report that we have a rather clean and healthy balance sheet, one that could take on additional leverage in the future, which I will speak to in a few minutes. For right now, I want to discuss CapEx. As you're aware, we are in an industry which requires significant investment in capital expenditures. As of December 31, we had almost 64,000 machines deployed, representing 6.2 exahash. While the company incurred significant CapEx to get to this point, I want to share what CapEx looks like for the remainder of this calendar year. As we discussed on the last earnings call, we have stated that we will be at 16 exahash by December 31 of this year. That required an additional 9.4 exahash machines. Just to remind you, we went from 1.9 exahash at December 31, 2021, to 6.2 exahash all in 12 months. As Zach said, we have confidence we will get there, primarily through the 200 megawatts of additional capacity coming online. We expect the total CapEx for miners for the additional 9.4 exahash will be in the range of $140 million to $200 million at current prices before coupons and discounts. With respect to our expansion efforts in Washington and Sandersville, our construction costs are expected to be approximately $70 million, which represents approximately $350,000 a megawatt to build out those sites. Of that amount, we've already paid $10 million, and we expect to make announcements in the coming weeks regarding purchases of miners as well. Our minor purchases throughout 2023 could be comprised of several different models to help us to get to our 16 exahash goal, and could range between 75,000 to 95,000 miners in total, depending on the speed and model of the miners. However, we remain very focused on purchasing and deploying miners, which have the greatest ROI. As we previously mentioned, there is still a value disconnect between the current cost of new Bitmain Antminer XPs and other models. So we keep a careful eye on our CapEx as we get the proverbial more bang for our buck and thus greater hashrate by optimizing the mix of non-XP and XP models. Before I wrap up, I want to take a minute to follow up on a few of Zach's comments. Now CleanSpark has seen explosive growth in the last 12 months. We feel very comfortable with our plans. As Zach discussed, we are laser-focused on executing with a clear path to our current goal of 16 exahash by December 31 of this year. We are in this for the long term, and we maintain a long-term vision and strategy, one that has us all rowing in the same direction towards our calendar year-end guidance. With respect to our strategy regarding M&A, we have been one of the most active miners to date in acquiring infrastructure and machines, and we will continue to be active. While deal flow decreased going into the holiday season, we have seen activity pick up since the New Year. We are still buyers in this market, and our strategy has not changed. That strategy is defined accretive acquisitions, which meet our ROI metrics and start producing free cash flow shortly after the deployment of capital. To finance these acquisitions, we will continue to use the levers available to us, which right now include the sale of bitcoin and equity. And as Zach mentioned, we have a shareholder proposal to increase the outstanding share count to 300 million shares. On that note, I want to emphasize that we will continue to be methodical and calculated when raising capital and deploying that capital as we're conscious of responsible equity management and want to be as efficient as possible when pulling any of our three levers. Additionally, the recent increase in bitcoin prices have allowed us to build back our huddle [ph] balance, a balance we will use to be opportunistic in the marketplace. Therefore, our huddle balance may fluctuate from month to month depending on the opportunities we take advantage of. So while we expect our huddle balance to increase over time, there may be fluctuations in our month-to-month reports, where decreases in our huddle are strictly for CapEx purchases that drive hashrate and cash flow. On a final note, we haven't talked much about the debt lever, but we continue to have conversations with lenders in this market. When the time is right, we do expect to apply a small amount of leverage to our balance sheet. And when we do so, we believe it will be at a reasonable cost of capital. On that note, I want to take a few minutes to also discuss what we believe differentiates CleanSpark from other mining companies. Exactly 1 year ago, Zach and I shared our vision and strategy with the goal of being a top 5 miner. Not only did we achieve that goal rather quickly, but we have also set the tone for other miners about what a proper and prudent business model looks like in this industry. You may remember, we stated that 100% huddle strategy was not sustainable and that our plan was to strategically sell bitcoin, and it was the prudent business decision. As we now know, miners who were previous 100% [indiscernible] have sold much of the bitcoin balance in 2022 and even recently in 2023, oftentimes at a loss compared to what they minded at or even purchased bitcoin. We believe that our selling of bitcoin is strategic, not idealistic and it is that strategy which has helped us experience the high growth we've reported over the last year. We're thoughtful and calculated buyers in this market, seeking out accretive acquisitions. And as you can tell from the deals we have completed in the past 12 months, we have been successful in sourcing and closing transactions to not only grow our percentage of the total global hashrate but also produce meaningful bitcoin and cash flow. In closing, we can't underscore enough the value of human capital and that of our team members. They are the secret sauce that make this work. While there have been macro headwinds over the last quarter, I'm personally very excited to see what 2023 brings as we believe this will be a year of continued execution and growth. Thank you, Gary. Audra, this concludes our prepared remarks. We would now like to open the line for questions from analysts. Hi, guys. Thank you for taking my questions today. My first question is on your capital management and allocation strategy. In our view, bitcoin prices still look subdued at these levels. So at what point do you think you might start holding on to a larger portion of the bitcoin you're mining? And what factors would you need to see before making that call? Hey, Mike, it's - good taking. Thanks for joining the call. Just like we said, we always approach this very strategic rather than with an ideological approach. We will look to measure this really by the market indicators. We agree with you. I think that bitcoin is, as I said, the tides are turning, and I expect to see a change of direction, which is why we do intend to see that huddle [ph] balance grow. But again, strategy over ideology is how we want to approach this on a real-time basis. With that said, I'm going to let Garry add a little bit to that. Yes. Thanks for the question, Mike. I think you can look at the huddle balance, particularly at these bitcoin price levels to be directly reflective of what our margins are. So as the margins expand, I'd expect the huddle balance to accelerate. But right now, we're really managing on a day-to-day basis because Zach sees a lot of deal inflow, whether it's infrastructure or bitcoin miners that are available on the market. And by having that balance of bitcoin, we can quickly strike and close a deal with a matter of a couple of days if need be. So we'll continue to use that opportunistically. But really, that huddle balance is going to be reflective of bitcoin prices directly and the margins thereof. That's great. I appreciate the color. And any additional color you can provide on the greenfield sites you're evaluating to support the growth plans for the year, specifically, if you could talk to any locations that you're considering? And if these sites offer an opportunity to lock in any PPAs? Yes. So everything we look at, of course, can't speak to the specifics because it just wouldn't be appropriate to do so. The one thing I can say is we do have a criteria that they have to meet. And that is, of course, that's going to have a PPA that will give us access to low-cost power on a long-term basis. It needs to be in a community that we want to put in investment into. But ultimately, we're looking at a lot of opportunities in a lot of regions, and we're going to pick the very best, but they have to meet a very strict criteria we have. I can tell you that we say no to a lot. And all kinds of factors that go into that, not least of which, of course, important to us is the energy mix in addition to the cost. Yeah. Hi, guys. Thanks for taking my question today. Congrats on the continued execution and really great results in January. It's always great to see. For my first question, I'd love to dive into energy cost. Can you speak to how they trended during the quarter and what you're seeing so far into 2023? Thanks. Hey, Josh, great question. I'll jump into that. So 2022 was a challenging year. Everybody knows it on the energy side. Our third fiscal quarter, we had prices right around the $0.04 range on average. And all these prices I'm going to name are across our entire portfolio, owned and operated and the hosting. Q4 fiscal ending September, we saw those rise and they were right around $0.05. And last quarter, we did see prices start to average around $0.06 is where they rose to. With that said, we were able to navigate those really well because of our active energy management strategy. But also most importantly, we've been put in a position and we've recently seen power prices as low as $0.018 at our facilities. We're consistently seeing prices in that $0.02 range. And right now, if you do a look back at, for example, at the last 7 day average, we are seeing across all our entire portfolio an average price at $0.031. So we really saw December be a tough month, and then January was - it looked great. It was kind of the godsend that we needed to shift tides and bring the margins back where we want them to be. Understood. That's very helpful color. Appreciate that. And then looking forward to the rest of 2023, can you provide an update in terms of your relationship with MEAG right now and how you're thinking about power costs for the rest of the year? Thank you. Yes, absolutely. We're having really constructive conversations. One of the things we're finding is the active energy management strategy we're deploying, we're actually outperforming the fixed price opportunities that we have in front of us. And so based on that, we feel like patience is going to be part of our strategy in dealing with them. And the reason that is, is because when you buy a locked-in power strip, for example, you - the other side of that, the hedge is really making a bet on the upside or the downside. And our ability to manage and avoid a few hours here or a few hours there, again, our average power price is outperforming this. So I think that there will be the right time, and that right time is going to come as the energy markets continue to drop in energy prices. We follow the energy markets very closely. And we think that wholesale prices, especially where we operate, but probably the country as a whole are on a really positive trajectory. And this winter being a mild winter and what we're seeing happen with natural gas prices, we think it's a little early to strike, and we're going to wait and cool our heels until we pick it because it's going to lock in something for a long term, and we want to make sure it's as low as possible. And that's going to happen as the energy providers really do see this impact their long-term forecast of what they're going to generate on their side is energy providers and revenue. Hey, thank you. And good afternoon, good evening, everybody. And thanks for taking my questions. Zack, I was - thanks for all your detail around the path towards that 16 exahash. I did kind of want to talk about or kind of get your thoughts around. Clearly, there is a lot of opportunities on the M&A side. It sounds like of physical assets. But just given the fact that CleanSpark, you mentioned the low leverage, you kind of have differentiated or started to differentiate yourself as an operator. What is potential appetite from CleanSpark and what type of opportunities are you seeing to kind of continue to go down the co-hosting route? Is that something that you have any interest in doing just as you think about whether getting to 16 or even potentially higher later this year? No, that's a great question. And I think it's an important question to ask. And as we spoke to in there, we really think that the proprietary mining model provides us with the reliability and efficiency that we really want to see. We have a great hosting partner, but I can tell you that our team is dedicated to the two things that are going to directly benefit us in a way that produces better results. And I think that, that's just a natural human thing that happens. And the human component of what we do, we think, as Gary said, is the secret sauce. So our growth, we really plan to push directly towards being proprietary mining. We do see being hosted and to have a time and a place, but that should really be when we seek out flexibility or when we have opportunities for miners without a place to give them a home. But even then, I would say we would look to rotate that into a proprietary mining model on a long-term basis because we truly believe we can produce better results. Okay. And to that point, there was a slide where you kind of had your progression and maybe it was just the optics [ph] of the slide, but it looked like the amount of hosting or co-hosting I guess, it looked like in '24, '25, that comes down. Is that related to existing contracts you have that potentially roll off? We don't plan on - right now, we have 50 megawatts of capacity hosted. And we don't plan on that increasing in the near terms or anything that we put up on the slide. So really, maybe it's just scale, showing our increase in proprietary mining, but we really plan on holding status quo is really the game plan now. We don't really plan on changing anything in our current relationship because we're going to keep those miners running in hashing. We'll probably keep them there until they're end of life or until we make a different decision. Okay. And then just realizing it's still a developing technology, but it seems like it's gaining traction. As you think about opportunities to continue to build out your infrastructure, any kind of leanings or thoughts around immersion and the potential how you think about maybe deploying that at future sites? Yes. We've had a great experience with our immersion facility right now in Norcross. And we are absolutely evaluating that at the Sandersville site, maybe incorporating that into part of it. In our expansion in Washington, we're not. And I'm going to tell you why it really comes down to capital. It takes more capital to build the infrastructure that supports immersion cooling. Now in the current market that hasn't been as supportive in the Nexpo [ph] market, I think that, that changes a little bit. What we really like, though, about immersion mining is that it does give you flexibility overclocking, underclocking, there's a lot we can do with it. But we're also seeing advances in what we can do overclocking, underclocking in an air cooled environment. So what this ultimately comes down to, and we - there are opportunities we're evaluating. It's closing that gap for the capital it takes to build air cooled versus build immersion. And as technologies improve and get better and that gap begins to close, that's when we'll likely make bigger moves towards immersion cooling. Thanks very much for taking my question. So I guess, taking a little bit of a longer-term view, how are you positioning the company ahead of the 2024 happing [ph] And how do you see that impacting the competitive landscape? Yes. Our positioning is to always increase the efficiency of our miners. So you'll see in the 10-Q, we identified that a year ago, our average fleet efficiency was about 35 watt or tools per terahash, and we've improved that to close to 31%, and we plan to continue to improve that. So always staying in a place where you're upgrading and improving the efficiency is really step one. Step 2, this is where we think investing and building our own infrastructure matters. It's a onetime long-term investment that puts us in a position where those long-term cost of operating are lower. That will give us a better advantage into happing. And then lastly, it's making sure we're pulling every single string we can on the technology side to be in the right position because I think from a competitive landscape, there's going to be a lot of hashrate that drops off when it occurs for the low performing or the least efficient miners. And it's important that we are not only just the most efficient at the time as we can be, but we are deploying technologies, as I mentioned, to both underclock and overclock. And when you underclock, you can actually take a machine, bring down attach rate a little bit, that add significantly more efficiency than it did remove hashrate. And so making sure we're on the cutting edge of all three of those factors is what's going to be really, really important. Brian, I just want to add a few things to that, too. We talked about our base case this year is executing that 16 exahash. But we don't feel compelled to go out and have to do M&A. But obviously, if we see a good deal, we'll take advantage of that. But really looking and having if bitcoin is not at, call it, close to $40,000, we think that there's going to be a lot of smaller miners and potentially private miners that can't access the capital markets. They're going to have trouble. So we really want to position the company to be able to pick off infrastructure and assets at good deals similar to what we've done in the last six months or so. So really from a positioning standpoint, we really are looking forward to some opportunities right around having of some other companies that want to get out of the game. All right. I'd like to thank you for your questions and for joining us today. We wish everyone listening a good afternoon and a good evening. Back to you, Audra. Thank you. Ladies and gentlemen, with that, we'll conclude today's conference. We thank you for attending. You may now disconnect your lines.

EarningCall_145

Thank you, Jennie, and good afternoon, everyone. Onto Innovation issued its 2022 fourth quarter and full year financial results this afternoon shortly after the market closed. If you haven't received a copy of the release, please refer to the company's website where a copy of the release is posted. I'd like to remind you that the statements made by the management on this call will contain forward-looking statements within the meaning of the federal securities laws. Such statements are subject to a range of changes, risks and uncertainties that can cause actual results to vary materially. For more information regarding the risk factors that may impact Onto Innovation's results, I would encourage you to review our earnings release and our SEC filings. Onto Innovation does not undertake the obligation to update these forward-looking statements in light of new information or future events. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. And as a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. Thank you, Mike. Good afternoon, everyone and thank you for joining our call today. With our strong finish in the fourth quarter Onto Innovation has achieved an exciting milestone crossing $1 billion in revenue this year. Throughout the year, we saw consistently strong demand for our systems with revenue growing 32%, well exceeding market estimates of 9% growth for wafer fab equipment in 2022. Even more exciting, earnings for the year grew 43%, while we increased investments in R&D, manufacturing capacity and established new training centers closer to our customers in Asia. Beyond the strong financial performance, we expanded our position in several areas of future growth. Starting with advanced nodes, Atlas Optical Metrology has been qualified by all three of the market leaders developing gate all around transistors. This increases our logic opportunity by over 20% versus prior nodes. In NAND, we extended our already strong position with Atlas OCD by qualifying our aspect IR metrology at four of the top three -- top 3D NAND producers for measuring critical parameters of NAND with over 230 layers. Moving across the value chain to specialty devices and advanced packaging, our latest inspection products have proven themselves capable in sub-micron applications in both front end and advanced packaging. This year, we had over 15 customers replaced the incumbent competitor's tools with the Dragonfly G3 for submicron inspection. We estimate this to be one of the fastest growing segments in our macro inspection market. Finally, in panel packaging, we finished the year with roughly $40 million in revenue and expect to double that in 2023. We estimate this market to be roughly $280 million with Yoel projecting a CAGR of 12% through 2026. This high level of performance across the value chain would not have been possible without the passion and talent of our entire global team and their unrelenting commitment to our customer’s success. Based on these results, we see even greater years ahead for our Onto Innovation team as these technologies migrate into production. Now, turning to our fourth quarter, we capped off this record year with revenue of $253 million above our midpoint of guidance. However, earnings of a $1.57 per share was well above the high end of guidance aided by favorable tax and investment income, which Mark will speak to shortly. In the fourth quarter, revenue from our specialty and advanced packaging customers grew 22% sequentially, setting a new revenue record. As expected, leading that growth was our power and compound semi markets, which grew 54% over the third quarter. Several of these customers selected Onto Innovation specifically for connected solutions, integrating software and systems to improve yield. For example, aligning patterns layer to layers particularly challenging in compound semiconductor applications, do the use of thick transparent materials by employing Discover Run to run software to analyze our overlay data and other process data, we're able to automatically provide more precise corrections to the lithography systems. This improves layer-to-layer accuracy by over 50%, translating to several million in additional yield per year. In the quarter, our inspection sensitivity and compelling cost of ownership resulted in several notable wins and hybrid bonding for future 3D chip stacking applications. In addition, Dragonfly G3 inspection was selected to provide process control to a supplier of many LEDs for next generation displays of a leading smartphone manufacturer. The mini LED market is still small, but we expect additional orders in 2023 from this customer as well as others ramping to support growth estimates of 22% annually through 2028. Turning to the advanced nodes, after a record, third quarter revenue declined 23% impacted by both the US restrictions announced last October and market declines in memory, especially NAND. However, looking deeper, we see nearly half of our advanced nodes revenue in the quarter was in support of R&D and pilot line production of next generation nodes. As mentioned earlier, this included the sign off and repeat order for Atlas Metrology at our third customer investing in gate all around technology. We also successfully completed an aspect metrology evaluation at our fourth leading NABD manufacturer. The aspect IR metrology is the only inline solution for characterizing lateral recesses, which are critical to maintaining the correct electrical parameters for NAND. Prior to aspect metrology, customers would resort to far slower sampling measurements using offline x-ray systems. Finally, in the fourth quarter, we won tool of record position for Iris Films at another top five semiconductor manufacturer. Since its market released two years ago, Iris Metrology has now been qualified at three of the top five semiconductor manufacturers, as well as several new power device customers. So even while factory expansion slow, our customers are fully engaged with us to develop and deliver the solutions they require to successfully migrate their new technologies into full production. Before I go into our outlook for the first quarter and give some color on the year, I'll turn the call over to Mark for the financial highlights. Mark? Thanks Mike, and good afternoon everyone. As Mike highlighted, we get another strong quarter with fourth quarter revenues of $253 million up 12% over the same period last year, and $3 million above the midpoint of our fourth quarter guidance range. This strong fourth quarter finish helped us achieve the significant milestone of surpassing 1 billion in revenue in 2022. This is an incredible achievement for a team that just came together three years ago and started at a base of just under $600 million in annual combined revenue. We also achieved several other financial records setting company highs in full year operating income of $302 million in net income of $275 million, contributing to our strong financial performance for the year. Now I'll move on to quarterly revenue by market. Advanced nodes revenue of $85.3 million, grew 16% year over year and represents 34% of revenue. Specialty device and advanced packaging achieved $125.4 million in revenue, grew 15% year over year and represents 49% of revenue. Software and services revenue of $42.6 million was slightly down 1% year over year and represent 17% of revenue. We achieved 54% gross margins for the fourth quarter in line with our previous guidance range. We continue to experience inflationary pressures on raw materials and labor. Fourth quarter operating expenses were $61 million at the midpoint of our previous guidance and flat to the previous quarter. Our operating expenses slightly declined as a percent of revenue year over year and flat to the prior quarter. Our mixed within operating expenses shifted with more investment into R&D during 2022 to support the strategic programs, Mike highlighted earlier in his opening comments, which will help propel our growth during the next phase of expansion. Our operating income of $76 million, which increased 10% year over year, was 30% of revenue for the fourth quarter. A record level net income in the third -- in the fourth quarter was $78 million, or $1.57 per share, up 28% over the same period last year, and $0.17 above the high end of our previous guidance range of $1.25 per share to $1.40 per share. During the quarter, we had several one-time discreet tax items that positively impacted our full year effective tax rate, bringing it down to 10.4% as compared to our previous guidance range of 12% to 13%. Excluding the impact of these one-time tax benefits, we would still have exceeded the high end of our guidance range by approximately $0.01. Now moving to the balance sheet, our cash and short-term investments were $548 million with operating cash flow of $137 million for the year down from 2021 levels, driven primarily by the increase in inventory within the year as we manage through supply chain issues, increased safety stock levels, and ordered long lead time items. Inventory end of the year at $324 million as we continue to receive in key components within the quarter to support the growth in our lithography business and to service our expanded install base. One of our top priorities for 2023 is to optimize our levels of inventory and return to the mid $200 million range in 2023. As a result, we expect inventories to start declining in the first half of '23 and throughout the year. This will continue -- this will contribute to our free cash flow returning to historic performance levels of over 20%. Accounts receivable increase to $241 million in the quarter and our day sales outstanding increased three days to 87 days, primarily due to the timing of revenue and receipts within the quarter. As commented on during previous quarters, we continually assess our capital allocation strategy, which includes the balance between internal investments, M&A and share repurchases. During the quarter, we repurchase an additional 846,000 shares of common stock, bringing our year-to-date total share repurchases to just over one million shares resulting in a return of capital to shareholders of $65.2 million. The share purchases were executed under existing $100 million authorization. Now turning to our outlook for Q1, we currently expect revenue for the first quarter to be $200 million plus or minus three percentage points. We expect gross margins will be between 51% to 53% as we pivot from and manage through our manufacturing cross profile in place supporting our record throughout the year. For operating expenses, we expect to be between $53 million to $55 million. For the full year '23, we expect our effective tax rate to be between 14% to 16%. We expect our diluted share count for Q1 to be approximately 49.2 million shares. Based upon these assumptions, we anticipate our non-GAAP earnings to be between $0.80 per share to $0.95 per share. As we entered 2023, we have already started to execute plans to reduce annual spending in the range of $25 million to $30 million, which includes driving further operational efficiencies at our manufacturing sites, staff reductions, reduced discretionary spending such as travel and outside services, while offsetting our annual employee compensation increases. With these efforts, we expect to move back into our long-term operating model when industry growth returns. Thank you, Mark. As Mark just mentioned, we expect a slow start to 2023. For the first quarter, we see specialty and advanced packaging declining by mid to upper teens, impacted by both the broader market slowdowns and the effects of seasonality. We expect advanced nodes revenue to decline by an estimated 30%, primarily due to sharp reductions in memory spending and restrictions in China. Looking beyond the quarter, we see customers reducing wafer starts or delaying expansion plans in response to the current oversupply of chip inventories. Advanced logic investments continue, but higher volumes are not expected until 2024 with slowing smartphone sales driving down utilization of lines and advanced packaging. Overall, wafer fab equipment spending estimates are down 20% for 2023. However, analysts at Stifle and Morgan Stanley are forecasting equipment spending to be down an estimated 30% after excluding front end and lithography spending. Despite this weakening environment, we remain confident in our thesis for outperformance, which includes backlog to support our lithography business doubling in revenue This year, novis Edge inspection increasing 50% to support EU wafer manufacturing, and we expect revenue from our power and compound semiconductor customers to grow. This year, in total, we see at least 70 million in incremental revenue from these markets giving us a range of market outperformance that is down about 18 to 22% year over year. In response to the industry slowdown, we've taken steps this quarter to reduce our overall expenses by about 11%, which includes both operating and manufacturing expenses. The majority of these reductions were invariable costs with minimal impact to our full-time employees. The adjustments will allow us to maintain a healthy financial model while continuing to invest in the r and d programs critical to our customers. We'll also take advantage of this time to focus on supply chain initiatives that will strengthen our margins and again, move us closer to our long-term operating model when growth returns to our markets. So though timing for that return to growth is not clear, the longer term estimates for chip growth has not diminished and is currently estimated to be 1 trillion by 2030 nearly doubled the current demand. In addition to strong unit growth, the complexity of the device is increasing and thus requiring additional process control innovations at a higher capital intensity to maintain viable yields. This is a great environment for to innovation, to continue to expand our customer partnerships across the semiconductor value chain and contribute to the introduction of the exciting new devices that will enable a smarter, greener and more connected future. Hi there. Good evening. Thanks for letting us ask a few questions and Mike, maybe just to clarify, I think what I heard in the remarks, but the way you're kind of aligning the year at this point, do you see revenues down, was it 18% to 22% year over year? And I guess that would let me, okay, so to clarify that, and I guess do you see maybe revenue tapering off a little bit further into 2Q and then maybe stabilizing there and kind of flattening out for the year? Is that sort of the contour that you're anticipating or is there sort of a different pattern? We see a lot of movement right now. That's what we believe. We think we're going to stabilize Q1, Q2 and start to see some improvements. But again, there's been a lot of movements both in and out. We've seen movements into Q2, we've seen movements out, but right now, we're expecting that to be flattish maybe slightly up from Q1. Flattish is slightly up. Okay. How about gross margins relative to margins, relative to some of the cost reduction efforts that you talked about? I think the $25 million to $30 million for the year. Are they focused, sort of balanced between OpEx and above the line, or how should we sort of maybe dial that into our models? Yeah. Brian this is Mark. Yeah, no, I think, I would say it's probably 60-40. There's definitely more down in the OpEx because I think there's a little bit more discretionary in that level related to traveling and other third party services and things like that. We are looking at all areas of gross margin as well, driving efficiencies there. We've had some benefit from freight reductions and things like that. So that will flow through margin. Okay. Got it. That, that's helpful. And then I, I, I guess tied to the gross margin guide for q1 obviously there's some, some volume impact there, but how much is Nicks coming into play there? It sounds like, you know, the panel lithography business should still be incrementally strong this year. So how much is maybe Nix related to in that gross margin guide? Yeah, certainly there's, there's some amount of mix in there, but I think the bulk of it is being able to make the adjustments relative to the change in volumes, the adjustments to manufacturing costs and capacity relative to the change in volumes. So that that's the bulk of it. There is some impact of a relatively strong lithography quarter, so it's nearly 50% greater than the prior quarter. But we do expect margins to start to move back into our level even as, as early as q2 and moving into the second half of the year. As well as, as a reminder, we did say we're gonna have incremental improvements throughout the year on the lithography tool margins and the end 2023 with those margins at Target. Yeah, thanks for taking the question and congratulations on all the financial records and calendar 22 guys. Nice to see. I wanted to start just by digging a little bit deeper into the cost savings. So nice to see that you're protecting margins. The question is for the, the savings that look like about $16 million in OpEx and $11 million in COGS. How much of that is included in the guidance that you've given for the first quarter and then with with some incremental benefit through the year? How should we think about the linearity of what's left beyond what you realize in one Q? Yeah, Craig, it's Mark. Yeah, no, certainly a portion of that, those savings are in our, our guide for q1. We've, we've certainly t0ried to start executing even at the end of Q4 to have those reductions be impactful to our Q1 guide and our results. There's certainly a lot of work we still need to do and we plan to do as, as we said to, as Mike just made note that the improvement around margin that'll occur in Q2 and beyond. We will see obviously historically Q2 does you know, pop up from an operating standpoint with the annualization of, of our merit and other stock-based comp items. But again, we're, we're doing our best and we've got plans in place and we've done we started to execute to offset those as much as we can. So I think you'll see, I would say it's probably proportional throughout the year. And you know, we're gonna continue to look for areas to drive the efficiencies up. Yeah, I would say there are some elements in q1, but I see, I think you'll see the majority of that. You're right, probably in Q2 and beyond because I think it's the Yep, No, it's just, it's just the pivot from Q4 into Q1 and just looking through the kind of the overall absorption and volume issues. Got it. And then Mike, just very helpful to get your view on industry generally and, and where the company we'll shake out. It looks like the excess growth to industry is pretty similar to what you saw three months ago. If we take litho out of WFP, we're about minus 28, your midpoints minus 20. So that's about the 750 basis points you were looking for before -- is that the right read and related to that, it looks like, at least versus my tracking and litho is up a little bit versus what we were expecting before. I was looking for 60 this year. I think you talked about 80. So just help me frame the macro and then come back to the micro point on panel litho. So definitely since our last call in November, we've seen, let's say more of a pullback a more broad pullback from, you know, as I mentioned in my prepared remarks from the, the advanced nodes, even logic a little bit, but DRAM and memory NAND and dram, very significant pullbacks and then even in the packaging area. So, and as far as the -- what we're seeing, so that when we originally talked, we talked about a 20% down market, now we're looking at maybe a 30% down ex front end litho, so that looks to be where the market's leveling out. And based on the several areas of booked out performance and litho being, being one of the areas, as you pointed out, then we've had those bookings of the full $80 million in place with the -- and then the Novis Edge is also booked with that upside. And then we already have several orders for compound semiconductor manufacturers that have bought complete suites of tools, which is quite exciting. The value proposition of our broad portfolio and the connected solutions we have with the software is really resonating in the compound semi market. So we see bookings there going up primarily from power customers, and that's part of why we believe we're going to -- why we're confident in our thesis for our performance in 2023. Yeah, just on that last point, Mike, I think if I think back over the last 18 months, we first started seeing customers buying full suites of tools, and I think I remember seeing that in DRAM and NAND and so now you're seeing it as well and compound semi. So it seems like the solutions that you're offering are really resonating and any thoughts on what the demand profile looks like, more intermediate term beyond just 2023? How do you look at the growth potential compound semi on a multi-year basis? Oh, we think on a multi-year basis we think our position in Compound Semi is just in the early stages of building out. We've always had a very strong software focus there and we have a good software position. But as far as the inspection and metrology, that hasn't been as big a focus as we, as we looked at other areas. And now what we're finding out is there's a number of high value problems that, for instance, our submicron resolution for the inspection, many of those 15 customers were tied to several of the 15 customers those 15 customers were tied to power applications. And then the metrology where it wasn't really promoted to those customers we're finding some real opportunities as far as the size, what you asked for. We haven't really looked at 2024. It obviously depend on their, on the continued growth there. The numbers we see is double digit continued growth, annual growth rates, at least for the next few years. So with that, we expect to grow better than that. Better than double dig? Well, I mean, if it's, if it's 10%, maybe we're going to grow another 50% better to 15% or 20% based on the, the fact that we're introducing new products into a broader portfolio or suite that seems to resonate with the customers and it's solving real, real problems for them. Sorry, I just mentioned it's also solving. Yeah. Yeah. We've been picking up data points that the yields are certainly tough in certain areas of compound semi, so your solutions would be quite appropriate. Lastly, I, I think you mentioned that there were three specific initiatives thin films, Novis Edge and Panel that could add an incremental $70 million of revenue. Looks like panel would be about half of that. Did the other two shake out about 50% each or how do we think about the relative contribution of the three? So thin films is additional upside that could be potential upside. So we mentioned a lot of that, but a lot of that is tied to some of the front end, right? So we're, we didn't mention that what we said was Novis Edge and then compound semi power devices and that includes a suite of products, but it's the power market that we see driving fairly good growth. As far as the shakeout, I'd say it's 50-50 of the other $30 million, right, 50%. So $15 million each, roughly. Just wanted to maybe follow up on the compound and power market. I think last quarter, you said it was the second largest segment. I apologize if I missed what you said it was this quarter, but wondering if you could just sort of give us a size, how big is that business for you now on an annualized basis. Quinn, we don't break it out, but it's definitely becoming a more significant -- I'm looking now -- it's definitely becoming a more significant part of the business. It remains one of the largest segments in the fourth quarter. It grew a lot, but we also had a lot of foundry logic spend as we mentioned, DRAM tank, the foundry logic stayed okay. So it's still relatively second in the categories, which is a high. And like I mentioned, it grew 54 -- 54% quarter-to-quarter. So does it continue that way? No, I don't think so. It's a lot of small numbers right now, but does it continue double digits. I think that's reasonable. Got it. Got it. Okay. And then just thinking about the year, you guided to $200 million at the midpoint for the March quarter. If I just look at your down 20% outlook for 2023, for the $1 billion base, it kind of feels like you're going to run rate at about $200 million for each of the 4 quarters. And so I just wanted to make sure that I'm thinking about the linearity. It sounded like in response to an earlier question, Mike, you thought maybe there was a little bit of chance for growth in Q2. And I think previously, you were looking for a slightly stronger second half. So just trying to get the shape of the right in terms of your current expectations. Yes, Quinn, I think that's about right. Obviously, things changed a lot from last November when we first guided. So we're just trying to reflect what we believe is a -- I guess, a bottom end scenario. And hopefully, we can start -- as we start getting better visibility and seeing more of the of the other activity, packaging, for instance, we'll see what the smartphone refresh cycle looks like, et cetera, 5G transition when we move past this inflationary period and recessionary mindset, and we'll see what that does to inventories and then further expansions. But right now, that would sort of be our bottom case. Got it. Okay. And then I guess for Mark, it sounds like with the cost reduction actions you can get back towards a 54% gross margin in Q2 and if not Q2, certainly by second half of the year, but that's on kind of flattish revenue. As I look into '24, '25 to the extent revenue gets back to the $250 million or higher quarterly level, it feels like there'll be some pretty good absorption benefits to gross margin. So I guess I wanted to ask you, getting to 55% or 56% feel like you can get there pretty easily. Just on an absorption basis. And so I wonder, are there some cost offsets that maybe come back as revenue starts to grow that would pressure margins? Or do you think that getting to 55%, 56% or maybe even higher as revenue recovers is now possible with some of these cost reduction actions you've taken? Yes. No, Quinn, you're absolutely right. I mean, our goal is obviously to go through and have these reductions be effective this year, helped drive the profitability and stay where we stay, stay in that range of that higher margin and maintain the OpEx. But certainly for '24 and beyond. I mean, our goal is to get quickly back on track to the long-term operating model and have -- reap the benefits of the, I guess, the operational efficiencies that we're trying to drive in '23, so. Yes, Quinn, it's kind of funny to say, but never let a good downturn go to waste. And so what we mentioned is we're going to still invest in supply chain initiatives and some of the -- remember, the second level synergies we talked about after the merger that we never got to because we were just so growing so fast. Now we have a chance to get to those, and we've got some pretty aggressive plans to try and complete some of them this year, so they'll be impactful in 2024. So there's quite a bit of strength that we hope to bring into our foundation for 2024. Great. And my last question was just really, I guess, a clarification on the lithography margins. Mike, I think you said that you now expect to get to kind of target levels by the end of 2023. I thought previously you thought some of those margin improvements might not happen until '24 because of the time to increase manufacturing and just time to reduce component costs. And so I'm wondering, have you been able to pull in some of that margin benefit or perhaps improve pricing that's leading to better margins? Or did I misinterpret your comments around lithography margins? Yes. I think it's a little bit of both. We've been very aggressively pursuing the margin situation, both from a cost side as well as a little bit on the pricing side. But we're also seeing some of our advances, we're able to show some of the new advanced technology we're beginning to release where we're seeing the ability to charge for the value of that, where -- 2 years ago, when we booked a lot of these orders, we were still selling PowerPoint presentations and demo lab equipment. So they didn't really get to see. Now we've proven, we're understood with the capability is clear, and we're able to charge more of the value for the new capabilities we're bringing in, whether it's overlay upgrades or illumination and throughput upgrades and things like this. So first, I want to follow up on the industry commentary. I was wondering what's your thoughts on the memory downturn, like given your conversation with the customer, when do you think the memory spending could resume? I would say at the earliest, it's the tail end of 2023 and possibly into 2024. The caveat to that is -- that would be production, but there could be some spending in R&D. So more spending in some of the high stack 3D NAND lines, which are still in the infancy. We could see that where the customers want to -- when they go to market, be more aggressive with their newer products going to market and hopefully make up some of the ASP erosion in this similar story in DRAM. So that will be the inflection -- or that will be the decision points that our customers are thinking through. But right now, there they're really focused on watching the inventory levels, watching ASPs and working this through the supply chains. Got it. Okay. And then given in your prepared remarks, so the [indiscernible] that's being selected by [ O3 ], the manufacturer for the gate-all-around transistor. So does that imply you have 100% market share? And just wondering, is there any competition on that. There is competition. So we don't have a 100% share but that's what we're fighting for. So we're -- depending on which customer we talk about, our share position is different, each one. In general, we're fighting to achieve over 50% share, and we have that at the majority. And if I take the average, it would be well over 50% market share. If I take the -- the average of all three of them. And again, these decisions aren't fully made, so we continue to fight and try and bring more layers onto our systems. We're also looking at the gate-all-around transistor is the hardest thing to measure, but we're also looking at moving outwards outside of that into the back end of line metalization layers that are further downstream. They're a little easier. But again, with our platform, the capability of our platform to be optimized for price performance, we're better suited for those applications as well. It's definitely higher in my remarks. I mentioned that based on this, we would expect at least a 20% improvement in revenue based on the dynamics of higher capital intensity and higher share versus prior nodes. Yes. Got it. Okay. And then -- and then also, I was wondering you mentioned like mini LED, it sounds smaller right now, but it seems like it could have some potential here. Just wondering how would you characterize the size of the opportunity from mini LED? I chuckle because I have got several display customers, and they have different opinions on the mini LED. So I want to be a little bit careful. I think there's certain applications where the mini LEDs are being looked at and certainly very aggressively by one of the large smartphone manufacturers. Whether or not that proliferates and becomes the new display type, replacing AMOLED displays. I'm not sure yet. There are certainly different opinions from the experts in the display manufacturing. Okay. Got it. And then lastly, just I'm wondering if you have any update on the capital allocation strategy. Just especially in just given like you have a very healthy balance sheet. And would you kind of see more share buyback? Or would you kind of prioritize for M&A and so on? Yes. No, definitely, as we look at the capital allocation, I mean, if the opportunity presents itself based on our set criteria for buybacks, we will execute that in the quarter and continue to do that within the approved limits. And we're also, of course, looking for M&A opportunities and being as aggressive as we can there. It's a great time right now. So we'll continue to search that as well. Yes. One of the things, I think, in your press release, you're talking about how your Dragonfly system is qualified, I think, to do some hybrid bonding applications. Could you just talk a little bit about what's going on in that particular product line in area? Yes. So it turns out one of the critical issues with hybrid bonding is the surface roughness of these pads. And when you're pushing them together, any kind of deformity particle or issue with the roughness, you have a bad adhesion. And of course, it just takes 1 of the thousands or millions of interconnects per die depending on what we're talking about here, to then now destroy two packages that you've just tried to connect. So the ability for the Dragonfly G3 to not only have the sensitivity to detect the defects but also leveraging the ADC to eliminate all the nuisance defects so the customers can really focus on the true yield killing defect, that's a big advantage. In addition, you may recall the Clearfind has always been a source of a reliability like improved reliability, where RECIST residue, which can't be seen through normal optical techniques can also be on these pads, and you can have a good bond. You can have an electrical test okay, but because of the RECIST residue, that born through heating and cooling and from cars and taking your phone out, walking around in the weather, you have a break. It ends up being electrical failure. So that is another big advantage for the Dragonfly G3. Okay. And -- regarding your compound semiconductor business, is the recent increase in growth rate, you talked about power. I was just wondering, is there a significant contribution from silicon carbide at this point? Or -- is that a focus? Or can you help us understand what your exposure is there? Yes. We definitely have seen more interest in growing interest from silicon carbide. It's still a small part of the overall power, but it's certainly a fast-growing area and an area that people are investing a lot in, and they have a lot of yield issues. So we're engaged there. But I'd say from the growth we saw in the last quarter, it was, I'd say, less than half, maybe 1/3, maybe a little less than 1/3 of silicon carbide and the rest GaN and some other compound semi applications. And then final question for me is you talked about additional qualifications, I think for the Iris tool, but it wasn't on the list of products that are going to grow on a year-over-year basis. I'm imagining that's because of the memory sector, but -- maybe just give us a little bit more color. I think that product was a quarter ago was expected to grow year-over-year. And now you've excluded on that list. And so -- is that the area where you're seeing the most reductions to kind of adjust for your new guidance for next year? Actually, the Iris is going to grow, but not as significantly as some of the other products. So -- and it's relatively mild growth is in the face of several of those customers reducing expense fairly significantly. You mentioned the memory, memory is expected to be down 50% for wafer capital equipment. Logic will also be down maybe in the 10% to 15% range. And yet, our Iris platform based on the initial penetration and the new customers that continue to adopt it and including some power customers that are adopting it. The Iris platform will grow, but it will be incremental. It won't be huge. The beautiful part is we're planting all these seeds across the major customers. So when expansions do occur next year, hopefully, maybe earlier this -- late this year, we should see fairly significant growth in Iris. Let me add my congratulations on a very good year in 2022. I was wondering if you could estimate in terms of the projected sales decline, what percent of that is coming from the -- related to the new U.S. restrictions? Okay. There's been a lot of funding by the U.S., Europe and Japan, as well as several new fabs that have been announced and are currently come up, but you're not optimistic. Are you optimistic when these -- these opportunities will start to show up in orders for you, will be more 2024. We're seeing orders now. So from -- although that's not chip sac money, but some of the -- like the TSMC fab going into Arizona, we're seeing orders now. So -- so those incremental orders are happening, but the Samsung Taylor fab, the Ohio fab from Intel, et cetera. I don't think we see any real significant volume of orders until 2024. And at this time, I would like to turn the call back to Michael Sheaffer for any additional or closing comments. Thank you. We'd like to thank everybody for joining us today. A replay of the call will be available on our website about 7:30 Eastern Time this evening. I would like to thank you for your continued interest in Onto Innovation. Jenny, please conclude the call. Thank you.

EarningCall_146

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Xpress Enterprises, Inc. Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It’s my pleasure to turn today’s call over to Mr. Matt Garvie, Vice President of Investor Relations. Sir, please go ahead. Thank you, Operator, and good afternoon, everyone. Welcome to the U.S. Xpress fourth quarter 2022 earnings call. Eric Fuller, U.S. Xpress’ President and CEO, will lead our call today; joined by Eric Peterson, our CFO, who will discuss our financial results. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that can cause actual results to differ materially. These risk factors are described in U.S. Xpress’ most recent Form 10-K filed with the SEC. We undertake no duty or obligation to update our forward-looking statements. During today’s call, we will discuss certain non-GAAP measures, which we believe can be helpful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. As a reminder, a replay of this call will be available on the Investors section of our website. We also have posted an updated supplemental presentation to accompany today’s discussion on our website at investor.usxpress.com. We will be referencing portions of this supplement as part of today’s call. Thank you, Matt, and good afternoon, everyone. Today, I’d like to discuss high level results across our business in the fourth quarter. What gives me confidence that we are moving in the right direction and following Eric Peterson’s financial commentary on the quarter, I will provide our current outlook for the freight market. 2022 was a year of transition for U.S. Xpress, as we executed our realignment plan, transitioned our OTR operations back to a more traditional model focused on ensuring freight is delivered on time and in a cost effective manner for our customers and recently transitioned all Truckload and Brokerage operations under one leader, just in harness. The heavy lifting associated with our realignment plan is complete and we began to see cost savings in the fourth quarter from the actions we have taken since early September. Overall, I was pleased with the progress we made in our OTR division and with our cost takeout initiatives from our realignment plan. Improvement in underlying metrics, including fleet availability, service level and utilization give me the confidence that we are moving in the right direction. From a financial results perspective, our spot market exposure more than offset these operational gains and cost savings from our realignment plan. Conversations with our customers continue to evolve. Our back to the basics message and our progress to-date continue to resonate well with them and has been instrumental in helping to add some incremental load volume despite the weak freight market. Feedback from our customers indicates that many are still working through some level of inventory destocking. Our pipeline of OTR freight opportunities is extremely robust, and we expect to make meaningful progress reducing our spot market exposure, as we navigate through bid season and begin to service new awards. Our customer base is heavily focused on industry-leading companies and defensive segments of the economy, including discount retail, consumer nondurables and retail grocery, which positions us well in the current market. The value we deliver for our customers is evident from the fact that many of our top customers have partnered with us for a decade or longer and use more than one of our service offerings. Our business development team continues to proactively add new logos to our customer base. We are excited to support these new customers and demonstrate the value proposition of partnering with U.S. Xpress every day. Turning to our Truckload segment. We generated Truckload revenue net of fuel of $397 million, a sequential decrease of approximately $5 million, primarily due to the spot market rates declining sequentially. Consistent with what we said on our third quarter earnings call, we exited the fourth quarter with a fleet that was approximately the same size as that which we exited the third quarter. We will continue to be focused on improving the mix and profitability at our current fleet size. Turning to our OTR division. In the fourth quarter, although peak didn’t materialize, we continue to make progress driving accountability through our OTR fleet. Our service levels continue to improve, our percentage of empty miles decreased and we continue to improve the overall quality of our OTR professional drivers, as sourcing qualified professional drivers continues to ease. Exiting the fourth quarter, the structure and discipline has been implemented into our fleet operations and we are seeing the benefit of this in our current utilization levels. While we still expect some modest incremental improvement utilization from these efforts, to meaningfully improve our utilization, we need to add more freight to our network. As I mentioned earlier, our ability to service the freight we do get from our customers at a high level is critical to adding more contracted freight. Turning to our Dedicated division. Our Dedicated division exited the year with another strong quarter. This service offering continues to resonate well with customers due to its unique value proposition, which includes exceptionally high service levels. As we said last quarter, we want to work closely with our customers to identify additional opportunities where our Dedicated offering is a good fit for them. For 2023, we are targeting approximately 2,800 tractors in this fleet, but could increase that depending on customer needs. Turning to Brokerage. Our Brokerage segment generated revenue of $78 million and sequentially performance was similar in the fourth quarter compared to the third quarter. Adding more freight to our network will not only benefit our assets, but should also benefit the topline and Brokerage. Our margin performance has benefited from a lower capacity acquisition cost, with gross margins of 20% plus for the last three quarters. In addition, margins in the fourth quarter benefited from some project capacity that we provided customers, which helps contribute to our 92% operating ratio in the quarter. In the first quarter of 2023, we could see some margin pressure, as we won’t have the benefit of this project work. Looking ahead to 2023, I am confident that we are moving in the right direction as our operational issues were concentrated in our OTR division. We spent much of 2022 putting the building blocks in place to correct these issues. As I said earlier, the heavy lifting has been completed with fleet ops and we are seeing improvement in our underlying metrics, including service level, driver availability, percentage of empty miles and utilization. The market remains challenging, but it will turn and when it does, we expect our financial results to reflect the work we put into the business in 2022. Thank you, Eric, and good afternoon, everyone. This afternoon I would like to discuss our financial performance in the fourth quarter, as well as capital allocation priorities and provide some financial guidance before turning the call back to Eric to provide our freight market outlook. Turning to our performance in the fourth quarter. We generated revenue, excluding fuel surcharge of $475.2 million, a decrease of 0.5% compared to the third quarter of 2022. Consistent with the last few quarters, we are focused on the sequential progress of the business, and therefore, my commentary will focus on comparisons to the third quarter of 2022 unless noted otherwise. Turning to adjusted operating loss. Total adjusted operating loss was $5.7 million, a sequential improvement of $15.8 million compared to the third quarter. Sequentially, our spot market exposure was a headwind that could not be overcome by our significant cost reductions executed this year and our improved results in both Dedicated and Brokerage. Our spot rates declined another $0.20 per mile sequentially, which contributed to a $0.06 per mile decrease in our overall over the road rate per mile. In addition, in our rising fuel environment, this business also has an adverse impact on our net fuel expense, as most of these spot loads don’t have fuel surcharge revenue associated with them. As a result, our net fuel expense increased an additional $0.02 per mile compared to the third quarter. This combination led to an overall $7.7 million headwind to our results. Spot rates continue to be at record discounts compared to the contractual rates. For illustrative purposes, had our spot rate spend at par with our contractual rates in the fourth quarter, operating income would have been better by $25.6 million. Keep in mind, we believe the headwind from our current spot market exposure is transient as, one, we add more contracted loads to our network through the current bid season, which is well underway, and two, the spot market rates recover from record discounts as compared to contractual rates. In terms of positive sequential contributions in the fourth quarter, realignment plan related cost savings totaled $8 million and included reduced office wages of $5.5 million and an additional $2.5 million in other fixed cost savings. On an annualized basis, this represents $32 million in fixed cost and savings, which compares favorably to our prior expectation of $28 million, which we disclosed on our third quarter call. In addition, incremental Brokerage operating income of $2.4 million and the $0.04 per mile increase in Dedicated rates were also positives in the quarter. Turning to capital expenditures. For the full year, net capital expenditures, which primarily relate to tractors and trailers was $153.1 million, compared to $97 million in 2021. The year-over-year increase was due primarily to anticipated equipment deliveries in 2021, which were delivered in 2022, as well as fewer proceeds from the sale of used equipment. In our earnings supplement, we have provided a slide, which includes our net CapEx by category. Looking at the other two categories, both general and other, which primarily relates to renovations in our terminal network and technology which is primarily capitalized wages from our IT development efforts decreased year-over-year. Our technology-related CapEx was $24.5 million, a decrease of $7.9 million compared to 2021. Keep in mind that our realignment plan, which included a meaningful reduction in the size of our IT organization, didn’t commence until September, and therefore, we expect our 2023 technology related CapEx to decline on a year-over-year basis, once again, as our leaner tech work will focus on concentrating their efforts on fewer, higher value projects. For 2023, we are currently expecting net capital expenditures to be less than $75 million. Our equipment is currently in excellent condition and the average age of our tractors is approximately 2 years old. Given our equipment is in such good condition and well maintained primarily through our in-house preventative maintenance program, we believe that we will not require significant capital expenditures during 2023. As we have said in the past, the per mile increase in maintenance costs from aging our fleet in a disciplined manner is significantly less than the incremental per mile cost of new equipment. We intend to take advantage of these to pay down debt and lower our leverage profile in 2023. Turning to net debt. At the end of the fourth quarter, net debt, which we define as long-term debt, including current maturities less cash balances was $481.9 million, compared to $369.8 million at the end of 2021. Over the next year, we expect to pay down debt and decrease our leverage through our disciplined capital allocation approach, divestitures of non-core real estate assets and improved earnings as the market turns. After the close of the quarter and not reflected in our fourth quarter results, we sold a terminal, which was previously being leased to an unaffiliated company. The sale generated cash proceeds of $6.5 million, which we used to pay down debt. Turning to liquidity. At the end of the fourth quarter, liquidity, which we define as cash plus availability under the company’s revolving credit facility was $106.1 million and we generated $43.5 million in cash from operations for the full year. Our overall liquidity position exiting the fourth quarter remained strong, providing us with ample liquidity to fund our business and serve our customers. As a reminder, we use cash generated from operations, together with our revolver to fund day-to-day operations, and use separate loan financing and lease arrangements to fund our equipment obligations. In 2023, we expect cash flow and liquidity to improve, as a result of lower net CapEx, improved operating profitability, and cash flows and debt repayment. Turning to guidance. To assist with your models, we expect the following; flat overall truck count as we focus on improving our mix and profitability at our current fleet size; moderate sequential improvement and utilization in our over-the-road fleet for at least the first half of the year; further sequential improvement in the second half is dependent on adding more freight to our network. In addition, for the full year, we expect the following, interest expense between 26 and $28 million and net capital expenditures of less than $75 million. Looking ahead to 2023, our priorities are clear; one, we must add more freight to our network to take advantage of our significant operational improvements; two, reduce our spot market exposure in our over-the-road business; and three, we must continue to manage expenses, deploy capital in a prudent manner and reduce our overall debt levels. Thank you, Eric. Looking out to 2023, we are anticipating a soft market for at least the first half of the year, as shippers continue to work through higher than usual inventory levels and there is too much capacity in the market relative to demand. In terms of capacity, although we haven’t seen evidence in the spot rate, we continue to expect smaller carriers to exit the market in the coming quarters as spot loads are less profitable, due to lower spot rates and increased delivery related costs, including higher fuel, equipment, maintenance and insurance costs. We continue to have an easier time sourcing qualified professional drivers and we have observed prices continue to soften in the used equipment market, both of which suggests some capacity is leaving the market albeit slowly. As far as how these dynamics will influence rates in 2023, there is still a lot of uncertainty about the rate environment. From our perspective, we will continue to price business in a manner that reflects the value we deliver for our customers and we are aggressively adding more contracted freight to our network, which should help to alleviate some of the volatility in our OTR rates as we progress through the year. In terms of 2023 priorities, we will continue to focus on what we can control, which includes; one, continuing to execute on the basics; two, servicing our customers at a high level; and three, reducing our spot market exposure. We expect the benefits from these initiatives, combined with cost savings from our realignment plan to positively impact our financial results as the market turns. So, Eric, I want to talk a bit about this drive from spot to -- well, first of all, where do you see spot versus cost of operations now, right? Maybe tell us how that is relative to cash costs? And then do we fear that you are converting to contract at the bottom right, is there a drive to say, hey, we want to get all this stuff on contract and then do you make a push that we are just doing this to get freight on the network, and therefore, we lock in the wrong rates, maybe walk me through that thought process, so we see how you progress in 2023? Sure, Ken. I mean if you look at where we started this down cycle, I mean we were in a different mode. We had a different strategy, and unfortunately, we had too much exposure to spot relative to our overall truck count and so we have gone through this period with way too much spot exposure. And if you look at the gap between spot and contracted times, it’s been as much as $1 a mile. And so, as we look at converting over into contracts, we can get a big pickup, even if we have to get a little bit lower than we would like from a contract perspective. So we are being selective on what contract business we are taking. We are trying to partner with people that we value from a relationship standpoint and those that we think have value long-term, but we do think that switching from spot to contract will have a meaningful impact to our results in this cycle and then will set us up to better manage our portfolio of freight and our network in the next cycle. Yeah. We hadn’t talked about it, but what Eric just said is, at times it was $1 per mile. But that’s -- he wasn’t saying that it was $1 per mile lower for the entire quarter, but just saying it reached levels as low as the dollar per mile. No. No. I meant the mix. What -- I think in the past you said, what, 30% of the base is spot exposed, do you talk about what percent is spot versus contract now? Yeah. It’s approximately -- yeah, I think, we disclosed that in the last quarter. We said approximately 30% of that over-the-road fleet and it’s slightly higher than that in the fourth quarter, but relatively consistent. Okay. And then, Eric, you talked about not growing the fleet and I thought you said in your commentary, it was flat, but I thought it was up and I am talking OTR, right? Wasn’t it up 200 sequentially in third quarter from second quarter and then another almost $200 million in the fourth quarter. So it seems like you have been growing or is your commentary that we are going to not grow it going? I am just trying to understand the difference there between what I am seeing on the numbers? Yeah. I was going to say, those are averages is what you are seeing to the average fourth quarter is higher than the average third quarter, but the exit rate of the third quarter and the exit rate of the fourth quarter were consistent. So that means you added and then removed, so what is that just deliveries and then you get rid of them through the quarter? No. I mean if you look at how managing a truck count is, I mean, when you are talking turnover anywhere from 80% to over 100%, there is -- truck count kind of moves around. It’s not something that I can sit here and say, we are going to be at this truck count and we are going to stay flat to that all the way through the quarter. It moves around. It could move around as much as 150 to 200 trucks at our size. And so that’s typical in any quarter and we try to manage that inflow and outflow. But if you hit, say for example, if you were to have a weather event or something like that, we could not get the drivers in for orientation that week and that could greatly impact our truck count. And in some cases, a single week like that could impact your truck count by 40 or 50 trucks and so you can have a big impact on that with some small movement. And so, we are always trying to manage it to this level. We are not -- over the next -- last two quarters and going forward, we have no plans to change our truck count or try to grow or shrink. But if you look at the average on a quarterly basis, it may look like it’s moving around 100 or 150 and that’s just normal operations. Got it. So that’s more seated truck count, right? So you are just not counting the non-seated, is that how to look at it? Well, because we are kicking that. The non-seeded, we are usually trying to -- if we don’t see that we are typically trying to divest of it. Got it. And then one last one for me, just to understand the math. Eric, you were -- Peterson, you were saying, we are moving kind of from CapEx, right, so reducing CapEx, but the liquidity available, but you are putting more of the -- I am trying to understand what you were saying there, the CapEx is not -- might not be cash CapEx, it might be more leverage, but that doesn’t count in your total leverage or did I not catch that in the right way? Yeah. I will just recap to be completely clear. What we are disclosing is that we have net CapEx for 2023 will be less than $75 million. And just to clarify there, too, we also have -- still have some noncore real estate assets on the market and so to the extent we sell and execute those transactions, we will give you another update and it will be even lower than the $75 million we are anticipating now. Liquidity, that’s where we talked, we are really just talking about the availability in our revolver, and since our CapEx is so low, we will generate some cash, we believe in 2023, which will increase our overall liquidity. So same liquidity was $106 million at the end of the year. I am saying my liquidity at the end of 2023, we believe that it’s going to be a number higher than that and we won’t burn through our liquidity during the year. Overall leverage, we had a challenging year in 2022, particularly in the third quarter, with over a $20 million operating loss that we believe that we are not going to have losses to that extent during 2023. So as these quarters roll off, not only will we have lower debt or earnings to be better, which will improve our overall leverage. I mean that’s really our focus during the year is just try and get as efficient as possible with the capital that’s already deployed and not throw new capital out there. I know I asked the few. I appreciate the time. Thanks for the thoughts and good luck for the bid season. Hey. I also want to circle back to the spot contract mix. As you guys think about targeting more of that contract rate, is there a particular mix that you are looking to target either year end or even longer out that you think is kind of the right balance going forward and as you look to do that this year. Any thoughts on the ability to kind of keep the contract rate either up or limit kind of how much price you have to give away to get that volume into the contract side of the business? Yeah. I mean if you look at it from a mix perspective, we would like to be below 20% as a percentage of mix of the over-the-road division or around 10% overall revenue and that’s probably going to take us into that next upcycle before we can accomplish that. But that’s our focus right now. It’s slow, and like I said, we are not just giving rate up just to get contract, we are doing it methodically and we are doing it very targeted. And so, it really -- it’s going to be a slow, slow build through the next couple of quarters until we get a more favorable market and then that will allow us to shift the portfolio a lot quicker. As it relates to rate, it really depends, if we are seeing a gap of $1 a mile between spot and contract, which is not something we see every single week, but in many weeks we have. We are willing to give up a decent amount of rate on the contract side. It just depends on the lane and it’s got to be something that’s going to be a direct trade one-for-one. I wouldn’t want to go and add a contract lane and not be able to reduce a spot lane. But if we can make that switch and it still benefits our network and hopefully benefits our network from an efficiency and utility standpoint favorably, then there’s some give that we are willing to give on rates. I can’t really say what it would be in certain lanes. I mean it could be -- we could be willing to close the gap by $0.15, $0.20, and in some cases, they may not be as much. It just really depends. Got it. Okay. Really appreciate the detail on that. Maybe switching gears a little bit on the utilization, if I could ask a follow-up. Just have one point of clarification, when you mentioned that the utilization has sort of improved, but if I look through the supplemental deck, it looks like the total number of miles actually declined sequentially. So is that just like a per day comment, given you call it, kind of number of holidays or an exit rate comment, maybe you can just clarify sort of what the improved utilization comment was pointing to? Yeah. This is Eric Peterson. Looking at our sequential utilization third quarter to fourth quarter, when I look at a normal working week, we are seeing absolute improvements in our over-the-road fleet and we are doing that by managing our drivers better in availability. But if you look at the year-over-year comp, say, fourth quarter to fourth quarter, you can see that in the numbers better, where there was the same number of holidays. Yes, sequentially, the decline in utility, that was driven by the calendar. But also I think it’s relative to the exit rate, too. So as we exited Q4 and going into Q1, we have seen significant improvement in our utility and that’s in -- what I would argue is potentially even a less favorable freight market. So we have gone from Q4 to Q1 with a significant weakness in the market, less volumes available to us, but we have actually increased utility and I think that’s a significant -- I think that shows that we have made some significant improvement in our model and we are really set up for when the market really turns to take full advantage of the additional volume. Got it. That’s really helpful. And maybe actually brings to a second question on the utilization front. I think in the opening remarks, you noted that the second half, any sort of further improvement in utilization in the second half would be contingent on getting some freight back into the network. Is the implication of that, that the first half sequential improvement is more idiosyncratic sort of in your control, even in the context of the spot market, maybe you can just kind of parse that out a little bit more for us? Yeah. I think we can make some small incremental improvements on a week-by-week basis. Now how the calendar falls and all that may create some noise in a quarterly basis. But for our purposes, operationally, I see improvements on a pretty much sequential basis. And so I see us getting better, we are getting better utility, we are being able to perform with the same, if not worse conditions, and so that’s made us pretty optimistic about where we are going when the market turns. But looking for some big significant increase in utility to the tune of 10% or something like that, we are going to have to wait until the market turns before we see something to that magnitude. Eric Fuller, just to follow-up on that last comment, just to make sure I understood, it sounded like you are saying conditions were actually a bit worse currently, I guess, maybe coming out of the fourth quarter. So maybe I just didn’t catch that right. But either way, if you can just give us an update on kind of where things stand versus the weak peak and your level of confidence and we might have actually seen the worst of this cycle from a demand perspective, obviously, the recovery is still to be determined, but where do things stand right now in January? Yeah. I think that comment was probably more of a seasonal type comment. Any time you are going from Q4 into that January low, you typically see a little bit of a dip. We have seen that from a volume perspective. I think if anything, things have bottomed out, I don’t see it getting necessarily worse. We see that rates have kind of bottomed. We have seen that volumes and demand seems to have bottomed at this point. And so we believe that there is a market, the market will turn, and a likelihood, given macro conditions, and I think, that that’s the big unknown, but given macro conditions that there’s a good likelihood that we could have a turn in the second half of this year. Demand actually is decently strong and could get -- will get stronger when we get through the inventory correction. I think that we have some of our retailers that have over inventory, and as they work that inventory up, we will start to see demand come back. And so as long as demand stays strong, then right now, we are also then waiting on the other side of the coin, which is supply and the supply in the market is coming out. We are seeing supply come out. We are hearing it from a lot of different vendors. We are hearing from a number of people in the industry. We are hearing -- we are seeing it in our Brokerage division and so we know capacity is coming out. But unfortunately, right now, it’s not coming out quick enough. I think there’s a lot of what I call zombie trucking companies out there that are kind of barely staying alive and kind of making it through the day, but they are not cash flowing. And eventually, they are not going to be able to continue operating and those guys have to come out of the market for the market really to turn and I think that will probably happen over the next couple of quarters. Okay. Got it. So when you roll all this together, maybe some improvement in utilization bottoming out of conditions here, do you think -- in the cost savings you outlined earlier, do you have visibility to profitability for the Truckload business in the first quarter, would that take a little bit longer, maybe it’s back half of the year. What are you thinking about return to profitability and the confidence around that or the conditions you need to see to really -- to turn back into the degree? Yeah. So we have too much exposure to spot and that creates a big headwind from a rate perspective. As we mentioned in our release, had spot rates just been equal to contracts, we would have had additional -- roughly additional $25 million in income this quarter. So that would have been very impactful, obviously, and really that rate is what’s dragging us down and so the problem is, I can’t outrun that rate per se. So I think it will continue to be a drag on us and will make profitability tough until we get to a little bit more favorable rate market. We don’t need a rate market where spot’s running $1 above contract or anything like that, but if we can get to a closer to equilibrium, where spot starts to come up closer to contracts, then we can start making money. And we are really well positioned, we have got our costs in the right place, we feel like our costs are very much in line with our peers and we are really set up to really take off, as soon as this market takes off, but we do need a little bit of that rate to come back. One quick follow-up for Eric Peterson, just on the divestments, you mentioned the one that happened after the quarter. Is there a way to size what’s up for sale in terms of either buildings or other pieces of the real estate? And then I think even in the slides you mentioned there’s maybe some cost reduction opportunities around that as well, I don’t know if that’s meaningful or not, but some commentary on that would be helpful. Yeah. If you look at our corporate headquarters, which is in Chattanooga, Tennessee, we have our main building and then we had an auxiliary building across the street meaningful and that’s what’s on the market right now and we anticipate being able to generate some cash to pay down debt during this year. And as if there’s a transaction and it becomes -- once it gets executed, we will be sure to give everyone an update on that, let everyone know what we did with the funds and what that did to the liquidity and our debt levels. Yeah. The expense report, I mean, you see where interest rates are right now. So to the extent you have a meaningful property that you are selling and we are a net debt organization, there could be a couple of million dollars a year in annualized savings and on the interest line item, then property and real estate taxes, you are no longer paying, utilities you are no longer paying and so, I’d say, in the grand scheme, those are probably a smaller number than the overall interest expense, but it’s still a number. And the point is on the cost savings, that’s our focus now, we are not trying to build an infrastructure that can help double the revenues of where we are now. We are looking at our current footprint and trying to be as efficient as possible. And as we do that, the mindset really changes of the organization, we will be able to, I think, continue to identify waste and it will just be a process. Maybe not big numbers from quarter-to-quarter, but the point is with the mindset, there will be A number from quarter-to-quarter of cost savings. There are no further questions at this time. I would now like to turn the call back to Mr. Eric Fuller. Great. Really appreciate everybody attending the call. We are focused and we believe we have the plan in place to get this thing turned around. We do admittedly need a little bit of the market to help us, but we have got the right strategy, we have got the right team and we have got a plan in place that we are executing and we see the results and so we are really excited to share those over the next couple of quarters as we start to see the market turn back positive. Appreciate it and we will talk next quarter.

EarningCall_147

Hello everyone and welcome to GBDC's December 31st 2022 Quarterly Earnings Call. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder this call is being recorded. Hello everybody, and thanks for joining us today. I'm joined by Chris Ericson, our Chief Financial Officer; Matt Benton, our Chief Operating Officer; and Greg Cashman, who Heads Golub Capital's Direct Lending Group. For those of you who are new to GBDC, our investment strategy is and since inception, it has been, to focus on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the quarter ended December 31, 2022 and we posted an earnings presentation on our website. We'll be referring to this presentation during the call today. As with last quarter, we're going to follow a new agenda for these calls and that new agenda has me leading off with headlines and with an overview. Let me start with the headlines. GBDC's performance for the quarter was solid and it was consistent with our discussion last quarter. We saw strong growth in net investment income and generally stable credit trends. What has changed is our macro outlook. I've said for the last that we're in a period of unusually high uncertainty. I think that uncertainty is now easing and we're in, and I think we're likely to stay in, a period of muddling growth. I'm going to elaborate later on what I mean by this, how we're responding to it, and why we think muddling growth can be good for Golub Capital BDC. After that, Chris and Matt are going to go through the financial statements for the quarter in detail. And finally, I'll come back and make some closing remarks and take questions. Before we jump in, I also want to mention that we intend to file our quarterly equity investor presentation over the next few weeks. You'll recall last quarter, I mentioned that this is a new presentation for us that we plan on updating each quarter. We hope you'll find it a useful source of additional information on GBDC and on Golub Capital. Okay, let's start with a summary of performance for the quarter. Adjusted NII per share increased by 12% to $0.37 from $0.33 per share in the quarter ended September 30th, 2022. This equates to an adjusted NII return on equity of 10%. The increase in adjusted NII per share was driven primarily by rising base rates and by higher spreads. Now, you'll recall from last quarter's earnings call that we believe higher base rates and higher spreads have materially increased GBDC's earnings power. This increase in GBDC's earnings power led to our decision last quarter to increase GBDC's quarterly dividend by 10% to $0.33 per share. We think GBDC's record adjusted NII per share for the quarter ended 12/31/2022, and its dividend coverage ratio of 112%, we think those validate the decision to raise the dividend. I'll come back to how we're thinking about the dividend going forward in my closing remarks. Credit trends in GBDC's portfolio remained generally stable. Realized credit losses were low. In fact, GBDC had a net realized gain of $0.02 per share for the quarter as capital gains on equity co-investments more than offset realized losses. This is a pattern we've seen consistently since GBDC's inception. We did see some incremental spread widening in the quarter and that drove some incremental unrealized losses. As expected, we also had a small number of borrowers show some deterioration in credit performance and this is reflected in a small uptick in non-accruals and a small uptick in the percentage of our borrowers in performance rating categories one, two and three. But the big picture is that credit performance remains quite encouraging, portfolio companies are generally healthy and growing, and I'll give you more detail on this in a few minutes. Overall, our view is that GBDC's performance in fiscal Q1 was quite solid. Before Matt Benton and Chris Ericson walk you through the financial results, I want to shift focus and talk for a few moments about our outlook. It may seem a bit odd to talk about the future before we fully unpack the quarter that just ended, but there's a logic for our approach. The reason is that our outlook has changed since our last earnings call and this change has implications for the key issues that we're focused on and that we think investors should be focused on. One of the key themes we talked about last year was our belief that we were in a period of unusual uncertainty. I talked about how there were an unusually high number of powerful vectors that were impacting the economy and that we're moving in different directions – inflation, rising interest rates, volatile energy and other commodity prices, changing consumer behavior post-pandemic, the Ukraine war. And I said that these different vectors meant it was very difficult to predict where we were going. We thought there was an unusually wide range of plausible scenarios for the coming period. In recent months I think the range of plausible scenarios has narrowed pretty considerably. There's still a fair bit of uncertainty. But in our view the last few months of data show that inflation has already decelerated strikingly, shows that interest rates are near their likely peaks. Occupancy costs, energy and commodity prices, they're all generally declining. The unemployment rate has stayed low and consumer behavior has changed far less than many feared. All this means the odds of a deep recession look much slimmer today compared to three to six months ago. And the odds have increased that we’ll be in a period of muddling growth, and likely in a period of muddling growth for a sustained period. So what does this changed outlook imply for GBDC? In our view it gives us higher conviction about our answers to three critical questions that investors frequently ask us. The three questions: First, how is GBDC's portfolio doing? Second, will we see a spike in credit losses in 2023 or 2024? And third, net-net, are we going to see more writedowns, or are we going to see reversals of some of the writedowns GBDC has already taken? I want to drill down on each of these three questions. I'm going to take the first one. I'll tag team the second with Greg Cashman and then Matt Benton is going to answer the third question. So the first question, how is the portfolio doing? The portfolio is doing well. The Golub Capital Middle Market Report for calendar Q4, which we published a few weeks ago, showed a positive surprise. Median profit growth accelerated from calendar Q2 and calendar Q3 levels and exceeded inflation by a significant margin. This was sharply different from the prior two quarters when median profit growth was a lot lower. Median revenue growth stayed strong in calendar Q4, consistent with prior quarters. Both the revenue growth and the profit growth numbers exceeded our expectations and this was true across all four sectors we track: consumer, healthcare, industrials and technology. We think these strong results reflect that our borrowers are adapting ably to the headwinds that started in the spring. Second question: will we see a spike in credit losses? I want to take this question in two parts. I'm going to describe what I think is a bad way to answer the question. And then I'm going to ask Greg Cashman to walk through what I think is a better way to answer the question. The bad way to answer the question involves a shortcut. It'd be great if we could answer the question with some quick to prepare or easy to understand set of quantitative metrics. And in fact some people try. I don't mean to pick on some of our peers, but many of them are showing charts these days that look at average interest coverage ratios. Sometimes they also show what happens to these coverage ratios using different assumptions about rising interest rates or declining underlying company EBITDA. This kind of chart, they sound instructive. Let me walk you through why I think they're not. First, interest coverage is EBITDA divided by interest expense. Sounds straightforward. But what's EBITDA? Are we talking about GAAP EBITDA, or credit agreement EBITDA, or adjusted EBITDA, or some other measure? Particularly in a period of rapid change and uncertainty like the one we're in now, all these measures are flawed. None really address what we really want to measure, which is go-forward earnings power and go-forward capacity to generate free cash flow. The denominator, interest expense, is also problematic. What's your base period? Are you factoring in the forward curve? Are you factoring in hedges or caps that the borrower may have in place? Again, this approach doesn't address what we really want to measure, which is go-forward interest expense net of hedges over the next several years. Another problem is this analysis assumes ceteris paribus. It assumes all else equal. But all else is rarely equal. What we really want to know is whether the borrower is facing worsening conditions like rising wage pressures or raw material pressures or greater competition. We want to know what kinds of surprises do we need to worry about? And how likely are those surprises? Assuming all else equal begs all those critical questions. There’s a fourth problem with this analysis. The fourth problem is that good management teams and good business owners they adapt to change. We saw this vividly during COVID-19. A sensitivity analysis couldn't have told you which companies would manage lockdowns well and which ones wouldn't. And finally the biggest problem. Even if you get all of the measurements I just went through correct, this analysis it tells you about the impact on your average borrower. Good lenders never lose money on their average borrower, they lose money on their weakest, what statisticians call the tail. I can tell you right now that Golub Capital's direct lending portfolio as a whole had a weighted average interest coverage ratio of 2.4 times at December 31, 2022 and GBDC's weighted average approximate Golub Capital's direct lending portfolio as a whole. But I don't honestly think this tells you anything. What's a better approach? Well, maybe there are multiple good approaches. But I want to tell you about the approach we've used. It's an approach we've tested through multiple business cycles over more than 28 years. And it's an approach that I think is at the heart of how we've excelled and produced premium returns that are consistent over time. Thanks David. I can summarize our approach in one sentence. There is no substitute for granular credit analysis. I mentioned on last quarter's earnings call that we enhanced our credit monitoring processes in response to the challenging environment. One of the key benefits of our scale is that when we hit a rough period like the one that we started over the summer, we can deploy some of our 170-plus investment professionals from offense to defense. We can and did pivot resources from underwriting new deals to scouring the portfolio for potential vulnerabilities. Then we assess each of the companies that we identify as vulnerable one by one. Specifically, starting last summer, we evaluated company-by-company Golub Capital's entire middle market loan portfolio. Our analysis focused on six key risk factors. First, we looked for a portfolio of companies who may have potential liquidity or cash flow issues from increased base rates. Second, we look for companies susceptible to contracting operating margins. This meant looking closely at cost drivers, as well as pricing power. Third, we looked at recession resistance. Some companies are more susceptible to recessions than others. We look for companies with material risk of falling revenues, deterioration in working capital, growth in accounts payable and similar vulnerabilities. Fourth, we look for companies with material vulnerability to a stronger US dollar or to customers or suppliers in areas of geopolitical tension or economic weakness, such as Europe and China. And finally, we looked at issues specific to our investments in software companies. We look for businesses with material amounts of high-margin, transactional or other non-recurring revenues. In phase one, Golub Capital's Direct Lending Team formed a leadership working group consisting of myself, our Co-Heads of Underwriting and our Head of Workouts. I'll call this working group DL leadership for short. DL leadership prioritized an initial set of credits for deeper dives based on the number and magnitude of risk factors that I outlined above. We developed a proprietary portfolio resiliency memo template that probed in detail on the six key risk factors I mentioned. Deal teams completed a resiliency memo for each of the prioritized credits and submitted them to DL Leadership for further review and discussion. In phase two, deal teams completed and submitted a portfolio resiliency memo for a second wave of credits that were selected by DL Leadership, but which we considered lower priority. In addition, deal teams completed a robust resiliency model for more than 100 credits in order to help us prioritize for phase three. In phase three deal teams completed and submitted a resiliency memo for a third wave of credits that DL Leadership selected based on the resiliency models from phase two. In total, 60 portfolio companies underwent a deep-dive bottoms-up analysis across each of phases one, two and three, a further 88 portfolio companies with potential exposure to one or more key risk factors were screened and modeled in phase two and determined not to be priorities for further analysis at this time. That's what we did. Now, let's talk about what we learned. We had two key learnings from our work to-date. First, our analysis led us to conclude that the tail of vulnerable companies in our portfolio is small. Put differently, we saw an encouraging level of resiliency in the substantial majority of portfolio companies we analyzed in detail. Encouraging, but not surprising. Our underwriting process focuses on resiliency and we're very selective about the companies we lend to. I mentioned a moment ago that we prioritized 60 portfolio companies for deep dive analysis. Based on the results of our analyses, we determined that 50 of them did not require enhanced monitoring at this time. We did determine that the remaining 10 portfolio companies could benefit from some enhanced monitoring to put ourselves in a better position to identify and address potential vulnerability in the future. As a reminder, these 10 companies were selected from Golub Capital's entire middle market loan portfolio. For context, seven of these companies are held in GBDC's investment portfolio and constitute around 3% of the investment portfolio at fair value as of 12/31/22. We believe this illustrates how the size and granularity of GBDC's portfolio of 300-plus borrowers enables us to mitigate company-specific risks through diversification. Let me take a moment to explain how we think about the GBDC portfolio companies that we're monitoring more intensively. In general, these borrowers are currently performing materially in line with expectations, but we concluded we're at a higher risk of them underperforming prospectively. In general, we expect these borrowers to pay us back in full. Having said this, part of our overall approach to credit monitoring is to be quite proactive to seek to identify vulnerable borrowers early, and to work with sponsors and management teams to increase the margin for error of those borrowers. You may recall that when COVID-19 hit in March 2020, we went through a similar process of screening the portfolio for vulnerability and prioritizing a subset for enhanced monitoring. Our analysis honed in on the portion of the portfolio in industry sub-segments we believe had relatively significant exposure to COVID-19, such as restaurants, eye care and dental care. We explained that we didn't necessarily expect this subset of the portfolio to become impaired. In fact, these credits generally recovered in subsequent quarters, and at the same time we thought it was prudent to devote more resources to early detection and if necessary early intervention. We hold a similar view of the GBDC portfolio companies who we’re monitoring more actively as a result of our recent portfolio review. This brings me to our second key learning, there were common themes among the 50 borrowers that were not designated for enhanced monitoring. Let me give you a few examples of factors that helped us get comfortable with the outlook for these borrowers. First, we validated that EBITDA add-backs were truly one-off. Second, we saw growth drivers that we expect to improve coverage ratios going forward and that had not been fully reflected in LTM financials, for example, recent acquisitions. Third, we identified credible cost savings and synergies that had not yet been fully realized. Fourth, ample liquidity was available to address temporary operating cash flow shortfalls. And fifth, interest rate hedges were in place, reducing the impact of higher base rates. We believe these mitigants reflect the care we take in underwriting, especially when we assess EBITDA adjustments. To reiterate a point we made earlier, formulaic stress tests and sensitivity analyses don't test whether EBITDA adjustments are real in the sense that they'll roll off and become actual forward earnings power. In fact, we believe the coming period will show that across the middle market some company’s adjustments won't roll off and won't prove to be real, and we believe this will be a key driver of increased dispersion and manager performance. So, to sum up key takeaways from our work to-date. Our detailed granular analysis showed that the portfolio is generally well-positioned for the coming period. We identified a small subset of borrowers that we plan to monitor even more closely than usual. These companies are generally performing okay today, and our expectation is that they will continue to perform. Nothing in these findings leads us to believe that realized credit losses will be outside the bounds of our historical experience. Two final thoughts. What I've described today is part of an ongoing process. We don't look at the portfolio in detail once and declare mission accomplished. We'll continue to hone our analysis as more data becomes available. It takes scale and experience to do this well. And we're not going to be 100% right. That's not a realistic goal. Our goal is to detect which of our borrowers are at a higher risk, and then to have early discussions with sponsors and management teams about how to make them more resilient. But there will be surprises. There always are. We'll continue to keep you informed about the portfolio throughout this challenging environment. With that, I'll hand the floor over to Matt. Thanks, Craig. I'm going to take the third key question that David mentioned earlier. Will we see more write-downs, or will we see reversals of some write-downs GBDC has already taken? Let me start by setting context. Over the last calendar year GBDC has performed well, despite a bumpy investment environment. Trailing 12-month ROE was 4.6%, which compares very favorably to traditional fixed income returns over the same time frame. The Bloomberg aggregate index was down 13%, high yield bonds were down 10.6% and the LSTA loan index was down 0.6%. Our returns were depressed by mark-to-market write-downs in calendar Q2, Q3 and Q4, which were largely a function of credit spreads widening on a market-wide basis and to a lesser extent a function of credit concerns. Net unrealized losses for this nine-month period added up to $0.79 per share, or about 5.1% of NAV as of 3/31/22. Importantly, over the same period GBDC had net realized gains amounting to 0.3% or 30 basis points of 3/31 NAV. So how should investors think about the $0.79 per share of net unrealized losses? One way to think about it is as an embedded loss reserve. Let's look at slide 8 of the earnings presentation. This slide breaks down the $0.79 per share of net unrealized depreciation on investments for the nine-month period ending 12/31/2022 based on our internal performance rating categories. You'll recall that the highest categories four and five represent loans that are performing as expected or better than expected at underwriting. The vast majority of our investments fall into categories four and five. They represented 89.3% of the portfolio as of 12/31/22. Critically, the box in gold on the chart shows that investments in categories four and five accounted for 75% of the cumulative unrealized losses incurred since 3/31, or $0.59 per share. If you believe loans in categories four and five are very likely to pay us back as we do, based on our experience, you'd expect GBDC to recapture most of this $0.59 per share over time. Put differently, we think GBDC has a sizable embedded loss reserve attributable to loans that we currently think will be repaid at par. Second, let's turn to slide 9. The analysis on the slide essentially looks at GBDC's actual historical realized loss experience and asks how high would future losses need to be compared to historical experience to eat through what we're calling GBDC's embedded loss reserve. Let me walk you through the chart. The left-hand bar depicts the 5.1% of NAV at $0.79 per share of cumulative net unrealized losses that we took for the nine-month period ending 12/31/2022. The right-hand bar shows GBDC's worst ever 12-month period of actual net realized losses. This totaled 1.9% of starting NAV for that 12-month period. This means that our unrealized write-downs on the portfolio over the nine-month period ending 12/31/2022 are about three times the size of GBDC's worst-ever 12-month loss experience. And bear in mind, GBDC both in the last 12 months and since inception, has recorded average annual net realized gains, not losses. We think the takeaway from this analysis is that GBDC is likely to see reversals of prior write-downs over coming quarters. With that let's shift focus to GBDC's results for the quarter and walk through the earnings presentation in more detail. I'll ask Chris to kick things off for us and I'll come back a bit later. Thanks Matt. Turning to slide four, we see GBDC's adjusted NII per share increased by $0.04 quarter-over-quarter to $0.37 per share, which represents an adjusted NII return on equity of 10%. As David described earlier, the increase in adjusted NII per share was primarily driven by the impact of increasing interest base rates on GBDC's portfolio and GBDC's low cost of funding structure. In addition, accrued dividends on certain preferred equity investments generated approximately $0.02 per share during the quarter and will be included in adjusted NII moving forward. The favorable increase to adjusted NII was partially offset by an accrual for excise tax of approximately $0.01 per share as a result of calendar year 2022 taxable income in excess of distributions or spillover income that was driven by realized gains and short-term temporary book-to-tax income differences that we expect to reverse over time. GBDC had an adjusted net realized and unrealized loss per share of $0.22, primarily from unrealized depreciation due to a combination of spread widening and isolated credit factors on certain portfolio companies. This unrealized depreciation was partially offset by $0.02 per share of realized gains on the sale of equity investments. Adjusted EPS was $0.15 per share. We view this as a solid performance in the context of the market and economic volatility and uncertainty. Now I want to take a moment to quickly provide additional details around two components of adjusted NII. First, we made the decision to incur an excise tax of approximately $2.2 million or $0.01 per share. Historically, we've sought to minimize excise tax payments. Our decision this year was primarily driven by the fact that a meaningful portion of the spillover income was related to short-term taxable gains on foreign exchange hedges that we expect to reverse over the balance of calendar year 2023. We felt this was more beneficial than NAV stability over calendar 2023 versus paying out a large one-time special distribution on a meaningful portion of spillover income that will ultimately reverse. Second, we evaluated our practice for recognizing dividends on preferred equity investments which previously were recognized in unrealized appreciation. This component of the portfolio reached a large enough size of our calendar year 2022 that we felt it was appropriate to accrue these dividends within net investment income, which is consistent with industry practices. This added $0.02 per share to adjusted NII and will be a continuing component of adjusted NII moving forward. One other comment that I would make here – the majority of these preferred dividends are structured as non-cash or PIK income and are generally collected upon redemption and equates to approximately 2.5% of our overall investment income. Turning to slide 7 you can see that NAV declined 1.2% quarter-over-quarter to $14.71 per share from $14.89 per share. Let's walk through the components. As I just mentioned, adjusted NII was $0.37 per share, and the company paid $0.33 per share of dividends. Adjusted NII was offset by a loss of $0.23 per share from the net change in unrealized depreciation on investments. And finally, net realized appreciation came to a gain of $0.02 per share. We turn to slide 12. This slide summarizes our origination activity for the quarter. Net funds growth increased slightly quarter-over-quarter, primarily due to new investment commitments, and delayed draw term loan fundings exceeding exits and sales of investments and the net change in fair value of investments. The asset mix shown in the middle of the slide remained fairly consistent with our prior quarter originations. Looking at the bottom of the slide, the weighted average rate on investments increased by 210 basis points this quarter from a combination of higher base rates and wider assets spreads on new originations. The weighted average spreads on new investments increased by 50 basis points over the prior quarter from 6.2% to 6.7%. Slide 13 shows GBDC's overall portfolio mix. As you can see the portfolio breakdown by investment type remained consistent quarter-over-quarter, with one stop loans continuing to represent around 85% of the portfolio at fair value. Slide 14 shows that GBDC's portfolio remain highly diversified by obligor, with an average investment size of approximately 30 basis points. As of December 31, 2022, 94% of our investment portfolio was comprised of first lien, senior secured floating rate loans and defensively positioned in what we believe to be resilient industries. Turning to slide 15, as we explored in detail last quarter, the rising interest rate environment really highlights the asset sensitive nature of GBDC’s balance sheet. Let’s start with the dark blue line, which is our investment income yield, which includes the amortization of fees and discounts. GBDC's investment income yield increased by 130 basis points, primarily from rising interest rates. By contrast our cost of debt, the teal line, only increased 70 basis points. Our cost of debt benefits meaningfully from our $1.5 billion of unsecured notes that are fixed rate and have a weighted average coupon of 2.7%. Combining these two factors, our weighted average net investment spread, the gold line, increased by 60 basis points over the prior quarter. Thanks, Chris. On slide 16, we've quantified the potential positive impact of higher base rates on GBDC's NII earnings power. The key takeaway is that GBDC's adjusted NII per share stands to continue to benefit from two key tailwinds in the coming period. The first tailwind is that there's a lag between when base rates change in the market and when loans in our portfolio reset the higher base rates, which happens once per quarter in those cases. Said another way, GBDC sees the full benefit of higher base rates about a quarter after those base rates actually increase. The chart on this slide is our attempt to help demystify this dynamic for you. As you can see on the chart, the average LIBOR or SOFR rate GBDC actually earned on its investments for the quarter ended 12/31 was meaningfully less than market rates at the end of the quarter. The second tailwind is that base rates will increase further from 12/31 levels based on the recent Fed decisions and the expectations embedded in the forward curve. The leftmost bar shows GBDC's actual adjusted NII of $0.37 per share for the quarter ended 12/31. On average for the quarter, the average LIBOR rate was approximately 375 basis points. The right bar looks at what GBDC's adjusted NII per share would have been in the 12/31 quarter if all of its floating-rate assets and liabilities had been based on a LIBOR rate of 477 basis points, the rate at quarter end. In this scenario, all else equal, we estimate adjusted NII would have increased 13% to $0.42 per share. Please note that today's three-month LIBOR is a bit above the level we assumed in this analysis. The bottom line is that we think GBDC's NII per share has a lot of built-in momentum just from higher base rates that have already occurred but not yet flowed through to GBDC's results. We aren't assuming wider spreads on existing investments for example, from amendment activity or increased payoffs. In our view those are likely drivers of further NII upside. You'll see additional details on GBDC's asset sensitivity in the Form 10-Q if you'd like to drill down further. Let's move on to Slide 17 and 18 and take a closer look at credit quality metrics. On Slide 17, you can see the number of non-accrual investments as of 12/31 increased to 9 from 8 compared to 9/30. This is because the disposition of one non-accrual investment was offset by the addition of two new non-accrual investments. Additionally, the percentage of investments on non-accrual measured at fair value increased modestly from the 9/30/22 quarter to 1.8% of our total portfolio from 1.3%. On Slide 18, as David mentioned earlier, internal performance ratings have been strong and stable and consistent with pre-COVID-19 levels. Over 89% of investments have an internal performance rating of four or higher, which means they are performing as expected or better than expected on underwriting and only 1.3% of investments have an internal performance rating of two or lower, which means they are performing materially below expectations at underwriting. We're going to skip past Slide 19 through 23. These slides have more detail on GBDC's financial statements, dividend history and other key metrics. The last slide I want to cover before handing it back to David is Slide 24. We believe GBDC has meaningful embedded value in its funding structure. We ended the quarter with almost $750 million of dry powder from unrestricted cash, undrawn commitments on our meaningfully over-collateralized corporate revolver and the unused unsecured revolver provided by our Advisor. Our GAAP debt-to-equity ratio as of 12/31, net of unrestricted cash, was 1.19 times. 47% of our debt funding is in the form of unsecured notes, the majority of which have maturities in 2026 and 2027. We issued these fixed rate notes with a weighted average coupon of 2.7% and did not swap these out to floating rate. Our weighted average cost of debt for the quarter ended December 31, 2022 was 4.4%, which we believe is among the lowest in our peer group of publicly traded BDCs. We believe our funding structure is a meaningful competitive advantage. Thanks, Matt. To sum up, GBDC's performance for the quarter ended December 31 was solid. Adjusted NII per share was strong and it was well in excess of our recently raised dividend. The portfolio is generally healthy and it's performing well from a credit perspective. Unrealized losses have been elevated for the last several quarters, but as we've said many times before, what really matters in the long run is avoiding realized losses. And in the most recent quarter and in the last nine months, we once again reported net realized gains. We've always believed that early detection of risks and early intervention to mitigate those risks are critical for limiting credit losses. It takes scale and experience to do this well. We've today taken you through how we last year undertook what we believe was a very thorough review of the portfolio against a range of key risk factors and how we honed in on a small subset of names that we plan to continue to monitor quite closely. Now Greg said it right. We're not going to be 100% right. That's not a realistic goal. Consistent with prior periods, our approach is to try to identify borrowers that are higher risk and then to have early discussions with sponsors and management teams about how to make them more resilient. This approach has worked before and I believe it's going to work again. What do I mean by work? I mean that once again we'll be able to keep realized credit losses low and we'll see a large portion of the unrealized losses that we've taken over the last nine months reverse. Finally, I promised I'd come back to the topic of the dividend in my closing remarks. We out-earned our dividend by $0.04 per share in fiscal Q1. And as we've said before, we think GBDC's earnings are going to be driven higher by higher base rates, higher spreads and GBDC's very low cost of funds. We're evaluating in this context whether and when it would be appropriate to increase the quarterly dividend further or make a supplemental dividend or both. For now, we think it's prudent to wait and see, but we'll keep you informed as our thinking progresses. Thank you. [Operator Instructions] We'll take our first question from Finian O'Shea with Wells Fargo Securities. Your line is now open. Hi. This is Jordan on for Fin today. Just a question on your loan documents. You spotted some PIK on – you spotted new or higher PIK on about 3% of loans this quarter. Is this -- if you could just like characterize this? Is this something that's normal course toggling? Maybe default interest or something else entirely? Combination of all of the above, Jordan. So we are seeing, particularly in our Golub Growth portfolio, demand from sponsors for loans that have a PIK component or an optional PIK component. So that's part of what you're seeing. And there are a couple of cases where we have added a PIK component to existing loans as part of amendments, as part of efforts to bring loans that were under-priced up to levels that we were looking to get them at without creating more cash drag on the companies. Okay. That's helpful. And then question for Chris. Did the BDC pay a full incentive fee back to the advisor this quarter? And if so what's kind of the -- what is the cushion before earnings fall back into the band? Yes, hi. We did pay a full incentive fee this quarter and we're well-above the 8% hurdle rates. I'll have to get back to you with the exact number on that. Yeah, sorry. It's tied to the vulnerability analysis that you completed. The disclosure is very helpful, the information in the presentation. How much of that if any was, is normal per share with say your third-party valuation consultant each quarter into the fair value analysis that they assist with? Or was this all incremental over and above the kind of normal analysis that goes into evaluating what the appropriate fair values are for the loans each quarter? So we do, just to set context for everyone on the line, each quarter Golub Capital has an internal group that does valuation work with respect to every position in the portfolio and approximately 30% of those valuations are also reviewed each quarter by third-party valuation experts like Duff & Phelps, Houlihan Lokey, or Kroll, Houlihan Lokey, et cetera. The information that we share with the valuation firms is a robust set of information. So there's nothing that we're looking to prepare, Robert, that we would not be sharing with the valuation firms. But the analysis, the resiliency analysis that we went through is a special analysis in the sense that we began in the late summer of last year to redeploy a significant portion of our underwriters to do an exercise that we've done before. We did it during COVID, we've done it during other periods of rapid change, where we go through and screen the portfolio again to look at vulnerability to changes that we've identified. So I think the answer to your question is, it is both consistent with information that's provided to the valuation firms and it's a new analysis that we do episodically as opposed to every quarter. Got it. I appreciate that. And then if I can one more, on kind of on credit, setting the landscape again. I mean, your non-accrual rate is not high by industry historic standards. So I just want to say that. Historically it’s been well below industry historic standards as well. But it is now, if I look at your non-accrual at cost, for example, or you know, fair value, it's relatively elevated by your standards historically. About the only level higher than this in the last more than 10 years was the peak during COVID. So can you give us any more color about what's -- what -- it's not many assets and the rate is objectively not that high, but why is it so high compared to your normal low levels currently? So you're focused on the percentage at cost. I don't focus on percentage at cost. I focused on percentage at fair value. I think that's the amount that we have at risk at a given point in time vis-à-vis the difference we've already taken that as a hit against earnings. And if we look at the non-accrual investments as a percentage of fair value, it's not out of line with our history. It's not -- it's low by the standards of our industry. We do have a couple of credits in this pool where our current carrying value is small. And I think the cost of those investments is elevated relative to fair value and that's kind of creating some distortions when we look at the percentage vis-à-vis cost. We're going to go back and do some more work on this and come back with some more analysis that I hope to be able to share with you. Hey. Good afternoon. First question I had -- well, let me just first say, I really do appreciate all the detail you guys put in and walk through kind of the resilient analysis and what you guys discovered as well as the couple of slides that went over kind of where the markdowns have come in your portfolio versus kind of potentially weaker credits versus kind of maybe mark-to-market declines that could recover. So it's a really great analysis, really appreciate that. On the resilient analysis when you talked about the seven investments that you guys identified that consist of in GBDC's portfolio. I'm just curious I think you said that generally those investments are performing fine today, but there's additional heightened potential for weakness down the road. Have you already started having conversations with the sponsors of those positions yet? And also, from just a higher level, you mentioned having this robust detection process helps early detection and early mitigants to risk. Can you just walk through, when you guys have identified a risky investment and it does start to struggle, what are the things that early detection and risk mitigant, what are some of the strings you can pull to help increase the recovery potential of an investment that's struggling? Sure. Thanks, Ryan, and I appreciate your positive feedback on the new approach to our earnings presentations and the new information. Thank you. Look one of the characteristics of Golub Capital that's unusual is we are almost always the lead lender in our loans. We -- I think it's over 90% and it's been over 90% for many years in a row. In a typical deal we’re, if not the sole lender, we're in a small bank group that we're the lead lender of. So that puts us in the position to be able to do things that are very challenging to do in the broadly syndicated market or even in the private market in situations where you're a participant in a larger club. It puts us in a position to have conversations with the borrower and with the sponsor where they know and we know that we're the decision-maker. And they know and we know that there's an opportunity to be creative and thoughtful about solutions. And in most cases this is with a sponsor we've done multiple deals with. So they know and we know, we're both interested in sustaining a strong and positive relationship on an ongoing basis so that we can continue to do business together. So with that by way of context, we're in constant touch with our borrowers and our sponsors. It's not just on poorly performing companies; it's on all of our companies. When we have a company that we're growing concerned about, we have more discussions with the borrower and with the sponsor. And we'll talk about concerns that we have. We'll talk about their plans and ways in which they can potentially take steps that might increase a margin for error. That might mean slowing down an expansion plan or decreasing CapEx or selling a division or a couple of small pieces of the business, or it might involve the sponsor putting in more capital, or in some cases it may involve putting the business up for sale. These are all discussions that we regularly have with sponsors and with management teams. And those discussions are informed by the credit monitoring work that we do. I think this goes in sharp contrast to say the broadly syndicated market where you have a very large collection of lenders, no one of which is a decision maker, and where the borrower doesn't really even have a reasonable expectation of being able to get that group to agree to make meaningful changes because they're so frequently a group of lenders or a single lender that won't agree. So it's a very different dynamic Ryan. It's purposefully a setup where we have more power and more control. And I think it works to the benefit of everybody involved. Okay, that's helpful background and color on kind of a little bit of insight into those processes and conversations. The other question I had and it kind of came up when you were talking about the weighted average interest coverage and how valuable that is. You all publish the Golub Capital Altman Index and I think it's very helpful to kind of give an insight on how general trends in the portfolio are moving on a quarterly basis. But when I think about your comments on kind of the weighted average interest covered not being a good metric because the average borrower is not going to really struggle, it's going to be kind of those marginal credits. Could you take that same sort of approach when you look at the Golub Capital Altman Index and say maybe the results that you look at that on a quarterly basis aren't as helpful because it's just showing the average and it really may not be indicative of the true credit performance of those individual underlying borrowers in your portfolio? I'd just love to hear your comments on this. I find the index really helpful. But in context when you said about the weighted average EBITDA, I'm just wondering -- I'd be curious to hear your thoughts on that. So it depends what you're using it for. I think your point is well taken. If you're thinking about using the index to create an indicator as a metric of how the portfolio is doing as a whole, I think it's very useful. If you're looking at the index as an indicator for how the tail is doing, I don't think it's very useful. I think the best source of information about the tail is our portfolio ratings. And one of the things that I like to emphasize in discussions with investors is are we seeing significant migration toward categories one and two, those are the two risk performance rating categories where -- which contain investments that are significantly underperforming. Are we seeing more and more of the portfolio in those two categories? What you would expect in a pre-recessionary or recessionary environment is that kind of credit migration. You'd see quarter-over-quarter increases repeatedly over a series of quarters and you'd expect to see levels of category one and two credits that are high by historical standards. And I think -- what we can say is on a portfolio-wide basis, the middle market index numbers are encouraging. And in respect of the tail, the portfolio performance ratings are encouraging in that they do not show the kind of migration that I was alluding to. [Operator Instructions] I'm showing no further questions. I'll turn the call back over to David Golub for any additional or closing remarks. Thank you. I just want to thank everybody for their time today. I know this was a particularly long presentation so thanks for your patience. We did want to present to you all some very detailed information about the portfolio and our approach to credit monitoring. So I appreciate your patience on that. As always also appreciate your partnership. Should you have any questions, always feel free to reach out and look forward to talking again next quarter.

EarningCall_148

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Fiscal Year 2023 EnerSys Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference call is being recorded. On the call with me today are David Shaffer, EnerSys' President and Chief Executive Officer; and Andrea Funk, EnerSys' Executive Vice President and Chief Financial Officer. Last evening, we published our third quarter fiscal year 2023 results and filed our 10-Q with the SEC, which are available on our website. We also posted slides that will be referenced during this call. The slides are available on the Presentations page within the Investor Relations and of our website at www.enersys.com. As a reminder, we will be presenting certain forward-looking statements on this call that are subject to uncertainties and changes in circumstances. Our actual results may differ materially from these forward-looking statements for a number of reasons. Our forward-looking statements are applicable only as of today, February 09, 2023. For a list of forward-looking statements and factors which could affect our future results, please refer to our recent 10-K filed with the SEC. In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance, adjusted diluted earnings per share and adjusted EBITDA, which excludes certain items. For an explanation of the differences between the GAAP and non-GAAP financial metrics, please see our company's Form 8-K, which includes our press release dated February 08, 2023. Please turn to Slide 4. We delivered strong Q3 results reporting $920 million of revenue and $85 million of adjusted operating earnings, our highest revenue and highest adjusted operating earnings in the company's history as all three lines of businesses performed well. We realized the second consecutive quarter of significant adjusted gross margin expansion, driven by impressive price/mix improvement and continued robust demand for our products in all of our end markets. Despite interest and FX rate headwinds, as well as ongoing supply chain and inflationary pressures, we reported third quarter adjusted earnings of $1.27 per diluted share, above the midpoint of our guidance and a 26% increase versus $1.01 per share in Q3 '22. As we've mentioned previously, the inflationary impact of these past two years has been truly unprecedented. For perspective, our Q3 '23 costs were $115 million higher than in Q3 '21 before inflation really began to rise. This annualizes to roughly $460 million of higher costs or approximately $9.00 per share of EPS pressure, which doesn't include the incremental impact on primary operating capital and interest expense. While we've experienced timing delays and price recapture, our focused efforts are now becoming visible in our results with opportunities for further mix improvement in EOS, or EnerSys Operating System, savings to expand profits in upcoming quarters. While some commodity and freight cost pressures have lessened, other supply chain shortages persist. Meanwhile, certain commodity prices remain elevated relative to and, in some cases, are even continuing to rise versus historical averages. We are mitigating our exposure to both through ongoing price recovery, increased stocking of critical raw materials and alternative sourcing. We remain vigilant in monitoring the global supply chain environment evolution, including energy allocation in Europe and commodity prices as China reopens from COVID shutdowns. Please turn to Slide 5. Backlog was up 11% versus prior year, but declined modestly for the second consecutive quarter, particularly in Energy Systems to $1.3 billion. Additionally, it is worth noting a calendar year-end is often a seasonally lower quarter for new orders in Energy Systems. Our backlog remains healthy at near all-time highs and demand is robust across all our lines of business. Please turn to Slide 6. We are delivering on our innovation roadmap with proprietary technology solutions that are defining the future of energy transition. For example, we are excited to have received our first orders for Motive Power wireless chargers and look forward to showcasing our maintenance-free battery and wireless charger solutions at both ProMat and LogiMAT trade shows this spring. Demand for our TPPL and lithium maintenance-free batteries is growing as customers across all of our end markets nice the competitive advantage of our offerings, which help them achieve their operating efficiency and sustainability goals through higher energy density throughput, software management capabilities and value-added services. We are advancing our fast charge and storage initiatives with our near production-grade system now fully operational at our Tech Center, including new capabilities such as bi-directional grid connection. Combined with our recent certification for OpenADR, a software standard allowing automated demand response to the grid, our system offers further value for our customers. The team has also increased focus on our supply chain as we progress on our production roadmap. I'll now briefly walk through our business segment highlights. The slides contain additional details about each line of business that I won't cover in my comments. Please turn to Slide 7. Continuing its positive momentum, Energy Systems saw solid demand in the quarter, particularly in broadband and data centers, reporting revenue of $434 million or 13% increase compared to the prior third quarter. Profitability was also much improved with adjusted operating earnings increasing nearly 170% year-on-year. We anticipate our top-line growth to continue flowing down to the bottom-line as we execute our price/cost recapture strategy and see a richer sales mix with supply chains improving. There is much to be excited about in Energy Systems with many of the major cable companies announcing CapEx increases for calendar year '23, the rollout of our new product pipeline and incremental opportunities for EnerSys such as the Rural Digital Opportunity Fund, or RDOF. RDOF momentum is building, with one of our largest cable customers being the biggest winner of dollars to date. To help to mention this opportunity, approximately 2.5% of their [$5 million] (ph) spend applies to network powering, which we would expect to dominate participation in over the next several years. As a leading innovator of critical power solution to telecom and cable companies, we continue to see 5G build outs as favorable to our business over the next several years in addition to new growth opportunities and activities at MSOs. Cable customers are expected to grow their wireless businesses and invest in the next generation of DOCSIS network upgrades as they build out their own unique wireless networks. With the estimated deployment of tens of thousands of these bespoke small cells, we expect robust demand for our power and backhaul gateway products and new OSP, or Outside Plant Power, systems over the next several years. We look forward to sharing more detail in this area with you at our Investor Day on June 15. Motive Power delivered another strong quarter with third quarter '23 revenue of $362 million increasing 7% compared to the third quarter of fiscal '22. Backlog and demand trends are strong with order rates in the Americas near record levels. And while EMEA order rates were somewhat soft in the quarter, we believe our order and backlog strength position us well for growth overall. We are monitoring this business very closely as it is our segment that is most vulnerable to economic slowdowns. Our positive Motive Power results reflect the strong customer demand for our proprietary NexSys TPPL and lithium-ion maintenance-free product offerings, which were up 140 basis points year-over-year as a percentage of Motive Power revenue mix. We expect these solutions to keep increasing as a percentage of revenue as the trend towards automation and electrification of material handling equipment requires technology-enabled power solutions. Our Specialty segment reported revenue of $124 million in the quarter, up 4% year-over-year, primarily driven by the continued pricing actions and improved mix. Though demand is still strong, this line of business is still challenged by our TPPL capacity constraints in our Missouri plants. With the team fully assembled and retention improving, we are laser-focused on driving operational efficiency improvement in these facilities and further realizing the financial benefits of strong product demand. Q3 started slowly for our Springfield factories with attendance and equipment issues, and as a result, we were unable to close the gap even with a strong push in December. However, positive momentum has carried over to a record Springfield January production. In Transportation, backlog was on par with the prior third quarter and Class 8 truck OEM demand signals are strong. We also remain very well positioned in our aerospace business and the recently announced 9% increase in the fiscal year '23 defense budget should provide an additional tailwind for our U.S. defense market, which is anchored by our premium TPPL and lithium technology. Moving on to some updates in our production capacity and operational efficiencies. The operations team continues to be confronted by a mix of headwinds, including ongoing inflation and productivity challenges. Utility inflation in EMEA and increased COVID cases in China have also presented some challenges, while we work with ongoing instability in our supply chain and elevated costs in the business. Putting the EMEA utility inflation into perspective, we anticipate our fiscal year '23 energy costs in EMEA will be 150% higher versus fiscal year '21, and for the first time in our history, is expected to exceed the annual cost of our direct labor force. On the positive front, we are seeing utility costs coming down from the peak in August, signs of cost stabilization and freight rates coming down, chip allocations improving with certain suppliers and better availability of raw materials, all of which begin to generate benefits in future quarters. Collaboration across operations, sales, finance and IT remained strong, with efficiency and capacity improvements in Missouri the top priority heading into the end of the fiscal year. Our two new lithium-ion module assembly lines are running as planned and the Ooltewah transition to Richmond is already paying dividends through greater operational efficiencies. Please turn to Slide 8. As one of the world's largest energy storage companies, corporate responsibility is a key area of focus for EnerSys. We had several ESG announcements in the quarter, including the appointment of Ms. Tammi Morytko to our Board of Directors. Tammi is the President of the Pumps Division at Flowserve Corporation, where she has established a reputation in the industry as an enterprise operating leader and a supply chain subject matter expert. Tammi's decades of experience with global industrial manufacturing operations will provide excellent support for the EnerSys' leadership team and our strategic objectives. Please turn to Slide 9. In closing, we are increasingly optimistic that our strong Q3 '23 results reflect the continued progression toward achieving our long-term financial and operational goals. While we are not out of the woods yet with inflation and supply chain unpredictability and there remains considerable uncertainty in global markets, demand remains strong with secular trends in our end markets that, along with a strong balance sheet and superior products and services, provides us a buffer from the impact of a potential economic pullback. We believe the steps we have taken over the past three years better position our business to benefit from global megatrends such as 5G, data center growth, material handling electrification and automation, grid stabilization and electric vehicle fast charging, which provides us near- and long-term growth opportunities that are starting to materialize in our financial results and outlook. In addition to these trends, we are excited about our opportunities to benefit from U.S. Government mandates and funding that are driving markets to us, such as broadband expansion through the Rural Digital Opportunity Fund. We are still waiting for clarification on the Inflation Reduction Act, but we are cautiously optimistic that a substantial amount of our batteries could qualify for the Section 45X tax benefit, which would provide meaningful upside to our profitability. I look forward to ongoing progress during the remainder of this year and in fiscal 2024 as the true potential of our business that continues to present itself. I want to thank our employees for their dedication and hard work, consistently capitalizing on opportunities and confronting a myriad of challenges head on. We, as a unified team with a common goal, have positioned EnerSys for long-term success, and look forward to updating our shareholders on that success in the quarters and years ahead. I will focus my discussion this morning on the key financial metrics and takeaways for the quarter. For more detailed information about our results, please refer to our third quarter 2023 10-Q, press release and supplemental slides that were posted to our website last night. For those of you following along on our PowerPoint slides, I will begin on Slide 11. Our third quarter fiscal '23 net sales increased 9% over the prior year to a record $920 million, even after absorbing roughly $35 million of foreign exchange offsets. This record was achieved through 5% organic volume growth and 8% price/mix improvement, partially offset by the 4% decrease from foreign currency translation just mentioned. Adjusted operating earnings were also a record for the company at $85 million in the third quarter, up 41% from Q3 '22 and 30% higher than Q2. Foreign exchange negatively impacted our year-on-year and sequential comparisons by approximately $6 million and $2 million respectively. In constant currency, Q3 '23 adjusted OE improved nearly 50% versus the third quarter of the prior year. Adjusted EBITDA for the third quarter was $98 million and 10.7% of net sales, compared to $79 million and 9.4% of net sales in the prior year third quarter. FX pressured the year-on-year comparison by approximately $7 million. Please recall that our margins are artificially deflated from the margin math impact of the unprecedented significant cost pass-through that Dave mentioned. A reconciliation of net earnings to adjusted EBITDA is presented in the appendix of our slides for your reference. Our adjusted EPS was $1.27 in the third quarter of fiscal '23, up 26% from $1.01 in Q3 '22 and up 14% from the $1.11 in the second quarter. It is worth highlighting the significant headwinds we are facing from foreign exchange and interest rates. Excluding the impact of FX and interest, our Q3 '23 adjusted EPS increased nearly 60% versus prior year. I will present a reconciliation of the third quarter sequential and year-on-year EPS shortly. Please turn to Slide 12. On a segment basis, compared to the prior year, all lines of business posted strong revenue growth, driven by substantial price/mix improvements, which were partially offset by foreign exchange headwinds. The favorable impact of price/mix improvements on adjusted operating earnings more than offset the higher costs and $6 million of unfavorable FX year-on-year. As Dave mentioned, Energy Systems delivered significant improvement to adjusted operating earnings as a result of impressive price/mix cost recapture taking hold for the second consecutive quarter, with nearly 170% adjusted OE improvement versus prior year and over 60% improvement sequentially. We are pleased with the recapture momentum in Energy Systems is becoming increasingly evident on our bottom-line as it had been slower to manifest versus our other segments due to the contractual nature and historically Asian-based supply chains inherent in this business. On another positive note, Motive Power adjusted operating earnings improved approximately 20% over both prior year and prior quarter, driven by mix improvements in maintenance-free sales, as well as positive price/cost recapture. And finally, AOE in our Specialty segment, while muted due to constraints in our Missouri plants, was still up over 20% sequentially and nearly in line with the prior year. Accomplishments across all of our lines of business coupled with healthy market dynamics resulted in solid improvement in our quarterly adjusted OE results and increasing momentum going forward. More detailed sequential and geographic results can be found in our press release and in the supplemental slides. Please turn to Slide 13. On a sequential basis, in the third quarter of fiscal '23, we realized $32 million or $0.65 per share of improvements in price/mix, adding on to an exceptional Q2 with nearly $30 million of sequential price/mix improvement as well. Q3 '23 sequential price/mix improvement more than offset the $12 million or $0.25 per share of volume adjusted incremental costs incurred during the quarter. While we are still incurring significant cost increases, Q3's $0.40 per share of price/mix cost recapture is our second consecutive quarter of significant improvement, further closing the gap on the unprecedented cost increases we have endured over the past two years. Cost increases in the third quarter were driven by continued inflation, including commodity and energy rates, particularly in Europe, as well as productivity challenges in our Missouri plants. While we are beginning to see costs stabilize, it is important to remember that there is a delay in realizing product costs in our P&L until the related inventory is sold. Fortunately, this accounting treatment, coupled with lagging price/cost adjustments, should provide very nice margin tailwinds if and when inflation turns to deflation and costs normalize. We are cautiously optimistic that inflation is near an inflection point. After six consecutive quarters of gross margin erosion from steeply escalating costs, we have now seen two consecutive quarters of solid improvement. Our adjusted gross margin expanded 130 bps in Q3 '23 after a similar increase the quarter before, posting a total of 250 basis point improvement over the first quarter of fiscal '23 despite the margin math impact from higher cost pass-through. Going forward, price/mix gains should continue to surpass cost increases due to ongoing price/cost pass-through, mix improvement from supply chain loosening, especially for our higher margin electronics products, and the margin benefit of maintenance-free conversions, as well as savings realization from our EOS accomplishments, such as cost reductions from footprint rationalization, all of which should drop to the bottom-line. Please turn to Slide 14. Looking at our quarterly sequential adjusted EPS bridge, Q3 '23 adjusted EPS came in $0.02 higher than the midpoint of our guidance at $1.27 per diluted share. Our sequential results were driven by the impressive $0.40 per share of net price/mix/cost impact previously discussed, which was partially diluted by the substantial $0.25 per share of net pressure from foreign exchange and higher interest expense from rate increases. The FX headwinds were primarily a result of the weak euro throughout the quarter negatively impacting transactional FX and AOE, as well as the revaluation impact in other income and expense when the euro strengthened at the end of the quarter. Year-over-year, Q3 '23 adjusted EPS has approximately $0.35 per share of drag in the quarter from FX and interest expense headwinds. Please turn to Slide 15. Our balance sheet remains very healthy with improved liquidity, positioning us even better to navigate both the current economic environment and the potential downturn. In Q3, we had $188 million of positive free cash flow with our net bank leverage improving to 2.3 times EBITDA at the end of Q3 '23 from 2.9 times at Q2 '23. This was driven by strong earnings improvement and reductions in working capital investment due primarily to the initiation of a $150 million asset securitization program in December. In addition to reducing bank leverage by 0.4 times EBITDA, this program will reduce interest expense by approximately $1.4 million per year beginning in Q4 '23. In constant currency, our inventory was flat despite investments to support Q4 volumes and maintained strategic inventory levels to mitigate ongoing unpredictability in supply chains. After a period of investing in working and increasing inventory to create targeted buffers and absorb the impact of longer lead times and higher costs, we are now focused on reducing inventory were prudent. Excluding the impact of our $150 million asset securitization program, we believe the leveling off of our primary operating capital levels in Q3 '23 represents an inflection point in which further efficiencies should positively impact cash by the end of fiscal '23, with significant cash generation opportunities when supply chain volatility and costs begin returning to pre-pandemic levels. That said, we are fortunate that we are able and will continue to prioritize minimizing risk to our business and customers with investments in strategic inventory when necessary. Capital expenditures were roughly $18 million in Q3 '23 and $58 million year-to-date. We remain confident in our multi-year plan TPPL capacity targets, building off our capacity expansion success in fiscal '22. Our prudent capital allocation strategy remains unchanged. Considering higher interest rates, the new 1% tax on buybacks already in effect and global economic uncertainty, we have tightened our target to remain below the midpoint of our 2 times to 3 times EBITDA bank leverage for the remainder of fiscal year '23. Please turn to Slide 16. Our business remains well positioned as demand for our products continues to be robust, supported by mega trends providing ongoing tailwinds for the business. Given prevailing economic predictions and some slowdown in other industries outside of ours, we remain vigilant and are making conservative capital allocation decisions. As a reminder, we have a strong balance sheet and a number of structural advantages that have mitigated the financial impact to us in past economic downturns and which position us even better at this time. The diversity of our revenue model includes large portions of our business that are cycle independent and we have enjoyed significant cash flow generation during past recessionary periods. While I don't intend to review it again on this call, our recession playbook remains intact, and is included in the appendix of our slides. For the fourth quarter of fiscal '23, our adjusted diluted EPS guidance range is $1.33 to $1.43, which at the midpoint is up 9% from the $1.27 per share we just reported. Year-on-year, our midpoint adjusted EPS guide reflects a 15% improvement over the $1.20 per share we reported in Q4 '22. However, while our year-on-year improvement is commendable, it significantly understates the impressive operational improvement of our business, as our guidance reflects our expectation of continued sequential volume and net price/mix/cost gains, but our strong financial performance will again be muted by FX and interest rate headwinds similar to what we saw in Q3 '23. We expect our gross margin to be in the range of 22% to 24%, and we are refining our CapEx expectation for the full fiscal year '23 to approximately $90 million, reflecting investments in new products, including lithium production lines, continued expansion of our TPPL capacity and cost improvement in automation initiatives. We look forward to updating you on our continued progress and providing an overview of our refreshed strategic plan at our Investor Day on June 15 in New York City. [Operator Instructions] Our first question or comment comes from the line of Noah Kaye from Oppenheimer Corporation. Mr. Kaye, your line is open. Good morning. Thanks so much for taking the questions. I'd love to just start with order rates and lead times within Energy Systems. Can you comment on the characterization of the orders you're seeing coming in? Are we kind of passed double ordering or longer lead times? And just with the supply chain starting to loosen, how are product lead times trending now? Yes, I would say that there is -- and good morning, Noah. I would say there is definitely a normalization of buying behavior. I think there's a little bit less pre ordering. I don't know that people were double ordering per se, but they were ordering very early whenever they had any visibility for a project. And of course, just like us, it puts pressure on your balance sheet, these inventory balances. And so, there just seems to be a general getting back to normal. As you know, we're coming off some tough comps. We had some big wins like the CPUC project. But I would say even relative to historical norms, I'm very pleased with our order rates. Our book-to-bill in January was 1.2 in ES. So, still very strong -- just this January, which we just closed. So, in general, I think Drew feels really good about the business. And then, in the other parts of the business, we reference Europe. I would say, we've looked at kind of Europe's on the Motive Power side is the other area where orders maybe are a little bit soft. I'd say revenue is actually dead flat. But we do have some price increases in there. So, from a volume standpoint, I would say, it is a little bit soft. But in general, we feel pretty good about the overall demand for all the businesses. One other comment, Noah -- and good morning. It's good to talk to you. One other comment I think that's worth noting in our slide deck you can see, our quarterly backlog coverage historically was a little under 1. Q3 '21, it was 0.8. Our backlog coverage is still at 1.4. And Motive Power was 0.5, now it's 1.1. Energy Systems was 0.7, now it's 1.6. So, we really do still have a lot of ground to cover. Yes. But I think Noah's question is right. I think the things are getting a little back, more normal in terms of lead times and expectations. That's very helpful. Thanks. And then, you mentioned commodities a couple of times in the prepared remarks, and then we can see what's happening with lead prices. And I think we understand there's some lag on commodities because of FIFO accounting. But just high level, what are your expectations in terms of how commodities impact margin profile going forward? Maybe you could mention that in terms of what contemplated in the 4Q guide and then, as we look out maybe a quarter or two? Right. Well, commodities have come -- the commodities that are important to us, lead being one of them obviously, with steel, copper, the ones that are important to us, most of them have come off some pretty significant highs. I think the -- so the go-forward and it should -- and I think Andi touched on this in her prepared remarks, the go-forward should continue to help us as we run more of these inventories at the higher cost through the P&L and off the balance sheet. And in general, as I said in my remarks, the one thing we've got our eye on, obviously, is China kind of reawakening and what impact that could have on commodities, coming out of the COVID shutdown. That's certainly something we have our eye on. What we continue to do is focus on recovering those through our pricing actions, wherever it -- and unfortunately, I know it's frustrating for all of us that it just doesn't happen overnight. But I think we are starting to demonstrate our ability to recover those commodity impacts, freight impacts, inflationary impacts with our pricing mechanisms. So, yes, I'd say the general outlook is things are better. We're looking for some stability. We've got our eye on commodities with China, kind of coming back after the shutdowns. But in general, I think there's some tailwind there. It seems like you're in a trajectory where you've [inflicted] (ph) positively on net recapture and that's going to continue in the quarters ahead, is that a fair assumption? Yes, we're really focused and I'm proud of my sales people. I think it took us a little while, so -- to get where we needed to be. But I think there's a clear acceptance that the inflationary pressures belong to the salespeople. They own them, and whether it's wage inflation or commodity inflation, as we just discussed, they need to offset these with pricing actions. And it's just -- we're just trying to stay level from a dollar standpoint and we've talked about that it's dilutive obviously on margin math. But we fought like tigers to just protect our margins. And I'm very proud of the teams. And those -- we've got different pricing strategies for different markets, whether it's surcharges for energy in Europe, whether it's list price changes, whether it's gains of high stakes chicken with certain big OEM customers, we've had to run the full gamut, the full playbook over the last few quarters, but you can see some of that starting to catch up. Thank you. Our next question or comment comes from the line of Greg Wasikowski from Weber Research. Standby. Mr. Wesikoski, your line is now open. Hey, good morning, Dave and Andi. Thanks for taking the questions. I'll stay with the backlog. I was just curious, can you talk about how you view kind of moving through that backlog? I mean, usually growing the backlog is unanimously a good thing, but at a certain point you want to be able to kind of convert it to sales and then reduction also becomes a good thing in its own special way. So, just curious, how are you guys thinking about that moving through the year? Where -- quantitatively, where could maybe be a happy place to settle for the backlog? And talk us through your thoughts like are you happy when you see backlog go down because you're converting it? Are you happy to see it go up because you're getting new orders? Just how are you thinking about that for this year? It's a great question. And I'm happy when the customers are happy usually. And I don't think our customers have been really happy with us because of our supply chain delays. And that's been such a struggle for us. So, certainly, we want to reach some stability. What I always do is I always go back to sort of pre-COVID to see what the normal order rates were, what were the long-term trajectories, what did we have as CAGRs in our five-year model, and compare the order rates against that and try to isolate all these buying behaviors that Noah talked about some of these the hoarding, some of the advanced ordering, trying to isolate that. So, to your point, for us, I definitely want to see our contract manufacturing partners, our chip suppliers pick up the pace. We had a very [Technical Difficulty] reshoring. We are way behind the original schedules we had laid out to bring contract manufacturing out of the Chinese tariff zone. We're very late on that. We're really frustrated, but that's gotten better. We've had to redesign everything. We're really now at the point where one of the chipsets that we're still struggling to this day to get, we're really trying to move all of our customers off of that product range. So, there's so many moving pieces to your question. I don't really have a good number for you. I do -- the electronics and chip allocations is improving. So, we should see as we go in the F '24 better tariff performance, because we're going to be doing more onshore. We should be seeing a little bit shorter lead times, which again can impact the backlog, to your question, is a lot of our customers just say no. With some of the struggles we've had on lead times, they've been ordering early. I think, when they get more consistent that we can deliver in an eight, ten-week kind of period consistently, they probably won't order as often. So, I will kind of be happy as long as we stay at those long-term CAGRs that we laid out in our five-year model, stay above the sort of order rates, and really want to get this -- we still have a lot of electronics trapped in the backlog and that tends to be accretive to the mix. So, I know that's a long-winded answer to a very important question. But like I said, January orders were good. I think we'll see how they go for the rest of the quarter. There's some seasonality to this as well that we can't ignore. But -- between the RDOF projects, finishing up the CPUC project, the 5G small cell, there's plenty of opportunities for us in this business. Yes, got it. Thanks, Dave. That's helpful color. Next one, two-parter here on capital deployment. So, first part, just on the CapEx guidance going down a bit, I mean, nothing major, but can you maybe speak to that? And what you're expecting for the year forward just in terms of investing in growth versus being disciplined on CapEx side, and how you're thinking about that? And then, second part is that kind of leading into M&A. Obviously, focus is on reducing that net leverage number, but it's been a while since we've seen some M&A. So, just gauging your appetite there, what kinds of things you guys could be looking at or focusing on in terms of application or geography, et cetera? Yes, I'll start on the CapEx and then Andi can talk about the rest of the cap structure. But on the CapEx, we're a little disappointed that we're not getting it spent fast enough on some of these big projects, some of these big productivity improvement projects, expansion projects, just because equipment lead times have been insane. Things that we're supposed to take six months to build and ship from the equipment suppliers are taking two years. So, some of that is just frustration on our part that these equipment guys, they can't get -- it's not their fault. They can't get the PLCs and other issues. That's starting to unwind a little bit, which is helpful. So, hopefully, we're going to see some CapEx pick up. But we've been pretty rigorous about that. But typically, with CapEx with us, it's a question how much we can digest as opposed to how much we have available. And then, regarding the other uses of cash, certainly, I'll start with M&A. We always have our eyes open. We have the bankers in here, pitching ideas regularly. And you're right, when the leverage is closer to 3, your appetite is probably a little less, but things -- as the look forward as things start to improve. Obviously, the high cost of debt -- higher cost of debt has -- paying down some debt has some intrinsic value as well. So, there's lots of lots of things for Andi to juggle. Yes, I mean I think one of the things we've -- first of all, the CapEx on your first question, Greg, I think that's just timing. As Dave mentioned, that wasn't any kind of strategic pullback or anything. As far as capital allocation, we're very fortunate that we've got a business that kicks off a lot of cash. And that said, given the current market conditions, interest rates being higher, uncertainty, we are taking a little bit more conservative view on targeting leverage more in the lower end of our 2 to 3 times EBITDA that will save a little more in interest expense. You've got the stock buyback, 1% tax that's already in effect. So, we're -- and we want to have a little bit more dry powder. With that said, our business continues to kick off a lot of cash, so no change first to invest internally. As -- if there is a slowdown, PwC should kick off a lot of cash. We're still being intentional about making sure that we've got buffers for customers. But if things move and there's deflation, that'll certainly turn into a lot of cash. And acquisitions were always just up opportunistic. I don't think we have any real change in strategy there. Nothing to announce at this time. One thing, Greg, I think might be worth mentioning as well, we've talked about just a significant impact of FX and interest. I mean year-on-year, it might be an impact as much as close to $1.00 a share of the change. So, it's been significant. I think one thing I'm really proud of our team here is while there's a lot that's outside of our control, we're not being victims in this. So, there's a lot we're doing to try to mitigate. As you recall, we entered into $300 million FX swap that was saving $4 million of annual interest expense. We terminated that, received proceeds, paid down a revolver, that was $2 million of interest expense savings. Then we re-entered into another $150 million swap, that saving is about $3 million. We repatriated [$175 million] (ph) from EMEA to pay down a revolver. That will save us about $9 million of interest. And we had to do a lot of -- we got cash out of China. We had about $100 million of cash. We took almost half of that out trying to work closely with tax on making sure we can minimize any impact of doing some of that repatriation. We mentioned the change in kind of our capital allocation strategy. We're getting out of pension plan that we had that taking advantage of where FX and interest rates are at right now to buy out one from $20 million to $4 million, so we initiated that. So, there's a lot that we're doing. We've got some FX hedges that we put in place. It is a lot of headwinds, but I think we're not -- the asset securitizations that we mentioned will save us significant amount of interest, but burns down on the -- on our grid on our pricing structure and also gives us a little more dry powder. So, there's definitely significant headwinds, but our team is doing a lot to mitigate it where possible. Thank you very much. Our next question or comment comes from the line of Brian Drab from William Blair. Mr. Drab, your line is now open. Hi. So, I'd like to focus on the fork truck market for a minute. Can you update us on what percentage of the overall business or what percentage of Motive is related to fork truck? And then, this is the area of the business that I think people are -- if there are concerns, maybe there are -- they are around the outlook for fork trucks given the macro. And the latest data -- I guess, we don't have the fourth quarter reports from some of the fork truck guys, but latest data is declining orders there. And I'm just wondering if you could give us any insight into like what kind of conversations you're having with the fork truck manufacturers? And if you have the [WITS] (ph) data at your fingertips, that would be really interesting to see what the latest trends are in electric fork trucks? Yes, I don't have the WITS data, I apologize. That's my fault. But in terms of what we're hearing from the customers and conversations we're having, in Europe, what we talk a lot about still are supply chain constraints at our customers. So, they -- that's really the prevailing narrative. And so, really, it's a question of how much they're forecasting then. We haven't had a lot of beyond the Russia, Ukraine markets. We haven't had a lot of narrative about the -- oh thanks, Andi. Appreciate that. The WITS is delayed six months. So, the stuff we have is not very fresh, but I do have some WITS data here. But in terms of the narrative we get from them, it's still mostly about their frustrations of getting enough parts, whether it's steering mechanisms or whatever the issues they're having. It's different for each of them. So that's the dominant narrative. And then the U.S. markets, I think the supply chain narratives are there as well. But there seems to be a little bit more. They don't have the high energy overhang like we do in Europe. So, there just seems to be a little bit more buoyancy in the U.S. We just went through the budgeting process with the Board last week and Shawn gave a cautiously optimistic outlook with the go-forward. And if you know Shawn, you would know that he's not going to get too far over a skis. So, the -- we end that business we -- I feel a little bit better if things do turn down with the Ooltewah move, the Hagen move, we'll be in definitely a better -- from a fixed cost absorption standpoint, we'll be in a much better place than we were in prior slowdowns. But that's just -- it's really mostly still about all of these chronic nagging supply chain issues that are driving most of the narrative. And in terms of WITS statistic, so I don't read the wrong column or anything. I'm going to have Lisa just send you whatever information you want. That's dominant, the dominant. I mean there's floor scrubbers and a little bit of rail and stuff. But you could say 80% plus is related a fork lifts. Yes. So, that hasn't evolved dramatically there in terms of that percentage. Okay. And then, I'll just ask one other question maybe for now. The opportunity with the -- for 5G and small cells for EnerSys, we've been talking about it for, I guess, four, almost five years now. And I know the way that, that -- the 5G has evolved hasn't been as favorable as you initially expected. But today on the call, I think you said something about tens of thousands of 5G cells. I think we're -- are you still hoping that your -- the opportunity is 1 million plus or is this -- how has that changed and how are you looking at the timing of when that impacts EnerSys? All right. Well, the tens of thousands was specifically for some of the DOCSIS modem-enabled strand mounted. So that's kind of part of our product portfolio. So, when the cable companies are building their own networks out, they like to use the strand for the backhaul and the powering. So that piece is going well and has accelerated. And then, what we did -- so that's just part of it. And then, the bigger, obviously, is the big wireless companies like T-Mo, and Verizon and AT&T, and what their strategies are. It's interesting timing. We had a guest speaker at the Board meeting last week and he is kind of one of the leading industry experts in this small cell area. And so, we took the Board through a deep dive. And the key topic was the timing and why are things off of where we had originally predicted, especially as we did the Alpha acquisition. It was certainly a key part of our deal logic was small cell powering. Because as you probably remember, 5G spending is a good thing for EnerSys. So, whether it's the central offices, whether it's the big cell towers, we have content throughout the network. We just have -- we were excited about small cell just because we think we've got a very interesting product portfolio there. And we have a chance to command more market share in the small cell arena. So that -- and then as we've noted, in the past, it literally takes 1 million plus small cells to match the coverage and the speed. I don't think any of us are satisfied yet with 5G. In terms of the incremental speed and benefit of 5G versus LTE, I don't think many people are satisfied. And so that real change in performance will be when they can start to build out these small cell, these densification initiatives and use the higher frequencies. And it's been a technical challenge and we had a deep dive with the expert. Lot of the issues were COVID related last week. So, we went through this. And we have Caroline Chan on our Board from Intel and she's really one of the thought leaders in this space. And she knew this consultant pretty well. And there was just -- I don't think there was anybody that's on our Board or in our management team that's happy with these delays. But in the meantime, we haven't stopped on the product portfolio and we're getting really close on some UL approvals that will be critical in this space. So, in a sense, it's given us some time to do some things that we may not have had time to do. So -- but there's still a tremendous upside expected at least from this industry consultant on 5G spending. And what he essentially showed us was a chart where things slid over three years to the right. I mean, it was literally three years where everything has just been in the stasis on these small cell builds, but it's getting better. The only other comment that I would just add because, as Dave mentioned, we have some really great proprietary products that solve customers' problems, high electronics content. These are our higher margin products for the business as well. Yes. The mix here is favorable. And then, the other thing as we noted is we think we've got some unique value propositions and that should help as well. But again, I share everybody's frustration with this, but it's not us. And it's nothing that the team has done wrong. It's just really the focus of the big telcos has been on building those macro cell sites up. And that's helped us. Don't get me wrong. We've got a lot of those orders as well. Thank you. [Operator Instructions] Our next question or comment comes from the line of Tyler DiMatteo from BTIG. Mr. DiMatteo, your line is open. Hi, everyone. Thanks for taking the question here. Dave, can we go back to the TPPL capacity constraints, especially -- just wanted to get a better sense of that Missouri plan and kind of how you're thinking about it. And just any other color there, we'll really appreciate that. Sure, Tyler. Thanks for the question. I would say at the highest level, we are hanging in with our demand and TPPL growth. But it has been painfully expensive to do it so far. So, we have generated a tremendous amount of manufacturing variances on the way there. And some of that is not in our control per se. Like for example, the wage pressures. And I think the sales guys, like I mentioned earlier, have owned that portion of the manufacturing variances. But the other part of the manufacturing variances, equipment delays from suppliers has been a huge issue, absenteeism, training, just the tenure. We're trying to hire a lot of people in a job market that's really tight in an area of the country with especially low unemployment. So, we've just done every trick in the book that we can think of to get the folks to come to the factory. We had a little bit of COVID scare that hurt us a little bit on some of the tenants issues. So, as I noted, the quarter started off really rough. And then, I would say, Andi, for Mark's group, the Specialty group, we probably left $15 million of revenue on the dock in a sense. That's about the right number, right Andi? That's about the right number. So, we -- December was pretty good. And January is really good. And so, we just have to keep these -- but we got ourselves into a pretty deep hole. And a lot of this, Tyler, has just -- it's a new team that's there, and we just need to get it stabilized. And every day we just need to make some improvement. So, I think we're going to -- between the CapEx investments between the demand, bringing on new customers and demand, we're still very confident that we can achieve what we've laid out historically as part of our long-term growth initiatives. What I need the team to do is get there without so much pain and it's literally, Andi, that -- [close out] (ph) the inflationary stuff, it's still tens of millions of dollars of productivity scrap related things that as we've ramped up this factory that we've left on the table. Yes. If we look at think the comment that we've made in the past, Tyler, that might be helpful, and this is just pure data. If we compare our Arras plant, which is our most highly-performing thin plate pure lead plant to our Missouri plant, we've called out we probably have $40 million of delta between performance, scrap, productivity, efficiency. Now that takes a longer time. You've got some of it as CapEx investment. You have to train people. So, it's a multiyear project. But I would say we run the Arras plant and we know how to do it. So, it's not an engineered number... It's same managers. It's same engineers. It's same equipment. Now, one of the big gaps is the Arras factory is farther along on automation. And we have struggled. In defense of my team, we have struggled with these equipment suppliers. We've ordered equipment years ago that's still just now getting commissioned. So, it's been -- we have not escaped COVID pressures, hiring pressures, labor pressures, where -- and I would say, for EnerSys as a company, our Missouri factories are right at the epicenter of those challenges. But every day is getting better. One of the metrics we use in HR reports on is just that the average tenure of our folks and 90 days seems to be a magic number, and we definitely have a lot more folks now that have at least 90 days tenure with the factory. So, we just -- we've got a lot of work to do, but I think the general question in terms of our CapEx deployment and generating enough demand to continue the growth in TPPL, I think we're -- everything's full steam ahead in that area. [Multiple Speakers] Okay, great. Thank you. I know we're out of time here. I'll take the rest of my questions offline. Thanks for the time. Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Shaffer for any closing remarks. Well, I just want to thank everyone for joining us today and we look forward to providing further updates on our progress on our fourth quarter fiscal year-end call 2023, that's in May. So, have a good day everyone. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

EarningCall_149

Good day, everyone, and welcome to the STERIS plc Third Quarter 2023 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. Thank you, Jamie, and good morning, everyone. As usual, speaking on our call today will be Mike Tokich, our Senior Vice President and CFO; and Dan Carestio, our President and CEO. I do have a few words of caution before we open for comments. This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission or rebroadcast of this call without the expressed written consent of STERIS is strictly prohibited. Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those risk factors described in STERIS' securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. STERIS' SEC filings are available through the company and on our website. In addition, on today's call, non-GAAP financial measures, including adjusted earnings per diluted share, adjusted operating income, constant currency organic revenue growth, and free cash flow will be used. Additional information regarding these measures, including definitions, is available in our release, as well as reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. Thank you, Julie, and good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our third quarter performance. For the quarter, constant currency organic revenue increased 7%, driven by volume, as well as 300 basis points of price. As anticipated, the divestiture of the Renal Care business impacted our revenue comparisons to the prior year by about $47 million, which is detailed in the press release tables. This is the last quarter of a year-over-year impact for the Renal Care business as we divested it in January of last year. The integration of Cantel Medical continues to go well. We achieved approximately $10 million of cost synergies in the third quarter, bringing our year-to-date total to about $45 million. We are well on track to achieve our stated goal of approximately $50 million in fiscal year 2023. As anticipated, gross margin for the quarter decreased 200 basis points, compared with the prior year, to 43.1%, as pricing, currency, and the favorable impact from the divestiture of Renal Care were more than offset by lower productivity, unfavorable mix, and higher material labor costs. Sequentially, the impact of material labor costs have improved and totaled about $15 million in the quarter, compared to the prior year. This puts us at about $75 million year-to-date, with our outlook of $90 million for the year remaining unchanged. EBIT margin declined 10 basis points to 23.9% of revenue, compared with the third quarter last year, which reflects the gross margin pressures mentioned earlier, which were partially offset by lower SG&A expenses. The adjusted effective tax rate in the quarter was 23.4% higher than the prior year, due primarily to geographic mix and favorable discrete items, which occurred in last year's third quarter. Net income in the quarter was $202.4 million and earnings were $2.02 per diluted share, reflecting the lower anticipated value. Capital expenditures for the first nine months totaled $290.5 million, while depreciation and amortization totaled $410.7 million. Year-to-date, our capital expenditure spending has been higher than anticipated, primarily due to timing of our investments within the AST segment. We still expect our full year capital expenditures to be approximately $330 million. Total debt increased slightly in the third quarter to just over $3 billion, reflecting borrowings to fund a few small acquisitions and share repurchases. Total debt to EBITDA is slightly over 2.3 times gross leverage. Free cash flow in the first nine months of the year was $263 million. Free cash flow was limited by higher-than-planned capital spending, mainly due to timing, and higher levels of inventory. With continued pressure on working capital, in particular, inventory and, now, accounts receivables, we now anticipate the free cash flow for the full year will be about $500 million or a reduction of about $100 million, based on our last guidance. I will cover a few highlights from the quarter and then address our revised outlook for the fiscal year. Starting with Healthcare, the segment grew 10% on a constant currency organic basis in the quarter. This was driven by high-teens growth in capital equipment. In particular, improved shipments in our IPT business were driven by operational and supply chain improvements in core washing and steam products. In addition, we saw double-digit revenue growth in our surgical products. Our main supply chain issue continues to be with electronic components. We are working hard to resolve these issues. And as we have discussed, we are working with existing and new suppliers where possible to ensure the availability of parts in order to meet customer demand. The Healthcare services business delivered double-digit constant currency organic revenue growth, driven by increased demand and improved pricing. We also saw sequential improvement in consumables. Consumables constant currency organic revenue grew low-single digits, compared with third quarter of last year. Supporting that growth, U.S. procedure volumes improved in the quarter, with recovery outside of the U.S. still lagging. The underlying dynamics of our Healthcare segment remains very favorable. Hospital capital spending remains stable, as evidenced by our Healthcare backlog, which totaled over $500 million at the end of the quarter. Orders for the quarter remained at approximately a 60-40 split for replacement and large projects, and we are not seeing any order cancellations at this time. Although we still have some delays, our capital shipments have improved dramatically from prior quarters. Approximately $30 million in capital equipment shipments were delayed into the fourth quarter. Overall, our third quarter Healthcare performance showed nice improvement. Opportunities remain from a supply chain perspective, which we anticipate will take some time to fully work through. Our expectations for the fourth quarter reflect a conservative outlook on how quickly we can recover from these challenges and difficult comparisons in AST and Life Sciences. Our AST segment grew 7% on a constant currency organic basis despite a reduction in demand for bioprocessing disposables and delayed shipments from Mevex, our capital equipment business. On the bioprocessing side, our second quarter this year was a peak level for biopharma within AST. We are hearing from customers that they are resetting their expectations due to reduction in vaccine production. Importantly, we are not seeing declines in total revenue at this time, but rather a flattening of growth. Positively, we anticipate that our core medical device customers will benefit from improvement in procedures, which we expect will help AST continue to perform at historic levels. Regarding Mevex, a large E-Beam capital equipment order of approximately $10 million was delayed into Q4, as our customer was not ready to receive the unit. Turning to Life Sciences, constant currency organic revenue was down about 1% for the quarter, with declines in capital equipment and consumables, somewhat offset by growth in service. The same factors impacting the bioprocessing demand in AST are also impacting our Life Sciences consumables volume. In addition, we have difficult comparison with strong consumables growth in the third quarter of last year. That said, we do anticipate that this is a matter of timing as cell and gene therapies continue to increase in demand, which should help offset the reduction in vaccine production. We remain confident in the long-term growth drivers within the customer base for both AST and the Life Sciences segments. In addition, Life Sciences had an unanticipated shipping challenge out of Europe that limited capital equipment growth in the quarter by about $10 million. Positively, backlog remains at near historic levels at over $100 million. Dental increased 1% on a constant currency organic revenue basis in the quarter. Procedure volumes remain at approximately 95% of pre-COVID levels due to the broader economic pressures impacting consumer spending. Based on market data, STERIS is performing better than market and benefiting from pricing and modest share gains. As you heard from Mike, gross margins remained under pressure as anticipated. Despite the impact of lower gross margins and increased pressure from foreign currency, we hit -- we held EBIT margins about flat in the quarter, as SG&A was lower than planned, largely driven by lower incentive compensation. With added pressure on interest rates and taxes, our adjusted earnings per diluted share for the quarter came in at $2.02. As a result of our performance to date and our expectations for the fourth quarter, we are revising our full year guidance. As reported revenue is now anticipated to grow 6%, compared with prior expectations of 8% growth. Based on foreign currency forward rates through March 31, 2023, currency is now anticipated to negatively impact revenue by approximately $110 million this fiscal year, a decline from expectations of approximately $150 million. Constant currency organic revenue is now anticipated to grow approximately 7%, compared with prior expectations of 10%. With one quarter left, this revision in outlook implies the challenges, which limit our performance in the third quarter do continue. Reflecting on the lower revenue, adjusted earnings per diluted share are now anticipated to be in the range of $8.00 to $8.10. Our long-term expectations for the business remain unchanged. We continue to be very strongly confident and believe that STERIS is capable in generating mid-to-high single digit constant currency organic revenue growth and double-digit earnings growth into the future. Great. Thanks. Hi, I just wanted to confirm something here, Dan. So, you called out $30 million in delayed capital shipment in Healthcare, I think, and then $10 million from AST and then $10 million, I think, from Life Sciences. So, if I look at those and add them up and get to $50 million, I mean that seems to be about -- the mix might have been different, but about what you were shy of the Street. Is that -- are we thinking about that correctly? Dave, I would also add in there. The reduction in bioprocessing was another $10 million roughly, and that was split about evenly between AST and Life Sciences, just so that we're all on the same page. No, I appreciate that. And I guess, one for Dan too. I mean, obviously, the good news is this is not a common occurrence with you guys. But if we look at this, the -- I think it even said growth in bioprocessing customers, but you explained that the vaccine was the main driver. But how does that sort of -- I guess, what is the lead time there? How does it sort of maybe sneak up -- probably not the right word, but on use of that, we didn't know this last quarter and now, we do? Yes. So, let me give you a little background. So, our customers are typically, at least in AST, where we took the biggest hit, are typically the manufacturers of single-use technologies that are sterile technologies that are used in aseptic manufacturing for vaccines and biopharmaceuticals. What we saw -- what we have seen for the last couple years is high double-digit growth on a year-over-year in that sector within AST. It's been one of our larger growers and depending on the quarter, it's contributed anywhere from 1.5% to 2.5% growth on top of the normal growth that we've seen in AST. That peaked in Q2, which would be at the end of the summer, early fall, which would be logical going into high vaccine production sort of season. Our customers had built a lot of inventory. And with the slowdown and either vaccine reluctancy or just vaccine production in general, they were stranded with a lot of inventory. And consequently, our volumes in Q3 went down significantly. So, we started to see it in the beginning of Q3. At that point, there is nothing we could do to adjust, and we think this is something that will work its way through as the inventories burn down. And the underlying supporting growth for single-use technologies in bioprocessing remains. It's -- once we work through the tough comparison of the vaccine spike that was anticipated. Hi, good morning, Dan, Mike, Julie. I just want to take a step back, Dan. Can you just -- could you just kind of frame for us what you think the normalized growth profile for STERIS is over the next several years? I imagine you really don't think it's a 10% or 11% grower, and where you're coming in this year is probably more in line with, what kind of longer term, how you look at the business? Yes. I mean, our stated objective is to grow high-single digits on the topline and low-double digits on the bottom line. And we believe with a high degree of confidence that's something we can continue to do even in the current market conditions over the long haul. And then as you think about going out to next year versus that high-single digits, what looks, I guess, better or worse as you think about next year? Matt, we've got to get through Q4 at this point. And so, we are not doing any guidance for next fiscal year. A few comments I would say that are -- this is preliminary, but encouraging is -- and you've heard some of our other medtech peers mention that they're optimistic about procedural recovery in the second half of the calendar year. We believe things started in Q3 to recover back to pre-COVID levels in Healthcare, particularly in the U.S.; it's still lagging pretty significantly outside of the U.S. But assuming that holds and improves in the second half of the calendar year, since we're largely a procedure-driven company, that would be beneficial to us. And Matt, I would just also add. Obviously, our backlog remains -- at least at Healthcare at record levels and within Life Sciences, near-record levels. And you have seen that we are getting through some of the supply chain constraints. We did ship more sequentially. That $30 million of capital deferral in Healthcare was $60 million last quarter. I mean, we are seeing progression there. So, that does give us, as we look out further, more confidence for next year. Okay. And I guess, just the last one, just on the order environment. I mean, your backlog did go up sequentially. It typically does on a seasonal basis. But as you're shipping out more from supply chain improving, how should we think about the order environment and your ability to replenish those? It's remained very strong at this point, which I know is a bit in the face of everything you read about the financial performance of a lot of the hospital systems these days. But they seem to be still willing to significantly invest in the future capacity requirements. For procedures -- and keep in mind, largely, everything that we sell in terms of capital into hospital systems, it's almost like infrastructure. In order for them to perform at a higher rate of sort of volume, they've got to have more sterilizers, they've got to have more washers, they have to have more OR tables and lights. So, I think our equipment is not -- it's not a luxury, it's a utility in many respects. Hi, thanks. Good morning. A couple on the bioprocessing market. First, Mike, if I heard you correctly, $10 million headwind in 3Q. Is that the right way to think about 4Q? And then as I kind of listened to what your customers are talking about, they're seeing some near-term headwinds from COVID, but -- and inventories, but they're kind of looking to the back half of this calendar year, where things will normalize again. Is that maybe the right way to think about it for you all, or is there some kind of lag in terms of what they're seeing versus when the demand comes to you all? I think what you're going to see as it relates to bioprocessing is you're going to see pretty tough comps leading up to Q2 of this past year, the year that we're currently in. So, I think as we burn those down and get back to what is the normalized growth rate for bioprocessing, which is still in the mid-to-higher double digits, but it's going to take some time to burn through the inventory and to burn through what was a spike in vaccine production demands. Okay. Thanks for that, Dan. And then my follow-up, which you may have answered, but I'll check is, just on the AST side of things, did the slowdown due to COVID impact any of your kind of capital allocation plans, especially as I think about X-ray capacity? No. I mean, it's -- we're obviously looking at our capital spending and adjusting the timing of when we build and add this -- the infrastructure into our capacity. The market and just the inconvenience of supply chains and construction has helped us defer capital a bit, just because it's been a challenging time to build anything. But no, our plans remain largely unchanged, maybe different prioritizations of what comes online first. But other than that, the projects are still in play and we're very confident about those. Yes. Good morning. Thanks for taking my questions. I want to ask one about the backlog in Healthcare. I understand you don't want to give guidance for '24 yet, but just not -- without specifying a time frame, I guess, it just seems like you kind of expected some above-normal growth this year and -- given the backlog and that didn't happen mainly because of the supply chain, I guess. But is there still potential for you to -- as you catch up on sort of that backlog, to see above-normal growth in the Healthcare business at some point? I mean, what I would -- yes, at some point, and we're not defining that point at this time. We expect sequential improvement in our capital shipments as we look to the quarter that we're in currently. And as we look into next fiscal year, we continue to believe things are improving and that would lead one to believe that we will deliver a disproportionate amount of capital in that backlog in the first half of the year. But we have not modeled that out and we have not done our planning yet on that. No, I understand. And then just as far as pricing I mean, good to see the 300 basis points. Again, without asking for a specific number for '24, but just I'm wondering about the sustainability of kind of that higher level of price increases. Is that -- with your contracting and everything that's in place, I mean, is that something that's got some legs to it that could continue for a while, or is it more like a one-year bump and then kind of goes back to, like, normal levels? I think that largely is determined by what happens or continues to happen with inflationary pressures. To the extent that we need to push through pricing and it makes sense to do so in order to protect our margins and still remain competitive in the marketplace, that's something that we'll do and we have always done consistently at STERIS. Okay, got it. And then my final question, just on the AST business. Just given what's happened with your primary competitor there with all the EO litigation and everything, I wanted to see if you've seen any -- I'm not asking about the litigation specifically, but just have you seen any kind of movement away from them or any impact on your business because of what's happened with them? No, I wouldn't say so. I mean, the current situation in the industry is the capacity is pretty tight, especially as it relates to ethylene oxide here in the U.S. So, we have strong partners across medtech, and we're always striving to take a little more share of wallet wherever we can do that. Hi, good morning. Thanks for taking our questions. First one, I'll follow up on Matt Mishan's question earlier, but maybe take a different stab at this. I wanted to come back to some questions around guidance. A lot of things that are understandably outside your control, we've seen that here this year. But guidance is in your control, and this is the second time in three quarters where we've seen guidance lowered. So, since we're sitting just a few months away from fiscal '24 guidance, I guess, what learnings can you say that you've taken from this year that can help inform how you set your outlook for fiscal '24? And then I know a few others have asked, but I guess, just any early puts and takes we should be considering as we work through our models for next year, particularly on the equipment side? Yes, Jason, I'll make one comment, and then I'll let Mike add a few comments as well. I think we came into the year when we did our planning in our guidance with an awfully large backlog. And just -- and we're under the impression, because we had navigated COVID incredibly well at that point relative to supply chain and we really got -- we got tripped up pretty bad in Q1. And it exposed some vulnerabilities in our supply chains across our manufacturing network. What I can tell you is we're a lot more resilient now and we have a much better eye and a much better strategic focus on managing those supply chains and having much more resiliency, and I believe that will carry forward into next year. Now, having said that, just because you roll into the year with a large backlog, I think we need to be a little more cautiously optimistic and a little more metered in our expectations of how quickly that will shift. Yes. I think surgical procedure volume was the other thing that we anticipated was going to be much higher this year. And obviously, everybody knows how that is playing out, although from a favorability standpoint, we have seen some improvement in Q3 in the U.S. in particular. But again, there is just so many moving pieces here. And to Dan's point, I think conservatism at the end of the day is the norm for us, and we have put out a outlook for the fourth quarter that we believe is conservative in nature, based upon the facts that we continue to work with throughout the year. All right. Very helpful, and that's good to hear. Okay. Then maybe one on free cash flow. I mean, we saw the pretty sizable reduction. I know we're talking, I think, some round numbers here, $500 million versus $600 million. But that is a much bigger drop than what's implied just from the EPS cut. I think, Mike, you mentioned some comments there around inventory running higher, receivable collections running lower. Maybe could you bucket those two? And does that reverse as we start thinking towards free cash flow then for next year, does working capital work lower? Yes. I would say that if we go back to the beginning of the year, we anticipated about $675 million in free cash flow. And obviously, we're down to $500 million. And I would bucket though, that inventory and receivables two-thirds, one-third. Inventory is remaining elevated. Obviously, as we have not been able to ship at the rates we anticipated, we are carrying more inventory, as we've talked many times the last couple of quarters. We continue to fill our manufacturing slots. So we're building, building, building, waiting for that golden screw. But that golden screw doesn't come, that product remains in inventory until we ship it. So, inventory has continued to be elevated. And then on the receivables side, it's not our inability to collect. It's just the timing of collections. We have about just under a 60-day DSO that we have collection. So, originally, we anticipated shipping earlier or more product in the third quarter. That has shifted to the fourth quarter, which pushes collections into the first quarter. So, free cash flow isn't lost. It's just more of a timing issue. Hi, good morning. Thank you. I want to follow up on bioprocess and AST and trying to put together some math, Dan, that you mentioned earlier in the Q&A. So, at one point, not long ago, it was contributing 1.5 points to 2 points of growth to the segment. I also heard that it's been growing high-double digits, which I would interpret as 15% to 20%. So, if I put those two data points together, bioprocess as a portion of total and AST is 10%. Is that a ballpark? The question is -- Okay. The follow-up also AST. The Mevex $10 million slippage, I know this is a recent acquisition. It's been lumpy quarter-to-quarter. I had $10 million of revenue from this in the year-ago quarter. And now, you're calling -- while you were annualizing it in the numbers and now you're calling out a $10 million slippage out of this quarter, which I would interpret as Mevex was at or near zero in the quarter. So, the question is, what is the revenue headwind from this equipment line in AST year-on-year? Yes. Your math is about right. And in total, we're somewhere between $25 million and $30 million for the full year for Mevex. But yes, you're exactly right, Mike. It was near zero. So, that full $10 million is flipped from one quarter, third quarter to the fourth quarter. And again, it's the timing. It is lumpy, unfortunately. I know that AST has in the past been much more predictable for us, but Mevex has hurt us twice now with shipping issues. But if you add the Mevex shipping issues, you take the biopharma processing, you're back to somewhere in the low-teens growth for AST. So, the trajectory hasn't changed dramatically, but it's the timing that is the concern, I think, from everybody's standpoint. Yes. Just to add to that, Mike, those systems for Mevex can be anywhere from $5 million or $6 million to $12 million, and they're large build systems with lots of conveyance and complicated electronics and control systems. And we rely on our customers to have the infrastructure in place before we can come install. And sometimes there's change in scope and sometimes, there's just delays in construction. So, it's as much as we try to stay on top of it and help project manage. Ultimately, it's in the hands of our customer as to when we can deliver. I have two for me. I would hop back in queue and ask a few more, but I guess -- maybe I'll do that and come back in. So, thank you. Yes, sorry about that. I guess, we're going to be doing some follow-ups on this call. Just first on the consumables, the low-single digit growth you saw, kind of -- it's been lagging or like flat to low-single digit, maybe even a little bit of declining in a couple of quarters ago. Kind of what's your sense of hospital inventory of your consumables? Is it pure volumes, or has there been some destocking that's going on as well? I think it's purely procedural volume-driven. They don't hold a lot of this, because it's heavy, it's bulky. It takes up a lot of space. So, it's not something that would carry a lot of excess inventory of. And is it across the board from core STERIS, Cantel, Key Surgical, or is there a little bit of mix change in pieces of the business that may be lagging versus others? You can get into a really complex stratification of this. But in the end, it's not really any one particular piece that's driving it one way or another. So, I wouldn't say it's a mix issue. It's truly procedure-driven, certain procedures in terms of where we have a little more exposure with our endoscopy products, obviously, to endoscopy procedure rates. But generally speaking, it's all procedurally-driven demand. Matt, you guys know we are heavy U.S., right, compared to a lot of other healthcare companies. We're 80% U.S. in what we do. So, the trends here have the biggest impact on our performance. And then back to AST, I mean, does this open some capacity for AST with some slower growth in bioprocessing? I guess -- and my sense would be you could fill that fairly quickly if -- because there's like the shortage through the industry. Yes. Well, keep in mind, all single-use technologies for bioprocessing only run in radiation, so not ethylene oxide, where there's real significant shortage. And really, the phenomena is, if we're running with a lot of product backlog, especially as we come up to the holiday seasons, in a typical year in AST, we would starve out our plants. So, we'd shut down a day or two and you either do it the Christmas week or you end up starving out, because it takes customers a longer time to start up production, because they've shut down factories before you see their supply chain start to flow in early January. In the case of the last couple of years, we've been sitting on so much backlog demand in bioprocessing that we ran at a number of our plants straight through the holidays, 24/7, 365. So, not doing that in this year's case; it's basically straight drop-through because of the high fixed cost model at AST. Okay. And then, Mike, if I'm looking at the balance sheet, right, it looks like the debt -- you've generated cash flow through the course of this year, even with the working capital build. Why -- I guess, why has the debt balance gone up? And why not pay some of that down to lower interest expense? Yes. So, the debt balance went up primarily for two reasons. One, we did some minor acquisitions, some tuck-ins that we paid cash for during the quarter. And then we continued to fulfill our dilution offset for share repurchases. And then we also were opportunistic during the quarter on the share repurchase side just due to the overhang that we were facing with the EO situation. So, in total, we spent about $88 million in the quarter on share repurchases and then another $50 million to $75 million of cost for acquisitions. So, those are the two main drivers that changed our profile of debt. We still are within the leverage ratio that we are very comfortable in. We're just over 2.3 times. We did pay off during the quarter a private placement note that was due, which was about $91 million. So, we actually just borrowed -- it was fixed versus floating. So, our interest rate ticked up just a tiny bit. Our average interest rate is just under 4%, as we sit here today. Hi, thank you. Just two. In Healthcare capital, given the supply chain strains, are you fully competing for new orders, or has the supply chain challenges impacted your kind of -- your ability to bid for new business? We're still fully competing. And you got to think of it this way. These are generally -- a significant portion of our business is long-term projects. And then the other portion is replacement, and that's largely replacement of equipment that we already have placed in the marketplace. So, if we have a longer term in terms of delivery for replacement unit, we tend to be able to work with the customer and manage that through our service arrangements and service contracts until we can replace that with a new system. Makes sense. And the last one. The few small acquisitions in the quarter, anything to flag there? In what business segments and any revenue that we -- even if minor, any revenue that we should consider for our bridge work over the next year or so? Thank you. We called those out in the Q last night, Mike, some Healthcare and AST really small deals in some cases, buying out a former distributor, for example, where there's really no change in revenue to the company, but we're choosing to go direct to markets opportunistically. And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Julie Winter for any closing remarks. Thanks, everybody, for taking the time to join us this morning. If anyone would still like to chat, please let me know, and I'll be happy to do my best to accommodate you. Take care.

EarningCall_150

Good afternoon, and welcome to the LightPath Technologies Fiscal 2023 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. Thank you. Good afternoon, everyone. Before we get started, I'd like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations, involve various risks and uncertainties, including the impact of COVID-19 pandemic that is discussed in our periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be prove to be inaccurate and there could be no assurances that the results would be realized. In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliation in the company's SEC filings and press releases. Sam will begin today's call with an overview of the business and recent developments for the company. I will then review financial results for the fiscal year. Following our prepared remarks, there will be a formal question-and-answer session. Thank you, Al. So good afternoon to everyone and welcome to LightPath Technologies’ fiscal 2023 second quarter financial results conference call. Our financial results press release was issued after the market close today and posted on our corporate website. The second fiscal quarter of 2023 proved to be eventful LightPath Technologies. In prior quarterly calls, we have touched on the fact that LightPath is evolving from a component manufacturer to complete solutions provider. Evidence of this evolution spouted up throughout the quarter and I'll will spend a large part of our time today discussing these important events. Additionally, I will discuss what we see as there were three pillars of growth going forward; the solutions business, defence business and the new high volume applications for infrared imaging. Starting with the first pillar of growth, the Solution business. The most important item I'd like to discuss here is our company's first ever new system level product mantis. Mantis is an advanced infrared camera that allows the users to record images across both midwave and longwave infrared spectrum and without the need for cryogenic cooling. This camera is significant for LightPath in that it is the first standalone finished product LightPath has produced in many years and it serves as a proof statement for our capabilities. I want to delve deeper into the significance of Mantis. Our plan to evolve into a solutions provider depends on LightPath displaying two key capabilities; value-added system development and proprietary differentiators such as in this case, our Black Diamond glass. With proprietary differentiators, we can design and deliver solutions that are better than otherwise available, while at the same time capture more of the value created versus only producing the components. Developing Mantis puts down with capabilities on display. The production of this unique camera represents a leap forward for manufacturing individual components to producing standalone systems. Design wise, our Black Diamond glasses all enabled the ability of the camera to image across that entire range that is two to 12 micro-meters or mid-wave and long wave bands without the need to refocus the camera when imaging different bands. For the user, this means that instead of having two separate cameras and focusing and pointing each camera separately, they can now do this with one camera, not only reducing their upfront costs substantially, but also improving significantly the operation and total cost of ownership. This also means we can now use existing technology, that of an uncooled microbiometer, and deliver a camera system that can also image in the midwave without the expensive cooling mechanisms that today are needed for the existing midwave camera technology. We expect this in turn to open up new markets and applications which until now found midwave imaging to be cost prohibitive. We are already working with customers on specific opportunities in defense, industrial and safety applications -- safety industries. The optical performance of this camera, because such a wide range of wavelengths cannot be achieved with traditional crystalline optics, it is really enabled by the unique properties of our materials. Chief among those -- chief among them are the ones licensed exclusively from Naval Research Lab. Besides the technical advancements visible in the camera, the camera also provides customers with a vision of the value LifePath can bring to any partnership by providing complete solutions. Additionally, during the last quarter, we also announced other exciting developments on the product front related to our second pillar of growth that is the defense business. Our BD Six glass was qualified by the European Space Agency for use in space, placing BD Six and Light path at the forefront of optics in extreme conditions. This project was specifically initiated by European Space Agency to develop and qualify an alternative specifically to germanium for use in space. Our BD Six glass was tested side by side with germanium to show and prove that it withstands the exact same conditions and performs at least as well as germanium. Having been an advocate for the need and potential to replace germanium with materials like ours, we are happy to see customers not only driving towards that direction but also willing to finance the effort needed for their applications. Substituting BD6 for germanium continues to be primary focus of LightPath and other stakeholders in the industry and in particular in the defense and aerospace industries. The growing awareness among the DoD and other government agencies for germanium's potential supply chain issues or liabilities. Is beginning to fuel demand to get more of our V Six materials qualified and designed into systems point. In case being that last quarter we announced that LightPath reached a backlog of 31 million in mid-December, our highest budget backlog in many years which beat our previous high watermark of 24 million set last August. Much of the growth of this backlog is driven by new defense contracts for which our products have been qualified and for which we received associated orders. With those contracts we are beginning to see VD Six take center stage, while Germanium is in some cases being phased out completely or avoided. One of those recent awards represents a new program which is one of the several new products we have been discussing in recent quarterly calls. This program is anticipated to become a new 10% customer for us over the next few years and while backlog fluctuates over time, we do believe that they are a reliable indicator of future revenue. At the end of the quarter, our backlog remained at historically high level for quarter end of 29 million. As mentioned on several recent occasions, the backlog is skewed more towards defense and commercial customers in the US and Europe than it has ever been. Additionally, around 20% of the backlog remains comprised of solutions oriented audits which is significant. We see both those developments being solution mixed in the backlog and the European and US dominance of the backlog as positive indicators that our strategy is working. This strategy focusing more on value added solutions. And lesson components also naturally leads us further away from the commoditized components that had historically driven our sales in Asia. Regarding our third pillar of growth, new high-volume applications for infrared imaging, we're beginning to see the potential of new significant implementations for thermal imaging in the commercial world. More specifically, we're working with several companies in the automotive space to explore adding thermal imaging to the automatic braking systems in new cars. The Institute for Highway Safety published a report that concludes that automatic braking systems are four times less effective at night compared to daytime. One solution for this problem, which we're seeing as potentially being implemented, is adding a thermal camera as another sensor input to the automatic braking system. This implementation, while far less sophisticated than some of the LiDAR solutions out there, is also far less risky and much simpler and lower cost for the automotive companies to implement. To date, we have been in various phases with four different automotive customers, with one of the assemblies having passed field qualification with one customer. The potential average sale price we are seeing for those assemblies varies between $20 to $50 a unit, depending on how much of the camera solution we offer. And though automotive implementations take time and there is always some inherent uncertainty, we believe that such new implementations and applications could act as our third pillar of growth for the next few years. Lastly, but certainly not least. After the quarter end, and to support this growth that we're beginning to experience, we raised a growth of $10 million in a secondary common stock offering. Among other things, this additional capital will be used to expand our manufacturing capabilities and significant increase in production capacity, in particular in the US. And Latvia, one of the largest first impediments to our ability to fulfil larger orders with limited production capacity, in particular in the defense business. We believe that the investment in our Orlando facility and our facility in Luthria will drive higher order volumes. We also intend to use a portion of the funds to pay down and restructure our debt, further strengthening our financial standing and reducing our quarterly debt payments, repayments and interest expense. Before ending, I'd like to thank our employees and stakeholders who have continued to work diligently through the various transitions and hurdles we have endured. We see a bright future and a growing company because of their dedication and hard work. I will now turn the call over back to our CFO, Al Miranda, to review our first quarter financial results. Al? Thank you, Sam. I'd like to remind everyone that much of the information we're discussing during this call is also included in our press release issued earlier today and in the 10-Q. I encourage you to visit our website@lightpass.com to access these documents. I will discuss some of the primary financial performance metrics metrics and provide additional color on them to better assist investors on a consolidated basis. Revenues for fiscal second quarter were 8.5 million, compared to 9.2 million in the year ago period. Sales of infrared products were 4 million, or 47% of the company's consolidated revenue of the second quarter. Revenue from precision molded optics or PMO products were 3.9 million, or 46% of consolidated revenue, and revenue from specialty products was zero 6 million, or 7% of total company revenue. Revenue generated by infrared products was approximately $4 million in the second quarter of fiscal 2023, compared to approximately $5.1 million in the same period of the prior fiscal year. The decrease in infrared product sales is due largely to timing issues related to a renewed large annual contract. Sales from PMO product was $3.9 million, compared to $3.8 million in the same period of the prior fiscal year. The increase in revenue is primarily attributed to increased sales in defense, industrial and medical customers, somewhat offset by decreased sales to telecommunication customers. Sales in specialty products was 0.6 million, compared to 0.5 million in the same period of the prior fiscal year. The increase was primarily driven by increased demand for pollinator assemblies. Gross margin in the second quarter of fiscal 2023 was approximately $3.2 million, an increase of 15% as compared to approximately $2.8 million in the same period of the prior fiscal year. Total cost of sales was approximately 5.2 million for the second quarter of fiscal 2023, compared to approximately 6.4 million the same period of the prior fiscal year. Gross margin as a percentage of revenue was 38% for the second quarter of fiscal 2023, compared to 30% for the same period of the prior fiscal year. The increase in gross margin as a percentage of revenue is partially due to the mix of products sold in each respective period. BMO products, which typically have higher margins than infrared, comprised 46% of revenue for the second quarter of fiscal 2023 as compared to 41% of the revenue for the second quarter of fiscal 2022. In addition, within our infrared product group, sales for the second quarter of fiscal 2023 were more heavily weighted toward molded infrared products than in the same quarter of the prior fiscal year. Molded infrared products typically have higher margins than non molded infrared products. SGNA costs were approximately 3 million for the second quarter of fiscal 2023, an increase of approximately 84,000, or 3%, as compared to approximately 2.9 million in the same period of the prior fiscal year. The increase in SG&A cost is primarily due to an increase in stock compensation, partially due to direct retirements that occurred during the quarter, as well as increases in other personnel related costs. SG&A costs for the second quarter of fiscal 2023 also included approximately 45,000 in fees paid to Bank United associated with our term loan. These increases are partially offset by decreased fees and taxes associated with our Chinese subsidiaries. Net loss for the second quarter of fiscal 2023 was approximately $694,000, or $0.03 basic and diluted loss per share, compared to 1.1 million, or point or $0.04 basic and diluted loss per share, for the same quarter of the prior fiscal year. The decrease in net loss for the second quarter of fiscal 2023 as compared to the same period of the prior fiscal year. Was primarily attributable to higher gross margin despite the decrease in revenue. We believe EBITDA; a non-GAAP financial measure is helpful for investors to better understand our underlying business operations. Our EBITDA for the quarter ended December 31, 2022 was approximately $207,000, compared to a loss of $41,000 in the same period of the prior fiscal year. The increase in EBITDA in the second quarter of fiscal 2023 was again primarily attributable to higher gross margin. As of December 31, 2022, we had working capital of approximately $9.6 million in total cash and cash equivalents of approximately $3.8 million of which greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries. Cash used in operations was approximately $752,000 for the second quarter of fiscal 2023 compared to approximately $157,000 for the same period of the prior fiscal year. Cash used in operations for the first half of fiscal 2023 are largely driven by a decrease in accounts payable and accrued liabilities, including the payment of severance related to the previously disclosed employee terminations that occurred at our Chinese subsidiaries for which that liability had been accrued in June of 2021. Increase in backlog during the first half of fiscal 2023 was primarily due to several large orders majority of orders received from customers in the in Europe for several long term projects which we are currently working on. Shipments on these large orders will begin the next quarter in the following twelve to 18 months. Going forward. We're cautiously optimistic about a recession over the next six to nine months in Europe and the US. China is clearly in a recession, but there have been some recent signs that recovery may occur in that market sooner than expected. Our cautious optimism does mean that we will work to continue to keep costs down and continue to look for more opportunities to produce, to improve production. Efficiencies we did achieved 38% gross margin in Q Two. I want to caution everyone not to extrapolate that forward. We felt in advance that Q Two had the right mix to create a good level of margin in Q3 and Q4. We will start delivering on existing higher volume contracts with favorable pricing to customers. At the same time, we will ship new products under contract with more value added and consequently better margins. The mix, while positive in dollars, will want to result in lower gross margins as a percentage. With this review, our financial highlights and recent developments concluded. Hi, good afternoon, guys. Thank you for taking my questions. First one Sam, I was wondering if you could put some dollar figure around what that China headwind is maybe versus a year ago. And how much of that business do you think you can reasonably expect to earn back over time? Yeah, I don't know if I would call it headwind, Scott. The expectation is that it's my expectation that they've hit bottom. Right. That was not clear, let's say, three months ago. But the opening up from COVID looks like it's having a positive effect, particularly in the service sector of the economy and definitely in the consumer purchasing. Eventually, that will have to trickle down to the rest of the manufacturing supply chain. Right. So we're still cautiously optimistic. We're cautiously pessimistic in terms of casting our revenue and earnings out of that organization. But I do think it might not be as long as we thought it would be, but we don't believe it. Go back to the levels it was. Two, three years ago. It's still going to be significantly lower than, I'd say, 2020 or so. Right, okay, that's helpful. And then Sam, I'm curious. Is there anything on the acquisition front that could help accelerate some of the scaling into whether it's defense or some other piece of business that might make sense for you guys? Yeah, I think that currently we're more focused on expanding capacity and growing. We're seeing great signs of growth. We're even seeing customers saying they would give us more work of some existing projects if we would add capacity. Historically, the company relied a lot of capacity in China. Now with defense work. We need to shift capacity or set up different type of capacity in the US and Europe. Europe getting its own defense license for our latter facility, which we believe will bring more growth. I think that as we progress on the engineered solutions and products like Mantis or great examples and reference designs for that, we would be looking to add technology and continue to focus on differentiating technologies to supplement that. Great, that's helpful. And then last one for me, I'm just curious on your US and European manufacturing facilities, what is kind of the timeline on getting some of these work done to ease any kind of capacity constraints? Yeah, I'll start with you because that's the easier one. So if you have a call about two years ago, we made a pretty significant investment in our European facility to add optical coating. And that was set up in a way that we really staged it toward adding more capacity easily later. And now with the money that we raised, we're starting to do that. Some equipment is pretty fast right now, very surprisingly, and we can get some pieces of equipment in a matter of weeks. Some are a matter of half a year, some are still a matter of twelve month lead time. So in Ludwig, it's purely equipment. In Orlando, we've been already renovating and expanding the facility. As a reminder, we signed actually a lease for the expansion. Just haven't started using that space yet. Last week we finished moving the optical coating into that space here in Orlando. It was in a separate buildings that will streamline our operations significantly. And we're now going to start also investing in more equipment and capacity in Orlando and lead times vary considerably, but I'd say to be safe, they would be typically six to twelve months on adding capacity. Hi Sam and Al; I thank you both for your leadership and the tough effort which is ongoing in turning the company around. And I'm just curious about a couple of things. I agree. The headwinds from China, by the way, are probably turning into tailwinds, but I don't know… It appears we only lost Gene. [Operator instructions] And our next question comes from Aaron Martin of AIGH Investment Partners. Please go ahead. Hi, guys. Sam, I think you mentioned four different automotive customers that you're engaged with on the automatic braking system with. Can you give a little more color around that process and where you are with the different automotive customers? Yes, absolutely. I'd say that all of this is fairly fresh with some of the customers, but moving surprisingly fast compared to the automotive industry. With one customer that has already field tested our system extensively, we've been working for, I'd say, a year and a half, maybe even close to two years. And with that customer, what we provide is actually more than just an optical assembly. We also do some of the electronics related to the system. I'd say that that customer we're most advanced with, and they would probably start if everything goes well, they would probably start taking deliveries within the next year and a half and gearing up and scaling up. They have a timeline of five years. This customer, I'd say, is the most advanced that we know of in terms of actually testing systems in the field, on cars and so on. Other customers are in different stages. Some are just exploring the area, taking some general samples from us to sort of play around with thermal imaging. Others are well established companies that know exactly sort of what they want in this and have very clear specifications. But their timelines sometimes vary and change. So I'd say with the automotive industry being where it is, and the swing is there between no inventory to over inventory and so on, I'd be a bit cautious about when we would see this go ahead but at least with one customer, signs are very positive. And for this customer, are you dependent upon them sort of specing in a new system or really this is adding them to adding your solution to an existing solution? Well, I'd say the base system that they are adding this in, meaning automatic braking system exists and so they know how to handle the input from those systems. They have already a platform for it. What we're doing is working with them to add another sensor, another input into that system, which is why I feel comfortable enough talking about it. It's not a pie in the sky as requiring the customer to learn a whole new system and a whole new set of data. It's something they're familiar with and can deal with it. However, they're not going to retrofit it, as far as I know. Not going to retrofit it into existing cars. This is into new models that would hit production in that time frame. Okay. And then on the gross margin, obviously a great quarter there and I heard the caution a little bit. In the short term, as we think longer term and hopefully with revenue growth, where should we be thinking on the gross margin side; medium to longer term? I think the positive thing I'm taking from the gross margin and hopefully I was noticing too, is a consistent improvement and no longer the big swings that the company had experienced in the past. So I see it continuing to improve. We're not vesting back and feeling that 38% is good and weaken. Kick back and open a beer or something. So there's more for us to improve there and we expect over the next few quarters is really we're starting to see revenue scale, we're starting to see a lot of the improvements we did both in cost of goods sold and in SG&A, take more and more plays. We're very positive about what we would be seeing. Hi, Sam and Al. The call dropped just as I started to ask about how many employees you had in China. Maybe there was a balloon over Orlando. Am reading. Too much news, Gene. Yeah, no kidding. I don't know the exact number Gene. It's around 70 in terms of headcount. And what is the head count, if I may ask roughly in Riga, Al as well, Orlando. And did you mention something about the Philippine? No, I didn't mention it. Riga is creeping up on 100. They're just shy of 100. We're about 120 here in Orlando. Okay. Well, first of all, I think you guys are working hard and doing a good job. I know it's tough. I got back on the call. I don't know what happened, and I heard the word automotive, and I assume you were talking about the braking aspect that Sam has alluded to rather than infrared nice driving. Or some of which are products that BMW and others discontinued, for reasons you might know. I don't know why, because it seemed like a pretty good idea. Or maybe this is all reflected by LiDAR. Yes. I mean, we're definitely talking about the braking system and trying to say in my comments, I think we're feeling far more confident talking about that and talking than any conversation we had about LiDAR, for example, in the past. Simply because it's sort of a known beast or understandable for the automotive companies much easier. It's not a computer that now downloads an enormous amount of data that you need to figure out how to use it and what to do. It's not giving the customer, the driver, any sophisticated display that might be confusing or might positive. It is simply adding another yes no sensor like binary black and white kind of to the automatic braking system. These systems have been already field implemented for years or pretty well known. I think most new cars have them. So we think that would be something that has a much higher potential of actually rolling out into production. I can appreciate that having just been rear ended a month ago and my car could not defend against getting hit. Thank you. Speaking of computing, you have Mr. Quantum Computer and LiDAR as your chairman of the board now. And I wonder whether since Scott Ferris at one of his roles had to do with the start-up of quantum computing company, whether there is a linkage between all three of these areas, lighter quantum computing and your infrared work and so on. Yeah, absolutely. All of them share a commonality of being really photonics technologies most of all. Right, without photonics they would not happen quantum any part of the quantum whether computing a quantum sensors on is essentially optics. So it's very interesting that as we talk about optics taking more of a center stage, enabling more applications, enabling more industries, those are two great examples of that. But I also want to touch on something you briefly mentioned and Scott becoming the chairman of the board. Last quarter we went through, I think the completion of a transition on our board of directors, scaling down the board to a size that is much more matches, much better the company's strategy and the direction. The board of directors now stick people, five independent and myself, we have a new chairman of the board, Scott Ferris, who exactly, as you mentioned, really is very active in the industry, has built and done quite a few companies and based successfully. And we feel this is a significant part of, again, alignment of the company over the last three years that I've been here, nearly three years. We've gone through many different aspects of that and now we can safely and comfortably say we've really gone through all aspects of this from the very top of the board of directors through the structure and strategic focus and operationally. I think you make a good team, all three of you. By the way. I am curious other than what you can't discuss. You're involved with youth and defense, battle management and that involves AI. I know that's a buzzword of the moment, but artificial intelligence, don't you have a role in all of these applications and products? A product like Mantis really lends itself to be used together with artificial intelligence simply because it brings so much more data that to really make best use of that and especially if you put it on drones hovering around collecting data, you have to have some artificial intelligence to. Identify and signal to you when something important is happening. You can't anymore have soldiers sitting there and looking at Google all the time or looking at screens, trying to decipher all of that. So I think artificial intelligence, just like in LiDAR, the power of AI has really enabled a lot of great things in LiDAR. I think the power of AI is going to enable things like our Mantis to really be deployed in much larger scale than ever before. Could you touch for a moment on the state-based aspect of what you're doing? I realized that a lot of it is classified and even corporations don't want to talk because like Starlink and its competitors become competitive as time goes on. And I wonder because there's talks of new cellular systems that won't need a cell phone, that any cell phone can use without specialized satellite linkage. And I wonder whether you're involved in the type of infrared linkage between these global encircling birds that would be involved. I'd say to some degree, yes. But of course, as you can imagine with the type of companies involved where we signed or would be signed on, very powerful NBA that prevent us from being able to talk too much about it, but I would say that I believe optical communication and infrared in particular is playing a major role in enabling the satellite based internet. I think it's under appreciation is why I brought it up. And I might mention it, I might ask when you did the secondary, which I thought and said at the time was a wonderful entry, not exit opportunity to get into the stock, was it essentially oversubscribed? Tense to run up after if people couldn't get enough shares. And were the buyers that you know of that were in the offering, were they restricted as to when they can sell or can they roll out stock anytime they want? Yeah. First of all, thanks for bringing it up. We didn't talk too much about it. We see the offering is extremely successful both because it was oversubscribed and because in spite of everything going on in the market and all other offerings that we saw in Microcaps, we did not need to provide any warrants or any financial incentives like that to be able to do an offering like that. I believe that the offering created a lot of interest. It probably played a role in the run up of the stock and continues to do. As you see, our volumes have also improved. After a few months of pretty low volumes, we're starting to garner the interest we should be getting again. And I believe, as you say, the market really signaled through that going up 40% day after the offering and continuing to go up after that, the market definitely signaled we did the right thing. Great. Glad to hear it. I'll let you go. Thank you, guys. I appreciate your leadership. I'm curious what we can anticipate this spring. And hopefully it's not merely another progression of an earnings report. Hey there, Brian. Was having trouble hopping in the queue. Just have a couple of questions. When adding capacity in Orlando and lots of facilities, could yield be impacted in the short term? That's a good question. I think we're not -- as of now, we're not adding any capacity that is, new capabilities in a way that we would expect that there will be a learning curve. And all the capacity being added is in existing facilities; never say never, but I would be surprised if yield would be gravely impacted by it. That makes sense. Thank you. And then for Mantis, can you help investors understand when revenue will ramp? How long before partners integrate your technology and then how long before sales ramp? Yes. So we expect to see, in the short term, single unit sales at I think the price we're selling them for single unit evaluation is about $15,000 a piece. We are starting already to work with some partners on possible integration. There are a lot of, I'd say, application and use cases that we're testing them for together with partners, some here, some at other sites. And I'd say that typically, the cycle time for partner to integrate it would be at a minimum, six months would be my guess. Thank you, everyone, for taking the time today to follow LightPath Technologies and listening to the call. As hopefully you all gathering from the remarks and from our enthusiasm about this, we really feel that we're at a strong point and turning into a great company that will now hit a steady and good growth rate. We appreciate the trust placed in us by stakeholders and look forward to future calls when we further discuss the fruit of our efforts to retool this business and move the company forward. Thank you.

EarningCall_151

Greeting and welcome to Saputo, Inc. Third Quarter Fiscal 2023 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Friday, February 10, 2023. It is now my pleasure to turn the conference over to Nick Estrela. Please go ahead. Thank you, Tina. Good morning and welcome to our third quarter fiscal 2023 earnings call. Our speakers today will be Lino Saputo, Chair of the Board, President and Chief Executive Officer; and Maxime Therrien, Chief Financial Officer and Secretary. For the question-and-answer session, Lino and Maxime will be supported by Carl Colizza, President and Chief Operating Officer, North America and Leanne Cutts, President and Chief Operating Officer, International and Europe. Before we begin, I'd like to remind you that this webcast and conference call are being recorded and the webcast will be posted on our website along with the third quarter investor presentation. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand it over to Lino. Thank you, Nick and good morning everyone. Following a solid first half of the fiscal year, our positive momentum has continued across all our sectors in the third quarter. We delivered strong results, reflecting our focus on execution and the advancement of our strategic priorities. Our U.S. sector led the way with a significant year-over-year improvement, while our Canada and international sectors continued to deliver consistent results. Our Europe sector trended better despite inflationary pressure and prolonged challenges in the consumer environment. Consolidated revenues increased to 18% versus the prior year due to both inflation driven price increases and improvements in our ability to supply ongoing demand. The broad based inflationary pressure we are experiencing across our cost base continues to be well controlled and mitigated. We're making progress on adjusted EBITDA margin recovery with a meaningful year-over-year improvement in Q3, a positive step up when compared to the last several quarters. Our focus on inflation driven pricing actions and on operational improvements position us well from a margin perspective going forward. Consumer demand for our products in the third quarter was strong. Despite increasing prices compared to last year, dairy remains an affordable, flexible, and accessible option relative to other proteins on the market. That said, consumers are value conscious, so we're meeting their needs through a tailored product offerings, pack sizes, and promotions. The operating environment remains dynamic. Consequently, we are advancing our efficiency and productivity initiatives. Like many other businesses, we have been constrained by labor shortages, especially in the U.S. Staffing levels and the impact on operational throughput have been a major challenge the past 18 months. We have responded aggressively by ramping up recruitment and retention activities and leveraging our foreign worker program. Although Labor has improved notably with greater workforce stability, we're not out of the woods just yet. While the external environment has required a heightened focus on execution, it has not limited our ability to advance our strategic priorities. We are continuing to make progress on our global strategic plan road map. While managing our portfolio to maximize value creation and drive organic growth we are investing for the future. As such, several capital investments and consolidation initiatives in our U.S. sector were announced last week to further optimize our manufacturing footprint and enhance operational agility. This includes the construction of a new state-of-the-art cutting rack facility in Franklin, Wisconsin and the expansion of string cheese operations on the West Coast. This has led to the decision to permanently close our Big Stone, South Dakota; Green Bay, Wisconsin; and South Gate, California facilities. As a result, we will increase operating efficiencies, translating into lower costs, further consolidate our production capacity in world class facilities, and increase capacity and capabilities for higher margin value added products to meet growing demand. Specifically, we expect to yield financial benefits beginning in Q4 fiscal 2024 and reaching its full potential of approximately $74 million annually by the end of fiscal 2027. This more focused footprint aims to strengthen the competitiveness and long-term performance of our U.S. operations. We reached a significant milestone with our One USA project. In April, we will have completed the combination of our legacy cheese and dairy foods divisions with the alignment of our business processes, system applications, and IT infrastructure. This will allow for a unified customer experience, easier customer and supplier transactions, support a single cheese and dairy food supply chain, and continued organizational growth. Overall, we expect the initiatives to harmonize our processes and procedures to maximize synergies, support growth, and drive more of an integrated business model in the U.S. sector. The project will mark the culmination of several quarters of hard work by our teams to thoughtfully plan for the implementation. So, I'm confident we'll have a seamless transition in Q1 of fiscal 2024. We're pleased with what we've accomplished so far this year. And overall, we see a long runway of opportunity ahead. I said this in the past, all of our efforts today need to be balanced with an eye towards future profitable growth. Although there remains more to do as we continue unlocking our full growth potential, this quarter's results represent a strong turnaround in our performance and we have good momentum exiting this year. Thank you, Lino and good morning, everyone. I'll cover the consolidated financial performance before moving on to the sector review. We are encouraged with the continued progress that we're making and we delivered solid results in the third quarter. Adjusted EPS on the diluted basis was $0.53 per share, up 61% when compared to the same quarter last year. Consolidated revenue were $4.6 billion an 18% increase when compared to last year. Revenue increased due to pricing initiative implemented in all of our sector, higher average market price for cheese and butter in the U.S., and higher international cheese and dairy ingredient market price. Ongoing inflationary pressures on input costs and commodity market volatility were successfully mitigated by pricing initiatives. Adjusted EBITDA amounted to $445 million, a 38% increase when compared to last year and up 21% versus last quarter. Higher year-over-year adjusted EBITDA was driven by previously announced pricing initiatives to mitigate higher input costs and the favorable impact from the relation between international cheese and dairy ingredient market price and the cost of milk as raw material. We continue to benefit from our cost containment measures aimed at minimizing the effect of inflation and our effort to prioritize efficiency and productivity initiatives. Although we are progressing with our labor initiatives, we still face labor shortages in some of our facilities and supply chain challenges, which put pressure on our ability to supply ongoing demand. These factors along with reduced milk availability in Australia negatively impacted efficiencies and the absorption of our fixed cost. We continue to actively manage these challenging market conditions. During the quarter, we recorded $38 million of restructuring costs which include a non cash fixed asset write down totaling $30 million. These costs were incurred in connection with previously announced consolidation initiatives in Australia being undertaken as part of the optimized and enhanced operation pillar of our global strategic plan. Net cash generated from operating activities amounted to 134 million, up $27 million versus last year. This brings our year-to-date total to $604 million. I'll now take you through key highlights by sector starting with Canada, revenues for the third quarter totaled 1.2 billion, an increase of 9% when compared to last year. Revenue increased due to higher selling price in connection with the higher cost of milk as raw material and pricing initiatives implemented to mitigate increasing input and logistics costs in line with inflation. Similar to prior quarters, sales volume were higher in the food service market segment, mainly in the cheese category partially offset by lower volume in the retail market segment, notably in the fluid milk category. Adjusted EBITDA for the third quarter totaled 149 million, up $28 million or 23% versus the 121 million for the same quarter last fiscal. The improvement was driven by pricing initiatives, favorable product mix, further benefit from our continuous improvement programs, and benefit from SG&A cost containment initiatives. In our US sector, revenue totaled $2.2 billion and 34% higher versus last year. Revenue increased due pricing initiatives implemented to mitigate increasing input costs and due to the combined effect of the higher average market price for cheese and butter. Sales volume increased due to improvement in our ability to supply ongoing demand. Adjusted EBITDA totaled $146 million compared to $83 million in the same quarter last fiscal. The year-over-year improvement was mostly driven by the previously announced pricing initiatives to mitigate higher input costs. The negative net impact of $6 million of U.S. market factor as compared to the same quarter last fiscal year was mostly the results of the negative spread between the block price of cheese and the cost of milk as raw material. On a sequential basis comparing Q3 versus Q2 U.S. market factor was positive approximately $13 million due to the favorable trend in milk cost component and the average block market price. We expect the commodities market to remain volatile but they have been trending favorably since the beginning of our fourth quarter. In the international sector revenue for the third quarter were $917 million similar to last year, while adjusted EBITDA totaled $111 million, up 26 million versus last year. Revenue reflected higher international cheese and dairy ingredient market price, higher sales volume in our domestic markets along with higher domestic selling price which were offset by lower export sales volume. Revenue also include $141 million of negative foreign exchange translation relative to the weakening of the Argentinian peso. The improvement in adjusted EBITDA was driven by a better relation between international cheese and dairy ingredient market prices and the cost of [Technical Difficulty]. In the Europe sector, revenue in the third quarter were $285 million or 17% higher when compared to last year. Revenue increased due to pricing initiatives implemented to mitigate higher cost of milk as raw material and other input cost increases. Sales volume decreased due to the added pressure on the retail market segment from inflation driven pricing action. Adjusted EBITDA for Q3 amounted to 39 million, which was $6 million higher than last year. The improvement was driven by pricing initiatives to mitigate the higher cost of milk as raw material and other input costs in line with increased commodity and energy costs. So this concludes my financial review. And with that, I'll turn the call back to Lino. Thank you, Max. The decisive actions we've taken to address some of the transitory challenges while also executing on our strategic priorities will enable us to be a much more agile, resilient, and customer centric company. We maintained our momentum in the third quarter with effective execution across our global system despite a macro backdrop that remains challenging. In Canada, we're building on that momentum on the strength of our balanced, flexible, and diversified business model. We had a strong revenue performance. Our top line also drove good growth in adjusted EBITDA where we benefited from manufacturing efficiencies and cost containment efforts. New product innovations within our leading brands are showing promising early results with new flavor extensions and formats. During the quarter, we launched the Armstrong Lactose Free Block and Shred in addition to the Saputo Mozzarella Lactose Free product line. And our efforts are being recognized by consumers and leading grocery associations. Best new product awards, as a leading consumer voted awards program recently named several of our products as winners in their respective categories. This includes Armstrong Combos, Vitalite plant based cheese flavored slices, Armstrong moths and yellow cheddar swirled cheese snacks, and Armstrong bacon natural shredded cheese. The Armstrong Bacon Shred was also named a Top 10 innovation of the year by Grocer Innovations Canada. These impactful product launches reaffirm our ability to bring innovative products to market as part of our overall growth strategy. We also continue to take meaningful action towards becoming one of the most sought after places to work. So we're extremely proud to have been recently included on the Forbes list of Canada's best employers. To be recognized for the efforts we make in providing the best possible work environment for our valued talent. It is a testament to our people focused approach and how it has always been central to the Saputo culture. In the U.S., we realized strong sales growth and margin recovery supported by pricing initiatives. Sales volume also increased as we made headway in improving our ability to supply market demand. Although still in negative territory versus last year, U.S. market sectors improved from last quarter, driven by favorable commodity market prices, which rebounded from trough levels. We continue to focus on improving staffing through investments in our people, enhancing recruiting, and retention efforts and process automation. With increased staffing levels, we're improving our ability to supply ongoing demand. We're pleased with the progress we're making around margin recovery with three consecutive quarters of improvement. This reflects strong execution on pricing action, a better supply chain performance, and cost containment initiatives. We'll continue to narrow the margin gap as we advance on our global strategic plan initiatives, which include productivity initiatives, right sizing our manufacturing footprint, optimizing our plant operating costs, and cost savings. In the international sector, we delivered a solid performance in Argentina, driven by international cheese and dairy ingredient market prices, pricing actions, and higher domestic sales volumes. In Australia, pricing initiatives and healthy demands bordered top line results while reduced milk availability continued to impact efficiencies, margins, and our ability to fulfill demand in our export market. We made good progress advancing on the Australia networks optimization plan. In Q3, we announced our intention to permanently close our Maffra facility and streamline activities at two further facilities Leongatha and Mil-Lel. These changes take effect in Q4. These measures are part of our road map to increase capacity utilization, reduce costs, and drive improved returns on invested capital in Australia. In Europe, despite persistent inflationary headwinds and a challenging consumer environment in the UK, the business improved its performance supported by pricing actions translating into revenue and EBITDA growth. The ongoing volatility in the operating environment, however, further pressured operating margins. Our retail volumes trended positively versus the prior quarter with the price gap to private label continuing to narrow following additional private label price increases in addition to the positive impact from new listings and private label wins. Cathedral City, the UK's number one cheese brand, recently extended its product lineup into the dairy alternative category. The recently launched plant based offerings have resonated well with consumers. We're seeing incremental volumes from this product offering as well as solid repeat purchase rates already exceeding our original demand forecast. We're also receiving positive retailer feedback with expanded distribution. Notably, we've secured several new retailer listings and we were recently recognized by the Food Bev Awards and the Grocer at The Best Plant Based Alternative to Cheese and the Top Launch award for dairy and dairy alternative cheeses. Recognized and trusted brands like Cathedral City provide a powerful platform to offer plant based options as well as a competitive advantage that will help us lead in this category. As we closeout the fiscal year and look forward to next year, we're paying particular attention to the following areas. First, inflationary pressures remain high across the supply chain and on wages. In response, we are focused on executing cost savings in addition to pricing initiatives to offset some of the cost pressures we cannot mitigate. Second, our elasticities are only moderately increasing and we see good market demand, but we are closely monitoring for signs of changing consumer behaviors. Finally, our labor initiatives will need to deliver further results and what remains a challenging labor market for us to accelerate the recovery of our U.S. sector and execute our global strategic planned initiatives. In closing, I'm very pleased with our year-to-date performance. We continue to build momentum and we are well positioned for the current consumer economic environment. We are confident that the focus on our key initiatives will drive growth through the remainder of the year and as we continue to execute our global strategic plan. I thank you for your time and for your support. I will now turn the call over to Tina for questions. Tina. Hi, thanks for taking my questions. Congrats on the quarter and the momentum that the business is building. And I think you alluded it to it off the top. But I'm just wondering as you look back when you initiated the global strategic plan or at least announced it to the market and you look at the various segments, if you can just update us on where each segment is versus plan or what you thought, if they're ahead of plan, there's still some catching up that needs to be done and if there is, how you're going to close that gap? Yeah, that's a great place to start, Vishal. You have to understand that when we first initiated the -- at first designed and architected the Strat plan, the world was a very, very different place. Labor, inflation, and supply chain impacted us over the course of the last two years and not just us, but also our suppliers, suppliers of goods, suppliers of services as well, and suppliers of equipment. So we have found ourselves over the course of this last year adjusting and adapting. So I'll take you back to year one, we weren't adjusting or adapting. We were just putting out fires. Last year, this fiscal year that we're in right now we have seen the resiliency of our talent, of our people, of our team to be able to adjust and adapt effectively to the new global macro environment and new realities that we had to contend with. So the world is very, very different today than the first day that we drafted and introduced our Strat plan. The fundamentals of our Strat plan are intact. Now I will tell you that as we're moving along, there are certain elements of the Strat plan and certain elements of the pillars within the Strat plan that are changing as we move along. And I'll give you a couple of examples of that. There are more opportunities today in the network optimization versus the original plan. And if I take a look at both the U.S. and the Australian platform circumstances have changed dramatically in the last two years and so those opportunities are going to be enhanced. Those opportunities are going to be put in the forefront. The other element I would say that has changed dramatically from the initial phases of the Strat plan is we're not focusing on the volume targets anymore, we're focusing on value over volume and this is a substantial shift to make sure that we keep our margins intact and that we continue to create a valued product for our customers in an environment where they're prepared to pay for the incremental value. And so that has just two examples of some of the things that have changed. So there are still some moving targets, we do evaluate on an ongoing basis of what fits best for us and what will drive the best returns, but there will be more details to follow. As you can appreciate right now we are in our budget season and these are the kinds of questions we're asking ourselves. So we can look well into fiscal 2024 and fiscal 2025. But I will say that Q3 is a great indication that we have turned the corner, we're well on our way to recovery, we've got great momentum, and the fundamentals of the Strat plan are very, very much intact. Okay, so with respect to the regions that are -- is it fair to say that some regions are performing ahead of plan, maybe Canada and some regions still have some catching up to do maybe Europe and in international. I think that's was the previous suggestion, is that still the way we should look at it? That is a very accurate statement. So I will tell you that there are some divisions that are ahead of their plan. Others are behind their plan. There are some puts and takes. We still feel very, very good about all of the initiatives that we put on paper even for those divisions that are lagging. But yes, there are some puts and takes, some pluses and some minuses, Vishal, that's a very fair statement. Hey, good morning. Obviously the volume recovery in U.S. is great to see. Can you just talk about that a little bit more, help us understand how the effect of the price increases played against the improved service levels, so in other words do you think the price increases had a negative impact on volumes at all? Hi Mark, this is Carl. Thanks for the question. No, what I would say is and I'll try and answer the question with some of our major categories, dairy foods and cheese. From the cheese perspective overall from a fill rate and service perspective we're back on track. So for the most part there is no challenges really in supplying the market demands in most of our cheese categories. On the dairy food side, I would say that demand has continued to increase materially. So in some of our dairy foods categories, we are I will use the word struggling to keep up with that demand. But our overall throughput in both categories has increased and continues to be on a good momentum. Pricing and the pricing actions that we have taken has not negatively impacted demand from the marketplace. So really when we take a look at our service levels it comes down to ongoing strong demand specifically in the dairy food sector and some ability to adapt to that strong demand in some sectors, aerosols being one of them in particular. Okay. And so on pricing, I mean, obviously it's going to depend on the category, but where you have a good degree of control, do you think you're effectively in balance today in terms of your operating costs and your pricing? Yes, Mark we've taken the necessary pricing actions across our portfolio as needed and I would say that we're effectively, I will use the word caught up at this point. And I also want to qualify that we've done everything we can and we continue to do everything we can to mitigate costs as they come through and before we think of the pricing actions. Obviously if you roll back 18 plus months there was lots of catching up to do as the inflationary pressures were coming in fast and furious. We've since caught up, we're on top of it, and as the inflationary environment persists and it is persisting, we will continue to look to mitigate to offset some of those costs before considering pricing action. And if we need to do -- if we need to explore pricing action, we would do that. And it may not be across the board. We always look at it on a case by case basis and ensure that we're doing the right thing for our customers to keep our demand in check. Yeah, understood. Okay, and then just the last one, I also wanted to ask about the progress towards the fiscal 2025 target, EBITDA target and notwithstanding the challenges in exports from Australia, it seems like the commodity is now generally a tailwind for you. Can you just give us a rough sense from the run rate that you're at today, how much of the bridge to the fiscal 2025 target would come from a commodity and how much will come from work that is within your control? Well, Mark this is Max. So I would say when we look at the market that are -- is now recuperating, all the favorable trend we'll take it. I mean we've been hurt in the last couple of years from a market perspective. Any benefit that we could get absolutely we'll take it as we move forward. We feel from a pricing perspective we're in a good spot. We now have to bring our initiatives up to the expectation and this will be for us the key element for us to achieve our fiscal 2025 target as Lino mentioned. And the labor is one of the critical component. We need labor, we need -- and we're maintaining our efforts in order to achieve that target by fiscal 2025. It is a stretch target. The mark remained on the wall. We're confident in our initiatives, I mean that they will materialize and the benefit will be there. And a lot has to do with what we can control and everything from a market perspective will absolutely take it. Thanks. And good morning, everyone. Can we just talk for a minute about the Canada segment, which it was really nice to see that sort of very strong trend, and the EBITDA margin level that we have not seen in a very long time. So, can you just walk us through what the key factors were that contributed and is there anything from the results in Canada this quarter that we can extrapolate to the other segments as time goes on? Thanks for the question, Irene. What I would say in Canada in particular, is that, from a timing perspective, what we're seeing is operational efficiencies benefiting also from prior initiated projects. So over the last several years, we've initiated, a variety of either consolidation projects, automation, all of the above. Some of that has finally come to fruition and we're seeing that in our results today. We're also seeing a shift in channels so the food service sector recovered very well in calendar 2022 here, and from an overall business, that was favorable to us, from a margin perspective as well. So overall, when we take a look at mix versus cheese versus fluid, all those pointed in the right direction, contributing to the positive results we see in Canada, on top of the efficiency. And I would also add that the Canadian team fared better, certainly than the American division with regards to labor attraction and retention. The gap was smaller in way of vacancies and they fared better at filling those roles quicker and benefiting from the market demand and being able to supply the markets, where others competitors may have faltered as well. That's really interesting. Thank you. And then just sort of jumping off from that point. Lino mentioned that the One USA is really going to be sort of coming together in let's call it in early in fiscal 2024. Again, any key learnings from when you merged Canadian operations, what kind of benefits or what is the magnitude of the benefits that we're expecting to see? And how should we on the outside be watching all of this to gauge the “success” of the One USA? Yeah, I mean, what I would say is, when we announced the merger of the two legacy groups, the very first thing that we did was with a management, if you want merger at that point. And we knew that the business processes and the systems in which they operate in, the ERP both being SAP at the time and the U.S. division was the cheese division, excuse me, we're still going through deployments of SAP. So, we had to let that sort of follow its course. We're now at a point where after having unity as a team, and as a group, we now need the business processes and the back-office systems to merge. That's what this One USA if you like and internally called Project North Star is really all about. And Lino referenced the date of April. So on April 1st, we will have those systems and mergers go live on us. And the learnings really come from the prior go lives, I would say from our SAP deployments. So much of the same work goes into this when it comes to change management. And ultimately, what we will see is an easier set of business practices that will allow us truthfully to have a combined supply chain, and an easier customer interaction or ease of transaction with Saputo as we move forward. So in the near term, the benefits will be small, in the longer term this sets us up to further integrate our two legacy business practices and installations, in fact. Thank you, and then just finally, because you'd be disappointed if I didn't ask about it. Can you update us on your current thinking around M&A and the activity levels and valuations? Yeah, so evaluations as you've seen in many transactions have come down. And you could expect that if we were to make an acquisition that we will be mindful of the current economic environment. Having said that, we continue to look at different files that do come up. As I’d mentioned in previous calls, we will be extremely disciplined in our approach to evaluate them, those acquisitions definitely have to be strategic and need to be accretive day one. Our primary focus, as I've also mentioned on previous calls, is the Strat plan. We believe in the investments we're making, we believe in the returns that those investments will make. But if there is an acquisition that will allow us to enhance part of the pillars of the Strat plan, get us further along quicker, and mitigate some of the CAPEX allocation, then that's something that we're looking at. We need to stay active in the market, we need to know what's going on, we have to have the market intel as well. Our M&A teams continue to look at different files, not all of them fit our criteria, not all of them are strategic, and not all of them are priced right. I can assure you that that discipline will continue as that focus will continue and we're just going to be moving ahead on the Strat plan as our primary focus. That's great. But presumably, as you move further along in the process of implementing the Strat plan, sort of the opportunistic elements of M&A, if the wheels are already in motion, the opportunistic element kind of diminishes in probability, is that the right way to think about it? I'm not sure I understood the question, right. But, you know Irene, that you've been following us long enough that acquisitions is part of our DNA. And so, if the opportunity for the right deal to come along at the right time is there, we will take that opportunity. But the criteria’s have tightened quite a bit. Multiples on transactions are not what they were even a year ago. And our willingness to buy a fixer uppers is no longer there, we have enough to do within our own platform that we don't need to fix someone else's problems. So, it's got to be a well-run good business that is accretive and diversification from the categories that we're currently in. So that would narrow down quite a bit, the number of fires that we're looking at. But still exciting for us, as we think about, beyond the Strat plan of future potential growth. Hi, good morning. Congrats on the results. I wanted to ask you about those U.S. fill rates because on the one hand it sounds like you're catching up in terms of your ability to deliver, on the other hand talking about labor still being a challenge, and you still have to make more progress. So, can you update us as to where you are on fill rates in the U.S. in Q3? And am I right to read into the outlook statement that you expect to be back to that 99% or so by the end of Q4? So maybe, Michael, I'll take that question in two parts. I'll speak to the labor aspect first, and then I'll circle back to the impact to fill rates. So from a labor perspective, we've made very important improvements since the start of the fiscal year with regards to filling our gaps and our vacancies. And if I had to put a number to it, I would say we're about two thirds of the way of where we filled about two thirds of our vacancies. So that's meaningful progress at this moment and that has absolutely contributed to our ability to rebound on our fill rate since the start of that fiscal. When we took -- when we take a look at the sort of the outlook, as well as the more near-term of what occurred in Q3. There are some categories and some regions where it was tougher to recruit, and we still have larger gaps than what I just referenced. And that would have impacted our ability to supply the ongoing demand. Now in Q3, there's some seasonality to contend with as well. There are some categories in particular on the dairy foods side that have very high demand at that moment in time. And despite increased output throughout the network in that dairy food sector we were not able to keep up with all of that demand. And so on a pure percentage basis, some of our fill rates may have dropped in that sector. But we're confident with the ongoing progress that we're making with talent acquisition and retention and we made some very specific changes to the way it is we onboard our teammates, the way we select candidates with compatibility to the manufacturing sector, all of those things are contributing to a more positive experience for those who join our team. And a quicker contribution, if you'd like from them, in way of the efficiency and proficiency. So very confident that Q4 will be able to continue with that momentum despite the U.S. continuing to be a very challenging labor market. Unemployment rates continue to drop in the U.S. as we just saw here in January. But I think our proposition as an employer is attractive. And that will translate into continued improvements in the overall outputs of both categories and then translate obviously into improved fill rate levels for most of our categories. So still very confident that we will get back to historical levels here in near term. Yes, that's absolutely the target. We feel very confident that both, our mechanical installations, as well as our human resourcing aspect to make it happen are both well positioned right now. Okay, great. And then also in the U.S., you talked about some of the dairy ingredient prices rising and I'm wondering which ones in particular were most helpful for you? I would say that, on the surface, the higher fractions of proteins, so WPC 80s, we've benefited from good market conditions not just in the U.S., but globally. Also, with some of the common lower value items or ingredients such as lactose, they were also I'll say good value in the marketplace. So that did benefit us, of course, but some of those highs are starting to taper off here. And maybe I can, turn it over to Leanne for some commentary about sort of global demand and pricing outlook for that category. Hi Michael, it's Leanne. Yeah, so we do expect pricing to moderate, especially in the lower protein ingredient categories. As we look ahead, however, highly specialized ingredients, as Carl referenced, that pricing continues to be quite stable. And we have a lot of contracted business as well. And we've taken that into those prices into account. We actually have overlapping contracts that move across quarters for a number of our geographies. So that market pricing has benefited a number of our geographies. However, we do expect that pricing to moderate. Really, it depends on the geographies and you're looking in the U.S. and Canada which we operate fundamentally as one group when it comes to the dairy ingredients space. We have a very good balance between higher fractions of proteins as well as what we would call lower valued whey solids which is fundamentally sweet whey protein. So we have a very good balance in North America with regards to those kind of market shares if you want. Leanne. And the same in Australia in particular, we operate across multiple categories. So we have tailored ingredients right through the mix and with Argentina it is again a mixture with more at the lower protein level. Yeah, good morning. Congrats on a strong quarter. I just want to talk a little bit about selling costs. They were down year-over-year typically, it grows with inflation over the past few quarters. Maybe any sort of comment there, is it a one-time thing or just maybe trying to get a sense of the sustainability of the trend over the next few quarters? Yes, on the selling costs we've seen customer that includes some delivery and logistical costs in that line that you're looking at. And in some instance, in the U.S. we do have some customer that have some pickups, rather than us delivering. So that attracted the cost down. I would also say that there's, of course some FX component within the line that you're looking at. And also from an efficiency standpoint, we have a lower resupply from facility to facility between our own plants that are being captured under that selling cost line. So those would be the key elements that would reduce the selling costs. Okay, thanks for that Max. And just one more on for you on working capital. The investment seems to be continuing there, can you maybe give us a sense of how long we should expect the drag to go for and maybe any sign of reversal coming up in next few quarters and any color there perhaps? Yes, every year in Q3 we tend to see an uptick in our working cap. Right now the level where we're at, we feel we're at a high in terms of investment. Understand that from that investment it's mostly market driven. So we have some instance where I mean, we're not only recovering or growing some of the business. So there's some logical or normal growth in the working camp. The majority of the investment we're seeing is market related. And yes, we feel we're a bit of an uptick and we do expect the use of cap frozen into working cap should diminish over the next couple of quarters. Okay, thanks. And just a follow up on an earlier question. Well, can you give us a sense of how much more room we have on the optimization initiatives, I think the bucket was 200 million, it seems that we're running well ahead. So maybe in any color that you can provide? Yeah, George. So we are right in our budget season, these are the types of things that we're discussing and evaluating. I would say that there is going to be more CAPEX allocated to optimization. But with it, of course, will come the return on investments. We'll have more color in the future quarters. We are challenging our teams to look at those projects and those opportunities that will derive the best value for us. So there are going to be some moving parts here. But more color to come. Oh hi, good morning everyone. And hi Lino, just made me a quick follow up on your answer to last question just, when you said about do you guys have identified more opportunities in optimization and additional shift, maybe a bit more from volume to value, is it fair to say compared to your original Strat plan, that you have essentially really pivoted to more areas of the operation where you do have greater control over your own destiny and if that's the case, does that change kind of give you more confidence that your Strat plan EBITDA target is achievable? Yeah, so let me start off by the achievable target that 2.125 is a solid number. That is, as Max mentioned, it's the target on the wall that we're all shooting for. And the initiatives that we have are supporting the 2.125. This part of the reflection that we're going through now, and number one is to see how quickly can we get some of these projects done, understand with supply chain impacts to our equipment vendors and service suppliers, in some cases have slowed down relative to the original project. Labor also is an important element for us, we need to have the talent to be able to execute internally. And so that is also an element. The number 2.125 is solid. Some of the projects and priorities may have shifted. But this is what we're all working towards right now. Okay, great, that's helpful. And maybe another question I have is, and I know no one has a crystal ball on where cheese spreads is going but can you remind us again, what is your underlying spread assumption to achieve that EBITDA target? And secondly, in your personal view, what are some of the risks that could drive the spread should you look back to that minus $0.20 range? Hi Chris, this is Carl. We certainly don't have that crystal ball, because every time we try and forecast something, the market surprises on spreads. So what I can tell you right now is that, yes, the spreads are favorable to what they were last quarter. They're actually not as favorable as they were last year, same time. So you can see that there's still lots of volatility in the market space. The near term, and I mean, like, really near term here, one week, two weeks, three weeks, we still see some, I'll say favorable market spread environments. But overall, some of the underlying assumptions that we do have, as part of our modeling is still negative territory. So it's not as though our models consist of some sort of positive territory. And whether it be historical levels that we may have seen like positive $0.03 or something like that, that's not built into our models. Okay, okay. That's great. And then maybe last one, just on the international side. You mentioned that the export sales volumes were negatively impacted by the mill situation in Australia, does that sort of worsened sequentially from Q2 to Q3 and also when do you expect that situation to start to stabilize or is that a growing concern? Hi, Chris. It's Leanne here. So as far as some of the things -- we talked about the pricing, so yes, both the market pricing obviously did benefit our Australian division. At the same time, we still have headwinds around our lower milk intake. Actually, we now obviously just passed the flush milk season as well for Q3. So sequentially we're seeing improvements. And of course, we'll need to keep obviously an eye on milk in Australia, managing our milk intake is a key priority for us. But equally as important is actually what we do with that milk. And we believe we can still be profitable and maximize the value of every liter of milk from the Australian platform. Thank you, Tina. We thank you for taking part in the call and webcast. Please note that we will release our fourth quarter and full year fiscal 2023 results on June 8, 2023. Thank you and have a great day. Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.

EarningCall_152

Good morning and welcome to the Perella Weinberg Partners' Full Year and Fourth Quarter 2022 Earnings Conference Call. During today's discussion, all callers will be placed in listen-only mode and following managements' prepared remarks, the conference will be open for questions from the research community. This conference is being recorded. Thank you, operator and welcome to our full year and fourth quarter 2022 earnings call. Joining me today are Peter Weinberg, Founding partner and Chairman; Andrew Bednar, Chief Executive Officer; and Gary Barancik, Chief Financial Officer. Areeplay of this call will be available through the Investors page of the company's website approximately two hours following the conclusion of this live broadcast through February 16th, 2023. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 9, 2023 and have not been updated subsequent to the initial earnings call. Before we begin, I'd like to note that this call may contain forward-looking statements including PWP's expectations of future financial and business performance and conditions and industry outlook. Forward-looking statements are inherently subject to risk, uncertainties, and assumptions that could cause actual results to differ materially from those discussed in the forward-looking statements and are not guarantees of future events or performance. Please refer to PWP's most recent SEC filing for a discussion of certain of these risks and uncertainties. The forward-looking statements are based on our current beliefs and expectations and the firm undertakes no obligation to update any forward-looking statements. During the call, there will also be discussion of some metrics, which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business. PWP has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8-K, which can be found on the company's website. Thank you, Taylor. Good morning everybody and thank you all for joining us on our earnings call. I will take a few moments to review our 2022 results and accomplishments and then turn the call over to Andrew and Gary to discuss outlook and financials respectively. Before I start though, I just wanted to acknowledge that we lost one of our colleagues who prematurely passed away very recently. He was a friend and a member of the PWP family and I wanted to take a moment to acknowledge his passing and reiterate our deepest condolences to his family. So, this morning, we reported full year revenues of $632 million, adjusted pre-tax income of $98 million, and adjusted EPS of $0.78 a share. Our topline results, while down 21% versus the prior year's record performance, are strong in the context of the tumultuous environment of 2022, an achievement which speaks to the tenacity of our team and the commitment of our clients within a challenged market backdrop. Within our traditional M&A business and in line with market trends, we experienced a broad base contraction in activity levels across industries. That said, industrials, financial technology, and healthcare represent positive performance. While European M&A faced many headwinds this year, the completion of a few large deals on our platform supportive stable absolute revenue contribution from this geography year-over-year. These attributed to our financing and capital solutions business, which includes global restructuring, capital markets advisory and private capital placement were up in 2022. A trend we hope to see continue as we further invest in this business and diversify the scope of our clients solutions. Andrew will speak more to the importance of this growth opportunity shortly. To me as both the founder and shareholder, the value of our franchise is measured by more than just financial metrics. And I would like to quickly touch on a few of these items, which defined our success during the year. In 2022, we were a trusted advisor on the largest bankruptcy, largest completed [indiscernible] private, the largest public debt restructuring in US history, and several complex spin-offs. We were involved in some of the most significant M&A transactions both in the US and Europe, and solidified our position as a preeminent ESG advisor, an area of focus for our clients across industries and geographies. These high profile deals are not only great for our brand; they also showcase our commitment to broadening our product suite and moving our capabilities and competence beyond traditional advisory. We continue to invest in top notch senior talent and cultivate talent from within. As of December 31, 2022, we had 64 partners and 47 managing directors in our advisory business. These figures; include eight partners, and 14 Managing Directors who were added to the platform in 2022 both as lateral hires and internal promotes. Through external hiring, we have broadened our product sector and geographic reach and have begun realizing synergies across the business. The future productivity potential from these newly made partners and MVs alone is tremendous. And finally, we acted on our commitment to return capital in total returning north of a $100 million in 2022. After announcing a $100 million share repurchase authorization in February 2022, we have deployed approximately 75% of it in under a year's time. And we announced this morning an incremental 100 million dollar authorization. Our new authorization reflects our continued commitment to our capital return objectives. We have also paid out a consistent quarterly dividend of $0.07 a share, and further mitigated dilution via net settlement of vesting employee RSUs. Well, this is my last earnings call, I will remain very involved in the firm as Chairman of the Board of Directors and as an active partner. Andrew has my full support and I strongly believe PWP is best days lie ahead. Hi and thank you, Peter for your dedication and leadership and for your continued partnership. Today I'm honored and excited to be speaking with all of you on my first call as CEO. The firm's accomplishments Peter just outlined are quite remarkable, given the structural headwinds we and our industry faced in 2022. Throughout the year, the narrative from us and our peers was largely aligned. We are in a more challenging operating environment. Client dialogue remains active and gross backlogs are full, but there is significant elongation and increased risk within transaction completion timelines. Over the past few months, we have started to see a subtle yet important shift in client behavior and in confidence levels. As we have alluded to before, when markets gain some clarity as is happening real time on rates and inflation, parties explore transactions in pursuit of their strategic priorities. To be sure the market is still turbulent, financing is more difficult, and comes at a higher cost than we have all become accustomed to. And transactions still need to get from announcement to close. But it does feel like the range of uncertainty has narrowed. And that is a step in the right direction. Looking beyond this quarter, let me speak to our strategy. Our singular focus is and will continue to be providing financial and strategic solutions to our clients across our platform, especially in connection with their most complex financial and strategic challenges. Our focus is on scaling the franchise's we've already built, so we can broadly serve the needs of our current clients, while also expanding our client footprint. Senior external hires, who can broaden our industry and product expertise will be the key to above market growth, as well top performers who rise through our ranks internally. Our advisory partner MD count today of 65 and 51, respectively, reflects the 2023 elevation of a number of individuals who embody PWP values, trust, integrity and teamwork, who are well respected by the colleagues and clients, who will contribute to our top line going forward. Expanding and optimizing our financing and capital solutions business was a priority in 2022 and will continue to be a focus in 2023. As the complexity of capital markets has increased, so too has demand to independent advice around financing and capital structure, both in the context of M&A transactions, as well as standalone. We made several important hires in this area, and their close collaboration with industry sector bankers will ensure that we are leveraging the combined expertise of our teams to provide the best advice to our clients. As we further scale our platform and expand our client footprint and our capabilities, our revenue streams become larger and more diversified, allowing us to realize operating leverage and grow earnings. I have discussed with our team internally the importance of goal setting, continuous improvement and delivering for our stakeholders from clients to shareholders. As we continue to execute against our strategic priorities, we have set a first financial objective of achieving annual revenues in excess of $1 billion. At $1 billion in revenue, we can more efficiently leverage our infrastructure to drive profitability and create shareholder value, as well as attractively compensated our team for their performance and enhance our ability to invest in new talent. Each of our senior bankers as an individual performance metric, but now all of us have a firm wide revenue objective as well. Thank you, Andrew. As it pertains to our fourth quarter revenue, the surprise to the upside versus our previous expectation can be attributed to some seasonality experienced across the firm, as well as the timing of a few large key events, and once again demonstrates how difficult it can be to predict the quarter's performance in our business. We do not expect our first quarter results to benefit from seasonality as our fourth quarter did. As a reminder, my following comments will focus on non-GAAP metrics, which we believe are relevant in assessing the financial performance of the business. Our GAAP measures and the reconciliation of GAAP to adjusted results can be found in our earnings press release which is on our website. On the expense side, our adjusted compensation margin of 66.7% for 2022 is above where we accrued during the first nine months of the year. As I discussed on our third quarter earnings call, and setting our compensation margin for the fourth quarter and the year, we carefully considered the business performance, market environment and the compensation levels needed to attract and retain key talent and decided a modest increase. But still within our medium term guidance of mid 60s was proven for the full year 2022. We view this investment in our team and our platform as the most important type of CapEx decision we can make in account driven business, and one which should further our long term value creation. As a result of setting our full year compensation margin at 66.7%, together with our third quarter year-to-date accruals at 64%.Our effective fourth quarter ratio was 73.2%. Our adjusted non compensation expense was $123 million for the full year 2022 flat year-over-year and $32 million for the fourth quarter down 9% from the same period last year. Our full year non-comp spend came in lower than expectations provided on the third quarter earnings call and well below our expectations at the beginning of 2022. Specifically, our fourth quarter expense benefited from lower legal recruiting and other professional fees than we had forecast. Throughout 2022, we were able to realize cost savings and reduce legal consulting and D&O insurance spend as our tenure as a public company grew, and lower rent and D&A expense as our headquarter locations reached the end of their initial lease terms. As it pertains to 2023, we expect an increase in non-comp spending of approximately 15% to 20% over this past year, due to an anticipated overlapping of GAAP rents in New York, a step up in depreciation expense related to our new headquarters and increase in legal expenses and technology related investments some assume continued increase in travel and related spend continued investment in talent and inflationary pressures. That said, and as 2022 demonstrated, we continue to look for opportunities to realize cost savings, especially in more challenging operating environments. Let me briefly provide an update on our London and New York headquarters projects. We moved into our new London headquarters this past Monday and 2023 rent expense related to that office will approximate our go forward run rate. Our New York headquarters renovation is underway and we expect it to be completed by the fourth quarter. We should have approximately three quarters of overlapping rents in our swing space as we renovate. In both locations, we have free rent periods which mitigate the cost of overlapping rent and build that cost. As mentioned previously, both leases were secured on attractive terms, increasing our overall square footage in those offices by approximately 20% with no increase in 2023 or 2024 rent expense, versus 2021. A new construction work will drive a material increase in the depreciation expense component of our non-comp expense in 2023 and beyond. We reported adjusted operating income of $87 million for 2022 and $17 million for the fourth quarter. Adjusted operating margins were 13.8% and 9.2%, respectively. Our adjusted non-operating income of approximately $11 million for the full year included nearly $7 million in net gains related to FX revaluation and realizations. During the fourth quarter, the relative weakening of the US dollar translated into unrealized FX losses for our quarterly P&L and reversed some of the net FX gains earlier in the year. As noted in prior quarters, we believe the majority of the net FX gains recorded in 2022 have no economic substance to our business as they're the result of the revaluation of US dollar denominated cash and intercompany receivables and payables held by our foreign subsidiaries. Adjusted net income totaled $82 million for 2022 and $12 million for the fourth quarter. Our adjusted if-converted net income was $70 million and $10 million, respectively, and presents our results as if all partnership units have converted the shares of common stock. Adjusted diluted if-converted net income per Class A share was $078 for the full year and $0.11 for the three months ended December 31, 2022. For the year-to-date period, our adjusted as-if-converted tax rate was approximately 28%, relatively in line with our expectations at September 30. Turning to capital management. In 2022, we returned $104 million through the repurchase of approximately 9.5 million shares in the open market, the net settlement of more than 1 million shares to satisfy tax obligations in lieu of share issuances, and the payment of $25.7 million in pro-rata distributions to limited partners, which allowed PWP to pay dividends of $12.8 million to its Class A shareholders. Year-to-date 2023, we remained active in the open market and had deployed an additional $5 million in share repurchases. The Board has declared a quarterly dividend and $0.07 per share payable on March 10, 2023 to holders of record as of February 28, 2023. As of December 31, 2022, we held $312 million of cash, cash equivalents and short term investments in US Treasury securities. We have no debt and had an undrawn revolving credit facility. Hi. I guess maybe just want to start on the current operating environment. You guys were I think early last year to point out some of the turn in sentiment. And appreciate that the environment remains uncertain. But good to hear about maybe some of the recent improvement that you're seeing in sentiment. So be great to maybe just add a little bit more context on how that's evolving. Whether geographically Europe versus US activity, corporates versus sponsors, I'm just trying to get sense that that's kind of a blanket comment of what you're seeing, maybe in some of the -- maybe the recent green shoots or are there some different themes that are emerging amongst either geographies or product types or client types? Thanks. Yes, sure, Devin. So, I think, last year, as I mentioned in the comments up front, there was very consistent alignment with our peers, and that is a relatively unconstructive macro backdrop for 2022. I think that in the first few weeks at 2023, I'd say the macro backdrop has improved. It's less unconstructive, but I wouldn't say that it's incredibly positive, sort of going into 23. We still have a lot of headwinds that that we and the peer group will grapple with. I think financing markets are opening, but they're not open. And so, you do have windows of open credit. You've had a bit of rallying here in the first couple of weeks. But it's very, very different from the 2021 backdrop, where you had wide open credit markets, not only in availability and size, but also very attractive rates. And so, that does tend to sideline financial sponsors and sort of credit-oriented acquisition activity. And so, we're seeing, a bit of a retrenchment for sure. And sponsor activity, I think that's very natural. When you have had such a rapid change in the rate environment, you have, typically buyers resetting on valuation faster than sellers. And so that is very natural disruption. I think that will change. PE will have to deploy capital. That's their job. And I do think it will come back with respect to corporates. It is an interesting environment that we see, because they're seeing less sponsors competing for assets that have been on their wish list for many years, and find themselves flush with cash and decent valuations. And so from a corporate buyer perspective, it's actually a quite attractive environment. And that's why I think you hear from us that overall client activity, especially with our within our core base of clients in the corporate world, it's very, very active dialogue. So we're encouraged by that level of dialogue that's been ongoing. And you're starting to see some of the plumbing that's been backed up in that market, unclog. And then lastly, you had a question, I think about just the European and the rest of the world versus U.S. not really seeing a big difference in activity there. It's pretty balanced in terms of our historic contributions from both Europe and the U.S. I do think, as I said, in my upfront comments, the range of uncertainty of outcomes has narrowed with respect to rates. We're in a round the back half of these rate increases, it seems. And with respect to Europe, I think the worst case scenarios that were outlined, post the invasion of Ukraine have really turned out to be significantly better than again, those worst case scenarios, which takes away a lot of uncertainty. Okay, great color. Thank you, just as a follow-up Andrew on the billion dollar revenue goal, just to give you more contexts there. What are some of the profitability metrics potentially look like? If that more revenue, I appreciate, you'll have more to pay, et cetera. But like, how should we think about, maybe what the comp ratio trend could look like? And then also, what you need to meaningfully larger infrastructure to get there, which would imply and usually hired non-GAAP costs, just trying to think about kind of what that billion dollars means for actually profitability? Thanks. Yeah. Sure. So I don't think our long term comp margin target of mid-60s which we've outlined historically, both in our original IPO process, and then with you all on our quarterly calls changes as we move through that initial revenue target. I think what does drive bottom-line earnings is that we have enormous operating leverage in non-comp. And so I don't see a material increase in non-comp required for us to achieve a consistent billion-dollar plus revenue target. Good morning. I just wanted to touch on the restructuring backdrop that you're seeing at this point, you talked about financing markets, opening but not being fully open. Has this impacted restructuring? And do you think it's a risk to that restructuring backdrop, if markets fully reopen? Yeah, thanks for the question, James. We have seen a very significant increase in our overall capital solutions and financing business. So within our financing and capital solutions business, that includes restructuring, liability management, debt advisory and private capital markets business that generally has picked up quite significantly through the course of fourth quarter and continues in Q1. I think credit markets are going to remain volatile. As I mentioned, upfront, there are windows that are opening and closing, we don't have a consistently open market. We also have realized within our corporate client base, we have a number of finance executives and CFOs that have really not seen this type of market. And in fact, many of many of us haven't with such a rapid rise in rates, and so much of the market hanging on to every Fed word. And so that's a challenge of where executives that needs to think about their financing, are seeing a market where they need some help and guidance and our teams are providing that guidance and we're able to be involved in transactions where it's not just you know call 911, I have a potential bankruptcy, but extends much further beyond that, it’s a perfectly healthy companies that need assistance in accessing markets and managing maturities. That's very clear. I just want to touch on the capital return priorities from here. You did increase the share repurchase authorization score by I think 100 million. So when you just think about the cadence of capital return, should we expect buybacks to operate to be a sort of this 4Q 2022 level, or could they increase or decrease from here? And then is there any ability to contextualize a minimum cash balance that you think about -- that you feel comfortable operating at? Hi, James, it's Gary. I'll take those questions. We don't comment on the cadence forward-looking repurchases. What we've kind of said in the past, and it's really true, as we do look at a number of factors. You saw -- if you look at last year, for example, if you saw the cadence from the time the announcement, it was heaviest in the second quarter, which is when our stock price was kind of at a much lower place. So obviously, that is one factor. We look at our overall cash needs, cash balances, other needs for investment. And we're mindful of liquidity in our stock as well. We want to make sure that we have sufficient liquidity that we can attract new investors into the name. So those are all things that we think about when we consider the cadence of it. In terms of cash balances, again, we haven't provided an explicit target on what that minimum is. You can kind of look at -- if you look at historically quarter-by-quarter where we've been, and you look at cash net of accrued comp liability, which is the biggest seasonal factor that we have, you can kind of get some sense of where that number has hovered around it. At year end, for example, we have $312 million of cash, cash equivalents and marketable securities, and net of those accrued comp liability, that number was about 100 million at that time. And so obviously, we have working capital needs, we have -- want to keep some dry powder for just both changes in the market condition opportunities and so forth. But that's kind of where we end of the year. Hi, good morning. So, Andrew, I was hoping that you might provide as a follow-up to Devin's earlier question, just some additional color on some of the assumptions underpinning that $1 billion revenue target. It didn't sound like you provided any explicit timetable for when you could get there. I was hoping you could just speak to your expectation around industry see full growth that would support that target, and your partner growth and productivity per partner, just trying to get sense as to like the same store versus new store dynamics that are underpinning that target? Yes, sure. So as I mentioned, it's not a time based target. It is something that we are working on. And usually when we set an objective, it's post based around here. So, our expectation and hope is that we drive to those targets as quickly as possible. But we have not set a specific time requirement against it. I think it's just important as we evolved from private partnerships, now, public enterprise, and we have a broad group of stakeholders, even though the partnership and employees own 51% of the firm, it's important to have these cuts and metrics for our public stakeholders. So that was a key reason why we wanted to set that objective. I think in terms of how we get there? We will continue to drive partner productivity, but also our MD productivity, which has been significantly improving over the years as we've made -- select hires. And we've also I think, done a better job at developing our non-partner talent. We also have six major industry groups, and if you think about contribution from each of those groups that 150 million plus we can see getting to our $1 billion target. And with respect to adding additional client coverage, as I said, upfront, our plan on hiring is about increasing our client footprint. We view ourselves as a small firm with a big brand, and we have a tremendous opportunity to acquire talent and add talent to our platform that does consistent with our values and can help us drive our business and achieve those revenue metrics that I on. Really helpful color, Andrew. And for my follow-up, maybe for Gary, just trying to understand some of the comps dynamics a bit better and how we should think about the outlook for comp from here? And I wanted to frame in the context of the original SPAC presentation that you provided. It had three year management forecasts. And interestingly, the 2022 revenue bogey that you outlined at that time, maybe it wasn't a guide or objective, but at least an indication as to what that revenue trajectory might look like was actually similar to what materialize this year, at around 630 some odd million or so. And you indicated in that environment, you could sustain a 64% comp ratio, and moderate the pace of non-comp growth. So recognizing that it is a tougher inflationary backdrop, it's just not clear to us what factors have limited your ability to manage both the comps. And based on the outlook you just provided, some of the non-comps a bit better versus what was contemplated in some of those original targets. So I was hoping for some additional context there. Yeah, see, I guess one -- just one point to clarify it at the time. This is like 2021 when we were prior to this SPAC transaction we were providing some estimates for sections. We were very clear that our comp ratio targets for the mid-term was mid-60s. We had to pick point estimates just to illustrate something in the projections. And that was kind of the best view that we had at the time. So we're today in a market environment that we can actually see what environment we're in today. We know kind of where we are in partners, how many new partners around the platform, and kind of where they are. We know, it’s competitive environment, it’s like to attract and retain people. And so, that we made that judgment for this past year. On a prospective basis, as I think Andrew made a comment earlier, we're not deviating from that mid-60s guidance, but where we land exactly is going to -- it's going to reflect the environment and kind of where we see things. And obviously, when we report our first quarter results, we'll need to put a stake in the ground on our best view at the time on where will we be going for the full year. We don't have that today. But obviously will on our next earnings call. So just one for me. Thinking about the backdrop and the environment, obviously, there's a lower number of new activity making across the finish line. And you've also spent a lot of this past year or so cleaning up the capital structure and having that behind you. So just kind of curious from here, how we should be thinking about your willingness to grow potentially inorganically? And maybe how we should think about it areas of potential focus with respect to that kind of potential inorganic growth? Sure, Matt. Thanks for the question. So a couple of things about just organic growth, and then I'll speak inorganic growth. So we have almost one-third of our partnership is on the platform less than three years. And so we think that represents significant embedded growth within the firm today. And this is an area where we invest, and it's part of the reason we took up our comp ratio, because we need to invest behind our teams and that's our CapEx. And we think that represents significant future revenue that's already on the platform. Our workforce management will be continuous, as we again drive the productivity of our teams, but also look to the outside to expand our client footprint. So in industries where it's adjacent to our core six industry groups, we will continue to add talent that increases our clients' footprint. We'll also selectively hire in areas that enhance our product capabilities. And that's both here in the US as well as in Europe. Okay. Great. And then one for Gary. I appreciate the non-comp growth guidance, especially '23. I know a lot of that is baked in just given the duplicative rent expense and the higher D&A of the build-outs. But just kind of curious what kind of operating environment and revenue backdrop we should be considering that's kind of underlying that that 15 to 20% year-on-year growth guidance, just wondering on what environment in particular we're looking at for that assumption? I think we're what we're really assuming in that is that, we're not assuming a dramatic change in the operating environment, but we are assuming, this is a very attractive business to be in over the long-term and we're continuing to invest in the business with that in mind. So while we -- we've certainly tried to moderate some of our non-comp expenses for things that will not impact growth in the business, we actually are still continuing to invest in things that support our people in some areas of technology and some of that is driven there. Some of that is inflation. And some of it is just headcount growth, which has been reasonably significant as we've invested in our business here over the last few years. Thank you. This concludes the Q&A portion of today's call. I would now like to turn the call back over to Andrew Bednar for any additional or closing remarks. Great. Thank you, operator. And thank you all for joining. I also just wanted to recognize the tremendous performance of our team, all of our partners, all the rest of our teammates that have worked extremely hard during a very challenging operating environment and continue to deliver for our clients and for all of our stakeholders. So thank you, and we'll talk to you on our next call. Ladies and gentlemen, this concludes the Perella Weinberg Partners full year and fourth quarter 2022 earnings call and webcast. You may disconnect your line at this time and have a wonderful day.

EarningCall_153

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Alpine fourth quarter 2022 earnings conference call. [Operator Instructions]. Joining us today are Mr. Matt Partridge, Chief Financial Officer, and Mr. John Albright, Chief Executive Officer. Good morning, everyone and thank you for joining us today for the Alpine Income Property Trust fourth quarter and year end 2022 operating results conference call. With me today is our CEO and President, John Albright. Before we begin, I’d like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. The company’s actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause the actual results to differ materially from expectations are disclosed from time-to-time in greater detail in the company’s Form 10-K, Form 10-Q, and other SEC filings. You can find our SEC reports, earnings release, and most recent investor presentation, which contain reconciliations of non-GAAP financial measures we use, on our website at alpinereit.com. Thanks, Matt. We had a nice finish to the year, as we continue to execute on our accretive asset recycling program, reduce leverage, and improve the overall quality of our retail net lease portfolio. Our acquisitions during the quarter emphasize high quality investment grade-rated tenants, demonstrating strong operating trends in well-performing sectors such as grocery, home improvement, sporting goods, and dollar stores. In total, during the fourth quarter, we acquired seven properties for just under$ 42 million at a weighted average cap rate of 7.4%, and a weighted average remaining lease term of 8.2 years. Notably, 100% of the acquired rents come from tenants with an investment grade rating, including the first Home Depot in our portfolio, as well as Family Dollar, Dollar Tree, DICK'S Sporting Goods, and Walmart. For the full year 2022, we acquired 51 retail net lease properties for just over $187 million at a weighted average going in cap rate of 7.1%, and a weighted average remaining lease term at acquisition of 8.7 years. 77% of the rents we acquired during the year were from tenants with an investment grade credit rating, and more than half of the rents acquired are in MSAs with over a million people. While we did see cap rates move higher as we made our way through 2022, we've seen a decrease in the number of assets listed for sale in the market to start 2023, which is contributing to a higher or tighter bid ask spread. Sellers with high quality properties in strong markets within in-demand tenants and sectors, have maintained conviction in their pricing expectations, and we're starting to see buyers be more aggressive as they look to put capital to work to start the year. This is resulting in cap rates either holding from where they were a few months ago, which is in spite of the higher interest rates, or in the case of investment grade-rated tenants and smaller price point assets, we're starting to see cap rates compress because those assets are more easily financed at better terms, offer a hedge against continued inflation, and provide solid risk adjusted returns in a relatively volatile macroeconomic environment. On the disposition front, we sold five properties for a total disposition volume of $31 million at a weighted average exit cap rate of 6.5%, generating total gains of $6.6 million. The dispositions include properties leased to Freddy's Frozen Custard, Big Lots, Rite Aid, and Harris Teeter. These sales, and the subsequent redeployment and nearly 100 basis-point net investment spread during the quarter, allowed us to drive a better return on equity, while moving out of some of the assets where we felt we had incremental risk. The proceeds also provided us with at attractively priced capital to put to work in the acquisition market that resulted in a higher yield and increased investment grade-rated tenant exposure. Year-to-date, we've sold 16 properties for approximately $155 million at a weighted average exit cap rate of 6.5%, or 5.9% when removing the impact of our last remaining office property we sold during the second quarter. These sales during the year generated gains of $34 million, and because we started this asset recycling process back in April, we've been able to maximize the value of the sold properties even as interest rates moved against us. As of the end of the year, our portfolio consisted of 148 properties totaling $3.7 million square feet, with tenants operating in 26 sectors within 34 States. Occupancy did tick lower and below 100% for the first time as a result of a vacant out parcel we acquired as part of a property acquisition in the fourth quarter. We ascribed no value to this vacant property at acquisition, but we're cautiously optimistic we can lease the asset to drive organic rent growth within the existing portfolio. Since our last earnings call in mid-October, DICK'S Sporting Goods is now our number two tenant, joining Walgreens, Family Dollar, Dollar Tree, Lowe's, and Dollar General, as our top five tenants, all of whom carry investment grade ratings. We enter 2023 with 54% of our total annualized base rents coming from tenants or the parent of a tenant with investment grade credit rating, which we anticipate will grow throughout the year as we continue to recycle out of non-investment grade-rated tenants and into high quality industry-leading retailers with balance sheets positioned to outperform in nearly any economic environment. We're hopeful that as our portfolio metrics start to better parallel our higher valuation multiple peers, we'll see an uptick in our own stocks valuation, reflecting the continuous refinement of our portfolio, our stocks increase liquidity, a de-risked balance sheet, and consistency of execution, as we've continued to drive attractive returns on equity for the benefit of all of our shareholders. Matt will outline the details of our 2023 guidance in a moment, but it's important to note that we do plan to continue our opportunistic approach to asset recycling. We've identified a number of properties that we think will garner strong pricing in the market as a result of the quality of the underlying real estate, allowing us to continue to generate attractive net investment spreads on the redeployment of the proceeds. I'll now turn the call over to Matt to talk about our performance in the quarter and the year, as well as our capital markets activities’ improved balance sheet and 2023 guidance. Thanks, John. Starting with our topline performance, total revenues grew 22% in the fourth quarter and 50% for the year when compared to the equivalent period in 2021, reflecting the benefit of accretive asset recycling and higher net investment spreads. General and administrative expenses for the year, which includes $3.8 million of management fees to our external manager, totaled $5.8 million. G&A as a percentage of total revenues in 2022 was 12.8%, a year-over-year decrease of nearly 400 basis points. We anticipate 2023 general and administrative expenses before the management fee, to be approximately $2.1 million. The current annual run rate for the management fee before any assumed new equity issuance in 2023, is just under $4.3 million. FFO in the quarter was $0.37 per share, representing an 11.9% decrease compared to the fourth quarter of 2021. In Q4 2022, AFFO was $0.41 per share, which remained unchanged from the fourth quarter of 2021. The decrease in FFO and differential to AFFO, was driven by a $443,000 extinguishment of debt charge relating to the defeasance and associated write-off of unamortized loan costs of our $30 million fixed property secured mortgage. For the full year, FFO was $1.73 per share, and AFFO was $1.77 per share, representing a year-over-year per share growth of 9.5% and 11.3%, respectively, when compared to the full year of 2021. Similar to the fourth quarter, the decrease in FFO in differential to AFFO, was driven by $727,000 of extinguishment of debt charges relating to the defeasance and associated write-off of unamortized loan costs for the $30 million fixed property secured mortgage, and for the termination and recast of our unsecured revolving credit facility that occurred in the third quarter. As previously announced, the company paid a fourth quarter cash dividend on December 30th of $0.275 per share, representing 1.9% year-over-year increase when compared to the company's Q4 2021 cash dividend, and the current annualized yield of approximately 5.4%. Overall, we increased our regular common stock cash dividend by 7.4% in 2022, while still maintaining a conservative FFO and AFFO payout ratio. Our fourth quarter FFO and AFFO payout ratios remain very efficient at 74% and 67%, respectively, and we anticipate announcing our regular quarterly common stock cash dividend for the first quarter of 2023 towards the end of February. Turning to the balance sheet, we made good progress reducing leverage closer to our long-term target. We ended the year with net debt to total enterprise value of 47%, net debt to pro forma EBITDA of 7.1 times, and we continue to maintain a very healthy fixed charge coverage ratio of 3.7 times. During the fourth quarter, we sold nearly 1.5 million shares through our ATM program for total net proceeds of $27.4 million. And during the full year of 2022, we sold 1.9 million shares through our ATM program for total net proceeds of $36 million. As I mentioned earlier, in December, we did defease the loan-secured mortgage on our balance sheet. The defeasance allowed us to unencumber the properties that secured the mortgage, of which we sold four of the six properties shortly thereafter. Following the secured mortgage payoff, our balance sheet is now completely unsecured. Subsequent to year end, we entered into a $50 million forward starting interest rate swap that commences in March to fix SOFR for our outstanding revolving credit facility balance, effectively eliminating our remaining go-forward floating interest rate exposure. As of today, we have no debt maturities until 2026, no floating interest rate exposure, and ample capacity on our revolving credit facility to complement our accretive asset recycling program. For 2023, the initial guidance in our press release last night reflects the confidence we have in the quality of our portfolio, while taking a reasonably cautious approach to the broader macroeconomic environment and underlying volatility in the capital markets. Our guidance relies on a number of significant assumptions, including, but not limited to, our ability to raise funds for investment at a reasonable cost of capital, our ability to acquire and sell assets at reasonable valuations, and continued operational and financial strength of our tenants. We begin 2023 with portfolio-wide in-place annualized straight line base rent of $40.4 million, an in-place annualized cash base rent of $39.9 million. Our full year 2023 FFO guidance range is $1.50 to $1.55 per share, and our full year 2023 AFFO guidance range is $1.52 to $1.57 per share. Our 2023 guidance for acquisition activity is $100 million to $150 million of retail net lease properties, which is subject to reasonable market conditions, and we believe these acquisitions will occur at a similar or better blended yield to our 2022 full year acquisition cap rate. For dispositions, we're projecting to sell between $25 million and $50 million of properties at a similar blended yield or better to our 2022 full year disposition cap rate. Thanks, Matt. During 2022, we delivered the second highest total shareholder return in our peer group. So, as we now fully transition into 2023, I'm excited about the opportunities we have in front of us and the support we've received from our shareholders. Our nimble size, evolving portfolio, de-risked balance sheet, and opportunistic approach to investing, are all drivers of momentum to help us execute in 2023 and beyond. I want to thank our team for all their hard work, and at this time, we'll open it up for questions. Operator? [Operator Instructions] Our first question or comment comes from the line of Gaurav Mehta from EF Hutton Group. Mr. Mehta, your line is open. Mr. Mehta, you may need to unmute your phone. Yes, thanks. Good morning. I wanted to ask you on your comments about cap rate compression that you guys mentioned for investment grade properties over the last few months. Can you maybe provide some more color on what you're seeing and what you're expecting for investment grade asset cap rates? Yes, so there's not a plethora of inventory out there. So, people that have good quality assets with good credits, they're holding onto their price. They're not breaking price. And so, because there's not a lot of inventory out there, your high net worth, your 1031 people are basically engaging at the price points that the sellers are willing to part with the assets. So, you are seeing that cap rates are definitely not expanding, and we just say they are kind of coming back down. Almost, it feels like a following the tenure or something that cap rates have come back in. We are hopeful and optimistic that we'll get some really good buying opportunities, but so far, it’s a pretty strong market if you have the right credits. Okay. Second question on leverage. Your pro forma debt to EBITDA at 6.6 times, do you expect that ratio to remain at current levels, or do you expect that to go up as you look to finance your acquisitions for 2023? Yes, I think we'd like to keep it in that general range, but it's going to move around just as a function of the size of the company, right? It doesn't take a lot to move it up and down. So, we'll see how the stock performs, and we'll see where the buying opportunities are and where the cost of debt is, and we will respond and allocate capital accordingly. Thank you. Our next question or comment comes from the line of Rob Stevenson from Janney Corporation. Mr. Stevenson, your line is now open. John, how are you thinking about sporting goods given the DICK’s acquisition? Is it just the credit on DICK’s, or is there something that you guys are seeing in the sporting goods vertical that has you excited about growth over the next few years? Yes, we've always been very impressed with how well DICK’s performs in the stores that we own and the ones that we've looked at acquiring, and they're just like such a strong operator that it seems like they're kind of the category killer. And so, it seems like their strong company performance really radiates from these locations. So, we're just really comfortable with that particular operator. Okay. And how much more is there in the portfolio today that you'd want to sell, barring some out of the blue offer that's below what your cap rate expectation would wind up being for that particular asset? Yes. I mean, we're seeing - basically we're getting inquiries on properties that we're not even in the market to sell. And obviously, we have our price point where we'll sell anything as long as we can - there's not a 1031 issue. And so, basically, we're seeing some really good attractive recycling candidates that we didn't really expect for this year. We didn't think we would sell them, but it looks like the pricing out there is better than we would've thought on the sell side. So, I expect to be somewhat active again here in the, call it more of the second quarter. Okay. And then Matt, in your guidance, what type of spread are you assuming on cap rates between the acquisitions and the dispositions for the year? Yes, I think it'll probably be consistent with what we did in 2022, so call it 100 basis points, plus or minus. Thank you. Our next question or comment comes from the line of RJ Milligan from Raymond James. Mr. Milligan, your line is now open. Hey, good morning, guys. John, I just wanted to revisit your comments on sort of the cap rate compression for investment grade, and I'm just curious what terms you're seeing out there from lenders to lend on that type of investment? Yes, it’s really high net worth, all cash. There's no lender involvement in where we're seeing the activity taking place right now. So, whether it's a smaller asset that it’s really a 1031 and there's no lender need, or it's high net worth, just very comfortable with the stability of net lease, and there's no problem on pricing. They just want to place the capital in with particular credits and locations. So, I guess per your comments, it's more a function of the lack of available product and that's sort of keeping cap rates relatively low. I guess the question is, if we were to see volume increase, would you expect cap rates to maybe expand a little bit? Yes, I would definitely - you're absolutely right. It's because there's not inventory out there. If you had a forced seller out there of assets or portfolio or motivated seller, I think you would see cap rate expand a bit because that's what we're all waiting for, is opportunities to deploy at higher yields. And so, if people know that they have to sell, you're not going to basically be very aggressive. That's kind of what we're all waiting for. So, yes, if you all of a sudden saw a lot more activity happen, I think cap rates would expand a bit. That's helpful. And then Matt, a question on the guidance for the outstanding share count. Obviously implies a little bit more equity through the year. How should we think about the cadence of that? Yes, so with the pro forma leverage that the Gaurav mentioned earlier and that's in our investor presentation, you can see we did a little bit of activity on the ATM to start the year before we went into blackout. So, a good chunk of that implied equity in the guidance has already been issued. The balance of that amount, I would expect to be more backend-weighted, and I think that would track transaction activity within the guidance as well. And then, do you expect for the transaction activity, is there - do you expect a mismatch in terms of dispositions versus acquisitions, or do you think they'll be pretty equally timed throughout the year? I think from John's comments, you can probably expect this to be a little bit more active on the disposition side in the second quarter, and there'd be a good match funding from that perspective, but then the balance of the acquisitions is probably backend-weighted to the second half of the year. Thank you. Our next question or comment comes from the line of Matthew Erdner from JonesTrading. Mr. Erdner, your line is now open. Hey, guys. Matthew on for Jason. Are there any specific regions throughout the country where cap rates are expanding or kind of holding steady rather than compressing, or is it kind of compression all around? Yes, I would say it's - I don't think there's a geographic area that is exhibiting something different than really the national new wave. I mean, I don't see a particular area that's expanding. Maybe some of the areas that are lower growth like as far as in Oregons or Californias, may be people that just don't have a bigger - as big a buyer pull, but it's pretty steady all across. Got you. And then following that up, last one for me, is there any specific industry that you guys are targeting, or is it just investment grade tenants that you're trying to recycle in? It’s definitely obviously investment grade kind of leads the way, but there's - it won't be really on the entertainment side, I guess. It'll be more your traditional staples of sort of assets, good consistent industries. Thank you. Our next question or comment comes from the line of Michael Gorman from BTIG. Mr. Gorman, your line is now open. Yes, thanks. Good morning. John, I was wondering if you could just spend a little bit more time talking about the acquisition market. I know you've talked about the investment grade cap rates. We've heard from some others that maybe there's also some differentiation within the specific sectors. Are you seeing that play out as well too, that there's more stratification between the sectors, even if they're both investment grade tenants? And then I know you've talked previously before about seeing opportunities in shorter duration leases or assets with maybe some more near-term role. Is that still out there as well, or is that starting to get priced out too? Yes. I mean, that's getting - there hasn't been really any gap out in that kind of pricing for the shorter duration. It’s hanging in there. I wouldn't say it's - on the shorter duration, it's not compressing more. The one thing I will say is, we’ve got to think about, on the inventory side, the merchant builders are not active - as active building new stores. So, you're not getting that inventory. I mean, first of all, the lender market for construction is tougher obviously. Rates don't make the performance look as good as they used to be. And then, obviously the construction costs are still elevated. They're not going up further, but they're not coming down like everyone had hoped. So, that kind of talks about the construction costs of these assets on a per square foot basis, makes the older product with low rents very attractive as far as the basis you're able to buy these assets. And so, that's why you're seeing a lot of capital come into these properties, whether they're on the shorter duration because the basis is so attractive. Got it. That's helpful. And then Matt, maybe just quickly on your side, what are you seeing in terms of the debt markets or the optionality for you all? You don't have any near-term maturities, no exposure to floating rate debt, but if you did start to see a pickup in maybe investment pipeline opportunities, how are you thinking about the debt markets here? What are the attractive products that would be available to you, or in terms of, would you be able to put on swaps at this point to keep fixed rate, or would it most likely need to be variable rate on the line? I think certainly there is an appetite for swaps in the bank market. And so, I think we could continue to sort of match fix acquisitions, whether that's on the line or a new term loaner or some other piece of debt, we can maintain the fixed approach. On the interest rate side, in terms of capital available, there hasn't been as much runoff of people's balance sheets. And so, I think everybody in the real estate banking market is expecting some capacity to open up here into the second and third quarter, which should allow for longer duration term loans and better match funding with assets to pick up. It's been pretty tight to start the year. For us, we've historically accessed the term loan bank market. We're getting to a size where the private placement market is more attractive. So, I think both of those areas is where you could see us add incremental longer duration debt. Thank you. Our next question or comment comes from the line of Wes Golladay from Robert W. Baird. Mr. Golladay, your line is now open. There's certainly - I would say there have been discussions, but whether it's not the right kind of purchase price for us. So, there's folks that would like to take OP units, but I think the bid ask on the asset is too wide. Okay. And then, you obviously articulated some dispositions planned for this year, but the cost of capital has been improving. So, I'm curious, how do you balance incremental dispositions versus scaling the business in light of the 400 basis points of improved efficiency this year or 2022? Yes. Well, on the disposition side, we’re using that capital to buy additional assets. So, it's not - we're not shrinking for sure. We're just taking advantage of upgrading the portfolio and accretive recycling. But other than that, we're definitely looking to grow beyond just the recycling. And so, we’re actively pursuing those opportunities. Okay. And then one for Matt. I think the 6.6 times debt to EBITDA, at what point does this start to benefit you on having a lower spread on your floating rate debt? And then you did mention maybe doing some more fixed rate debt. Would there be a point where you are potentially over-swapped and maybe a long floating rate? Yes, so with the 6.6 times, that's probably a 15 basis point benefit to our spread on the revolver and the term loans. Going forward, it resets every quarter. So, it'll take a little bit of time to get the benefit there once we head into the second quarter. But it certainly helps. On the longer duration debt, the swap that we did was a five-year swap. So, if and when we do a new term loan, it would effectively match up with that new term loan. Whether we go farther out on the swap rates to further hedge out, I think that'll depend on where interest rates are and what kind of duration is available on the debt origination side. Our next question or comment comes from the line of Mr. Craig Kucera from B. Riley. Your line is now open, sir. Yes. Hey, good morning, guys. Most of mine have been answered, but I wanted to ask about your lease rollover. I think historically, you haven't had much in the portfolio, but you are starting to see a pickup here a little bit in ‘23 and certainly in ’24. Are you having any discussions at this point on extensions? And I just would be curious about any thoughts you have on lease expirations over the next year or two? Yes. Thanks, Craig. We have had extension discussions. We're actually seeing some tenants with expirations a couple of years away try to come in early to get something for an early extension. And a lot of those locations were comfortable basically waiting till the renewal. And - but if there's an opportunity to do something with the tenants on multiple assets, we're certainly open to those discussions. So, yes, we're obviously in intended discussions about renewals and early renewals. Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Albright for any closing remarks. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.

EarningCall_154

Good morning, and welcome to the Interpublic Group Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time. Good morning. Thank you for joining us. This morning, we are joined by our CEO, Philippe Krakowsky and by Ellen Johnson, our CFO. We have posted our earnings release and our slide presentation on our website, interpublic.com. We will begin our call with prepared remarks to be followed by Q&A. We plan to conclude before market open at 9:30 Eastern time. During this call, we will refer to certain non-GAAP measures. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance. We will also refer to forward-looking statements about our company. These are subject to the uncertainties and the cautionary statement that is included in our earnings release and the slide presentation and further detailed in our 10-Q and other filings with the SEC. Thanks, Jerry, and thank you for joining us this morning. As usual, I'll start with a high-level view of our performance in the quarter and the full year and our outlook for the year ahead. Ellen will then provide additional detail, and I'll conclude with updates on key developments at our agencies to be followed by Q&A. We're pleased to share another year of strong performance. Before turning to the numbers, I'd like to once again thank our more than 58,000 colleagues around the world whose dedication to our clients and one another are exceptional, along with our expertise spanning creative marketing services, technology and data management, that's what continues to be at the heart of our performance. Turning to our results. For the full year, organic growth was 7%. Our adjusted EBITDA margin was 16.6%, both are at the levels we shared with you in our last update in October. It's worth noting that a year ago at this time, we looked ahead to full year 5% organic growth on top of very challenging multiyear comps and performance throughout the year drove consistent increases to that 7%. We grew in every world region and broadly across client sectors. Our three year organic growth stack, therefore, stands at 14%. The level of performance that speaks to the strength and relevance of our offerings, particularly in services and sectors demanding precision and accountability. In our fourth quarter, organic net revenue growth was 3.8%, which brings three year growth performance to 9.7%. That means that, as expected, growth slowed in the fourth quarter consistent with global macroeconomic and geopolitical crosswinds, which we're all aware of. Notwithstanding slowdowns across the global economy and with that, a broadly more cautious marketing and media environment, our growth continued in every world region during the fourth quarter. Overall, U.S. organic growth was 2.4% despite dilution from certain units in the portfolio on top of a very strong 12.1% a year ago. Organic growth in our international markets was 6.1% on top of 11% a year ago. By sector, growth in the fourth quarter was led by our clients in the auto and transportation sector, followed by the retail, our other sector of industrial and government and health care. Going the other way, second telco, which for us is our second largest client sector began to show the impact of - but I guess we could refer a sector-specific issues, which we're forecasting will continue to present headwinds for us for at least the first half of 2023. Also in Q4, we felt the largest quarterly impact of the late 2021 loss of a large food and beverage client which will finish running off at the end of Q1 this year. Each of our operating segments grew organically in the quarter. In Media, Data & Engagement Solutions organic growth was 5%, led by double-digit growth at IPG Mediabrands. Increases at our digital specialists, which we've called out previously, weighed significantly on segment and group-wide growth in the quarter and the year. Our Integrated Advertising & Creativity Led Solution segment grew 2.6%, paced again by IPG Health, which posted high single-digit growth performance. Our segment of Specialized Communications & Experiential Solutions grew 3.5% organically with leadership from the full range of our experiential and sports marketing offerings. Turning to profitability and expenses in the quarter. Our teams continued their outstanding execution, effectively navigating today's complicated economic environment. This, in turn, led to the strong fourth quarter margin performance we're reporting today. We've been able to deliver this result while continuing to invest in our offerings and to take significant real estate actions in the quarter that will further our structural operating efficiencies going forward. Fourth quarter net income was $297.2 million as reported. Our adjusted EBITDA was $568.4 million, which is before a noncash charge in the quarter for those real estate actions. Adjusted EBITDA margin in the quarter was 22.3%, and that brings full year adjusted EBITDA to $1.57 billion and margin on net revenue of 16.6%. I think it's worth reflecting that at that margin level, we've successfully consolidated 260 basis points of margin improvement over the last three years, along with that very strong three year growth stat that I mentioned earlier. Fourth quarter diluted earnings per share was $0.76 as reported and was $1.02 as adjusted for the real estate restructuring charge, intangible amortization and the disposition of small nonstrategic businesses. In sum, our fourth quarter completes a year of strong financial performance across the key performance metrics of growth, adjusted EBITDA and earnings per share. During the quarter, we also closed on the acquisition of RafterOne, a leading e-commerce implementation partner, which brings additional scale and capability to our offerings in an area of growth and strategic importance. Over the course of 2022, we also returned capital to shareholders in the amount of $777 million between dividends and share repurchases. Given the continuing strength of our operating results and confidence in our strategic trajectory, our Board has once again raised IPG's quarterly dividend by 7% to $0.31 per share. This marks our 11th consecutive year of higher dividends, which, as you know, continued uninterrupted through the pandemic. Our Board also authorized an additional $350 million share repurchase program on top of the $80 million remaining in our previous authorization. Turning to discussion to 2023 and our outlook for the year. There remains a meaningful degree of macroeconomic uncertainty. Visibility, therefore, is somewhat challenged. I think it's fair to say that clients are approaching 2023 with equal parts conviction in the need to be in the market, as well as an increased level of conservatism. That's not to say that they are any less focused on the need to drive for growth into the new year or to invest in the transformation of their business. It's just that we're seeing budgeting decisions made with more deliberation. And it's also fair to say that there's significant variability within our client portfolio from client to client. We're confident that the strongest growth areas of our business such as consultative media services, health care marketing, experiential marketing, commerce as well as data management and data sales will continue to perform strongly despite the broader economic situation. We're also confident in our operational rigor and flexible cost model. Our actions in the fourth quarter to further reduce our occupied real estate footprint by nearly 7% demonstrates our consistent and ongoing focus on identifying and acting on opportunities to rethink our business model and improve efficiency. So bridging all of these moving parts together, we expect organic net revenue growth for 2023 of 2% to 4% on top of those industry-leading multiyear comparators and further expansion of our adjusted EBITDA margins to 16.7% for the full year. Our priorities for the year remain consistent. First, to build on IPG's strategic differentiation, which for us means to focus on the people, talent and capabilities that enable us to solve a broader set of business problems, and which further our evolution into a higher-value solutions provider, as well as strong execution when it comes to integrating our agency's expertise through open architecture solutions. Second, to combine those client focused offerings with operational excellence, which is always important, but never more so than in an uncertain economic climate. Delivering on these goals and our new financial targets, as well as our long-standing commitment to return of capital should lead to another year of value creation for all of our stakeholders. Thank you. I hope everyone is well. I would like to join Philippe and thank our people for their terrific accomplishments. As a reminder, my remarks will track to the presentation slides that accompany our webcast. Beginning on slide two of the presentation. Fourth quarter net revenue was essentially flat from a year ago, with organic growth of 3.8%. That brings organic growth for the year to 7% and our three year growth to 14%. Adjusted EBITDA in the quarter before a net restructuring charge was $568.4 million and margin on net revenue was 22.3%. Our restructuring charge in the quarter, resulting from having identified further opportunities to optimize our real estate portfolio. We reduced our occupied real estate footprint by approximately 500,000 square feet or 6.7%. The net charge in the quarter was $101.7 million, which we expect will result in $20 million of permanent expect savings, which will be realized as we move forward. There was no severance involved in these most recent actions. You'll recall that in 2020, we reduced our lease footprint by 1.7 million square foot, and the additional actions are a recognition that in the wake of the pandemic operating model has changed with respect to office space. While we will still continue to optimize our square footage in the normal course of our business, we do not anticipate additional restructuring charges. Our diluted earnings per share in the quarter was $0.76 as reported and $1.02 as adjusted to exclude the restructuring charge, the amortization of acquired intangibles and a small amount operating loss from business dispositions. Our adjusted diluted EPS was $2.75 for the full year. We concluded the year in a strong financial position with $2.5 billion of cash on the balance sheet and with 1.6 times gross financial debt to EBITDA as defined in our credit facility. We repurchased 3.2 million shares in the fourth quarter, bringing our full year repurchases to $10.3 million, returning $320 million to our shareholders in 2022. Our Board increased a quarterly dividend to $0.31 and authorized another $350 million repurchase program, in addition to the $80 million remaining on our prior authorization. Turning to slide three, you'll see our P&L for the quarter. I'll cover revenue and operating expenses in detail in the slides that follow. Turning to the fourth quarter and full year revenue on slide four. Our net revenue in the quarter was $2.55 billion, an increase of $1.6 million from a year ago. Compared to Q4 '21, the impact of the change in exchange rates was negative 3.9%. Net acquisitions added 20 basis points. Our organic net revenue increase was 3.8% and which on the right-hand side of this slide brings us to 7% for the full year. Further down the slide, we break out segment net revenue performance. Our Media, Data & Engagement Solutions segment grew 5% organically on top of 11.9% in the fourth quarter of 2021. As you can see on the slide, the segment is comprised of IPG Media brands, Acxiom, Kinesso and our digital specialist agencies. IBP Media brands grew at double-digit rate. As first noted on our third quarter call, R/GA and Huge are in the process of transforming their business models and have soft performance, which weighed significantly on the overall segment growth. That's something we will not lap until the back half of this year. At the right-hand side of the slide, organic growth was 6.4% for the full year. Organic growth at our Integrated Advertising & Creativity Led Solution segment was 2.6%, which was on top of 10.3% a year ago. As a reminder, the segment is comprised of IPG Health, McCann, MullenLowe, FCB and our domestic integrated agencies. Our growth in the quarter was led by a strong increase in IPG Health, which grew in the high single digits. For the year, the segment grew 7.1% organically. At our Specialized Communications & Experiential Solutions segment, organic growth was 3.5%, which compounds 15.2% in last year's fourth quarter. This segment is comprised of Weber Shandwick, Golin, Jack Morton, Momentum, Octagon and DXTRA Health. We will lap a high single-digit increases in our experiential solutions. For the year, the SC&E segment increased 8.5% organically. Moving to slide five, our revenue growth by region in the quarter. The U.S., which was 63% of our fourth quarter net revenue grew 2.4% organically on top of 12.1% in last year's fourth quarter. We had notably strong growth at IPG Mediabrands, IPG Health, MRM and Jack Morton experiential. Decreases at our digital specialists R/GA and Huge weighed on our U.S. growth rate by 160 basis points in the quarter. International markets were 37% of our net revenue in the quarter and increased organically. You'll recall the same markets increased 11% a year ago. In the U.K., organic growth in the quarter was 9.4% led by notably strong performance in media, experiential and at MullenLowe. Continental Europe grew 5.7% organically. We were led by very strong growth in Spain, while Germany and France were relatively flat year-over-year. In Asia Pac, organic growth was 3% in the quarter with strong results in Australia, Japan and China, while India decreased. In LatAm, we grew 5.8% organically on top of 22.5% a year ago. Our other international markets group, which consists of Canada, the Middle East and Africa, grew 6.9% organically on top of 18.7% a year ago, which reflects notably strong growth in the Middle East followed by Canada. Moving on to slide six and operating expenses in the quarter. Our fully adjusted EBITDA margin in the quarter was 22.3% compared to 19.3% in 2021, an increase of 300 basis points. As you can see on this slide, we had operating leverage on each of our major cost lines. Our ratio of salary and related expenses as a percentage of net revenue was 61% compared with 62.2% in last year's fourth quarter. Underneath that ratio, we delevered on our expenses for base pay, benefits of tax as headcount increased to support revenue growth. We ended the quarter with headcount of 58,400, an increase of 5% from a year ago. Our expenses for temporary labor, performance-based incentive compensation and severance were all notably lower than a year ago. Our office and other direct expenses decreased as a percentage of net revenue by 160 basis points to 13.5%. That reflects leverage due to lower occupancy expenses. We also reduced all other office and other direct expense compared to last year as a percent of net revenue, which reflects lower client service costs consulting and employee-related expenses. Our SG&A expense was 1.2% of net revenue, a decrease of 10 basis points. Turning to slide seven. We spent detail on adjustments to our reported fourth quarter results in order to give you better transparency and a picture of comparable performance. This begins on the left-hand side of our reported results and steps through to adjusted EBITDA, excluding restructuring and our adjusted diluted EPS. Our expense for the amortization of acquired intangibles in the second column was $22.1 million. The real estate restructuring charges were $101.7 million and the related tax benefit was $26 million. Below operating expenses are losses on the disposition of small nonstrategic businesses was $8.3 million, which is shown in column four. At the foot of the slide, you can see the after-tax impact per diluted share of these adjustments, which bridges our diluted EPS as reported at $0.76 to adjusted earnings of $1.02 per diluted share. Slide eight similarly depicts adjustments for the full year, again, for continuity and comparability. Our amortization expense was $84.7 million. Our charge for restructuring was $102.4 million. Dispositions over the course of the year resulted in a book loss of $3.8 million. The result is adjusted EBITDA of $1.57 billion and diluted EPS of $2.75. Our adjusted effective tax rate for the full year was in line with our expectations at 24.8%. On slide nine, we turn to cash flow for the full year. Cash from operations was $608.8 million, cash used in working capital was $672.3 million compared with cash generated from working capital of $743.4 million a year ago. As we've pointed out in the past, working capital is volatile. In each of the previous 3 years, we had very strong working capital results. And over the last 4 years, we generated a total of $1.4 billion. Our investing activities used $460 million. That mainly reflects our acquisition of RafterOne and our CapEx in the year. Our financing activities used $869.5 million, representing our common stock dividend and repurchases of our shares. Our net decrease in cash for the year was $719.1 million. Slide 10 is the current portion of our balance sheet. We ended the year with $2.5 billion of cash and equivalents. Slide 11 depicts the maturities of our outstanding debt and our diversified maturity schedule. Total debt at year-end was $2.9 billion. As you can see on the schedule, we have $250 million maturity in 2024 and then our next scheduled maturity is not until 2028. In summary, on slide 12, our teams continue to execute at a high level. I would like to again recognize the accomplishments of our people and the strength of our balance sheet and liquidity have us well positioned to continue our track record of success, both financially and commercially. Thanks, Ellen. As you can see from our results, our strategy, talent and culture continue to drive innovation, creativity and collaboration that fuel our clients' success in an increasingly digital economy. Over the past 3 years, we've organically added $1.2 billion of revenue to our business as well as increased adjusted EBITDA by over $360 million since the start of 2020. Credit to our teams for those very strong results. Throughout this period, what we're seeing play out are the accelerated technology-driven shifts in media and consumer behavior that our company had anticipated and against which we've made significant investments. Our expertise in first-party data management, performance media and accountable marketing solutions are all areas relevant to marketers looking to build their brands while also delivering business outcomes. Vital to our strong performance are our media, data and health care offerings. These specialized assets have evolved their offerings to combine marketing services with emerging communication channels and technology is to help clients find new ways to identify and interact with individual consumers. As you saw in October, we continue to look for strategic areas of investment. With our RafterOne acquisition, we brought a talented and specialized team into the IPG network, to architect and implement scaled sales force solutions that connect brands with customers through end-to-end commerce experiences in both B2B and B2C settings. The RafterOne team will help us deliver creative campaign that work smarter for our clients by building meaningful relationships in digital marketing platforms. Enterprise marketing suites like Salesforce and Adobe formed the foundation of so many brands marketing technology stacks, and our company can serve as a bridge between those brands, their consumers and these platforms, strengthening every touch point in the customer journey. We continue to invest in this important growth area and recently announced that we brought on board our first Chief Commerce Strategy Officer. He joins us from Accenture where he oversaw their omnichannel commerce practice. At IPG, he'll connect our existing channel and platform expertise, including strong and scaled teams at MRM, RafterOne, reprise media and IPG platform services as well as others across our entire portfolio. And he'll orchestrate how our company supports clients as they build out commerce solutions and integrate them with a full breadth of their marketing programs. Turning now to the highlights of agency level performance in Q4. As we've mentioned, results were once again led by our media, data and technology offerings. Media performed very strongly to close out a successful year. And during the quarter, we saw a series of notable wins, including Celebrity Cruises at Mediahub, Energy Australia, the REIT tension of major client Merck and the addition of assignments on AWS at initiative and the onboarding of Moneysupermarket Group at UM where earlier this week, we also announced that we welcomed the new Global CEO to the agency. As we speak, IPG Mediabrands is also hosting their third annual equity upfront which provides opportunities for clients and our agencies to engage directly with diverse owned media partners, including black, API, Hispanic and LGBTQIA owned media which is vital to establishing the kinds of partnerships that can change buying patterns in the industry. Acxiom continues to be a strong contributor to the performance of our media agencies as well as others in the group who've incorporated audience-led methodologies into how they develop strategic insights and creative work. During the quarter, Acxiom brought in new logo wins and contract renewals in the automotive, CPG, financial services, insurance, retail and travel and entertainment sectors. They were recognized as a leader in the Snowflake Modern Marketing stack report and also launched a new integration with a customer data platform, Telium to enhance deterministic modeling capabilities. Turning to IPG Health. That network continued to deliver strong results for us in the quarter, compounding very strong -- excuse me, again, trailing growth since we created the group approximately 15 months ago. While growing with nearly every existing client, IPG Health also focused on expanding its presence globally through some strategic alliances, notably in Europe. And the caliber of their creative work was honored at the 2022 M&M awards, where the network was named large Healthcare Network of the Year. At our global advertising networks, we continue to see the benefit of our investment in strong differentiated agency cultures which are driving distinctive ideation and creativity, and we're seeing that recognized again and again in the industry. FCB won significant accolades during its first full year under its new leadership team, who was named as 1 of the 10 most innovative advertising agencies of 2022 by Fast Company. It was honored as the #2 network overall in Cannes and was once again named Festival's top rank North America network, thanks to powerhouse offices in New York, Chicago and Toronto, which it bears noting are all leaders in leveraging data to power audience insights and creativity. With a new CEO in place at the beginning of the fourth quarter, McCann saw new business wins with Smirnoff which make it part of the Diageo roster and post-consumer brands. McCann also launched work for recently won clients Converse and Prudential. Additionally, the agency was named Network of the Year to 2022 EpicaAwards for the fifth time at 6 years and McCann New York won Epica innovation Grand Prix for Mastercard's Touch Card, the accessible card standard for blind and partially cited people. More recently, McCann also announced a series of senior organizational changes, elevating key internal leaders and adding new executives to the agency. MullenLowe Group continued to secure new business as it had throughout the year. With the addition of Ferro International, [indiscernible], National Highways in England, Lifestyle Fashion in India and the Barcelona football club in Spain. We also announced the new global CEO for MullenLowe promoting the key female leader from within our organization, who's known across the industry as a champion of creativity, a strong growth driver and someone fully committed to diversity and inclusion. Among our domestic independent agencies as part of the agency's goal to help reshape our industry, the Martin Agency announced their commitment to hire a minimum of 50% directorial and editorial talent from underrepresented groups for all their video content production. At our earn and experiential agencies, performance was led by Octagon, Jack Morton and Momentum, all of which posted strong growth in the quarter. With more than 3 decades of World Cup experience, Octagon was very active with a range of clients at this year's tournament. For example, with a long-time client Budweiser, the agency ran a range of on-site activations in Doha, managed complex global influencer campaigns and hosted nearly 0.5 million consumers who are fans and viewing events around the world. Jack Morton continued to deliver outstanding performance and launched a sponsorship consulting practice, which has dubbed Jack39 and continue to build out JackX, which is their global experience innovation practice which creates events of the combined content with Web 3.0 times. Among our public relations firms during the quarter, Golin had several wins, including a product launch for new alcohol brands, corporate communications work for food products and services brand and then being named the influencer AOR for household appliances manufacturer globally. Weber Shandwick announced new client wins with HP in North America and IKEA and the U.K. And the network also launched what it's calling the business Society and Society Futures, which is a C-suite offering that combines public affairs, corporate affairs as well as organizational design and consultancy. During the quarter, DXTRA Health posted strong gains, winning a large global oncology assignment for a major pharma clients. And in addition, its leader was named to PR Week Health Influencer 30, which is the annual list of most influential individuals in health care communications. At the holding company level, as you know, we have a long-standing commitment to ESG and DE&I as key strategic priorities. And as you may have seen last week, we announced that IPG has been included on the Bloomberg Gender Equality Index for the fourth consecutive year and was recognized for the first time as a top-rated ESG performer by Sustainalytics. We were also once again included in the FTSE for good Index, and Newsweek's America most Responsible Companies 2023 and Forbes featured us on both its America's Best Large Employers list as well as the world's top female-friendly company for 2022. As a business in which human capital is so vital to our success, our culture, including an intentional approach to ESG has long been an important part of our strategy for attracting and retaining top talent, whether in strategic, creative, data analytics or engineering roles, or across a range of other skill sets that have become key to our evolving offerings. Looking ahead, we believe IPG remains well positioned for the future. Much of our growth in recent years as well as in 2022 was fueled by disciplines that most actively tap into our data and precision marketing capabilities as well as our exceptional health care marketing offerings. These are growing parts of our portfolio that continue to develop into more structural and secular revenue streams. We know the world in which we live is increasingly digital and that more than ever, clients need help from us in using audience-led thinking to solve for a widening set of business problems and opportunities. We've been leaders in this space and 2023 will be a year in which we consolidate those gains and prepare to further evolve the way in which we deliver this expertise to marketers is to elevate the value of the services and solutions we provide. In addition, we're confident that our commerce and experiential disciplines, which not today figuring as large in our revenue mix will continue to grow going forward. As stated earlier, despite the broader uncertainty that we're seeing at a macroeconomic level, we expect to deliver growth in 2023 of 2% to 4% on top of a very strong record that has compounded for a number of years. Of course, another key area of value creation remains a strong balance sheet and liquidity. And our ongoing commitment to capital returns is clear in the actions that were announced by our Board today, which also speaks to the confidence in our strategic position and future prospects. Part of our balanced approach to capital allocation, we'll continue to further invest behind the growth of our businesses by developing our people and continuing to differentiate our offerings. This includes a disciplined approach to M&A focusing on opportunities that are consistent with strategic growth areas, primarily commerce and Performance Media, business transformation and consultancy. We thank our clients our people and those of you on this call for your continued support. And with that, let's open the floor for questions. Hi, thank you. Philippe, you noted client uncertainty at a conviction to stay invested. I wanted to see if you could provide some insight into your conversations with marketers, how they manage that balance and kind of what factors are keeping them tipped into the side of remaining in the market? And then just on the guide overall, that range is a little wider than we're used to seeing. Is that all due to the economy? And should we think of macro is maybe the main driver in pushing you towards the lower or upper end? Maybe I'll take them backwards if that's okay with you. I mean I think if you think about our budgeting process, right, it's bottoms up with our operators. We do, in fact, as you suggest, go client by client. We look at pipeline. And then with our larger clients, obviously, we're able to engage with them directly. And I think what we're pointing out there is just that I think what's happening is that the caution that we're seeing is less a function of the specifics of what's going on right now. I think it's just the open-endedness, the concern about a potential downturn somewhere along the line as we get further into 2023. But again, if you go back to how we build the budget, that bottoms up, look at clients, factor in the pipeline, clearly factor in a view of the macro, and we're going to have a geographic or a client or even a business mix that's specific to us. And then we did call out a couple of places. As you know, I think we're quite direct and kind of clear about what's going on in the business, where are we taking the business. So we call that a couple of places where some things require attention and some things are having an impact as we look at the year ahead. So I would say that, that's how we got to the range the fact that the range is broader than one would see in other years is reflective of that sense of uncertainty. I think you're seeing broader ranges when companies are going out there. And I would say we're comfortable at the midpoint of that range. Okay. And then maybe 1 for Ellen. I wanted to ask a question about longer-term margins. So as IPG pushes to become more of a higher-value solutions partner, as you guys raised it, how does that potentially impact your margin trajectory? Should we necessarily think of higher value services is translating to higher margins in addition to higher growth? Or are there other kind of considerations like specialized labor that could offset that we should consider? Sure. Thank you for the question. Very optimistic about the opportunity to increase our margins going forward. And I would point to, we have a long track record of doing so. I mean if you look at the past couple of years, we've increased our margins 260 basis points since 2019. So I think it's a combination of several factors. One, as you point out, I think high-value services is a continued opportunity for us. But also, I think we have a good track record of translating growth profitably into margin expansion. We manage our costs in a very disciplined way. And we're continuously looking at opportunities on business transformation. We have a large portion of our revenue in shared services. We manage our real estate portfolio centrally. So put all those things together, I do think that there is opportunity for margin expansion as we move ahead. And 1 just quick add there, David, is just that across the senior teams, whether it's corporate or any of the units, our incentives are fully aligned to that objective, right? So the plan is modestly more heavily weighted to margin than revenue. And so to our mind, that ensures that where there's growth, there's profitable growth, and that when we're in a circumstance that's got more uncertainty, we're still able to, as Ellen said, make good on that consistent record of where there's growth, we've demonstrated that we can convert it to incremental profit. Good morning. Philippe and Jerry. Thank you for taking my questions. I have three, please. The first one is on the guidance. Could you elaborate a tiny bit more the guidance regarding the impact of inflation on the revenue? And marginally, what shape do you expect the growth to be, for example, H1 versus H2? The second one, perhaps for Ellen on wage inflation. How much was wage inflation in '22? And what have you taken for 2023 in your assumptions? And lastly, Philippe, just to come back on your point at the beginning of your remarks, could you comment on the performance by sector? I think you mentioned telecom. Could you elaborate? And more [indiscernible] what is the attitude of your claims by sector ahead of '23? Thank you. Sure. That's a lot. So I guess there are 2 inflation questions. I will take the -- so in terms of inflation, vis-a-vis our growth, yes, the majority of our contracts have written into them the ability to -- as the world changes, sort of go back to clients and talk about the cost of the services that we provide to them. That's not something that triggers automatically, it requires that you enter into a conversation or ultimately kind of a negotiation with clients. So if I were to talk about what's gone into our thinking and how we build the forecast that leads to the guidance, revenue growth is primarily from growing scope with our existing clients. And we definitely believe that there is that the primary avenue for growth, the most -- the 1 that we are most keen on is growth with existing clients. So deepen the relationship, bring additional services. Then secondarily, clearly, you have the opportunity to add when there are new business opportunities and pitches. So I think that, that's really what is baked into it. And then as we've discussed, we are beginning to, in some instances, be able to go to clients with some of these services that are -- new services based on the data and the technology part of what we've been building. So I think that's 1 part of the question. And then Ellen, I'll let Ellen take the cost as it bakes into our business and then the second part and then I'll come back for your third piece on sectors. So as far as inflation on our cost base, we've been very transparent that there's been modest inflation in the salary line, but ones that we feel are very manageable and that will not take us off the growth trajectory on our margins nor deter us from expanding them accordingly. So that was factored into our guidance for '23 and going forward. And then I guess on sectors, so auto and transportation is strong, and we see it continuing. Health care, financial services for us, given the mix of clients that we've got in retail, that has continued to be a place where we've got quite progressive modern clients, and then the other category. As I mentioned, I think the -- a lot of the headlines and a lot of the sort of sector-specific issues that we're seeing in tech are manifesting in conversations with clients. And there, what we're seeing is clients either taking reductions or being not committing for a full year. So I think as we said, what we saw there was something that I think is -- we're seeing the impact, the duration on that is perhaps open ended. And then food and beverage for us will have the runoff of a very large industry consolidation that took place at the holding company level in late '21. And as we said, it impacted Q4 most heavily, but we'll still see some impact. So in terms of the revenue deltas, it's definitely, for us, the items that we've identified for you, which we are addressing are definitely going to impact first half, whether it's the digital agencies and where they are in their cycle of transformation as the macro becomes a bit more challenged, and then some of these client items. So for us, it's definitely - a stronger back half is very much where and how we've gotten to that guidance. Good morning. Maybe just to follow up on that theme a little bit first. So Philippe, can you give us an idea of what the net new business impact is for 2023? It sounds like it's probably modestly negative. So I just want to make sure I'm piecing all that together. And I'd love to include some components of this question, which is how does kind of health care set up from a growth rate perspective in 2023 since that's such a big part of the revenue mix? And R/GA and Huge, it sounds like those will be drags this year. Historically, they've kind of been some real superstar agencies for IPG. So I guess, how do you kind of think about the journey of these digitally native agencies? Is it still an area of investment? And how do they kind of fit in the portfolio going forward? Sure. Look, I think you're right. They're premium providers. It's a largely project-based business, which is -- I think both of those, a premium provider uncertain macro project-based business. Again, projects showed up in Q4 for us at a very solid level. I'd say in line with overall Q4 growth. Experiential was strong. PR was maybe a bit below the segment growth, but the digital projects that you would see at those very high-end agencies, we're definitely not at the levels they were weak. And so I think that every 3 to 5 years, these agencies need to kind of reinvent and reconfigure because they are, to your point, at the leading edge. But I think that in the current environment, that's where we find ourselves with them. PS, they're also probably more exposed to tech than many of our businesses. So we've seen client attrition and lower growth there. And Huge has pretty clear line of sight into what their new value proposition is, and that will be going in the market probably towards the end of the first quarter here. So they've also been because of the strength that you call out, tying them more into whether it's open architecture or whether it's the kind of the overall data stack that we've built is clearly something that we need to focus on. So it may be that long-term success. And a measure of independence is something that is going to need to be addressed. And then on the question around new business, again, we now see new business in the big media pitches and then in some of the more traditional parts of the business probably the creative ad agencies and some degree, PR. We don't see the new business within health very much. And then a lot of what's going on, as I said, has become project specific. So I'd say we are going into the year exactly, as you said, with a modest headwind. And then was there 1 piece of the question that I'm forgetting at this point? And then health. I think we see health at scale now, having put these assets together. And as we said, trailing very, very strong performance, doing high single digit in the quarter. That's probably consistent with what they did for the year, and that's consistent with the expectation that we have for them as we go into '23. Great. And then maybe just a short follow-up for Ellen. Working capital was a big use in '22 I think it was favorable in '21. I know the timing of the year can be a strange line to draw on the sand, but should we expect it to then be back to probably a benefit in '23? So as we've pointed out, working capital is volatile. Whether you get paid on the 31st to the first, you're right, when you print your balance sheet and cash flow makes a big difference. It is something that we spent a lot of time and have a lot of discipline around and carefully manage. And if you go back over the past 4 years, I think we've generated a billion in working capital. So I would expect going forward, it will normalize. But you're right. In any 1 year, you can get an aberration. I am good. How are you? I want to ask you about the RafterOne acquisition. I believe it's the biggest deal since Acxiom. If you go back to the history of the company, it's probably 1 of the biggest deals we've seen, right? So can you talk a little bit more about the necessity to do it, the multiples of skill sets and whether or not like this is the beginning and it's not like we take but the beginning of maybe more tuck-in acquisitions like that. And then Ellen, given the FX volatility, what's your thinking on the year ahead for FX and any impact from acquisitions and investments to revenue this year? Thanks. Look, I think that's really -- I mean it's very apt observation, right? I can definitely speak to RafterOne and what it is about them and why, right? So to our mind, a very strong asset in a very specific space that is growing very fast, right? So obviously, Salesforce as a platform means a lot more to more of our clients. So they're ascendant. And then for the dollars that go into a major sales force implementation, there's a multiple, there's that goes to the service providers. So that's a -- there's a large service economy around that, and we're very strong in Adobe. And to us, we were building that Salesforce capability, started working with this company as a partner got to know them. And it was actually preemptive on our part because I don't know that their ownership was -- their owners were necessarily thinking that this was a moment in time at which they would trade the asset. But from where we sit, tech implementation, direct-to-consumer work, the internal platform services group that we've created so that we are bringing kind of bigger presence into those kinds of engagements. So I think Salesforce -- I mean, RafterOne is 500 experts, I think 800 or 900 certifications and both B2B and B2C expertise. But I think what you said that's very accurate is that we're a bigger company by a fair bit as of the last 3 years. So you used to think of us as doing tuck-ins, and they were quite small, and they were much more sort of agency like. And to our mind, I think we want to concentrate that buying power and then focus on these areas where what you've got is sort of a hybrid of marketing expertise, some measure of creativity against an emerging channel and then some piece of what they do, which brings some technology expertise. So I think you probably will see us do fewer and scale-wise, they'll have gotten bigger. What tuck-in means will be, I think, more like this. And with regards to FX, '22 was a larger impact than what we typically see. It was negative 3% on revenue growth and actually 20 basis points on margin. For the most part, our revenue expenses if you historically are pretty well matched. And so going forward, we're expecting based on what the rates are today, a flat impact on revenue and a de minimis impact on margin. Ellen, can I follow up? I remember asking you when you started about that question about margin. Why was your drag on margin from that tax this year? I think you answered previously, what was a much difference. So what happened this year on margin that didn't happen in the past? It was more an impact of what happened in the currency markets, right? If you look at '22, the currency markets moved more than they historically do. But for the very vast majority of our businesses, revenue and expenses are matched by currency and we -- that was probably the largest impact we've seen in a very long time, and we do not expect that type of impact at all going forward. Hi. Thanks very much. Could I ask a couple of cost-related questions, please. If my math is right, your $20 million in real estate savings equates to about 30 basis points of margin. Is that the kind of scope of upside we could expect in 2023? And maybe an offset to that or maybe a boon to that, I don't know, would be any comments you could make on staff. I heard your comment on managing the staff cost inflation versus the revenue growth. It sounds like you guys maybe net might still be hiring rather than reducing staff. And there's a lot of talent now available from all these layoffs and lots of other companies. I'm just wondering what you could say about your expectations in terms of staffing levels and growth in cost this year? Thanks. Sure. Maybe I'll start with your second question first. We always -- hiring always lags revenue growth. And so where -- we are forecasting growth for next year and underneath growth, we will hire responsibly in a disciplined fashion. Conversely, when we have contractions, we take actions. As far as the real estate, I think your math is a little bit aggressive on the 30 basis points. And the $20 million that we noted on the call will happen over more than 1 year. You need to sublease some of the properties in order to realize the full benefit. But we're very optimistic about the numbers we put out there, we feel really good that we've taken another look and really have been able to optimize our real estate portfolio. Like I mentioned, it's a very centralized process and the way we manage it here and we've really taken the learnings that we've had over the last couple of years and then the pride in a way to become more efficient. I had a quick question in terms of the macro. In terms of the macro uncertainty, is there anything that you would call out in terms of either higher or lower risk profile as it relates to account reviews? It just doesn't seem like it's been as active as I would have thought, but I'd love any color that you have. That's an interesting question and a fair one, right, because we've all been assuming that there was going to be a backlog going all the way back to pandemic. Understandable that there were fewer, but everybody sort of waited for the floodgates to open. And I think '21 was -- there was just a great deal of opportunity growing with your existing clients, doing more of the kind of new services that we have been building for some period of time. The word is that there likely will be, as I said, scale reviews these days tend to come in media and then to some extent in health care. But at the moment, it's more kind of in the murmurs than the reality. But we'll obviously all know, I mean the - our folks on the ground at agencies are growth leader here at the center are all saying that they believe that it will begin to pick up steam. But right now, I don't have a ton of hard data that says that's the case. Thank you, Sue. Thank you all for the time and the interest. We're looking forward to the year. We've got a lot of work to do, and we'll keep you posted as we go. Thanks again.

EarningCall_155

Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to PayPal Holdings' Earnings Conference Call for the Fourth Quarter 2022. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to introduce your host for today's call. Ms. Gabrielle Rabinovitch, Senior Vice President and acting CFO. Please go ahead. Thank you, Julianne. Good afternoon. And thank you for joining us. Welcome to PayPal's earnings conference call for the fourth quarter and full year 2022. Joining me today on the call is Dan Schulman our president and CEO. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast, and both the presentation and call are available on our Investor Relations website. In discussing our company's performance, will refer to some non-GAAP measures. You could find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. We will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the first quarter and full year 2023, our planning assumptions for 2023 and our comments related to anticipated foreign exchange rate, cost savings, operating margin and share repurchase activity. Our actual results may differ materially from these statements. You can find more information about our about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, February 9, 2023. We expressly disclaim any obligation to update this information. Thanks, Gabs. Hi, everyone. Thanks for joining us on today's call. Well we obviously have a lot to cover in the next hour and I want to be sure we have plenty of time for your questions. So let me jump right into my remarks. In a difficult macroeconomic environment with the overall growth of e-commerce continuing to slow, we still managed to grow our 2022 revenues by 10% FXN to $27.5 billion. We grew our TPV by 13% FXN, with our branded checkout volumes growing in-line with global e-commerce growth. And we processed over $1.35 trillion of volume on our platform. Our non-transaction-related OpEx grew by 2.7% for the year, down from 20% growth last year as we operationalized the reduction of over $900 million in costs in both our transaction expense and non-transaction OpEx. And throughout the year, we drove 3,900 basis points of improvement in our non-GAAP EPS growth rate from negative 28% in Q1 to positive 11% in Q4. We returned $4.2 billion of capital to shareholders in the form of share repurchases, representing more than 80% of our free cash flow, which totaled $5.1 billion in 2022. In the quarter, we set several new milestones, and we returned to operating margin expansion and positive earnings growth. For the first time in our history, we exceeded $7 billion of revenue in the quarter, meeting our guidance of 9% FXN growth with the revenues of $7.4 billion. In addition, for the first time ever, we exceeded 6 billion transactions in a quarter, resulting in 51.4 transactions per active account growing 13% year-over-year. We delivered $1.24 in non-GAAP EPS, $0.05 above the midpoint of our guidance, as I mentioned, growing at 11%. The quarter was clearly a positive inflection point and is a direct result of our intense focus and cost discipline and the pursuit of profitable growth. I'm particularly pleased with the team's progress to rightsize our cost structure. For the quarter, our non-transaction-related OpEx declined year-over-year by 6%, and we are exiting the year with a run rate ahead of our planned $1.3 billion of savings in 2023. We grew our non-GAAP operating margin to 22.9%, up 115 basis points from a year ago and up sequentially for the second quarter in a row. As we look towards 2023, I want to lay out our thinking about the year ahead. First, we have identified an incremental $600 million of cost savings on top of the $1.3 billion of cost savings previously identified. This includes the very difficult decision to reduce our headcount by 7% as we continue to improve our processes and sharpen our focus. We will also continue to reduce our external vendor spend and real estate footprint. We now expect that non-transaction related OpEx for the full year will decline in the high single digits year-over-year, driving approximately 125 basis points of margin expansion and 18% non-GAAP EPS growth. The second point I want to make is that we have designed our cost structure and EPS growth targets based on what we believe to be a very conservative planning assumption of mid-single-digit FXN revenue growth rate in order to give high confidence in our ability to deliver our EPS. And the third and final point is that our actual revenue expectations are well higher than that planning assumption. As you can see from our Q1 guide of 9% FXN growth with Q1 non-GAAP EPS anticipated to grow by 23% to 25% to $1.08 to $1.10. I want to emphasize another point, and that is we are confident that our 2023 cost structure enables us to continue to fully invest in our high conviction growth initiatives. We are putting significant resources behind the modernization of our checkout experience in order to defend and grow our market share in our branded checkout business. This includes a drive towards passwordless, one click native in-app experiences as well as deploying the next generation of advanced checkout using our data and AI capabilities. Although this will be a multiyear initiative and will take time given the scale of our base and our legacy integrations, I am extremely pleased with the progress we made last year. We will continue to deliver scaled growth for Braintree. And last year, we made significant progress in modernizing our architecture and capabilities. These improvements resulted in a substantial number of new sales and incremental volume from existing accounts. In addition, we have an impressive pipeline of opportunity for 2023. In the first half of this year, we intend to fully ramp our unbranded offering to small and midsized businesses, either directly or through channel partners. The launch of PPCP, or PayPal Complete Payments, will meaningfully expand our unbranded total addressable market by as much as $750 billion, and enables us to drive incremental share with higher margins than our Braintree Enterprise service. On the consumer side, we'll continue to enhance our digital wallet value proposition. We are focused on the end-to-end customer experience, from onboarding to the entirety of the consumer life cycle, utilizing more advanced forms of AI to drive optimal consumer choices. In the past two years, we have introduced a significant number of products and services. For instance, our Buy Now Pay Later service is driving significant lifts in checkout and incremental TPV, and it's now one of the most popular Buy Now Pay Later services in the world. With almost 200 million loans to over 30 million consumers since launching in 2020 and with approximately 300,000 merchants putting our Buy Now Pay Later upstream on their product pages. We have introduced savings, bill pay, new forms of giving, more ways to send international remittances, new debit and credit cards, rewards and customized deals and offers, all within a single app, and we are now integrating these disparate services into what we hope will be a seamless user experience that is customized across both Venmo and PayPal with the ultimate goal of driving daily usage. We need to reestablish P2P as a core anchor for PayPal and Venmo. It is a key driver of usage and often establishes the amount of balance an individual consumer holds in their wallet. The more people store in their balance, the more they use checkout and the better our overall economics. We plan to meaningfully enhance the overall P2P experience, including revamping the onboarding experience, reducing declines and introducing more value-added capabilities. I'm proud of all the team has done to responsibly innovate. We've made significant strides in upgrading our legacy infrastructure and retiring our technical debt. Eight years ago, we were primarily a monolithic C++ stack. By the end of Q1, we will have completed a full payment stack replatforming, leveraging a modern architecture and the latest software engineering methods. We had record platform availability in 2022, and we put out approximately 80,000 software releases. Our increased productivity and focused efforts are enabling us to make significant progress every quarter in upgrading our merchant base to our most advanced checkout flows. In 2021, approximately 20% of our top 100 merchants were on our latest checkout experiences. At the end of 2022, one third of our top 100 were in our latest checkout integration. And in 2023, we are targeting to be approximately 50%. And despite an increasingly competitive environment, we are confident that in total, we continue to hold share across our core markets. As we look ahead to 2023, we've built our plan to assure proper staffing of our key initiatives. But we also know that we must have a mindset of continuous productivity, not just last year, not just this year, but in the years ahead. Still difficult to accurately assess how the year ahead will play out in terms of e-commerce growth. If you ask 20 experts, you get 20 different opinions. Our baseline assumption is that discretionary spend will remain under pressure, and global e-commerce growth will be slightly positive year-over-year. That said, we are seeing signs that inflation is beginning to cool, and it's logical to expect that discretionary spend versus non-discretionary spend will begin to increase. To be clear, we have not built any recent positive economic news into our forecasts. But as I mentioned, our Q1 is off to a much stronger start than we anticipated with branded checkout volumes accelerating nicely from Q4. Longer term, the secular tailwinds that have benefited our business have not changed. And we are confident that when e-commerce growth starts to turn and grow at more historical double-digit rates, we will be extremely well positioned to capitalize on that shift and drive even higher revenue growth with increased margins. Finally, I'd like to address my plans around CEO succession. As some of you have noted, I turned 65 last month, albeit I will say, a very young 65. The board and I discussed CEO succession multiple times a year. And that informed the board that I plan to retire from serving as the President and CEO of PayPal at the end of this year. I felt there were two important considerations in terms of timing. First, I wanted to be sure that PayPal had positive momentum and was in a position to deliver a solid year of performance. So I can be sure I wasn't leaving the company in a difficult position. And second, it was important to me that the Board have enough time to conduct a thorough search and have a reasonable transition period. In a global business as complex as PayPal, there are important relationships with government officials and regulators across the world, with the CEOs of our partners and with the CEOs of our customers, that will need to be thoughtfully transitioned. I feel that a year gives the board enough runway to find the next leader of PayPal and time for an orderly transition. Of course, I will be flexible in my time frame in order to assure we seamlessly onboard the ideal next leader of PayPal, and I look forward to continuing to serve on the PayPal board. I'm eager to see the next CEO build on all we have accomplished in the last eight and half years and seize the immense potential ahead of us. In the meantime, I will remain fully focused on maintaining our momentum and executing on our plan. Since our IPO, PayPal's stock price has outpaced the S&P 500. And as you can see in our investor deck, our revenues, TPV, earnings and free cash flow have all tripled in size during that same time period. However, I feel confident that now is a time where our business has hit multiple positive inflection points. By the end of this year, we will have the appropriate cost structure to ensure that we deliver profitable growth with consistent and healthy non-GAAP EPS growth. And more importantly, we are confident we have the right road map in place to drive continued improvements in our customer experiences so that we remain a global leader in digital payments. In this current environment with so many of our competitors struggling to make money, we see a path to emerge from this economic downturn in a position of increased strength. We are quite encouraged as we look out at 2023 and beyond. I want to thank all of our employees for the outstanding work and passion they display every day. We still have a lot to accomplish, but we are finally at the point where 2023 can be a transformational year for our customers and our shareholders. Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a solid quarter. The results we're reporting today demonstrate the strength, resilience and diversification of our business. We accelerated earnings growth on both a year-over-year and sequential basis despite ongoing pressure on e-commerce throughout our core markets. We continue to navigate this dynamic operating environment with strong discipline and a renewed focus on our key priorities. While the macroeconomic backdrop remains challenging, we're energized by the significant opportunity we have to advance our leadership in payments and better serve our customers. We believe this is an environment where the strong will get stronger and where our scale, profitability and stability make us a partner of choice and a formidable competitor in the payments ecosystem. Our results reflect our efforts to manage our business with greater discipline and deliver operating margin expansion. Our ongoing savings efforts are resulting in sustainable efficiencies for our business. In addition, we're investing in our high-conviction growth initiatives to ensure that we emerge stronger from this period of economic uncertainty. We're proud of the quarter we delivered. Relative to the fourth quarter targets we shared with you in November, our non-GAAP EPS outperformed, and our revenue was in line. Importantly, the sequential improvement in our earnings growth continued. The fourth quarter was an inflection point as our non-GAAP operating margin expanded for the first time since the first quarter of 2021, marking a return to profitable growth. We have now established a solid foundation to build on these results. And in 2023, we plan to deliver meaningful non-GAAP operating margin expansion and a significantly stronger non-GAAP earnings profile. Before discussing our 2023 outlook, I'd like to highlight our fourth quarter performance. As Dan mentioned, revenue increased 9% on a currency-neutral basis and 7% at spot to $7.38 billion. This represents a three-year revenue CAGR of 14% and 19%, excluding eBay. Transaction revenue grew 5% to $6.7 billion, driven primarily by Braintree and Venmo. Other value-added services revenue grew 26% to $681 million. Relative to last year, this performance resulted from higher interest income on customer store balances and positive contributions from both our merchant and consumer credit products. In the fourth quarter, U.S. revenue grew 10% and international revenue grew 2% at spot. On a currency neutral basis, international revenue grew 6%. We had solid take rate performance. Transaction take rate was 1.88%, flat to last year, and total take rate improved 3 basis points to 2.07%. eBay Marketplaces revenue declined 31%, and the take rate on these volumes decreased to 1.95% from 2.29% in Q4 2021. This was offset by a 4-basis point increase on the rest of our volume. Transaction expense came in at 93 basis points as a rate of TPV, relative to 87 basis points of the rate last year. The increase in transaction expense as a rate was primarily driven by higher growth in unbranded processing volumes relative to other contributors to our payment volume mix. Transaction loss as a rate of TPV improved to 6 basis points versus 9 basis points last year. Our loss rate in the quarter benefited from the release of a portion of reserves related to recoveries from a merchant insolvency proceeding. This reserve was originally taken in the second quarter of 2022 and was a drag on that quarter's transaction loss performance. In addition, Venmo loss performance improved relative to the fourth quarter last year. Credit losses were $174 million, or 5 basis points as a rate of TPV. We ended Q4 with $7.4 billion in net receivables, reflecting 24% sequential growth. The growth in Buy Now, Pay Later receivables was the largest driver of loan origination. In 2023, we plan to externalize a meaningful portion of our Pay Later receivables portfolio, reducing our balance sheet exposure and securing a sustainable long-term funding partner for this part of our business. The mix of shorter duration originations from our Pay Later products and solid performance of our overall portfolio resulted in a reserve coverage ratio of 7.4%, flat sequentially and 180 basis points lower than the fourth quarter last year. In the aggregate, volume-based expenses increased 12%. This increase was more than offset by a 6% decline in our non-transaction-related expenses. Cost savings initiatives and efficiency gains contributed to this performance across all major expense categories. As a result of this discipline, non-GAAP operating income grew 12% to $1.69 billion, and non-GAAP operating margin reached 22.9%, expanding 115 basis points from the fourth quarter of 2021. In addition, for the fourth quarter, non-GAAP EPS was $1.24, growing 11% from Q4 '21 and marking the first quarter in 2022 that earnings per share grew on a year-over-year basis. We ended the quarter with cash, cash equivalents and investments of $15.9 billion. During the quarter, we generated $1.4 billion in free cash flow, which resulted in $5.1 million of free cash flow generation in 2022. In the fourth quarter, we completed an additional $1 billion in share repurchase, which brings our capital return in 2022 to $4.2 billion, representing 82% of the free cash flow we generated. As noted last summer, we've taken a more aggressive approach to our capital return program over the past several quarters. We continue to believe that share repurchase remains an excellent use of capital for our shareholders. I would now like to discuss our outlook for 2023. For the first quarter, as Dan mentioned, we expect revenue to grow approximately 9% on a currency neutral basis and approximately 7.5% at spot to $6.97 billion. We also expect non-GAAP EPS to be in the range of $1.08 to $1.10, representing growth of approximately 24%. The first quarter is off to a great start and sets us up well for the year ahead. We are encouraged by what we're seeing, but remain vigilant as there continues to be potential for variability as we move through 2023. Since the beginning of the pandemic, forecasting four quarters ahead has been especially challenging. And while the direct impact from COVID is now largely behind us, the macroeconomic and geopolitical environment remains uncertain. The rate of e-commerce growth in our core markets has decelerated. Inflationary pressures have affected discretionary consumer spending and post-COVID spending patterns are still evolving. As a result, we're not providing guidance for full year revenue growth at this time. We will guide the quarter ahead and believe this is a responsible approach. As Dan indicated, for the full year, we now expect non-GAAP EPS to grow 18%. This is an increase from the outlook of 15% growth we discussed when we reported third quarter results. Relative to our prior expectations for the year, our forecasted tax rate increased, and we now expect the externalization of part of our Pay Later receivables portfolio to result in several cents of dilution. Offsetting these headwinds are benefits from additional cost savings, higher interest income, and from a shift from cash compensation to stock for a portion of our annual incentive plan, increasing share-based compensation. In putting together our financial architecture for the year and guiding 18% non-GAAP EPS growth, we have been prudent about our planning assumptions for our revenue performance and in establishing an efficient cost structure that enables us to deliver on this commitment. We believe we can deliver 18% earnings growth even with revenue growth in the mid-single digits on a currency-neutral basis. That said, our objective is to grow revenue ahead of this baseline. Our revenue growth is highly correlated to discretionary e-commerce spending in our core markets. We are optimistic that when e-commerce growth reaccelerates, we will fare better than most. In addition, our framework contemplates as much as a high single-digit decline in non-transaction-related expenses on a year-over-year basis. Over the past year, we significantly increased the operational rigor with which we run our business. We've sharpened our focus on strategic priorities, strengthened our planning process and increased our discipline with respect to capital allocation. We've also begun to realize benefits from cost savings initiatives. We are continuing our work removing complexity within our organization. We believe we are on track with streamlining and resetting our cost base and essentially putting ourselves back on a pre-pandemic trajectory with respect to our non-transaction-related expense profile relative to our growth. Accordingly, we believe we're well positioned to scale more profitably and sustainably going forward. I'd also like to share more on our expectations for foreign exchange. Our revenue guidance for the first quarter contemplates an approximate 150 basis point headwind from FX. Foreign exchange rates, we expect an approximate 1-point headwind to full year revenue growth. In addition, as we have discussed, we're prioritizing engagement. We have approximately 190 million monthly active unique users on our platform today. Increasing the activity and engagement level of these users, converting new ones and driving more daily use is one of our greatest opportunities. While we will continue to track and report on our active accounts each quarter, we will no longer guide net new active accounts. Given our strategic focus, we do not expect total active accounts to grow in 2023. That said, we have confidence that our monthly active unique user base will be stable to growing. Finally, in 2023, we expect to generate approximately $5 billion in free cash flow. We plan to continue our aggressive posture towards capital return and allocate approximately 75% of our free cash flow to share repurchase in 2023. In closing, we're pleased with the progress we're making across many fronts and with our momentum. Our team is working tirelessly to serve our customers, advance our strategic priorities and improve our cost structure. The cash flow generating power of our business is a competitive differentiator and gives us a high degree of flexibility as we allocate capital with discipline. Whatever macroeconomic conditions we face, we will continue to deepen our focus, invest in innovation in our people for the long term and strengthen our competitive advantages. We look forward to sustainably delivering long-term profitable growth and creating value for our shareholders. Before I pass it back to the operator to begin the Q&A portion of the call, I'd like to give an update on our plans for the year. Later this year, we will host a meeting for the investment community to provide an update on our strategic road map and introduce you to more of our leadership team. We're targeting the latter part of Q2, and we'll share more as we get closer. Thank you. [Operator Instructions] Our first question comes from Lisa Ellis from SVB MoffettNathanson. Please go ahead. Your line is open. Thank you. Dan, wow, big news. I'm sad already, and you're not leaving for another year. It has been such a journey over the last eight years. Can you just talk a little bit more about your thought process, your decision around choosing to retire now versus, say, a year ago or a year from now? And then also perhaps comments on, in your view, what sort of profile would make the ideal next CEO of PayPal? Thank you. Yeah. Thanks, Lisa, for that. I'm going to miss you, too. But as you said, we've got a year ahead of us here. So look, there's never a good time to retire because it's always a bittersweet moment. I love working here at PayPal. I love working with all the incredibly talented people here. I'm proud of all we've accomplished. But as I've gotten older, I also realize I have a lot of passions outside the workplace as well. These range from politics to non-profits to academia. I want to do a lot of travel. And frankly, I want to spend a lot more time with the people that I love. But I had two criteria for when that right timing was. I mean the first one was I wanted to be absolutely sure that PayPal was on solid footing with a bright future. And as we look at kind of the quarter we delivered in Q4, as we look at what's happening in Q1 right now, which is coming in much stronger than we anticipated across a wide variety of fronts, we feel that 2023 is shaping up to be a strong year. And we think we have a real nice glide path as we go into '24 as well. And so that kind of like leaving the company in a good place seemed to be a good time for that. And the other thing is that I wanted to be sure that the Board had enough time to do a thorough search and an orderly transition after we find the right CEO. As I mentioned, it's a complex business. We have massive scale on both the consumer side, on the B2B side. We're a financial services company, but we're also a tech company. We're heavily regulated across the world. There are a number of experience sets and leadership traits that the Board will be looking for. And they'll work with a search firm to look across the entire landscape to be sure that we find the best possible person to seize what I think is a very bright future for PayPal, and I really look forward to working with that person and doing an orderly transition. And of course, I'm going to be flexible in my time frame. If that happens sooner, great. If it takes longer, I've told the Board that I'm willing to stay on slightly longer as well, just to be sure we get the right person. And until then, you can be sure that every single day, I'm going to be fully focused on execution. Just ask my team that, they'll tell you the same thing, and making sure that we continue the momentum that we have. And so hopefully, that helps a little bit, Lisa. Thanks, guys. Dan, I also want to reiterate what Lisa said. Sorry to see you go, but I can only concur that you are very young mid-60s person that we all try to be like. Let me just ask more on the expectations, if you don't mind. I mean -- and to be sure that you or Gabrielle. You guys touched on, I guess, embedding mid-single digits in the guide, or maybe better than that with your expectation to achieve better. How should we think about the cadence just considering how much higher the growth rate should be starting off in Q1 per your guidance? And then if you can give us any color on expectations around transaction revenue or OVAS and Braintree or core branded, anything else that could be provided would be great. Thanks guys. Yeah. So Darrin, I want to separate out two things that I was afraid might be conflated, which aren't linked. The first one is, when we were looking at our cost structure to deliver an 18% EPS growth and to make sure that we fully staffed our high conviction growth areas. We wanted to look at what we thought would be a worst-case revenue assumption, because we don't want to be chasing our cost structure for, we were like, okay, what's the worst case going to happen. We could do mid-single digits FXN growth. That would mean that you've got Europe going into recession, U.S. going into recession, inflation stays high, discretionary spend remains muted. And that's what we built our cost structure around to give us and to give you high confidence that the 18% that we're guiding to is something that we can deliver in pretty much any economic scenario that we could imagine. So that's kind of assumption set number one was around our cost structure and the revenue around it. Number two though, is our revenue expectations. And we clearly are expecting something very different than the worst-case scenario that we have in place for our cost structure. We're assuming, as we think about the year ahead that we hold or slightly grow our share globally. As Gabs said in her remarks, there's a lot of moving parts that could happen here, and we want to be responsible in our guidance for revenues. And we saw last year that revenue can move from quarter-to-quarter, but we're pretty darn accurate when we guide in the quarter ahead. And so we put out a 9% revenue guide in Q1. And frankly, Darrin, Q1 is off to a very strong start for us. We're seeing widespread acceleration both in January and February. We're seeing it in branded checkout, which has stepped up quite nicely from Q4. We're seeing it in our Braintree services as well. Buy Now Pay Later continues to accelerate for us. So much stronger than we expected. We wouldn't say 9% if we didn't feel confident in that number, as well as the 24% at the midpoint on our EPS guide. There's still a lot of the year ahead of us, right? We're five-six weeks into the first quarter, but it's clearly off to a very strong start, and we will have more as we report out Q1 earnings, as we look into Q2 that may inform how we're thinking about the full year. But we just didn't want to get ahead of ourselves. And also, we want to be really responsible in the guidance that we give. Yeah, maybe just to add a little more detail on kind of the trajectory of the year. I'd say just we're focused on delivering a great year, and we think we've set ourselves up to do that. At the same time, to Dan's point, we're definitely not going to get ahead of ourselves so early on. I would point out some dynamics though, that we're growing over in 2023 relative to 2022, which will make the first half of the year probably stronger from a revenue growth standpoint than the back half. That really relates to an expectation of Braintree deceleration. Braintree has had exceptional growth, and we have a great ramp of merchant volumes coming on this year with new merchants as well as additional volumes we expect to get from existing merchants. At the same time, just given the exceptional growth we had last year, we do expect a little bit of decel into the back half. I'd also say, given the interest rate environment and how we're currently positioned in our book, we'd expect the incremental benefit from the higher interest rate environment to benefit us more in the first half than the back half as we lap some of those benefits from last year. And so that would create a little bit of decel as well. And then finally, there were some pricing changes that we made in 2022 that were predominantly front-half loaded. And so we start to lap those as well. So just in terms of the shape of the year, I would expect a little bit of decel as we move into the back half. Great. Thank you very much. Dan, I'll add my thanks, and looking forward to a last final year, man, so it should be fun. I wanted to ask quickly on the branded checkout point. It sounds like you feel like you're kind of growing consistent with the market, if that's accurate and what you're seeing kind of early in the year? And perhaps more importantly, what are you thinking about in terms of when we can start to see some of the improvements impact, maybe share, but more importantly, engagement, et cetera, with the customer base. Thanks. Yeah. I think that's an incredibly question. You saw probably in our investor deck, James, that our branded checkout volumes grew by 5% for the year, that's lapping 23% in 2021 and 38% in 2020. And that really is following the shape of the e-commerce. Part of the reason why there's questions around this and some mix commentary is that there's no perfect data source for market share. Share obviously, for us, it varies by country, by channel, whether it's mobile, mobile web, desktop and by merchant size, whether you look at large enterprise or small or midsize. And we look at everything that we possibly can and look at e-commerce growth around the world. And we look at 2022 -- 2022 e-commerce growth is probably mid-single digits, maybe lower than that across the world. By the way, that 5% was roughly the same in the U.S. as well. And so overall, we feel like we, at a minimum, held share to global trends. And I think there's some interesting commentary out there. But one of the things that is important to realize is digital wallets, in general, including PayPal, have been growing share overall. We grew share over 100 basis points during the pandemic. We've held it since there, but we continue to take share from manual card entry. Manual card entry say, like three years ago, it's 50% of the market. It's still about 30% of the market today. And there's a lot of share to be taken from that by digital wallets. In addition, a lot of the Buy Now, Pay Later wallets are -- their growth is starting to slow quite meaningfully as they move from growth as their number one objective to making money as their number one objective. And if you look at our Buy Now, Pay Later results, we're clearly gaining share in that, it grew at 102% Buy Now, Pay Later $7 billion of TPV. So we're taking share from there. And if you look across the globe, across the globe, which is how we look at this, you can start with the U.S. And in the U.S., for the year, I think it's clear that we held share, growing at about 5%. And if I look at the fourth quarter, which is we're still digesting. It looks like we gained share in the first part of November coming into the holiday period. It looks like we lost somewhere like 2 to 4 basis points of share during the Cyber 5. And then we held in December. And as I've mentioned, we have accelerated meaningfully in terms of our branded share of checkout coming out of December into January and February. As we look at this, if you exclude Amazon in the U.S. in the fourth quarter, we held share. Again, all of these things are plus or minus 1 or 2 basis points. If you include Amazon, which had an extra Prime Day in the holidays, we might have lost 1 or 2 basis points. But that is the best view that we have for the U.S. right now. What's interesting is when you look at mobile checkout, it's clear that somebody like Apple has some inherent advantages in authentication, exclusive use of the NFC chip. But if you look at where we have implemented our most advanced checkout flows, and as I mentioned in the script, now about third of our top 100 of our most advanced checkout flows, there, even in mobile, we are gaining share. So the things that we are working on and deploying are making a big difference in the market. That's why I'm so proud of what the team has done in improving and really going after share of overall checkout with our latest integrations. Maybe we can talk more about that with another question. Across the rest of the world, there are some markets like the UK where we're holding share. In Q3, we lost a little bit of share. In Q4, Australia, we've been losing share due to Buy Now, Pay Later players in that market, and we're now starting to pull back on that. And across most of the major countries in Europe, we are either holding or gaining quite a bit of share. So as I look across the world, there are some places where we're gaining a lot of share, some places like the U.S., where we're probably holding in other countries where we're losing a little bit. But overall, steady in terms of our market share. And I really think the product teams and the sales teams have done an incredible job of looking at what we can do to improve our checkout experiences. We obviously have a lot we can still do. But year after year after year, we're either holding or gaining share. Hey, thanks. I'm just curious if your investment in the R&D budget at PayPal has changed given some of the incremental cost savings, the bigger margin expansion. And I think, because we're really focused on the product road map and you got checkout, and it sounds like you're extending unbranded to the SME space, which makes some sense. So just love your latest thinking on balancing the cost savings with investments in product development. Yeah. The first thing we do is ensure that we have all the investments we need to drive our road map. Again, we've honed our focus, sharpened our focus to make sure that we are investing and executing against our high conviction growth areas. And we're doing that since I mean, we are -- the team is making a ton of progress. I mean whether you look at what we've done in Braintree to harden the infrastructure, to create additional capabilities over the holiday season during the Cyber 5, we were five 9s [ph] and above in terms of availability. And you see that in terms of kind of the new sales, people moving more volume over to us. Braintree's auth rates, something like 390 basis points better than the competitive set. And so a ton of investment there and making a lot of progress. We've put a lot of investment against PPCP, which is our unbranded, small and midsized and channel partner play. And by the way, it's not just unbranded. It has our most advanced checkout flows in it, and we're going to probably take about 20% of our TPV through PPCP with integrations through Shopify, Adobe, TikTok, and move that to our most advanced checkout flows. And so that, we've invested in, and obviously, the rest of checkout. Like things like our SDK and APIs, two years ago, we were not really playing in that developer market. And today, if you go to Postman, which is like one of the largest sites that developers go to, to look at SDKs and APIs, we're now one of the top 10 requested SDKs and APIs based on both popularity and quality of that. We actually are number seven, number eight at Stripe. And so we have really gone from almost nowhere to top 10 in terms of our SDK and APIs. And so -- and just all the basic hygiene, the next-gen stuff, we're working on, that is #1 for us. Like we are going to invest as much as we need to into that. We're going to invest in our digital wallets, our unbranded and our checkout. And that's where we are focused, and we have plenty of investment there. At the same time, really, if you look at our non-transaction-related OpEx, and you look over the course of three years ago, we were like 17% growth, then 20% growth, then 2.7, and now low high single-digit negative growth, I guess, is the best way to put it. If you add all that together, you come up to about 7%. And our traditional OpEx growth was somewhere, I call it, 6% to 8% or so. So we've just come back to where we've been. Honestly, we still have a lot more to go. As I mentioned, we have identified and are executing already against an incremental $600 million. And as we get more and more efficient as a business, you're going to see more and more of a productivity mindset so that we feel as we go into 2024, that we're going to go back to the same place we were, where we consistently grow our operating margin as we grow our top line going forward. And we're all aligned against that. We feel great about the amount of resource we're investing, but also making sure that we have the right cost structure going forward. Obviously, you're always balancing that. But when we have a balancing decision, we err towards investing. Thank you, Dan, congratulations. I wanted to do a follow-up on engagement. I know it's kind of been a recurring theme on the call. The growth in the payment transactions per active stayed elevated this quarter, 13%. Hoping you can delve into some of the specific drivers, the primary drivers of that and whether you feel it's sustainable in 2023? Thanks. Yeah. So I think it's one of the things that we talked about, which is kind of a new piece of information for us is that nearly half of our base is a monthly active user and about 190 million or so. Those monthly active users, without Braintree in the number, because a lot of people are Braintree in that number, without Braintree in the number, use us 6 to 7 times a month. So they're transacting 72 to 90 times a year with us. That is up 40% from 2019. It's up 5% year-over-year. And that -- those characteristics of those MAUs is they have an extremely low churn rate. They are extremely engaged, highly satisfied with high and growing ARPU. Our biggest opportunity is to move our active accounts into our MAUs. We generate an enormous amount of organic active accounts. Enormous. Every single year, they come on to our platform. And they come on to our platform because we're so ubiquitous. We have coverage across 35 million merchant accounts, 80% of the top 1,500 accounts in the U.S. and Europe. And so they come. They make a transaction, or they get a P2P request, and they -- and they do kind of a one and done. And the way that I think about, probably the best analogy between MAUs, monthly active users, and the rest of our accounts is how the wireless industry thinks about postpaid and prepaid. Our MAUs are our postpaid accounts. Again, they're very satisfied. They have high ARPU, very, very low churn. And they're engaged in our mobile app. They're ready to try new services as we put them on. When we put on a new service, when they try on new service, their ARPU goes up by 25%. And so we are very focused on ensuring that we grow our MAUs and that we take those tremendous organic number of people that are coming on. By the way, with no cost per gross add on that, not CPGA. Like those organic things are coming in, just constantly at the top of our funnel. It's a bit of a two-edged sword. One, it kind of -- it adds to churn, obviously, but churn of a base that's not transacting at all. But our opportunity is with -- as we get a better value proposition, a more compelling proposition across our consumer side as we upgrade our merchants into the best possible checkout experiences that we take those active accounts and move them into MAUs. This whole thing about what's happening with your churn, what's happening, that's a false narrative actually. What's really happening is our MAUs are incredibly consistent, staying with us highly satisfied, acting quite a bit and growing. And that's really where our engagement is coming from. That's probably -- for instance, we have 35 million consumers that use us for subscription management. Every single month, we manage their subscriptions automatically for them, whether they be to Hulu or to other subscription management services. And so those are incredibly sticky high-value customers for us, and we have a ton of focus on moving people to that MAU base, which is why it's such a focus for us as opposed to net active accounts. Thanks a lot. I want to drill down a little bit on the core PayPal modern checkout migration progress. The numbers you gave were great to 20 going to one third, going to 50% for gold this year with the top 100. Two follow-ups on that. The first is, could you talk a little bit about the conversion uplift that you see when the new modern checkout experience is integrated there, and that would help us to kind of quantify what one third going to 50 in could mean? And the second one is, can you talk a little bit about and recap the actions that you're taking to help incentivize that? Clearly, it's a win-win for both you and the client. But what are some of the either financial or people resources that you could allocate to help speed things up? It's a great set of questions. So when we put in the latest checkout experiences, it's anywhere from a low of a 3% lift in conversion up to a 10% of lift in conversion. So that's actually pretty meaningful in terms of what we see. We also see in our latest checkout integrations that we're growing our share there across mobile, across mobile web and desktop. And with the top 100, it's an account-by-account play. They're quite sophisticated payments teams. They have a lot of legacy integration. And clearly, the increases in conversion matter a lot and also the ability to seamlessly implement our Buy Now, Pay Later, which has the highest loss rates in the industry, lowest loss rates and a great value proposition is another reason for those top 100 plus to move forward on their integrations. And we're making good solid progress, as I mentioned, every single quarter there. Mobile SDK, same thing. Conversion rates up to 10%. We are now in developer portals. Our mobile SDK is a merchant requirement going forward, so no new merchant can come on without being in our most advanced checkout flows. In our mobile SDK, Buy Now, Pay Later will also be included in that in the second half, which is also something that our merchants are really asking for in terms of seamless integration of that. And then PPCP, we have Braintree, and that's -- when somebody signs up for Braintree, they immediately go on to our latest checkout experiences. I already talked about auth rates going up 390 basis points on average when that happens. But PPCP, that's a big opportunity for us. We're going into a $750 billion addressable market that we've never been able to go in before. We're going in both with our sales force direct into midsized customers and for that longer tail through channel partners. As I mentioned, we're already working with Shopify on PPCP. In France, we are beginning integrations with merchants like Adobe and TikTok. And we feel that those channel partners, when we upgrade them to PPCP, they almost instantaneously will upgrade that long tail. And that's, call it, 20% of our TPV out there. So we've got quite a bit of plans to address each part of the market with, I think, pretty significant detail around them and pretty significant movement as well. Thank you. Looking at your plans to reduce transaction margin pressure from Braintree over time by expanding it to more profitable segments, including downmarket to SMBs and PPCP, which you've talked about, unbranded full-stack processing with channel partners. Is there anything in your 2023 guidance that contemplates reduced transaction margin pressure from Braintree? And if not, when would you expect some of these initiatives to alleviate that margin pressure? I'll start off and maybe Gab can follow on that. And thank you for the question. So there are a number of high-margin businesses that we add on to Braintree. Braintree itself is a lower-margin business. And by the way, we're serving the highest end of the customers that always have a lower margin structure for us. But a lot of the higher-margin businesses that we had into PayPal or things like risk-as-a-service, we'll be introducing FX-as-a-service, payouts is a higher margin. We're expanding Braintree into both Europe and South America, which are higher margin for us. So we expect to see unbranded, as a whole, that margin structure move up. And then as we go into the small and midsized merchant with unbranded, that obviously is a much higher margin. PPCP, is more of a call it sort of a mass customization platform. Braintree really is a customized platform because each one of those merchants have unique needs that we need to customize for. Yeah. I mean, to Dan's point, the geo mix, the merchant mix and the value-added services layer all are margin-enhancing to bring to overall. I'd also say we've talked about investing in the platform. And a lot of those investments that we're making are really to allow us scale that business more efficiently over time. So each incremental piece of volume will actually cost us less to profit as a process. We're also doing a lot on our own side in terms of how we think about processing as efficiently as possible and doing everything we can to make sure that, over time, we're going to scale those volumes as efficiently as we can. And so I would think about it as a multiyear dynamic in terms of how we think about the progression of Braintree again, sort of as we move more out of the U.S. down into a slightly smaller merchant set overall. In addition, as we layer on the value-added services and the margin profile really does come through. Thank you so much. Okay. Well, I think we're a little over the top of the hour. I just want to thank everybody for your great questions. Thank you for all the e-mails that you're sending me already. Again, we're going to work quite closely. We're focused on executing against our plan, and look forward to speaking to all of you again soon. Thanks again for your time. Take care. Bye-bye.

EarningCall_156

Good morning and welcome to the U-Haul Holding Company Third Quarter Fiscal 2023 Investor 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. Before we begin, I would like to remind everyone that certain of the statements during this call including, without limitation, statements regarding revenue, expenses, income and general growth of our business may constitute forward-looking statements within the meaning of the Safe Harbor provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a discussion of the risks and uncertainties that may affect the company’s business and future operating results, please refer to Form 10-Q for the quarter ended December 31 2022, which is on file with the U.S. Securities and Exchange Commission. Good morning and thanks for being on the call. I am not satisfied with our third quarter or our year-to-date numbers. Clearly, the post-pandemic easy top line growth is going away. We knew it would. The question now is will we maintain the new customers we serve during the boom? Of course, I intend that we do. In new move, we are experiencing a decline in average miles per one-way move and a decline in total one-way move. In in-town transactions, I would expect us to begin to stabilize. Our third quarter decline in in-town revenue is a bit misleading as while we saw last mile delivery business income decline, we have also increased our transactions with our reliable individual consumers. Self-storage is tightening up for everyone in the sector and we're not immune to that. However, we are still re-renting rooms as customers vacate and getting a fair rate. Self-storage is very local market dependent. Of course, this is not news, and a great effort is being made to add storage in an opportunistic, as well as a strategic manner. Personnel expense is up. We are running a bit more personnel than our revenue justifies. We need to affect some productivity improvements before this will flatten out or come down. Rental equipment maintenance is up. The difficulty in purchasing enough new vehicles and the resulting trade-off of lower depreciation for increased repair expense is the trade off, I would rather not be making. At this point, I believe we are trading down. We have very modest input on what the original equipment manufacturers are willing to produce and sell. Until their appetite increases and unless we can figure out a better solution, this will be a drag on us. We have experienced this before and it does not fix very fast. Overall, I'm very optimistic on our prospects. We are working to increase our service and value to the customer. This is achievable and I remain hard at it. Jason? Thanks, Joe. Yesterday, we reported third quarter earnings of $199 million, compared to $281 million for the same period in fiscal 2022. In November, we issued our new Class of UHL.B Series N non-voting shares to our existing shareholders. This issuance along with the dividend policy that we put in place for these new shares requires us to now report our earnings per share in accordance with what's called the two-class method under GAAP accounting. This disclosure is included in our Form 10-Q, as well as our earnings release. So let me start off with our equipment rental revenue. As you may recall, last year during this third quarter, we reported $187 million increase in U-Move revenue and the year before that, we had reported $167 million increase. For the third quarter of this year now, we're showing a $77 million decrease. If you were to look at our last third quarter pre-COVID, which was the third quarter of fiscal 2020, and calculate an average growth rate over those three years were still up 13%. The decrease year-over-year in one-way transactions that we saw begin to develop last quarter, continued into this quarter. Along with that, we then had a decrease in overall in-town transactions this quarter as well due in part to a decrease in the last mile delivery rental business. During the first nine months of this year, we've invested just over $1 billion on new rental equipment that's up from $809 million for the first nine months of last year. But half of this increase I would estimate to be attributable to inflation with the other half associated with an increase in trailer, towing device, and U-Box container production. During our last earnings call, I had reduced our forecasted gross fleet CapEx number down to $1.4 billion and further reducing this now to just under $1.3 billion. Proceeds from the sale of retired rental equipment increased by $56 million to a total of $527 billion for the nine months. Sales proceeds from pickups and cargo vans have increased, compared to last year, but we purposely slowed the sale of box trucks for now. Retail values on pickups and cargo vans, while historically strong have been coming down from levels seen last year at this time. Performance of self-storage remains strong, although as Joe mentioned, there's some moderation that’s beginning to show through. Storage revenues were up $31 million, which is a 20% increase. Looking at our occupied unit count at the end of December, we had an increase of 55,000 occupied units, compared to the same time last year. In addition to the increased occupancy, we experienced close to 9% growth in average revenue per foot. Our occupancy ratios across the entire portfolio of storage locations decreased 70 basis points to 83% year-over-year. The moderation in occupancy can also be seen in same-store groupings of these properties where they saw an average occupancy decrease around 80 basis points to 94.6%. On the expansion front, for the nine months of this year, we've invested just over $1 billion in real estate acquisitions along with the development of self-storage and U-Box warehouses, that's up from $783 million last year. Over the last 12-months, we've added 77,000 new units, that's right around 6.2 million net rentable square feet. And we currently have another 6.2 million square feet that's in some process of being developed right now across the 148 projects. And then we have an additional 153 or so projects where we own the land or buildings, but we haven't started actual construction that should account for somewhere around at least another 9.2 million square feet by the time we're done. On the new acquisition front, we're down to just under 60 deals in escrow. Last quarter when we spoke, we were somewhere around 100, so that number started to come down. In the moving and storage segment, we saw expense growth outpaced revenue growth, leading to a decrease in operating results. Our operating earnings from moving and storage decreased by $99 million to $305 million for the quarter. This still represents our third best third quarter -- still represents one of our best third quarters in the history of the company based upon total operating income. And it's also one of the best operating margins for a third quarter. This is not to say that we're not working on improvement, so. Within the operating expenses, we saw them increase $75 million, we highlighted in the press release the $34 million attributable to fleet, repair and maintenance. On that front, we're increasing our internal capacity order to do more of the repair work ourselves. And the fleet is in good shape going into the summer months as far as preventive maintenance. The increase in personnel costs slowed in the third quarter to a $13 million increase and actually the month of December we saw a small decrease. But there's still much more work that we can do here. The next largest operating expense increase was a combination of what I call property level costs that include utilities, building, maintenance and property taxes combined, those were up $13 million. We continue to have strong cash and liquidity at the end of December. Our cash and availability from existing loan facilities at moving the storage totaled $2,895 billion. Also during the quarter, we invested $225 million in six months U.S. Treasuries to increase our yields, that $225 million is not currently reflected in cash, it’s in investment fixed maturities. During the quarter, our interest expense for moving and storage was up $15 million, while interest income on our cash and short-term investments increased $24 million. And then for the nine months, our interest expense is up $43 million, while interest income is up $42 million. With that, I would like to hand the call back to our operator, Gary, to begin the question-and-answer portion of the call. [Technical Difficulty] purchasing cycle. And of course, I'm just putting more emphasis on budgets and I think that's standard management. We have, I think, some opportunity at property lever costs. In our customer facing personnel, we would have to reduce the work in order to reduce the workforce expense. And we have several initiatives that have good promise there. The second question is, with self-storage moving rates coming down and occupancy falling in the industry, are there any changes to the desire to expand self-storage? As far as desire, the desire is real-high. So -- but of course, what we're trying to do, storage is a very market specific business. It's not a national market in my experience. So we're trying to pick our way through the opportunities to find stuff that will run a little bit better than what the macro market is reflecting. And I think we're showing some success at that. Of course, we perform everything and have a lot of confidence when we start out, they don't always work out as expected, but in a macro sense they are. So I'm continuing to have a desire to expand self-storage, it’s at least a 30-year asset, and I don't know how long this present dip will go. If it goes couple of years, well, on 30-years, if not that big of disturbance. So I'm still pulling ahead on that. And finally, CapEx for new trucks is moving up, but it seems management still wants to invest more in the fleet to improve the age. On a scale of one to 10, how far behind is the company where it wants to be with regard to the age of the fleet? Any color on how much management needs to spend to bring the fleet back to good standing would be useful? I'll touch that and then maybe Jason will try to give you a number. It's not actually the age we're working on, it’s a cost per mile. There's a trade-off that relates to accumulated miles on the vehicle and that kind of correlates to age, we have the same utilizations. This gets very model specific. On scale one to 10, I think we'll probably the best shape on our small trucks and the worst shape on our biggest trucks. And I think if you just say, we're having more constrained, replacing our biggest trucks than our smallest trucks. So I don't know on the scale of one to 10, I haven't thought of it that way, I wanted to tell you. I still think we're about a year behind as far as truck purchases go. So that won't all be -- that all won't happen in one year, it’s going to be spread out over several years. So it will be elevated spending over several years. I would say that so far this year we haven't been able to on the box trucks make much progress putting the dent into that. We're kind of just treading water, but with the number of new larger trucks that we're getting. Good morning. I'm sorry, I was disconnected. I went to star one and I don't know if this question has been asked yet. But I was looking at it more that it was a real tough comparison quarter. I thought you sort of indicate that and we were trying to retain the customers that you gain during the COVID. You also mentioned that you've been in this situation before. Could you talk around what you did in the past and will you be doing the same thing this time or is there something more additive that you'd be doing to try to retain those customers that you got during COVID? So generally in the United States customer expectations have increased over the last 20-years and I expect they'll steadily increase. So everything we've done in the past is applicable, but the customer is looking for us to do more and my challenge is how to do more without just driving up relative costs. The positioning of our what we call our rotation fleet, that the fleet that basically stays at a location most of the time. This is a critical step. I think we've introduced new analytical tools that give freighter certainty that people do at the local level or to attempt to decide. It should be at the truck be at location A and B or C and D, and that sounds like it's a simple matter, but it's quite a blizzard of information. We've spent some time and got new analytical or better analytical tools, which I think will help that. And I think we saw just a little bit of that effect in the third quarter. And that's about what I -- it's just a whole bunch of small things. It's kind of like I think football. So a whole bunch of small things you had to correct that. Yes, blocking and tackling. I was impressed with that comment from Sebastien saying you had a step up in the operating margin in the third quarter, which is fiscal quarter, which is usually slower. And I look back and yes, the operating margin almost consistently stayed below 20% and here you came in at 23%. Is there been a structural change in the cost structure? This is Jason. I would say it's probably two-fold. It has probably more to do with revenue, and we have this larger base of self-storage revenue, we have U-Box revenue. So our business and the margins, it's an economy of scale. So the more utilization we can squeeze out of our assets, the better that's going to look. So over a long period of time, if you look at our expense structure, I think we've done a good job of improving revenue without increasing expenses as much. In any small time period, compared to the last two years, for example, you see some large variations. But over time, we've done a good job of increasing revenue without a significant increase in expenses. There used to be a time where the third or fourth quarter we would dip into a loss period. And I think self-storage is a large component of why that isn't the case anymore. Hi, fellas. Clear, that’s U-Haul call now. First question regards the public announcements by public storage that they were trying to buy life-storage for 11 billion. And life-storage said that, that price was too little. Just by way of reference, life-storage has about 80 million of owned and managed square footage. What is our current square footage in self-storage for owned and managed? In their facility. Okay, pretty much the same thing. Is there anything different in their facilities or occupancy rates or rental rates or growth trends in their business as you see they are publicly held information versus our self-storage operation? Well, this is Joe. I thought that, that uncle Bob's bought wife, I thought that -- well, that move was -- didn't get a good response from shareholders for the near-term in my recollection, I think that was real step up. They got themselves where they had a brand name that it could possibly leverage it before that they had no brand presence at all. I think they done, you know, for a credible job in moving that ahead. I don't know that. I get to see a lot of their facilities, but they don't publish information specific about. But my impression is, is that the life-storage team has increased the ratio of Class A to Class B storage in their organization, since they did B, moved away from uncle Bob, and they've been working pretty hard after that. So I think they've done a decent job of that in my mind. I don't know that they're -- most recently, it sounded like they said they would have a little still maintaining rates. I don't know that for a fact, I'm not experiencing that, I'll say better. Well, I think it's the same mix. I mean, if you have a 30-year-old asset, very simply just not what you would build today. Now we -- as a normal thing, go back through these projects, reconfigure and say, okay, well, we have a whole list of what the characteristics we would like to see in a facility and we take a facility and do them. Review and where does it fall short of what we would build today. And is there a way to do that? And so there you see us spending money in what we call, I think, improvements in some [Technical Difficulty] for it. But it -- so we're constantly doing that. I couldn't tell you. I don't get a lot of opportunities to walk through other people's sites. I get some, but it's not -- they're not as open with that. You kind of, going to have to fit a little bit to the operator to do that. So I think we've got, of course, a long-term strategy. I think we have, arguing better security. But other than that, it's kind of, it's a little bit of money, but I think they've done a decent job first. Given that they want to do a stock for swap for life-storage, it'd be an interesting thing if you would consider stock swap for our self-storage to kind of crystallize the value that you have created in self-storage given that, that $11 billion is not that far from our full market cap for UHOL. If we could get stock for it and then distribute those shares to shareholders or pretty tax efficient way to create liquidity and secure value for that operation. And we would still have our entire truck rental operation basically for free, if we could do that with. Would you ever entertain a scenario like that? It seems like an interesting way to build value in a very tax efficient way for shareholders and your family? You know, I haven't looked at that real hard sometime. I think that really the fact that our strategy is to verge from the standard self-storage REIT, and that we're in the U-Box business, which at one time public was in and exited, okay. So we're in the truck rental business, which public has [Indiscernible] with, it doesn't have no part of it. I think extra space and life still have some few locations they offer their own truck rental. But we have -- I think our physical strategies have diverged, but that's probably not something that I would expect any real movement on, that that would be my opinion. It's again, you never know our strategy is going to turn out. We have somewhat divergent strategies, as Jason said, the self-storage has probably made it, so we don't have to seasonally adjust our workforce as hard as we had to 15 or 20 years ago. 15 or 20 years ago, we had cut to the bottom in October, September yet, because we just didn't have -- there was too much seasonality in the truckload business. And so we've done a lot of things, part of it is U-Box, bunch of its storage, and then we've done a tremendous amount of how we -- the size and the location of what we call our rotation fleet. And all three of those have combined to give us more predictable revenue in the winter months. So I don't -- it's going to be real, I have no idea if public in life can make this happen. I have no idea if the -- who wants to do what, I'm not privy to anything there, but really interesting if they have slightly different strategies. And combining them, I suppose they're both can argue, the other guy's strategy is no good. So I don't really know. Public does a great job of both of them. Getting value for their NOI and I think they're doing a great job in the marketplace and they have respect to a lot of investors. And so I think all the other REIT competitors have struggled in the numbers that I've seen. I haven't seen anything in the last 30-days, but we look at that stuff. Public seems to just do a better job of getting investors support for giving them our rental revenues. So maybe that we'll make that deal work. But as far as just being operators to both grade operators. Joe on the truck rental side, one of the things you said in the past is the main metric that you really look at is fleet utilization. Now I realize we have to upgrade the age of the fleet, but I look as with volumes declining a bit, yet fleet size increasing, how does this coincide with your objective to optimize fleet utilization? So we need to do a little bit of truing up, we've been -- I think, kind of, a little bit shell shocked that three years of very strong utilization, but the average miles per existing unit is mainly crept up. And average miles is a better indicator of cost per mile, okay? So -- and also availability, I'll be a little wrong, but we have roughly 2,000 more trucks down for maintenance today, then we did a year ago, because you've seen as you probably know from just maintaining your own vehicle, there's a whole bunch of [Indiscernible] to it, and then sequel, you got to get it to maintenance and you got to get it back out of maintenance. And this burns up time and basically makes the fleet kind of non-productive. So we've done a fair amount of investing and adding personnel to try to streamline that process a little bit. But we’re -- if you took our top line number of vehicles, compared to last year, I'd say take 2,000 off because they just aren't in service. 2,000 additional what we would have seen a year ago. And I agree with you, we're just getting right where maybe we need to print some very -- but we have to do a very model specifically, need to let some trucks go. But even the fleet, the older it gets just as you could watch it to expect. If it's difficult to maintain the same amount of utilization just because of these maintenance intervals jamming things up. We worked real hard this winter, as Jason alluded to, to be going into the spring here with the fleet fully maintained. We crossed that line probably in the last six weeks to where we're at where we won't be. Now of course, I then need to get see how the customers are going to respond to this. It's not altogether clear, I see all kinds of positive signs, but overall, as I indicated, one-way transactions are down. And if we don't have the transaction, we don't need the trucks, that's simple. I agree with you 100%. Okay. And then lastly with technology a few years ago, you initiated a program where people can rent a vehicle without having to go into a store and do it 24 hours a day. Could you talk about the success and failures of that and how that's changed the dynamics of your business? Well, it’s an example, of course, of the changing technology, but also if consumer desires, there's more people who want to do some version of a very low contact transaction. And there's people who want to do transactions at the hours that Walmart maintains their stores instead of the hour U-Haul maintains their stores. So there's been one new transaction 9 o'clock at night and we've not seen an ability for us to staff to that. So the -- what we call 24/7 truck rental has been a success. It's as a percentage and a little bit more of it at dealers as a percent of total transactions that we do at centers. And that is because our centers are seven day a week operations and the dealers pretty typically a five day a week operations. So this has allowed us to mitigate some maybe modest decline in total demand with an increase in our service and the customer has responded. So it's been a success. There's still a great deal of room for improvement and we're hard to add improving that. I would take to have a location in Park Slope, Brooklyn Park Slope, and there the company managed location, it's a big location. They're the managers done a very good job of getting the customer literally to complete the transaction all but the keys. So the customer comes in who are on their phone and they've already basically agreed to everything. We need to see their driver's license and ask one or two questions, handle the keys. And then the trucks are all -- we have all the -- we have most of our locations coded, so we can identify where the truck is located at any given point in time, we could direct the customer do it. And at Park Slope, they just walk out to the truck and drive away. So that's an example of the productivity enhancement. And we simply need more of that and we're very aware of that. We're working on it. It's not -- it hasn't come as fast, but we have good acceptance with that particular program. I can't quote the number of transactions year-to-date very, very thoughtfully. But I think we're up about like 14% or 15% of those kind transactions year-over-year, it’s a number like that. [Todd] (ph), it’s Joe. I just appreciate you being on the call. As you can see, we're attempting to learn how to do a better job in communicating with investors. I appreciate Steve with Zach's being on the phone. I mentioned last time, I'd like to get another organization to follow us too. We're attempting to do that, but it's not as I am now learning, it's not a 30 or 60-day process. It takes a little while. And so I'm not going to say we have something till we have something, but we're working on it. Again, I appreciate it. Look forward to talking to you next call.

EarningCall_157

Hello and welcome to Doximity's Fiscal Q3 2023 Earnings Call. I will now pass the call over to Doximity's Head of Investor Relations, Perry Gold, to kick off the call. Thank you, operator. Hello and welcome to Doximity's Fiscal 2023 third quarter earnings call. With me on the call today are Jeff Tangney, Co-Founder and CEO of Doximity, Dr. Nate Gross, Co-Founder and CSO; and Anna Bryson, CFO. The complete disclosure of our results can be found in our press release issued earlier today as well as in our related Form 8-K, all of which are available on our website at investors.doximity.com. As part of our comments today, we will make forward-looking statements. These statements are based on management's current views, expectations and assumptions and are subject to various risks and uncertainties. Actual results may differ materially, and we disclaim any obligation to update any forward-looking statements or outlook. Please refer to the risk factors in our annual report on Form 10-K, any subsequent Form 10-Qs and our other reports and filings with the SEC that may be filed from time to time, including our upcoming filing on Form 10-Q for the quarter. Our forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, February 9, 2023. Of note, it is Doximity's policy to neither reiterate nor adjust the financial guidance provided on today's call, unless it is also done through a public disclosure such as a press release or through the filing of a Form 8-K. Today, we will discuss certain non-GAAP metrics that we believe in the understanding of our financial results. A historical reconciliation to comparable GAAP metrics can be found in today's earnings release. Finally, during the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details may be onetime in nature, and we may or may not provide updates on those metrics in the future. Thanks, Perry, and thanks, everyone, for joining our third quarter fiscal 2023 earnings call. We have three updates today: our financials, our network growth and new products. I'll start with the good news. Our Q3 financials were strong. We delivered a 3% beat on the high end of our revenue guidance at $115 million and a 14% beat on the high end of our adjusted EBITDA guidance. Our adjusted EBITDA margins hit a record high of 48%, and our free cash flow grew 85% year-on-year. We completed 31 client ROI studies in the quarter, and our median return remains well above the 11:1 median we reported last quarter. Our physician engagement also hit new record highs, but more on that in a minute. Overall, it was a strong Q3. Okay. Now for the not so good news. Our new peer-to-peer and point-of-care modules, which are first paid products to offer vertical video, hit unexpected content approval delays. One of the main moats in the pharma industry is the complexity of medical legal review or MLR. It's a moat we're adept at navigating. Last quarter, our writers and account teams manage thousands of MLR approvals and new content launches, including over 100 video assets of all types. To us, vertical video was just another aspect ratio. But to many of our clients, it felt like a completely new medium, one which raised unique new questions. This required us to go back to MLR square 1 often for the first time in a decade and represent to their independent promotional review boards. While a surprise to us, these content re-reviews went well. After a few live meetings and a couple of months of testing, they found our vertical videos to be "endemic" or medical in their tone. But the net result of these delays is that we expect about a 2% miss from the midpoint of our annual guidance, finishing the year at 22% annual growth versus the 23% to 26% we had projected. A few comments as we reset expectations here. First, this revenue is delayed, but it isn't lost. It's still under contract. Second, the silver lining here is that clients bought more new product than we expected. In the short run, this amplifies our revenue delays. But in the long run, it bodes well for our ability to innovate and grow. Last but not least, this miss is not something we take lightly. We'll be sure to keep innovating, but also to bake in ample time for new product approvals. Okay. While our implementation slowed a bit, we closed a record high selling season last quarter led by our new products and existing clients. As a reminder, our clients include all of the top 20 pharma companies and all of the top 20 hospital systems, we tend to renew our annual contracts in December. We signed the first of these clients 11 years ago. Interestingly, our largest and longest-standing clients tend to be our fastest growing. In Q3, our net revenue retention rate was 127% among our top 20 clients, each of whom has worked with us eight years on average. You can see our land and expand growth at a brand level as well. Last quarter, we doubled our number of $5 million brand clients to eight. We even signed our first ever $10 million brand with a top 10 pharma company that we worked with now for over a decade. As a highly analytical and respected industry leader, we believe this client is a bellwether of things to come. At the market level, we focus on the 415 pharma mega brands, those with over $100 million in U.S. sales. And we now work with slightly more than half of them. We estimate we're gaining share, but we're still less than 5% of U.S. medical professional marketing budgets. The upshot of this strong renewal season is that we project a minimum of $500 million in revenue or roughly 20% growth year-on-year as the backstop for our fiscal 2024 guidance. Of note, given macro uncertainties, we're being more conservative with our assumptions here than in years past. Turning to our bottom line. We expect our fiscal 2024 adjusted EBITDA margins to be the same or better than this year's 43%. All in all, we're projecting a rule of 60-plus year in fiscal 2024. Okay. Turning now to our network growth. Our quarterly active users, among physicians, NPs, PAs and medical students, hit an all-time high last quarter across our entire platform. This growth was led by our telehealth tools, which were used by a record 375,000 unique providers last quarter. And we're thrilled to announce that for the second year in a row, Doximity was ranked the number one best-in-class telehealth video platform, beating out Microsoft Teams, Zoom and many others. Based on class interviews with hundreds of hospital IT clients, we earned the top marks for product, culture, loyalty, operations, relationships and value. Last quarter, we signed several new health systems, totaling over 43,000 new physician users. In sum, over 35% of all U.S. physicians now have a Doximity dialer enterprise integration via their health system. We also hit record highs across our entire workflow suite led by new physician usage records for our scheduling, HIPAA secure digital fax and e-signature tools. With all-time high network usage in Q3, we're proud to help more physicians be more productive than ever before. Okay. To close, we'll highlight a couple of projects coming out of our R&D labs. First, we're excited to collaborate with scheduling automation leader Calendly. Each year, doctors attend millions of events to stay up to date on the latest treatments. And we know from the 200,000 physician on-call schedules that we power today that doctors need help keeping track of it all. By integrating Calendly lease scheduling software into our platform, doctors will be able to easily schedule appointments with colleagues and industry without having to navigate multiple platforms or waste all that time on back and forth scheduling e-mails. In our pilot test, doctors like using an online tool to arrange meet-ups with the scientific medical industry impromptu meetings can disrupt their clinical workflows and aren’t efficient for either party. While this is clearly early stage and 0 revenue this year, we're excited about the very large market opportunity this could unlock. Okay. Our second labs project is using chat EPT, the buzzy AI writing assistant we all can't stop talking about. It began over the holidays when our engineers created a beta site called DOCS, D-O-C-S-G-P-T, dotcom. The site lets doctors and their staff play around with their chat GPT API and share some of their favorite prompts. After the usual mirth and humor, like Dr. Seuss rhyming treatment instructions for kids, a key use case doubled up. Doctors still handle a lot of actual paperwork, and much of it is still sent by fax machines. So we integrated our free online facts directly with GPT for doctors to share news. Its early use has been promising. And oncologists from Ohio called DOCSGPT "a game changer" after it drafted an appeal letter for a cancer patient with a heart condition. The insurer got the fax and approved within the hour, allowing the patient to receive a non-generic medication with fewer cardiac side effects. Meanwhile, a department chief from a top five hospital e-mailed us to say that DocsGPT was "pretty badass" for helping him fax through his backlog of peer credentialing letters. Obviously, DocsGPT is just a small test project. But more broadly, we're enthused about AI's potential to streamline workflows across all of our physician cloud. Imagine an auto field reply to a pharmacy fax form or a 3-line summary of any journal article. With AI, we don't think the future is far off, and we plan to be at the forefront. As always, we'll roll off our sleeves with our physician advisers to build the best products. Speaking of which, we are excited to convene our 11th Annual DOCS Tech Summit in San Francisco next month. We can't wait to brainstorm and beta tests with 200 of our nation's top digital doctors to build the next phase of the clinical cloud. Okay. I'd like to end by thanking my nearly 1,000 and growing Doximity teammates who continue to work incredibly hard to realize our mission. Thanks, Jeff, and thanks everyone on the call today. I'll begin with our Q3 financial results and then move on to our outlook for Q4 as well as an early preview for fiscal 2024. Third quarter revenue grew 18% year-over-year to $115.3 million, exceeding the high end of our guidance range. Similar to prior quarters, our existing customers continued to lead our growth. Our net revenue retention rate was 119% in Q3 on a trailing 12-month basis. Additionally, our largest customers are still growing fastest with a 127% net revenue retention rate for our top 20. We ended the quarter with 290 customers contributing at least $100,000 each in subscription-based revenue on a trailing 12-month basis. This is a 12% increase from the 258 customers we had in this cohort a year ago. This cohort of customers accounted for 87% of our total revenue. As a reminder, our fiscal third quarter represents our largest sales order by a significant amount. During Q3, customers sign on for next year's program and commit the majority of their entire annual marketing budget. This year, we had a record selling season and achieved some major milestones. Notably, we signed 8 pharma brands to programs of $5 million or greater, which is double the number we signed last year. This includes our first ever $10 million brand, which purchased five different modules. This demonstrates that as we continue to innovate and create new additive modules, we can continue to unlock incremental spend per brand. Turning to our profitability. Non-GAAP gross margin in the third quarter was 91%, flat versus the prior year period. Adjusted EBITDA for the third quarter was $55.5 million, and adjusted EBITDA margin was 48.2%, a new record compared to $47 million and a 48% margin in the prior year period. Now turning to our balance sheet and cash flow. We ended the quarter with $801 million of cash, cash equivalents and marketable securities. We generated free cash flow in the third quarter of $47.5 million compared to $25.6 million in the prior year period, an increase of 85% year-over-year as we continue to run a very profitable high cash-generating business. Now moving on to our outlook. For the fourth fiscal quarter of 2023, we expect revenue in the range of $109.6 million to $110.6 million, representing 18% growth at the midpoint. And we expect adjusted EBITDA in the range of $45.2 million to $46.2 million, representing a 42% adjusted EBITDA margin. For the full fiscal year, we're revising our revenue guidance to $417.7 million to $418.7 million, representing 22% growth at the midpoint. We are revising our adjusted EBITDA guidance to $180.2 million to $181.2 million, representing a 43% adjusted EBITDA margin. As Jeff mentioned, our revised fiscal 2023 outlook is primarily the result of new product launch delays. Simply put, content approval has taken more time due to the novel formats of our new point-of-care and peer-to-peer offerings. These delays are having a larger impact on our near-term revenue due to a higher mix of new products sold in Q3 than initially thought. We do expect to have this content approved and ready to go live in the coming months, and the early demand we've seen from customers makes us even more confident in the potential of these products to drive future growth. While the delays are disappointing, we'd like to be clear that the absolute dollar value of our Q3 sales came in slightly above our internal forecast as of our November earnings call. The issue is the pace of revenue recognition. As we look ahead to next year, we are providing a preliminary outlook for fiscal 2024 of greater than $500 million in revenue and at least 43% adjusted EBITDA margins. For this outlook, we are assuming a similar percentage of midyear upsell to what we saw in fiscal 2023, which was about half of our historical upsell rate. While we hope to outperform here, we are not assuming this in our outlook due to continued macro uncertainty. As of today, we have a higher percentage of this $500 million backstop under contract than we did of the $418.2 million midpoint at this same time last year. I'd like to close by reiterating that while our forecasted growth won't be quite as high as we'd expected for the full fiscal year 2023, the momentum in our business remains strong. After achieving our first $5 million plus brand only last year, we have reached a new milestone with our first $10 million brand just a year later. This speaks to the market fit of our innovative new products and the robust ROI our customers are receiving from our platform. Additionally, we continue to run a highly profitable business, and we're encouraged by the fact that we are still projecting fiscal 2023 adjusted EBITDA to come in near the midpoint of our prior range. Looking ahead, we'd like to reiterate our commitment to be a long-term rule of 60-plus company through a combination of growth and profitability. Hi, thanks for taking the questions. So I wanted to clarify on the March quarter guidance and maybe what changed. It sounds like some of the newer products were a little bit more delayed versus what you guys expected, but was that just related to some new products like point-of-care that were coming out? Or I know there were some plans to -- for some of the renewed programs to get those out earlier. And given what's happened, is there any kind of updated view on how we should be thinking about the seasonality of the business going forward? Yes. Sure, Brian. Anna here. I'll start with your first question and then go on to your second one there. So as far as where we're seeing the delays, it is contained to just our new products, so only peer-to-peer end point-of-care. I know you heard us last quarter talk a lot about the operational efficiencies we are working on to increase the pace of launches for our core news and video products. And we actually were really successful there. We had a greater than 50% increase in the number of programs launching in January for our core news and video products. So because of that, we had initially thought when we gave guidance back in November that these operational efficiencies would increase revenue conversion from Q3 deals by several percentage points. However, as you heard here in our prepared remarks, given we sold a greater mix of new products than expected, and we faced delays getting these new products live, this counterbalance the increase in revenue conversion from our operational efficiencies, and we ended up not seeing a material change in our overall revenue conversion rate from Q3 deals, which is the primary reason for the revised guidance you're seeing here. As far as the seasonality question, which I'll hit on as well -- give me a big one there. I'll hit on the seasonality piece, too. I think the way our customers have purchased and launched their programs has fundamentally changed over the last several years. And we're certainly seeing quarterly cases that have been difficult to draw patterns from. As we move forward, and we're getting a better handle on what post-pandemic buying looks like for our customers at this increased scale that we're at now, we are actually starting to see a pattern emerge where we do see a step down around annual launches, but it's now occurring in our fiscal Q4 instead of our Q1 as we get more efficient with launches and our customers are getting stricter on running programs from calendar year start to calendar year end. So because of this, our best estimate at this point is that going forward, we will see a step down between Q3 and Q4 around our annual launches, but then we'll see flat to a slight step-up between Q4 and Q1, a step-up between Q1 and Q2 and then a larger step-up between Q2 and Q3 as our customers add on to our programs. Awesome. Thanks a lot of detail there. And maybe one -- Jeff or Anna, I don't know if you want to take this, but it sounds like the newer products had a pretty strong start. Can you talk about where that fits into budgets? Is that kind of net new? Does that maybe displace other categories? And any updated perspective on how some of your customers are thinking about overall budgets for next year? Thanks guys. Yes, Brian, this is Jeff. I'll speak to that. It does come from slightly new TAM, new budgets, point-of-care budgets. And as Anna said, the mix there came in much stronger than we had thought, which is great. Actually, we're getting very large organizations to buy into our innovative products in the first quarter as it's available. And as Anna said, more than 100% of our missed really was those new products. So if those new products at all launched, we would have hit our forecast. But for the reasons we described in the prepared remarks -- and they got a little bit spooked, I think, by vertical video. They are used to viewing us sort of like a medical journal, and vertical video is a little different. So it did take us back to having to do more of a base review, which was fine. And it has gone fine. I would add that most of the clients that we have had to go back and do that new product review with have now approved it, and it's going ahead to launch. So revenue is delayed, but not lost. Hi, everyone. Thanks for taking my questions. And congrats on the core bookings momentum here. I guess we got a couple of them here. Wanted to start off with commentary on the midyear upsells, at least you're forecasting next year to be in line with what you were selling this year. I guess how should we think about the variance opportunities with that? And I don't know how that maybe sits relative to what you saw bookings so far in Q3. We tend to get a lot of questions on the opportunity for that to rebound, but also on the opportunity that those midyear bookings just might be weaker on a perpetual basis going forward. Yes. Sure, Scott. Anna here. I'll take that question. I mean we certainly hope that, that can rebound. I think in this current macro environment, we're not going to assume that. I think what we saw last year was pretty atypical, right? We're coming out of a pandemic and right into a macro downturn, and we saw our customers do some precautionary belt tightening. We think as we move forward, our customers have done a better job of planning for next year. So we certainly are hopeful that we'll see more mid-year upsells, but we don't think it's the prudent thing to do to include that in our guidance right now. Sure. Got it. Helpful. And then from a follow-up perspective, I thought the -- at least the initial commentary on any sort of chat GPT functionality to be interesting, I guess -- as you look at that product, and I'm sure it's very, very early. Is this something that you can ultimately monetize directly through some sort of subscription payments, et cetera? Or is this really a piece of functionality that should be viewed as drive higher levels of engagement by the physicians on the platform? Yes, Scott, this is Jeff. Honestly, I'll make a joke here. We probably spend more time worrying about the liability of that product than the monetization of it so far. But that said, we think there's a lot of ways that down the road, we could monetize here, ultimately helping doctors save time. And of course, they're in our products, so they're coming back in our news feed and other ways. So we've shown that we can, I think, monetize physician time pretty well, but we just need to provide things that are useful to them. And for physicians, 76% of health care documents in our U.S. system today are still sent via fax and snail mail. And so you just think of all of those letters that need to be sent back and forth between insurers and providers, and we'd really love to help them out with that, it's really had a lot of warm accolades in a pretty short period of time. Great. Thanks so much. So I guess maybe a follow-up, Anna, on -- about the cadence. So if I just look at the difference between where guidance was last quarter and this, it's about a $10 million push, when we think about, I think, as Jeff mentioned, that revenues booked, not lost, just timing, I want to make sure that you're not implying that there's a $10 million sequential increase in the June quarter, and then you build from there. But that you'll probably see that build more smoothly? So I just want to make sure I'm clear on that first? That's correct, Sandy. We are not saying that we'll start seeing a $10 million step-up right away in our Q1. While we are through most of the approvals, so we do actually have the approvals that we need for most of our customers to get this program live. We're still working on them. We think they'll go live in the coming months. And so you'll see it more of a smoother cadence there. But that does contribute to the kind of slight step-up between Q4 and Q1, but it will be more of a smooth cadence throughout the year. So it won't all be hitting in our Q1. Okay. Great. That's helpful. And then on the expense side, just thinking about the different lines, are there any -- and when I think about just the $3 of sales and marketing, R&D and G&A, would you call out any notable changes from growth rates from -- on a relative basis, how those are going to be trending out over the -- when we're looking out next year to maintain the 43% margins or when I think about relatively how those grew relative to the top line, say, in '23 and in '22, the trajectory is the same? Or as you're the CFO thinking about where we're maybe spending more, but we're going to pull back here, are there any things we should be thinking about? Thanks. Sure. No significant changes to what we saw this last year. We're going to continue to invest in R&D and sales and marketing. I think our investment in R&D has shown to be successful. Jeff mentioned that we saw record QAUs with last quarter as we're continuing to invest in our R&D team, continuing to invest in our product and continue to invest in growth there. Additionally, we're continuing to invest in sales and marketing. We saw that come to fruition with our most successful new product launch to date. We are tightening our belt here and sharpening our principles on G&A, as I mentioned last quarter. So that will be an area we'll continue to be pretty prudent about how we think about investments, but certainly continuing to invest in sales and marketing and R&D. Hi, thanks for taking my questions. Last quarter, you called out earlier start date for contracts, they're benefiting the fiscal fourth quarter. So if we think about kind of like an apples-to-apples comparison with the prior year fourth quarter, how should we think about the contract start dates contributing to your revised guidance for this fiscal 4Q? Sure, Stan. I'll take that one. So as I mentioned earlier with Brian's question, we did see some success in getting our core products launched in January. Now it unfortunately was counterbalanced by the new product delays. So when you actually look at our holistic revenue conversion rates from Q3 programs in fiscal 2023, it ended up being essentially flat versus last year because these new product delays counterbalanced the increase in operational efficiency on our core products. On a go-forward business, we're continuing to focus there. We are really, really pleased with the progress we've made, and we'll continue to focus on there and continue to get more and more of our customers live in January. But this year, unfortunately, the new product delays made it less impactful. Got it. And then it was interesting to see that the end of the third quarter, particularly since it didn't seem if you've got any new client growth sequentially on 3Q. Was that part of expectations? Or is it something materialized where client growth kind of stalled out this quarter? No, not necessarily. We do see some quarterly fluctuations in the number of 100k customers. A lot of that just has to do to the timing of launches and when programs run. That's why we try to focus more on the annual growth, which continues to be strong. One thing that we've talked about before historically is as we think more on a 3- to 5-year horizon, we do believe that over time, we'll start seeing more growth come from the average revenue per 100k customer than the total number of 100k customers. So we're continuing to lean in there and upsell our customers. Yes, thanks for the question. I had a couple here. I was wondering maybe if you could provide any metrics on the higher visibility this year versus last year for us. And we'll start there, and I'll ask a follow-up. Sure. Richard, happy to take that one. So I think my best proof point for you is going back to the prepared remarks where I said as we sit here today, we have a higher percentage of the $500 million preliminary guidance under contract than we did at this point last year for the final $418.2 million midpoint for fiscal 2023. So we're going into the year with more backlog, which leads to higher visibility. And we'll also go into the year with pretty low assumptions from our perspective for a midyear upsell. We are assuming no improvement there versus what we saw last year. Now as I mentioned earlier, we hope to be able to see some improvement, but all those things combined means that we do expect to start the year with more revenue under contract than prior years. Okay. And Jeff, you noted the record engagement. You had scheduling in there. I was wondering if you could provide any metrics in terms of the uptake in scheduling, considering, I guess, it's been about a year now that you've had that. Yes. No, thanks, Richard. I'd love to talk about our scheduling product, Amion. It's been doing really well. So I'll speak to the client side of it. This past quarter, we went out and started offering an enterprise -- unlimited enterprise offering so that you wouldn't buy department by department in an office, but the whole health system could use it for a flat rate. And it was really popular. We got 3/4 of our top 20 clients with Amion to go purchase that. And that's going to increase, we believe, our overall rollout, get more doctors, more departments using us as a more centralized scheduling system. The other thing I'd share there is just like we all check our calendars every day, doctors do, too. So the -- most of our doctors are using the service, and again, there are 200,000 physicians who have schedules on Amion, are using it every day. The final point I'll make there is it's not just some sort of bolt-on for us. We've fully rebuilt the product, integrated it inside the Doximity platform, and we have now migrated about half of those doctors into the fully logged in Doximity platform where they can also directly make phone calls and message each other. So really making it part of our full larger suite. Thank you for taking the questions. Anna, let me start with one for you, and this one relates to the EBITDA guidance. Obviously, really strong outperformance this quarter and just a modest downtick to the full year, I think about 70 bps, which means Q4 is going to come in lower than you anticipated. So is there any color you can offer on why this quarter was so much stronger than you anticipated and then why the Q4 performance will be below prior anticipated levels? Was there any pull forward or nuances there? Sure, Ryan. I think the majority of that difference from an EBITDA perspective has to do with the difference from a revenue perspective. That said, we do continue to be diligent with how we think about our investments. And we are also seeing continued improvement in our vertical sales model from an efficiency perspective. So when we think about Q3, for example, as we mentioned earlier, we did have a higher mix of new products. And our new products and new module have very high incremental margins. So that can help contribute to the EBITDA beat that we saw in Q3. And as far as it pertains to Q4, it really is just a function of revenue. Okay. That's helpful. And then, Jeff, one for you just to go back to the comment on the peer-to-peer and point-of-care video content approval delays. Are those now at a point where they've been approved and you actually have a firm launch date? Or is that still in the works where there could be some delta and push forward again? So you've got the approval, do you actually have the launch date is my question. Thanks. Yes. That's a good question, Ryan. As we said in the prepared remarks, most have been approved. I would say that not all of those are live yet, so some have hard scheduled dates and will get live soon. So it's really a continuum. The short answer is, I think, in the coming months -- we say, in the next few months, we expect to get these all out there. Hi, guys. Thanks so much for the question. In the quarter, I just noticed you guys didn't really do any share repo, which is a little bit of a departure from other quarters this year. I was just wondering if you had any updated thoughts on the pacing given the authorization that you guys put forward a couple of months ago? Thanks. Sure, Elizabeth. Not much I can really say there, to be honest. I mean from our perspective, we have done, set and forget hit plan from a share buyback perspective. So for us, just as simple as it didn't hit our price targets this quarter, but we're continuing our commitment to doing that on a go-forward basis. And it's still live. It just hasn't triggered yet. Thanks so much for taking the question. I was hoping you could discuss some of the behavior you're seeing for branded drugs facing biosimilar competition. What are kind of the trends in physician education for the brand versus biosimilar? And are you seeing educational budgets for these categories increase, decrease or stay about flat overall where there are biosimilar launches challenging to major brands? Jessica, this is Nate. Happy to chime in here. So the industry has always had arcs of provenance for major therapies. And industry competition in general is a good thing for society that drives competition, drives innovation. As new products, competing products are launched, that creates a need for education at the caregiver level. And what's interesting about biologics and biosimilars, the nuances between them at a molecular level, at a current state of research level, a patient cohort level, a payer adoption, coverage and policy level, that's a lot to parse and keep up with. And that complexity is only going to continue to accelerate as medicine becomes increasingly personalized. So it really takes a precision education and really an individualized digital platform like ours to be able to address the needs in that sort of evolving complex market. And we think we're well positioned to help the field there, even as the amount of spend on different budget shifts. Got it. That makes sense. And then I just have a quick follow-up to Ryan's question. How would you describe the visibility into the revised FY '23 guidance at this point? Sure. At this point, when it comes to the revised fiscal '23 guidance, I mean, we've got, what, two months left in the year. We have a ton of visibility there. We're very, very comfortable with those numbers. Hey folks. Thank you for taking my question. Anna, building on your visibility comments, can you walk us through how you've looked at contracting and get visibility? And maybe give us a bit more of a bridge around the GoGet renewals and already contracted pieces of the revenue for next year? And then Jeff, I'd actually like a history lesson from your time at Hippocrates. Were there any insights on contracting for visibility there given similar tough macro backdrop that you've seen in the past? Sure, Steph, I'll start out and then pass it over to Jeff for your second part of the question. So continuing to elaborate on the visibility. We're not going to give the exact figures around 60, 65, 70, whatever percentages we've given in the past. But I think is a good way to think about it is we are starting the year with more revenue under contract than prior years. We are less dependent on major upsell than prior years. And that means we're more dependent on our core annual renewal cycle, which continues to perform really well for us. Our core annual renewal cycle this year was incredibly strong. Demand is incredibly strong. We saw larger brand sizes, longer-term programs than we've ever seen before. So we're really encouraged by that, and that's something that's really never been up in the air for us. So I think from a visibility perspective, we feel very, very comfortable with how we look for next year with this $500 million backstop. Yes, Stephanie, this is Jeff. I'll chime in and say, yes, having managed through the 2008, 2009 crisis and other crises in the past, in general, pharmaceuticals and health care is recession-resistant. I joke we're not immune to broader macroeconomic deals, but we are fully waxed. And I think that comes up and shows that we're still an organic rule of 60-plus company this year, right, giving guidance here for 20% top line growth, again, in a very tough macro and 43% EBITDA margins based on a record 48% EBITDA margin last quarter. So I think we're seeing folks pull back a little bit. I think in some ways, a more efficiency-driven environment is good for us. It clears out some of those digital pet projects that sort of accumulated during the height of lockdown. The new websites, they got a few million here or there and never got any use. So the fact that clients see that they spend $1 with us and get $11 back, I mean, over time, they just keep moving more and more of that budget over to us, which is why I'm so proud that this new $10 million client we have, brand we have is with one of our oldest clients, someone we work with for a decade. So the more you know is the more you want to work with us. And we think that's great. My last point I'd just add on is we talked a lot about pharma on this call, but our hospital business this time around. It's surprisingly -- I shouldn't say surprising. It's been very strong and I know last quarter, we had shared that we were so excited we had our first $4 million brand there, first $4 million account. And now we've upped that now. It's our first $5 million account. So we continue to see strong growth in our hospital business as well as they move more digital. I'll do a follow-up there because it sounds like you want to talk hospital a little bit. Is that a function of more of the tight labor market and trying to get more seats filled within the hospital? Is it telemedicine? Is it something else that's really hitting on all cylinders? Yes. It's really the marketing side of it. And I think hospitals are realizing that it's not about the billboards and sports stadiums. It's about finding patients digitally and having good relations with physicians in the community who refer in. So I think we're very strong at doing that. And to our team's credit, I think we've done a really nice job of penciling the math for them, actually looking at claims data to see how many referrals they get from the programs we run so that they can go back to their management and say, look, we ran this program, and here's the ROI. We should do more. Thanks for taking my question. Jeff, I just want to come back to this visibility thing, right, because we get so many questions on it. If you look over the last four quarters, three of them you've been surprised on a number of different things, and each one of them kind of sounds like it makes sense, but it -- we're getting a lot of questions about are they guiding conservatively or do they really have the level of visibility they think they have. And just kind of coming back, Anna, o your comments on the visibility for next year, I went back to this same transcript last year, and you said -- both of you guys said that you had 60% visibility sort of heading into the next year, and that was fiscal '23. Is that like a reasonable benchmark to start when we think about this $500 million? We're just trying to get a sense for how much of this may already be booked, and maybe you don't want to share that number, but maybe you can comment if that 60% last year was even accurate? Sure. Thanks, Glen. Yes. As Anna shared, it's above that 60% as we plan into this next year. So we're ahead as a percentage of where we were last year. But I do take your comment to heart here. I think this new product shift was something that we should have seen coming. And from our end, we, I think, gotten into an easy rhythm with our clients where everything was sort of on a fast-track approval. And we assume that our new products would be as well. And then our new products sold much, much better than we thought. I mean again, this is the best product launch we've had by many-fold this last year. Again, it's great that our clients are innovating with us. But those delays were not something that I think we put in enough buffer for. So we take your feedback very seriously. We do not take this lightly. But I can tell you it's not like folks are canceling contracts or other things. It's really just that the revenue has been a bit delayed. All right. And maybe if I could just sort of follow up. I also want to talk about margins, right? Anna, if I look at this year, basically, you're going to have three quarters with kind of flat to down margins. And obviously, the September quarter had nice margin expansion. And now you're sort of forecasting 20% of the growth with your gross margin level and those -- and the margins are basically flat year-over-year in terms of what you're forecasting. I mean I heard you about the incremental investments in a couple of areas. But Jeff, is there anything going on with the competitive landscape? Anything sort of happening here with pricing that may be worth sort of talking about? Or I don't know if there's any sort of comments you can make because I'm trying to assess your rule of 60 comments, and I think we were all sort of conditioned to believe, and I don't know what you're implying, if that's 40 and 20 or if it can be 45 and 15, but we're just trying to think because your margins have fluctuated. You had 48% one quarter, 37% in the fiscal first quarter. And so I'm just trying to think about volatility in margin when we're sort of building our models for next fiscal year? Thanks. Sure, Glen. I'll take that one. And just before I hit on that, actually, I'll also hit back to your visibility piece. I do think it's just important to remember, and we'll be the first to say it, like this was a tough year from a visibility perspective. We were coming out of the pandemic into a macro downturn coming off of the two years where we were growing at a 70% plus CAGR. So it definitely was a harder year from a visibility perspective, and we'll be the first to admit that. And I think going forward, as we're looking ahead and as we're hoping to give some more color on the guidance for next year, I think we're going in eyes wide open, and we're thinking more about what could potentially happen as macro deteriorates further, et cetera. So I just want to kind of clarify that and hit that on the head. From an EBITDA perspective, we do see quarterly fluctuations. It typically is around the selling season. We do see higher sales and marketing in Q3 and Q4. So there is some increase there. As far as how we're thinking about next year, we're continuing to invest in growth, but we still see ourselves as a growth company, and we want to keep investing there. So we think 43% plus margins in this environment and 20% growth is really strong. So we're really pleased to be able to be a company that's organic rule of 60 plus. No. We're not seeing erosion on the pricing side. I mean the way we think about pricing is we think about it through a value on. That's how our customers are thinking about pricing. So given our ROI, it actually continues to get more affordable to our customers because our ROI continues to increase. As far as how we think about like long-term pricing, I mean we aim typically for somewhere near a mid-single-digit price increase each year, and we're having no problems achieving that. That concludes our question-and-answer session. I will now pass the call back over to Doximity's CEO, Jeff Tangney, for any closing remarks.

EarningCall_158

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viad Corp's Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Good afternoon, and thank you for joining us for Viad's 2022 Fourth Quarter and Full Year Earnings Conference Call. We issued our earnings press release after market closed today, along with an earnings presentation, which are both available on our website at viad.com. We will be referencing specific pages from the presentation during the call as we discuss our business performance and outlook. I also want to point out that our earnings press release and presentation contain important disclosures regarding non-GAAP measures that we will be referring to during the call, including adjusted EBITDA and net income or loss before other items. During the call, you will hear from Steve Moster, our President and CEO and President of GES; David Barry, our President of Pursuit; and Ellen Ingersoll, our Chief Financial Officer. Before turning the call over to Steve, I want to remind everyone that certain statements made during the call, which are not historical facts, may constitute forward-looking statements. Information concerning business and other risk factors that could cause actual results to materially differ from those in the forward-looking statements can be found in our annual, quarterly and other current reports filed with the SEC. Good afternoon, and thank you for joining us. To start the call, I'd like to thank our team members around the world for their continued dedication and efforts, which are reflected in our fourth quarter and full year results. Starting on Page 4, I want to provide my highlights on the quarter and our path forward. David, Ellen, and I will expand on these highlights later in the call to give you more clarity on what we're seeing in each business. First, I'm very pleased with our performance in 2022. Pursuit achieved record revenue in the year due to the continued recovery of the adventure travel industry and the steady investments we've made to drive growth through our Refresh, Build, Buy initiatives. GES significantly outperformed our expectations in 2022 as the live event industry came roaring back from pandemic levels. Second, in 2022, Viad delivered strong results through our strategic focus on scaling Pursuit and improving the profitability of GES, despite several macro external forces. During the year, Pursuit continued its growth trajectory with the additions of a high-quality attraction experience to our Glacier Park collection and the remarkable new hotel in downtown Jasper as well as made headway on other exciting growth investments, including FlyOver Chicago and a new mountain coaster at our Golden Skybridge traction. Also during the year, GES continued to make meaningful progress to improve the profitability of the business through GES exhibitions transformed cost structure and inspires new and existing client wins. And lastly, I'm excited about the path ahead for Viad businesses. I expect growth to continue in 2023 and beyond based on fewer border restrictions on international travel, the acceleration of Pursuit's new experiences and the full recovery of our businesses. And now I'd like to turn the call over to Ellen to discuss our fourth quarter and full year performance in more detail. Ellen? Thanks, Steve. Before I jump into our current quarter results, I'd like to spend a few minutes covering an 8-K that we filed just prior to our earnings press release this afternoon. During our year-end close review procedures, we identified an error relating to our accounting for a finance lease obligation at Sky Lagoon. That lease liability is recorded on Sky Logan's balance sheet in Icelandic krona, but is payable in U.S. dollars and therefore, requires re-measurement on a monthly basis with any changes in valuation being recorded as noncash foreign exchange gains or losses. This re-measurement had not been taking place prior to December 31, 2022. As a result, the lease liability that we reported as of September 30, 2022, was understated by $5 million, with a corresponding understatement of cost of services of $5 million, an overstatement of net income attributable to Viad of $2 million relating to the FX loss that should have been recorded. We plan to file an amended and restated Form 10-Q for the 2022 third quarter to correct this accounting error. The re-measurement of this lease liability resulted in an FX gain of $804,000 during the fourth quarter, bringing the 2022 full year FX loss to $4.2 million. FX gains and losses are included in cost of services on our income statement and we have and will be excluding these noncash gains and losses from our non-GAAP measures of adjusted EBITDA and net loss or income before other items. As shown on Page 6, we delivered consolidated revenue of $248 million during the fourth quarter. This is up 35% or $64.5 million year-over-year, driven by 46% growth at Pursuit and 34% growth at GES. Net loss attributable to Viad was $5.7 million as compared to a loss of $22.5 million in the 2021 fourth quarter. During the quarter, we completed the sale of ARM Services, a noncore business within GES for approximately $30 million and recorded a gain on that sale of $19.6 million. Excluding that gain and certain other items, our net loss attributable to Viad was $25.5 million for the quarter as compared to a net loss before other items of $22.5 million in the prior year fourth quarter. Our consolidated adjusted EBITDA of negative $2 million improved by $1.8 million year-over-year and was in line with our prior guidance. GES adjusted EBITDA of $12.7 million increased $3.1 million year-over-year and surpassed the high end of our prior guidance range as we continued to see strengthening of live event activity and great execution by the GES team. Pursuit adjusted EBITDA was negative $11.3 million and came in slightly below prior year and our prior guidance range, primarily due to higher-than-anticipated expenses in the seasonally slow quarter. Turning to Pursuit's year-over-year performance on Page 7. Fourth quarter revenue of $34.1 million grew $10.8 million year-over-year, with same-store revenue growth of $5.9 million or 32% and $4.8 million of revenue growth from New Experiences that we opened or acquired during 2021 and 2022. The same-store revenue growth was largely the result of stronger leisure travel to our Canadian experiences, resulting from reduced COVID restrictions as well as our efforts to refresh existing properties and maximize revenue. Fourth quarter adjusted EBITDA was negative $11.3 million as compared to negative $9.9 million in the prior year. The decline of $1.4 million was driven primarily by higher expenses versus the prior year, including insurance and compensation-related expenses as well as COVID wage subsidies received in 2021 that did not repeat in 2022. The New Experiences we opened or acquired during 2021 and 2022 delivered positive adjusted EBITDA of approximately $800,000 during the quarter, which is a $1.6 million improvement versus the prior year, reflecting the continued ramping of Sky Lagoon and FlyOver Las Vegas as well as the addition of the Forest Park Hotel, partially offset by seasonal losses from Glacier Raft Company and Golden Skybridge. GES delivered total revenue of $213.9 million. Spiro revenue grew 31.8% or $17.4 million and GES exhibitions revenue grew 32.7% or $35.4 million. As Steve will review later, we continue to see strong levels of recovery toward pre-pandemic live event activity. GES' fourth quarter adjusted EBITDA improved by $3.1 million year-over-year, reflecting the increase in revenue as well as higher cost to support the more robust business activity. At the end of 2021 and into early 2022, GES was running with a very lean cost structure as we cautiously rebuilt the workforce as revenue returns. By the third quarter, we had returned to a normalized workforce level for GES exhibitions and we are continuing to prudently add talent within Spiro. We remain acutely focused on maximizing profitability and cash flows within GES. Now switching over to our full year results on Page 9. Viad's full year revenue more than doubled versus 2021 and consolidated adjusted EBITDA reached $116.1 million, up from $1.3 million in 2021. While not everything went as planned this year, we are extremely pleased with how well our teams executed to deliver strong results in customer service as our industry saw a rapid improvement from the suppressed levels of activity during the pandemic. Pursuit's full year revenue grew 60% and reached a record level of nearly $300 million. Full year adjusted EBITDA was $67.9 million, up $25.3 million year-over-year. New Experiences acquired or opened during '21 and '22, contributed revenue of $43.2 million, adjusted EBITDA of $6.9 million and an adjusted EBITDA margin of 16%. We expect the contribution from these New Experiences and their margins will continue to grow in 2023 and beyond. On a same-store basis, Pursuit's adjusted EBITDA improved by $21.6 million on a revenue increase of $84.7 million or 49% and same-store adjusted EBITDA margin improved by 80 basis points. Margin expansion versus 2021 was constrained by several factors, which we primarily view as transitory pandemic impacts, including the mix of guests, staffing-related challenges and other cost increases that we were not fully able to offset through price increases. At GES, we delivered an adjusted EBITDA improvement of $91.6 million versus 2021 on a revenue increase of $507.7 million. Full year adjusted EBITDA margin was 7.4% as we leveraged GES' lower cost structure to drive strong flow-through as revenue increased nearly 160% year-over-year. GES margins were particularly strong during the second quarter as revenue returned far more quickly than we had anticipated in our staffing levels. We experienced deceleration of margins during the third quarter as we continued rebuilding our service teams for the sustained level of business activity. Margins improved slightly during the fourth quarter as we maintain a sharp focus on cost management and cash flow. Now I'll quickly cover some balance sheet and cash flow items before we dive more deeply into business highlights. We ended the fourth quarter with total liquidity of approximately $146 million, comprising $60 million in cash and $87 million of capacity available on our revolving credit facility. Our cash flow from operations during the full year was an inflow of approximately $72 million. Our capital expenditures totaled about $67 million for the full year and were mainly at Pursuit, including growth CapEx for the Forest Park Hotel, the mountain coaster at Golden Skybridge and FlyOver Chicago. Our cash flow from operations during the quarter was an outflow of approximately $33 million. Our capital expenditures totaled about $12 million for the quarter and were mainly at Pursuit, including growth CapEx for FlyOver Chicago. On December 15, we completed the sale of the assets of ON Services, a U.S. based audiovisual services business that operates as part of GES for cash proceeds of approximately $30 million. This transaction enhances our balance sheet and builds on the strategic transformational changes that we have implemented at GES over the past few years by further simplifying GES' operating model. At December 31, our debt totaled approximately $482 million, including $395 million on our term loan base, financing lease obligations of approximately $65 million and $11 million construction loan to help fund the development of the Forest Park Hotel and other debt of approximately $11 million. Thanks, Ellen. We're proud to have delivered record quarterly revenue in each of the 4 quarters of 2022, along with 59% year-over-year growth in full year adjusted EBITDA. These financial results were not as strong as we projected entering 2022. We continue to experience travel restrictions and the temporal effects of the COVID pandemic, which impacted same-store results and the first full year of operations at our newer experiences. And we saw slower-than-expected ramping of FlyOver Las Vegas as our marketing efforts continue to take hold and increase awareness of this new attraction on Las Vegas Boulevard. COVID has thrown many headwinds our way over the past several seasons and we're pleased to be seeing some meaningful relief on that front. Our performance is on track to strongly improve in 2023, and we're looking forward to delivering record revenue and adjusted EBITDA in the year to come. But more to come on that shortly, first, let's take a review of our 2022 performance. Page 11 of our earnings presentation reflects our ongoing commitment to Pursuit's Refresh, Build, Buy strategy and its impact on our revenue growth. The 11 New Experiences that we've opened or acquired from 2019 through 2022, collectively delivered $88.1 million in revenue in 2022, which is nearly 30% of Pursuit's total revenue for the year. As guest awareness continues to build and visitation from long-haul destination markets continues to return, we anticipate further growth and margin expansion at these iconic experiences. Refresh, Build, Buy is also about improving performance at existing experiences and we've been successful driving revenue growth at the experiences that were part of Pursuit prior to 2019.On a same-store basis versus 2019, Pursuit grew full year 2022 revenue by 5.5% despite pandemic-related headwinds as we remain focused on elevating the guest experience and price optimization. Relative to 2019, we drove stronger same-store revenues through lodging, food and beverage and retail, while same-store ticket revenue from our attractions remain below 2019 levels due to their greater reliance on long-haul international group leisure travel. Page 12 in the deck covers attractions performance for full year 2022. On a same-store basis, our attractions visits reached 85% of 2019 levels. However, 2022 overall ticket revenue of $115 million grew by approximately 36% versus 2019 as we invested in new attractions and drove higher effective ticket prices. We're thrilled to have welcomed a record total of 2.9 million attraction visitors during '22 with 88% growth in overall ticket revenue as compared to '21. And we're looking forward to additional upside from the gradual return of international visitors from Asia-Pacific markets and other destination markets in 2023 and beyond. Page 13 covers fourth quarter attractions performance and I'd just like to highlight that we saw continued acceleration at our newer year-round attractions. At FlyOver Las Vegas, we've made important inroads into attractions ticket distribution networks that are fueling growth. Q4 visits increased 21% from the third quarter and 35% from the same period in 2021. And we're proud to have won multiple awards for the experience, including silver for best immersive experience by bestoflasvegas.com. Sky Lagoon in Iceland also delivered strong fourth quarter results with visitors increasing 61% from the prior period -- from the same period prior year. Now I'll cover results and performance metrics at our lodging properties, which we reference on Page 14 of our earnings presentation. 2022 rooms revenue of $77 million grew by 34% year-over-year and by 31% compared to 2019. The year-over-year growth was driven by higher occupancy, which nearly returned to 2019 levels as well as higher ADRs. The growth versus 2019 was driven by our investments to expand and refresh our lodging portfolio with additional rooms and higher ADRs. On a same-store basis, RevPAR increased 35% year-over-year and 10% versus 2019, reflecting increases in both occupancy and average daily rate. On Page 15, that shows our lodging performance remained strong during the 2022 fourth quarter. Rooms revenue at our year-round properties in Vance, Jasper and Montana increased 17% year-over-year. And similar to our attractions, we see the continuation of a strong year-over-year growth into the first quarter of 2023. Moving on to our ancillary revenue streams. Pursuit, Food and Beverage businesses delivered revenue of $47.3 million in 2022 and continues to be an integral part of the hospitality experience. We made strategic investments to improve the culinary experience at restaurants located within our hotels throughout the year and again delivered healthy year-over-year growth of 63%. 2022 also saw strong revenue growth in our retail business, which increased 33% year-over-year to $33.5 million. And we view retail as a key growth lever into the future and driving retail growth is an important part of our focus on returning to historical margins. All right. So now let's turn our attention to the year ahead. We continue to see performance at our newer experiences accelerate. And that coupled with the return of international leisure travel guests and healthy early season booking indicators has us optimistic for a strong and successful 2023. We see no dents in the armor in terms of demand for the '23 season as booking pace remains strong. For our Canadian experiences, 2023 will be our first season in 3 years that will not be constrained by COVID restrictions, testing and quarantine risk. And all of these testing and quarantine restrictions to enter Canada were finally lifted on October 1, 2022. And this is already showing a positive impact and although still early in the '23 year, we're seeing improvement in year-over-year pacing in each operating geography. Through January, Pursuit revenue is pacing well ahead of the same period in 2022. Canada is seen as a safe destination and is enjoying strong visitation from the United States in the current ski season. Demand for Pursuits Alaska and Montana product is also strong with a strong return of cruise line arrivals planned for summer '23 in Alaska and continued demand for iconic Glacier National Park in the great state of Montana. While still early in the booking cycle, we're pleased with our early season bookings pace, which lends confidence to our full year expectations. We expect our attractions visitation will improve to approximately 95% of 2019 levels on a same-store basis. Demand from Western European operators in the UK markets is strong for all of our destinations from Iceland to Western Canada and the Western United States. As China reopens to the world, we expect to see a slow increase in inbound visitation to Western Canada during 2023. And this specifically will come in two segments, visiting friends and relatives and FIT. China's reopening was late for tour and travel partners to resume their historical programs given the short notice for '23 bookings. Pre-pandemic, China exported 155 million tourists to the world and we expect it will take two seasons for outbound visitation to return to full momentum. In Iceland, our research suggests that Iceland will benefit from an increase in international visitation relative to pre-pandemic 2019 levels. We anticipate this increase to be about 8% in the first half of the year, which will, in turn, benefit both Sky Lagoon and FlyOver Iceland. So we're acutely focused on three important and related success factors in 2023, revenue growth, margin expansion and winning the war for talent. So starting with revenue growth, I just highlighted the strong and improving demand trends we're experiencing. With that backdrop, we are sharply focused on ensuring that our new experiences as well as those that have been slower to recover from the pandemic, regain traction and perform to our expectations throughout the year. This means maintaining a heavy focus on driving guest awareness and visitation at our New Experiences, including FlyOver Las Vegas and the Golden Skybridge. It also means executing strategies and tactics for regaining pre-pandemic visitation volumes at certain attractions that are more dependent on long-haul international guest volumes such as the Columbia ICO Glacier Adventure and Skywalk. Margin expansion is another critical focus area, and I'd like to take a minute and share our view on how we expect margins to recover in 2023 and beyond. As Ellen touched on earlier, our 2022 adjusted EBITDA margin of 22.7% was constrained by pandemic headwinds on cost and mix of guests as well as the ramping of our New Experiences. In 2023, we expect to see meaningful margin expansion driven primarily by increased visitation at our high-margin attractions, but not a full return to pre-pandemic levels. As you know, our attractions are built for volume, meaning that the profitability increases significantly when guest visitation is high, once fixed cost breakeven is achieved. The revenue from every incremental guest flows at a very high rate to our bottom line. Additionally, staffing pressures are easing and we're actively ratcheting back the extraordinary measures put in place due to the pandemic labor shortages and disruptions to the foreign worker programs in both Canada and U.S. Beyond '23, we expect margins will once again exceed 30%.There are a few key drivers of margin expansion in 2024 and beyond that we're focused on. First is achieving attractions visitation in line with 2019 on a same-store basis; three of the seven attractions that we owned and operated in full in 2019 are not expected to return to 2019 levels in 2023 and recapturing that guest volume is a critical part of our margin recovery strategy. Contracting pace and demand are the best indicators of future years and we're pleased to report that our travel trade partners across the world are returning in earnest to historic levels of contracting and we see strong interest for '24 and '25 seasons as China shifts its COVID policies and begins to reopen. Our second driver relates back to my comments about ensuring that our businesses perform and our long-range plan anticipates continued growth at our newer attractions and specifically FlyOver Las Vegas and the Golden Skybridge in '24 and beyond. We also expect to launch FlyOver Chicago in the first half of '24, and we expect FlyOver Chicago to be accretive to Pursuit's EBITDA margin. And the third driver, specifically on margin and is really a careful focus on labor and expense management. And that brings me to our final critical success factor for 2023, winning the war for talent. Our early season hiring metrics are trending positively and we're starting to see normalization across the talent acquisition ecosystem, including an increase in the number of seasonal team members who are returning to pursue for another summer and in the availability of the international workforce supply. In addition, with a vision to be the world's leading provider of attraction and hospitality experiences, we will execute against a number of important investments centered on improving the guest and team member experience at several locations. Some examples include a refresh of the original founders cabins and the Pines restaurant at Pyramid Lake Lodge in Jasper, upgrades to our workforce housing facilities and exciting new content for our flyover attractions. We continue to seek and evaluate investment opportunities in multiple geographies for the next great Pursuit experience. So in closing, we believe that 2023 will mark the return of a more normal operating environment across all of our geographies and we very much look forward to welcoming a record number of guests to Pursuit iconic, unforgettable and inspiring experiences. Thanks, David. Now let me switch gears and talk about the GES business, which includes both GES Exhibitions and our marketing agency, Spiro. During the fourth quarter, GES continued to perform better than expected as revenue continued to recover above our expectations. In addition to delivering strong top line growth, GES drove a substantial increase in profitability during the fourth quarter with adjusted EBITDA of $1.7 million above the high end of our guidance range for the quarter. First, I'd like to talk about the performance of GES Exhibitions, which provides trade show services to leading event organizers in North America, Europe and United Arab Emirates. During the fourth quarter, GES Exhibitions delivered $143.6 million in revenue and $6.9 million in EBITDA. Like prior quarters, the strong results were driven by a faster-than-expected recovery. During the fourth quarter, GES Exhibitions continue to experience improvement in the size of events produced. As shown on Page 18, U.S. same-show revenue reached 93% of 2019 levels, up from 91% in the third quarter. I'm very encouraged by the pace of recovery of trade shows at GES Exhibitions. The rapid recovery relative to 2021 illustrates the resilience, strength and value of trade shows as a major component of today's corporate marketing channels. The recovery, however, has not been uniform as there continues to be significant variability in the pace of recovery across a broad set of trade shows with individual shows performing between 70% and 140% of their pre-pandemic size. As the lower performing shows fully recover, this will be a tailwind for the GES Exhibitions' performance. Next, I'd like to discuss the fourth quarter at Spiro, our experiential marketing agency, which serves as the agency of record for Fortune 1000 corporate clients. During the fourth quarter, Spiro delivered $72.1 million in revenue and $5.8 million in EBITDA. Like the trade show side of GES, Spiro saw a strong level of marketing spend from our corporate clients, which are concentrated in the pharmaceutical, medical, aerospace and defense, industrial and technology industries. During the fourth quarter, Spiro marketing clients spent approximately 90% of the level spent in 2019 on a same-store basis. During the quarter, Spiro won several new clients, including Dentsply Sirona, which will have an impact in 2023 and beyond. Our first project for Dentsply Sirona will be producing their 2023 Implant World Summit in Avon's Greece for Dentsply top implant dentists, periodontist and implant surgeons. These new client wins demonstrate the strength of Spiro's creative, strategic and production talent on an international stage. The fourth quarter finished a rewarding but challenging year for the GES business. From an uncertain start with Omicron-driven cancellations and postponements in the first quarter, we experienced a rapid acceleration in live event activity beginning in the second quarter. Revenue recovered much faster than expected, while the business bought through labor shortages, supply chain challenges and high levels of uncertainty. I'm very pleased with how the team responded to these adversities and their hard work will position the business well for 2023. Now I'd like to give you some insights into our expectations for the new year and Ellen will cover our guidance later in the call. In 2023, I expect GES Exhibitions same-show revenue to stay in line with what we experienced in 2022 at close to 90% of 2019 levels. While medium and large corporations quickly returned to trade shows in 2022, we have not yet seen significant participation from international companies and smaller domestic companies. Given the strength of trade shows, I anticipate these companies will participate again in the future, but not until late 2023 or early 2024.Additionally, GES Exhibitions will experience year-over-year revenue headwinds in 2023 of approximately $20 million from our sale of ON Services and approximately $30 million from what we call negative show rotation, driven by the timing of major non-annual shows. Show rotation will turn positive in 2024, bringing an expected year-over-year increase in revenue of approximately $60 million for GES Exhibitions. At Spiro, I expect client marketing spending will be similar to 2022 levels at roughly 90% of 2019. Additionally, I anticipate growth from new clients won in 2022 that will start their 2023 marketing programs with Spiro. We have seen great success in winning new business from new clients and existing clients and intend to prudently invest in additional resources to service our clients and drive continued growth with expanded capabilities. Thanks, Steve. We expect continued growth in 2023 and are focused on maximizing performance from our existing businesses. As shown on Page 21, we expect Pursuit's adjusted EBITDA for the full 2023 year to be in the range of $85 million to $95 million as compared to $67.9 million in 2022. Revenue is expected to increase between 10% and 15% year-over-year, primarily driven by the lifting of all COVID restrictions at the Canadian border, acceleration of new experiences and ongoing focus on improving the guest experience through our Refresh, Build, Buy growth strategy. For the seasonally slow first quarter, we expect Pursuit's adjusted EBITDA loss to be in the range of $14 million to $11 million as compared to $11.5 million in 2022. Revenue is expected to be in the range of $28 million to $32 million, up from $23.8 million in 2022 with continued improvements in international leisure travel, removal of border restrictions into Canada and all signs pointing to a much stronger visitation in 2023. Pursuit is entering the year with higher staffing levels as compared to the same time last year when the world was just beginning to relax restrictions and facing concerns relating to the Omicron variant. We anticipate that Pursuit's full year adjusted EBITDA margin will expand as our attraction visitation continues to recover. The performance of our newer experiences improved and pandemic error cost pressures ease. Now turning to GES on Page 22. We expect GES' adjusted EBITDA for the 2023 full year to be in the range of $48 million to $58 million as compared to $61 million in 2022. Revenue is expected to decrease about 5% year-over-year, primarily due to headwinds from sale of ARM Services, which contributed about $50 million in revenue in 2022 and negative share rotation revenue of about $30 million. We expect GES' full year adjusted EBITDA margin will be temporarily impacted in 2023 due to the year-over-year decline in revenue and investments to fuel Spiro's growth in '23 and beyond. As Steve mentioned, we anticipate GES Exhibitions same share revenue and Spiro clients market spend to remain at about 90% of 2019 pre-pandemic levels. We're also expecting growth from new client wins at Spiro. For the first quarter, we expect GES' adjusted EBITDA to be in the range of $8 million to $11 million as compared to $2.7 million in 2022.Revenue is expected to be in the range of $195 million to $215 million, reflecting a relatively easy comparison to $153.6 million in the Omicron-impacted first quarter of 2022. The stronger first quarter performance and new wins in Spiro will mostly offset the expected headwinds during the balance of the year. We expect the show rotation headwind to be most pronounced during the third quarter with about $50 million in revenue rotating out. We expect modest positive rotation in each of the first, second and fourth quarters. Now on to cash flow outlook. For the full year, we currently expect an operating cash inflow of $65 million to $75 million, with the first quarter outflow in the range of $5 million to $10 million. We expect full year capital expenditures of $75 million to $85 million, including $15 million to $20 million in the first quarter. This level of CapEx reflects our commitment to Pursuit Refresh, Build, Buy growth strategy with growth CapEx for key projects, including FlyOver Chicago. In connection with our 2023 capital expenditure outlook, I'd also like to provide a quick update on our proposed flyover project in Toronto, Ontario. As we've mentioned previously, the permitting and approval process for this project has experienced significant COVID and other related delays since the original project inception in 2019. The final permits and project approvals remain pending with the city of Toronto. At this time, we expect to incur minimal capital expenditures related to the FlyOver Toronto project in 2023 and we no longer expect to open its attraction in 2024, as we had previously anticipated. We will provide further updates regarding FlyOver Toronto as and when available. Thanks, Ellen. I'm very proud of what we accomplished in 2022 and I'm thrilled about the growth that lies ahead in 2023 and beyond on both sides of the business with our new world-class experiences at Pursuit and a stronger, more profitable GES. As we look ahead to 2024, Pursuit is well-positioned for solid top line growth and margin expansion from a more fulsome recovery of long-haul international travel trade visitation, the continued ramping of our New Experiences and the opening of FlyOver Chicago. For GES, we expect strong tailwinds in 2024 from positive show rotation of approximately $70 million and an anticipated full recovery of show sizes and corporate client marketing budgets. GES is expected to reach its target of greater than 8% adjusted EBITDA margin in 2024. We remain committed to our strategy to create extraordinary experiences and strong returns for our shareholders. For Pursuit, we continue to selectively invest in high-return growth opportunities to advance our proven Refresh, Build, Buy strategy. For GES, we will build on the progress we've made to date to improve the margin profile and resume generating strong cash flow through our lower cost structure and focus on higher-margin clients and services. I want to thank our hard-working and dedicated employees and our shareholders for your continued support in Viad. Steve, just a couple of questions on Pursuit. Maybe I don't know if it's too early, but just your outlook, 2023 from early reservations or early demand for some of the properties would be helpful. Yes, Kartik, demand is positive. We're seeing increasing demand in all channels. What's interesting, everything from web traffic, which is up 20% year-over-year and up 70% from 2019 demand, specifically in Alaska and Montana, Western Canada is all pacing well ahead. So it feels good. We're off to a good start. Steve, you talked a little bit about show rotation and I'm wondering, is this just normal show rotation? Or have you seen something or large or was canceled or changed because of the economic environment or just COVID? Kartik, that's a good question. This is the normal cadence of the non-annual events that we see. So what we laid out for '23 and for '24 is what we expect based on these non-annual events coming back into the calendar for those years. And then just one last one, both on the Pursuit side and on GES. Obviously, in the past, there were some issues with trying to find employees and I think you addressed that a little bit on the call. I'm wondering, one, you kind of -- do you feel like you're fully staffed? And two, maybe what's happening to wage inflation and what you anticipated in 2023 from that? Yes. Thanks, Kartik. In terms of labor on the GES side of the business, we are successfully finding talented people to join the team. We are on the exhibition side, very close to, if not at the staffing level that we need for this level of revenue. And within Spiro, we continue to selectively add people as we're building out the capabilities. So we're able to find the talent, which is -- in 2022, there was a bit of a challenge in that -- in the heart of the pandemic. So I feel like a lot of that is past us and we're finding good quality candidates to join the team. And I'll let David talk a little bit about Pursuit. Yes, it's encouraging. We continue to have strong demand. We're pacing ahead for the hiring of team members. We're able to put some of the incentives that we have put in place during the worst of the pandemic to get folks to work. We're able to put those back on the shelf, which is encouraging. That will help from a margin perspective. The foreign worker programs in both the U.S. and Canada are back in full swing. So that's quite encouraging because both the J1s and then the longer Commonwealth is as having them available really helps on a team level. So quite encouraged by the hiring pacing ahead of where we've been historically and looking to a good season. On the show rotation, you talked about the non-annuals and kind of the third quarter's week 1, 2 and 4 strong. Can you give us a little more granularity as to kind of what big commenting or exhibitions are not going to be in the year and maybe some that are being added? Just some of the bigger ones to give us a little color. Yes. On the show rotation we had IMTS last third quarter. We won't have that this third quarter and International Woodworking we had last third quarter as well. The ones rotating in, I mean, they're fairly small, are rotation in, in Q1 and Q2 and Q4 ranges from $5 million to $10 million.Bryan, just one more thing, sorry. We do have air shows that switch quarters. So we have in '23, the Paris Air Show, and that is in the second quarter. And in '22, we had the Farmborough Air Show, that was in Q3. Yes. Sure. So in 2024, we have IMTS rotating back in again, and we have MINExpo rotating back in as well as Woodworking. MINExpo is only every 4 years or so, so we didn't have that in '22. And then on the Pursuit side, listening to the commentary and kind of seeing what you've been developing over the past couple of years. Is it safe to say that there's no real new attractions currently expected for 2023 or that at least have been announced publicly? Yes, you're quite correct. But what's exciting is that we're, I think, going to be performing at higher levels with the increase in international visitation. And obviously, it's a more normal year. I mean one of the challenges in '22 was that we expected border restrictions to lift early in the first quarter of '22 and they didn't lift until October 1st. And so our visitation from the U.S. was a bit throttled. And we're just excited that this is the first year in 3 years that, Bryan, we're operating with no restrictions. Nobody's going to get -- have to go into quarantine when they arrive, and that's, I think, going to drive visitation throughout the whole summer. Right. I made some notes here. Refined grow enhance kind of seems like the theme at Pursuit this year 2023. Kind of thinking about the percentage of long-haul international travel, I guess, mainly from Asia. What do you think you'll end up seeing in 2023? I think you said maybe two years to come back to seasons to come back. Relative to 2019 levels, where do you think you could shake out for this year? It's a bit tricky to say, but think about it on a global level. So China exports annually and its hay-day with no restrictions about 155 million tourists leave China and go out into the world and experience that. This season is going to be late for tour and travel partners because they really didn't get the news until December. And so what we expect we'll see will be an increase, obviously, in visiting friends and relatives and also FIT travelers leaving China. It's constrained with a couple of other things, which is the aircraft lift is not back to traditional levels. So that's going to, again, have an impact. But we'll definitely see an increase. And what's most exciting is the contracting demand for '24 and for '25 is moving at real pace. So I think we'll see more of a return to normality in the '24 year, but we definitely will get it on for '23. It's just hard to predict what that's going to be given how late the announcement was. Okay. And then last for me and maybe both Steve and Dave, you can both weigh in for each of your segments. Given what we're seeing with macroeconomic uncertainty, rising interest rates, various geopolitical issues around the world. Are you seeing any spots of weakness even if it's just anecdotally in any parts of your business as yet? No. I'll speak to the GES side of the business. And we've been looking heavily into the kind of first quarter. We have visibility into kind of first quarter, maybe early second quarter events that are coming up in client spend. And I currently don't see any signs of pullback in any way at this point. So if anything, the momentum kind of continues from Q4 into Q1. Yes, very similar. I mean, we're not seeing any consumer price resistance as we continue to take rate in a variety of things. We're not seeing any signs of recession. And in fact, we're seeing things continue to accelerate. It was a great job to report historically low unemployment, consumer discretionary spends and high-quality leisure travel experiences is really strong. So we continue to see the opposite, which is more of an acceleration. Certainly, our visitation from the U.S. just looking at pacing bookings and the kind of ski season they're having is terrific.And little things like this is the largest flight schedule in the history of Iceland Air happening in 2023, more destinations, more gateways, 950 departures a week inbound in Iceland for the season, which is all at record levels. So we're actually quite encouraged. First question for me, a couple on the GES side of things. I think Steve made a comment 70% or what range, I think, in terms of shows. I think it's 70% some show or 70% in 2019, some are 140% in 2019, a pretty decent amount of variability there, which may be a little bit surprising. Can you give a little bit more detail on the types of shows that are doing better or worse? And for the shows that are still quite a bit down versus 2019, what needs to happen for those to improve? Yes. It is surprising. It's been this way for the last several quarters where on average, the same show growth versus '19 has been relatively high, kind of in the 90-plus percent or close to 90%, even greater. But the variability has been there in each of the quarters. And each show has its own dynamics, but I can highlight a couple of industries that are slower to recover versus others. And so auto, some of the auto shows are slower to recover. Certain sectors of retail are slower to recover as well. But we're optimistic. And I think I mentioned it during my talking points, but there's a large opportunity as that variability decreases that creates a tailwind for us in the future.As to why those aren't recovering. Some of it is industry-specific and some of it is just the international exhibitors not participating in 2022 and different shows have different level of international participation. I also see fewer small U.S.-based companies participating in 2022. And both of those, I think, will come back. It's a question of when and I believe that will happen later in this year and into 2024. Okay. Great. And then a follow-up question on the show rotation topic. I mean when I think of show rotation, I know that what was traditionally the big 3 shows for you guys, IMTS, MINExpo, ConExpo as well and I noticed that you guys are not participating in ConExpo. Can you address that a little bit more? I'm assuming that was a strategic decision, maybe lower profitability there. But maybe just talk about that decision, if there's anything else going on in terms of competitive dynamics in the industry between you and other major competitor out there? Absolutely. When we had a long relationship with ADM, which is the producer of ConExpo and had a long relationship with them. When we looked at the pricing that we would need in 2023, for us, financially, it didn't make sense from a margin perspective. Some of the changes that we've made in the organization allows us to be a little bit more nimble and be more selective on what we're picking from a profitability perspective. And so we did propose pricing that got us to that level of profitability and the organizer went in a different direction. Okay. Great. I appreciate that detail. Switch gears to the Pursuit side of things. I think you had made a comment attraction visitation will be 95% of 2019 levels on a same-store basis. I'm just kind of interested, I mean, how conservative could that be? I know you're missing the travel trade long-haul from Asia, but the commentary seems very positive. Broadly speaking, the demand for leisure travel seems quite strong. The restrictions in terms of getting to Canada that have been removed. So I guess I'm just a little bit surprised that you're still only expecting 95% recovery in terms of the attraction visitations. Yes, I think we're being cautious and it's important that we do be cautious. We've been surprised with things before. I think what we have is a number that's very achievable and we're focused on it. There's still a lot of parts of recovery that are not certain. But definitely, while we feel momentum, we're cautiously optimistic and encouraged. And I sense your enthusiasm, I applaud your enthusiasm, but my jobs could be steady on the wheel. So that's what we're going to do. Okay. I appreciate that. And I think the last question for me, Steve, the sale of ON Services, it was small. But can you just talk a little bit more about the rationale behind that? And then I'm not sure on the M&A side of things, such as anything else that might make sense from either a sale perspective or perhaps what you're looking at from an acquisition side of things as well? Yes. That's a great question, Tyler. So you've seen some of the strategic decisions we've made within the GES portfolio. So we specifically have pulled out and organized the GES Exhibition team and then also our marketing agency team Spiro. And in doing so we really had a laser focus on simplifying the overall cost structure around exhibition. And as we look forward, the AV business for us in this strategy was really -- it didn't fit in well with us. It was a nonstrategic asset. And so we took the opportunity to sell the asset and feel good about that.And so when we look forward, a lot of our focus will be from a capital allocation perspective, as seen in the past, we've been investing on the Pursuit side of the business while we continue to improve the profitability on the GES side, and we'll continue to do that. I had just a quick question for Ellen. You mentioned that there were some wage subsidies, I think, related to the COVID programs that you got in the fourth quarter '21 that you didn't repeat in '22. Could you size how much that was in the fourth quarter '21? All right. Thank you so much. And thanks, everybody, for joining us today. We look forward to giving you an update on the year in a month or in a quarter. So take care, and we'll talk soon.

EarningCall_159

Welcome to News Corp's Second Quarter Fiscal 2023 Earnings Conference Call. Today's conference is being recorded. Media will be allowed on a listen-only basis. At this time, I would like to turn the conference over to Michael Florin, Senior Vice President and Head of Investor Relations. Please go ahead. Thank you very much, operator. Hello, everyone, and welcome to News Corp's fiscal second quarter 2023 earnings call. We issued our earnings press release about 30 minutes ago, and it's now posted on our website at newscorp.com. On the call today are Robert Thomson, Chief Executive; and Susan Panuccio, Chief Financial Officer. We will open with some prepared remarks, and then we'll be happy to take questions from the investment community. This call may include certain forward-looking information with respect to News Corp's business and strategy. Actual results could differ materially from what is said. News Corp's 10-Q filings identify risks and uncertainties that could cause actual results to differ and contain cautionary statements regarding forward-looking information. Additionally, this call will include certain non-GAAP financial measurements such as total segment EBITDA, adjusted segment EBITDA and adjusted EPS. The definitions and GAAP to non-GAAP reconciliations of such measures can be found in the earnings release for the applicable periods posted on our website. Thank you, Mike. The second quarter produced challenges for some of our businesses and highlighted the progress made in other segments that had been challenged. Obviously, a surge in interest rates and persistent inflation had an impact on all of our businesses, but in particular, Digital Real Estate and Book Publishing, which remains a majority of physical business and continues to be subject to logistical exigencies. But we believe these challenges are more ephemeral than eternal. And just as our company passed the stress test of the pandemic with record preference. The reform is now underway at our businesses should create a solid platform for future profitability. Crucially, we will be reducing headcount across the company by 5%. That is a necessary response given these macro conditions. There are other broader trends that will inevitably be auspicious such as our evolving partnerships with major tech platforms and the incipient changes to the digital advertising market, which should enable us to improve yields for our valuable inventory and have more oversight of permission data. At the same time, we are absolutely focused on reducing costs across our businesses and making price adjustments where prudent. And we are continuing to work on the integration of our recent acquisitions, OPIS and CMA, which are already enhancing revenue and profits at Dow Jones. As for our discussions over the potential sale of Move, we will provide an update at the appropriate moment. Obviously, any potential deal would be designed to maximize value for our shareholders in the short and long term. Looking now at the second quarter of fiscal year 2023. We generated over $2.5 billion in revenues, representing a decline of 7% year-over-year, though most of that was due to foreign currency. Adjusted revenues were down only 3%. Profitability was $409 million compared to $586 million in the prior year, reflecting the challenges of interest rates and inflation noted earlier, and the impact of fickle ForEx movements, which have shown signs of abating in recent weeks. Even in the midst of the obvious global challenges I've described, Dow Jones had a solid quarter, and the professional information business displayed particular promise with revenues surging 45% year-over-year. The result highlights the value of our opportunistic acquisition of OPIS and CMA, where we have recently launched products, including carbon credit indices and are working on more sophisticated analytics for our growing customer base. Risk and Compliance again reported strong revenue growth, increasing 13% despite capricious currency trends, with the demand for New York customer tools expanding as governments globally continue to tighten regulations and wheeled sanctions. The imperative for an authoritative audit trial has expanded far beyond financial institutions and the credibility that Dow Jones brings is in itself an important factor for many companies. Is there anyone on this call who does not want to minimize risk and maximize compliance? Dow Jones has begun to roll out a new user interface for the Aladdin's Cave of content that is Factiva, which is an essential tool for serious businesses. The truth is that the interface was in need of simplifying and the Dow Jones team have addressed that issue. The easier Factiva is to use, the more it will be used. Overall, at Dow Jones, digital revenues now comprise 76% of total revenues, a 4 percentage point rise over the past year. Some of that expansion is due to continuing strength in digital subscriptions. Digital-only subscriptions increased 10%, while total Dow Jones consumer subscriptions rose 5%. In fact, just in recent weeks, total Dow Jones subscriptions sold past the 5 million mark for the first time. Almar Latour and the team are increasing the emphasis on upselling subscriptions with the bundling of Market Watch, the WSJ, IBD and Barron's. The basic strategy is to provide an ever more premium service for our readers as we leverage valuable audiences across platforms. I am particularly proud to highlight the continuing revival of Foxtel's fortune under the Sage leadership of Patrick and Chevron and the team, we have increased profitability and thus optionality. Reported segment revenues were down 7%, while segment EBITDA rose a healthy 5%. Even more impressively, adjusted revenues, which excludes the impact of ForEx volatility, rose 3%, while adjusted segment EBITDA rose a handsome 16%. Streaming continues to be a core strength of Foxtel, as we have added well over 0.5 million paying OTT subscribers in the past year. BINGE reached nearly 1.4 million paying subscribers in the quarter and we'll be launching an advertising tier later this fiscal year as we seek to maximize Foxtel's revenue potential. Total paying subscriptions at Foxtel were up 10% year-over-year, and we also saw the benefits of modest price increases at Kayo and BINGE. Our sports programming portfolio has been enhanced with the renewal of Australian cricket rights to 2031. We are now on the cusp of the peak selling season for Kayo as the Australian Football and Rugby League seasons will start imminently, and we solidified our entertainment offerings with an expanded multiyear content deal with NBCU. Overall, Foxtel's continuing success and positive trajectory have certainly increased our optionality for that business. HarperCollins experienced another difficult quarter, reflecting sluggish spending on books after the pandemic inspired surge, difficult front-list comparisons as well as the continuing impact of Amazon's logistics issues. Under the prevailing circumstances, it is absolutely necessary to confront the cost base as we seek to bolster long-term profitability in the post-pandemic marketplace. Some of our key titles this quarter include Fox News, host Harris Faulkner’s Faith Still Moves Mountains, and Joanna Gaines' The Stories We Tell. While best-selling orders, Colleen Hoover and Tarryn Fisher's work Never Never will be released later this month. The News Media segment showed signs of real resilience in the midst of a volatile advertising market and ForEx headwinds. The standout masthead was the sun.com in the U.S., which reported 127% year-over-year increase in quarterly page views. Meanwhile, the Times and Sunday Times reached nearly 490,000 digital subscriptions in the quarter. And at News Corp Australia, total digital subs exceeded 1 million, representing an 11% rise year-over-year. Wireless had a solid quarter in connected listening, which was assisted by interest in the World Cup on talkSPORT, while TalkTV revitalized its lineup, and the New York Post remains on target for another profitable year despite the air market. As for Digital Real Estate Services, the patent complexities of the current housing market in both the U.S. and Australia are well known and have had an effect on REA and Move. The property market inevitably has interest rate-related cycles. But with rates nearing a peak in both the U.S. and Australia, we believe the next phase of the cycle is not far away. We have this week launched a new campaign to use our media inventory to drive traffic at realtor.com and the positive effect should be seen in coming months. REA continued to maintain its number one market share in Australia this quarter with over 3.3 times the audience of its nearest competitor. And our business in India, now the market leader in audience is showing much potential. While leads were down at realtor.com in the quarter, the business saw a year-over-year improvement in revenue per lead as the team is focused on pricing, sell-through and close rights. We now are increasing our emphasis on the monetization of sell-side listing as inventory time on the market has increased significantly in recent months, and we will be able to provide realtors and vendors with improved service. In closing, while we expect the macro trends to have a continuing effect on our businesses and are committed to a 5% reduction in our workforce, we are confident that the combination of prudent cost management, sound capital stewardship, commitment to digital expansion and simplification should provide a firm foundation for future growth. And we will remain acutely focused on the creation of value for our shareholders as the possible sale of Move eloquently testifies. We also remain firmly committed to our $1 billion share buyback and dividend program. Thanks, Robert. Before I discuss the quarterly results, I want to expand on Robert's opening comments. As we noted in our recent SEC filing, we have been engaged in discussions with CoStar about a potential sale of move. Any potential transaction would need to not only maximize shareholder value, but also strengthen realtor.com's competitive position. We do not plan on making additional comments on this call regarding the potential transaction, and we'll update the market when appropriate. Turning to our fiscal 2023 2nd quarter results. The macro environment weighed heavily on the financial results and conditions worsened as the quarter progressed, most notably in December. Second quarter total revenues were over $2.5 billion, down 7% year-over-year, which included a $171 million or 6% negative impact from foreign currency headwinds. We -- excluding the impact of foreign currency fluctuations, acquisitions and divestitures, second quarter adjusted revenues fell 3% compared to the prior year. The revenue decline was primarily driven by the Book Publishing and Digital Real Estate Services segment. On a constant currency basis, we saw continued growth in circulation and subscription revenues, which was partially offset by a modest decline in advertising revenues. Total segment EBITDA was $409 million, 30% lower compared to the prior year's record profits. The results included $6 million of onetime costs incurred by the special committee and the company regarding the proposal from the Murdoch Family Trust, which has now been withdrawn and the special committee has been dissolved. Adjusted total segment EBITDA declined 28% versus the prior year period. For the quarter, we reported earnings per share of $0.12 compared to $0.40 in the prior year due to lower total segment EBITDA and higher losses from equity affiliates. Adjusted earnings per share were $0.14 in the quarter compared to $0.44 in the prior year. Moving on to the results for the individual reporting segments, starting with Digital Real Estate Services. Segment revenues were $386 million, down 15% compared to the prior year, impacted by the ongoing macroeconomic pressures on both the Australian and U.S. housing markets. The results include a negative impact of $26 million or 5% from foreign currency fluctuations. On an adjusted basis, segment revenues decreased 10%. Segment EBITDA declined 28% to $128 million, impacted by lower revenues and a negative impact related to currency headwinds, partially offset by lower broker commissions REA adjusted segment EBITDA declined 22%. REA revenues were $240 million, down 16% on a reported basis, including a 9% negative impact from foreign exchange. Revenues were impacted by the weakness in financial services due to fewer settlements amid rising interest rates and a decline in residential revenues driven by lower new buy listings. In the quarter, Australia national residential buy listings were down 21% with Sydney and Melbourne down 34% and 31%, respectively. Those declines were partially offset by price increases in the residential and commercial businesses, higher contribution from Premier Plus and favorable depth penetration as well as continued momentum at REA India, which is scaling in both traffic and revenues. Please refer to REA's earnings release and their conference call following this call for more details. At Move, revenues were $146 million, down 14% compared to the prior year, with real estate revenues down 17% driven by lower lead and transaction volumes, reflective of the broader housing market challenges, unique lead volumes fell 37%, while Realtor's average monthly unique users were $66 million in the second quarter based on internal metrics. Turning to the Subscription Video Services segment. Revenues for the quarter were $462 million, down 7% compared to the prior year on a reported basis due to foreign currency headwinds. On a constant currency basis, revenues rose 3% versus the prior year, the fourth consecutive quarter of growth in constant currency, underscoring the improved stability of the business. Streaming revenues accounted for 26% of circulation and subscription revenues compared to 19% in the prior year and again, more than offset broadcast revenue declines, benefiting from both volume growth and higher pricing at Kayo and BINGE, we also benefited this quarter from growth in commercial revenues as the prior year results were impacted by the pandemic-related lockdown. Total closing paid subscribers across the Foxtel Group reached over $4.3 million at quarter end, up 10% year-over-year. Total paid streaming subscribers were approximately $2.7 million, increasing 25% versus the prior year and represented 62% of Foxtel's total paid subscriber base. Kayo paying subscribers reached over $1.1 million, up 11% year-over-year, but declined sequentially from the first quarter as it exhibited typical seasonal patterns with the end of the AFL and NRL seasons in September. Given its enhanced and expanded content offerings, Foxtel has rolled out a price rise to its Kayo customers effective this month on its basic to stream tier. BINGE paying subscribers grew a robust 48% year-over-year to almost 1.4 million subscribers, benefiting from a strong release slate, which included the second season of white Lotus and carryover demand from House of the Dragon. As Robert mentioned, we are looking forward to the introduction of advertising within BINGE later this fiscal year and have begun selling launch packages. Foxtel ended the quarter with 1.4 million residential broadcast subscribers, down 10% year-over-year. Broadcast churn improved sequentially and year-over-year to 12.9% despite the migration of cable subscribers to streaming or satellite. At quarter end, less than 80,000 subscribers remained on cable as Foxtel continues to migrate subscribers from cable by fiscal year-end. Broadcast ARPU rose 2% to AUD 83. Segment EBITDA in the quarter of $90 million was 5% higher versus the prior year, which reflects an 11% negative impact from foreign exchange. Adjusted segment EBITDA increased 16% despite higher sports and entertainment costs. Moving on to Dow Jones. Dow Jones posted a strong top line performance in the second quarter with revenues of $563 million, up 11% compared to the prior year. Digital revenues accounted for 76% of total revenues this quarter, up 4 percentage points from last year. On an adjusted basis, revenues rose 1%, impacted by a weaker advertising marketplace compared to the prior year. Circulation revenues grew 3%, driven by strong year-over-year volume gains, including bundled offerings with total Dow Jones digital-only subscriptions up approximately 10% to over $4.1 million. We are particularly pleased with the performance of our professional information business, which saw revenue growth accelerate from the prior quarter to 45%. PIP revenues accounted for 33% of segment revenues. The integration of OPIS and CMA are progressing in line with our expectations as the businesses benefit from the strong demand across numerous industries, including metals, carbon plastics, sustainability, biofuels and renewables, while yields continue to rise and retention remains strong. Risk and Compliance revenue growth accelerated from the prior quarter, up 13% despite a 7 percentage point negative impact from foreign currency. We saw improved growth in all regions, underpinned by a healthy new business pipeline most notably in EMEA, led by demand for screening and monitoring and financial crime search products. Retention remains strong at above 90%. Advertising revenues declined 7% to $131 million, with digital advertising revenues down 3% in the quarter and print down 13%, which was mostly due to weakness in December, with October and November reasonably stable versus the prior year. Digital advertising accounted for 59% of total advertising revenues, which improved 3 percentage points from last year. The technology and financial categories, which are typically our 2 largest advertising categories were both impacted by the macro conditions. We saw digital advertising growth at the wallstreetjournal.com, underscoring its premium audience. However, this was more than offset by the declines at MarketWatch, which face more headwinds as its audience and advertising demand tend to be more stock market-sensitive. Dow Jones segment EBITDA for the quarter declined 3% to $139 million, reflecting a higher spending rate compared to both the prior year and first quarter, driven by costs related to the OPIS and CMA acquisitions, higher compensation costs and phasing of marketing expenses. Adjusted segment EBITDA for the quarter was down 16%. We expect cost growth to moderate in the second half, and I will provide more detail on this later in my commentary about the outlook for the upcoming quarter. At Book Publishing, while we saw some impacts from the logistic constraints at Amazon, the results were mostly hampered by significant softness in consumer demand across the industry, notably in North America. On the cost side, lower cost due to volume declines were partially offset by ongoing supply chain inventory and inflationary pressures, further contracting margins. For the quarter, revenues declined 14% to $531 million and segment EBITDA declined 52% to $51 million. The backlist represented 57% of revenues, up slightly from last year, partly driven by weaker frontlist performance with the mix being more weighted towards physical copies rather than digital, which had an adverse impact on margins. Digital sales declined 7% this quarter and accounted for 19% of consumer sales. On an adjusted basis, revenues fell 11%, and segment EBITDA declined 51%. To mitigate the recent challenges, HarperCollins has already implemented price increases and has been actively reviewing its cost structure, including the recently announced 5% company-wide headcount reduction. Turning to News Media. Revenues were $579 million, down 9%, which included a $65 million or 10% negative impact on revenues from foreign currency. Adjusted revenues rose 1%. Circulation and subscription revenues declined 7%, but were up 4% in constant currency. Growth on a constant currency basis was driven by cover price increases in the U.K. and Australia and double-digit subscriber growth across News Australia and The Times and The Sunday Times. We saw advertising conditions worsened from the prior quarter, albeit with variance across our markets. Advertising revenues were down 13%, but down 3% in constant currency. Advertising at News U.K. was down modestly in constant currency as lower print advertising revenues were partially offset by strong growth in digital advertising at -- the Sun, which has seen very strong momentum in both page views and yields from its U.S. site. Advertising trends were notably weaker in Australia and at the New York Post. During the quarter, we saw that December was the weakest month for both the U.K. and the New York Post, while in Australia, November was the most challenging with December showing modest improvements month-over-month. Segment EBITDA of $59 million declined 47%, which was driven by approximately $22 million of higher costs related to the Talk TV initiative in the U.K. and other digital investments, notably in Australia as well as nearly $21 million negative impact from higher newsprint pricing. New York Post remained a positive contributor to segment EBITDA. Adjusted segment EBITDA fell 43%. Free cash flow for the 6 months ending December 31 was lower than the prior year due to lower total segment EBITDA as well as the timing of working capital payments, which included the payment for sports rights in the second quarter. We remain focused on driving strong and positive free cash flow generation for the year. Turning to the outlook. We continue to expect a higher cost due to supply chain and inflationary pressures, advertising conditions remain challenging and visibility is limited. We expect ongoing foreign exchange headwinds, albeit at a more modest impact given recent spot rates. We remain committed to reducing costs where we can, driven by headcount reductions across our business units, prioritized marketing spending and lower discretionary costs, while balancing investment spend. Looking at each of our segments. Our digital real estate services, Australian residential new buy listings for January declined 9%. Please refer to REA for a more specific outlook commentary. At Move, we expect lead volumes to remain challenged in the near term, due to macro conditions, albeit moderating mortgage rates have led to early signs of improving trends in the housing market. In Subscription Video Services, we remain pleased with the performance of the streaming products and the ongoing focus on broadcast ARPU and churn as we continue to migrate customers off cable. We are very encouraged by the year-to-date performance and continue to expect the Foxtel Group's profitability in local currency for the full year to be relatively stable. Profitability will be skewed to the fourth quarter as we expect third quarter cost to be higher in local currency compared to the prior year given the contractual escalators and expanded content from the AFL and NRL. At Dow Jones, we remain focused on the integration of OPIS and CMA. January advertising trends were similar to December with revenues down versus the prior year, and we expect trends to remain challenged, especially given the ongoing pressures within the technology category, noting that visibility is limited as usual. As I mentioned earlier, we expect the rate of investment spending growth in the second half to be more modest than the first half rate, which should aid profitability. In Book Publishing, we are optimistic about our new release, which should help with the performance in the second half, although near-term industry trading conditions have remained challenged. At News Media, similar to the second quarter, we expect ongoing inflationary cost pressures, especially on newsprint prices, which will be balanced by targeted cost initiatives. We will continue to see incremental costs in relation to product investments, albeit at a lower rate than the second quarter. And finally, in relation to the potential sale of Move and the special committee's work on the now withdrawn proposal, we expect to see some additional onetime transaction costs in the third quarter. Just 2 quick ones. One, just that $0.05 head count reduction you're talking about, I mean we saw the 5% reduction for books -- do we think that's broadly consistent across the News Corp group? Or could it be more skewed to Dow Jones or NIS or some of the other segments? And then try luck, obviously seen the move and I take your comments, Susan, or how do I think about the importance of REA in the broader portfolio, if we assume that the Move -- was complete. And so some of the synergies of owning REA would diminish without the Move asset in the portfolio. So just interested, there's any comments you can make that. Okay. First of all, the 5% reduction will be across all businesses, and it will be conducted in coming months with a view to concluding this calendar year. We expect savings of the order of at least $130 million annualized. As for REA, what I can say is that REA is a core part of our portfolio. It's a different company to Move the -- and you can do the math for what REA is worth to us in terms of market cap, which is around AUD 16.6 billion and our shares around 61.4%. Obviously, we all loan -- gratitude for his digital property. But we're very pleased with the way the business is progressing. You heard a little from Susan about the success that we're currently having in India where traffic was up 37% to 38 million uniques. And we've transferred the oversight of the India business to the REA team whether you expertise evidence and candidly, the time zones more sympathetic. So not only do we have the most successful property site in Australia. We have the largest digital property side in India. So tell me what that's worth now and what that will be worth in a decade from now. . With Book Publishing, wondering if you could quantify the Amazon impact in the quarter or maybe relative to last quarter. And then you noted a slowing consumer demand generally -- is that a function of post-pandemic behavior of the economy or just the titles that are in the market? And then Susan, any update on when you might expect some easing on the inflationary pressures there? Well, first of all, it's difficult to specifically identify or quantify the Amazon effect, I wasn't to say that it's real. And you can see from the fact that there was a 14% decline in revenues and will segment EBITDA fell 52%, that the impact of inflation generally was profound. But let's be very clear, this is not the new normal. The relatively large EBITDA fall shows inflation, which over the past year, has risen significantly had an impact. And it was because of the mix of titles, you've probably heard that physical was around 81% of the business in the most recent quarter. In the past, years, digital has been as much as 24% or 25%. So -- and the physical is obviously more impacted by inflationary pressures given paper, printing and distribution. David, just in relation to Amazon, just to add a couple of points on that. One, we did see a slightly lower impact in Q2 than what we did in Q1. And actually, in January, we have seen Amazon sort of patterns return to relatively normal levels, albeit that is predicated on macro conditions going forward. Just in relation to inflation, unfortunately, I think we expect those inflationary impacts to continue through the balance of this fiscal year, which is one of the reasons that we've implemented the headcount reductions that we've talked about. Two questions if I could real quick. If you can hear me, in your equity investment line, you had like a $29 million loss there. Can you explain that, if you would, please, is that -- is there sort of recurring here for next few quarters? And separate from that, I want to ask you, CMA and the OPIS acquisitions, what was the organic revenue growth there if you had owned it in both periods, please, in the quarter? Craig, I'll just -- I'll take these. So the first question in relation to the equity losses, we've actually got a small investment in a wagering platform down in Australia, the sub USD 50 million investment, and the quarter reflects some start-up losses in relation to that venture. I think importantly, we don't expect that equity loss reflected in Q2 to the run rate going forward? And then just in relation to OPIS and CMA, we don't break out the run rate for that going forward. But you can see from the adjusted revenues was up 1%, and you can see the impact of what the reported numbers were. Susan. Just one very quick clarification around the 5% head count reduction and I'd appreciate that must be a difficult decision. Presumably, that only applies to the wholly owned assets and not REA. And then just secondly, I appreciate you're not talking about the sale move specifically. But assuming it was to go ahead, how do you think about the use of the proceeds, given they could be reasonably material. Are you thinking about reinvestment? Or are you thinking about further returns to shareholders? And sure, obviously, REA is a separate listed company, but I think I can assure you that they are very much focused on cost reduction in the present climate and you'll be able to hear more from the REA team a little later. Look, I can only speak generally about capital allocation. We're constantly reviewing our capital allocation policies. As I said earlier, we're committed to our $1 billion buyback to our dividend program. And obviously, we're going to consider further measures given the potential proceeds of the Move deal and the savings inherent in the cost-cutting program we've announced today. But we'll also be opportunistic on investment as OPIS and CMA providential proved and we'll seek to share those profits that providence with shareholders. Yes. I've got two, please. Robert, we're seeing the U.S. streaming companies sort of get religion and now looking for profits as opposed to just growth. How does that impact Foxtel? I know Foxtel had gotten a lot of its content from HBO and some of the other U.S. companies. So does it now appear that, that content will stay on Foxtel as opposed to those companies that are starting their own streaming areas? And secondly, you talked about 1 of your policies being simplification. Obviously, selling move would help for simplification, but are there any other simplification moves we're seeing? Well, first of all, I think we've spoken on past calls about the prospect of Imperial overstretch among some of the U.S. entertainment companies. I think that prognostication is indeed coming to pass. And it also shows you the value of the Foxtel platform. It's of itself clearly a success story, not only for our company or for Australia, but globally. They've got the streaming mix right they've secured the sports rights long term truly matter to viewers and not only one sport in one region, but across sports and regions. And looking here from New York Foxtel genuinely being transformed by much toil and sustained sagacity and it has evolved from what you might call euphemistically, a complicated situation to a genuine opportunity, and we will be opportunistic with that opportunity. As for simplification, look, simplification and transparency, obviously important, as you can see by how the company is involved in recent years. We've broken out the Data Jones numbers, which shed some light, not only on its potential and potency, but on the situation of and revival of News Media, as you know, the New York Post was profitable last year and will be likely to be profitable again this year, and that profitability should increase over time. And -- you know that in that sector, we've sold News America Marketing, which became more peripheral over time given the changes in that sector. The peripheral is we're not the integral. But simplification does not mean reductio ad observers. And it does mean focusing on core growth engines which is why we've invested in the professional information business at Dow Jones and the fruits of that investment already obvious, even in difficult trading conditions overall. Robert, you mentioned making price adjustments were necessary. Where do you see the priority divisions for such adjustments from this point onwards? Maybe I can take that, Brian. I mean, look, I think we've all -- we've got opportunities in each of our segments. We take cover price increases as it pertains to the mastheads across news media, the journal, we're constantly having we get our yields on advertising to see what we can do to maximize those. As I've mentioned in my commentary, we've just recently announced is at Kayo that goes to the strength of the product down there. We had a price rise on BINGE not so long ago. And we've also been having a look at price rises across. So actually, we have a lot of pricing power and we think about our different segments, and we really just assess the market conditions as we work our way through what's appropriate. I just wanted to ask on the interest in the advertising per and being so far. Like I know Netflix had some issues launching in Australia. We've done two high demand, but not enough audience. So I just wanted to see your thoughts on any strategies around this as well. Look, I think we're just doing a soft launch in relation to the ad tier down in Foxtel. It hasn't yet launched. So we haven't got any learnings from that, and we just expect a modest uptick in the current financial year as a consequence of that launching later in the fiscal year. So we'll have more learnings from that once we've got it out in the marketplace. I just wanted to ask quickly, in the release, it indicates some in relation to Realtor or Move that as part of the transaction is to create shareholder value and strengthen Realtor’s competitive position. So I appreciate not talking about the transaction as such. But can you give us an idea as to what strengthened competitive position looks like, please? Look, sorry, Darren, to be so circumspect, but we really can't say any more about the discussion so you'll have to stay tuned. You can presume that we are very much focused on shareholder value and we would have an ongoing role in value creation. Those are imperatives and always been the imperative of News Corporation. I have to say in passing, and we have much respect to CoStar as a company, its leadership, what they've created, what they could trade what they could do for competition in a very competitive digital real estate market here and frankly, how we could partner with. And look, I think I'd also add that it is important for us if and when we complete any sale, what actually goes to an owner where we believe we'll continue to invest and grow that business going forward. I think that's important for any assets that we look to sell. . Great. Well, thank you, Leyla and thank you all for participating. We look forward to talking to you soon. Have a wonderful day to talk to you soon. Bye.

EarningCall_160

Thank you, operator. Good afternoon or good morning, everyone. I'm delighted to welcome you to our full year results call 2022. As you've just heard, I'm David Loew, Chief Executive of Ipsen, and it's a real pleasure to be here today to run through our performance in 2022 and our guidance for 2023. Please note that our presentation is available on ipsen.com. Please turn to Slide 2. This is our safe harbor statement, which outlines the routine risks and uncertainties contained within this presentation. Also any commentary on growth you'll hear today will be based on constant exchange rates, unless stated otherwise. Please turn to Slide 3. I'm joined today by our CFO, Aymeric Le Chatelier as well as Howard Mayer, Head of Research and Development. Howard will be with us for the question-and-answer session later. Please turn to Slide 4. Here is the agenda for today's call. I will start our presentation with an overview of the business, after which Aymeric will take you through our financial performance in the year as well as our 2023 guidance. After concluding our presentation, we'll be happy to take your questions. Please turn to Slide 6. We are consistently growing our business. In 2022, we produced total sales growth of 8.5% at constant exchange rates with a core operating margin of around 37%. On the pipeline, there were compelling data presented last month for the Onivyde regimen, which could lead to a significant impact on the lives of patients with pancreatic cancer. On palovarotene in FOP, we received a complete response letter from the FDA in December as well as a negative opinion from the CHMP last month. We remain with the conviction that the data are supporting the benefits of palovarotene as a potential treatment for people living with FOP and, therefore, will ask for a reexamination in the European Union and submit the additional data requested by the FDA. I was delighted by the progress we made in our external innovation strategy, acquiring Edison in the summer and as we anticipate by the end of next month, all derail. We are replenishing the pipeline at pace, adding 20 new assets in the last 2 years alone. Lastly, we are guiding to further top line growth this year of greater than 4%, with a core operating margin of around 30%. Please turn to Slide 7. Our growth platforms are continuing to outweigh the gradual decline of Somatuline with each of esports, Decapeptyl, Cabometyx and Onivyde delivering double-digit performance in the year. As we begin to relaunch TEZERIC in the United States, we expect this will drive an increasingly meaningful contribution to our growth as well Bellway. Please turn to Slide 8. Our growth platforms grew by 21% in the year led by this board. Strong performances across both aesthetics and therapeutics, drove disparate sales growth of 29%. To meet consistently growing demand, we increased capacity in our factory in the United Kingdom in the year, helping to deliver sales growth in the fourth quarter of 40%. The 12% growth in the competitive sales in the year was mainly driven by continued strong underlying growth despite the impact of the pandemic in China. Cabometyx up by 24% and was supported by the growing contribution from the first-line renal cell carcinoma combination with nivolumab, including in France, Germany at the recent launch in Italy. I'm pleased with the progress we are making. The momentum in second-line monotherapy also continued as we launched and gained reimbursement in more markets with the region and strongest growth for Cabometyx being the rest of the world where sales were up by 79%. Finally, the 14% increase in Onivyde sales, which is currently approved only in the post-gemcitabine setting reflected solid growth in the United States, while there was a good performance from our ex-U.S. partner. Please turn to Slide 9. Somatuline sales declined by around 6% in the year, accelerating to a 13% decline in the fourth quarter, reflecting an increased impact from competitor activities in the U.S. and in Europe. In North America, sales of Somatuline declined by 7.5% in the year and around 18% in Q4. Pricing was impacted by the level of commercial rebates and we experienced continued unfavorable movements in channel mix driven by the increased effect of 340B. We were also impacted by lower wholesaler inventories this year, notably impacting the year-on-year performance in Q4. In Europe, the volume and pricing impact from generic competition intensified in the second half of the year. This was most keenly felt in Germany, France and Spain, and we expect this trend in Europe to continue in 2023. The Somatuline performance in the rest of the world, however, was excellent with strong volumes and sales growth in a number of markets, including Japan and Brazil. We will continue to see growth in the rest of the world in 2023 for Somatuline, albeit at a lower level. Please turn to Slide 10. When I first laid out our strategy, I said that building our pipeline was central to our future growth. So I'm delighted with our external innovation process or progress across the 3 therapy areas and the different stages of development. Most recently, the acquisition of Epizyme, not only broad teceRIC, but also an oral SETD2 inhibitor and the number of preclinical assets. And while a number of deals were indeed designed to replenish our early-stage pipeline, I'd now like to turn to our most recent deal designed to deliver a number of further additions to the pipeline. Please turn to Slide 11. The expansion in rare disease through the acquisition of Albireo is perfectly aligned to our external innovation strategy. The focus of this deal was on the potential of Bylvay, possibly best-in-class rare liver disease medicine with global rights, that's already on the market for progressive familiar intrahepatic cholestasis in the United States and in Europe. There were multiple attractive opportunities presented by this deal. We have the possibility of adding 2 further indications to the currently approved indication for Bylvay with algal syndrome, which was filed end of last year and biliary atresia. Furthermore, the acquisition also comes with an earlier stage pipeline in adult cholestatic liver diseases. Bylvay and the clinical and preclinical novel bile acid transport inhibitors are clearly an excellent potential strategic fit in rare liver disease with elafibranor. And financially, we anticipate sales of around EUR 800 million and an accretive impact to core operating income in 2 years tax. Please turn to Slide 12. Turning to the major elements of our pipeline, this chart continues to build nicely, thanks to the progress of our external innovation strategy. The next time we show this chart, we anticipate reflecting the Albireo acquisition. We have developments in Phase II to highlights. Firstly, we recently initiated the ONWARD trial for elafibranor in primary sclerosing cholangitis. In neuroscience, we have now focused our longer-acting neurotoxin development on one candidate, IPN10200. In aesthetics, this has now progressed to Phase II development with the LANTIK trial. Also in neuroscience, we do note that the primary endpoint was not met in the Phase IIb trial of mestopitam in levodopa-induced dyskinesia within Parkinson's disease. We were delighted that the Onivyde regimen in the first-line PDAC setting met its primary endpoint, and we plan to file data with the FDA in the first half of 2023. We have a number of milestones for the pipeline in the next few months, which I'll address on the next slide. So please turn to Slide 13. Firstly, in rare disease, we await the unblinding of the Elite Phase III trial for elafibranor in primary biliary cholangitis. This is likely to come around halfway through the year. As mentioned, the complete response letter issued by the FDA in December in respect of palovarotene was related to the regulatory agency's previous request for additional information on clinical trial data around the time the advisory committee was. It was not a request for additional efficacy or safety data beyond existing studies, and we anticipate responding to the request in quarter 1 with an expected 6-month FDA review cycle. Last month, we received a negative opinion from the CHMP for palovarotene, so we will request a reexamination of the opinion based on scientific data available from the existing palovarotene clinical trial program. We do look forward to filing with the FDA the data from the Phase III NAPOLI-3 trial for the Onivyde regimen in first-line pancreatic ductal donor carcinoma, while we have progression-free survival data from the Phase III CONTACT-02 trial of caboatezo in second-line metastatic castration-resistant prostate cancer. It's worth noting that for Ipsen's territories, approval and reimbursement may well require mature overall survival data. Finally, in the second half of the year, we anticipate a regulatory decision in the U.S. and Europe for Bylvay in Alagille syndrome. Please turn to Slide 14. I do want to draw your attention to the opportunity for Onivyde as mentioned. We have the United States rights for Onivyde, which is currently approved in the post-gemcitabine setting in pancreatic ductal adenocarcinoma, and we were delighted by the results from the Phase III NAPOLI-3 trial that demonstrated a statistically significant and clinically meaningful improvement in overall survival and a significant improvement in progression-free survival versus gemcitabine-abraxane in the first-line indication. I want to stress the important point that NaliriFox is a novel regimen based on the liposomal formulation and dose of irinotecan and the dose of oxaliplatin used. We believe that in addition to the efficacy demonstrated against the standard of care treatment with gem-abraxane, this regimen has a manageable safety profile that, if approved, could allow MaliriFox to be used more broadly in patients with untreated metastatic pancreatic cancer. We will look to file with the FDA in due course. And should we be granted approval, this would present a significant opportunity for Ipsen, especially given the substantial increases in treatment duration and the number of treated patients versus the current setting. As with the Epizyme acquisition, the Onivyde opportunity will leverage further our in-market U.S. presence and will build on our sustained commitment to oncology. Please turn to Slide 15. I want to turn to generation Ipsen, our identity that centers on our ESG strategy. I was very pleased with the progress we made on the ever pillar in the year. Within our focus on environment, our trajectory to reduce greenhouse gas emissions was officially certified by the science-based target initiative, while the move to renewable electricity resulted in our global operations, utilizing 90% renewable electricity. We also launched fleet for future programs supporting our ambitions to reduce greenhouse gas emissions by moving to electric cars. Our patient focus has included the partnership with Axis accelerated as we continue to support communities that lacks sufficient access to health care. We also provided support to people in Ukraine in medical need with financial donations to direct cross and Tulip as well as the nations of assets. Within the people pillar, we are targeting a balanced generation for our global leadership team by 2025, and we are very proud to report that ratio has already reached 48% from 43% the year before. Ipsen was also recognized as an employer of choice in 23 countries. Finally, our focus on governance included the renewal of anticorruption certification by ISO, and we have maintained our unrelented rigorous compliance with the highest ethics and compliance standards. Thank you, David, and hello, everyone. Please turn to Slide 17. As David said, we've delivered a very strong financial performance in 2022 across all metrics. The success of our growth platform means that total sales increased by 8.5% at constant exchange rate to exceed EUR 3 billion. Our core operating income grew by 13.5%, and our core operating margin was broadly unchanged at around 37% of sales supported by our strategic focus on growth and efficiencies, while our core earnings per share was up by 18%. The emphasis on cash generation led also to an increase in free cash flow of 4%. Please turn to Slide 18. Looking at the detail of the core P&L, the growth in total sales at actual rates was augmented by favorable currency movements boosting sales by additional 6 percentage points. Other revenue increased by 25%, primarily reflecting the increase in royalties received from our partner for this port in aesthetics. In fact, despite the impact on the mix of sales by the decline of Somatuline, the gross profit margin only failed by 0.5 percentage points. R&D costs increased by 5% as a result of investment in newly acquired assets, while SG&A costs increased by 13%, reflecting commercial investment to support growth as well as preparing for several potential launches. We also experienced a substantial impact from the level of postponing spend on T&E and medical and marketing activity, offset by our continued focus on driving cost efficiencies across the organization. As a consequence, core operating income grew by 13%, as I said, with a broadly unchanged core operating margin at 36.9%. Please turn to Slide 19. Not only we deliver a strong profitability. We continue to deliver strong cash flow and have today a robust balance sheet. Free cash flow grew by around 5% to EUR 817 million. The rate of growth was impacted by increase in the change of operating working capital driven by our sales performance, while we increased our CapEx investment to ensure that we have the capacity to support our ambitions. After the dividend, the net investment from business development, including the acquisition of Epizyme as well as the proceeds from the divestment of our Consumer Healthcare business, Ipsen became fully deleveraged with a closing net cash position of around EUR 400 million. Our capital allocation priority remains focused on increasing our firepower for our external innovation strategy. At the end of 2022, and on a pro forma basis, assuming the closing of the planned Albireo acquisition, we have today firepower of EUR 1.5 billion available for further transaction, all of that is based on the net debt below 2x EBITDA. Please turn to Slide 20. So now going more into the detail of our guidance for 2023. First, I wanted to remind you that this guidance incorporates the impact of the Albireo deal, which should be completed by the end of the first quarter. We expect growth in total sales of more than 4% at constant exchange rates, our growth platform are set to continue performing well and to again outweigh the gradual decline of Somatuline. We will also have the first full year impact of sales as well as the contribution of Bylvay from the second quarter. On the core operating margin, we anticipate a level around 30% of total sales. This lower margin versus 2022 reflects clearly the dilutive impact from the investment in growth as a result of the external innovation strategy, including the Albireo plan acquisition. Alongside the significant increase in R&D investment in 2023, which will come mainly from Epizyme and Albireo, we will also increase our commercial investment to support and creep up the launch of new media. Finally, just for information, we plan to provide a midterm outlook before the end of the year to reflect the anticipated completion of the acquisition of Albireo as well as the pipeline milestone that David presented. Thanks, Aymeric. Please turn to Slide 22. So before we go to questions, please let me conclude. The ongoing execution of our strategy and the progress we are making means that we are continuing to deliver strong results. Our growth platforms are performing very well ahead of the gradual decline and the potential new medicines are set to augment our growth journey. The pipeline is advancing, and we're making good progress in the number of trials and the assets we are developing. We have clear opportunities across 3 therapy areas. And in near term, we look forward to a number of key milestones. Finally, our focus on external innovation has led to a significant replenishment of the pipeline with substantial firepower derived from a strong balance sheet and our ability to generate good levels of cash. And our strategic momentum will support further external innovation deals in the future. Please turn to Slide 23. Thank you for listening to our presentation. We now have time for your questions. Operator, over to you. I have two to start with. Perhaps we can start on Dysport. You had a particularly strong quarter. What level of sustainable growth should we be thinking about for this product going forward? And what does that mean for your other revenue royalties as well? And then just to touch on TetERIC, are there any updates you can share here on the relaunch? And 4Q sales looked a little bit modest. So what gives you confidence that this should accelerate into 2023? Thank you, Liz. Let's start with the Dysport Q4, which of course, was very strong. We do forecast a continued strong growth of Dysport in aesthetics and in therapeutics also in 2023. Also, you have to keep in mind that with the increased volume that we were able to produce, there was a catch-up effect in Q3 and Q4. On the other royalties, I'll let Aymeric elaborate. So as you know, the way we account for our partnership with Galderma, we book part of the revenue in sales, part in royalty. So you should expect the other revenue line to grow as the aesthetic business is going to grow. And then on the CEREC relaunch, please remember, we have finalized the integration of Epizyme by the end of October. In November, the field force was first brought together. We are redoing the promotional material and repositioning the drug. On the good news side, we have gotten inclusion in the NCCN guidelines, not only for mutants, but now also for wild-type patients, which was a very important point. And we also need to remember that the pickup is going to be gradual because follicular lymphoma is a very slowly progressing disease and the typical office base hematologist has 1 to 2 patients. So it's going to take some time until patients are going to start to progress, and that's the time point when the physician can then decide what they want to put them on. So it's a normal dynamic which is going to play through in the duration of 2023. Next question. First question, just on pricing pressure in Europe. A number of companies are calling out increased pressure from clawbacks and other mechanisms. Just -- how do you see that picture across your portfolio? That would be great. Maybe a question as well on the erosion of Somatuline. You've said a gradual erosion from here. But how are you seeing the specifics in the U.S. and Europe -- and do you see pressure increasing from the launch of another generic in Europe on top of advance towards the end of the year? And then maybe one final one, if I can speak in. You've mentioned you started the ELMO trial for elafibranor. Just what data gives you the confidence to start that trial now? Richard, thanks for your questions. In terms of your first question on pricing pressure in Europe, I think all companies see that because the clawback mechanisms, which are being put in place are not necessarily specific to a given product, but often, they are on the part of your sales that you're having on the national health care system. And so these clawbacks are broad brush clawbacks and they are included in the 2022 performance, but they are also included in our 2023 guidance. In terms of the erosion on Somatuline, clearly, I mean, we are seeing that this is becoming more competitive. And for example, in Europe, Vance is launching or preparing to launch in additional markets, for example, like the U.K. but also some other markets. But it's going to continue to gradually ramp up the erosion. The same thing is true for the U.S. Perhaps you need to be a bit careful for the Q4, where there was also the inventory comparison against the Q4 2021. So the erosion should not be seen as a quarter-on-quarter, but more that this erosion that we are seeing in Q4 overall is probably kind of predictive for an erosion that you might see in full year in 2023. Please remember also that the rest of the world is continuing to grow very nicely, and we anticipate that the rest of the world will continue doing that, albeit perhap to a bit of a lesser degree, but we still see a very strong dynamic there. And then on the ALMA trial, I'm going to refer to Howard. Great. Thanks, David. So good question. So basically, in terms of elafibranor, we're optimistic about PBC based on the Phase II data, which led to FDA granting breakthrough therapy designation. And we decided to conduct mid, which is a proof-of-concept study in a related disease, PSC, to really determine if we should move on to a registrational trial. And that's the thinking behind Elmwood and we consider PSC to be a really significant opportunity, both medically and commercially given the lack of effective therapies available for patients with PSC. Charles Pitman from Barclays. Maybe just firstly on Onivyde. If you could give us any more details on kind of when you expect to file this and we could see a launch and maybe the expected incremental investment that it's going to require to expand into first-line PDAC and what I mean for your second line sales? And then just secondly, you give us an idea maybe on the kind of OpEx move between SG&A and R&D as you conclude some Phase III trials, but then you're offsetting this with kind of product launch activities. What are we going to expect to shift from R&D and SG&A? Or can you maybe see some cost savings over FY '23? Thank you, Charles. In terms of the Onivyde filing, we anticipate it will be as we said in the first half. So the team is working on the filing preparations. The launch will depend if we're going to get priority review, we could get an approval at the very end of this year. If it's a normal review, then it's going to be at the beginning of next year. In terms of your question on the investment and what comes incremental, there will be a very small incremental spend because you need to remember, we already are actually seeing physicians with our field force and they can easily put this into their bag. So yes, over time, there is going to be some small cannibalization that you're going to see in second or third line. But since the pool of patients is so much larger in first line because you need to remember, pancreatic cancer is a very fast progressing disease and actually less proportionally patients in pancreatic make it to second or third line then, for example, in breast cancer, where you can have like 6 or 7 lines of therapies nowadays, so it's very different. And also the treatment duration is much longer. So there are going to be these 2 additional benefits. Then also, if we get the first-line indication, we anticipate that all patients are eligible. So it's not just like post-gem-abraxane like in the second line, and you can't use it after FOLFIRINOX. We actually believe that the NaliriFox regimen can definitely start to replace FOLFIRINOX, but it can also start to replace gem-abraxane as the trial has very nicely shown. Then in terms of OpEx and the SG&A and R&D dynamics, I referred to Aymeric. Yes. So regarding that question, as you can see in 2022 we have lowered significantly our SG&A to reach a level of below 35% or R&D expenses were below 15%. 2023 is going to be a very different year. And I think it was your question, where we will see a significant increase in R&D as we're going to integrate both Epizyme and Albireo because today, as you see, Albireo is fully included in our guidance. So we expose the R&D to significantly increase. As we integrate Epizyme, which was only consolidated for 4 months in 2022 and that we will integrate Albireo, we will also see some increase in SG&A, while we are still committed to increase our efficiency program and to continue to generate cost savings. So this is really the way we see our cost base to evolve in 2023, which will explain the dilution from the 37% that we deliver in 2022 and the guidance above 30% that we provide today. Just a couple more on Dysport, if that's all right. Just a follow-up on Elizabeth's question. So this catch-up effect that you saw in Q3, Q4. So does that mean kind of mechanistically, the beginning of 2023 could be, I guess, quarter-on-quarter could be a little bit challenging? And thinking about the kind of phenomenal growth that you're having in terms of demand, so is that the broader market growing and you're continuing to kind of keep your share stable? Or is that you kind of taking market share? And then just on the long-acting neurotoxin that's gone into Phase II, which is super exciting, what are the timings around that? When can we potentially kind of see data? Thank you, Rosie. In terms of the catch-ups we are not guiding quarter by quarter, but we do see very strong underlying dynamic in the aesthetic but also in the treatment space. So we anticipate solid double-digit growth. In terms of the demand, is it the market growing or market share, it's actually both. So clearly, the aesthetic market is growing very rapidly with the expansion into younger people using it, also more males starting to use it. We have to also -- when you look at our growth by region, you can see that, in fact, the rest of the world region has very, very strong growth. So we see also an expansion, for example, in Latin America or in Asia. And then in parallel, we have been gaining some market share in the treatment space in the market. For aesthetics, it's a little bit harder to say because, as you know, there are not IQVIA data like we have, for example, in cancer. So it's harder to say, but clearly, we are very happy with the developments that we are seeing. In terms of the long-acting neurotoxins in terms of when we can expect data, Howard, do you want to elaborate on this? Yes. Thanks, David. So as you know, we -- as David said, we've started the Phase II program in GL for the land, and we anticipate having proof-of-concept data, including 9-month data at the very beginning of next year. And then we also are planning on moving into Phase II for adult upper limb spasticity the year. And we'll probably see those proof-of-concept data in more mid next year. So that's the time line for the land program. So just one on Elefsina and the readout we expect in TBC in the first half. If you could explain a little bit different possible outcomes. I guess there is a very clear situation where the composite biomarker endpoint reach a threshold that you can file for accelerated approval. But is there also a scenario where maybe the interim is not reached, and the study continues. And if that's the case, what is the likelihood of reaching a positive outcome at a later date? Yes. I mean I think the bottom line is that we will -- we're optimistic about the trial because of the Phase II data and the primary endpoint will be the composite endpoint versus placebo. So I think that the reality is that if we meet the primary endpoint on the composite endpoint, then we will move to submit an application for accelerated approval. I'm not convinced that there's a second scenario. So I think, again, we're optimistic about meeting the endpoint because it's basically what was done in a shorter time frame in Phase, but we'll have to meet the primary endpoint in order to file for accelerated approval. Two, if I may, please. The first one, on your next-generation long-acting neurotoxin. Just wondering kind of what is the point at which Galderma has the right to open to it? Is it at the end of Phase II? Or is that time line already passed? Linked with that, as I look at kind of the Phase II, you've got 2 studies ongoing, one in aesthetics, one in therapeutics. On the aesthetic side, what are you hoping to know by the end of the study? Will we kind of be in a position where we know your target profile for this is our duration of, say, 6 months or whatever that number is? And how should we think of that? And then separately, going on to Somatuline for next year. Can you give us a bit of a sense for how you are seeing kind of the underlying volume dynamics versus the pricing dynamics across the various geographies? Thank you, Keyur. On the land, so on the Galderma opt-in socal Derma does not have currently a license. We would have to enter into negotiations and it would be after proof-of-concept. Regarding your question on the Phase II data on aesthetics and treatment, I will let Howard elaborate. Do you want to start with aesthetics and a question on the 6-month duration. Sure. I mean I think the question was what will know at the end of the proof-of-concept study and obviously, this is a trial that's comparing versus Dysport and placebo. So at the end of the proof of -- when we achieve proof-of-concept, we'll know how the drug compares in terms of efficacy with the standard and also what it looks like in terms of long-term efficacy. So we'll have 9-month data in all the patients. So we'll know how many patients achieved 6 months of efficacy, how many patients achieved 9 months of efficacy and how it looks like versus competitor products. And again, we anticipate seeing that at the very beginning of next year. Somatuline, the underlying mix of volume and price, I guess, this is your question. So in the U.S., we still see continued growth on volume. However, of course, then you have the price impact, you have the market share impact with Cipla and you have this inventory impact that I just talked about. In Europe, it's mixed. So for example, Germany, we still don't see a lot of market share. It's very flat with advance. And -- but for example, in Spain, they have referenced themselves with the lowest price, and they are taking rapidly market share. So it depends market by market. In the rest of the world, of course, we still see a very strong volume growth. So overall, volume growth dynamics, very strong, which continues. So you need to have production capacity that's important to satisfy to the mat. Next question. Just a couple of questions for me. The first question was on how much inventory there was in Dysport and the second question was just on the differentiation of the NileroFox regimen. I was wondering if you could go into a bit more detail on how you see the safety profile specifically in terms of adverse events offering an advantage over Folfirinox in the first line? Yes. Thank you, Colin. In terms of the inventory of Dysport, so it was not a question of really just the inventory, but it's actually a catch-up effect -- so I hope this clarifies it. Then on the differentiation on Nalirifox, that's a very important question, Howard, what can you tell us about this? I mean I think that obviously, it's difficult to compare across studies because these were very different studies. I think David highlighted this, but it's important to know that Nallirutox is a novel regimen that consists of lyposomal irinotecan plus a different dose of an -- and we think from a safety point of view, this has potential advantages in terms of Neuropimyelo suppression and other factors. So we think that this is a regimen that provides both efficacy and also some potential safety advantage that may allow us to be used more broadly in patients. But obviously, the next steps are for us to to file with FDA and hopefully get it accepted and reviewed. Is this the top level of business development because I can argue with your existing growth drivers adding on top of the Talavera and Bovan. Hopefully, Sybrin from Mace, you have a lot on internally in terms of new product as you roll out. And I could argue that could paint a quite robust picture for growth beyond 2023. So does that perhaps lessen the urgency for BD activity? Or would you anticipate continuing at the pace we've seen for the last 12 months? Thank you, Alistair. Well, so we are definitely in a much better situation right now because we, of course, knew that this ethylene gradual erosion is going to happen. But then we had presented to you this 4-pillar strategy, and one of them, which was a very important one, was to maximize our current brands. And that is actually executed very nicely. So we had to really work with all the affiliates on making sure that we are very, very strongly focused and we see this very nice growth now with our growth platforms, plus, as you said, we are going to get more growth from the Serica and Bylvay ultimately. So that puts us in a situation where we now have to first digest the time and Albireo acquisitions. So -- we're not in a hurry to make another late-stage deal right now, so at least short term. And so we can -- we will, of course, still continue to refill the pipeline also in the earlier stage. But we're going to be opportunistic. I mean as Aymeric told you, we have EUR 1.5 billion firepower even after the integration of Albireo. But we need to give the organization a little bit of time now to digest it. to really focus on the execution on what we have acquired in terms of the late stage. And then a bit later on, continue to add also more later-stage rocks. Congratulations for the results. A quick question on the capital. We have a lot of a stocking effect in Q4 year. Can you extract the Chinese performance for the Cape and probably quantify this stocking effects that we've seen in Q4, just to get a better view on the underlying growth. A question regarding the mood in China of a whole, if you can also specify that Other question deals with the difficulty that some of us may have regarding the forecasting. You had some, let's say, engagement regarding the R&D target last year in the range of 14% to 15%. Is it fair to assume that we are more in the range of 19% to 21% of revenue for this year? And finally, I was wondering if your assumption in terms of revenue growth includes this already 18% erosion on so much lead. Thank you, Delphine. So on Decapeptyl and the China effect, we have seen a bit of a slower down in Q4 because of what was happening around COVID, obviously, because this was a very difficult situation China is going through. But there wasn't a particular really strong stocking effect in that sense. In terms of the mood in China, I think people want to get back to a normal life. Of course, it was a lot of dramatic things happening, but we see also that people come to work. Some of them, of course, fell sick, but they are now coming out of this, and we all know that the current variance is less lethal than what we have seen 2 years ago. So it might be that it's going to normalize more rapidly than what we have seen before. We also need to remember that China has started to open up again. So international travel now is allowed again. So there, I think, is a willingness to try to come back to a more normal life as quickly as possible. But we need to be careful. And it's hard to know exactly what it is going to do to elderly people, what the mortality rate is because of the statistics, not being very precise. It's hard to say what could this trigger as an impact, for example, on elderly people and the epidemiology and the way they're going to get their treatments. Clearly, we have seen less people turning off elderly demand, for example, with prostate cancer, less people turning up in the hospitals. So there is going to be an effect there, and we have to see what happens there. On the forecasting on the R&D targets, Aymeric, you want to take that? Yes, David. Delphine, as I said before, I mean, our guidance is assuming that a significant part of the dilution that we're going to see this year versus 2022 is going to come from higher R&D investment. And the range that you are proposing is probably makes some sense given where we are today slightly below 15%. Clearly, the ambition will be to bring that ratio closer to this year. And then in terms of the revenue growth, the erosion of Somatuline is obviously included in the growth rate that we have guided for you. So with this, we are wrapping up our call today. Thank you very much. Back to you, operator.

EarningCall_161

Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Fourth Quarter 2022 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead sir. Thank you, Carl. Good afternoon, and welcome to Great-West Lifeco's fourth quarter 2022 conference call. Joining me on today's call is Garry MacNicholas, Executive Vice President and Chief Financial Officer, and together we will deliver today's formal presentation. Also, joining us on the call and available to answer your questions are David Harney, President and COO, Europe; Marshall Jamal, President and Group Head Strategy, Investment and Reinsurance; Jeff McCown, President and COO Canada; Ed Murphy, President and CEO of Empower; and Bob Reynolds, President and CEO Putnam Investments. Before we start, I'll draw your attention to our cautionary notes regarding forward-looking information and non-GAAP financial measures and ratios on Slide 2. These apply to today's discussion and presentation materials. Please turn to Slide 4. Great-West Lifeco delivered a solid performance in 2022 with full year base earnings of $3.2 billion and base EPS of $3.46 These steady results were achieved against a backdrop of economic and market uncertainty and driven by the strength and diversification of our businesses. We closed out the year with a strong fourth quarter with base EPS of $0.96, which Garry and I will cover in our comments. The company's fundamentals remain strong and we continue to reduce our post-acquisition leverage ratios and build up cash and capital. Yesterday we announced a 6% increase in the common share dividend. This announcement and our long track record of raising the dividend, highlight the strong capital generation of the Lifeco portfolio and our confidence in the future. The strength of the company's market leading franchises provides stable growth in earnings and liquidity to support our investments in future growth. In the last few years, we've deployed significant resources on three transformative acquisitions to accelerate growth at Empower. We've made strong progress in 2022, adding new capabilities and welcoming millions of new customers to the empower platform. We completed the Mass Mutual integration in December, achieving our cost synergy target of $160 million and exceeding our objective for client and asset and revenue retention. We're using the same disciplined approach with Prudential and we'll start migrating its 4 million participants to the Empower Platform in March. The acquired Prudential business is performing in line with our expectations, run rate cost synergies of U.S. $43 million have been achieved to date and the business has contributed $171 million Canadian to the Lifeco base earnings since we closed the transaction in April. Together, the Mass Mutual, Prudential and Personal Capital Acquisitions Position Empower with the tools, capabilities and customer relationships required to build a wealth management growth engine alongside its market leading defined contribution retirement business. To this end, we launched Empower Personal Wealth in January of this year integrating Empower’s IRA business and Personal Capital's hybrid digital wealth business. We will begin reporting the DC business results and the personal wealth results businesses separately starting in Q1. Given this change, we're planning an investor education session to introduce this new reporting approach ahead of our Q1 results reporting. There's a lot going on at Empower, so later in the presentation I'll provide some color on 2023 growth that management is targeting for the Empower business and the key drivers behind this target. This of course, is the last quarter, which will report under IFRS 4 before transitioning to IFRS 17 and IFRS 9 in Q1. We're nearing the finish line of our preparations and are well positioned for the transition. We have provided a condensed opening balance sheet as of January 1st, 2022 in our disclosures today and updated the expected impacts we shared with the market in June, which remain largely in line with previous disclosures. In addition to moving forward with our business priorities and getting ready for IFRS 17, we're also advancing our corporate purpose and social impact agenda. Over the last 18 months, we've taken action in three areas of focus, introducing a commitment to net zero carbon, establishing enterprise diversity goals and deepening our commitment to reconciliation. We've aligned the organization and our Board around these three focus areas and look forward to sharing more on this with you at our annual meeting in May. Please turn to Slide 5. This slide shows our medium-term financial objectives, 8% to 10% base EPS growth, a base ROE of 14% to 15%, and a target dividend payout ratio of 45% to 55% of base earnings. Notwithstanding the headwinds that held back 2022 performance, we’re tracking to our base EPS growth objective with five-year growth of just under 9%. This reflects solid organic growth and strong contributions from acquisitions. It also reflects our operational discipline, including how we manage our investment portfolio, underwrite and price new business and manage expenses. With these same ‘22 headwinds while they had a dampening impact on base ROE, we remain confident in meeting this objective over the medium term. With respect to our dividend payout ratio, this is a medium-term target and our goal is to work into this range over the next few years. Please turn to Slide 6. Our fourth quarter saw strong overall results with base earnings of $892 million and base EPS of $0.96 cents up 8% year over year. Net earnings were over $1 billion or $1.10 per quarter, up 34% year over year. Garry will cover the financial drivers in more detail. Please turn to Slide 7. Our Canadian business saw an improving trend in insurance and wealth sales to close out the year. While group insurance sales were lower year over year due to fewer large case sales persistency was strong and Canada Life led the market in sales in the fourth quarter. Strong Individual Insurance sales results were driven by participating Life sales. Group Retirement sales had strong sequential growth, with gains in our core defined contribution and next step asset rollover businesses. On the individual well side, sales also improved sequentially and were in line with industry trends. These results are supported by Canada Life's continuing improvement in technology enabled customer and advisor experience. Please turn to Slide 8. In Europe, business performance was steady, as economic conditions improved and the political environment in the UK stabilized. Insurance sales were down from a year ago, while individual annuity sales increased sequentially. And while the UK bulk annuity market demand remains strong, we did not write any large cases, as we maintain strong pricing discipline. We've resumed selling equity release mortgages in December and are seeing solid traction in an overall market that has somewhat lower new business activity, due to higher interest rates. While Europe sales were down from a year ago, Q4 sales were up sequentially with positive net cash flows in both individual and group. The stability in these European results reflects business models focused on financial necessities like pension savings, retirement income solutions and group protection. Please turn to Slide 9. Putnam's AUM was impacted by market declines and ended the quarter at $165 billion. Net outflows of $1.5 billion showed continued improvement compared to the last three quarters and were primarily in Putnam's lower fee fixed income products. Notably, Putnam delivered positive equity flows in 2022 in a period when equity sales across the market declined by over 10% year-over-year. These flows are supported by Putnam's excellence in investment performance for clients with 40 funds rated four or five stars by Morningstar, 96% of equity assets with four or five star Morningstar ratings and 83% of total assets with four or five star Morningstar ratings. These ratings reflect Putnam's track record of strong performance over five and 10 years. Please turn to Slide 10. Empower's DC business continues to experience strong momentum with sales up 8% year-over-year and client retention at 97%. This is a testament to the excellence in service our Empower colleagues have continued to deliver to clients, despite the heavy integration activities over the past year. As noted, the MassMutual integration is now complete. Targeted pretax cost synergies of $160 million were achieved and asset participant and revenue retention outperformed our original expectations. The Prudential integration is on-track. $43 million of realized pretax cost synergies are unchanged from last quarter. As we noted with MassMutual, cost synergies are typically front and back end loaded. In Prudential's case, we expect the remaining $137 million of annualized cost synergies to be realized, when client conversions are complete and redundant systems and services are decommissioned after Q1 2024. We are excited about the prospects for continued growth in Empower Personal Wealth with our enhanced customer experience now available across the combined Empower and MassMutual participant base. We are seeing good early momentum with sales growth up 15% over Q3. Please turn to Slide 11. Capital and Risk Solutions expected profit increased 7% year-over-year. Other margins and fees were up 20% with growth in structured and longevity reinsurance and improved pricing in the PNC business more than offsetting slightly lower actuarial PfAD releases. The new business pipeline remains healthy in both structured and longevity reinsurance portfolios. We remain focused on our core businesses in the U.S. and Europe, and we continue to pursue expansion across -- expansion opportunities in select new markets. Thank you. Paul, Base EPS of $0.96 was up 8% from Q4 2021. Notwithstanding the lower market levels this quarter compared to Q4 last year. All four segments contributed to the strong performance, which also included the acquired Prudential retirement business that was not in last year's results. Net EPS of $0.10 is up 34% from last year, reflecting the higher base earnings as well as favorable excluded items which were primarily actuarial and tax related. In Canada, base earnings of $295 million were down 7% from a strong Q4 last year, primarily due to market related fee, income pressure and lower yield enhancement contributions partially offset by strong group life and health insurance results. In the U.S., Empower base earnings of $155 million included $47 million from the addition of Prudential retirement business. Excluding Prudential, the results are down 8% in U.S. dollar terms year-over-year due primarily to market impacts on fees and the anticipated integration shock loss in the mass mutual block, partly offset by strong organic growth in the business and improved spreads in the general account. Recall, over 50% of net revenues at Empower are asset based, and so the impact of lower markets on asset-based fee revenues continues to be a headwind, especially against the market levels in Q4 2021. This comparative period markets issue is expected to continue into Q1 2023 based on market performance so far this quarter. That said, business fundamentals such as top line organic growth, customer retention, and retail expansion remains strong. As noted on the last call, in Q4, we completed the final conversions for the MassMutual Business. Through the integration, we have met our expense synergy targets of $160 million on an annualized run rate basis, and we have exceeded the original customer revenue retention targets excellent achievements by the U.S. team. A similar integration revenue loss pattern is expected on the Prudential business. While there has been very little revenue attrition to date, some is expected in 2023 as part of the integration process and that will begin to impact year-over-year comparisons as we progress through 2023. We remain confident in hitting the customer and revenue retention targets we set out for this transaction. We also expect the benefit of full expense synergies $180 million annualized to emerge once the integration is complete early in 2024. While we have achieved run rate synergies of $43 million to date, we do not expect to see much additional synergy benefit to arise until 2024. Turning to Putnam, earnings were down from Q4 last year, largely impacted by two factors. First, lower asset-based fees as expected given sharply lower average market levels for both equity and fixed income this year compared to last. Second, there was a negative swing of $33 million from one-time tax items, a negative $16 million this quarter opposite, a positive $17 million in Q4 2021. The Europe segment posted a particularly strong quarter with solid business fundamentals and results of across Ireland, Germany, and the UK. In addition, there were elevated deal enhancement benefits in the UK and favorable tax impacts. The capital and resolution segment, which is primarily the reinsurance business unit saw earnings continue to benefit from steady new business success. Also, U.S. life claims experience continues to improve from the elevated COVID related claims experienced at the height of the pandemic. Turning to Slide 14, this table shows the reconciliation from base and net earnings. Net earnings were over a $1 billion this quarter. In addition to the strong base earnings across the segments, there are positive actuarial assumption changes, management actions, and market related impacts on liabilities. The previously announced tax increase on Canadian financial institutions was substantially enacted this quarter. While the additional 1.5% tax will modestly impact future earnings, the revaluation of deferred tax attributes resulted in a one-time positive impact this quarter. The remaining items are predominantly acquisition and integration related costs. Turning to Slides 15 and 16. These next two slides highlight the source of earnings first from base earnings perspective and then net earnings. I'll focus my comments on Slide 15, the base earnings SOE with a reminder, the amounts above the line are pre-tax. Expected profit was up 2% year-over-year the increase is primarily due to the additional Prudential, plus business growth in Capital Risk Solutions and improved margins in both Canada group customer and the Empower general account. This was largely offset by lower expected fee income due to the sharp market downturns experienced during 2022 in each of the regions. Experience gains are the other notable item I'd call out, largely driven by yield enhancement in the UK mentioned earlier. The improvement from last quarter's Experience loss needs to be viewed in the context of the $130 million impact of Hurricane Ian provisions taken in Q3. Earnings on surplus of minus $24 million, improved $12 million from last year with the benefit of higher interest rates partly offset by the impact of additional financing costs related to the Prudential business acquisition. The effective tax rate on base earnings this quarter was 11% reflecting the jurisdictional mix of earnings and certain non-taxable investment income. Skipping ahead to Slide 17, these tables expand on the Experience results as well as the mentioned actions basis and changes in assumptions to highlight various items in the quarter, most of which we've touched on already. As shown in the chart on the left, yield enhancement continued to contribute positively, primarily in the UK this quarter. The elevated UK gains were in part due to having secured attractive assets earlier in the year that could either be used to support new business or enforce liabilities. Given the absence of large bulk annuity deals recently, the assets were allocated to the enforce block, resulting in a yield enhancement pickup rather than new business gains that we've seen in the past. The net impact of mortality, longevity and morbidity was neutral this quarter with some pluses and minuses across a diversified book of insurance risks. Credit was a small positive gain relative to expected credit loss impacts as our high-quality investment portfolio continues to perform well. The table on the right highlights modest basis change impacts this quarter plus the actuarial portion of the corporate tax rate change. There are only a few smaller year end assumption updates and refinements as the bulk of the actuarial reviews were completed in Q3. Moving to Slide 18, this slide highlights operating expenses by segment. Expenses are up year over year, but that was to be expected given the increase in business and the addition of the Prudential business. Adjusting for Prudential and currency movements, expenses overall are up 3%, demonstrating strong expense discipline. Recognizing there will likely be some inflationary pressures in labor and other costs emerging in the future, this is an area we will monitor closely and we will look to achieve productivity gains in our operations and adjust pricing if appropriate. The overall message here, consistent across the segments, as we continue to manage our expenses closely, balanced against the need to continue to invest for future growth. Please turn to Slide 19. The Q4 book value per share of $26.60 was up 8% year-over-year. About three-quarters of that or 6% growth was driven by strong retained earnings over the past four quarters. In addition, currency translation was a positive this year, led by a stronger U.S. dollar. The LICAT ratio of Can Life remains strong, improving two points to 120%. Earnings net of dividends and the continued smoothing in of the scenario switch benefit drove the increase. Lifeco cash, which is not included in the LICAT ratio, ended the quarter at $1 billion. The increase from last quarter primarily reflects the €500 million debt raise in Q4 in advance of a €500 million maturity in April. OSP released its 2023 LICAT guideline in Q3, setting out the adjustments to accommodate the transition to IFRS 17. The first LICAT ratio under the new guideline will be reported as part of the Q1 2023 results, and we are currently estimating a positive impact of approximately 10 points on transition. Note the actual impact will be dependent on market conditions at the time, including the level of interest rates, given different sensitivities between IFRS 4 and IFRS 17. Turning to Slide 20. This slide provides an updated view of the anticipated impacts as we move to IFRS 17 and is very much in line with the information we provided last June. Note two, in the year end consolidated financial statements contains summarized opening balance sheet information on the transition to IFRS 17 and IFRS 9. As expected, there is a reduction to shareholders' equity, which we had flagged in June as being in the 10% to 15% range. This is a result of a net reduction to retained earnings, driven primarily by the creation under IFRS 17 of a new deferred profit liability, the contractual service margin, which basically represents unearned expected future profits. The resulting reduction is 12% for shareholders' equity and 14% for book value per share, in line with original estimates. The contractual service margin is included in regulatory capital. And as noted earlier, we are expecting approximately 10 points improvement in the LICAT ratio on transition, based on current estimates and conditions. I should note, we have only recently begun to work on the IFRS 17 comparative Q4 results, as we wrapped up to IFRS 4 reporting this week. Also, we are still analyzing the comparative results from previous quarters, particularly in relation to investment results given the large equity and interest rate movements during 2022. We will be looking to share information on comparative 2022 earnings under IFRS 17 and 9 at the Q1 call in May. We continue to expect modest base earnings impact overall, although of course, that will vary by segment given the different business mixes, and we continue to target 8% to 10% base EPS growth over the medium-term. Thanks, Garry. Please turn to Slide 21. As Garry outlined, we remain confident in delivering on Lifeco's objective of 8% to 10% base EPS growth per annum over the medium-term. For 2023, we expect low single digit offset to this growth as a result of the transitioned IFRS 17. As a reminder, this is an accounting change that impacts the timing of earnings, not the economics of the business. We will report our Q1 financial results in May under the new IFRS 17 and IFRS 9 standards, including results for the comparative quarters in 2022. As part of our new reporting, we'll be providing more insight into Empower financial results by splitting out Empower’s core DC business from Empower Personal Wealth previously referred to as retail. We're planning an education session for analysts and investors in the spring where we will outline our new reporting for Empower. In advance of that, given the multiple Empower transactions over the last two years and with much of the Prudential integration still to come, we wanted to broad more detailed perspectives on the drivers of Empower performance as we move into 2023. Management is targeting annual base earnings growth between 15% and 20% from 2022 to 2023 for Empower. This growth assumes long-term average equity market growth and stable interest rates throughout ’23. It includes pre-expense synergies of $43 million already captured, but does not include the remaining targeted synergies of $137 million with the majority of those coming in early 2024 when client conversions are complete and redundant systems and services are retired. It also reflects expected pre-revenue losses associated with clients not retained. To date, we've retained approximately 94% of approved revenues and are targeting ultimate revenue retention in the low to mid 80% range. We expect to see most of these terminations in associated revenue losses late in the latter parts of ‘23 or early parts of ‘24. Finally, it reflects the continuing growth of our Empowered Personal Wealth business, which is beginning to see solid traction following the integration of personal capital capabilities into the Empower participant and IRA rollover experience. As I noted, we're providing this additional information from Empower because of the multiple acquisitions impacting Empower’ financial results year-over-year. We do not plan provide this type of information for our other segments where we'll be focusing on providing insights into the impacts of IGRS 17 for 2023. Hi. Good afternoon. I just wanted to follow-up. Paul, you were talking about retention rate assumptions for Prudential, if my notes are correct, mass mutual retention was over 85% when all was said and done. So, I want to make sure I have that right and then compare it to the guidance of low to mid 80%. And the question is just why do you think that the retention rate for Prudential will come in lower than for MassMutual? What's driving that assumption? I'll start out, but I'm going to turn it over to Ed who can provide a bit more color. The reality is we had set a low to mid-eighties target for MassMutual and we have performed it. And if you actually look at precedent transactions in the market that was a kind of a market leading level of performance and the strong performances one we're very proud of. But maybe Ed can provide a little bit more color on the target, the targets we've set for Prudential. Ed. Sure. Thanks Paul. You're correct, Manny. The performance on MassMutual was 85%, actually a little north of 85%. And, you know, there's obviously a lot of moving parts with these transitions. Prudential has about 3000 clients. MassMutual had 26,000 clients. The level of complexity with the Prudential clients is far greater. That said, we feel very confident that we'll come in, well, within that range that we shared with, on MassMutual, as Paul referenced, we had a target in the 82% to 83% range. And, we feel very confident we'll hit that range, if not exceed it. Thanks. And, and then just a question on the dividend, just wondering, we haven't seen a dividend increase since mid ‘21. I'm wondering if you could just help us understand the expected cadence of dividend increases from here, and with the move that was announced today, is it a reflection of something in the outlook that's changed, or is just a function of the payout ratio? So, I'm just curious about that. So, Manny, taking it back to last year, we actually increased our dividend in Q4 last year. We kind of did a two-part increase. And the overall increase was actually 12% last year. That was after having stepped away from dividend increases for a year during, COVID. But if you actually look at the track record, we've kind of been focused on Q4 increases. If you go back and look at it historically, generally it's been in around the 6% range. And, this would be a continuation of that. And I would say it's reflective of our view on, the strength of the business, our liquidity, and it's about trajectory. Having said that, we've outlined that obviously there'll be a bit of softening in our EPS growth because of the one-time impact of IFRS 17 transition, but we do view this dividend as indicative of our view as we think about, our medium-term growth and we're, we like our prospects for medium term growth. Hey, good afternoon. The after-tax yield was about $135 million, which is good number, but quite a bit higher than the run rate, and I got the explanation on all that. I was wondering if you can tell me what that number would look like, if it happened in Q1 of next year under IRFS 17? Yeah, I think, we will be doing our Q4 comparative work, as I mentioned, we'll, that'll be coming up and we'll be sharing the comparative quarters when we get to the Q1 reporting. So, we might have an opportunity to discuss what it looks like between the two different regimes then if we're in at that level of detail. I'll just make a couple of comments. I think and we've noted in the past that, some of the yield enhancements will fade away under IFRS 17 and others will stay there different mechanism, but they'll stay impacting our results in the base earnings. And I just wanted to point out that all of that has been factored into our, when we say, you know, a lower model, single digit impact, it's all factored into that on a proforma basis. So, any one quarter, it's a bit up and down. But, we just looked across the year and said what's a typical year? That's why, I figured you could at least provide a ballpark is that low single-digits earning impact would have factored that in, as you say. So, is there any way you can ballpark it? Annual, I'd say, you are running around $50 million to $100 million of yield enhancement gains under IFRS 4. What's the comparative under '17? Yes. I think the things I'd point out is, when you look at this specific quarter, even just the impact on switching from one to the other will depend on the nature and the location, which portfolios the yield in enhancement and the nature of what drives the yield enhancement. In terms of a quarter like this, it's probably more 50-50. But it really does vary quarter-to-quarter. As Garry said, a rough estimate this quarter 50-50. But if the jurisdictional earnings were in another quarter, it could be a different way. Okay. That's good enough. And just on UK, I guess, I was expect them to see some action on the real estate front there. We're seeing other companies getting their appraisals and marking down their real estate holdings. And I know you have got a different portfolio than other companies, and went through an experience in the post Brexit period that maybe you adjust the portfolio a little bit. I'm wondering what you are out looking there for valuation on the broader real estate portfolio, the $7 billion and the third of that that's in the UK? Yes. Thanks Gabe. I'll start off at the high level and then I will pass it to Raman Srivastava. The reality is, we have been staying totally on top of appraisals, the discipline we have always had. I will say that, if you think about the journey from financial crisis to now, we have been very, very disciplined in terms of managing our real estate portfolio, staying on top of it, staying on valuations, quality and a like. So, we come into what you could say is some market dislocation with the strong portfolio. But I'll let Ramon speak to what we saw in quarter and actually what flowed through the income statement in quarter. Raman? Yes. Thanks, Paul. And Gabe, you are right, there was a challenging quarter for real estate in the UK and other areas. I don't think -- we didn't come to unscathed, if you would that the details that are embedded within the SOE on the market related impacts on Page 17. Embedded within that, there is roughly a pretax number of about minus $30 million associated with the impacts over quarter. But what I'd say is, it comes to you on the property side, but ours is skewed more to industrial than it is to office or retail. So that's one thing. And then we have talked in the past about the mortgage book and there is a lot of detail in the back as well, the analyst Slides on Page 38. And you would have seen some deterioration. So, like if you look at the DLTVs, for example, a year ago versus today, they are at 54% a year ago they were at 51%. So there has been some deterioration in the credit quality. But I'd say, the starting point is still strong. We think if this weakness in the property sector continues. There may be some headwinds for us, but they are manageable, given our starting point and then diversified nature of the portfolio. Okay. And just, I mean, it's been a while since you talked about UK property last time. In 2016, the portfolio just on $3 billion today, it's a little over two. I guess, you have been shrinking it for the past several years. I didn't notice. I apologize, but maybe you can walk us through that a little bit. Yeah, I mean, we're continuing to reposition. I think we haven't been adding a lot to the UK property over the past number of years. We've been judicially disposing of assets where it made sense, where the values made sense. Our mortgage book, we had talked about before, some of the impact’s years ago, we're in the pre-financial crisis mortgages. That's dwindled down just a few hundred million now. So, it is quite a different composition now on that side than it was say, four or five years ago. So there has been some gradual, you wouldn't have noticed any one quarter, but gradual transition. Raman, I'd say -- Gabe, I would say, and Raman probably doesn't want to his horn, but the reality is seeing his team have worked really hard at managing down the risk. And if you thought of as we went into the financial crisis, what was the shape and nature of the invested asset portfolio in particular, if I was thinking about the UK versus where we're at today, and it has a very, very different shape. And as you recall, we got through that crisis period with relatively little damage. So, at this stage, we will -- we, like everyone else will see some challenges along the way, but our starting point is strong. Good afternoon. Just wanted to go back to power and what I guess my question is what is the ROE for this business? And where should the ROE be? And how quickly can you get there? And you've talked a bit about synergies and early termination pressures and market pressures, but bigger picture, just kind of taking a step back, like what is the ROE? Where should it be? How quickly can get there? Because I think of as businesses having low capital requirements, low margin, but high ROE especially for those that have scaled, I think you've got scale. So just try to understand that side of it. Yeah, I guess I'll start off at the high level, Doug, and turn it to Garry. But if you think in terms of the empowered business, we actually deployed capital to acquire that business. And obviously our model and our view was that these were accretive strong transactions with lots of expense and revenue synergy potential. And ultimately, to be -- and growth from once fully synergized would have a good solid ROE and then forward business would be very capital light or limited capital applied to it. So very high ROE growth beyond post-transaction, post getting this synergys in place. Yeah, we do actually have the ROEs in the MD&A, and so you'll see that the U.S. financial services, basically the empower business is in the low double digits right now. And again, that reflects making all the capital investments, all the e but without yet getting the R fully synergized. So, as the R picks up, and then the organic growth, as Paul mentioned, the organic growth is very capital light. So, you should be seeing these ROEs -- we would expect these ROEs to be going into the upper teams as the business, uh, develops in the coming years. No, we have the U.S. Financial Services, which is the Empower Business, and then we have the U.S. Asset Management, which is Putnam. We break out both in the ROEs. Okay. So the idea is like 11, 10-11% getting to the upper teens. How long does that take? Is that a two-year journey, five-year journey? Just curious to? You know, I would say getting ourselves into the mid-teens is going to be a function of booking the remaining synergies, client retention. And then you're kind of into getting at where our targeted rates are right now and, you know, pre IRFS 17. And then after that it's all about organic growth and its capital light organic growth. And that's both, adding DC record keeping clients saying, just remind you that we've been growing at a good clip there at sort of twice or more than twice the market. And that's relatively capital light growth. And then the retail, or what we call the Empower personal wealth, that will be fundamentally capital light business that's serving individuals who, IRA rollover individuals and the like. So, that will kind of build and it'll build from year to year to year, as that becomes a larger part of the portfolio. But I can't kind of say when we would hit, you know, 18 or 19 or any of those things, but that's the vision and that's the goal. No, that makes a lot of sense. Just moving to the UK, it looks like you've exited the individual protection market in November. I'm just curious, why, how big was this business? Like, will there be any bumps as a result of that? And how quickly does that book roll off? Yeah. Thanks, Doug. Good question. I will turn that one over to David Harney to provide context around the scale of that and whether it has really an operational impact into the, in the business, David? Yes. No, it's a small business, so that's a mark as we entered a few years ago just from a zero position, like our protection business in the UK is our group business, and we're the leader there. So we had to go at adding on individual protection to that. We've, it's a very competitive market and we’ve struggled the last number of years, so we've decided to tag it out of it. It won't have any meaningful impact on the UK results going forward. Okay. Fair enough. And then last quarter, I think you had $300 million of cash at the HoldCo this quarter you've got a billion dollars. I don't think this was moved up from the Canadian or Canada Life sub. So maybe it came up from the U.S. sub, just curious, where that cash came from and how much cash would be left down in the U.S. sub. Because I don't think we have the visibility, or if we do, you can point me to something to take a look at that. Yes. It's, actually fairly straightforward. It's the real jump is the fact that we raised 500 million euros in Q4. So that's, which we've got sitting at LifeCo and that's in anticipation of a maturity that's coming in April. So we de-risked the refinancing of that maturity back in, following the Q3 results presentation so an early sort of midway through Q4. So that's what the cash is. Yes, thanks very much. Good afternoon. The question's really looking at the source of earnings on the base earnings. Experience, gains and losses in the U.S. of 82 million, just wondering what those are. I think the majority of the experience gains and losses that you had for the entire company were, on a base earnings basis. Garry, is that something we have got visibility into or is that something we don't? Give us one minute here, Tom. Yes. I think the one thing I know right off the top was the improvement interest rates would have been a pickup there. They would have also had relative to the expectations going into starting -- start of the quarter on the fees. So we would have got a low starting point for market. So I think there was about a 20 million pickups on the market related side to be another. As I mentioned, the interest rates being up. I think 30 million pickups versus what we got going into the quarter, that would have come through on the spreads. And then they had -- again expenses were positive relative to expectations in the quarter. I don't remember the details why they were positive, so those three categories were really what was what was driving it. And Tom, it kind of reflects our methodology that when we go into the quarter, we set the expectation market levels, interest rate levels, expense levels that are anticipated and to the extent that markets kind of outperform that goes into... I think the expenses are probably tied to a budget. So as you go through it, there was a lag in updating that. So I think that's -- there was nothing, it wasn't the yield enhancement. I think that's really what you are getting. We didn't have the yield enhancement there. Yes. I mean, the yield enhancements were 90% of the experienced gains and losses on a base rate, or more than 100%. I think of the 148, there is pretax 161 from yield enhancements for the entire company. So I don't know how this -- and there is no market impact -- market related impact on liabilities associated with that because this is base earnings, not reported earnings. So I'd be curious to see what this 82 here is, but you are suggesting none of it is related to yield enhancements. I guess, what I'm looking at, it was this largely an Empower? I think it was largely an Empower. So something happened in Empower that was better than you would thought that even drove the numbers to be still weaker than what I think the Street was looking for? So what was it that was happened in Empower that was better than you thought in the quarter that drove this 82 experience gain? Yes. I think it was the three factors I mentioned earlier. But I'm happy to do a follow-up right after this, Tom. Just go through -- maybe just go through that in a little more detail. I think, Tom, just frankly, it's three relatively more modest factors that I'd update you to if you think about it. Market levels improved a bit. So then we ended up with fee income slightly ahead of what we would have locked in as sort of the expectation. Interest rates moved a bit. So we would have seen maybe some widening margins. And then finally, Ed and his team actually did take some expense actions in quarter. And if you add those three things up, they add up to 82. But what I suggest is Garry could help you out offline on that one. Okay. Thanks so much then. That’ll be perfect. And there is absolutely nothing with respect to yield enhancements ever associated with this block. Is that what you are trying to suggest? In terms of this quarter, there were no yield enhancement. I think in the past, we probably had some yield enhancements in the past in the U.S. block, but there aren't any at the moment going through. And I don't see this as one where we aren't going to see yield enhancements in this block going forward either under IRFS17. So, I think, I'm sure there have been some in the past. I can remember some, but there aren't -- that was not the factor this quarter. So first question is regarding the date on LICAT proforma, IFRS 17 obviously it gives you a lot more regulatory capital. I'm just wondering how you're thinking about that A, in terms of how much of that is actually deployable capital, and then B, to the extent a portion of it is deployable capital, what are your capital deployment priorities? So there's a -- that's kind of a two-parter, Paul, so maybe I'll let Garry walk you through where we're seeing the strengthening of LICAT is as we contemplate transition. And then I can maybe take the second part as we think about deployable capital, what are the priorities? It's over to you, Garry, for part one. Yes, sure. I think, in terms of the 10 point -- approximately 10-point rise that we're expecting, that's again, driven by the new Ascoril [ph] Plus, just the way IFRS 17 and IFRS 4 moved differently during 2022. So that made it a larger jump than we might have anticipated early in 2022. I'd say over the longer term, I wouldn't expect us to be holding more capital. It was typically run in the 120s or in the lower 120s. And that used to be the top end of our old range. So, I don't see us holding more so in that sense. I think this the fact that it's another 10 points over 130%, there's going to be some more deployable capital there, but I think that's the longer term. Yes, our sensitivities are reduced a bit, interest rate and sensitivity to reduce somewhat, a little more NFI sensitivity than IFRS 17, but we're not seeing that, changing our targets. So I think, we will -- once we've gone through this -- we're being very measured right now in the near term just given the transition and the macro environment. But I think over time there's more deployable, and maybe Paul can like to comment on that. You stole my words, Garry, which would be in the near term, if you -- and I would kind of characterize that as we think about the balance of ‘23, we probably not going to be looking to sort of unwind that through deployment in the short term because we will be in transition and we'll all be learning and going forward. Having said that, as Garry said, the new regime for us does actually reduce some of the sensitivity we would've otherwise had. So it's not as though we have to set ourselves up with more strength to deal with volatility. We're not too concerned about that. But having said that, it's a risky environment. It's an in -- it's a point of transition. So I think what we'll do is we'll maintain good discipline. But having said that, the reality is we're also not taking our eye off the ball in terms of opportunities to grow the organization and to put our capital to work. So, we're always looking for opportunities in the market and we'll be if the right opportunity came along, we would figure out ways to finance it. Having said that, again, Empower still has hard work ahead on the Prudential integration, and that will be a big focus for us in 2023. But we'll continue to look across some markets for opportunities where we think we can strengthen the business. And as I said, with some caution though, given the kind of the risk on environment. Second question is related to Capital and Risk Solutions. I mean, there's a number of like positive business drivers that you've articulated. Maybe it just be helpful for me to understand if you can, sort of to what extent each of those driver’s sort of matters for the business or, if I think about the increase in P&C retrocession rates as an example, how much does actually matter to future growth versus say the growing demand for pension risk transfer versus the improved mortality trends and life reinsurance. I guess getting a better sense of or characterization of how much of each of those driver’s sort of matter to future growth might be helpful or would be helpful. Yes. Great question, Paul. And you actually are sort of helping with the answer and appreciate it. because when you think about it, it’s a very diversified business that we've got and the only factor that we didn't talk about there was structured solutions where they're continue to be market participants who are looking for capital effective capital solutions in our structured solutions. So it really is about diversification where there's opportunity in each of those categories and maybe Arshil can provide a little bit of color on that. Arshil? Yes, thank you for your question. So you've highlighted sort of the three or four areas that we are really focused on. So, over the last eight quarters or so, we've probably achieved something like 7% underlying expected profit growth. And that's really the metric that we're focusing on for our reinsurance business. And then we have opportunities in all of the business lines. But there's slightly different pressures and slightly different outlooks. So on the P&C catastrophe, which is where you started our focus there really is on risk reduction as opposed to driving up the margin. So, pricing in the marketplace has moved quite a bit and we're not focused on increasing our margin, but we're moving further away from the risk. So we're trying to preserve the historic margin that we've made but get a little bit further away from the risk. Whereas on the asset intensive side and on the longevity side, we see really strong market opportunities. We're being very cautious in an elevated risk on environment, but we're working closely with our investment colleagues and we did those large transactions in Japan when we could get very low cost to funds and put the money to work. And when we see opportunities like that, we really try to capitalize on those. So lots of opportunities on the asset intensive and longevity side. And we were talking a little bit about excess capital and using some of that to drive organic growth in CRS and some of our other business lines is also a place that we can deploy some capital. And then finally we have our structured solutions business. And geographically that business really has sort of it as its core the U.S. marketplace and beyond the focus that we've had in the U.S. and continued growth that we're seeing in the U.S. we've expanded that into a number of European markets and we have quite a good position there. And now very cautiously we're thinking about other geographies and whether we can take some of those structures that we have on capital relief for client companies and apply them in other regimes. And we've had some success doing that in places like Israel and Australia. And we're thinking about some other markets so, you know, very measured, always a trade-off between margins and returns and risk, and good sort of measured growth or whatever. And the key metric for us is really that expected profit growth and we've been delivering sort of that 7% expected growth and in a slightly more stable environment that's something that we target. And then in a riskier environment it might be a little bit less because we put a little bit more focus on risk reduction as opposed to margin growth. But that's kind of the context across the three or four businesses there. Helpful. Thank you. Thank you for that. And I'm going to sneak in one more. Paul, appreciate your comments as you addressed. Slide five, which I think is an interesting one and just sort of as I was looking at slide five and saw that decline in base earnings this year and then the ROE. The market impacts are obvious. You highlighted it. But can you help to think, are there any areas where maybe the company identified? Maybe could have done better in 2022? Is there room for action improvement? The Canada segment might be one area that comes to mind for me in terms of getting more sustainable earnings growth there. But Paul, interested to hear your thoughts, if there are any kind of areas you have identified where you think the company can do a little bit better? Yes. It's a good question and it's absolutely a question that we talk amongst ourselves and talk with our Board about, because it's not just about M&A and growing capital, it's about growing your businesses organically and making sure you are making the right decisions from a capital deployment perspective. And I mean, organic capital deployment, as we invest in systems and capabilities to participate in markets where you really think you can get traction in growth. Having said that, if you really look at the thing that was a drag in year is markets. When you think about the impact of markets, that's sort of the most fundamental drag. But having said that, we are looking at businesses. So for example, I know Jeff and his team are actively working through opportunities to expand the group business in Canada with our Freedom channel. And I'll let him speak to that. And when we look at the individual business, real discipline around pricing and making sure that, we have got the right products in the right markets and we are not getting opposed to ones that where we don't feel like there is the right margins. And then we look to Wealth Management in Canada where we think we have got a big with our affiliated channel. So maybe a little bit of color. So that Canada is one, and then all markets, Ireland where we have launched our a lot of digital capabilities in Ireland. We are extending through the Allied Irish Bank business that we have launched in partnership with AIB. So we are constantly thinking about how do you actually drive growth. And then backing all of those things is efficiency. We do it. We are very, very minded to efficiency. So maybe just as a bit of color, I'll let Jeff speak to where we are looking for growth and also the way he is thinking about efficiency. Jeff? Thank you, Paul. And you mentioned some of the fundamentals already. But I would just say that, we continue to believe that, the business fundamentals in Canada are very strong. If I pointed to some examples of that. If you look at '22, we are very pleased with our top-line growth. As an example on the life and health side in the quarter, we were number one for sales, our retention of business, our persistency, our margins are very, very strong. We are delighted on our growth of our group wealth business. As you recall, at this table, a couple of years ago, we talked about our investments in that area. So we see good growth in that top-line and also net growth and we see an opportunity to grow into other markets. Paul touched on the retail well side, I think there is an opportunity for us as we look to expand that area. And just on our membership that we have, the participants we have close to 4 million Canadians. We are expanding our Freedom experience, which we would call it. So those opportunities to work with Canadians, as their plan members, whether that be individual insurance, whether that be next steps, our retirement business, et cetera. And we continue to spend dollars wisely and invest on the technology side, in areas where we see big growth opportunities. So we are quite bullish on it. We have an aggressive plan and we think that there is great growth areas in all of our four key areas. So life, individual wealth, group wealth and the Life and Health side. Good afternoon. Could we just go back to Capital and Risk Solutions and maybe Arshil might be best positioned to address this? A business like this, I often think of being helpful from a tax R perspective or regulatory R, and then also just there's a good business case for it as well, which is risk reduction. When you think of your business in the context of that, like tax regulatory and risk reduction, do you see any vulnerabilities in the near future related to new business? Are there any sort of changes on the horizon that could impact demand for the products? I think, Arshil is best positioned, but I think one of the -- I'll just say at a general level. We've got a very expert team that remains very connected with their clients globally. And Arshil talked about a solution that we tapped into in Japan and then more recently doing things in Israel. There are opportunities that exist really globally. We just need to make sure they're disciplined in finding the right ones. So, I would start a little bit just by reframing a little bit to whatever. So, there isn't really tax arbitrage or regulatory arbitrage. There is risk transfer and making sure that the risks ends up into the party that's best able to absorb that risk. And a number of the things that we do in our reinsurance business are very diversifying from a life perspective, including the property catastrophe cat business. So there we're exposed, we're taking on risk, but we're doing it in a way that doesn't correlate with the rest of our balance sheet, doesn't have equity market risk or credit risk. It's more tied to natural perils. And so we're well able to bear that volatility and that's kind of our approach and mindset. And then on the longevity and asset intensive side, that's full risk transfer to us. We use our investment expertise, we use our actuarial pricing and underwriting expertise. We make a judgment and assessment and then we're good long-term holders of that risk. But you are absolutely right to note in all of those businesses once we decide that we're a good holder of it, we try to operate with -- in a tax efficient way and in a capital efficient way fully respecting all of [indiscernible] LICAT rules. So certainly, tax over time is a potential exposure for us to be managed. So I don't think it would threaten the underlying business, but how we conduct it, our business and how we price our business potentially would be impacted by tax over time. And then finally, we have our structured financial solutions business where we're typically taking on tail risk exposure for our clients and they're entering into these arrangements to improve their capital position and effectively paying us a cost of capital. And they're very interestingly with higher interest rates some of the solutions that we have. And the cost becomes even more cost competitive relative to raising debt in other forms of capital in a higher interest rate environment. So, I think it's a very balanced portfolio that we have with risk that we're appropriately able to bear on our balance sheet. And I wouldn't be describing it as sort of regulatory arbitrage or tax arbitrage, but we are absolutely tax and capital efficient in how we try to operate our reinsurance business as are every other reinsurer because that's a key part of the success that reinsurers have relative to direct companies. Yes, I think I understand, and I appreciate the nuance and the distinction you're making too. It doesn't sound like there's anything imminent on the tax or regulatory front that would impact how Great-West Lifeco deals with it or demand for the product. So, I appreciate that color. One other quick one, the contract service margin, I'm coming to understand that there are some companies in 2023 where we're going to pay a lot of attention to the evolution of the contract service margin. And then there are companies, and I put Great West Life in this camp, where there are plenty of businesses that drive long-term earnings growth without having a contract service margin attached to it. So with that being said, I want to demonstrate that I understand that distinction. How do you think the contracts margin for this company evolves over a year? Would it be fair to say that every year it would grow by a certain percentage, or is it conceivable that it could shrink over time? Sure. Yes. I think, you're right. There are businesses where the contractual service margin will be an important part of the description and the value creation story for business. And we'll have some of those. If I look at, say our, bulk annuity in the UK would be an example. The German business is another one that comes right to mind. But if I look at across Lifeco overall, I would not say that the contractual service margin and how it develops will be a big part of our narrative. So I think for us, it'll be a more focused on the businesses where it really helps understand the value creation in that business and the growth trajectory of it. And a lot of our businesses, Empower, a lot of the Canadian business, whether it's the wealth side, the group businesses, you're not going to have a CSM. So it's -- you're just not going to see that, we've got some inforce, just based on mix of business. But where we've been growing and focusing and a lot of our businesses, you won't see as much on the CSM, but there will certainly be pockets where we'll be calling it out where it makes sense. No, that was precisely what I was getting at in my preamble, that I know that for Great West Life, the contract service margin doesn't necessarily play a big role. That was the point I was making. But the contract service margin itself for this company, will it grow every year or do you think there are years when it could shrink, but I'm thinking of the total company contract service margin. It'll very much depend on the mix of business that we're riding in that year. because that's going to be a big driver. As I say, it's, I mentioned the UK bulk annuity is a really good example, a bumper year of that's going to change the growth trajectory. And a quiet year, it'll go, it could be a lot flatter. So it really will depend on the mix of business. I would say on a relative basis, our non-contractual service margin businesses, I would expect would be growing faster than those that are exposed to the CSM. So the CSM would feature, as less of a driver of growth and earnings as opposed to the other areas where we see growth. Yes, and I appreciate that that's our responsibility as analysts and investors to find ways to compare companies even though they present in a pretty different way. So I appreciate your guidance in that respect. Thanks for that. Thanks guys for taking my questions. Just a quick follow up. The first was just how you think about the dividend as a point of clarification. You mentioned the positive impact of LICAT on transition going to be healthy buffer to your internal target. So when you think about dividend increase in the future, what's the catalyst between the payout ratio and the LICAT level, is the LICAT come into play, and you're willing to pass on dividend increases and let base earnings catch up? Or is it purely a payout ratio that's going to drive your decision making going forward? Yes, sure. Just to clarify, the LICAT ratio is for Canada Life, that's the insurance -- the consolidated insurance operation Canada, Europe and most of the CRS business. So that's what's -- there is a LICAT ratio. And so, the LICAT ratio has an impact on the dividend in Cat Life would send up to Lifeco. But the payout ratio, that's measuring Lifeco's common dividends relative to its earnings. So, it's not directly impacted by LICAT, other than that liquidity related comment. But given the cash generative nature of our businesses, the strong LICAT position, it's not really a factor in our dividends or a payout ratio at this stage. Yes. And Nigel, I would say, broadly, as we think about dividends, we will use our payout ratio range as a guide, as we think about considering what we do in a given quarter. But the other major consideration is our perspective on forward growth. And we would use those as the key drivers. As Garry said, we have highly cash generative businesses. So, liquidity wouldn't tend to be a constraint. It would be a function of, as I said in my previous comments, we are looking to manage down within that range of 45% to 55%. We are a bit over it now and where our intention is to manage down over the next number of business cycles. And with that in mind, we will be thinking about forward growth as we think about growth in dividends. Okay, that's helpful. And the quick last question is again on the old enhancement follow-up. Just trying to get a sense of, if you could expand on the drive side, you have got healthy yield enhancement gains this year and pretty healthy yield enhancement gains in 2021 as well. So, is that driven by certain set of market conditions that are more correlated to it or is it just either a pickup in yields and spreads? And how do you think about the run rate going forward, irrespective of the transition? On the first part, what drives the yield enhancement pickup is effectively the additional spread that we are able to take by trading assets. So, we come out of lower yielding assets, say government bonds as easy example, into spread assets and we would capitalize that spread. So, 2022, we would have had good success. We had quite a good pipeline of ERMs that were attractive spreads and in general in the market. I'm looking at Raman and seeing nothing. The spreads were corporate spreads were in general wider in 2022. So that combination gives us good opportunities for yield enhancement. But it is just capitalizing the spreads net of appropriate credit risk charges, asset default charges. So that's really what drives it, that's the first part. I think that's really, I mean, obviously, your credit spreads have narrowed somewhat in the back end of the year. But that has ebbs and flows overtime. So, I think we will remain active. We have got a very good investment job and we will remain active in that. And as I said earlier, under IFRS 17, depending on the portfolios and the nature of the underlying investments, you might get a slightly different presentation of it. But the underlying value created by trading into attractive assets on a diversified and a high-quality portfolio basis, that will still remain regardless of the accounting regime. Thank you, very much for taking my question. I know it's a little bit late, so I really appreciate you taking the time. I just have two questions. The first is I wanted to just follow up, Paul, on what you said earlier with respect to Empower and when I look at the $710 million of base earnings in 2022 and suggesting that that will grow by, or you're targeting 15 to 20 in 2023, and that's all well and good. I think I have that conceptually in place in my mind, but at the same time in the US, we saw the corporate go from a loss in 2021 to earning money in 2022. Are there any other puts and takes that we should be thinking about in 2023 with the rest of the U.S. business in terms of earnings power? And also, maybe if you can just throw in the answer to that, I noticed that you did a large reinsurance, or if you did a reinsurance and revenue reinsurance at the end of the year, does that factor into earnings power anyway, or shape or form in 2023? And that's my first question. Yeah, sure. I think, the first part of it was just the corporate segment in the U.S. and that often picks up miscellaneous things could be plus or minuses. They're generally not that large and they do move around. They are not directly tied to the underlying businesses. So, we wouldn't be anticipating that necessarily. But obviously, things can arise positive or negative in a year, but that's -- so that's not really a factor in our -- we were correctly surmised that we were talking about empower and as say the corporate can just move around a bit, but it tends to be just one-offs. And then the second part, and I had a great answer. The second part, I'm just trying to remember what the question was on the second part. The reinsurance, yes. I knew it was another, it was another unusual question. That's good. No, the reinsurance -- So in terms of, this is primarily for us, it's primarily focused on capital relief. It was part of our planning and financing of the Prudential acquisition that we would potentially utilize external reinsurance as a part of the support for the RBC relief. So, there is a fee we pay, but it's modest in the overall picture of this. We would expect under normal business conditions to keep the economics of the business. So, it really is just a capital relief in some ways similar to the business that we actually provide for others in through our CRS business unit. But this is one that we've done with an external party to help support the RBC ratios in the U.S. Okay. Great understood. So, my second question is similar to Mario's question with respect to IFRS 17 and the contractual service margin. I'm going to ask it a little differently though. When I look at the presentation of the balance sheet under IFRS, the opening presentation, I see that you've established a $6.8 billion contractual service margin. What surprised me was all of the puts and takes in terms of reclassifying some insurance contract liabilities to investment contract liabilities some pretty big movements there. But at the end of the day, net-net your insurance contract liabilities are actually down about $10.8 billion, and that's about 5%. So conceptually, I think of that as your long tail insurance businesses actually being a little, having a little bit less earnings power under IFRS 17 because before your PfAD apparently look larger than your contractual service margin of your risk adjustment. So can you correct my thinking on that or am I missing something pretty critical in that thought process? Yes, so I think the, probably the one piece that wouldn't necessarily leap off the page is one of the big contract classification changes with some of our U.S. businesses that were within Empower while there would've been insurance contracts under IFRS 4 are actually IFRS 9 contracts in the new regime rather than IRFS 17. So that's what's driving a lot of that shift. Now, that's the big one that would come to mind. And if you have pegged it right, that our, the risk adjustments under IRFS 17 are lower than the actuarial provisions for adverse deviation, the PfADs that you'd have today. And that's cause the risk adjustment does factor in diversification, whereas the actuarial PfADs tend to be standalone margins on each assumption. So there is a natural reduction there as you move from the PfADs to the risk adjustment. So I think those are the two biggest ones you called out. But again, we'd be happy to follow up afterwards if there's, a chance to step through it more. But those are the two things I'd note right off the top, but we can certainly have a follow up call. Yes, I'd love to follow-up on the IFRS 9 reclassification of Empower because I didn't think it impacted Empower’s earnings capability. Therefore, I'm still stuck on the thought process that overall the embedded earnings power on your insurance contract liabilities is lower under IFRS 17. But yes, absolutely. Let's do a follow up call. That's great. Yes, it doesn't -- you are correct that it doesn't impact Empower's earnings power that shift. So that's one where the shift between the two didn't affect the earnings power. So let's have a follow up call. That'd be super. This concludes the question and answer session. I would like to turn the conference back over to Mr. Mahon for any closing remarks. Thank you very much. As we close the call, I'd like to thank all of you for attending and I'll also thank the analysts for their questions. As noted, we're planning an education session on Empower’s new reporting and we'll communicate the date when we've locked it down. And in the meantime, we wish you a good start to the year and look forward to reconnecting on our next call. Take care.

EarningCall_162

Good afternoon, everyone and welcome to the Sampo Group Fourth Quarter 2022 Conference Call. My name is Sami Taipalus and I'm Head of Investor Relations at Sampo Group. I'm joined on the call by Group CEO, Torbjörn Magnusson, Group CFO, Knut Alsaker and CEO, If, Morten Thorsrud. The call will feature a short presentation from Torbjörn followed by Q&A. A recording of the call will later be available on sampo.com. I am pleased to be able to release yet again very solid figures for the quarter and the full year. Both the backward-looking cost and claims ratios as well as the forward-looking retention and rate change numbers are overall very satisfactory, especially in the Nordics. Furthermore, in this main market of ours, we observed no changes to the market structure in the latter part of the year, no startups either from fintechs or international insurers. The second leg of any insurance business, investments also look promising, and we saw €230 million an increased run rate profits from higher yields compared to 2021. The balance sheet looks very strong, of course, and we plan for both the regular dividend based on the insurance operations, as well as an additional dividend and buybacks. The last quarter has been a bit technical in accounting, with a goodwill write down for Topdanmark Liv and reallocation of non-life provisions. But this does not in any way reflect a deterioration in the underlying development. So for key developments, in our P&C operations. They look very healthy, at the beginning of 2023. We have actually not seen any meaningful increase in claims inflation in the quarter. And at the same time the necessary rate increases are implemented in the market. There are comments in this slide about increased marketing activity in certain areas. But we were actually very close not to include that comment it has not had any significant effects. Claims inflation still varies between roughly 3% and 6% across the Nordic geographies and products, so no product standing out with any extreme number. And we have focused more on customer satisfaction and corresponding growth in Q4 than increasing rates furthermore. In the Nordics, we also rearranged provisions a bit increasing the Finnish discount rate more in line with reality but did with the margin but keeping the prudence in the regular reserves. Thus, the positive discount effect of 218 million and corresponding negative reserve increase of 103 million. All-in-all, we have kept our longstanding prudent stance on provisions at roughly the same level. The U.K. then, the premium numbers are quite extreme for us in the quarter as we did not participate in the aggressive market behavior in Q4 2021. And then, we have of course, increased rates in line with a 12% claims inflation this year. So our total growth in Hastings in Q4 was a very high 31%. This also reflects rapid growth in home insurance and growth in telematics as well as the multicar product. Even if home insurance still is much smaller than motor for us at more than 400,000 policies, it's no longer a negligible line for Hastings. The U.K. market has it seems met but not exceeded the increase in reinsurance rates at the year-end now, which means that we still see average rates somewhat inadequate in motor. As mentioned already, for the first time, in many years, running yields have increased and contributed in a non-negligible way to our results. Underwriting still makes up the majority of our total profits before taxes, but the more normal at least from a historic perspective, interest rates makes the underwriting discipline even more valuable. The running yield at If P&C was 3.2% and Mandatum 4% year-end, and we have strived to lengthen the maturity yields also in these beneficial surroundings since roughly the half year and average maturities are now just below two years for the same entities for If P&C up from one-year just 12 months ago. This slide is a dull one but let me comment briefly on two things. First of all, we continue to grow the underwriting profits rapidly. And the underlying combined ratio has improved in the Nordics both from cost reductions and continued underwriting improvements. There's no change to that development. Secondly, the Hastings figures look a bit odd much due to the same effects as previously in 2022. Due to technical items having to do with our acquisition, as well as the reinsurance structure changes. We missed our target for the year by just below 2% for Hastings, which reflects the unusually tough winter in the U.K., something not at all unique to us, of course. The more important remark is that the motor rates in general need to come up more than they have for this market to perform adequately in 2023. Needless to say, as part of Sampo Group, Hastings will never chase volumes unless rates are sufficient to meet our targets. Then, in the capital markets, say in 2021, we introduced a new balance sheet framework. We have also tried to show a lot of discipline in this respect. With the conclusion yesterday of the €1 billion buyback program and with a proposal today of a €2.60 dividend plus an intended 400 million buyback, we continue on this path. The remaining excess capital after this is by and large the capital tied up in the PE portfolios. Finally, a couple of words on the ongoing Mandatum evaluation that the board initiated in December. This, I think came as no surprise after the last few years of strategic process. We are considering a broad range of alternatives including a sale, demerger or just continue as is. Remember Mandatum provide some dividends support for the Group, and also is gradually but at a high pace growing a business which is more less with profits and more present-day business. And this sub-sentence of possibility for support for the dividend for the Group is in no way intended as an indication of the end result of this process just to be clear. We carry out this evaluation as usual at high-speed and expect to be able to provide a concrete update before the end of the first quarter. Sorry, I will just start again. I have three questions. The first one was on the excess capital that you have, one hand you suggested €2 per share and based on the PE days, but on the other hand, you mentioned slowing down and [Technical Difficulty]. Sorry, Faizan. You keep cutting out all the time. Operator, can we move on to the next question and we'll come back to you Faizan, if you rejoin. Sorry, if I take your question then. But my first one that was actually also on the excess capital and the last year, I think, Mandatum, we talked about the leverage rate, which seems to be your most binding requirements now being at 30%, roughly after the payout. But back then, we also talked about you being willing to let it drift above 30 for a while because you basically had the cash or the liquid assets as well. Now it seems like you've changed that strategy and when Torbjörn talk about the last two years being tied up in the piece they exactly, if look at from a solvency perspective, you do have those €2 already present. So what is it that has changed in euro sort of way of looking at the leverage rates are being sort of across that instead of a net debt approach? Good afternoon, Jakob. I don't think I would agree with you, that we have changed everything, anything. The reference last year was more in the order of things that if we have a leverage that goes slightly above 30, for a while and a plan to take it below our target, we would be fine with that. What we now have done is decided to return 1.7 billion in capital, including the planned buyback that brings the solvency as you alluded to comfortably above the 170 to 190 range. And I would also say that the leverage, we are comfortable with landing slightly below 30 with the older accounting regime, and 1% to 2% lower as we speak, since that's the benefit of own equity of the new accounting regime. So the decision on the buyback plan buyback and the dividend we have done is not relate to turning the fact that we have a constraint as such, which is here. And now, it's in line with our communication to do gradual capital return. And we just concluded the sizable buyback and we have today announced further sizable capital distributions. Fair enough. But just to make clear, for my side is, would you agree that if we take from a solvency perspective to 210 versus 170, if you take the bottom-end, that's around €1.5 billion, and the same if you would include your sort of net liquid position in your, so they could take a net debt instead of gross debt leverage ratio, that would be roughly the same. So even without selling the piece, they actually would have at least €2 per share today, which you have then chosen to save for later, is that correct? Not sure I followed all of it. But maybe one thing, I would necessarily say that we define excess capital above 170. We have a capital management framework with a target range between 170 and 190. So excess capital would more be above 190 than 170. I think we still have a comfortable capital position and would say that we do have excess capital which of course, some of that needs to be monetized in terms of the private equity stakes. We are after all, distributing €1.7 billion. So to distribute more in terms of liquidity, we need to monetize some of the or the private equity stake or do other things to get liquidity offered to the group. Jakob on Slide 17 of the investor presentation, you've got the position on the solvency without selling the PE assets. We have 0.8 billion of headroom on the solvency. But I guess you do have the liquidity though. If you look at the Plc balance sheet, you have 2.5 billion, which would also be 800 million more than you pay out. We do have liquidity left. Absolutely. But now we have decided on this dividend to be planned buyback. It's a gradual return. Could we have sort of paid out a little bit more probably could argue that we could doesn't mean that this is sort of the last time we announced a capital return and unlike has also said many times before a buyback takes the time a buyback takes. You can't speed up the buyback just because you announced a larger buyback than the planned buyback, we announced today. I think, I get it. Thanks. And then on the underwriting, there's been some talk, I think in the market where what the underlying claims rate or combined rate is actually doing in this quarter but stripping out for all the extra stuff that we can't see but you can see. What would you say as sort of the development of the underlying combined ratio claims rates of year-on-year, please? I will start and then leave the details, the insights to Morten but there's been no dramatic or significant change on previous years, we've had good development for several years with growth due to our longstanding investments in IT and the web. We have also been able to improve the underwriting also this year, stripping out the volatile items, as you can see from one of the pages in the package, say 0.5% for the year, and also been able to improve the cost ratio 0.3. So virtually the same development as we have seen for the past few years, underlying. Yes. And then, more detailed figures underlying improvement, 80 basis points, 30 basis points from cost reductions, which of course is important to bear in mind. It's part of our sort of long-term strategy of always reducing that. And then, the 50 basis points on the risk ratio. And I think sort of full year underlying improvement of 80 basis points is sort of what is really representative, doing underlying combined ratio on a quarterly basis, it's always a lot of sort of smaller volatility that they influence. So I think the 80 basis points that you see on the full year is really what's representing the underlying improvement. Thanks. And given the price initiatives you have done and the claims inflation, which guess seems to be leveling off a bit, would you then expect something similar in 2023, or is that too optimistic? No, I don't want to speculate too much about sort of the future development. But of course, we are implementing price increases now between 5% and 6% into 2023. We have seen inflation so far, 4% to 5%. And it is correct that it's cooling off somewhat. Motors seems to have reached sort of the level that we expected and property clearly leveling off, and even seeing some reductions as we see some of the raw materials even being reduced in price. So again, we don't want to speculate too much about sort of future development on online. But I think we are clearly pricing in order to really take care of the inflation that we have seen and sort of anticipate in the market. So I think we feel very comfortable about that situation. And then, Morton, you're not going to get off next year without having improved the cost ratio, once again, of course. As I said, the long-term strategy, always improving that to 20 basis points, which of course, it's important part of that underlying improvement. Last question from my side, reinsurance. How was your program retention levels and pricing change what will be the potential negative impact to combined ratio in '23 from reinsurance prices having gone up? The reinsurance market was finally hardening. We expected it to harden already a year ago. But now it was finally hardening. Thinking it's important to bear in mind that's a positive for us. It's helping us driving up rates in the large corporate market. And being the largest insurer in the Nordics. Of course, we benefit from a hardening reinsurance market. We have slightly increased our net retention from SEK 250 million to SEK 300 million. But that's a more flippant comment. You can say that over the last 10 years in euros, it's been more or less unchanged. So we have €27.5 million as net retention today, which was exactly the same we had 10 years ago actually. Price increases, the brokers report 20% to 50% price increases on the reinsurance renewals. We are in the very, very low end of that range. And this was fully anticipated for us so we have already included this in the pricing for 2023. And I usually quote, the number, our total reinsurance spend for the core programs are to the tune of €70 million, something like that, you can compare that to the overall if premiums and figure out whether that has an importance or not. I could ask you about just the competitive environment, I get the point that there has been no dramatic change, when you've mentioned it several times. But I think in your slides you talked about some market activity in some areas. So maybe you could elaborate on that to start with. And then, secondly, on the U.K., on Hastings. I mean you changed the quarter share reinsurance last year. So it's a bit hard for us to work out the earned premium dynamics versus the rating actions you've taken and claims inflation. So I was wondering, could you tell us like, here's the first half probably like a difficult half, when you can get back to the operating ratio? Or do you think that's achievable? Thank you. I can comment, the first one. I think it's quite exaggerating, saying that we see any changed behavior in the Nordic market, it's sort of quite often we see a bit of marketing campaigns and different types of activities towards the end of the year. So I think this is no change in the market at all. Then, as I said, on Hastings is part of Sampo Group, so we price according to what we need to meet the targets, and we have done so in 2022. And we would expect hope that the market will follow. Otherwise, we will find it increasingly difficult to increase our market share, of course, by the usual dynamics. Having said that, I'm impressed that Hastings has been able to keep up their top position in the price comparison websites, even with higher prices. So there's obviously something to the brand and the way that they do business that is very skillful. Great. Can I ask a follow-up just in the UK, please. Because there are at least some suggestions in the market that there's been quite material improvement in pricing for both your business and renewals in general? Are you able to comment on that, please? I think there's lots of public statistics in the U.K., rates have improved in the second half of '22. You could say that that's good. We don't see that as quite enough. So but general position is better now, better not adequate now compared to six months ago. And then, an early indication of the rate increases at the beginning of the year is that they reflect the increases in the reinsurance prices that we just discussed here but not more. I have one question on Mandatum and strategic view, you mentioned in the slide that enlisting to give shareholders control over the valuation. But I'm just wondering, with this growth to create a risk, for example, for a potential overhang on the shares given that you could perceive this potentially looking to sell the stake at some point. Would a potential sale be a better option here. Presumably the latter will result in a more immediate cash infusion and more value creation. Thank you. I think I could follow roughly half of your question, unfortunately. But anyway, on Mandatum, I don't think that we wish to comment more than that. At the moment, we have all options open and it's reasonable after just a little bit more than a month exercise here. We'll return to this during Q1. First, I just wanted to circle back on Jakob's point about the adjusted risk ratio outlook. I think before you were saying pricing increase was five plus percent in the Nordics and claims inflation was 4 to 5. It now looks like you're saying pricing is 5 to 6 and claims inflation is the same. So are you implicitly saying that margins are going to improve going forward there? And then, secondly, just around the sort of geographies that you're seeing in the combined ratio improvement, is that sort of 20 bps underlying improvement consistent across all the geographies that you're seeing there? And then, just finally, just if there's any update on discussions on PE timelines, and anything that you could give on that? Thank you. Yes. I'll start within the line improvement. Just to repeat that, again, I think the fair view there is to look at the full year 50 basis points, risk ratio improvement and 30 basis points, cost ratio improvement, so 80 basis points in total. Obviously, that's sort of the representative number for 2022. And most of the improvements is in large corporate and commercial, and then a smaller of it in private but clearly improvement in all areas. When it comes to inflation, and pricing, the 5% to 6% is what we are implementing now. Obviously, then looking forward into 2023, then the 4% to 5% inflation is what we've seen historically in a way sort of during 2022. And then, we are not expecting a really inflation to increase further from this level. We are seeing that inflation in motor is now stabilizing. It's been increasing throughout the year exactly as we forecasted, it's being now stabilizing somewhat. And the same we have seen for a while now even on property. Then, of course, the big uncertainty when it comes to inflation in 2023 is the wage development in the Nordic Region. But that is a fairly controlled sort of development, since it's mainly done through the big union negotiations. So yes, I think that's what we can say about pricing and inflation. Couple of questions left for me. Firstly, has the higher interest rate effect fully earned through now in '22? Or would you expect more of that to come through in 2023? Second question is, I wonder if I can give any color on the reserve edition that you made, I think to see the eight points what was going on there? Is that just reflecting inflation of something else? And finally, on Mandatum, I know you're not going to say much, but to what extent is the lost dividend of consideration with respect to the coverage of your insurance dividend should you decide to spend Mandatum without any proceeds coming to Sampo Thank you. Good afternoon, Blair, Knut-Arne here. In terms of effect from higher rates, there is a little bit more to come. In terms of the running yield, I would expect that to continue to take upwards a bit during the next couple of quarters not north to the same tune as, as we've seen during the second half or so of '22. But to continue slightly upwards given the investments we are doing. And also, before addressing your second questions on the effect of the higher rates the reserve adjustment or the discount rate adjustment, we know under the old accounting regime wasn't up to the level where we will start '22. So there will be -- you can say an additional positive effect in equity from implementing IFRS 17 at an even higher discount rate. Yes. And then, I could add on the prudency. We always have had as a philosophy of having prudent reserves. And this quarter, we're moving some of that prudence from Finland to other countries. Obviously, driven by the fact that we have rapidly increasing discount rates in Finland, that gives us 218 million in positive effect. We are taking 115 of that and moving prudency to other countries. And then, in addition, it comes 8 million in claims adjustment reserve, which on the waterfall in the presentation is classified as current year reserves strengthening. So again, we are, as always having prudent reserve and moving some of that prudency in the fourth quarter, which obviously makes the figures a little bit difficult for you to fully interpret, unfortunately. And if I should add Blair, just on the beauty of doing what we have done in Q4 and going into IFRS 17 and nine for that sake, of course, we will be marked-to-market in terms of interest rates, where interest rate prudency is a blast from the past. Now, we go into IFRS 17, actually having reshuffled some of our prudency into the best estimate, which will continue to be prudency and also under IFRS 17. Well, Blair it's very helpful that Mandatum has been able to grow his underwriting profits so much lately so that profit dividends can come from different sources can't they. Okay. When you say end of Q1, do you mean end of calendar year Q1, so in the next six weeks? I have a couple of follow up questions on the wage inflation levels. Your reinsurance quota share in Hastings. And also the frequency we have seen in the Nordics, any differences between the countries have normally been worse from Sweden, within Sweden better than Denmark, et cetera, when it comes to frequency, especially on the motor side. And how much impact of this in England on the Hasting side. Then finally on discounting may be witness to this totally wrong, but the discounting on the IFRS 17 side, shouldn't that improve your combined ratio when you move into the next leg year or should they? How much have you not discounted in your book so far versus what you have done? Finally, on the buybacks, would it be fair to say that you can have more buybacks coming into your AGM this year? Or should we not think that could be an option at all? Frequencies in the Nordics that's obviously Morten's question, but there will be frequency variations for all gradual slow frequency evaluations for all products in all countries. So sort of summarizing that by country is an illusion. But Morten, do you want to say something? I can try, of course. I mean, first of all frequencies have returned off the COVID. That's, of course, that's for sure. That you see also we have indicated and that's roughly exactly as expected. And then in terms of development, we've seen a little bit sort of harsh winter in Norway and Finland. What typically cause problems on the insurance side is if the temperature goes a lot up and down and in Norway in particular, it's been sort of quite a varying temperature throughout December. So that obviously has sort of had certainly impact on frequencies in Q4. But there's nothing in the frequency of development that is different than what we have expected. So it's very much sort of developing as planned in, in all BAs. Then on U.K. frequencies, frequencies, for us is of course very much something that we follow closely monitor always and price -- to price for now, and then something more sudden happens and we had more severe winter in the U.K. than the usual. And then there has been various interpretations of frequencies, trains have not been running, people have driven more to the office, and therefore we've had higher frequencies. I think that's partly speculation, but it will be interesting, I expect frequencies to come back to normal in the U.K. in Q1. But it'll be interesting to see when we have the numbers. Apart from that COVID is long gone, and numbers are normal and have stable developments. IFRS 17, Knut? IFRS 17, you're right, there's a little bit more discounting under IFRS 17. And what we've had previously since all reserves will be discounted. I think we said when we had the IFRS 17 brief a couple of months or so ago, the impact on the combined ratio will be around 1%. And that's a positive number with the current rates. Then, of course, just since we're talking about technicalities, the effect of changes in discount rate will no longer be a part of the combined ratio, but what will be a part of the net finance result. So it means that the changes you've done now is sort of improving the combined ratio this time around and it stays there while the change to the one percentage points referring to the last change the combined ratio lower into the IFRS 17, is that understood correct;y? Not sure, I got your question right. But what we now have done will not change the effects we talked about on first December. We still will have a positive effect from discounting on our combined. The second part of my answer was more related to future changes in discount rates under IFRS 17. In other words, the mark-to-market valuation or liability changes in the interest rate levels the curves will not be recorded in the combined ratio the change in itself that will be a part of the net finance result, but there's nothing we have done now, which in any way materially changes, what we talked about on 1st of December, I think that presentation was. So but let me just reiterate what we have down here. Since under IFRS 17, there is no prudency with relation to discount rate you can't choose another curve than the market curve for rates. So that prudency possibility if I should call it, the silly thing like that will be removed. But of course to have a prudency in your best estimate since that is not only one number. But a range that is still possible. And we have taken some of the prudency out of the interest rate discussion and moved it into our best estimate where it will remain also now under IFRS 17. On the buyback should I -- its customer customary for the board to in Sampo to go to the AGM and ask for an approval of doing buybacks and without front running any AGM proposal. I would personally guess that that will happen also this year, which means that it would be possible to do more buybacks for Sampo in the future. One buyback at a time like we always do. Yes. It's gone down to 30%. So not a big change. We did a big change last year. This year for strategic reasons, we didn't as strategic meaning buying reinsurance in the best way. Now strategic for example, of course, we don't really need that reinsurance program, for Sampo solvency or anything. Let's see. But I guess what people sort of anticipate is somewhere around that figure but let's see. And then of course, for us on the insurance side, we have also a number of sort of contracts that are negotiated. So I mean, to a fairly large extent, we also have a fairly good view on what we are going to pay our suppliers. So that means that we can sort of manage inflation in a good manner and make sure that we price and continue to price and stay ahead of the curve. What is so Implicit about this. I mean, he has renewed many of -- you have renewed many of your supplier contract already for the year and then it's if claims if wage inflation would be higher, that's actually their problem for 2023. I don't expect that to be the case. But Morten is – Sorry about that earlier. Most of my questions have been answered. But I just wanted to follow up. Firstly, on the reserve adjustment that you've done. I appreciate the rationale behind it. But I'm just trying to think about it as a starting point. Because if you've increased your calendar year lost stakes, and would it be fair to say that the risk ratio that we start off with for 2023 will be 64.5 rather than 64.3? That's first question. The second is, I know you can't say too much on data at this stage. But how much does my doctor contribute to the diversification benefit and solvency ratio? And my third and final question is on Hastings, there are a lot of moving parts and pricing has also changed a great deal over the course of the year. What is the starting point or the exit loss ratio that we should be using sort of forecast 2023? I'm a little bit uncertain if I understood your question on the risk ratio. But given the numbers that you mentioned, I interpreted like you're pointing at the current year effect of the reserve changes, which is what we call claims adjustment reserve. So when we increase priors reserves with 150 million, we also need to set aside claims adjustment reserve. And that claims adjustment reserve is always booked on current year. So that's kind of a technicality more than anything else. When we are reducing the reserves as a result of the discount rate increase. We are not releasing any claims adjustment reserve because that's purely sort of technical. But as long as you increase sort of the reserves, you also set aside sort of claims adjustment reserves. So it's a purely technical thing, and it's nothing in that you should put into down the line. As I said, the correct understanding is, it's for the underwriting years 2021 and prior and therefore it's just more how it looks optically rather than what -- I try and do Hastings. Let's put it this way. Hastings, the starting point for this year is that we feel that the market in motor is slightly inadequate in terms of pricing. I'm not going to give you a number, but this means life is not only numbers. So people we have been able to keep our live customer policy count stable despite this during last year. And we have of course, priced at the level we need to for the claims inflation and the developments. Then, when it comes to home, we didn't have any backup book, which was helpful. So we aim to continue to be able to grow in home insurance. And another backdrop to the development in the U.K. is, of course, that last year we had the [indiscernible] reform that for 12 months reduced the incentive to change insurer. This year, we don't, so I think that we would expect to see churn to increase a little bit in the U.K. market this year. Maybe not back to 2020. But higher than last year and that will be for the benefit of Hastings. And when it comes to the capital, synergies between Mandatum and the rest of the Group, let's revert to that discussion. If needed when we have concluded on the strategic review. The reason why I'm saying that is that that is of course dependent on how they balance sheet of Mandatum and the rest of the Group looks from time to time, which would impact what I would assume that you are would be using that number for. Just three very quick ones, for me, please. One is this slide 17 the excess capital in the future the return? I think you have tied and bound to PE, the private equity portfolio. But I think in the past, there also used to be a hint of something called featured actions. In fact, being taken out or you're just left out and stimulated a topic, I'm just trying to explore. If there's no sale of the [indiscernible] there might be some other things happening. That's the first question. Second question is the industrial is lessen 30%, we've heard some of the Nordics deal that needs exiting, withdrawing from this business for a while. Isn't a dream well for you 20%, gross profit, do you see this as an opportunity. Who are you competing with just any feedback or comments would be very helpful? And last question is inflation. I think [indiscernible] pointing out that you were expecting inflation to go up in the fourth quarter, but clearly it hasn't happened. So you would agree to be better than expected? Is it because of property peaking? And it's likely to be that, we can celebrate a bit the peak of inflation behind us. Thank you. I can start with the first. I think you asked about the link between our excess capital and the PE portfolio. Was that – No. In the past used to be something called future action that well, so I'm just -- even if I go back to the third quarter slide. We just haven't included those future actions on the slide. This time. There's no change in the pipeline. It was on the things like the capital model, for example, partial internal model. Oh, yes. Okay, sorry about that, but there's no change in the ongoing work we are doing and that preparations. So it's not because we have changed our mind or anything like that. It's just like somebody said that it's not on the slide. So that's the only reason we could include the colors or on this slide as well, absolutely. Then the line was a little bit bad. But I think your second question was about the strategic position on the large corporate market. And that's a book of business that has been sort of good and profitable for us historically. Obviously, now we see an even much better situation than I would say, in a long, long time with record highs sort of rate increases due to sort of general hardening market, of course, both in the Nordics and internationally. But also, that we see in some capacity sort of withdrawn from that part of the Nord market, both in terms of Nordic players reducing focus on this, and also some of the international players, reducing their presence in the Nordics. So I think the outlook and situation in the large corporate segment is very good. And clearly improved over the last few years. Then, the question on inflation, I will say that inflation developed in the fourth quarter, very much as expected. I think we've been talking about a motor inflation that gradually was increasing throughout the year, mainly driven by increased spare part prices. And that was the situation they did increase during the year and they ended up more or less exactly where we expected them to end. Then on the property side, I think we will also on the third quarter was signaling that it was slowing down and more stabilizing. And that's what we have seen also into the fourth quarter, and even with some effects of reduced inflation in property as we see raw material prices coming down. So as I would say, that sort of inflation is developing much as expected, but we end up with a total inflation than between 4% and 5% for sort of the Group. Thanks a lot. Just forgot one question. You have increased the duration of If P&C's investment assets by almost a year, over the past half year or so looking at your development in your solvency bridge, market risk have come down around 380 million or so from Q2 to Q4. Is that due to this increase? And also, how much of that sort of changed in your SCRs related to Topdanmark sale of the life business? Which I guess must have had €200 million or so positive impact? If you could just clarify and maybe give some more details here would be appreciated. Yes. It's true that we have increased duration obviously coming from all three investing in durations with more three, four years duration than what we had before three, four years maturity and what we had before have very, very short-term. So that has gradually increased although not a lot, it takes a while before increase in duration increase. In increase when you have a large portfolio like we have an [indiscernible]. And as we always do, we've had take gradual steps. In other words, it hasn't had a material impact on the market effects on our solvency that duration increase, I would say. But some and of course, we also have done these three investments with slightly higher average credit exposure than what we had before which has a slight positive effect as well. When it comes to the big market effect moves in lately, it's basically the symmetric adjustment that has moved, the market effects have been down and in the last quarter clearly in the negative direction. I think we combined a lot of different markets effects on one of the slides there to be minus 8% minus 9% is the symmetric adjustment. So the rest is netting off slightly positive. The positive effect from top the live sale is included in what we call out there and there's a few other technicalities in the roster there will always say it's but in that go along, you will find the effect from the live sale on top, which is slightly different than what it would be in total, because of the way that top zone funds in SCR is consolidated on a Group level. Okay. Just coming back to the symmetric adjustment, I thought it had gone up from 31 to 36. And what was it 33 or something the quarter before. So I guess that sort of had a negative importance led to an increase in your market risk, but it's come down. Now the symmetric adjustment, I think when went from minus eight to minus three during the quarter, so it come down. Which means that it's a negative effect since this time it was on the minus side of that depend between minus 10 and plus 10. So it means that the market risk for equities increased, since we could dark day higher symmetric adjustment end of Q3 and then we could then end of Q4. Okay. Maybe I'll take that afterwards. I'm not quite sure I understand. So if the symmetric adjustment goes up, you have a higher – Just one small question, then I see you bought lots of Denmark shares in the quarter. Is that correct? And what should I read into that? Before Jan Gjerland starts, I think this is the last question we can fit in, in this hour today. Go ahead Jan. Thank you. Just one final one on Mandatum on the running yield, the average seven, you show that it's 4% versus to guarantee 3.2. How much of this 230 million increase in sort of run rate to be pay tax profit is standing from Mandatum's profit sharing. If you can shed some light to that? You mean from -- with the profit portfolio? It's most of it since unit linked would be the customers more. So this would all be sort of the assets that that we manage as part of our own equity of course in Mandatum and managing the profit assets. It's not including unit linked assets in that calculation. Just to be clear Jan. Most of the 230 million comes from If of course, but from Mandatum is what Torbjörn mentioned. Okay. So, inside those 230, there is no profit0sharing element is just the pure elemental earning more on the equity inside Mandatum? No, no, but this profit sharing or whatever you guys call it, when you take everything about people 3.2. Is those included in the 230? You don't need to think about. This is the number that -- it's a number we meant to say we'll come to the bottom-line. Okay. Thank you all for your attention today. That concludes our conference call. And we look forward to seeing everyone on the road soon. Thank you very much.

EarningCall_163

Good afternoon. And welcome to the Yellow Corporation’s Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be a question-and-answer session. Please note, this event is being recorded. I would like to turn the conference over to Tony Carreno, Senior Vice President of Treasury and Investor Relations. Please go ahead. Thank you, Operator, and good afternoon, everyone. Welcome to Yellow Corporation’s fourth quarter 2022 earnings conference call. Joining us on the call today are Darren Hawkins, Chief Executive Officer; and Dan Olivier, Chief Financial Officer. During this call, we may make some forward-looking statements within the meaning of federal securities laws. These forward-looking statements and all other statements that might be made on this call, which are not historical facts, are subject to uncertainty and a number of risks, and therefore, actual results may differ materially. The format of this call does not allow us to fully discuss all of these risk factors. For a full discussion of the risk factors that could cause our results to differ, please refer to this afternoon’s earnings release and our most recent SEC filings, including our Forms 10-K and 10-Q. These items are also available on our website at myyellow.com. Additionally, please see today’s release for a reconciliation of net income or loss to adjusted EBITDA. In conjunction with today’s earnings release, we issued a presentation, which may be referenced during the call. The presentation was filed in an 8-K, along with the earnings release and is available on our website. Thanks, Tony, and good afternoon, everyone. Thank you for joining our call. In Q4, we saw a notable drop in demand for LTL capacity as the economy continued to cool down. With fully stocked inventories the retail sector had already begun to require less capacity from supply chain prior to Q4. During the quarter, the manufacturing sector also began to slow down following several quarters of growth. In response, we kept our focus on meeting our customers’ needs while adjusting our cost structure to help mitigate the near term headwinds. The adjustments, including reducing the size of our workforce to align with demand in addition to closely managing the use of purchase transportation, we also benefited from a gain on the sale of an excess terminal no longer needed as a result of the efficiencies from phase one of our network transformation. We use the net proceeds from the sale of a down a portion of the term loan. Even in the face of an economic slowdown and declining tonnage this is one of the most stable LTL pricing environments we have experienced and many years. We have stayed consistent with our strategy of improving yield on the freight moving through Yellow’s network to improve profitability and offset inflationary cost pressures. In Q4 year-over-year LTL revenue per 100, including fuel increased 21.1% for the month of January Yellow average between 5% and 6% on contract negotiations, despite the economic slowdown later in the year, the company made significant financial improvement in 2022 and reported its best operating income and operating ratio since 2006. Turning to phase one of the network optimization in the western U.S. the real end and optimize terminal coverage positioned us closer to the customers, which has enabled us to make pickups and deliveries more efficient and timely both of which are critical to the Yellow customer experience. Concerning the phase two network optimization in the Eastern U.S., we are following the same contractual process as phase one. The phase two recommended changes have been mailed to the local unions, and we are in process of meeting with those unions to field any questions or concerns around the optimization. We plan to communicate externally when an implementation date is determined. Looking ahead, our priorities in 2023 include continuing to enhance our customer experience with technology investments to provide new transactional capabilities and self service features on our website. We also plan to provide a streamlined suite of service offerings utilizing the speed of our super regional network. Serving our customers in a first class fashion will help us grow shipment count and profitably grow our company. Thank you again for joining us today. I will now turn the call over to Dan, who will share additional details about the quarter. Thank you, Darren Good afternoon everyone. Full year 2022 operating revenue was 5.24 billion compared to 5.12 billion in 2021. Operating income in 2022 was 197.8 million, which included a 38 million net gain on property disposals. This compares to operating income of 103.6 million in 2021. Adjusted EBITDA for full year 2022 was 343.1 million, compared to 306 million in 2021. For the fourth quarter of 2022 operating revenue was 1.2 billion compared to 1.31 billion in 2021. And operating income was 40.3 million, including a net gain on property disposals 28.2 million. This compares to operating income of 55.8 million in the prior year. Adjusted EBITDA for the fourth quarter 2022 was 54.6 million, compared to 115.5 million in 2021. The 8.3% decrease in year-over-year operating revenue in the fourth quarter was attributable to lower volume, partially offset by continued strong yield performance and higher fuel surcharge revenue. Including fuel surcharge fourth quarter LTL revenue per hundredweight was up 21.1% and LTL revenue per shipment was up 17.8% compared to a year ago. Excluding fuel surcharge LTL revenue per hundredweight was up 12.4% and LTL revenue per shipment was up 9.3%. LTL tonnage per day in the fourth quarter was down 25.1% driven by a 23% decrease in LTL shipments per day and a 2.8% decrease in LTL weight per ship. Sequential LTL tons per day trend compared to the prior year were as follows; October down 23.9%, November down 24.8% and December down 27.1%. On a preliminary basis, January LTL tonnage for workday was down approximately 17% compared to last year. On a sequential basis from December to January, our LTL tonnage per day was up approximately 8% compared to our historical trend of down roughly 1%. Capital expenditures for the fourth quarter were 51.1 million, compared to 54.7 million a year ago. Total capital expenditures for 2022 were 191.8 million compared to 497.6 million in 2021. Total liquidity at the end of the fourth quarter is 241.8 million, compared to 358.8 million at the end of fourth quarter 2021. As a reminder, in December, we paid the remaining 42.8 million due for the deferral of certain payroll taxes under provisions of the Cares Act. In early January, we paid the remaining 66 million due on the CDA notes that matured at the end of 2022 consistent with the terms of the agreement. The pay off of the CDA notes, combined with 32 million of net proceeds from the sale of excess facilities used to pay down the term loan have reduced our outstanding debt by nearly 100 million in the fourth quarter through early January. Much like the extension of our asset based lending facility in October, we continue to strengthen and simplify our capital structure. Thank you, Dan. 2022 was another year of tremendous progress at Yellow. When I think about our team’s accomplishments I’m very proud of our employees’ dedication and passion to meeting the needs of our customers and executing one of the largest network changes ever implemented by unionized LTL carrier. We expect customers, shareholders and employees to benefit from the execution of this multiyear strategy. As we head into 2023, which is just a year away from the company’s 100 year anniversary we couldn’t be more excited about the future of this company. We will now begin the question and answer session. The first question today comes from Jack Atkins with Stephens. Please go ahead. Hey, good afternoon, Darren and Dan. Thanks for taking my question this afternoon. I’m going to have more than one I promise. So good afternoon. So I guess maybe if we could start I don’t know who wants to take this with January? I think we’ve kind of heard pretty consistently for most folks was a little bit better than expected or better than feared. You’re seeing January up better than normal seasonality. Anything that you would attribute that to maybe an easy cop versus December just better weather. Just if you could maybe talk a little bit about that, that could be great. Yes, certainly, Jack. This is Darren. We were pleased with the direction of January, especially from a pricing standpoint, as well as those contract renewals were up 5% to 6%. And what we saw there was positive from a customer aspect. I’ll also comment now that we’ve got our entire sales force on the sales force technology I’m also encouraged with the pipeline that I’m seeing for Q1 and I think there’s opportunity for Yellow and the value proposition we’re bringing into the market. Dan, I’ll let you get into any more specifics. Yes. Good afternoon. Jack. I talked a little bit about time. It’s trends, as I mentioned in my opening remarks, LTL tonnage per day on a year-over-year basis for the fourth quarter was down 25.1%. And that was roughly an 11% sequential decline from Q3 compared to our historical sequential decline of approximately 4%. Specifically November and December’s sequential declines were certainly more pronounced than what we would have expected. However, you could call out the sequential increase from December to January was up 8%, which was much better than historical average of a 1% decline. So when I think about the first quarter in its entirety, historical sequential change and LTL tonnage per day from Q4 to Q1 is typically about a 3% decline with January, outperforming that, and of course, we don’t yet know how weather could impact the remainder of the quarter But I believe we have a decent chance to outperform that historical 3% sequential decline. No, that’s really helpful commentary and I guess, maybe kind of thinking about the bottom line impact from that. I know that the original plan, which would have been to perform in line with normal seasonality, if I’m not mistaken in the fourth quarter, but obviously the market had a different kind of idea, just given how challenging November, December were. Now that it feels like maybe things have stabilized a bit here in the first quarter, you’re going to have the benefits, maybe of one Yellow kind of showing up perhaps a bit more. I mean, can you maybe help us think about the seasonality of operating ratio versus the fourth quarter? Yes, Jack. So our OR for the fourth quarter was 96.6, which included the $28 million gain on property disposals. So excluding that OR would have been at about 99 which, as you call it out, is a little worse than we would have expected driven like I said, by the tonnage declines we saw in November and December. When I think about sequential changes now, from Q4 to Q1 we historically see degradation in OR about 200 basis points, and considering a few things, the sequential tonnage per day from December to January, which was a little better than we expected. But that also considering though, that we’re still incurring some costs associated with the execution of phase one, and in preparation for phase two. And now without expecting really any benefit from phase two during the first quarter I would expect we would probably be in line with that historical sequential change. I appreciate that color. And I guess maybe kind of shifting gears and kind of thinking about one Yellow for a minute. I mean, if we go back to the third quarter call, I think the idea was to be effectively wrapped up with phase two by this point. Can you maybe kind of walk us through what’s maybe dragging that process out a bit and kind of walk, kind of just explain that for a moment would be great. Jack, this is Darren. So for phase two, we’re working through a similar planning process as we did with the successful implementation of phase one. And that’s to ensure we have the best execution strategy. Phase two includes approximately 70% of our network and three of our legacy operating companies, compared to phase one and about 20% of the network and two legacy operating companies. We’re using the lessons learned from phase one to execute this much larger phase. The phase two recommended changes we’ve been through two mailings on that, the most recent mailing to the local unions. And we’re in the process of meeting with those unions and fielding any questions or concerns around the optimization. So we do plan to communicate externally when the implementation date is set. But phase two is still moving forward. And with the number of employees, local unions, and also the importance of the number of customers involved, we’re certainly being very stable and focused in the way we’re approaching phase two. Okay that sounds good. I guess Darren in terms of communicating externally at what point do you think you’ll be in a position to maybe communicate to the market, the impact that the one Yellow kind of cumulatively could have on the cost structure or your stability to kind of be more competitive in the broader market? I mean, do you think that’s something that this year, you guys will feel more comfortable talking about more broadly, just any sort of thoughts around that? Sure. The asset utilization we’re already seeing in phase one in the West, the customer convenience of not having the congestion of having to have our brands at their facilities at the same time, already seeing the reduction in pickup and delivery miles driven, the cost benefit on our dock and, of course, the pickup and delivery operation along with better customer on time service. All of those things together, along with the reduction in debt from freeing up facilities that are just creating redundancy and keep in mind, we’re not giving up any geography and we’re only improving transit times through this process. So absolutely, we will be able to lay out the benefits and all of those categories as we do this significantly larger change in the coming weeks. Maybe we’ll maybe one last question for me, and I’ll hop back in queue. But Dan, can you maybe talk a little bit about interest expense this year. You’re paying down debt, which is good. You’ve been able to rework some things on the balance sheet in terms of refunding a couple of things. But overall interest rates are rising. How should we be thinking about interest expense on the P&L in 2023? Any kind of way to think about that broadly? Yes, so I’ll start. The interest expense for the fourth quarter was 45.9 million, and was 162.9 million for the full year. Our current run rate right now is between 180 million and 190 million per year of interest expense. Our cash interest for Q4 was 24.6 million and 127 million for full year 2022. And our current run rate for cash interest is between 135 million and 145 million per year. The interest rates on our term loans, of course, have a LIBOR component with a floor 1%. So naturally, like you’ve called out we are incurring incremental interest expense right now and cash interest compared to the prior year, and that’s reflected in the annual run rates I just provided. Hey, thanks, afternoon, guys. Can you give us an update on where you are on the terminal count? Where do you think you’ll be end of the year and then any CapEx guidance in case I missed it? Scott, this is Darren. As of today we’re at 308. When we are complete with phase two, we will be 200 and mag. Yes, jump in and get on the CapEx. Good afternoon. We start with 2022 total CapEx came in at 192 million. We did have about $14 million or so related to tractors that carried over into 2023, just based on timing and deliveries. Those would have been delivered as expected, we would have been within that 210 to 230 million guidance range we provide on the third quarter call. For 2023, we aren’t quite in a position yet where we feel comfortable providing full year CapEx guidance. Once we get through the completion of phase two and maybe have somewhat of a clearer picture of the economic environment, we’ll have a better line of sight as to what our ‘23 requirements will be specifically for equipment. Okay, just taking a step back, obviously, last year, a lot of price gave up a lot of volume. What’s the plan this year? Are we hoping to regain volume? Can we keep pushing price? We have to give up a little price to get some volume back? What do we have to go to market? Yes. This is Darren. And we continue to prioritize yield. As I said in the script, we’re finding the yield equation across LTL to be strong and certainly to cover the cost and the inflationary costs we’ll continue to prioritize that. The one Yellow efforts are truly about a growth story. We’ve got capacity in this network, as we eliminate the redundancies in phase two. We will be poised and ready when the demand cycle changes. When I think about what’s going on in America right now, with the infrastructure investments, the number of the 600,000 jobs that are going to be involved in that be in direct competition for driving jobs. I think we’ve got an opportunity to see demand exceed capacity, and Yellow will certainly be ready for that, while also protecting our value proposition by holding the line on price. I think after today, earlier, there is some concerns about the competitive dynamic, maybe some guys going after share with national carriers. Are you seeing anything that troubles you from a competitive dynamic right now? Our contract renewals in January I was pleased with where they landed. We’ve been, we took our general rate increase back in October. I was glad to see other carriers be around that 6% range is that typically sets the pace for the larger contract negotiations. I’m encouraged with what I’m seeing from the Yellow perspective. And I haven’t seen predatory pricing that has me concerned. Good. And then just last thing, can you just remind us just in this environment what are the covenants we should just be keeping an eye on? Can you feel how we I guess we’ll need to start growing EBITDA from where we are Q4, Q1 run rate to maintain that, but hopefully we can stick it’s better and we can start getting back to those run rates. Thank you very much. Hello, everybody. I want to follow up a little bit on Scott’s question. Down 25% tonnage, that’s not a little number. And it was a lot bigger than the rest of the industry. And I know there’s some strategic review and the focus on yield. But can you talk about not all tonnage is the same what kind of tonnage is falling away more in this number? And there’s been some debate as to whether what we’re seeing is simply a very large inventory correction, or is there something a little more nefarious going on, beneath the hood, and you did allude, in your comments to a bit of a slowing environment that you saw, particularly in the manufacturing side? So can you kind of address A, the bigger picture, what you think is really happening? It was at happening is 80% of what we’re seeing just a timing issue on inventory that will come back, or and then kind of talk about the tonnage that you’re down 25. Is there a difference in the tonnage that’s down more than the others and when tonnage starts to come back how is that mix going to change? Good afternoon, Jeff, this is Darren and I’ll start with the part of your question about how I see things. I’m bullish on America, and I’m bullish on LTL. I think there’s incredible opportunity for national carriers that will have capacity available. As we see, in the coming months, the supply chain really starting in America again. So that is incredible opportunity and the moat around these national LTL carriers, I still see it as strong. In the meantime, with the tonnage that we no longer move through our networks, we’re certainly adjusting our costs to match the tonnage that we are moving. The waterline we’re currently at is okay with me with the very large phase two implementation coming up. I think that is an ideal time to make that transformation in the eastern part of the United States. As far as the business is no longer with us we certainly saw a decline in our retail shipments in Q4 right at the end of Q3 and in the Q4. Yellow’s business is pretty evenly divided. In the past, we voted more of a 60/40 range, it would actually be closer to 50/50 on retail and industrial, the retail customers tend to be very large shippers, and there’s portions of that business that do very well in our network and operate well for us. But a lot of that, that we’ve adjusted over time, was in retail and then also on the industrial side, as far as the business is no longer with us. If it’s not operating and adding to the profitability of this company, we’re better off pulling back on purchase transportation and other areas and focusing on the business that operates well for Yellow. As our value proposition expands with the completion of phase two I think we’re going to be uniquely positioned where we don’t have to add any terminals, or build any terminals or lease any terminals, we will have the capacity to bring on a tremendous amount of shipment count and through our driving schools, we’ve proven that we can bring the drivers on to handle that increased capacity. So I think we’re positioned well and certainly we’ll continue to watch the cost plan until we’re through the other side of phase two implementation, and then our value proposition will do the work on expanding and growing our business as demand improves. Okay. Great. Thank you. I guess maybe two questions. One, just on following up on Jeff’s kind of question on the demand outlook. I mean there’s a thought that we’re going to see the markets, free markets generally stabilize here around the second quarter, and maybe start to build back a bit in the second half of the year, once we get through this destock phase. Darren, I just be curious to get your take on that. Is that something you’re willing to underwrite? Or is it just too early to tell? Hello, again, Jack, and absolutely that I will typically share what I believe is going to play out. And as I said, I’m bullish on America, and I’m bullish on LTL. And I think near-shoring, re-shoring from an industrial standpoint, we’re going to have a great awakening in America, that’s going to be a big benefit to the LTL industry over time. Now, certainly the timing of those come into play and more near term, we’re going to get our phase two implemented, work through those processes, and be prepared for when demand exceeds capacity. And I do want to comment on the infrastructure investments it’s going to happen is I personally believe that the summer and with 600,000 jobs being added in that capacity, good jobs, and we know that construction area is the number one competitor for drivers to the LTL and truckload industry. So I think we’re right back in a situation where there will be a shortage of drivers, and we’ll see capacity challenged. And that’s an opportunity that we’ll be watching for Yellow. And I think we’re all kind of pulling for that same build back in the second half. Last question for me, and I’ll let you guys go. But there was discussion earlier this week with one of your united competitors, about finding ways to on their conference call to maybe find ways to collaborate with other unionized carriers in a way to reduce costs, improve efficiency, improve density, that sort of thing. You guys really are leaving no stone unturned in your effort to get Yellow back on track. What do you think about that? Is that something that you guys would be willing to explore? Do you think it makes sense? Just be curious to get your thoughts on it? Well, Jack, I’ve been working with four companies under the Yellow umbrella for the last five years. So we’re well down the road on a lot of that discussion just right here at home with the companies that were part of. And we’re it’s been a multiyear transformation for us. And we’re in the final year that and we’re just terribly excited about what’s going on at Yellow, I don’t really have any input for those competitor comments. But we’ve had four companies that we’re working through, and we’re proud of where we’re landing here. So there’s enough with a chopper with your own organization, before thinking about maybe collaborating with other unionized carriers. I mean, that makes sense. I just kind of wanted to get your thoughts on, it’s been on folks minds. And the moat in that I think the reason so many people are interested in LTL the barriers to entry are so high, which you’re aware of, and everyone that follows and as part of the industry is aware of, but we’ve just simply-simply got a real estate portfolio that cannot be replicated. And as we’re approaching our centennial anniversary, next year, that real estate portfolio, and then those 30,000 employees, we’ve got back in it up. We’ve got tremendous opportunity right here in front of us at Yellow, and that’s what we’re wholly focused on. And looking forward to what 2023 is going to bring, especially after the nice progress we had in 2022 of delivering improvements that we hadn’t seen in over 16 years. So it’s just exciting time to be at Yellow. This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks. Thank you, operator and thanks again to everyone for joining us today. Please contact Tony with any additional questions that you may have. This concludes our call operator. I’m turning the call back to you.

EarningCall_164

Good morning and welcome to the Kellogg Company's Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session with publishing analysts. At this time I will turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellogg Company. Mr. Renwick, you may begin your conference call. Thank you, operator. Good morning and thank you for joining us today for a review of our fourth quarter and full year 2022 results as well as our outlook for 2023. I'm joined this morning by Steve Cahillane, our Chairman and Chief Executive Officer; and Amit Banati, our Vice Chairman and Chief Financial Officer. Slide Number 3 shows our forward-looking statements disclaimer. As you are aware, certain statements made today such as projections for Kellogg Company's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation, as well as to our public SEC filings. This is a particular note amidst the current operating environment, which includes unusually high input cost inflation, global supply disruptions, and other uncertain global macroeconomic conditions, all of whose direction, length, and severity are so difficult to predict. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of kelloggcompany.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. And now, I'll turn it over to Steve. Thanks, John and good morning, everyone. The fourth quarter completed what was an excellent year, competitively, financially, and in terms of the grit and skill, our organization demonstrated in executing through what were truly extraordinary circumstances. The strength of our snacks portfolio was clearly evident with double-digit net sales growth across all regions underpinned by strong end market performance. We sustained exceptional growth in emerging markets led by our noodles and other portfolio in Africa, but also posting strong growth in snacks and cereal across EMEA and Latin America. We mitigated the profit impact of unusually high input costs that accelerated during the year, leaning into productivity and carefully executed revenue growth management actions. We navigated through economy wide supply bottlenecks and shortages and worked to restore capacity in much of our business, most notably in North America Cereal and North America Frozen Foods. The result of all of this was strong financial delivery that exceeded expectations throughout the year prompting us to raise guidance more than once this year for net sales, operating profit and EPS and still over deliver that guidance thanks to a strong fourth quarter. We also announced, planned, and made significant progress towards a separation of our company that will not only improve performance of North America Cereal Co., but provide clearer visibility into the strength of the snacks oriented parent company. With all of this going on and amidst global supply disruptions and high costs, we kept our focus on sustaining momentum in all of our businesses. We stay true to our deploy for growth strategy, leveraging our growth shaped portfolio, orienting our brand building and innovation towards winning occasions and sustaining momentum in our biggest world class brands, all while working to restore service levels and leveraging all levers of revenue growth management in an attempt to keep up with soaring cost inflation. The results of this focus on sustaining momentum are shown clearly in our organic net sales growth which is shown on Slide Number 6. Not only did our sales come in ahead of expectations every quarter, but our growth accelerated sequentially every quarter and this growth was impressively broad based in all four of our regions and in all four of our major category groups, snacks, cereal, frozen and noodles and other. We also remain committed to our better day’s strategy towards environmental, social, and governance practices. Slide Number 7 show some examples of tangible actions taken and recognitions received during the fourth quarter alone, illustrating this continued commitment. And you can expect us to maintain this focus on execution and reliable financial delivery in 2023. Slide Number 8 shows that you can expect many of the same drivers of this financial delivery as we saw in 2022. Our snacks business, which is roughly half of today's Kellogg Company should see sustained momentum led by truly world class brands. In our strong emerging markets businesses, we expect to continue to drive growth and manage through what are always interesting macroeconomic conditions. Input cost inflation remains high, which means we will again be focused on realizing productivity and cost savings supplemented by utilizing all levers of our database revenue growth management disciplines around the world. And we continue to progress on our supply recovery in specific businesses. As a result, we are forecasting growth in net sales and operating profit that are above our long-term targets even as we continue to invest in the enhancement of capabilities, service levels, and the strength of our brands. Meanwhile, we continue to March towards the separation into more focused companies, starting with the spinoff of North American Cereal Company still scheduled for late this year. Work has progressed on the carving out of financials, the designing of new organizations, and the separation of key systems and processes. Separately, you'll recall that we were exploring strategic options for the plant based food business which represents about 2% of our company's net sales. Given current market conditions as well as our confidence in this business as a long-term growth vehicle, we have decided to retain it as part of global snacking company. We remain as confident as ever in the value to be created by making global snacking company and North American Cereal Company more focused with better visibility into and valuation of their performance and outlook. In short, we are poised for another good year of results. Thanks, Steve, and good morning, everyone. Slide Number 10 provides a summary of our 2022 financial results. A better than expected performance in quarter four drove us to hit or exceed our guidance for the full year. Our net sales led the way accelerating to 16% organic growth in the fourth quarter and resulting in 12% organic growth for the year, which was higher than expected. This top line growth more than offset a sizable year-on-year increase in investment resulting in our adjusted basis operating profit growing 20% on a currency neutral basis in quarter four. This brought our full year growth to 7%, also exceeding expectations. Our adjusted basis earnings per share increased 17% on a currency neutral basis in quarter four despite being weighed down by the as anticipated increase in interest expense and reduction in pension income related to the decline in financial markets. This quarter four performance resulted in full year EPS growth of 5% on a currency neutral adjusted basis, ahead of our expectations. Cash flow came in at about $1.2 billion and increased from the prior year and in line with our expectations. Excluded from our currency neutral results of course is foreign currency translation, which reduced our net sales, operating profit, and earnings per share by about four percentage points in quarter four and about the same for the full year EPS. Now let's look at each metric in a little more detail. Slide Number 11 plays out the components of our strong net sales growth. Our double-digit organic growth and net sales in 2022 was driven by price mix which accelerated in the second half as we continued to execute revenue growth management actions around the world to cover accelerated input cost inflation. Volume grew slightly in the quarter due to continued recovery in North America Cereal and declined only modestly for the full year, reflecting both price elasticity that has not moved up as much or as soon as we had expected, as well as our replenishment of trade inventories during the year as our supply improved. Foreign currency translation was a headwind all year, with particularly adverse impacts in quarter three and quarter four. Let’s discuss gross profit on Slide Number 12. Supply disruptions created incremental costs and inefficiencies throughout the year and input cost inflation accelerated across the year. Yet because of productivity efforts and effective revenue growth management actions around the world, we were able to largely offset the dollar impact of those higher input costs and we grew our overall gross profit dollars this year. In fact, our gross profit dollars came in higher than expected both in quarter four and the full year. From a percentage margin perspective, though, there is a mechanical impact of matching input cost inflation which price realization. And because we could not cover the unpredictable inefficiencies from economy wide bottlenecks and shortages. We did see year-on-year increase in gross profit margin in quarter four as we lapped the first of two quarters impacted by the fire and strike and we finished the full year in line with expectations we had communicated. In 2023 we expect to continue to grow gross profit dollars while our margin stabilizes and improves slightly during the year. Some of this is related to the fire and strike impact being one time in nature largely isolated to quarter four 2021 and quarter one 2022. And some of it will come from bottlenecks and shortages gradually diminishing. But this improved margin performance will also be driven by price realization catching up to input cost inflation that is expected to moderate in the back half of the year. Moving down the income statement on Slide Number 13, we see how our SG&A accelerated its year-on-year increase across the year just as we said it would. After having been curved during severe supply disruptions including the fire and strike in North America our advertising and promotion investment was ramped back in the second half and finished the year roughly flat with 2021. Overhead meanwhile increased year-on-year in all four quarters as we gradually returned to travel and meetings and as we accrued higher incentive compensation related to our above budget financial performance. In 2023 the quarterly phasing of SG&A expense will be affected by lapping last year’s North America’s Cereal pull back on brand building in the first half and rapid ramp up in the second half. Slide Number 14 shows our continued upward trajectory on operating profit. Operating profit in the fourth quarter was up 16% year-on-year including a negative currency translation impact of almost 4 percentage points. While it was lapping a year earlier decline due to last year’s fire and strike, this year’s quarter four profits was above that of two years ago. Importantly it featured exceptional topline growth and a significant year-on-year increase in investment. For the full year our operating profit increased by 4% after a negative 3% impact for currency translation. As you can see on the slide, this operating profit was not only higher than 2021, it was also higher than two and three years ago. Slide Number 15 shows are below the line items which were again collectively negative to EPS growth in the quarter and therefore the full year. Driven by non-operating factors, they will be an even larger headwind in 2023. Interest expense was up sharply year-on-year in quarter four as rising interest rates affected the roughly one fifth of our debt that is floating. The quarterly run rate for 2023 interest expense will likely be a bit higher than this quarter four level. Other income decreased in quarter four and the full year. Most of this was related to the media remeasurement of certain U.S. benefit plans, though in quarter four it was partially offset by better than expected FOREX gains and interest income that we do not expect to repeat. As we have discussed previously, the decline in benefit plan income is related to 2022's fall in financial markets, which reduced the value of planned assets and raised interest rates. We remeasured about half of our planned exposure in the second-half of 2022 and 2023 will feel the impact of remeasuring all of our plans. Hence, we could see a year-on-year decline in other income in 2023 that is almost twice the decrease we recorded in 2022. Our effective tax rate came in a little higher than expected in quarter four and therefore the full year, mostly reflecting geography mix. For 2023, we expect the tax rate to be approximately 22%. Our JV earnings and minority interests were collectively flattish year-on-year in quarter four, finishing the year higher than last year, led by good performance by our joint ventures. Collectively, these are expected to be relatively flat in 2023. And average shares outstanding were flattish in 2022 as increased options exercises by employees over the course of the year offset the benefit of share buyback executed early in the year. Our cash flow and balance sheet also remained in very good shape as shown on Slide Number 16. Our cash flow increased year-on-year despite year-on-year swings in sales and receivables in December as we lapped last year’s fire and strike. This increase in cash flow over the past few years has helped us to reduce our debt right through 2022, leading to lower leverage ratios. This has given us enhanced financial flexibility even as we have continued to increase cash return to shareowners in the form of an increased dividend and buybacks this year. Let's now pivot to 2023, starting with Slide Number 17 and some key assumptions behind our guidance. First and most importantly, we expect to sustain a strong business momentum. Between price realization, the momentum of our categories, and the strength of our brand plans we are confident we can achieve another year of above algorithm net sales growth. And while input costs inflation remains high, it should decelerate year-on-year in the second half, and the same can be said for bottlenecks and shortages. Therefore, we expect to generate above algorithm growth for operating profit as well in 2023. Next, our guidance reflects the impact of headwinds on our non-operating below the line items. Interest expense will increase substantially because of the rise in interest rates worldwide. And non-cash pension income will drop sharply owing to lower asset values entering the year and to a higher interest charge reflecting the rise in interest rates. The pending spinoff of North America Cereal Co, is still targeted to be executed towards the end of the year. For simplicity reasons only our guidance assumes it remains in our results for the full year. Slide Number 18 shows our guidance by key metric. Organic growth in net sales is forecast to be in the 5% to 7% range, another strong year. Given the cost environment this growth will be weighted towards price mix, reflecting revenue growth actions from both 2022 and this year. Importantly, this net sales growth is expected to be broad based across our portfolio and led by momentum in snacks and in emerging markets. On an adjusted basis and excluding currency, we expect operating profit to grow in the 7% to 9% range. This above target growth will be driven by the strong net sales, which drives the growth in gross profit dollars that fuel increased brand building. At the earnings per share level, the strong operating profit growth will be more than offset by the pension and interest headwinds we discussed earlier. The impact of the accounting re-measurement of pension and post retirement alone is negative 7 percentage points to EPS growth. Again, it should be emphasized that this is a noncash, non-operating item, and it was driven by what was a rare steep decline in the financial markets in 2022. Without that item, our EPS would be up 3% to 5%, even despite the higher interest expense and tax rate. Cash flow is expected to come in somewhere between $1 billion and $1.1 billion. Our underlying base business cash flow will continue to grow year-on-year, reaching $1.3 billion to $1.4 billion, but there will be roughly $300 million plus of cash outlays related to the pending spin-off. This is a combination of cash costs and capital expenditure, all onetime in nature and all related to executing the transaction and setting up the stand-alone business. So to summarize on Slide Number 19, we continue to feel very good about how we are performing and about our financial condition. Across our regions and category groups, we sustained solid momentum in 2022, and we expect that momentum to continue in 2023. Amidst high cost inflation across inputs and energy, we were able to protect profit dollars through productivity and revenue growth management in 2022, and we will do so again in 2023. In an environment of disruptions up and down the supply chain, we have executed well and steadily improved service levels in 2022 and will continue to do so in 2023. In 2022, we delivered above-target growth in currency-neutral, net sales and operating profit, and we plan on doing that again in 2023. We have increased our cash flow and further deleveraged our balance sheet, giving us excellent financial flexibility going into 2023. And we remain as confident as ever in the value that can be created by spinning off North America Cereal Co. Not only will that business thrive amidst increased focus, but the strength of the remaining global snacking co. will be significantly more visible. So we are looking forward to another good year in 2023. And with that, I'll turn it back to Steve to discuss our individual businesses. Thanks, Amit. Let's start with Kellogg North America on Slide Number 21. As you can see, our largest region performed very well in 2022, straight through the fourth quarter. We started the year with a lingering inventory impact and costs arising from the second half 2021 fire and strike as well as other supply disruptions. And quarter-by-quarter, we executed well, both from a supply chain perspective and a commercial perspective, finishing the year with very strong net sales and operating profit growth. Within North America, our largest segment is snacks, representing over half of our sales in the region. And this segment led the way in 2022, as shown on Slide Number 22. There was some timing of shipments, particularly year-over-year within the quarters, but North America Snacks finished the year in double-digit growth. In fact, North America Snacks has accelerated its organic net sales growth in each of the past four years. Leading the way were world-class brands like Pringles and Cheez-It, both of which generated double-digit consumption growth in 2022, and Pop-Tarts and Rice Krispies Treats, both of which sustained their multiyear momentum as well. Our North America Cereal business, as depicted on Slide Number 23. This business overcame enormous obstacles on its way to delivering very strong net sales growth. We entered the year depleted on finished goods inventories. As we rebuild those inventories, SKU by SKU, we were able to replenish retailer shelves more quickly than we anticipated. And during the second half, we were able to ramp up our commercial programs, and we've entered the new year with real momentum. Slide Number 24 shows the end market progress we have made since restoring inventories and commercial activity. As you can see, our performance has continued to improve sequentially, accelerating both our consumption growth and our share recovery. This business is back on track and is poised to sustain growth in 2023 when we will have a full year of commercial activity. In addition, with supply back in place, this business has begun to restore its profit margins. North America Frozen Foods is shown on Slide Number 25. This was another business that ran into capacity and supply challenges in 2022. For Eggo, it was simply a matter of strong demand over the last couple of years, putting us up against capacity. We put in capacity in midyear and since that time, Eggo's consumption growth has accelerated. And for Morningstar Farms, we experienced significant production issues at a co-manufacturer. During the fourth quarter, supply came back online and almost immediately, we saw signs of improvement in market. So moving to Slide Number 26, Kellogg North America has all the pieces in place for another good year in 2023. Our snacks brands are demonstrating undeniable momentum, and they represent more than half of our North America regions net sales. Our cereal business continues to outpace what has been very strong category sales growth as we continue to ramp up commercial activity. And our frozen businesses are getting past some severe supply constraints. Meanwhile, our productivity and revenue growth management actions are catching up to what has been steadily rising input cost inflation just as we are starting to see signs of bottlenecks and shortages receding. The result should be margin improvement for North America this year. And of course, North America will be moving full speed ahead with the carving out and spinning off of North America Cereal Company. We're making good progress with detailed implementation plans, all while remaining focused on delivering good financial results and executing in the marketplace. Now let's turn to Europe and Slide Number 27. Cost inflation accelerated faster in this region than others, particularly when energy prices and other costs soared after the outbreak of war in Ukraine. Our revenue growth management actions have yet to catch up to the accelerated cost pressures, pulling down profit in the last couple of quarters and will likely remain a pressure on profits into the first half of 2023. The fourth quarter also featured a meaningful year-on-year increase in brand investment. Nevertheless, Kellogg Europe had another good year, posting its fifth straight year of growth in both organic net sales and operating profit. Leading the way were snacks, which now represent more than half of our Europe region's net sales, as shown on Slide Number 28. And aside from the Russia impact and year-ago comparisons in quarter three, this segment drove strong double-digit net sales growth all year. This momentum is not new. This was our fifth straight year of organic net sales growth for Europe snacks. End market, Pringles generated strong consumption growth across key markets in the quarter and the full year. And in the UK, we also delivered rapid growth for Pop-Tarts and Rice Krispies Squares. Turning to our European cereal business and Slide Number 29, you can see that this business continues to deliver steady growth. On the strength of commercial activities and revenue growth management needed to cover rising costs, this business showed sequential acceleration in its organic net sales growth in each quarter. End market, category growth rates in markets across the region picked up in the fourth quarter, and we have been particularly pleased with accelerated growth and share gains for brands like Rice Krispies in the UK, Tresor in France, and Special K in several markets. So you can see that Kellogg Europe remains in very good condition as we head into 2023. As indicated on Slide Number 30, we expect to sustain momentum in snacks led by Pringles, but also increasingly accompanied by portable wholesome snacks like Pop-Tarts and Rice Krispies Squares. In cereal, we have strong brand plans, including renovation and innovation and a campaign celebrating our 25th year of our Better Days social program in the UK. We will continue to manage through cost and supply pressures, which are particularly heavy in the first half. And we have an agreement to divest our Russia business, though the deal's timing, approvals and final details are still pending. This business represents a little more than 5% of Kellogg Europe's total sales. So the impact of this divestiture should not be meaningful to adjusted basis results. Now let's turn to Latin America on Slide Number 31. As the chart shows, Kellogg Latin America grew net sales and operating profit strongly, both in the fourth quarter and full year. In fact, this region posted strong and accelerating organic net sales growth all year attributed to its brands, its commercial execution, and its expansion of route-to-market capabilities as well as its revenue growth management actions and its agility in managing through supply challenges. Our snacks business in Latin America is shown on Slide Number 32. This business has grown consistently over the years. In 2022, it led the organic net sales growth for the region with year-on-year growth of more than 20% in both the fourth quarter and the full year. The growth was broad-based, finishing the year with the fourth quarter that featured strong double-digit net sales gains across all of our sub regions, Mexico, Brazil, Pacific and the Caribbean and Central America region. The strong growth in the quarter and year was driven by price/mix needed to cover soaring cost inflation and adverse transactional currency impact. And while volume did decline, the elasticity was below historical levels. End market data shows sustained double-digit category growth in the quarter and the full year for our major salty snacks markets, with Pringles gaining share in both of its biggest Latin America markets, which are Mexico and Brazil. Our cereal business in Latin America also grew net sales organically in the fourth quarter and full year, as indicated on Slide Number 33. Early in the year, this business felt the impact of supply disruption coming out of North America's fire and strike, particularly in our Caribbean business. But as you can see, once that was behind us, our cereal net sales reaccelerated strongly. In market, our consumption growth was robust across the region in the quarter and the full year, led by key brands like Frosted Flakes in Mexico and Brazil, Corn Flakes in Brazil and Puerto Rico, and Froot Loops in Colombia. So moving on to Slide Number 34, Latin America, too, is poised for another good year in 2023. We expect to sustain momentum in snacks, led by Pringles, and we expect to continue to grow in cereal. We expect to improve profit margins this year, and work is well under towards carving out our Caribbean cereal business into the North American Cereal Company spin-off. We'll finish up our regional review with EMEA, shown on Slide Number 35. This region continues to deliver exceptional top line and bottom line growth. Net sales grew organically in the high teens or better all year long. In the fourth quarter, as for the full year, this growth was broad-based with growth across all of our sub regions, Africa, Asia, Australia, New Zealand and the Middle East and North Africa. The growth was also strong across all of our category groups: cereal, snacks and noodles and other. Despite enormous cost pressures, the region also delivered double-digit profit growth on a currency-neutral adjusted basis both in the fourth quarter and the full year. Snacks in EMEA posted outstanding organic net sales growth all year, as shown on Slide Number 36. This growth was led by emerging markets ranging from Asia, Africa to the Middle East. And it was led by Pringles, which sustained strong consumption and share growth across key markets, both in the quarter and for the full year. In Australia, we also realized good consumption growth in Pop-Tarts and Rice Krispies Treats both for the quarter and the full year. This bodes well for further international expansion of those brands. Cereal also posted strong organic net sales growth all year, as shown on Slide Number 37. As with snacks, the growth was led by price mix, with elasticity impact on volume being lower than usual. And we saw growth across all sub regions, both in the fourth quarter and the full year. Growth was most pronounced in Africa and the Middle East, but it also remained solid in Asia and Australia. Overall, for the measured markets of this region, we grew consumption and share in the fourth quarter and the full year. Our most developed market, Australia, posted strong consumption growth in the quarter and year, led by many of our biggest brands, including double-digit gains for corn pops, corn flakes and Sultana Bran. We also sustained good consumption growth in emerging markets with particular strength in India. And then we come to the largest segment of EMEA, noodles and other, which is shown on Slide Number 38. In every quarter this year, our EMEA noodles and other business recorded organic net sales growth of well over 20%. In fact, it has delivered double-digit organic growth every year since we consolidated the distributor portion of our West African business in 2018. Turning to Slide Number 39, we expect another year of strong top and bottom line growth for EMEA in 2023. Macro conditions can be challenging in Africa, and we have an experienced management team and joint venture partner to execute through them, which should enable us to sustain momentum in noodles and other. We should continue to see growth in cereal, led by our markets in Asia and we believe there is plenty of runway for Pringles to continue its strong growth. Meanwhile, EMEA will be looking to improve its profit margins as well. So with that, allow me to briefly summarize with Slide Number 41. From our results and our outlook, it should be very clear that our Deploy for Growth strategy has us focused on the right priorities and building the right capabilities and that our portfolio has been shaped decidedly towards growth. And following our planned separation later this year, visibility into the strength and performance of this portfolio will be even clearer. In fact, the vast majority of our portfolio is enjoying very strong momentum right now, as shown on Slide Number 41, and this is expected to drive above-target growth in net sales and operating profit in 2023. I want to thank our talented and dedicated Kellogg employees for making sure that nothing, not unusual economic conditions, not declining financial markets and pension accounting, not the preparation of a historical spin-off will distract us from continuing to deliver for our stakeholders. And with that, we'll open up the line for your questions. Thank you. [Operator Instructions]. Our first question for today comes from Jason English of Goldman Sachs. Jason, your line is now open. Please go ahead. Hey, good morning folks. Thanks for sliding me in. Lots of questions still on the table. Amit, maybe we can start real quick with you, housekeeping. We all have restaurants out here but based on current spot rates, where do you see FX coming in, in terms of impact to top and bottom line? Yes. I think, Jason, just looking at the current rates, we'd say probably 1% to 2% impact on EPS and OP, maybe on sales around 3%. So that's kind of the outlook if you look at where the rates are today. Okay. That's helpful. And then Steve, you mentioned that Europe is finishing strong and carrying good momentum in the year, but it sure doesn't look like that from a bottom line perspective. I mean the margins are kind of falling off, and falling off fast, as we exit the year. And I think you mentioned where the pressure is going to carry into next year. I missed part of it, though. I heard you say like higher marketing. Can you unpack that a little bit more for us, what's driving the substantial step down in profitability, and also touch on -- I mean we know you were probably through price negotiation periods right now, can you give us an update on where status sits on negotiating price in that market? Thank you. Yes. Sure, Jason. In Europe, it's essentially, we're catching up, right? The inflation came fast and furious, and our ability to catch up to it was impacted in the third and fourth quarter. We also had, obviously, the Russia impact primarily, in the third quarter. Higher A&P continued to bolster our top line, which we're committed to doing. And so we're catching up. It's still going to be a bit of a pressure in the first half, as we mentioned, but our underlying business is very, very solid. And our ability to get price -- earned price has also been solid. It's never easy anywhere, but the European dynamics can be challenging, but we've been making our way through it. And so we have good confidence in the underlying momentum of the business. It's really just -- took a little time to catch up. Yes, we're in reasonable shape right now, Jason. We don't like to talk too much about individual negotiations with our customers. They're doing everything that they always do, which is protect the consumer. We want to protect the consumer as well, be as affordable as possible, but we need to maintain our margins. And we're having those adult conversations, and they're proceeding constructively. Thank you. Our next question for today comes from Alexia Howard of Sanford Bernstein. Your line is now open. Please go ahead. Great, can I ask about the volume situation in the U.S., particularly as we rolled into 2023. I'm looking at the Nielsen data that came out yesterday, and it looked as though, frankly, that a lot of companies that was a bit of a step back. So two questions; one, is there anything you're seeing from the consumer that's shifting or is it just tough compares from Omicron last year? And then secondly, as I look at the U.S. cereal business on a two-year basis, looks like the volumes are still down mid-teens. So are we -- I know that right now, it's looking good year-on-year, but what does that imply for the ongoing price elasticity in that business as we lap the fire and strike from last year? Thanks, and I will pass it on. Yes, Alexia. So for us in North America in the fourth quarter, volume was up. And obviously, overall revenue was up nicely. We did have a fairly easy comparison, particularly in North American cereal because of the fire and strike. On a two-year basis, though, we -- well, first of all, the trajectory of our North American cereal business is very, very solid, and we're very, very pleased with it. On a two-year basis, NSV is also up. I'm not sure what you're looking at, but it is up. Volume is down slightly as the category is. But our NSV on a two-year basis and a one-year basis is up in cereal. And we're very confident about the plans in 2023 that we have in place. We're confident about the distribution that we've been able to gain. We're confident about our shelf sets. Our consumer promotions are, as I said, really back on track. You can see Jalen Hurts and Tony the Tiger on television right now as a matter of fact, which is lucky for us that Jalen is in the Super Bowl. So feeling very good about our North American cereal recovery on a one year and two-year basis. And then I think just to build on that from a guidance standpoint, we have incorporated rising elasticity. So that's built into our guidance for 2023. Thank you. Our next question comes from Michael Lavery from Piper Sandler. Michael, your line is now open. Please go ahead. Thank you, good morning. Just wanted to follow up on the volume piece at a little bit higher level. Contrasting the declines you've had globally throughout the year with the relatively stronger performance in North America, excluding the 1Q hit from cereal obviously, but can you just unpack a little bit of what you're seeing differently and is it stimulus and sort of savings drawdown that supported volumes in the U.S. that now maybe is rolling over, just maybe inform how you think about the differences in the U.S. consumer versus what you're seeing around the world? Yes. So it's different everywhere around the world. The U.S. has been strong. It's been relatively inelastic, particularly in our categories. So we've definitely benefited from that. There's no question that the U.S. balance sheet, consumer balance sheet still remains stronger than it was pre-pandemic, although continues to erode over time. The employment situation, as you know, in the U.S. is still very strong. So overall, the consumer in the U.S. is in a good place. And when you look at the categories that we play in, it remains very strong, right. So they are cutting out discretionary items, which, we all know, high-ticket items are under a lot of pressure. Our categories are doing very well. And if you look at the emerging markets, the same could be said, the consumer is very strong, surprisingly resilient in virtually all of our emerging markets, which has been very positive for our results from a category standpoint. And then we're doing well inside those categories. Europe is where you see -- if you go back a couple of quarters ago, we did indicate that we were seeing the beginning of elasticities returning, particularly in the cereal business, and we're seeing a little bit more of that. So the European consumer, I would say, is probably under more pressure than just about anywhere else in the world. And you see that, obviously, in the discretionary categories, and you're starting to see a little bit more of a normal return to elasticities in the European consumer. Still not back to pre-pandemic levels or what we describe as normal levels, but higher than it is in the rest of the world. Okay. That's helpful color. And can I just squeeze in a housekeeping follow-up on the pensions, that's a big below the line item for you this year, obviously, but is there any meaningful split between cereal and the legacy, the rest of the company and just trying to understand when that happens. Does one side of the business or the other have a disproportionate impact from that? Great, thanks so much. I guess just kind of first question housekeeping is, when should we expect to get a little bit more information on the spend? And then the second question simplistically is just around cash and CAPEX side. I don't know if I heard it. But in terms of the $300 million from the upfront charges and CAPEX of the spin, just provide a little clarity as to kind of where -- what's driving that? Yes. So I think we are on track to execute the spend towards the end of the year. So leading up to that, we'll be providing all the information as well as having the Investor Day as you'd expect. So towards the end of the year is what we're working towards. I think the $300 million, it's a combination of onetime costs related to executing the transaction. So consultants, I think we're working very closely with some blue-chip advisers on program management, ensuring that we have a comprehensive program to manage the change and develop a comprehensive plan of action. I think it includes your typical banker loyal fees as well, as well as some capital expenditure to realign the supply chain to get IT systems up and running for the new cereal company. Hi, I just wanted to ask about your guidance for a -- I think the word was stabilizing gross margin this year. Just curious, does stabilizing mean down versus 2022 but at a maybe decelerating rate of decline? And I'm just curious, rather, what it implies for SG&A either as a percentage of sales or on a dollar basis. It would seem to imply that both would have to come down a little bit but just curious what your thoughts were on there? I think on a full year basis, it will be flat to slightly up on gross margins, and I think it'll improve progressively as we go through the year. So I think that's kind of the range where we are on gross margin. And then I think from -- and I think just the puts and goals in gross margin, obviously, from a positive, we've been lapping the fire and the strike. We do expect bottlenecks and shortages to moderate as we go through the year. We are starting to see that in -- as well. So that, I think, would be a positive tailwind from a gross margin standpoint. I think from an input cost standpoint, we expect mid-teens inflation, and that's what our guidance incorporates. So it's still elevated. It's moderated from what we saw in 2022, but still elevated. And I think we continue to see input cost inflation in oils, in corn, in wheat, rice, potatoes. So that's been built in. And I think from a phasing standpoint, we'd expect gradual improvement in the year-on-year change of gross profit margin as the year progresses. And then I think to your question on SG&A -- now I think on your question on SG&A, I think we'd expect an increase in overheads broadly in line with inflation, I think as normal activity continues to restore. And then from a brand building standpoint, we'd expect an increase as we -- as supply is restored full year of brand building through the year. Great, thanks so much. Steve, there's a concern, I think, among investors for the group as a whole, right, that supply constraints ease and the benefit from pricing wanes, food companies will somehow choose to sort of ramp promotional spending to maybe more irrational levels to drive volume. And I guess this concern seems particularly acute, I think, in really cereal space, partly because Kellogg is obviously heading towards a split of the business. And I'm just curious how you'd kind of respond to that concern and get a sense for what your plans are in terms of in-market sort of activity as you go through the year? Thanks so much. Yes, Andrew, we really don't have that concern. We haven't seen anything that would point to an irrational environment on the horizon. And as our supply has improved, we've been gradually restoring merchandising activity, which is an effective complement to our brand building, always has been. And so it's not a bad thing. It's not a bad thing to obviously drive displays, as you well know, drive merchandising activity. And from a supply standpoint, it's not as if there's a lot of excess capacity in our categories for us, certainly, and I think even for some of our competitors. So when you look at that, when you look at the supply availability, when you look at the demand creation, which is out there, and available, I see a very rational environment on the horizon. Thank you. Our next question for today comes from Robert Moskow from Credit Suisse. Robert, your line is now open. Please go ahead. Hi, thanks. Amit, I was hoping for a little more color on the phasing for your operating profit growth by quarter. Like first quarter, for example, I think you have an easy comparison on gross profit dollars, but then you're going to increase SG&A investment. So do you think first quarter profit growth is higher than your annual average or is it not really much different? Yes. I think certainly, from a gross margin standpoint, as I mentioned, right, we'd be lapping the fire and strike in quarter one. But I think on the brand building in particular, right, if you recall, last year in quarter one and quarter two, we had pulled back as we were emerging from the strike. So you're going to have that negative lap in quarter one and into quarter two as well. So it's kind of -- those are the puts and goals from an operating profit phasing standpoint. Okay. A quick follow-up, can you give a little more color on what your process was for pursuing the spin-off of Morningstar, did you also seek a buyer in this process, and what do you think the results will be like in 2023, can it improve off of 2022 or expect a weak year? Yes, Rob, I would say definitely will improve in 2023. That is our plan. And the process was very thorough. We said from the beginning, we were going to pursue a spin but would look at other strategic alternatives. We did that. And if you recall, when we began this process, valuation for peer companies were stratospheric compared to where they are today. They've come down quite substantially. So the thesis when we started the process was to truly unlock shareholder value if we could attract the same types of multiples in the public market, we should pursue that. The environment has clearly changed. And when we look at what's on the horizon for this category, we see an imminent shakeout coming. It's happening already. And there'll be a couple of players left standing, and Morningstar Farms still has some of the highest household penetration, highest name recognition, fantastic foods, strong in the freezer space where this consumer is migrating back to, and profitable, unlike many of the peers. So as we step back and look at it, we are the best parent for Morningstar Farms. And when we shared with our people this morning that we were keeping the business, there was elation. And so there's a lot of momentum underlying in our people, in their plans, and we're optimistic for 2023. And more importantly, we're optimistic beyond that because when the shakeout continues, there'll be a few left standing. And the underlying consumer drivers around health and wellness, around environmental concerns, around moving away from animal proteins, all still remain. And Morningstar Farms has one of the cleanest labels out there. And so there's a lot going from Morningstar Farms, and we're excited to keep it. Thank you. Our next question comes from Bryan Spillane from Bank of America. Bryan, your line is now open. Please go ahead. Thanks operator. Good morning everyone. Steve, maybe just to take a step back on the snacking business. And obviously, there's a lot of focus on getting these businesses separated. But as we look forward, like how do you -- how opportunistic or how aggressive can you be in M&A, there's a lot of opportunities for acquisitions in snacking, it's definitely proven to be a very resilient category through everything we've been through the last couple of years, so just trying to get a sense of how quickly you might be able to begin adding to the portfolio or it's not really part of what you think the strategy will be going forward? Yes. Thanks, Bryan. I think it will be part of the strategy. Obviously, we're going to execute the spin. That's priority number one. And we'll execute the spin, and we'll have a global snacking company with a very strong balance sheet, cereal company as well. And so as we look for opportunities, we'll look for organic and inorganic opportunities. And our organic opportunities, as you can see, with Pringles remain exceptional, with Cheez-It, Rice Krispies Treats, remain exceptional. Cheez-It is only now really leaving the United States and expanding overseas in Canada, Brazil, and soon other geographies as well. So on balance, we'll look at those opportunities for continued organic growth, but where we can supplement our portfolio with additions, we'll definitely look to that because we do have great capabilities in snacking, great route-to-market, and bolt-ons or bigger will be part of our considerations going forward. Okay. And then just as a follow-up, just as we're thinking about the split going forward, how dependent -- like is there any risk that if the markets really melt down or valuations change or just what's the risk that you decide to pull it or is there -- like what conditions would create a scenario where you delay it or pull it? Well, Bryan, you never say never, obviously, right. But we are very, very confident that there's no condition by which we won't execute the spin by the end of this year. It's a tax-free spin-off, a dividend to our shareholders really. And so we don't have to rely on the debt markets. We don't have to rely on IPO markets, equity markets. It's a dividend to our shareowners and nothing is without risk, but we have a very high degree of confidence, and we absolutely plan on executing this by the end of the year. Thank you. Our next question comes from Eric Larson of Seaport Research Partners. Eric, your line is now open. Please go ahead. Yeah, thanks for squeezing in everybody. Congratulations on a good year. So my question is really this, Europe seems to be the one area that might have a little more uncertainty for the kind of the forward look, probably a pretty difficult first half comparison, maybe better second half. Do you expect Europe to make a good positive contribution this year to the U.S. total? And are there any special onetime events that you had last year, either as a headwind or a tailwind, such as promotional events where Pringles has been very strong in things like soccer events, etcetera? Is there -- can you kind of peel back an onion a little bit for us on kind of the forward 12-month outlook for Europe? Yes, Eric, thanks for the question. I'd say there's nothing unusual that we're lapping aside from an easier comp when we get to the Russian comparisons is one. And the first half is really the catch-up -- pricing catching up to costs, and we're very confident that we're going to do that. The underlying brand strength remains very strong. Europe has just completed their fifth year of growth and so it's been a long story of underlying momentum driven by great execution on Pringles. We've got a great plan for Pringles again based on a number of different activities, strong consumer engagement, strong customer engagement with Pringles. Our cereal brands remain strong. And one of the real surprises has been our portable wholesome snacks has really returned to growth and is doing quite well. And so it's a first half, second half, but it's really more in terms of catching up, which we're in process of doing. And we can see it. We can see it in our forecast that it's happening, and it gives us a great deal of confidence that there'll be a sixth year of growth in Europe. You want to add anything? No, I think just building on the phasing comment, I think we'd be expecting to catch up on the pricing at an increasing rate through the first half. And then I think in the second half, the combination of the pricing having been caught up as well as easier comp and, hopefully, moderating inflation, I think, would lead to a higher growth, OP growth in the -- operating profit growth in the second half. One quick follow-up. Given that your pension income is really kind of a noncash event, but I think it gets priced and looked at as a cash event, have you ever considered reporting your EPS on a cash EPS basis as opposed to the way you report it now? Thank you. Our next question for today comes from Steve Powers of Deutsche Bank. Steve, your line is now open. Please go ahead. Hey, great. Good morning. Thanks guys. Maybe to start, just some follow-up on a couple of topics that came up earlier. Just -- the first one on the cash cost, the CAPEX associated to $300 million, is that -- is there any kind of timing element on that, does that -- has that come pretty equally throughout the year, does it build as we get closer to the actual event? And on pricing, I'm sure there's incremental pricing in 2023 in the emerging markets. It sounds like there's pricing to come in Europe. My question is, is there any kind of material magnitude of pricing anticipated in the U.S. and if so, could you give us a little sense of the magnitude there? I'll start with the pricing and let Amit take the CAPEX. I'll start with what we always talk about in terms of we're not going to get into forward-looking pricing and customer negotiations and things of that nature, but we always start with the first line of defense against rising costs is productivity. And so this is -- the receding of bottlenecks and shortages have given us the opportunity to really put together more historic productivity plans because all that noise is starting to recede. And so we will have an aggressive productivity plan. But as Amit talked about, our intention is to stabilize margins to slightly grow them. So that's going to require revenue growth management throughout the year, and that'll look different throughout the year, depending on what geography it is. But that is our intention. And I think in terms of the onetime costs and the phasing through the year, I mean, we're right in the middle of the program. And so I think you could expect it to be spent through the year. So there's nothing particular to call out in that. Okay. Yes. Okay, great, thank you. And I guess the other question is and I appreciate that a lot more will be forthcoming on this. But just in terms of thinking about the North American Cereal Company and its anticipated prospects over the course of 2023 relative to the total enterprise and the guidance you gave this morning. Is there a way to frame the expectations for organic growth and operating profit growth of that North American cereal portion of the business relative to the total company guidance you gave today? Yes. We don't go into that category level, but you can look at the momentum that we have and the comments I made earlier. We plan on continuing that momentum, getting back TDPs that were lost that's been very successful up to this point and to continue to grow our gross margin. We came to a low point, obviously, because of the fire and strike. So we're coming off that. But the underlying momentum, the trajectory of the business, we feel very good about, and we aim to continue that trajectory. Operator, we are at 10:30, so we are out of time. But everybody, thank you for your interest in Kellogg. And please give us a call if you have any follow-up questions.

EarningCall_165

Good afternoon, and welcome to the Lionsgate Third Quarter Fiscal 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Good afternoon. Thank you for joining us for the Lionsgate fiscal 2023 third quarter conference call. We'll begin with opening remarks from our CEO, Jon Feltheimer; followed by remarks from our CFO, Jimmy Barge. After their remarks, we'll open the call for questions. Also joining us on the call today are Vice Chairman, Michael Burns; COO, Brian Goldsmith; Chairman of the TV Group, Kevin Beggs; and Chairman of the Motion Picture Group, Joe Drake. And for STARZ, we have President and CEO, Jeffrey Hirsch; CFO, Scott MacDonald; and President of Domestic Networks, Alison Hoffman. The matters discussed on this call include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors. This includes the risk factors set forth in Lionsgate's most recent annual report on Form 10-K, as amended in our most recent quarterly report on Form 10-Q filed with the SEC. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Thank you, Nilay and good afternoon, everyone, and thank you for joining us. We just reported strong financial results and into our fourth quarter with encouraging trends across all of our businesses. The domestic box office is rebounding and, most importantly, supporting a broader range of films just as our biggest slate in years returns to theaters. Our television series continue to earn renewals and move into later seasons where their contributions increase exponentially. With six scripted series renewed in the quarter, we now have a total of nine recent shows already renewed for at least their third seasons. We reported record trailing 12-month library revenue of $845 million in the quarter from a broad mix of film and television properties. We continue to extend and renew our biggest properties. As you read on Tuesday, we're adapting six-time Oscar winner La La Land to the Broadway stage, shepherded by a world-class creative and musical team. Finally, though STARZ had a softer domestic subscriber quarter, we've already returned to subscriber growth with the strong launch of BMF in the current quarter. Now, let me drill down in each of our businesses, beginning with our Motion Picture Group. The Gerard Butler action thriller, Plane, got this year's film slate off to a great start. It outperformed expectations at the domestic box office and in nearly every one of our international territories. And by pivoting to a PVOD release date three weeks after its theatrical release, we're creating an outsized contributor that illustrates our ability to create bespoke business models, new and more efficient marketing approaches, and alternative distribution strategies. Next up is Jesus Revolution from I Can Only Imagine filmmaker, John Erwin and Brent McCorkle. Early sales indicate a big win in the faith-based space. On March 24th, we released John Wick Chapter 4, starring Keanu Reeves in the latest chapter of one of the world's biggest action franchises. If you've seen the trailer, why we're so excited. With John Wick 4 releasing in theaters in March and coming to STARZ this fall, the John Wick television event series, The Continental rolling out on Peacock and Amazon later in the year, the action spin-off, Ballerina, starring Ana de Armas in production for release next year and a AAA video game in the works, the John Wick franchise is set to drive outsized value across all of our businesses. In addition to John Wick, the slate includes new chapters of our Saw, Expendables, and Dirty Dancing franchises. And the Hunger Games: Ballad of Songbirds and Snakes arrives in theaters in time for the holiday season with a November 17th global rollout. We're looking forward to the releases of the original new properties on our slate. Are You There God? It's Me, Margaret; the retelling of Judy Bloom's classic novel; Crazy Rich Asians [indiscernible], freewheeling and raunchy directorial debut, Joyride, premiering at South by Southwest and Tim Story's The Blackening, a horror comedy in the vein of Scream slated for the Juneteenth holiday weekend. And we're heading into production on Michael, produced by Bohemian Rhapsody's Graham King, directed by training days Antwan Fuqua and starting 26-year-old Jafar Jackson, who will portray his uncle, Michael Jackson in the never-before-told and in-depth portray of the complicated man who became the King of Pop. Turning to television. We reported another strong quarter of series renewals, launches and new series pickups. The hit comedy series Ghosts for CBS reached an all-time series high end viewership last week and has become the number one half-hour comedy on television. It has been renewed for a third season and is poised for a long and profitable run. The Eugenio Derbes' comedy, Acapulco, has been picked up for a third season on Apple TV+, where our hit series Mythic Quest from Rob McElhenney has already been renewed for a fourth season, with a companion series Mere Mortals heading into production. Power Book 2 Ghost, P-Valley and BMF were all picked up by STARZ for additional seasons during or immediately after the close of the quarter. We also continue to fill the pipeline with new series. The wildly inventive Palti Goldman made a splashy debut on Peacock. The critically acclaimed first project from our 1619 partnership with Nicole Hana Jones, Oprah Winfrey, and The New York Times, a six-part docuseries on Hulu. As a reminder, the great content is not only extremely valuable but can also make a thought-provoking contribution to the national conversation. The HBO True Crime limited series, Love and Death from the Big Little Lies team of David Kelly and Nicole Kidman, will have its world premiere at South by Southwest next month. And Apple TV+ recently ordered half-hour comedy series starring, co-written, directed and produced by Seth Rogen. Financially driven by three straight years of strong television slates, our TV segment profit is growing 50% this year with similar growth expected next year. Importantly, these contributions are coming from every part of our television business. Lionsgate Television with one of its most robust slates of premium scripted series ever, 3 Arts, the number one talent management and production company continuing its very strong performance. Pilgrim Media, a nonfiction leader with 21 shows on a dozen networks; and Debmar-Mercury, a top distribution and syndication company that recently renewed two of its biggest syndication properties, the Sherri Shepard Daytime Talk Show and Freemantle-produced game show Family Feud for multiple years. The value of great intellectual property grows with every prequel, sequel, spin-off, remake, and adaptation. And in that regard, I'm pleased to announce this afternoon that Lionsgate Television will produce an expansion of one of STARZ' most celebrated and groundbreaking original series, Spartacus. Spartacus writer and creator Steven S. DeKnight will return as showrunner an executive producer. Big, bold and fiercely premium, Spartacus adds another great STARZ franchise along the Power Verse, Outlander, P-Valley and BMF franchises. Turning to STARZ, the streaming world is transitioning to an environment for which we've been preparing, more rational content spend, a focus on profitability instead of chasing subscribers and greater receptivity to bundling and packaging. The bundling of Paramount+ and Showtime, the evolution of the HBO Max and Discovery+ offerings and the emergence of new retailers are indicative of a landscape that plays to our strengths as a complementary pure-play premium service with a focused content strategy and two valuable and scalable core demos that can sit on top of every platform and be part of every bundling and packaging conversation. In this regard, we will announce our first major domestic bundling agreement next week. Against this backdrop, we'll continue to prioritize three things; first, continuing to execute Starz's focused content strategy. STARZ returned to subscriber growth this quarter with the launch of BMF. With Season 3 of Power Book II: Ghosts and the long-awaited remind a fan favorite Party Down, we expect our subscriber growth trajectory to continue this quarter. Looking ahead, we have confidence in the slate with over 80% returning series, strategically scheduled with tentpoles every quarter and combined with a lineup of fresh studio movies from its Pay-1 and Pay-2 theatrical output deals from Lionsgate and Universal, respectively. Second, reducing our exposure to linear headwinds as our transition to digital continues with 73% of STARZ subscribers and 64% of our revenue coming from digital in the quarter. And finally, continuing to take cost out of every part of STARZ business domestically and internationally as we remain focused on our most important metric, profitability. In closing, our plan to separate Lionsgate and STARZ by the end of September remains on track. Separation will give our two core businesses the opportunity to pursue strategic and financial paths that make sense foreach of them and unlock greater value by operating as pure-play entities. We're exploring a number of financial strategies to leave both companies with strong balance sheets at the time of separation. With our film and television studio businesses operating at full throttle and STARZ establishing itself in the streaming ecosystem as a complementary bundling partner of choice, operating on a stand-alone basis will give both companies a chance to shine. Thanks Jon and good afternoon everyone. I'll briefly discuss our third quarter financial results and update you on the balance sheet. Third quarter adjusted OIBDA was $168 million and total revenue was $1 billion. Revenue was up 13% year-over-year, while adjusted OIBDA was up 83%. The year-over-year revenue increase reflects studio strength across both TV and motion picture, while the adjusted OIBDA increase reflects studio segment profit improvement at television and motion picture as well as Lionsgate+. Reported fully diluted earnings per share was $0.07 a share and fully diluted adjusted earnings per share was $0.26. Adjusted free cash flow for the quarter was $30 million. These financial results put us in a position to deliver on the fiscal 2023 and fiscal 2024 financial outlook ranges we provided on last quarter's earnings call. Now, let me briefly discuss the fiscal third quarter performance of our Studio and Media Networks businesses as well as the underlying segments compared to the previous year quarter. Media networks' quarterly revenue was $380 million, and segment profit was $50 million. Revenue was down 2% year-over-year as favorable shifts in subscriber mix that drove continued OTT revenue growth was more than offset by domestic linear pressure. Domestic revenues was down 6% year-over-year, while international revenue was up 46%. Media Networks' segment profit was up 74% and primarily reflects lower marketing spend, lower content expense, and foreign exchange. As we had outlined earlier in our fiscal year, content amortization expense peaked in the first quarter and it continues to trend toward a more normalized level. Our international results reflect the impact of our decision to exit seven territories by the end of fiscal 2023 and the year-on-year improvement in the international segment profit reflects the progress towards our commitment to reach breakeven exiting calendar year 2024. We ended the quarter with 37.2 million total global subscribers, including STARZ Play Arabia. Excluding the subscribers in the international markets that will be exited in March, our global subscriber count was 28.7 million at the end of the quarter. Focusing specifically on our OTT subscribers in the remaining markets, we ended the quarter with 18.5 million global media OTT subscribers. This represents year-over-year global OTT subscriber growth of 14%, comprised of domestic OTT growth of 5% and international OTT growth of 33%. A modestly quarter sequential decline in global subscribers reflects a lighter slate of originals and Pay-1 titles. As Jon mentioned earlier, the domestic business has already returned to subscriber growth as we move into the March quarter. Now, I'd like to talk about the Studio business in aggregate. During the quarter, Studio revenue and segment profit growth was driven by both television and motion picture. Revenue of $894 million was up 25% year-over-year, while segment profit of $148 million was up 71%. Library revenue for the quarter was a record$277 million, up 55% from the prior year quarter. On a trailing 12 months basis, library revenue at the studio was a record $845 million, up 13% compared to the prior quarter's trailing 12-month library revenue. Breaking down the Studio business between motion picture and television, let's start with motion picture. Motion picture revenue was up 5% year-over-year to $289 million, while segment profit of $77 million is up13% year-over-year on the strength of multi-platform releases such as Fall and Clarks 3 as well as foreign exchange. Revenue and segment profit trends in the quarter reflect continued strength in our library as well as our multi and direct-to-platform business. In addition, we have been preparing for the return of our larger theatrical titles over the next 18 months. In this regard, we are already seeing success with the recent release of Plane and expect to finish our fiscal year strong with releases of Jesus Revolution and John Wick 4. And finally, television revenue was up 38% to$605 million, driven by continued growth in output, which included both new and returning series as well as strong library sales, including the licensing of Schitt's Creek. Segment profit was $72 million and was up over270% year-over-year, reflecting solid performance across scripted, 3 Arts, Pilgrim, and library sales. Now, let's talk about our balance sheet. Excluding the restructured Lionsgate+ territories from trailing 12 months adjusted OIBDA, leverage for the quarter improved almost a full turn to 4.7 times. We also continue to retain significant liquidity with $425 million of unrestricted cash on hand and $1.25 billion of an undrawn revolver. This level of liquidity is particularly strong after having utilized over $100 million of cash in the quarter to reduce the amount of bonds outstanding. In particular, we acted on a highly attractive opportunity to delever our business by purchasing some of our unsecured bonds in the open market at a substantial discount. As you can see from our disclosures, we purchased $124 million of our bonds for $82 million, representing a $42 million reduction in net debt. Our cash position was further enhanced in the quarter with the receipt of$43 million from the partial sale of our interest in STARZ Play Arabia. As a reminder, the cash proceeds from the gains on STARZ Play Arabia and bond repurchases were effectively tax-free as we utilized a small portion of our $1.4 billion of NOLs. In summary, we finished a strong quarter with significant liquidity, and we have no maturities until the fourth quarter of fiscal 2025. We remain committed to strengthening our balance sheet and continuing to pay down debt, while funding our investment in content and marketing from adjusted free cash flow. Thanks. Good evening everybody. Maybe you could start by talking about what drove the uptick in the library revenue? You mentioned Schitt's Creek in there. Was that a big component of that increase? Or was it more broad-based, including things like AVOD rights or just TV deliveries or anything else? So I'd just love to get some context of what drove that. And then secondly, just on the spin as it relates to that. I'm wondering if you could talk at all about what kind of corporate costs you're expecting at each of the Studio and STARZ segments? And anything about how you're thinking about the capital structures and where the NOLs are going to sit? Thank you. Sure Steven, appreciate the question. First of all in the library, Schitt's Creek was a benefit in the quarter but it was widespread and AVOD continues to be a growth area for us and library sales is just great demand across the board. What I would say, too, is to remind you that we also have more and more of our film slate coming online, and we effectively haven't had so much of our films refreshing our libraries in the last three years. We really have a lot coming up. Obviously, the John Wick and Hunger Game franchises moving into the into this quarter and fourth quarter for John Wick and Hunger Games next year. So that bodes well for future library licensing revenues as well. With regards to the structuring, the spin or separation, I'm not going to get into the specifics of the capital structures there. But what I would say is with regards to leverage, we're in a very good position. You saw we delevered a full turn this last quarter, and we're in a good position to further delever. In terms of overall cost and corporate overhead, I would just note that we have quietly reduced our workforce by approximately 150 full-time employees or approximately 10% of our workforce. We've done this through restructurings and managing open positions. So that bodes well as we go into 2024 for continuing to manage cost across the board including programming spend, marketing and G&A. So, that will benefit the companies in separation. Thanks. Maybe just as a quick follow-up, Jimmy. Was wondering if you see any more debt out there that you think you can attractively retire? Look, I don't think I'm going to get into what we may do there. I feel very confident though that in separation, Steven, that the bonds will travel with STARZ. If you can see, we've already started to take some steps already to right-size that, if you will, for a separation. And we will then refinance the term loan As and Bs, and we have substantial, as you know, substantial unsold library rights on the studio side, which would facilitate that. Great. Thanks for taking the questions. I guess two really. One on the process. Could you just give us kind of a summary of, to the degree you can, of what's advanced since last quarter? Since everyone is focused on this and what kind of remains to be done for this to kind of move ahead? That's one thing. And then secondarily, you gave us some color around STARZ subs recovery. I was wondering to get a little bit more kind of granular on that, and that would be -- you said there's growth. Is this growth off of what we had before this quarter? Or is this just growth off of where we exited the quarter? Trying to get a sense of how much has already come back with the slate kicking in. In terms of the timing of separation, we've been doing a lot of work here preparing separate financial statements, discussing matters that would relate to a reverse spin of the studio with our auditors and with the SEC. We're on track to file our initial Form 10 before the end of March. And as Jon has said, we will conclude separation, we're on track, by the end of September. Hey Barton, it's Jeff. How are you? Thanks for the question. We had a very strong financial quarter. You pointed out, we had some softness in subs. We had two shows, new shows that premiered in the quarter that underperformed our expectation, coupled with no Pay-1 movies which resulted in the softness. We have, as Jon said in his prepared remarks, premiered BMF. We're into one of our strongest content quarters. We returned to growth. To answer your question, return to growth as we've exited the quarter, but we do expect on a full year basis to have a really strong year based on the tentpoles per quarter in the way that we've scheduled our content for 2024. Great. Thanks for taking the questions. Two, if I could. First, can you provide a bit more color on the restructuring charge in the quarter at the domestic Media Networks? And second, as we approach the spin, it's interesting because it seems more and more investors are kind of sharpening their pencils around the Studio business. So, I wanted to ask about motion pictures. And if you could maybe flesh out the opportunity you see ahead over there? It's been quite a few years since you've had such a strong lineup. And if I go way, way, way back in my model to maybe a comparable year of late strength, the profit profile of Motion Pictures was quite attractive. So, I know it's too early to get specific and we still need to see these films actually perform. But if you could just provide any guardrails or color around your expectations, that would be very helpful? Thank you. Sure. Appreciate the question. With regards to the restructuring charge on STARZ, it's primarily domestic related to the curation of the domestic programming lineup. And I would just point out that in the quarter, there were no benefits to our adjusted results as a result of the restructuring charge. And the restructuring charge was excluded from the adjusted results to help normalize the trends. I would also point out that we similarly excluded from the adjusted results amounts that were almost completely offsetting that, which would be below the line gain on the -- sale of a partial interest in STARZ Play Arabia as well as the gain on the repurchase of the bonds. I can give you a little bit of -- this is Joe, thank you for the question. I'll give you a little on the slate. So, I want to first talk about the multi-platform and streaming business leading into our wide release slate because it's all lined up in a pretty extraordinary fashion. We've talked in past conference calls about growing our multi-platform business. That business has doubled. We stood up a streaming business. And those two businesses alone combined cover the cost of the Motion Picture group for 2023. And at the same time, we've lined that up with -- as that growth has happened, we've lined that up with the strongest slate we've had for many, many, many years. The interesting thing about what's happening, Jon in his prepared remarks talked about Plane and what a strong contributor was. And we've been talking about this for a few calls. The actual fundamental economics of the Motion Picture business theatrical release have improved. And they've improved for a number of reasons. They've improved because you can just be much more prescriptive on every dollar of P&A you spend for a customer that comes in the door. And theatrical films have become scarcer and therefore, they are more valuable. And so whether it is our digital conversions, which are some of the strongest we've ever seen, whether it's the value of our pay television, whether it's various television windows, how we window them. Jon mentioned moving up PVOD. And so without giving you specific numbers, what I can tell you is the greenlights that we ran, the greenlight films three years ago, at similar levels of box office have significantly improved. And so we're going into this year very bullish on the trajectory of the business. Yes, I'd say sort of to finish that thought. If you think about that Joe's -- what we used to call segment too business creates the foundation for the business pays for most of the Motion Picture Group overhead. Then you put on top of that a very robust, wide release slate, I would say that we've given you an outlook for 2024 that's strong. I would say we didn't put in any huge grand slam home runs in our movies. That's not to say that you should start thinking they're going to be. But I would say when you look at that outlook, I would say that you think -- we think that's certainly an achievable outlook, and I think you could say that with big homeruns, you might have a fair amount of success above that. Is that helpful? Thanks very much. One on STARZ for Jeff. Any more color you can share on the domestic bundling agreement? Is that with another complementary streaming service? And how does that work exactly? Is the consumer price point different on a bundled basis? How should we kind of think about the unit economics and maybe the co-marketing approach? And then great Studio results. I mean, Jon, you mentioned television strength across the unit and mentioned 3 Arts as well. Any color on what you see as strategic options with taking in that minority stake or an update on thoughts about taking the rest of that in? thank you. Hey, Thomas, this is Jeff. Thanks for the question. We've been talking for a long time about how STARZ is a great complementary bundling partner all and I think finally, it's here. We're excited about it. The partner, obviously, is another complementary streaming partner that we're excited to go to market with. And as in any bundle, we will have a joint price point that's cheaper than the two individual parts to give consumer value. But in exchange for lower ARPU on that business, you get better churn characteristics, lower SAC and all the benefits that you would see in the bundled linear world from the past. And so we're excited to kick that off. We're excited to get -- to have more down the pike, and we can't wait until we get it to market and see how it does. And in terms of 3 Arts, here's what I would say. This has been a great partnership. We've created a lot of value together and it's value for both sides. There are numerous ways we can continue the partnership. But we're just beginning those conversations. I think it would be inappropriate for me to front-run those conversations. All right. Thanks Another thing on the theatrical business. There's been somewhat of an uneven return of content to the calendar. I'm wondering if what sort of approach you're taking to the theatrical calendar in terms of how much of it offers legitimate opportunity. It seemed like there were some holes in the calendar last year and potentially looking forward this year, there might be. Is this an opportunity for you? As I had indicated earlier, we see enormous opportunity. We've got, I believe, 12 films in this current calendar. What we are seeing to speak to the idea of opportunity is, there aren't a lot of competitors left playing in that mid-budget space, and the economics, as I said, have improved. I can't announce it on this call, but we've actually added, just yesterday, an additional film into the lineup that has no risk to it and a ton of upside the way we structured it. And it's partially being a theatrical distributor at this moment in time when others are focused on other segments of the business, and it gives us a ton of opportunity. So, where we see openings in the calendar that match with either content that we're making or content that we acquire, we'll take advantage of it. I mentioned earlier this, our multi-platform business. We have a title called [Indiscernible] that we acquired at -- in Toronto. That is a movie that we acquired, I think it was going to be kind of a multi-platform release. We've actually seen the title, and it too offers an opportunity to leverage our infrastructure go theatrically. The economics by doing that will improve. And like any title that goes out, if the audience falls in love with it, we can have a breakout success. Okay. Maybe one other -- I think we talked about this perhaps in prior calls. But are there some additional films that you intend to go more direct to streaming that might warrant a week or two in a theatrical window just to create greater value for you and the purchaser? Look, we always want to maintain flexibility with our partners. We are building movies that are built specifically for streamers. We have those -- we have conversations with them all the time about how can we add value, and are there different models that will help them and be good for all of us? And so we would remain open to that as an opportunity. But whether we do that or not, there is an incremental leg of our business that we intentionally set out to build 2 years ago that's now a really meaningful contributor. Hey good afternoon. Thanks for taking the question. I just had a couple of housekeeping ones, guys. You mentioned Schitt's Creek license in the quarter. Just wondering if you're able to quantify that? Secondly, in the release, you talked about the OTT subs and international in the remaining markets. I think it was 8.5 million. Is that meant to be the bedrock number that's the go-forward OTT number that we can then work off of? Or is there still more to kind of come down as you normalize those markets? That's the second question. And then the third question was around the John Wick AAA title that you mentioned. Has that -- does that have a home? Does that have a studio that has taken on that project or is that still in negotiations? Thanks guys. Yes. On the international side of things, excluding the remaining territories, we look to finish the period right around 7 million subscribers, which is what we said in the prior call. In regards to Schitt's Creek, there are no specifics on that. Obviously, it was good in the quarter. But as we've had Mad Men in the past and we've had Nashville, we always have some lumpiness relative to quarter-to-quarter in library revenues. But we have a lot of library and expect to fill that hole, if you will, as a tough comp going forward. So, really feel good. And as I alluded to earlier, we have a lot of strong film titles that will be replenishing the library. Hi, thanks for taking the question. I got a couple. So, just maybe the first one for Jeff. Just when we think about the domestic business, which I think subscribers sort of sitting around 20 million, I know it's down sequentially. But like as we look out over the next, I don't know, a few years and I ask this from the context of as the business separates later this year, how should we think about what the trajectory is of that 20 million sub base? And what are the puts and takes as you look out over the next couple of years? And then I just want to follow up that earlier question on 3 Arts. I know it's obviously early in the process. But when you think about sort of the revenue and earnings impact of 3 Arts, how big of a business is this and how integrated it is into the rest of Lionsgate, meaning is it -- is there -- are there obvious like strategic people that this would fit with if you were to sell this? I guess how do we think about sort of the importance of 3 Arts to the overall Lionsgate and how much that business is generating today? Any color would be great. Hey Rich, thanks for the question. Look, I think I'll start globally and work my way back into the domestic business. We think in the fiscal 2025, 2026 timeframe, the global business should be in the mid-30s in terms of subscribers. The domestic business is really continuing to pivot from linear to OTT, so really driving profitability and swapping subs to being more digital than they are linear. As Jon said in his prepared remarks, 64% of our revenue is already digital today and then really pure growth internationally to get to that kind of mid-30s number. On 3 Arts, appreciate the question, Rich, but I'm not going to give you that much more color. As I say, we're just starting discussions which essentially are both a combination of strategic discussion and, I would say, negotiation at the same time. So, I'm not going to show you sort of all the cards in the deck, if you will. I would say in general though, the color I could give you is 3 Arts is a pretty much stand-alone business in terms of its management company. Again, it's been great opportunities for us to work with some of their talent, but also to help build them into kind of a mini-studio. And they've done a great job in working really closely together. They've got some shows on STARZ, one actually on the air Queen which is great, another 1 that's in sort of very advanced negotiation that we're very high on. That business and that relationship will continue no matter what. And so we're going to have a lot of business together. Again, there's a lot of options and different ways can play out. I think in virtually all of them is going to be extremely positive, and we're going to do it together with them as partners and just figure out how to both extract the value we've already created and to continue to create additional value. And maybe just to follow-up on that, could you just help us understand because everyone may not be totally familiar with 3 Arts. In terms of like its talent representation, but do they actually own -- like when works get created, who owns it? Like are those Lionsgate-controlled shows? Are those 3 Arts-controlled shows? Do they have direct ownership? Just like what exactly is inside of 3 Arts catalog or not, would be -- just trying to understand it. Yes. One of the benefits that we had for them is having -- rather than sort of participation that they have with their clients as executive producers, we've made them more owners. I don't know, Kevin, if you'd like to expand a little bit on that? Sure. Just to add to that, we have four or five series together and we're really essentially co-studios, co-own. Lionsgate continues to do the things we do really well with our talented distribution team, our creative teams that work hand-in-hand with their group. And that really improves the overall economics and kind of long-range participation and upside and back end for everybody in the old, including the talent, clients, 3 Arts and ourselves. So, we have five of those, we'd like to have 10 or 15 and we intend to do so. Hey guys. Two quick ones, I guess, housekeeping/follow-ups. The sale of Shotgun Wedding, just remind us if that's fiscal 4Q this year. I just want to make sure we have that right. And then just coming back to the John Wick video game title. I had asked this earlier, but is this -- is that something that a studio has already picked up or are you still in negotiations with a studio to build that game? Thanks again. Game. We're not -- we are in negotiations for a AAA game. We're not at a stage that we would announce the game. I believe Shotgun is-- It appears there are no further questions. This concludes our question-and-answer session. I would like to turn it back over to Nilay Shah for any closing remarks. Thanks everyone. Please refer to the Press Releases and Events tab under the Investor Relations section of the company's website for a discussion of certain non-GAAP forward-looking measures discussed on this call. Thank you and see you next quarter.

EarningCall_166

Good day, and welcome to the Flow Traders Fourth Quarter and Full-Year 2022 Results Conference Call. This meeting is being recorded. At this time, I’d like to hand the call over to Jonathan Berger, Investor Relations Officer. Please go ahead, sir. Thank you. Good morning, and thank you all for joining Flow Traders fourth quarter and full-year 2022 results call. As you’ll no doubt already seen, we released our results first thing this morning. I’m joined here on the call today by Flow Traders CEO, Mike Kuehnel; as well as Chief Trading Officer, Folkert Joling, who will run through this results presentation. Afterwards, I’ll be happy to take any questions you may have. Before we begin, let me draw your attention to the disclaimer on Page 2. Please be advised that if you continue to listen to this presentation, you are bound by this disclaimer. Also, please note that the results we will discuss in this presentation are unaudited. Thank you, Jonathan, and good morning, and thank you all for joining this call where we will provide additional color on our fourth quarter and full year 2022 results. 2022, as a whole, saw an increase in the levels of market activity when compared to 2021 amidst the generally higher volatility environment. Market ETP value traded increased 41% year-on-year as investors absorbed various geopolitical and macroeconomic events. The fourth quarter of 2022 was marginally more active than the third, and this was reflected in ETP market value traded increasing by 2% quarter-on-quarter. Our own ETP value traded slightly decreased quarter-on-quarter. However, for the year as a whole, ETP Value Traded increased by 15%. 2022 saw record ETP value traded versus last year, which in itself was a record for our business. This was also the fourth consecutive year when our ETP Value Traded surpassed the €1 trillion mark. This is once again a testament to our market presence and leading global footprint. We also saw record value traded across each of our three asset class pillars in 2022, which demonstrates the structural return on recent investments and the development of a more diverse and resilient business. From an NTI perspective, there has been a greater relative fixed income contribution in 2022. Consequently, this market environment, along with Flow Traders own pricing and hedging capabilities, translated into total income of €113.9 million for the quarter. This comprises net trading income of €115.6 million and negative other income of €1.7 million. As a reminder, the other income line item reflects the performance of our strategic investment portfolio. 2022, as a whole, saw normalized total income of €460.6 million, which was 19% greater than recorded in 2021. We delivered another strong financial performance and our second most successful year ever from a top line standpoint. We demonstrated yet again strong margins with a normalized EBITDA margin of 42% in Q4 ‘22, with normalized EBITDA of €48.2 million. Overall, in 2022, normalized EBITDA was €208.2 million, with a margin of 45%. As a reminder, our normalized income statement presentation removes the distorting impact of IFRS 2 in relation to share-based payments and excludes one-off nonrecurring advisory costs in order to provide an underlying performance view across the financial periods. Q4 ‘22 normalized net profit amounted to €33.6 million with normalized basic EPS of €0.78. Ultimately, we recorded normalized net profit of 2022 of €150.2 million, with normalized basic EPS of €3.45. Taking all of this into account, Flow Traders proposes a final dividend for 2022 of €0.80, which equates to a total dividend of €1.50 for 2022. This will be paid in early May following our AGM. We once again retained a strong focus on implementing our strategic growth agenda during the fourth quarter, which saw further confirmation of our structural growth. Accordingly, we have worked to enlarge our trading footprint across multiple products and asset classes. And lastly, I would also like to take the opportunity now to pay tribute to the professionalism, resilience and loyalty of all of our colleagues globally this past year. Everyone has contributed to the considerable operational and strategic achievements and successes over the past year. Thank you, Mike, and good morning, all. As shown at the top left-hand side of this slide, ETP market value traded increased slightly up in the fourth quarter of 2022 compared to the third quarter, although both quarters were down from quarterly volumes seen during the first half of the year. Implied volatility, as represented by the VIX, remained elevated into Q4, although trending lower than Q3 as markets reacted to ongoing macroeconomic developments. There was a downtick in ETP velocity in the second half of ‘22, mainly driven by the Americas and Europe. ETP assets under management has reduced by 10% since the start of 2022, predominantly due to the broader market backdrop, but overall inflows remain strong. In summary, it’s fair to say that momentum and the outlook across the ETP universe continues to be positive. I will now move on to dynamics within the fixed income and crypto markets. As shown on the top left of the slide, it is evident that the investment-grade and high-yield bond markets have remained reasonably robust from a volume perspective, although being slightly down from the volumes seen in the first half. We can also see that credit spreads have widened in 2022 when compared to 2021. There has also been a corresponding widening of fixed income ETP spreads during the same period. From a crypto market perspective, Bitcoin, including other digital currencies experienced a sharp price decline during 2022. There was also a noticeable volume spike seen in the market following the collapse of FTX. The declines in the cryptocurrency valuations have naturally impacted crypto-ETP value traded, which also fell sharply in Q3 and Q4. I will now review Flow Trader’s regional performance. On this slide, we present an overview of some of the key performance indicators for the fourth quarter as well as for the full year 2022 on a regional basis. As Mike mentioned earlier, we have seen another strong performance in Q4, heightened market activity and disciplined execution resulted in growth in NTI in Q4. In Europe, we maintained our position as the leading liquidity provider in ETPs and delivered a robust overall trading performance in Q4. Encouragingly, our fixed income and corporate credit trading businesses continue to increase its presence across the markets. Flow Traders retained our top 5 bloomer dealer rankings for executed tickets and volume within our Euro investment-grade universe. From a crypto perspective, as a regulated listed firm, Flow Traders continues to be well positioned, supporting partners in the overall ecosystem. It is also important to note that regarding FTX filtrates has an immaterial exposure and more broadly, we continue to manage risk effectively. Moving to the Americas, it was clearly a strong trading performance in Q4, and this was partially driven by fixed income. As in Europe, we continue to build out the fixed income businesses in Americas and saw improved rankings in various RfQ platforms. There was also a continuous focus on international equity pricing capabilities, including ADRs. Flow Traders has also opened a new office in Chicago since 1st of February, and we seek to further benefit from the city’s unique talent pool and academic diversity. We also have created closer proximity to many innovative players in the U.S. digital asset space to ensure Flow Traders remains well positioned to be part of this defining moment in the future of finance and technology. Lastly, with respect to Asia, we saw a solid quarter-on-quarter trading performance, in line with our strategy to expand geographically in Asia, we have further build out activities in China following the receipt of Flow traders QFII license and the opening of the Shanghai office with the purpose of helping to develop the local ETF market in making domestic and international indices effectively to make it available to investors. Flow Traders have also started to leverage U.S. and European fixed income businesses with our coverage in Asian trading hours for global coverage of both index products and selected single bonds. From a digital asset standpoint, we acted as a market maker on the Hong Kong Stock Exchange first virtual asset ETF and reflects our ongoing support for crypto and digital asset ETPs globally. Thank you, Folkert. As you can see, we have seen 32% year-on-year and 5% quarter-on-quarter increases in fixed operating expenses. As we mentioned in recent earnings releases, a major impact has related to the U.S. dollar strengthening against the Euro. This has affected all the fixed operating cost categories. In addition, new hires, base compensation increases implemented in H1 and technology investments have also been contributing factors. I will discuss these developments in greater detail on the next slide. We have also incurred €14.1 million of nonrecurring strategic advisory costs predominantly relating to the updated corporate holding structure and further balance sheet review assets. These are excluded from normalized operating expenses. We have also seen further growth in head count with a 3% quarter-on-quarter increase to 660 FTEs as we drive strategic growth. The business overall continues to demonstrate healthy normalized EBITDA margins both quarter-on-quarter as well as year-on-year. While we remain committed to bringing on board additional talent in growth business areas, FTEs are expected to remain broadly flat during 2023 given expected efficiency gains. There is a strong commitment from the entire business to maintain the fixed operating cost base in line with the December 2022 run rate. Accordingly, normalized fixed operating expenses in 2023 are expected to amount to approximately €175 million to €185 million. I will now discuss the development of our fixed operating expenses in 2022 on the next slide. On this slide, we have presented the bridge to provide additional details and explanation around the development of normalized fixed operating expenses in 2022. As you can see, there has been a 19% increase in the normalized fixed operating expense development when adjusted for the strengthening of the U.S. dollar as well as the targeted base compensation increases implemented in the first half of 2022. The impact of a strengthening U.S. dollar versus the Euro amounted to €6.6 million across all expense categories. In terms of the base compensation increases, this had a €7.1 million impact. It is important to note, however, that this was offset by the change of the profit-sharing percentage to 32.5% of operating results from 35% previously. This ensures an income statement-neutral impact overall. I will now take a closer look at Flow Traders capital position. On the next slide, we show our required CET1 capital levels on the top left-hand part of the slide. After accounting for the final dividend, Flow Traders’ capital buffers have remained strong and remain comfortably above our requirements under IFR/IFD. Our own funds requirements reduced to €274 million at the end of December from €323 million at the end of September. This reflects the nature of the trading book at that point in time. We had a total CET1 of €539 million at the end of December 22, with €265 million excess capital. As you may have seen, we completed the update to our corporate holding structure on January 13, 2023. With this new holding structure, group consolidated supervision and associated capital requirements no longer apply. On a pro forma basis, this would have reduced our capital requirements by 15% if the new holding structure would have been in place at the end of 2022. From a disclosure standpoint, the concept of CET1 and other associated capital metrics at the group level no longer exist and accordingly will not be reported on going forward. On the top right-hand side of the slide, you can see our trading capital position. Trading capital really is the lifeblood of our business and has the ability to generate attractive returns, as shown on the chart. Our trading capital increased to €651 million at the end of the year and includes the proposed dividend as well as deferred variable remuneration. It is also worth noting how consistently accretive trading capital has been over recent periods with levels in excess of 60%. Considering all of these developments and the growth opportunities we very much see ahead, Flow Traders has set the full year ‘22 final dividend at €0.80 per share, implying a €1.5 total dividend for full year ‘22. Moving to the next slide, I will discuss market trends, our strategy and recent achievements. On this slide, you can see the support of megatrends, which we outlined at the Capital Markets update remains very much intact. These four megatrends continue to shape our market environment, are acting as tailwinds to our business and offer increased opportunity set. Crucially, these trends all feed into and reinforce each other. Particularly relevant to our core business is the ever increasing acceptance of ETPs and growth in passive investing. According to BlackRock, ETP AUM is expected to double by 2025, which underscores the strength and importance of the ecosystem we are a key part of. Electronification of trading is critical for all of our activities, but specifically, it is within our credit business, where this is a key structural trend in corporate credit and emerging market sovereign bonds. Increasing adoption of electronic trading ties into our core technology-enabled competency set. Despite the recent market events, there has still been considerable average daily volumes across cryptocurrencies seen globally in 2022. Moreover, digital assets remain a long-term growth opportunity within the underlying technology expected to drive significant transformation across global financial markets in the coming years. Lastly, regulation continues to support our business in terms of creating a level playing field in terms of execution transparency. In addition, increased regulatory adoption of digital assets will also create more opportunities for our firm as we are an active participant in accelerating these discussions with regulators. I will now hand over to Folkert to review our strategic objectives and progress in 2022 and focus items for 2023 and beyond. Thank you, Mike. With those key market trends in mind, our strategic goals and objectives across the three asset class pillars are fully aligned with the ambition outlined at the Capital Markets update. We made significant achievements in 2022 and have clear focus areas for ‘23 and beyond. Again, these are all entirely consistent with our long-term strategic outlook. From an equity standpoint, we are seeking to deepen product coverage and geographical footprint to align with structural industry growth. In 2022, we achieved record selling trading across equity as we grew our large counterparty base even further and traded on a large array of avenues. We also commenced onshore trading in China, which is a significant component of our broader Asia expansion plan. In 2023, we will increase our focus on the U.S. – in the U.S. on index product with international underlying. In Asia, we will expand our set up in the major markets of China and Korea. We have further expanded and diversified our fixed income trading during the course of 2022. There was a material increase in fixed income value traded versus 2021 and the single bond market-making proposition has grown globally in the past year as well. 2023 will see further growth globally in our single-bond market-making proposition. In line with this, we will also be onboarding additional fixed income institutional counterparties in the full year. In terms of CCC, the focus here is on growing our presence and participation in digital assets, FX and commodities. We retain our long-term conviction around digital assets and accordingly, have continued to grow our presence in the global crypto financial ecosystem. We expanded our coverage of cryptos and have acted as a market maker on numerous crypto ETP launches. Work will continue in 2023 on accelerating our footprint in ETP, spots and derivative products as well as expanding OTC bilateral counterparty business across CCC space as a whole. To complete the picture, we have expanded our strategic ecosystem approach, which is channeled through our corporate venture capital unit – corporate venture capital, which is covered in more detail on the next slide to be covered by Mike. Thanks, Folkert. In 2022, we announced the establishment of Flow Traders Capital, which formalized and refines our overall strategic ecosystem approach. It is clear that there is a tremendous amount of change in innovation happening in global financial markets. Given our position within the ecosystem, we believe we can play a critical role in driving this innovation and change. Yet at the same time, we believe that single firms acting alone cannot accomplish this. We, therefore, want to make sure we partner with other organizations to leverage this change as well as to accelerate our overall strategy by driving themes of electronification and transparency. In 2022, we made 16 strategic investments in total, which has a current portfolio value of €25 million. And this slide illustrates selective investments we have made recently. I do not propose to run through each initiative shown on this slide in turn. But as you can see, our current portfolio is split across our three asset class pillars of equity, fixed income and CCC. Interest in strategically partnering with Flow Traders remains high. And whilst new investment activity has reduced, focus has intensified on strategic planning with existing portfolio companies. The pipeline for new investments in both digital assets and traditional finance ecosystem systems remain strong. Thanks, Mike. This now concludes the formal part of our presentation. We would now like to open up the floor to any questions you may have. Operator? Thank you, Jonathan. [Operator Instructions] And our first question comes from Greg Simpson from BNP Paribas. Please go ahead. Your line is open. Hi. Morning, guys. Thanks for taking my questions. Just first one maybe is could you talk about the net trading income mix by asset class? And I know the Capital Markets Day you kind of gave that mix. How did it shape up in 2022 and in Q4, in particular, interested in the contribution from fixed income? That would be my first question. Thank you, Greg. In line with the market activities, fixed income was more active in ‘22 than in ‘21. So this is also reflecting the relative contribution of fixed income on the total. So it has grown a bit. Equity is still the strong holder, very stable contribution on the distribution. So fixed income grew relatively and because of the crypto downticks and the activity in the CCC space, relatively fixed income, yes, it’s slightly larger than in ‘21. equity, very stable and fixed income, takes that part probably relative from the CCC bucket. Got it. Okay. And the – and then just on the – looking at the EMEA segment, the fall in NTI in Q4 versus Q3 in volumes look quite stable and the market you didn’t feel particularly different between those quarters. So can you just talk a bit more about why things are a bit slower on the revenue side in EMEA in Q4. There’s always a bit of variance in those patents. So the KPIs are very stable and strong. So we don’t see a significant change in those. So it’s nothing materially different. And I think it’s the key indicators that we are looking at also a very stable pattern. Got it. And then maybe just one final one is maybe answer, but any kind of particular change on the competitive front in terms of the players you’re kind of seeing in the market? Or is it still kind of stable? And also, is your market share in equity ETFs, very different to fixed income ETFs. Is there a big difference between those two on market share front? Thank you. The competitive landscape in Q4 has remained relatively intact. So we do see the continued developments in technology, latency and prediction ongoing. But the mix of competitors is relatively equal. The market shares across the different asset classes depends a bit on the segment of the pillar. So we are very strong on the international side on equity, relatively less on the domestic. That has also remained similar. And in fixed income, this is also the case where we are stronger on the investment grade and the high yield bucket relatively to the treasuries. So the pricing element of our competence set is the reason for this. So those market shares have remained strong in equity side in Europe, 40% market share on exchange between 25 and 30 off exchange. So these are all very stable. Greg, if I may add just to provide a bit more broader color. When we presented our Q3 results, we made a bridge into the diversification strategy paying off. So what we see now consistently is that the structured investments we made in our business and fixed income is a very prominent example are increasingly paying off. So I think this is a testament to the trends are right. We indicated as key opportunities for us. But secondly, creating a global footprint of our underlying infrastructure and making sure that we can capture very systematically and more market share. That’s another leg to it. So in a way, this is now, for us, a proof of concept for diversification work. So we can be, in part, significantly more asset class agnostic. And secondly, we are able to increase more operational leverage on a global basis. So I hope that this ultimately then builds the bridge into becoming more competitive down the road. Got it. Thank you. And so, the fixed income was 10% of NTI in 2021, any color where that actually was in 2022. Hi. Good morning, gentlemen, and thanks for taking my question. Congrats on the strong set of results. Of course, I have a couple of them on my side. I have to kick off, I’d like to kind of dig deeper a bit into the trading capital and the returns on that. So I was just wondering what are the main drivers actually for growth on the returns of trading capital. So in Q4, this landed at 71%, while it was at 67% in Q3. And you clearly traded less crypto, which in the past was a bit of phase, say, a kind of high return on capital, while the non-ETP volume stayed broadly flat quarter-on-quarter. So could you please give a bit of color from where this is actually coming from? Yes, Julian, I can kick it off. I think there are different components to that equation. One is an increased level of also internal visibility on trading opportunities. So we started talking last year actually about we want to make capital or drive velocity of capital and drive also across the entire global footprint even, the visibility of a rising trading capabilities and build an organization behind, that in order to capture that. So that is clearly and has been and still is a key priority for us. So that’s a key driver. I think the second point is that we feel that the investments we have made over the last few years also give us an opportunity to capture the right opportunities around high volatility and market dislocation. And there’s clearly also a point on global alignment across the firm. So we’ve been very diligent in fighting complexity of a growing organization and building systematically more alignment into the business. So this gives us a significantly higher speed in being able to react to a rising trading opportunities for us. So in a way, this trading capital return footprint is a key indicator. And there are multiple KPIs below in order to make sure that this comes not as a surprise to us, but we are very systematic in driving the trading capital return to these levels and also making sure that we can maintain it there. But there is more behind in order to make sure that the entire organization can capture these opportunities structurally quarter-by-quarter. Got it. Thanks. And just kind of building on that, you said that you’d like to kind of keep it at this level for the medium-term. What kind of confidence would you have to kind of, let’s say, generate the same returns in trading capital in 2023, for example, assuming there is no crypto and assuming the same split in trading, let’s say, volumes across all the asset classes? Is 30% something feasible to kind of stay at in the mid-term? Now there are a couple of points to highlight. So the first point is, it’s always driven by market development that’s hard to foresee. So we have seen, as you know, the figures, we have seen trading capital returns above 100%. We’ve also seen levels of 60% or 50%. But I think what we have been building out is a very resilient model now that gives us an increasing level of comfort that there might be an up-leveling of the new trading capital return. The second layer is in the capital markets update, we have been quite vocal on building out our research predictive trading capabilities. And it’s fair to say that if we further diligently do that and embrace that and embed that in the business that this will have or could have, at least that’s our hypothesis a meaningful impact on trading capital returns going forward. And the third highlight I would like to make because we have been quite reflected internally on not the average return, but the incremental return. And if we also embrace more capital through external sources as we highlighted earlier, we had a very stringent review process on how that would impact our trading capital returns, and we are quite confident that this won’t be dilutive. So in a way, what we want to demonstrate is a high degree of scalability of the business. But it’s important to make the link out of the trading capability evolution, which is a critical component, the ability of the organization to become further global to continue our investments in the key priority areas and fixed income is one of it, but also on the CCC layer and at the same time, maintain our strong equity position globally. So if this all comes together, it’s a fair assessment from our perspective that we can maintain or even further expand. Well, got it. Thanks, Mike, for all the flavor. Then switching on to a different one on a strategic point of view. So you mentioned in the discussion today, but also in the press release that we opened a new office in Chicago. Could you kind of speak more about the rationale and vision behind that, let’s say, try to build a team of IT techs roles, traders. So what’s exactly the vision behind us? And also, how does this correlate with the fact that you mentioned that you actually expect that account to stay flat year-on-year? Yes. So you are right. It’s predominantly focused on tech capabilities. And there’s also a lot of existing experience and knowledge in that region. So that probably would mean within, let’s say, a head count not growing unless we grow the businesses that is still affected, obviously, that it could mean that we hire new staff in Chicago if we were to have attrition in New York instance. Not to say, additional growth. The size is expected is relatively small at the moment. So we have a couple of smaller representative offices across the globe. So we have main trading hubs, and we’ve got a couple of small offices. So in this case, the plan is to start with a tech footprint. So it’s not materially changing a head count plan at all. But kind of a buffer just in case what I just also mentioned, just in case there are people dropping off from other regions and you can try to kind of, let’s say, hire more in the Chicago base. Let me just add one point. So this entire asset further globalizing the firm is also very much related to boosting further boosting our brand name. And we are very focused on understanding what needs to be true and how we need to act in order to make sure that we dip into the top, top talent pools across the world. So that’s one of the key ingredients of making sure that we can maintain our growth. And Chicago has been identified for obvious reasons as a critical component in that equation. Yes. Thanks. And just maybe also another one. Actually, it’s a question that I guided from one of the investors. The question is as follows. I mean, if you want to really boost the trading capital, the idea is one of them, let’s say, besides, of course, taking that is to basically cut down even more the penetration of the dividend and basically pump all the net profits into the trading capital. Well, we of course have done that already. So the payout and now it’s reduced to 61 percentage points. Is there any – let’s say, have you actually thought about having it even a bit more in the short-term, just to kind of, let’s say, boost the trading capital quickly and then eventually flip it back to where it was. So the perception is as follows: we operate very much in a dynamic decision tree, if I may say it like that. So if we bring in more trading capital to the firm, there needs to be a deployment process. So you’re not immediately able to deploy it. And coming back to your point on incremental trading capital returns. We have a very stringent and very competitive approach in making sure that we steer that, so to avoid dilution. And in light of the fact that you need a bit more time than over the different cycles, which then cannot be foreseen, but we are quite reactive to that. We are getting internally in terms of the capital allocation to a clear view, and there’s also a predictive model in place to understand how we can play then the investment side versus the dividend side. And I think that’s the true answer to your question that given the high cash generative power of the business and our – not just ability, but focus on making sure that we are always accretive on trading capital return when new capital is being added. – we have flexibility. And I think that we explained in the past, how important that is for us in order to make sure that we explain the link between the dividend policy and our deep conviction that the business is still significantly scalable at attractive returns. Good morning, gentlemen. I have a couple of questions. The first one is on your workforce that you want to keep unchanged versus year-end 2022. However, the number of people was only 5% higher than at year-end 2021. And yet you have a lot of growth initiatives, including new offices here and there and a lot of initiatives on Slide 11. So keeping your workforce unchanged should be compensated by much more efficiency. So could you explain a bit what kind of efficiency measures you wish to implement and in which fields of the operations that will happen. Well, there is also the fact that we’ve been hiring a lot of young staff over the last couple of years, we have been training and that process from graduates coming in to becoming fully effective also takes time. So from the number of people that we’ve been hiring since 2019 and onwards, these all will become way more effective. So that’s one element. And on the other side, the effort that we’re making on the inside, the link between the benefits of the NTI and the cost and the way to get there. We’re putting a lot more focus on that in the last couple of months, and we feel confident that we can realize long efficiencies gains coming out of that insight that we have created. And maybe one additional layer and that’s more the mid- to long-term perspective. So when we conducted also our review last year on our strategy, understanding what are the opportunities, where can we go from here? There was a key reflection that we need to also put a strong focus on how to create a lean organization and how to avoid redundancies, how to capture more scale for the next few years in the most ideal way. So a lot of reflection has gone into avoiding redundancies, functional duplication and creating more standardization. So that’s also a key element. This might not be seen right away, but we are very much convicted that this is one of the key ingredients, making sure that the company is further growing. We are not facing a cost spike. We are not facing any limitations on further growing the firm. And it’s a broader picture around the pieces Folkert highlighted and the more long-term perspective, the next few years, how does the organization further need to be built in order to capture that growth. Okay. That’s clear. And you also mentioned you can grow further if you want to. But based on the flat workforce, you’ve also given cost guidance fixed costs… So we have different or put different scenarios into it in order to have some flexibility. And the reality is that we are most comfortable with the range we gave in the press release. So in our own calculation, assuming that there won’t be significant changes, we are around in the middle. But if there are some deviations, we also have a longer mitigation list in place. So it’s already a very holistic approach with clear ownership across the organization on how to drive then the cost evolution throughout the year in order to make sure that we stick to that target. Okay. But basically, the dollar weakened – last year, you had a negative impact from a stronger dollar on your cost base. This year, it looks like it’s going the other way around so far this year. But of course, we don’t know what it will be happening later on. But surely, if there’s going to be strong swings, you cannot compensate everything. So is it fair to assume that you basically put in today’s spot rate for the dollar in your cost guidance? As part of the scenario setting, that’s what we did. However, it’s important that I highlight what I said before. So we approached it via different scenarios, also expecting different changes than to the exchange rates in order to make sure that this is in line. And I have to highlight the cost guidance we are giving is then also on a normalized level. So it’s important for us that the starting point, the 161.6 million has been given in the presentation on an adjusted basis is a clean figure. So what I’m trying to say is we will monitor the U.S. dollar exchange rate development over time. And depending on where this comes out, we have different levers to pull in order to make sure that we can really yes, counteract. The more important piece to that equation, however, is that the key focus will be really on driving structural efficiency. So this is about functional redundancies, creating more alignment in the organization, increasing standardization the focus highlighted on making sure that incoming ranks are becoming significantly more productive over time. There’s a very stringent process in place to make sure that this is working. So it’s a meaningful and comprehensive effort across the entire firm and also with the global executive committee being fully in charge to make sure that we have a common goal to steer towards. And with that, we want to set a clear signal to the market that this is not just a top line-driven business. We are very reflective on what needs to be true in order to make sure that we are able to further grow with a very healthy cost structure. Okay. That’s quite an elaborate answer. Then I also have two questions on the dividends. The first one is that the press release mentioned a 51% payout, the dividends against the normalized net profit was only a payout of 43%. Why did you decide to pay out against the reported net profit, which is not your main KPI? The IFRS was the reference for the interim period, and we wanted to stick to the former method and make it also clear that IFRS is the – well, the non-Flow Traders adjusted version of the net profit in order to make it very transparent. Yes. So it’s basically – we wanted to stick to what we communicated to markets before and in light of – and that’s the broader setting for the answer in light of the tremendous trading capital returns we see in the 71 in Q4 is a fair reflection of that. We also felt that that’s a very prudent and comprehensible approach, making sure that we are able to further drive the business with the retained capital. Okay, good. So I guess we already have the answer to one of the questions of my – the other analysts with the investor who wanted a lower payout. So you could grow faster. So it’s on IFRS. But then to turn it around. Last year, the dividend payout ratio was lowered to free up more capital for growth. In the meantime, you have changed your corporate structure, which will free up capital for growth. If that would be sufficient, would it be a possibility to raise the payout ratio again to former glory? Well, that last statement is not fully true. That change of the legal structure doesn’t impact trading capital. There’s a difference between the trading capital and regulatory capital, so yes, the trading capital and the regulatory capital are not complementary. There’s two different views on the operation. Okay. But I thought that changing the corporate structure would remove some regulatory capital on some of your units that would be able to be put at work. But that’s not the case. So what, in order to be perfectly clear, the new environment gives us more flexibility to deploy trading capital. So there will be, if you will, a higher capital excess. And this is now important to explain what that actually means. It means that depending on rising trading opportunities, we have more flexibility. So specifically, if there are trading opportunities in more capital intense part of the businesses, such as fixed income, we have now an ability to boost these opportunities even further. So there was a restriction, if you will, from a regulatory perspective in place before under IFR/IFD, in the new setting, we are significantly more flexible. And why is that relevant? It’s relevant because we felt when we built the higher degree of capital velocity in the firm and the higher degree of transparency on where returns actually occur and us wanting to jump onto these returns, we felt that we need to have a higher degree of flexibility. And the point we made earlier on, we want to create, or want to be on a level playing field with competition, we felt that’s a key ingredient in making sure that we remain fully competitive on that front. So in a way, what you will see going forward is an impact yet hard to break out, but an impact on NTI. I wouldn’t call it cherry picking. I would basically say we have an opportunity to double down on rising opportunities more significantly. For the growth, it is not forming a similar constraint on the growth for the future. So on the current, it doesn’t change anything. But for the growth of the trading capital, that makes it possible. But I think we do conclude that it’s probably good to explain a bit more on the trading capital versus regulatory capital to the analysts in a later stage. Let’s commit to that. Thank you very much, guys. Great presentation. Just a couple of questions from me. One is on capital, but I’m going to take a little break from that right now. I guess in terms of the FTE and the head count space, as we think about it, you want to kind of keep this flat. We’ve seen, let’s call it, around 10% or 11% net growth in FTEs over the past five years per annum. I imagine that was probably 15%, 20% gross increases, a loss of, I don’t know, 5% to 10% of employees a year. I was just thinking as we look out to 2023, in terms of your, how you’re budgeting in terms of the gross increase in FTE, i.e., how many incremental spots you expect to add? And then kind of backing out of that kind of the number of head count you expect to potentially reduce as a result of efficiencies. The attrition has been a bit higher than 5%, especially since the COVID period where people do reevaluate their lives, so flexibility in working from home. And all let’s say, the personal items have reflected in those periods generally in the entire market for people moving and making some decisions to life. So I think that attrition has been a bit higher since 2021 compared to before. So for this year, we still have around 50 people confirmed starters to join us. And we have – we are anticipating an attrition, which is probably still a bit higher than the years before COVID. So the natural attrition, we’re not expecting to – that you net off. And then we have a lot of vacancies still open as well because we do intend to grow the businesses with new activities. So what we look at here is what we know, what we can build with the current staff. So we have a couple of spots, which we need to fill, but we also are looking for new business growth, which is not embedded in the budget yet, so that will lead to also adjusting the NTI budget, for instance. So if the – if we manage to find talent that would go along with increasing the business plans. It’s not only looking on the efficiency side. It’s looking at probably it’s better to see us looking at the ratio between the NTI and the cost and not just the cost. Thank you. And then just a quick question. Have you had any loss days, trading loss days, either in Q4 or in the full year 2022? To be honest, I don’t know if I had because it’s not really something we focus on, could be one or two, but nothing really special in my recollection, but I have not looked at the data because it’s not something which is relevant to us because it’s not a theme here, to be honest. I probably one or two or something. Okay. Thank you. And then finally, just kind of getting back to kind of the capital. During your Investor Day last year, you indicated you have ambitions for 20% annualized NTI growth, I believe. At the same time, again, that’s kind of really punchy, pretty much kind of a growth company. And yet at the same time, you have a 50% dividend payout ratio, which is not really a characteristic of a growth company as that capital typically is needed to be reinvested to generate the excess revenue growth. I certainly recognize that the change in the corporate structure will improve the revenue return on trading capital. But how should we think about that? Where you’re kind of aiming for 20% growth. And at the same time, you’re returning half of the earnings in the form of the dividend. Is that 20% growth achievable on a sustainable basis with the current kind of capital strategy? Yes, that’s a fair question. The answer is yes. And I’ll explain in more depth why. So one key piece of the equation is indeed the new corporate holding structure. So we sense, and this is also driven by analysis we did over time that, that increased flexibility can give us more ambition to – more drive in order to increase the NTI footprint. The second point is the fact that we have structurally increased the capital allocation throughout the firm, including the velocity is another driver where we can capture the rising opportunities faster and better. So that’s a key part of the equation. And the third point is there’s a very clear perspective on our side on how our investments are paying off. And I think we have clearly made the point in the past, even when we started looking into it, that we are very much following these long-term investment strategies around the underlying themes we feel strongly about, electronification being one. So the combination of us then driving that into a stronger counterparty penetration and an ability to also be significantly more competitive than others in the market is another point where we expect that the next few years will give us an increased ability to really push that further. But these components together then really drive our conviction that the top line growth is realistic. And the – I wouldn’t say the trading capital return per se, it’s more than a combination of trading capital return and equity returns should also increase on that front. Good morning. I was just wondering if you could provide a breakdown of the trading capital for 2022. You had the breakdowns for ‘20 and ‘21 at the Capital Markets Day. So it would be nice to be able to build a time series of that – and then sorry, by breakdown, I mean to asset class, the asset class split. Yes. So to answer it properly, what happened with the, let’s say, the crypto markets in Q3, Q4, that made us moving trading capital away from there for the risk appetite and the balance between risk rewards on those allocations went down – so we moved that trading capital to other parts of the business. So if you would look on the full year, it might be a bit distorted. So in the end, the mix shifted a bit more to less to the CCC and more to the others, where the growth of the fixed income activities has a higher projection for needs on still the next months to come compared to equity. So the – let’s say, in rough terms, what we have seen is a shift from the CCC to relative – that is all relative to the fixed income books more than to the equity pretty logical, nothing major different than... Okay. But are you not going to give us a breakdown going forward then for the NTI and the trading capital splits because I was under the impression that one of the key elements of the CMD was to align periodic reporting with the business structure given that you’re organized along these asset classes rather than by geography? I was under the impression; we were going to get a clearer view of how the individual businesses themselves are performing. Thank you. As there are no further questions in the queue. I’d like to hand the call back over to our speaker for any additional or closing remarks. Thank you, operator. We would like to thank the analysts for participating in today’s call. Please note that we host our next analyst call when we release our second quarter and H1 2023 results in July. Details for this call and the timing of this call will follow in Q4. As a reminder…

EarningCall_167

Ladies and gentlemen, welcome to Zurich Insurance Group Annual Results 2022 Conference Call. I am George, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by Q&A session. [Operator instructions] At this time, it's my pleasure to hand over to Mr. Jon Hocking, Head of Investor Relations and and Rating Agency Management. Please go ahead. Thank you. Good afternoon, everybody, and welcome to Zurich Insurance Group's full year 2022 results Q&A call. On the call today is our Group CEO, Mario Greco, my Group CFO, George Quinn. Before I hand over to Mario for some introductory remarks, just as a reminder for the Q&A, we kindly ask you to keep it to two questions each. Mario? Thank you. Thank you, John. So good afternoon everybody and many thanks for joining us today. Before George and I started asking -- answering your question, please allow me to give you a few remarks on this year results. This morning we reported our highest business operating profit since 2007 and also that we exceeded all our financial targets for the second consecutive three year period. This is despite several tough years where we have had to deal with many unexpected challenges. We remain agile, we focus on our goals. We continue to execute against our consistent strategy to transform Zurich into a simpler, into a more innovative and to a customer-centric organization. I'd like to thank all of my colleagues, our customers, our partners for this remarkable achievement. We ended the most recent cycle with the BOPAT ROE at 15.7%. That indicates the strength of the underlying business performance improvement and significantly exceeds our target of greater than 14%. The combination of robust profitability, strength of capital position, and predictability of cash remittances allowed the board to recommend a 9% increase in the dividend to CHF24, which will correspond to compound annual growth rate in the dividend of 6% over the most recent three year cycle. In US dollar terms to compound annual dividend growth would be 8%. As we set out back in November, we will continue to focus on customer needs transforming Zurich into linear and more agile insurer, that's prime for the future. Results continue to be seen in our growing customer's number and loyalty with more than 2.1 million net new customers added during 2022 and an increased retention rate of 82%. Now let me turn quickly to our business segments and start as usual with the Property and Casualty. Property and Casualty today reports an excellent combined ratio at 94.3% and record premium levels. Gross written premiums grew by 14% on a like-for-like basis with a strong growth achieved in both commercial insurance and retail business. Lower catastrophical losses and the benefits of earned rate in commercial were offset by the impact of inflation in retail motor and business mix shift towards crop in commercial. While we expect rate increases in commercial insurance to moderate from the 8% seen in 2022, we expect to see further margin expansion in 2023. In retail and SME, given the rate increases that we have already actioned in 2023, we should see results starting to improve. In key European retail markets like Switzerland and Germany, where January renewals are important, we are seen encouraging signs. Live; 2022 was another year significant progress for our life business. We achieved the highest profit ever despite unfavorable currency movement due to the US dollar appreciation and announced a complete sale of the Italy life back book, which boosted the SST ratio by nine points in the fourth quarter. We also announced the sale of the life back book in Germany. That is on track to be completed in the second half of this year. Together, this transactions for the reduced balance sheet volatility and enhance our already industry-leading capital light business model. We remain focused on profitable growth in our target segments of protection and unit linked with 2023, bringing new distribution opportunities in both Italy and Germany, markets where we remain committed despite our portfolio optimization activities. Farmers; now. 2022 was a strong year for farmers against the challenging backdrop for US personal lines insurance. Gross written premiums at the farmer exchanges increased by 9%, driven by the inclusion of the MetLife business for the full year and accelerating levels of rates across lines of businesses. Overall, the farmer segment pop increased by 18% over the priority -- the priority year period, also helped by lower COVID claims in the life unit. Given the challenging market environment, the farmer's team led by the new COO, Raul Vargas are laser focused on improving the underwriting performance of the exchanges, which in turn will help rebuild the surplus. As you will have also seen this morning in order to support the exchanges, effective December 31, 2022, Farmers Re has tactical increased its participation in the farmers' exchanges Online Quota Share Treaty. Sustainability; now sustainability continues to be a key focus for Zurich and we look forward to discussing our initiatives with you in more detail at our dedicated ESG at Zurich webcast, which will be held on the 30th of March. Looking into the future, finally, we remain absolutely committed to deliver the strategic ambition in the financial targets that we set out in Zurich back in November for the next three year cycle. The new plan looks for us to grow EPS at a compound rate of 8% to 2025, while further increasing the BOPAT ROE in excess of 20%. We also expect to achieve further step up in cash remittances. The package as whole should allow us to reward shareholders with continued attractive growth in our dividends. Thank you very much. Two for me please. Firstly is on the reinsurance program and just really wondered if you can talk through the changes here in a little bit more detail both in terms of cost of the program and in terms of what it means for earnings volatility, protection from the group and I suppose how much it's actually renewed on 1st of January versus how much is still turning you through the year? That's my first question and then my second question is just looking at Slide 27 of the pack, the commercial lines accident year combined ratio ex times and ex COVID flat year on year at 88.2%. Just really wondered if you can give us an idea of what that would be, ex crop as well how much improvement we've seen, I guess I'd expect to see a bit of improvement given pricing momentum and given we saw 1.7 points improvement year on year in H1. So just what we're seeing really ex crop? Thanks Andy. It's George. So on the reinsurance program, first we've made two changes. So two changes to the CAT piece of the program? So I think as I'd suggested prior to the end of the year, we haven't renewed the CAT aggregate. We couldn't find a reasonable economic proposition. So in the end we've kept that. That believe on note the expected outcome is actually a small improvement to the expected Brazil, but the expense of slightly more volatility. So, it's a relatively immaterial change. The volatility could be plus minus a CHF100 million, CHF150 million. Having said that, though, what we're doing on to reduce CAT capacity on the incoming side, I think that's more significant than that. And if you look at the more recent estimates on the events like Ian or Elliot, I expect that the efforts that we are undertaken to cut CAT exposure on the incoming side, probably more significant than the small negative impacts from giving up the CAT aggregate. At the same time we've added a bit more coverage at the top of the program. So, that's -- it's not a replacement for the CAT aggregate, and it's more I was thinking about in particular events we haven't seen yet. So things like quake and where our covers exhaust and particularly in the context of very significant events. So having looked at that, with some support from some advisors, we concluded that we wanted to have a bit more coverage up top. Overall for us, we've seen a relatively modest change in the reinsurance program. Most of what we've done its non-CAT January 01, with the exception of the two things I've mentioned. And they're not really that significantly impacted by the current market conditions. Probably the key date for us is April 01. That's when we renew the US tower. So, you guys already have seen the impact on some of the US companies that renewed January 01. As you would expect, the argument that we advance to our reinsurers is that again the actions that we're taking on the incoming side of CAT means that there's already a fairly significant reduction in exposure. We would expect that to be part of the consideration when we look at the renewal of our US CAT tower on April 01. So still to renew that piece but so far, no significant impact and certainly no impact and excess of what we assumed when we put the targets together back in November. It'd be tiny. The -- if you look at what we pay for CAT cover overall, a 10% rise and, what we pay is something like CAT10 on the combined ratio. So, you need massive changes to have massive impacts on the group's numbers, and we just -- we just don't see that. And we're not dependent on reinsurance in that way. So, commercial year-over-year, so if you look at crop so, crop has actually had -- it's had a decent year? It's slightly higher than we would've assumed in our plan. So maybe we are about a 100 Bps higher overall. There's a small issue of first half, second half comparison. There's a bigger issue of 2022 versus 2021. So last year was actually a pretty good year for crop. And if you look at the gap between last year's outcome and this year, you've got about a 200 basis point difference. If you are low for the fact that crop is, somewhere about 12%, 10%, somewhere 10% to 15% of premium volume across all the commercial and you're going to end up with somewhere in the mid double digit basis point impact. So if you take it 88.2, we would be in the high 87 once you adjust for crop. So not a bad year for crop, but certainly a weaker one that we had last year and a weaker one that we expected. Good afternoon and thank you and well done for beating all your records. I had two questions. The first one is on cash maintenances. I was actually hoping for more, it seems a tiny improvement. I know I'm being really demand -- probably wrong or headed or something, but CHF4.4 billion rising to CHF4.6 billion doesn't sound like a record year in many of your business lines. I just wondered if you can give some color of what drives the cash from instances. And the other thing is also a very general question, 265%, what are you going to -- you bathe in this every morning. I would love it, but what you going to do with all this money? I saw, on the tape, and maybe I'm misread, but buybacks are not your big thing, so that's fair enough. But I just wondered if you -- and I know you did have a couple markers then, and you kind of addressed this, but 265% is extraordinary. Thank you. Thank you, Michael. So, in cash remittances for us yeah, I'm a better like you. I always want more for businesses as well. I think if you look at last, I think the outcome overall is really good. So we've certainly landed where we wanted to land. I think there were -- there were upsides that we have not yet taken on the cash side. So if you look around some of our businesses, and some of you who've been on this call for longer will know that we've certainly got one business that just seems to have a slight structural issue around being able to remit all of its earnings in the form of cash after one of our more significant businesses. And it means that periodically we go looking for a special dividend from that business. That's something we're still working on. That offers upside to 2024 and 2023, I hope. I think on the -- it's not a big negative, but one of the small challenges actually in a rising interest rate environment is that some of the local statutory balance sheets on the life side can end up being a bit long. And therefore this can exert a wee bit of pressure on life cash remains. But, overall, we are really happy with the outcome. We've still got a number of pockets or pocket, they're not small pockets. We've got a number of pockets that we need to address and increase the cash remits going forwards. So there's room for more, but I think we're pretty happy with, we achieved last year. On the capital topic, so, you absolutely rate, it's a huge number. It doesn't yet include obviously the impact of Germany, which is still to come, but again, I think you've probably read on the wires commentary that was entirely consistent with what we said back in the Investor Day in November. As everyone knows, we've got a buyback that's underway to address the expected dilution from the sale of the German business. There's a bit more to go on that. We were not quite halfway through that by the beginning of February. Beyond that, our preference would be to deploy it on growth. We've talked before on these calls about the dynamics of SST and the extent to which organic growth drives it. It's nice to have the option given what we expect in terms of growth over the course of the next three years. I don't expect it to be that capital intensive. So that again gives the business freedom to look at other ways to deploy capital again, to support growth, to deliver more in terms of earnings and deliver more in terms of dividend. So, a preference beyond what we're doing at the moment is growth. Hi there. First question, just on the underlying accident loss ratio 60.8 in the full year, I just want to understand if there's anything I should do to that as a starting point. I think it looks like crop was running around 96, so there's a small adjustment down if I, if I assume crop is mid-nineties normally. Is there anything else? For example, was there a particularly you know, maybe a, a conservative booking on some more inflation exposed classes in the second half? Or, and I guess maybe, you know, was there any particular negative one-offs on retail? So really it's just to understand, is that the right starting point, obviously adjusting maybe 50 bits for crop. The second question on farmers, I'm just trying to understand why, why is eight and a half percent the additional quota share the, the right, the right number? It looks like you're just replacing a third party reinsurer who's -- who's come off is, is therefore 35% surplus. Do you think that's fine from this point for farmers and you are confident there's organic capital generation from here, or, or do you still think there's more capital actions need to take place rather than just waiting for the earnings to come through? Thanks. Hey, thanks Andrew. So on the, on the underlying, crop would be the obvious thing, I think on, on the lost picks around what we've booked. We haven't deliberately been any more conservative than the commentary I gave already at the half year. So we maintained the stance we had around things like GL and commercial auto. So we didn't change the direction on those topics. The only one, the only one, it's a small number, but it's, it's quite hard to judge and that's first half, second half on commercial. So if you look at the two, two half second half is about a hundred bits higher. It looks as though that's just the kind natural fluctuation of the book, given that we can still see underlying improvement on the lost reserve picks versus lost cost trend. So maybe on commercial, the, the answer is somewhere in between H1 and H2, but it's going to be a small impact at the end. So I think crop assuming we take the cat the equation and we adjust for the COVID topic and the prior year, which is also quite small that I think gives you a reasonable indication of what the underlying is and there's no reason to think crop isn't still a mid-'19 business. Yeah, no, so her view hasn't yet, we planned this somewhere around the 94 level. So it's a bit more than a hundred basis points higher than we would expect currently. Last year we were about 92. We've been lower than that and we've been higher than that over the course of the last five years on farmers. So yeah, we have increased our participation on the quarter share. Obviously the market is a bit more challenged for the exchange currently. I think in the end I think our view, and I think the view of the exchange is too, is that in the end, this, this is not a surplus issue. This is a profitability challenge that they need to solve. And by solving that profitability challenge all the other things that connected to the exchange that would including the surplus which would read questions at 35, they go away at that point. So I think overview is that that there's no need unless there was a, so, so maybe I've explained what the exchange is doing, and then I'll come on to the, the more positive side of it. So obviously the entire US auto market has a bit of an issue. There's lots of rates being pushed through at the moment you've seen already in today's release what we see in terms of what the exchanges have been doing. Exchanges have a bit of a challenge as anyone would, that's got more of a concentration in California because that's a bit slower on rate approval. But, having said all of that, we can see the we can obviously see trends on a shorter time horizon than the ones that we publish. We start to see some improvement, although it's still got a long way to go on the exchange. And therefore us supporting the exchange to the capital level that they're targeting, I don't think it needs more than that. If on the other hand, and I think I said this at the investor day already if the exchange get to the point where they're in line with their profitability targets, and to put it in context, somewhere around 101 is kind of neutral, you need somewhere closer to 98 for the growth. If there was a really attractive opportunity for growth and the exchange needed support for that, then obviously that would be something we would consider because of the benefits that would bring us. But we're, we're not at that point today. So the exchange has a staggered CAT renewal. So you'll see that get renewed over the course of several years. So they're not completely exposed to the impact in a single year. Thank you very much. Two for me please. The first one was on the outlook. I guess I was a, just a bit surprised that you refrained from giving your sort of many of your usual outlook items. And I know we've got IFRS 17 but even given the change in framework, I'm sort of thinking year on year comps are probably still relevant for premium growth, investment income, etcetera. So, I'm just wondering if you could sort of elaborate on your thoughts and, and in particular whether there's any help you can give us on the, the life outlook. Second one non-core, just really what you did say in the outlook, it, it sort of sounds like you're possibly expecting further reserve strengthening given the comment of, you know, less negative. So just wanted to check whether that's the right understanding. If I can be very cheeky and just ask for a clarification on the, the answer you just gave to Andrew as well on the commercial George because you said H2 commercial is about a 100 basis points higher than H1, which is natural fluctuation. I'm just thinking, given the margin expansion that's flowing through, I would've expected that to be lower. So the delta is more than a 100 basis points, but I maybe you could just clarify those dynamics would be very helpful. Thank you. So on your sneaky question, you're absolutely right. So there's -- but I guess I would characterize a slightly more than a hundred basis points you would expect to see more on the first two questions. I, so, I think that the challenge on Outlook is it's got nothing to do with our clarity of visibility of where we're headed. And in fact, of course, that's incorporated in what we said back in November. It's just that we could be dealing with different metrics even if the substance is the same we've got changes to headline things like revenue coming away. We're going to have a different treatment of combined ratio. So there's a whole series of things I think we need to restate for people, which is the mathematical and mechanical part of the process. And we'll have that all in front of you come q1. And I think that's just an easier point at which to get a bit more detailed around where we're headed from an IRS 17 perspective. So we, we avoided doing it today, not because of a lack of clarity about where the business is headed. It was really that we'd be talking a slightly strange language. I think for most people who are not yet familiar with it. I, I think on the life topic, again, we'll cover it in more depth when we get to Q1 so that you guys can prepare for the first half. But, there's a, there's a relatively simple logic. In the current models the insurance companies apply under IFRS, you've got a combination of a book of business that's pretty locked in, generally pretty stable. There's a consistency to that that flows into the new system, albeit in a different way. So volatility is also dampened. But the dynamics around that piece, I don't really expect to be, to be vastly different from what you've seen today. And I guess most people are setting up to try and make sure that they've got the right risk adjustment to make sure that we don't get unexpected amounts of volatility from CSM amortization on the thing that is different, it's different. No, I think over time it converges. So again, a pretty characteristic a pretty consistent characteristic of life businesses, the impact of management actions, I guess it's analogous to P Y D on the p and C side. That part will get smoothed. So eventually once you've smoothed enough of it, you'll get a similar impact to what you see today but you don't have it in the starting point. So I think the way to think of this is there's an underlying core component that I think behaves in a similar but not identical way to IRS four. And it will take time to build the same effect from management action as you have an four. But, having said that one of the comments we made back in, one of the comments I made back, I think already in September was that if you look at the group overall of man earnings trajectory, I'm not expecting a significant change. You might see some change, relatively modest changes between the segments and non-core. So I think we're just in artfully worded the commentary. So if, if you look at what we've got and non-core, you've got two components that are driving the, the outcome today. We've got something that I think you've seen in the past from us. There's a di book in there, it's got some market related features. So there's a, there's a Weber market volatility. Typically it's been relatively modest. We're talking low tens of millions positive or negative in any given year. I think what's different this year, so you saw it in the first half, we, we moved a booker business into non-core with the intention of disposing it during the pandemic, well, not disposing it during the pandemic, but we had moved it during the pandemic with the intention to dispose of it afterwards. And I think what we discovered there is that the experience that that book had during the pandemic was not as representative as we would've liked it to be of future claims experience. So it's taken us a couple of bites to correct that this year. But I think at this point, I, I don't expect to see a thud on this topic. Hi, afternoon everyone. Thanks for taking the question. I guess first of all, just thinking about motor on the retail side, could you talk through those geographies that are causing the greatest strain in motor inflation? And is this part or bodily entry related? And I guess, what is it that's changed reasonably significantly? Two H versus one H here? And, and as an extension to that, but I, I will let this be the second question. Are you able to give any updates on the outcomes of the major renewals at January for Switzerland and Germany in these retail portfolios? Thanks. Yeah, thanks Will. So yeah, I'm going to, I'm going to focus the comments on motor retail. I, I, I think that there are similar issues on commercial. So you could read across but I think there is one reasonably significant difference. So anyway, more retail. I, I think the, the big driver it continues to be the CPI, the inflation driven component which means it's still mainly a whole or issues connected to whole issue. We're not as big as some of the other markets where there are bi severity issues. So for example, if I look at a market, we can see data on, which is the us but we don't have the direct exposure to maybe the mix of maybe the issues that are driving the market are slightly different to what we see in Europe. And I guess that's probably more a function of the, the health and legal system there. So Europe mainly a very traditional challenge. And the reason you see deterioration in the second half it's just a continuation of trends that we saw in the first and the inability to take rate to offset it. So, to some degree that's what we expected to see in the second half of the year. So anyway, so that, that's how we get to the second half of 2022. So what about 2023? So, at this stage, we've got pretty good insight into renewal for Germany and Switzerland as of Jan one, for both of those books, we've got a reasonably significant renewal. So we've got a good understanding of where we think it's headed. So I think Germany first, the way I would characterize Germany would be that assuming that assuming that we see inflation levels that are similar to what we saw last year Germany has achieved the price increase that will address that, and we'll start to address part of what we saw last year. I think it's a most likely a multi-year process. Maybe, maybe there's a couple of years of rate increase required to get this business where we think it needs to be, but there is a significant step in Germany as of Jam one. It's what we expected, so it's not, it's not a surprise to us but it's obviously we're very pleased to see it take place in reality rather than forecast. Switzerland's a bit different. So in Switzerland it has, so obviously it hasn't seen the same levels of inflation that we've seen in other European markets. Having said that, by Swiss standards, we've seen some pretty chunky numbers, but we're talking two and a half, 3% rather than nine, 10% in other markets. And the team here they've taken a more targeted approach to the renewal. Again, they've put some fairly significant rate through for some key parts of the portfolio. It's a pretty significant proportion of the portfolio overall, and again expect that also to address what will happen this year plus start to catch up on what we saw in the prior year. However, in both markets, we expect more price action required. But the, the first steps we've seen on January one this year it's a good sign of where the retail market is headed. Yeah, hi good afternoon. I just wanted to spend a bit more time on that retail deterioration app full year, please. So the fully accident, year loss ratio in retail up 1.9 points at full year and I think you're saying that's used to the frequency and inflation, and some of which you've talked about just now that that's up from the 1.3 points at 1H. At 1H you really called out expenses and loss ratio actually being better. So just like to focus a bit more on the discreet second half of the year because it seems as if the, the crossover between rate and claims inflation seems to have happened the most at that time. And I hear the comments about the outlook going into '23, but I guess my theory is that this seeing nominal rate increases but not rate in excessive claims inflation once we adjust frequency as well. The second question was just returning to farmers. So again, I, on the eight point a half percent closer share why is it you've chosen to do a closer share? Because it, it farmers as a volatile business and, you know, 10 points plus or minus on that combined ratio is not an insignificant number to the Zurich group earnings. So can you just talk us through a, is that a multi-year close share why you settled on that and, and, and why you didn't do other alternatives such as surplus mode, for example? Perhaps I'm also interested in why it didn't actually require any extra capital in the, in the target capital that you have in the denominator of the sst, thank you very much. Yeah, thanks James. Yeah, so, so on the first one so to put in, I don't really want to quote a number today in Germany but it's in double digits, not high double digits, but it's in double digits. So in our opinion, it's enough to deal with nominal frequency and part of the prior year, not enough though, to put Germany in a position where we would be satisfied with the return again, on that line of business. And the German team themselves identified that in the conversations that we were having with us last September. So there, there's definitely be, there's definitely more to be done, but we think it not only addresses what we're currently seeing addresses part of what we had last year, so, and we feel pretty confident by that on the farmer's question, so, yep. So maybe I'll start from the end. So it's a, it's a very good question. So target capital, it, it will have a relatively small impact on target capital, but it will build as the reserves build. So that's why you're not seeing it yet, but we're talking, something that's in the up to mid single digit impact on sst. So it's pretty small overall on the, on the why this and not something else. So, guess that if you, if, if you cast your mind back to, to 2015, which was probably the last time we were a very significant participant on the quarter share, some of you will remember that we actually had some pretty significant amounts of capital up against that. Again, I think many of you aware that the nature of that contract has changed significantly over the years because of discussions between the exchanges and their reinsurers. And the particular form of that contract that worked for both the exchange and for the reinsurers. The nature of the risk that the contract carries is a bit different than it was before and therefore the amount of capital required would be more modest than it was in 2015. It would also be reflected in the fact that the potential volatility would be more modest than it had been previously. In particular, CAT is capped and cat is now more dealt with through the CAT covers that these changes place. So I, I think it's an overall Zurich perspective. This is probably the simplest the most straightforward and sound Zurich will benefit from the, the way the exchange and its reinsures have changed the structure of the contract over the course of the last several years and I think that combination is really why we've done what you've seen us do. It's a simple and straightforward way of addressing the the challenge that they currently face and gives them some time to deal with their plans around the improvement in the combined ratio. Hi. Afternoon everyone. Two questions. The first one is on just back on the farmer's quota to share, could you maybe talk about the profitability assumptions you've made in I guess the increase there? Is it 101% as you mentioned, as kind of the target level, or is it, or is there something else there? The second question on the commercial line cycle, could you talk about the impact that the reinsurance market changes, you know, changes in terms of price, structure, etcetera, it's likely to happen in that market, I think at the investor day in November. You said you expect the cycles to probably, you know, tail off in, you know, by the time we get halfway through 2023, do you still think that will be the case with all the changes in the reinsurance market? Thanks. Yeah, so thanks Cameron. So I want to avoid that I end up giving out the plan for the exchanges on the combined ratio. I think probably the best way to look at this would be that, we've significantly increased our participation in the quarter share but we're still a, a small minority compared to the others, and the others are there because they expect to make money. So maybe if you combine that with the comments I gave earlier around where the neutral points is, that that gives you some sense of what the market anticipates from the exchanges. On, on the second comment on the, or the second question on rate. So, I think if you go back to the comments that I made earlier around the, the more differentiated view of what's happening on rates at the moment, so if you look at what we see in the market towards the end of last year, somewhat predictably property is the one that maybe sees the maintains a fairly strong trend. And if fact, if we look at our numbers from a, an North American perspective, we would see property rate ticking up at the end of last year. So that, that may be partly connected to reinsurance may be partly connected to the continuing concerns around risk of inflation at that point; difficult to attribute it entirely. But you certainly see the line of business that it probably impacts the most in the strongest position. I think in general, one of the things I think as we look out through the remainder of this phase of the, the commercial cycle, it's going to get very differentiated. I think I mentioned this earlier, if you look at the different lanes things like property motor they're still in pretty good shape also in good shape workers comp specialty, they're around the same positions they were at before. So, slightly negative, fairly flat towards the end of last year and you've got primary gl somewhere in the middle of all of that. The more negative one is financial lines in particular d and o. So that is softening currently mean it's probably the part of the market that's all the biggest run up. It's not the biggest part of our book, so we're, we're not as exposed to it. But that part of the business or that part of the market is showing a different price characteristic to most of the other lines at this point. Hello. Thank you very much. Judge, is there any evidence that you point to for building prudence into your current accident? Ear loss picks. Normally that's very much what will be, would be expected at this stage in the hard market. But when you've been discussing, the flat commercial lines combined ratio or the underlying loss ratio, I haven't really kind of heard you emphasize that potentially quite positive points. So could you talk a little bit about prudence and how it may or may not be changing in the loss picks? And then secondly, please, on slide 21 so we've now got the 6% rate increase across the book. Can you tell us a comparable inflation figure that we should be netting off against that? And just to make sure I'm gauging it correctly, I think this time last year that 6% was seven. So if you could remind me what the inflation equivalent would've been a year ago as well, please. Thank you. Okay, so, all right, I got it. So on prudence. Apologies. I should have spent more time on that topic. The so, again, to take you back to the some of the reserving decisions we make made at the end of Q2, end of the first half we touched a number of, again, probably the more social inflation exposed lines of business. Not necessarily because we saw experience that was a source of concern as a precautionary step. So I think I may have mentioned earlier, primary GL and commercial auto were two targets for that. And we haven't changed that stance through the end of the year. It's also a characteristic part of our reserving process that we don't accept as a basis for reserving the lost pick chosen by the underwriter. We and certainly for most of the last two, three years have added a margin to that. And that's designed to build up within a range of acceptable levels of prudence additional assurance that we have less exposure to the risk that we see adverse development on some of the reserve lines. And then finally, if I tell you the usual worker's comp story. So, I think, from the prior conversations that we've had that if you look at rate on workers comp again for the end of last year, beginning of this year, kind of flat-ish, slightly negative, if you look at lost cost strain for in the mix that we think is for our book, something similar to that, so not vastly different we've still maintained a relatively long run view on the parameters that we choose to include for the reserving decision. If you chose a shorter term perspective, so say you took five years rather than 10 years, that's a very significant surplus to reserves. So I think the traditional areas of prudence that you're familiar with in our book continue to be there. We continue to follow the same processes around trying to make sure that we we add appropriate prudence to the assumptions that the underwriters make when they write the business. But, but in terms of our overall philosophy, nothing has changed. So we're doing the same things in the same way on the, so on the inflation topic. So it varies a lot by line of business. So maybe if I focus on the area where I think it's probably you have most transparency for all of last year we've talked about the fact that for the US business we've got a lost cost trained a, sorry, we've got a rate increase that's around 8% across all lines of business inflation. So if, and if I exclude exposure changes from that so look purely at severity and frequency excluding, we still see it somewhere around the 5% mark for commercial picture in Europe is different. In the conversation I had earlier with James he highlighted the fact that obviously retail in Europe in particular did hear it in the second half of the year, which is a saying that lost cost strain is an excess of the pricing that we're achieving here. But that's probably the best guidance I can give you. 5% is the same as what you would've said a year ago for North American commercial. Isn't that strange? Shouldn't it almost inevitably be higher? So, so if you break out where we were on commercial last year and you look at the loss picks we've added to it, it's still around 5%, but we've added a point to commercial auto and a point to primary gl. Hello folks. Thanks for taking questions. I just got a couple of questions on, on Capital Generations. I'm on Page 45. Just looking at economic profit business growth. The first thing I just wanted to check on is the AFR generation 5.0% this year? I think it was 5.5% last year. So that's defining despite the op profit in I going up, just trying to help, I wonder if you could help me bridge why one is going down a bit and the other, the other one's going off a bit. Second question is on the target capital. George, I think earlier you, you were saying that you expect the growth to be pretty capital light. And I think actually the third capital went down a little bit in H2 is up 0.5 in H1. On a run rate basis, are you expecting this sort of 0.4 to be roughly 5%-ish? I realize that the quota share will increase it in 2023, but is the rough expectation that this will be flattish? And broadly does this matter for, for cash REITs or, or is actually the Swiss solvency lens? Not really very useful to think to thinking about your, the cash REITs. Thank you. Yeah, thanks Dom. So, so on the second question first, the so, so obviously part of what's driving the dynamics that you see on AFRS versus target capital is impact of interest rates. So it's part of what impacts the first half of the year. It impacts it again in the second half of the year. So if, if we end up in a reasonably in a slightly more stable environment, I think it would be flattish. I'm not sure we're going to be in an entirely stable environment. I guess the outlook seems to anticipate that we'll see a bit more rise potentially followed by some reduction at some stage in the future. But if we don't see it at the same pace as we've seen, whether some of the historic changes we've seen last year, it should be pretty flat on SST is a, it's a good guide to the overall risk appetite perspective the firm has and how we manage capital from a consolidated perspective. But it doesn't say much to cash remittance certainly in short term periods. Cause of course those cash remittance numbers are typically driven by the local statutory requirements. And they can and frequently do deviate significantly from SST over time, though again in a stable environment. So if we keep interest rates relatively stable, given the relatively short gen duration nature of the book, the two things should be more in sync than perhaps we've seen last year. On the capital generation topic, so five AFR versus where we are from a reported profit number. You can obviously get a number of differences at the margin. I think the way I would look at this I would probably work off of the operating profit number and tax it, the impact of in particular gains that appears in the NEAS number can really distort this because of course we, we've got a mark to market perspective on AFR. And I think if you work off the bulk number, you'll get, you'll get something that's probably a bit closer, is my expectation. Thanks, George. And just to understand, given the bot went up but the AFR went down, is that just an anomaly to do with rates or, or is that something else? So the rates are going to have an impact on that because of what you saw in the prior year, partly through the impact of discounting the discounting, that's lately to be the main driver, but I, I need to look at it in more detail and come back to you with a bare answer. Thank you and good afternoon, Georgia. Just a couple of questions I have is first of all, again, sorry, going back to this retail inflation topic. I agree Italy and Spain is relatively small for you, but the combined ratio in both Italy and Spain has gone up significantly in second half versus first half. So could you just give us some color as to what is driving that? Is it just like general auto industry or is it anything specific to Zurich here? So that's the first one and second one is going back to the capital question again, clearly you have a very big solvency ratio at the moment, two 65%, but what is your view of excess capital in that? And I would say excess capital, which is fungible as well, not necessarily just a ratio perspective. If you want to deploy some, some cash to do m and how much cash you can extract out of that two 65%. The reason why I'm asking is, your leverage looks like more or less full, at least on the current FS four basis. So I just want to understand how much of cash liquidity you can gather within the business. Yeah, please two questions. Thank you. Ashik, I need to tell you that we're all smiling here on the other side of the, at your question. Yeah, because we're, we're all probably all thinking of ways we're not going to answer the second part. Yeah, so let me try to be more helpful than just a straight out I'm not giving you an answer that anyway. So let me start on the retail thing. I, I don't think it's different from the store there are some local dynamics and both businesses that are relevant. So for example, in Spain we have a pretty significant investment program running in the business to try and expand and it's just increase our geographic coverage in the market. In Italy, it's probably more the traditional effects that we're seeing elsewhere driven by lost cost trend. But in both markets inflation is likely to be the principle driver of what you've seen in the second half of the year. And it, and, and it is auto that's prime, home is not much definition. If you look at Germany in particular you don't see a very different outcome on home. So I would pick out both of those lines of business as the prime factors. So it's on the SST topic. So, again, given the comments that I made back at the investor day around our ambitions around leverage and the fact that we're probably lowly to dele a bit, given that the cost of financing is increasing. We don't have an awful lot that's maturing over the course of the next year or two. But it's going to get more expensive to run that and we've certainly got enough cash to lowers that option if that's what we choose to do. More generally the company obviously has significant flexibility given the way we generate cash across the group. Obviously I, I want to avoid, I'm going to get into a number that I need to specifically update on a regular basis, but it's a feature of the group that we tend to we have a strong preference for businesses that we can measure, not only in terms of the actuarial judgment, but also in terms of the cash they can provide to the group to underpin that actuarial judgment. And that that's not something that's going to change. So I think when you look at as necessarily from an earnings perspective it's pretty clear how much of what we generate we distribute. So, you're getting 75% more or less back on a regular basis. We retain the additional piece and we also retain, of course, any cash we generate an excess of the earnings levels. And I think I mentioned earlier in response to Michael's question that, we regularly undertake exercises to, I guess I would say liberate cash that's not needed in the various businesses and bring it back to the mother ship. But, mean as you would expect with such a significant capital level, we, we have significant flexibility. Oh, thank you for the opportunity. Last question. Sorry. The, the life side, just, I often ask this, George, your life numbers frequently hit the ball out of the path, particularly when you look at the guidance and again, it's happened again and again. The guidance is very weak. I don't know, which is very light, very cautious looking. I'm just curious about the life fighter, but also you know, there's a shop for an NBV, there's some assumption changes. Are you not happy with the mix mean setting protection? And, and, you know, are you trying to de-emphasize protection a little bit in this high interested environment? So that's one of life. And just very quickly follow up this slide 25 the 60.8 underlying cost ratio. When I compare to 59.8 ex COVID last year, is this, this one percentage is seems to be mostly explained away by drop. And then there's also mortar, there's also, you know, effects of pricing. How should we think about this? Sorry, just to be very clear, 60.8 minus one point of crop make. Is that how we should think of it and then we apply some margin or how should we think of it? This one, thank you. So, I think the, to the, to the last part of your question, more or less yes, would be the approach. I think to the first part of your question, it would imply a lack of satisfaction with a life business if I was to agree with any of it. And I don't suffer from that. I think we're really happy with how the life business performs. We're really happy with the, the transformation that the life business has undergone. So if you think of it what the firm, what are life businesses achieved against what they were doing alongside supporting the clients? I think it's a fantastic outcome. Again, I think the implied criticism around the life guidance is entirely valid. But it doesn't make me any less happy about the overall outcome on the fallen NBV. That's really a 2021 topic in the end. So if you, if you think back to the end of 2021, we talked about the fact that we were, we were positioning afr for I a 17 because of the, the, the requirement for a certain level of consistency and best estimate assumptions. So we were trying to make sure that we had the life AFR and exactly the place that we wanted it, and we'd reduced life AFR at that point that then gets caught up in the new business models that come into production for jam one and the following year. So part of what you're seeing in the fallen new business value is really that decision that we made in 2021. There's a, there's a secondary impact. With interest rates rising, there's a bit more competition around the, you know, length business. So that has a bit of pressure. But I think if you look at the new business margin even after the change, it's still, we think pretty good. It's pretty strong. So from a, from a mixed perspective given that we make a big song in dance every time we produce a presentation about the mix of our life business, it's a saying that we actually really like it. And we've got no intention to deemphasize protection. I think in our philosophy, emphasize underwriting, whether it's p c or in life and therefore we like protection in life where we get the chance to, to underrate it in the right way. It's a strong preference to do that. So really happy with life. I think the caution on the guidance, just going back again to, I think it was Peter's comment. It's got nothing to do with what we expect for the year and just the fact we, we've got a change of metrics coming up and about I was thinking it maybe in three months, it's probably a bit quicker three months. So, you've seen, I hope the the supplement, at least the structure of the supplement we're going to, we're going to hand out. So you've got a sense that even if the business is not changing, some of the, the ways that we describe it are about to. So rather than out some IRS four guidance, which, I'm sure most of you could probably interpret I thought it's, it's just more helpful to give you more general guidance lean on the fact that we've given you already an outlook as far as targets from last November concerns. And then we can have a more detailed conversation when we get to q1. And we actually have the new structure in front of us. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Jon Hocking for any closing remarks, please go ahead. Thank you all for dial in. If you've got any external questions please get in touch with one of the IR team. Thank you very much. Ladies and gentlemen, the conference is now over. Thank you for choosing CHO score and thank you for participating in the conference. You may not disconnect your lines. Goodbye.

EarningCall_168

Good afternoon and welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2023 Earnings Conference Call. Today's conference is being recorded. At this time all participants have been placed in a listen-only mode. The call will be open for question-and-answer session following speakers' remarks. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference. Good afternoon, everyone. I'd like to welcome you to PennantPark Investment Corporation's first fiscal quarter 2023 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections. And we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at PennantPark Investment Corporation or call us at 212-905-1000. Thanks, Rick. We're going to spend a few minutes and comment on our target market environment, provide a summary of how we fared in the quarter ended December 31. How the portfolio's position for the upcoming quarters, our capital structure and liquidity, a detailed review of the financials, then open it up for Q&A. The results were mixed for the quarter ended December 31. However, PNNT is now well positioned to be a more stable, higher earning and higher dividend paying BDC. We saw significant reduction of NAV, primarily due to fair value adjustments to RAM Energy and the publicly traded stock of Cano. Additionally, our NII was reduced by $0.02 per share, due to an increased accrual for excise taxes resulting from overearning our dividend in prior time periods. We're closing the chapter on our legacy investment in RAM Energy and moving forward with the investment strategy that has served us well over the last seven years, including during the COVID time period. Our debt portfolio is performing well and is positioned to withstand volatility in the current economic environment. Our income has been growing, and we are significantly raising our dividend in line with the new earnings power of the company. The debt portfolio continues to benefit from rising base rates. As of December 31, our weighted average yield to maturity was 11.9%, which is up from 10.8% last quarter, and 8.8% last year, our PSLF JV continues to generate an attractive double digit ROE for PNNT. We are targeting a $1 billion vehicle overtime, which can drive additional growth and NII at PNNT. As a result of a stable debt portfolio, and the growing and investment income, the board of directors has approved another increase in the quarterly dividend to $0.185 per share. This is a 12.1% increase from the prior quarter. The dividend will be paid on April 3 to shareholders of record as of March 16. We're confident that with the continued strong credit performance, the increased dividend will be more than fully covered by net investment income. Now let me review the results for the quarter ended December 31. GAAP NAV decreased 14.1% to $7.71 per share from $8.98 per share. This decrease was driven by unrealized losses, of which over 85% was from our equity investments in RAM Energy and Cano Health. In December, RAM Energy closed on the sale of its Fayette assets to a public E&P company. The sale was completed after running a broad auction process in the second half of 2022. The Fayette assets sold comprise the majority of the value at RAM. After repaying indebtedness, expenses, hedging contracts and other liabilities, we expect to receive approximately $32 million of net proceeds from the sale. The December 31 fair value for RAM equals the estimated proceeds from the sale. As many are well aware, this has been a long and challenging investment. We are disappointed that we were not able to produce a better outcome. However, we are happy to finally close the book on this legacy investment. The December 31 fair value for our equity investment in Cano Health decreased significantly from the prior quarter as a result of the significant decline in Cano's publicly traded equity. Net investment income for the quarter was $0.16 per share. However, NII was reduced by $0.02 per share due to an increased accrual for excise taxes. NII would have been $0.18 per share after adjusting for this additional expense accrual. We have substantially executed on our goal to reduce the equity portion of the portfolio, which is December 31 adjusting for the RAM Energy investment was 14%, this compares to a peak in March of 2021 of 30%. Now let me turn to the current market environment. From an overall perspective in this market environment of inflation, rising interest rates, geopolitical risk and a potentially weakening economy, we are well positioned as a lender focused on capital preservation in the United States where the floating interest rates on our loans can protect against rising interest rates and inflation. We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities where we are important strategic capital to our borrowers. We believe that the current pinch [ph] of middle market directly originated loans should be excellent. Leverage is lower, spreads and upfront fees are higher, covenants are tighter and loan to value continue to be attractive. For the quarter ended December 31, we invested $86 million in new and existing portfolio companies at a weighted average yield of 11.2% and at sales and repayments of $31 million. For the investments in new portfolio companies, the weighted average debt-to-EBITDA was 4.3 times the weighted average interest coverage was 2.1 times and the weighted average loan to value was only 24%. We have a long term track record of generating value by successfully financing high growth middle market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask and have an excellent track record. They are business services, consumer, government services and defense, healthcare and software and technology. These sectors have also been recession resilient, and tend to generate strong free cash flow. It's important to note that we do not have any crypto exposure in our software and technology investments. In many cases, we are typically part of the first institutional capital into a company and the loans that we provide are important strategic capital that fuel the growth and help that $10 million to $20 million EBITDA company grow to $30 million $40 million $50 million of EBITDA or more. We typically participate in the upside by making an equity coinvestment. Our returns on these equity coinvestments have been excellent over time, overall for our platform from inception through December 31. We invested over $375 million in equity coinvestments, and have generated an IRR of 27% and a multiple on invested capital of 2.3 times. Because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care, we thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive upfront fees and spreads and equity coinvestment. With regard to covenants. Virtually all of our originated first lien loans had meaningful covenants to help protect their capital. This is one reason why our default rate and performance during COVID was so strong, and why we believe we're well positioned in this environment. This sector of the market companies with $10 million to $50 million of EBITDA is the core middle market. The core middle market is below the threshold and does not compete with a broadly syndicated loan and high yield markets. Many of our peers who focus on the upper middle market state that those bigger companies are less risky. That is a perception and may make some intuitive sense, but the reality is quite different. According S&P Loans, the companies with less than $50 million of EBITDA have a lower default rate and a higher recovery rate and loans to companies with higher EBITDA. We believe that the meaningful covenant protections of the core middle market where we have more careful due diligence and tighter monitoring had been an important part of this differentiated performance. The borrowers in our investment portfolio are performing well, and we believe we are well positioned for future quarters. As of December 31, the weighted average debt to EBITDA on the portfolio was 4.7 times and the average interest coverage ratio, the amount by which cash income exceeds cash interest expense was 3.2 times calculated based upon the last 12 months interest expense. The interest coverage ratio when calculated using the annualized interest expense at current LIBOR and current LIBOR and SOFR base rates, is 2.3 times. This compares favorably to a market average of 1.6 times, which is according to Lincoln International. Since inception, PNNT has invested $7.4 billion at an average yield of 11%. This compares to a loss ratio of approximately 21 basis points annually. The strong track record includes our energy investments, primarily subordinated debt investments made prior to the financial crisis, and recently, the pandemic. With regard to the outlook, new loans in our target market are attractive, and this Vintage should be particularly attractive. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors. We want to reiterate our goal to generate attractive risk-adjusted returns through income coupled with long-term preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle margin companies and have high free cash flow conversion. We capture that free cash flow primarily through debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. Thank you, Art. For the quarter ended December 31, net investment income totaled $0.16 per share, including $0.01 per share of other income. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $9.7 million, base management and incentive fees were $6.8 million, general and administrative expenses were $1.1 million and provision for excise taxes was $2 million. The provision for excise tax of $2 million included an additional accrual of $1.55 million. We estimate that the quarterly run-rate provision for excise taxes will be $450,000. NII would have been $0.18 per share, if adjusted to exclude the additional accrual. As of December 31, we had two non-accruals, which represent 2.7% of the portfolio at cost and 1.1% at market value. For the quarter ended December 31, net realized and unrealized change on investments and debt, including provision for taxes was a loss of $82.2 million or $1.26 per share. The change in the fair value of our credit facility increased our GAAP NAV by $0.11 per share. As of December 31, our NAV per share was $7.71, which is down 14.1% from $8.98 per share from the prior quarter. Our GAAP debt-to-equity ratio was 1.3 times. As of December 31, our key portfolio statistics were as follows. The portfolio remains highly diversified with 125 companies across 32 different industries. The portfolio was invested in 55% first-lien secured debt, 11% in second-lien secured debt, 5% in subordinated debt excluding PSLF, 17% in preferred and common equity, excluding PSLF and 12% in PSLF. The weighted average yield on debt instruments was 11.9%. 96% of the debt portfolio is floating rate with an average LIBOR floor of 1%. Thanks, Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PNNT and its shareholders. Thank you all for your time today and for your continued investment and confidence in us. Hi. First question on the buyback program. Obviously, I mean you didn't utilize the buyback program in the December quarter. I could understand why. You had a lot of information, things going on. It expires, if I remember that, at the end of March. Can you give us any color on whether you expect to utilize that completed extend it? Any thoughts on that front? Thanks, Rob. Yeah, we're always considering a stock buyback program. We've -- I think this might be our second or third program we've done. We are now 1.4 times levered at PNNT, which is a bit above our target leverage, and we're working with the rating agencies on our ratings. So stay tuned. Nothing really to announce at this point. Got it. Got it. And then on one of the other portfolio at company, Walker Edison. Obviously, you did get -- it's been an issue. You talked about last quarter. I mean you're not the only BDC, and obviously, you're in with several other private credit platforms. Does that -- this effect that you're in it with -- so by your standards, a lot of other investors, obviously, by the syndicated market time number. Does that make anything more complicated, slower or more difficult in resolving that particular asset? No. So Walker Edison has been troubled now for a couple of quarters. It's in restructuring as we speak. There's three public BDCs, including us, who have the asset. There's a fourth lender in it. So there's not a public BDC. So there's four lenders in total in that name. We're all going along very well. It's all very consensual. I think we all see things the same way. So it's really just about executing the restructuring and then operating the company hopefully well. We still think the company is a viable company that has a real place to be -- a real reason to be in the marketplace that has value. We will be converting the majority of the debt that we had into equity. We'll still have some debt, and then we're all putting in additional debt to fund liquidity needs -- a small amount on the liquidity needs for the company over the next few quarters. But we all are doing that in the belief that we think it's a viable long-term business, which had some non-recurring issues going on primarily with supply chain, but over the long run, should have a lot of value. Got it. Got it. Thank you on that. And last one, if I can, on the dividend. Obviously, you increased it again. Earnings power trending up and that's even without rates. Obviously, the proceeds from RAM will be available and principle to invest in yielding assets. One of your comments in the beginning with the board raised the dividend in line with growth in earnings power. So is that something investors going to look forward to potentially again because all likelihood, earnings power is might be likely to ramp a little higher at least over the next several quarters. Yeah. Look, we believe, based on today's interest rates, our NII is well covering the $0.185 dividend. So we think we're well covering it now. And you're right with the growth of the joint venture potentially to $1 billion, really without any incremental capital from us as well as the potential for RAM rotation. We think we have potential additional upside above and beyond that. Hey, good afternoon. My first question, obviously, you talked about the exit of RAM Energy that's been a long state investment you guys have worked through a lot. Obviously, you're sort of turning the page on that. But I would just love to just -- before we completely turn the page on it, just for you visit kind of what occurred over the last 6 to 9 months? Because that investment started being written up pretty meaningfully earlier in 2022. And then last quarter, it had a pretty meaningful write-down and then the exit this quarter was -- significantly a little the previous value. So can you just talk about, I guess, what occurred? Was it something fundamentally in that business that didn't play out as expected? Or was it just the purchase -- the market when you guys were looking to sell? Didn't come to fruition as you would have liked? Or just any sort of comments on what sort of took place and how the ultimate value was decided. Yeah. So it's certainly, again, we are disappointed with the outcome, and ultimately, it's a decision we turn the page or you take a disappointing result. We decided to -- or keep it alive and you keep going. And what happened, unfortunately, over the last six months or so as those last well or two, the results were not -- and there were some operational issues that came into freight with the last well -- in the four with the last well that unfortunately hurt the ultimate valuation. It was a very robust process. The M&A bank went out to over 100 people, other parties, and this was the end result. It's disappointing. Again, this is why at PennantPark, we will never do oil and gas again when the value of the company relies so much on one or two wells. So certainly, it's been a disappointing investment from the get go. We continue to be disappointing. We are hopeful and optimistic a while back because the results were really good. Oil and gas prices at one point were much higher than they are today. And I feel that we ran a very robust process. Of course, we're not pleased with the outcome. We are pleased to hopefully be turning the chapter here. I'm mentioning, this company again on future conference calls, but this is kind of the fact, and we ran a robust process and this is the outcome. Yeah. Thanks for that back added color. Rick, maybe on that, you gave guidance for the additional excise taxes on a quarterly basis going forward. I'm just curious, I would presume the answer is, no. But does the exit and the loss of the realized loss you guys will occur in RAM Energy, will that have any potential to lower those excise taxes at all? And then maybe following up on Robert's question regarding the buyback and leverage. I would just love to -- and you kind of mentioned you're talking about credit rating agencies today. You guys are above your target leverage range. I think that's maybe even a little bit high for where rating agencies are typically comfortable. Is it the plan do you think to get that leverage range down closer to the 1 25 level or -- in the near term? Or is this a level that you guys are comfortable operating at for the foreseeable future? Yeah. Look, we're still working on that. The answer to that question, to be frank with you, the argument would be and we believe it, which is the portfolio that remains is mostly senior debt, first-lien debt, which might be justifiable to be at this kind of 1.4 times ratio. It's certainly less equity-heavy portfolio than we had. So I think we're going to be kind of somewhere between the 1.25 and 1.4-ish debt to equity. And certainly, the discussions with the rating agencies are important part of that analysis. Yeah, good afternoon. Switch gears just a little bit to a different topic. The company's position in Cano Health has been handcuffed and that it's under the control of the private equity sponsor. Have you considered restructuring your equity co-invest or not making equity co-invest, if they fall under the control of the private equity sponsor? Because the company has missed several attractive opportunities to monetize that investment, but the lack of control has all of a sudden resulted in what at this point in time is another poor surprise or a poor outcome. And is there something that you can do to mitigate that loss of control that gives you a better position to take advantage of attractive equity prices when they exist in future investments or not make them at all and get better terms on the debt? A great question, and there's a couple discussion points that you brought up, which are really good discussion points. First of all, Cano Health itself, it's a mark-to-market. Deal is not done yet. They're the largest competitor. Oak Street Health announced yesterday that they were getting bought by CVS at a very high price. There is a bit of a turf grab going on in that primary care space. So we're not done yet. I would remind you that Humana is a minority shareholder of Cano Health. Whether they or other parties see value in Cano Health company that the company itself yet to be determined. It has been a volatile stock. It has been painful to watch the stocks trade lower over the course of the last three-six months. But we're not done yet on Cano Health and our belief is, over time, this company will ascertain real value above and beyond where it's being marked today. So that's Cano Health. Look, part and parcel of the equity coinvestment business, if you want to call it that is, you're lending money to the company, you're saying, the sponsor we want to ride alongside of you because we're helping to drive the growth, and we want to participate in the upside of the growth and we're also good partners. So in most of the cases, the exits are to strategic buyers or other larger private equity firms. Rarely is the exit to an IPO like Cano was. So in most cases, you can track it and we put it out there. The MOIC on our equity co-invest over 17 years is 2.3 times. It's about 27% IRR. And there are times, Casey, when equity looks really good, and there are times when it looks less good. We're now in one of the times where it looks less good. A year year and half years ago, it looks better. And we're long-term investors, and we try to think about things in the long term. And understand that once in a while, we're going to have a quarter where we don't look that smart, and then there's been other quarters where we have really smart tenants a public stock we have zero control over where it trades. Most of our equity co-invests are private. And when there's liquidity, it's usually to a strategic buyer or another private equity buyer. So we look at it over the 17 years and say being in the equity co-investment business alongside the debt where we're helping create the upside with the debt. For us, for 17 years has been good point-to-point and you could pick any point over that 17 years. And of course, there's going to be quarters where it doesn't look as smart as it does in other times. So it's -- when you ride alongside the private equity firms, it just kind of is what it is, and they're the controlled shareholder. We're not -- we become control, unfortunately, sometimes when we have to convert debt to equity and sometimes that works. They really worked well in Pivot. It did not work well in ramp. It did not work well in land. So if it's in the healthcare space, we have a deep expertise in healthcare. We've got a good track record in healthcare. We know what we're doing in healthcare. Obviously, in the oil and gas, we know what happened there as well, and we're very disappointed. My next question is relative to the JV. Given the fact that you're effectively not only fully levered, but somewhat overlevered and likely are going to have to use repayments to reduce your leverage ratio to a certain extent. How does the JV go to $1 billion if you don't currently have the capability to add additional equity to support that growth? The JV is financed to some extent with securitization/CLO leverage. The middle market first-lien loans that we do have proven to be really terrific collateral for the CLO securitization box. It's a strong box. We've led through during COVID. It's really good for middle market credit. There's lots of elements of middle market credit that make it even more appropriate than wrongly syndicated loan credit. To get to $1 billion, we don't need to do the degree on the CLO or anticipate doing that, but we do anticipate continuing to use securitization technology to finance the vehicle. Over time, the leverage will be kind of probably 2 to 1 type of leverage. Again, we own 60% of it -- Yes. Art, a lot of good questions this afternoon. I just have one follow-up to Casey on the JV. The dividend that you accrued on the JV was up sharply versus the previous quarter, and it was also well above the GAAP net income for the quarter. And I realize there's differences between GAAP and tax and cash and things like that. But is the current dividend run rate at the JV that's being upstreamed to the BC sustainable? Or is there sort of a onetime non-recurring dividends received this quarter? There's no non-recurring. It's a sustainable dividend. In fact, we're -- same thing we ever in the dividend and the JV. Yeah, good afternoon. What does the timing on when you get clarity from the rating agencies or when you work through that process? Does that impact your ability to invest in the second quarter here? Yeah. Look, I think it's over the next couple of months. Again, the difference between 1.25 and 1.4 is really not that material, particularly with the type of portfolio we have, but it's something that we do need to solve this one. Fair enough. And then of the five sectors that you target, anything in particular there that you're -- you feel like there's more deal flow or you have more interest in at this point given the macro backdrop? Yeah. Certainly, we're one of the largest lenders to the government services, defense space. We think of that as a very steady, stable space. We have real domain expertise there. Given the geopolitical environment around the world, we think that's a space that will continue to grow and will experience tailwinds. Also, healthcare is a big space for us. Typically, healthcare services. And there, there is usually tailwinds through demographics. There, we just want to make sure that we keep our leverage appropriate and reasonable, but we've had a very nice track record in that vertical as well. Good afternoon. Thanks for taking my questions today. Just a follow-up on sort of the portfolio rotation component that you talked about today. I mean this has been something that you've talked about for more than just -- longer than just today. Given that the exit from RAM should bring equity -- the equity component of the portfolio down significantly. It would be helpful, I think, if you could update us on how you're thinking about equity as a component of the portfolio going forward? Where -- do you still target sort of a long-term 10% allocation? Or how you're thinking about? Yeah. So it's a great question because there are some nuances in the answer, which is, we have this joint venture in PSLF. Of course, that is equity, but we don't count that as kind of a true equity coinvest like we would elsewhere. So we have to exclude that. And I don't have it at my fingertips when our equity with ran out of the portfolio, excluding PSLF. What our equity percentage would be. Rick, do you have it? 14%. So 14% excluding PSLF, excluding RAM is still kind of in the zone. Probably, a little high. I think we'd still probably target 10%, but 14% is not that wildly off kind of our long-term target. Okay. That's helpful. Thanks. And then as a follow-up to the question about sort of recycling capital given where leverage is right now. Is there anything that we should be thinking about in terms of visibility that you have on additional repayments outside of the $32 million expected from RAM in the near term? Thank you. Yeah. No. Yes. No, in this environment, both deal activity and repayments have slowed down a little bit, and they're usually related. There's usually a corollary between new deals and repayments. They slowed down a little bit, but we do -- we are getting methodical episodic repayments. That's one of like things about a loan portfolio. It's under incorrectly. You will get repayments. Sometimes it's faster. Sometimes it's slower. It's been on the slower end recently, but we are getting repayments. Nothing that material in and of itself, but kind of a drift trip over time on the repayments. Yeah. Thank you, everybody, for participating today on our conference call. We will speak with you next in early May as we go through the 3/31 results. Thank you for participating today.

EarningCall_169

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Fourth Quarter and Full Year Conference Call. My name is Emily, and I'll be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Our fourth quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at 313-792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We describe these risks and uncertainties in our Risk Factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. I'll start this morning with some brief comments on our fourth quarter, and I'll turn to our full year results and our view on 2023. Before I get started, however, I'm sure you saw our announcement that John Sznewajs has decided to retire from Masco, effective at the end of May, and we are working to identify his replacement. John has been a fixture at Masco and in the industry for over 25 years now, and has been an invaluable partner to me, our Board and the investment community during his 15-year tenure as CFO of our company. He will be sorely missed, and we wish John all the best in his future endeavors. Now please turn to Slide 5. In the fourth quarter, our top-line decreased 5%, as we saw lower volumes across most categories, partially offset by significant pricing actions of 9%. Our operating profit declined in the quarter due to the lower volumes, higher operational costs and currency. This was partially offset by pricing actions and expense control as SG&A declined $22 million to 17.4% of sales. Our earnings per share for the quarter were $0.65. Earnings per share benefited from a lower average diluted share count as well as effective tax rate of 24%, lower than our previously guided 25%. Turning to our segments. Plumbing grew 2% in local currency with a 1% decline in North American Plumbing, offset by 7% growth in International Plumbing. Hansgrohe drove market share gains in many key markets, including China, Germany and France. Our International business has continued to execute well, which speaks to the strength of the Hansgrohe team, its strong brands and its ability to gain market share. In North America, our spa business has now worked through its extended backlog and backlogs are now in the normal range of four to six weeks after a tremendous three-year run of more than 50% sales growth. Turning to our Decorative Architectural segment. Sales declined 8% against a strong 15% comp. DIY paint sales declined low double digits, while PRO paint continued its excellent performance with mid-single digit growth against a tremendous comp of over 50%. Now let's review our full-year performance. Please turn to Slide 6. 2022 was a challenging year with strong growth in the first half followed by notable declines in demand in the second half. Despite these volatile conditions, Masco and our 19,000 employees across the globe responded well to deliver for our customers and our shareholders. For the full year, the company grew sales 4% for a two-year stacked comp of 21%. Strong pricing actions increased sales by 9%, offset by volume declines of 3% and currency impact of 2%. Volume growth in the first half of the year was more than offset by volume declines in the second half. Operating profit declined 7% with an operating margin of 15.6%, and earnings per share increased from $3.77 -- to $3.77 from $3.70. Total commodity and other inflation was low double digits for the full year. This inflation, together with supply chain challenges, resulted in lower margins for the year despite our significant pricing actions. We are focused on improving our margins by continuing to drive productivity as we apply our 80/20 mindset to return to our pre-pandemic levels. Turning to our segments. Our Plumbing segment grew 6% excluding currency, led by strong growth at both Hansgrohe and Watkins. In our Decorative Architectural segment, full year growth was 6%. DIY paint grew low single digits for the year, while PRO paint grew over 25%. PRO paint has had a tremendous three-year run of approximately 70% growth, and now accounts for one-third of our paint business or over $900 million. This strong performance earned Behr its second consecutive Partner of the Year Award for the Home Depot. We will continue to invest in our paint business to capture further share in both the DIY and PRO markets. Our recently launched adjacent paint categories such as aerosols, interior stains and caulks and sealants have performed well and are expanding the offering to additional stores and expect further share gains in 2023. We will be launching Behr Dynasty Exterior for the summer painting season, expanding the lineup of our number one rated Dynasty paint line. And we will continue to invest in people and capabilities to better serve the PRO painter and continue our strong PRO performance. Turning to capital allocation. Our strong balance sheet allowed us to deploy approximately $1.2 billion in capital during the year. We repurchased 16.6 million shares for $914 million, representing approximately 7% of our outstanding shares. We increased our quarterly dividend 19% and paid $258 million in dividends to shareholders. And we finished the year with net leverage of 1.8 times, providing us ample financial flexibility. Our balanced, disciplined approach to capital allocation and strong cash flow resulted in a return on invested capital of approximately 39%. Lastly, on the ESG front, we believe our business should be part of the solution to the world's climate crisis. Therefore, we have established a target to reduce our emissions by 50% by the year 2030, aligned with science-based targets. This is consistent with our commitment to doing business the right way and our purpose to provide better living possibilities for homes, our environment and our community. I want to thank all our employees for their outstanding efforts throughout 2022. It is a team effort to continue to deliver for our customers and shareholders. Now, turning to 2023. We expect the softening demand trends in the second half of 2022 to continue into 2023 as our markets adjust to increasing interest rates, persistent inflation and tighter consumer spending. Overall, we anticipate volumes to decline in the low double digit range, offset, to a small extent, by pricing actions. Our current market assumptions for 2023 are as follows. For the North American repair and remodel market, we expect the market to be down approximately low double digits. This is after a very strong three-year run of approximately 20% growth. For the paint market, we expect the DIY paint market to be down high-single digits and the PRO market to decline by mid-single digits. And for our International markets, principally Europe, we expect markets to contract by high-single digits. As a result, we anticipate Masco sales in 2023 to decline approximately 10%. With this lower top-line assumption, we will drive to minimize our decremental margins to be in the low 20% range versus our typical 30% decremental margins. We are focused on recovering the significant cost inflation we experienced over the past two years through operational productivity, supply chain normalization and additional pricing actions. With this focus, we expect our operating margin to be approximately 15% in 2023. Turning to capital allocation. Our strategy remains unchanged. First and foremost, we will invest in our business to maintain and grow our leadership positions and win in the recovery. The second pillar of our capital allocation strategy is to maintain a strong balance sheet with gross debt to EBITDA levels of below 2.5 times. Third, we have a targeted dividend payout ratio of 30%. Our Board declared a 2% increase in our dividend for 2023, which will bring our annual dividend to $1.14 per share and marks the tenth consecutive annual increase. We expect our cash flow conversion to be over 100% in 2023, as we manage our working capital. We will deploy that free cash flow after dividends to share repurchases or acquisitions. Based on our projected free cash flow, we expect to deploy approximately $500 million to share repurchases or acquisitions in 2023, in addition to paying the remaining $200 million of our term loan. Lastly, there is no change to our M&A strategy. We continue to review and selectively pursue opportunities that have the right strategic fit and the right return for Masco. With the actions we are taking to address this more challenging environment, coupled with our continued strong capital deployment, we anticipate earnings per share for 2023 to be in the range of $3.10 to $3.40 per share. While we expect the near-term environment will remain challenging as our markets and the economy adjust to higher interest rates and prices, we believe the long-term fundamentals of our repair and remodel markets are strong. Cyclical factors such as home price appreciation and existing turnover will remain challenged and likely a headwind for 2023. However, structural factors, such as consumers staying in their homes longer, the age of housing stock and high home equity levels will drive increased repair and remodel activity in several ways. Many homeowners have taken advantage of low mortgage rates and are likely to remain in their homes longer. 1.5 million more homes will reach the prime remodeling ages of 20 to 39 years old over the next three years. And home equity levels remain high and can withstand significant pullbacks in home prices and still be above 2019 levels. All of these structural forces provide tailwinds for our business and increase our confidence for a strong repair and remodel market after the economy stabilizes in 2023. We will continue to invest in our brands, capabilities and people to outperform the composition in both the near and the long term. With favorable fundamentals and our continued focus on executing our growth strategy, together with our strong free cash flow and capital deployment, we are positioned to continue to drive shareholder value creation for the long term. Now, I'll turn the call over to John to go over our fourth quarter, full year and '23 outlook in more detail. John? Before I begin my comments, I want to take a moment to thank Keith, our Board and the entire Masco organization for the opportunity to serve as CFO for more than 15 years. I've had an amazing and fulfilling 27-year career with company. As I look forward to my retirement, I wish everyone the best. With that, as Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to Slide 8. Sales in the quarter decreased 5% and, excluding currency, decreased 2%. Lower volumes decreased sales by 11%, partially offset by net selling prices, which increased sales by 9%. In local currency, North American sales decreased 5%. Lower volume decreased sales by 14%, partially offset by higher net selling prices, which increased sales by 10%. In local currency, International sales increased 7%, driven by increased selling prices. As it relates to inventory, we believe channel inventories have stabilized as we saw sell-through approximately equal to sell-in and destocking had minimal impact in the quarter. Our operating profit in the fourth quarter was $234 million and operating margin was 12.2%. Operating profit was impacted by lower volumes, higher operational costs and currency, partially offset by higher net selling prices. Lastly, our EPS in the quarter was $0.65. I would like to note that this performance was based on a tax rate of 24% versus the previously guided 25% tax rate due to the implementation of our tax planning strategies. Because of this assumption, we have provided restated adjusted EPS numbers for the first three quarters of 2022 in the appendix on Slide 28. Turning to the full year 2022. Sales increased 4% over prior year against a healthy comp of 17% for full year 2021. Excluding currency, sales increased 6%. Higher net selling prices increased sales by 9%, partially offset by lower volumes, which decreased sales by 3%. In local currency, North American sales increased 6% and the International sales increased 8%. Lastly, our EPS increased 2% to $3.77. This amount also assumes a tax rate of 24% versus a previously guided 25%, which favorably impacted full year EPS by $0.05. Our adjusted EPS calculation for 2023 will continue to assume a 24% tax rate. I want to thank our employees across the globe for their hard work and dedication to achieve these solid results during a challenging year. Turning to Slide 9. Plumbing sales in the quarter decreased 3%. Excluding the impact of currency, sales grew 2%. Pricing contributed 9% to growth and volume decreased sales by 7%. North American Plumbing sales decreased 1% in local currency. This was driven by lower demand we started to experience in the third quarter. Lower demand was fairly broad based across product categories and channels. International Plumbing sales increased 7% in local currency. Hansgrohe grew sales in many of their key markets, most notably China, Germany and France. Segment operating profit in the fourth quarter was $148 million and operating margin was 12.4%. Operating profit was impacted by lower volumes, higher operational costs and currency, partially offset by higher net selling prices. Turning to the full year 2022, Plumbing sales increased 2%. Excluding currency, sales increased 6% with net selling prices contributing 7% to growth, partially offset by lower volume mix, which decreased sales by 1%. In local currency, North American Plumbing sales grew 5% and International Plumbing sales increased 8%. Full year operating profit was $834 million, with an operating margin of 15.9%. Turning to Slide 10. Decorative Architectural sales decreased 8% for the fourth quarter against a 15% comp. Our PRO paint sales increased mid-single digits against a robust comp of over 50% in the fourth quarter 2021, as we continue to see solid demand for our PRO paint offering, strong brands and high-quality products. Our DIY paint sales declined low double digits versus prior year. Additionally, our lighting and builders' hardware businesses, in aggregate, declined mid-teens in the quarter against a solid mid-single digit comp. Operating profit was $101 million in the quarter and operating margin was 13.9%. Operating profit was impacted by lower volumes and higher material costs, partially offset by higher net selling prices. Turning to the full year 2022, sales increased 6%, driven by low single digit growth in our DIY paint business and outstanding PRO paint growth of over 25%. Full year operating income was $608 million and operating margin was 17.7%. Turning to Slide 11. Our year-end balance sheet is strong with net debt to EBITDA at 1.8 times. We ended the quarter with approximately $1.5 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver. Working capital as a percent of sales was 17.4% at year-end. In 2023, with expected lower volumes and less supply chain disruptions, we anticipate working capital as a percent of sales to improve and be approximately 16.5% at year-end. In 2022, we also paid down $300 million of the $500 million term loan that we borrowed in the second quarter of the year. Now, let's turn to Slide 12 and review our outlook for 2023. I'd like to preface our guidance by reminding everyone that these are uncertain times, which makes forecasting extremely challenging. For Masco overall, we are planning for volumes to be down in the low double digit range, partially offset by low single digit pricing. Based on this assumption, we expect 2023 sales to decline approximately 10%, with operating margins of approximately 15%. Currency is projected to have minimal impact on our 2023 results. Our SG&A as a percentage of sales trended below our normal levels during the pandemic. However, as we continue to invest in our businesses for future growth while maintaining cost discipline, we expect this percentage to increase back to a more normalized pre-pandemic level to be around 17.5% for 2023. As always, we will take appropriate actions to address our costs as the year develops based on market conditions. Operating margins will be impacted more in the first half of the year due to lower volumes and strong year-over-year sales comps, particularly in the Decorative Architectural segment. As we previously discussed, operating profit in the first quarter will also be impacted by the higher operational costs we experienced starting in Q2 last year, particularly in the Plumbing segment. As we think about the cadence for the year, we expect our Q1 sales and margin profile to look similar Q4 2022 with our year-over-year operating margins expanding -- expected to improve each quarter thereafter. In our Plumbing segment, we expect 2023 sales to decline in the range of 10% to 14%. We anticipate the full year Plumbing margins will be roughly flat with 2022 segment margins at approximately 16%. Lower volumes and, in the first quarter, higher operational costs will impact margins, with favorable selling price increases partially offsetting these headwinds. In our Decorative Architectural segment, we expect 2023 sales to decline in the range of 5% to 10%. Looking specifically at paint for 2023, we currently anticipate our DIY business to decrease high-single digits and our PRO business to decrease mid-single digits, as we cycle over 25% PRO paint growth in 2022. We anticipate the full year Decorative Architectural margin to be approximately 16%. This margin is largely due to our significant pricing actions in this segment that typically only recover the dollar amount of the inflation. As a result, all else equal, operating profit dollars remain neutral from cost recovery pricing actions, but results in margin compression. We are also playing an increased investment in people and capabilities in 2023 to drive future growth in our PRO paint business. As it relates to share repurchases, we have begun modest share repurchases and expect to spend approximately $500 million on share repurchases, with this activity being weighted more towards the second half of the year. Finally, as Keith mentioned earlier, our 2023 EPS estimate is $3.10 to $3.40. This assumes a 226 million average diluted share count for the year and a 24% effective tax rate. Great. Thanks so much. And John, best of luck. It's been a real pleasure working with you. I can't believe it's been 15 years. You've been a real pro the whole time. So, best of luck. Sounds good. First question, I appreciate the 2023 guidance and particularly the volume assumptions, which I think are more conservative than your peers and -- so far at least this earning season and appropriate. I wanted to focus though on the Decorative margins and your comments around the fact that the price -- the cost inflation recovery doesn't include margin in that price, so hence, the margin decline. But when you look at the margins versus the last 10, 15 years, Decorative has consistently done an 18%-plus margin. So, this would be somewhat below. I was hoping to get a sense of, if not for 2023, perhaps '24, '25, how you're thinking about the business if cost deflation might help reverse some of that margin contraction if that might occur later this year? Or is perhaps there's anything structurally different about the business either with PRO perhaps having a slightly lower margin or other factors to consider relative to the longer-term average? Hey, Mike, this is Keith. As you pointed out, the past two years have really been unprecedented, in recent times anyway, with regards to the rate of inflation coupled with supply chain difficulties, which clearly impacted our margins. We are absolutely focused on bringing the costs out of our operations and taking additional price where needed. Now, when you look at the impact of this significant inflation, and we've talked about this before when you -- particularly in our paint business, recover the dollars, we performed well in the overall dollars, but a significant margin erosion arises from that dollar-only coverage when you talk about increases to this level. So, there will be incremental pricing that we take as we move through the year in some parts of our business. We expect these levels that we're experiencing in 2023 to be the kind of the base of which we will build going forward. And when you think about that with regards to our 30% incremental leverage on additional volume, that would actively improve our margins. So, we anticipate [and are] (ph) driving very nice margin expansion as we get through 2023. We do feel that this is going to be a relatively short-lived recession. I'm reluctant to put a number on where we can go to, but I think if you think about the margins historically that we experienced pre-pandemic, that's certainly where this business is heading. And Mike, maybe I can give you -- in addition to Keith's comments maybe a little more color specifically as it relates to the Decorative Architectural segment, the margins there. So, to your point that you raised, obviously, we recover the dollar cost and inflation. And maybe to put a finer point on that, if you consider -- if we take a 10% price increase in the segment, that will result in roughly 180 basis points of margin compression. And so, while we maintain our operating dollars at flat levels, and so -- and to the point that you were making, yes, clearly what we're seeing now and what we're foreshadowing for 2023, a big part of our '23 guide versus historical performance relates to the cost recovery that we're getting on inflation. The other thing that I would point you to, in Keith's prepared remarks and my prepared remarks, we talked about that we're going to make some incremental investment in the -- particularly, in the Decorative Architectural segment around the PRO business. And so that's also having an impact on 2023 margins. Now, to the point you also raised, to the extent that commodities were to roll over, and there would be input cost deflation, you would see some margin expansion as a result of that -- due to the fact that there could be some pricing concessions that we would give when commodities rollover. So that's how that math would work. Okay. No, that's a great answer. And before I ask my second question, perhaps you could fold it in. You highlighted the incremental investment in PRO. I'd be curious to know how much of a drag that might be in this current upcoming year. But secondly, I mentioned also that overall volume expectations for '23, I think, being much more conservative than some of your peers and we're certainly in that direction ourselves in terms of how we're thinking about things, would be helpful, and sorry if I missed that earlier, if you think about the low double digit volume decline, you kind of broke it out between, I believe, how you're thinking or at least on a top-line basis the two segments. But from an end market perspective, I'd assume that repair/remodel end market demand, you're thinking about in a similar level, but correct me if I'm wrong. And also, how that other end markets that you play in such as Europe or new res, which is admittedly pretty small, how those different end markets play into the down low double digits? And if you're expecting that to kind of accelerate as the year progresses? Thanks. Mike, maybe it'd be helpful if I kind of go through our principal markets and talk through our assumptions as it relates to overall market performance. The big one, obviously, is North American repair and remodeling. And in general, we're looking at that market to be down low double digits. International, obviously, a significant portion of our business. We're calling to be down high single digits. And then, as we talked a little bit already in terms of the paint market, we think broadly of that and, obviously, in two markets, the DIY and the PRO market, and our estimation is that the DIY market will be down high single digits and the PRO market would be down mid-single digits. So, we look at -- to get those numbers, we look at trends that we see and numbers that we evaluate in terms of industry research and we come to an assumption on how that all filters out. And then, importantly, we look at how we were performing in the back half of '22 and we roll that in with our R&R focus and industry research to come up with, our estimations are where they are. Now, obviously, we've heard and talked to many folks who have different views. So, it really is a matter of the point of view that we take. And if that point of view varies, I think, you can see that we consistently have delivered 30% drop down on the incrementals. And when we see some pullbacks like we're expecting in '23, we will [Technical Difficulty] decrementals that look better than that 30%. So, we are ready to not only flex our business down and have demonstrated that with regards to cost control and working through issues associated with variable productivity and lining up our supply chains to address a new volume level, but we're also committed to investing in the key growth levers of our business. PRO being one, PRO paint, investing in high growth markets for us. We've talked about how successful we've been in China and in Europe. We continue to do that. And then, of course, the core business here in North America. So, hopefully that gives you an idea about our perspective and why our guidance is what it is. And how this business is ready to do what I think is most important in these times of volatility and that is to adapt to changes as they come. Yes, thanks very much guys. And again, John, I'm sure you're going to get a lot of this, but it's been a pleasure and best of luck. First question for you, I guess, sort of at a high level. I understand that certainly things are uncertain and you don't want to lean too much, I suppose, on your outlook for later in FY '23. But you did provide a -- some commentary about a quarterly cadence, which I found very helpful. I was curious as to whether when you said that you anticipate that the sales growth and the margins would improve quarter-by-quarter as you make your way through 2023, is it your sense that by the time you get to the end of the year, we could actually be looking at some positive comparisons on the top-line and then certainly on the margin as well? So, Stephen, yes, the guidance that we gave in terms of the cadence, obviously, we said Q1 is going to look a lot like Q4 of last year. So -- and then what we said, from there, operating margins should expand on a year-over-year basis each quarter thereafter. To your question on whether we should see positive sales comps by year-end, just given the double-digit decline, the approximately 10% decline that we're expecting in sales for the year, it's hard to say how Q4 is going to develop at this point. But at this stage, I probably wouldn't count on positive comps in Q4. Okay. That's helpful. Thanks for that. And then, just a sort of a broader question about your expectations. Obviously, 4Q came in a little bit lighter than I think you were expecting. What's interesting to me is the timing of when you provided that commentary or outlook, was right about when mortgage rates were peaking in the U.S. And I would say, in general, since late October, there's kind of been a growing sense in the U.S. housing market that perhaps we've at least -- we can see where the bottom is, we -- January was actually surprisingly strong. I know you're going to say one month doesn't a quarter make and all that, but if you could just sort of comment a little bit as to what it is that worsened in your -- worsened relative to your expectations despite the fact that maybe the housing market, which is sort of the leading indicator perhaps, looks like it's actually gotten better? Yes. Maybe, Stephen, I'll start off and maybe, Keith, you can chime in. So, I know you're [tying] (ph) things off the housing market, I just want to remind everyone on the call that the housing -- the new construction market really doesn't impact us all that much. It's about 10% of our revenue. But what we look at in the fourth quarter with our demand that we are seeing and also how the consumer is behaving, that's what really kind of drove us to the guide that we're giving right now. The other thing I would say, as you think about 2023 and think about some of our businesses, Keith in his prepared remarks talked about how our spa business, which has been a strong growth engine for us during the pandemic, and its backlogs are now down to more normalized levels. And as we think about that product category in particular, as we go into 2023, just given the high-ticket nature of that product, we do expect that will probably weigh more heavily on Plumbing growth in 2023. And so, it's broadly around what we're seeing relative to the consumer right now. But Keith, I don't know if there's something else you want to add? Sure. Stephen, if you think the fundamental question of, if things are better, what would that drive in our business, and I think we've covered that in terms of thinking about our dropdowns on the incrementals and how we manage on the down with the decrementals. I would also put a finer point on this notion of volatility and things can change. And sure, yes, absolutely, a month doesn't a quarter make and a quarter doesn't make the year, particularly if you think about our business and our industry is in June or July and then what have ended up happening in kind of a tale of two halves of last year. So, things can change and this is a volatile time and we're specifically focusing our organization on adaptability and looking at signals. Now, in terms of how our guide or how the industry may improve, you point to rates, obviously, that's a factor. We are a new -- a repair and remodeling company and a little bit of new construction, but fundamentally, we're in repair and remodeling. So, some of the things that could change the assumption for us would be home prices and home equity holding up better than expected, for example. Certainly, an increase in existing home sales would help. When you think about our International, down high single digits, if we saw better than expected GDP in U.S., Europe and China, that would clearly help. We're strongly related to consumer confidence. So -- and then, on the performance side, the ability for us to gain more share than expected. So, there are things that could -- we're watching and that could drive the economy to perform better than our guide. Again, I'll take us back to -- our fundamental message here is, we have a very adaptable business, small ticket used on big projects, used on small projects. We cover very effectively on the premium segment in China, a brand leader in Europe and, of course, a strong fundamental base here in North America. So, our business is built for that and for these sorts of things in terms of variability and that's what we're driving. But there are areas, Stephen, that could lead to better-than-expected performance on the overall macro. Good morning. Thanks for taking my questions. And I'll echo others, John, congrats. It's been a heck of a ride and look forward to catching up more offline. A couple of follow ups here. On the cost side, I think that the discussion with Mike earlier around the paint side was helpful. But just to follow-up there, some of your peers in paint have been talking about deflation coming through as the next quarter -- couple of quarters progress. And so maybe you can give us a sense of how you're thinking about costs and how you're seeing costs in the paint business? And also, let's expand that in Plumbing, it seems like it was going to have some tailwinds now maybe copper is back up. So, give us a little more color on what you're seeing on Plumbing costs as we look through this year? Thanks, Mike. I'll -- this is Keith. I'll start off on the paint raw basket to give you a perspective on what we're seeing in terms of inflation and how we're thinking about that. If you look at our overall paint raw material baskets, while we have seen some relief in feedstocks for resin, but TiO2, for example, and other specialty chemicals are very sticky and remain elevated. So, we are continuing to see overall in the basket an elevation. On the indirect costs, which is a big portion of our raw materials and our manufacturing process, we are seeing continued inflation, so it remains a challenge. And I'm talking about things like pallets, transportation, labor absolutely is still elevated. So, we've seen some sequential moderation, but the raws continue to remain relatively elevated. We are still recovering from significant cost increase that we've incurred over the past couple of years. So, at this point, we really have minimal raw material deflation built into our plans for 2023, and don't expect to see it. And that's based on what we're currently seeing from our supply base and from the market. And Mike, maybe I'll take the Plumbing side of the equation. So, as you know, as you look at some of the base metals, copper, zinc that go into our Plumbing products, obviously, the inflation there was pretty significant in the year, [up low] (ph) double digits. If you look at the prices through the course of '22, they probably peaked in the second quarter. We saw some moderation in Q3 and Q4 of last year in those commodities. That said, since the year has begun, we've seen a little bit of an uptick in both of those copper and zinc. And so, they're still elevated, but off their highs, obviously. In ocean freight, which is another good significant input for us on that side, has moderated as well. But it's still, compared to historical, it's above normal levels. And then, obviously, wage inflation is still something that we're dealing with. Some of the things that are also impacting us in the Plumbing segment, like, are energy cost in Europe, as you might expect, given what's going on over there, that's offset. So, any of the benefit from moderating demand -- or moderating inflation in the raw materials have been partially offset by some of these things. So, net-net, where do we land on this in 2023, we think we'll expect -- we're expecting low single-digit deflation in our Plumbing input basket as we continue to recoup some of the cost increases that we've incurred over the course of the last couple of years. Okay. That's great. Thank you, both. That's very helpful. And then, on my follow-up question, I wanted to ask about the SG&A. So, the comment that it's going back to 17.5%, certainly, conceptually understand the idea of needing to invest in the business and some of the baskets qualitatively that you've talked about. But when I look at the numbers, I mean, what that really implies is you're guiding sales to be down, give or take, $900 million year-on-year with SG&A dollars down immaterial now maybe $20 million, $25 million. So that seems like an awful lot of reinvestment. Maybe you can help us understand a little bit more bucket out quantitatively some of the things that you've discussed in terms of what's [Technical Difficulty] sticky outlook on SG&A dollars. Yes, Mike, maybe I'll give you a couple, and then, Keith, feel free to add to supplement my comments. So, Mike, you're right. We are guiding SG&A as a percent of sales to be up, and a big part of it is what you refer to. Obviously, we're foreshadowing sales down 10% for the year, which will have an impact on the margin. I think the other thing to point out -- two things, I guess, I would point out. One is the reinvestment that we're making in SG&A and some of that comes in a couple of different forms. Some of it is the PRO investment that Keith referred to some of the headcount, PRO sales reps and things like that, that we'll be adding some more feet on the street and the job site delivery. Also, like in Q1, for instance, there's a couple of large trade shows that we historically went to, but we're really suspended during the pandemic. So, this is the first time that we are going back to those in several years. And so that will be an expense for us. And then, I'd also point out, like in '22 for instance, there are certain variable costs that were just lower in the year, and we're projecting those to come back to more normalized levels in '23. Yes. Mike, when you think about it, it's kind of in general areas, the economy is coming back and the way that we approach growth and the way we develop advocacy in the markets, you have to be out in those markets. So, I think you were at KBIS in -- out in Las Vegas. That's an example of a big national Kitchen and Bath Show in the United States. Every two years, there's a similar, even bigger show, I know you're aware of this, in ISH, where we have significant investments and big presence there as a matter of -- of course, of business. And that hasn't happened in four years, and that's coming back this year. And there's other examples of that across the globe where we're investing in what I would say is a more normalized way of building advocacy for our brands and launching our new products. Now, when you look, for example, in Europe, at ISH, we've always had our significant competitor in a very big position out there. They've made the decision not to reinvest and won't be there. We don't think that's the right thing to do. In fact, we're leaning into that investment. We're showing a great new product assortment with Hansgrohe in terms of our showers and our faucet launch. We're getting into adjacent products with our bath furniture, and we're continuing to build our brand. When you look at where we're investing in, continued growth and continued momentum. Look to the PRO, as John mentioned, that's an investment for us. PRO loyalty has been building over the last three years. We've gained significant share, and we intend to continue to outgrow that market. So, adding more people on the street to continue to get new customers, new painting customers to try our products, we've seen that be very successful when they try it. There was a lot of question on our ability to maintain the share gain and the stickiness, we've done that. So, we're focused on continuing to drive those share gains, and it takes an investment to do that. In terms of operations, things like buy online, pick up in store, expanding delivery options, expanding the PRO sales force, as I mentioned, working and expanding our loyalty programs. This is all fundamentally part of our strategy. And at the end of the day, we're committed to managing our decrementals in the downturn, while at the same time, investing so that we win and exit stronger coming out of this recovery. And we think that's the right equation for our business. Apologies if I missed this. I had some call issues. But on the revenue guide for Plumbing, the down 10% to 14%, I think you had talked about Q1 sales results for the whole business perhaps looking similar to Q4. So, I'm assuming that you're saying something similar for Plumbing. And so therefore, the assumption would be a rather sharp deceleration in the Plumbing segment beyond Q1. I guess, number one, correct me if I'm wrong. But number two, can you sort of help us out with any additional cadence there? And any kind of specifics around whether it's the spa business that's moving the needle or some assumed destocking? Anything along those lines to help us on that Plumbing guide? Thank you. Yes. Sure, Matthew. So, I'll give you a little bit of color on that. And you touched on it partly in your question. And a portion of what we expect to see happen in the year in Plumbing is due to the spa business, because it is a high-ticket item and it's one that, as Keith mentioned in his prepared remarks, is now back at normalized backlog levels -- backlogs. And so that's a portion. But the other portion that I would guide you to think about is, if you look at the sales cadence through the course of 2022, Plumbing had much less of a pullback than our paint business did in 2022. And so, as we see the calendar role to 2023, partly due to the spa business, partly due to some of the stronger comps that they're going to be facing in the first part of the year, we should expect to see a little bit of soft -- a little bit more softness perhaps in the Plumbing segment as a result of those strong comps that they'll face. Matthew, you mentioned destocking, and I know there's been talk out in the industry of that in various channels. We did see, I'll call it, moderate to very moderate destocking in Plumbing in Q4, a little bit in North American wholesale and less in retail. It really wasn't significantly material for us, and we're not expecting significant headwinds from destocking in 2023. All right. Thank you for that. That's super helpful. And then, just second one, sticking with Plumbing on the margin side and the guide there. I mean it seems like the assumption on the decrementals, I guess, on the softer end of the low 20%-s you mentioned for the entire business for the year. And I heard you say earlier, you're not assuming much in terms of raw material tailwinds for the business. So, just kind of any help on kind of what you are assuming there? Is it ocean freight, et cetera? What are some of the areas where you feel like you can sort of manage that decremental in 2023? Thank you. The biggest impact is the planned volume reduction. So, the way we impact that is to drive productivity and to reset our manufacturing and supply chain. So, as you might imagine, we're working hard to equalize shifts to make sure we're continuing to drive productivity in the variable overhead line. We always drive and focus on our direct labor and shifting that direct labor down. And we have had, as we talked about, really starting in the back half of last year's operational and supply chain challenges, and it really is on rhythm and getting our supply base to deliver us and delivered in a way that's synchronous with what we expect and how we have our build scheduled, so we can be very efficient. That's still a challenge. Now we're significantly better. That challenge will remain through Q1, but coming out of Q1, we're going to have that behind us and have our productivity where we expect it to be. So, lower volumes is the principal driver of the margin pressure, and then higher costs that we'll work through early in the year. Good morning, guys. Thank you for taking my questions. And John, best of luck with everything. The first question I guess is, are you guys anticipating implementing additional pricing actions in 2023, or is it really just largely carryover pricing at this point? No, we'll have some additional actions. There are spots of our Plumbing business that we're looking at, and we'll be implementing price. And then, in our Decorative business, as I mentioned with our commodity basket, we're continuing to see elevation there, and we'll watch that. Got it. Okay. And then, I think, the outlook for $500 million of either acquisitions or buybacks, I think you mentioned buybacks would be sort of back-half weighted. Just more curious on the acquisition front. I mean, what you're seeing in terms of pipeline there? Yes, I'll take that, John. So, our corporate development team is active and we, as a management team, are active in the cultivation process of [flock] (ph) of acquisitions. But at the same time, as you might imagine, in this environment, there's -- the conversations are probably not as productive, just given some of the softening performance in businesses through the course of the back half of '22. But that said, you never know when people are going to transact. And so, we have to be out there. We have to be engaged. And so, we've got the team out there and actively looking. That's -- and so it's always hard to forecast what may develop through the course of '23, and so that's why we're guiding for everyone to think more about share repurchases at this moment. Yes. I think it remains to be seen, but the cost of capital and the leverage limitation that, that represents could make it a little bit more difficult for financial buyers and could help us. But we are seeing a little bit of a slower deal flow, but again, very active in the cultivation and trying to make sure that we drive strategic fit and right return. Hi, thanks. Just curious on the DIY paint side with [Technical Difficulty] down low double digits in 2023. This category has been slowly up against some tough comps, but it has been trending lower from a growth perspective. Just wondering, are we at pre-pandemic levels for DIY paint? And any perspective of how we are there relative to history would be great. Yes. So, as we look at our DIY paint volumes, Garik, we are at roughly 2019 volumes, if not, just slightly under them right now. So we -- the market has kind of reverted back to those 2019 levels. I would tell you that the fundamentals and how we look at that market are still supportive of long-term growth for DIY, particularly the millennials. That's a big cohort. They're clearly influxing into the housing market. And we've seen, based on our basic research that they're more than willing to pick up a paint brush and do their own painting. So, I think that's a position that will bode well for us as our brand gains more and more traction and really a leadership position with those millennials when they look at the data that we see. And the other thing I would point out, Garik, and I should have mentioned this earlier, to the extent that the economy does soften, you do tend to see a shift more towards DIY consumers take on projects, more projects themselves as opposed to have the projects done for them. So that could be a tailwind for us as we go into 2023. If you think about the pandemic and how that played out as it relates to a significant growth early in the pandemic with DIY, and then as that fear, if you will, of folks coming into your house abated as the pandemic was more under control, that shifted over to PRO growth. And I think the position that we have with our outstanding partnership with the Home Depot, in terms of being able to cover that variability in those shifts, our PRO business is very strong now. [Technical Difficulty] different shifts in the market and potentially different shifts from one part of that market, say DIY to PRO. We like our brand, and we like what our brand represents to both the end consumer as well as the professional. No, great. Thanks for the color. On the pricing side, you mentioned you're looking at some targeted price increases. I'm curious just given some of the softening in demand, are you seeing any pushback on pricing? Any impact on mix at all? Again, where we're talking about our targeted price increases for 2023, it's mainly in Plumbing. We've got some international price increases planned in some spots. I think we have some on certain parts of our assortment in North America. So that gives you a little bit of color. In terms of pushback, to-date, not really. I think it's all about the price value relationship and the service that we bring, and our customers and channels are well aware of the costs that we're experiencing, not only in the direct material front, but really, as I talked a little bit before referencing our paint basket, the way we ship our packaging, our freight costs, our labor costs, those sorts of things. So, I would say not any more pushback than you would normally see. On the mix front, a little bit of trade down. Slight trade down in our Plumbing business we've seen in spots, but really nothing that I would call significant at all in '22 and nor do we expect it in '23. And that's part of that similar to our coverage across DIY and PRO in paint as it relates to being able to address market swings. We also have broad assortments. And we cover price points, and we have styles and various technologies that fit for different people. So, we're prepared for those kinds of changes if they come, but we're really not anticipating very much mix shift at all. And Garik, the one point that I would just add to Keith's good comment is, as you think about price for '23, the significant majority of price will be carryover price rather than newly implemented price in 2023. So, I just want to make sure that, that distinction is very clear to everyone. Thank you. I just want to go back on the guidance in Plumbing. You highlighted some several things that have done well, particularly the spa business. They're coming off some big numbers. But is there any other detail you could give us? The decline you're forecasting is greater than your -- equal to or greater than your decline in remodel that you're assuming. What else is going on there? I think John touched on this a little bit earlier, Keith, is the -- if you think about our paint business, that adjusted volume-wise, kind of midyear. The Plumbing business was a little bit later to do that. So, I think that's a combination of larger backlogs, bigger projects that tended not to flex so much. So, I think that carryover helps to account for a little bit more of a volume reduction guide on Plumbing than we have on paint. And will it be all the same cadence you talked about earlier, or will the decline be more ratably during the year based on your forecast? I think, Keith, it would be kind of the same -- similar cadence that we described earlier, where a little bit more impact in the first part of the year, given the stronger comps that we're up against, and then we get into easier comps in the back half of the year. I'd like to thank all of you for joining us on the call this morning and for your interest in Masco. This concludes today's call.

EarningCall_170

Good afternoon, and thank you for holding. Welcome to the Motorola Solutions Fourth Quarter 2022 Earnings Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. The presentation material and additional financial tables are posted on the Motorola Solutions Investor Relations website. In addition, a webcast replay of this call will be available on our website within two hours after the conclusion of this call. The website address is www.motorolasolutions.com/investor. All participants have been placed in a listen-only mode. You will have an opportunity to ask questions after today's presentation. [Operator Instructions] Good afternoon. Welcome to our 2022 fourth quarter earnings call. With me today are Greg Brown, Chairman, and CEO; Jason Winkler, Executive Vice President, and CFO; Jack Molloy, Executive Vice President, and COO; and Mahesh Saptharishi, Executive Vice President and CTO. Greg and Jason will review our results, along with commentary and Jack and Mahesh will join for Q&A. We've posted an earnings presentation and news release at motorolasolutions.com/investor. These materials include GAAP to non-GAAP reconciliations for your reference. And during the call, we reference non-GAAP financial results including those in our outlook unless otherwise noted. A number of forward-looking statements will be made during this presentation and during the Q&A portion of the call. These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Information about factors that could cause such differences can be found in today's earnings news release, in the comments made during this conference call, in the Risk Factors section of our 2021 Annual Report on Form 10-K, or any quarterly report on Form 10-Q, and in our other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. Thanks, and good afternoon, and thanks for joining us today. I'm going to start off by sharing a few thoughts about the overall business before Jason takes us through our results and the outlook. First, our record Q4 results highlight the continued robust demand we're seeing for our public safety and enterprise security solutions. During the quarter we grew revenue 17%, earnings per share of 26%, expanded operating margins by 150 basis points, and generated a record $1.3 billion of operating cash flow. Additionally, orders remained strong, which led to record ending backlog of $14.3 billion, up $800 million versus last year. Second, 2022 was an outstanding year across the board. In our Products and Systems Integration segment, we grew revenue 14% driven by strong growth in both LMR and video security and we ended the year with record backlog, up 22% versus last year. We also expanded operating margins in the segment by 110 basis points despite higher costs related to semiconductors. In Software and Services, revenue was up 8% and 12% when normalized for FX headwinds, highlighted by double-digit growth in both video security and Command Center. And finally, as I look to 2023 [Technical Difficulty] positions us well for another year of strong revenue and earnings growth. Thank you, Greg. Revenue for the quarter grew 17% with record fourth quarter revenue in both segments and in all three technologies. Revenue exceeded our guidance and was driven by supply chain execution during the quarter, enabling higher product revenues in LMR. FX headwinds during the quarter were $87 million, while acquisitions added $39 million. GAAP operating earnings were $692 million, up 26% versus last year and GAAP operating margins were 25.6% compared with 23.7% in the prior year. Non-GAAP operating earnings were $822 million [Technical Difficulty] GAAP operating margin was 30.4%, up from 28.9%. This was Motorola Solutions' first ever quarter of over 30% operating margin and was driven by the higher sales in both segments and the improved operating leverage, particularly in the Products and SI segment. GAAP earnings per share was $3.43, up from $2.30 in the year-ago quarter on higher sales and on a lower effective tax rate driven primarily by a $47 million or $0.27 per share tax benefit from the release of a valuation allowance against U.S. foreign tax credits. Non-GAAP EPS was $3.60, up 26% from $2.85 last year, driven by higher sales and improved operating leverage. OpEx in Q4 was $541 million, up $21 million versus last year, primarily due to acquisitions and higher incentives. For the full-year 2022, revenue was $9.1 billion, up 12% with strong growth in both segments and across all three technologies. The impact from unfavorable currency was $216 million and revenue from acquisitions was $121 million. GAAP operating earnings were $1.7 billion or 18.2% of sales versus 20.4% in the year prior. The decrease was primarily driven by the $147 million non-cash fixed asset impairment recognized in the current year related to our exit of ESN. Non-GAAP operating earnings were $2.4 billion, up $251 million and non-GAAP operating margins were 26% of sales, up from 25.9% in the year prior, driven by higher sales and improved operating leverage, partially offset by higher material costs, and higher expenses from acquisitions. GAAP earnings per share was $7.93, up 11% compared to the $7.17 in the year prior, driven by higher sales, a lower effective tax rate and partially offset by the asset impairment charge related to the ESN exit and higher material costs. Non-GAAP earnings per share was $10.36, up 13% from $9.15 in 2021 on higher sales, improved -- and improved operating leverage, partially offset by higher material costs. For the full year, our operating expenses were $2.1 billion, up $107 million from 2021, primarily driven by acquisitions and investments into our video business. And the effective tax rate for 2022 was 20% compared to 21% in the year prior, due to higher benefits from stock based compensation in the current year. Turning next to cash flow. Q4 operating cash flow was a record $1.3 billion, up $570 million compared with the prior year, and free-cash-flow was $1.2 billion, up $565 million from 2021. Our record cash-flow performance during the quarter was driven by improved working capital and higher earnings. And for the full year, operating cash flow was $1.8 billion with free cash flow of $1.6 billion, consistent with the prior year. Higher earnings in 2022 were offset by the cash payments related to the increase in annual incentive payments earned in 2021 and higher inventory. Capital allocation for 2022 included $1.2 billion for acquisitions, $836 million in share repurchases at an average price of $225 per share, and $530 million in cash dividends. Additionally, during the year we issued $600 million of new long-term debt and repaid $275 million of outstanding debt. We also increased our dividend to 11%, our 12th consecutive year of double-digit increases. Moving next to our segment results. In Products and SI, strong demand continued with Q4 sales up 21%, including record revenue in both LMR and video. The currency headwinds were $43 million and revenue from acquisitions in the quarter was $20 million. Operating earnings in Q4 were $514 million or 28.4% of sales, up from 25.3% in the year prior, driven primarily by higher sales and operating leverage, partially offset by higher material costs. Some notable Q4 wins and achievements in this segment include several large APX NEXT device orders, including $45 million from the City of Houston, $39 million from a large U.S. customer, $30 million from the City of Dallas, and a $21 million add-on order from a large U.S. customer that previously purchased APX NEXT devices. Additionally, during the quarter, we received a $20 million APX NEXT and Command Center order from Kansas City, a $19 million P25 System order for a large international customer, and a $3 million fixed order for metro rail in Chicago. For the full year, Products and SI revenue was $5.7 billion, up 14% from the prior year, driven by higher sales of LMR and Video. Revenue from acquisitions was $53 million and currency headwinds were $98 million. Full-year operating earnings were $1.2 billion or 20.5% of sales, up from 19.4% in the year prior on higher sales and improved operating leverage, partially offset by higher material costs. In Software and Services, Q4 revenue was 9% -- up 9%, which included $44 million of FX headwinds, and $19 million of revenue from acquisitions. Total software revenue was up 17% with double-digit growth in both video and Command Center, while in LMR Services revenue was up 5% after a $39 million FX headwind. Q4 operating earnings in the segment were $308 million or 34.4% of sales, down 100 basis points from last year, driven by unfavorable mix and higher acquisition expenses. Some notable Q4 highlights in this segment include a $56 million P25 multi-year extension of the managed services operations at Interexport which serves the Chilean National Law Enforcement Police; a $25 million P25 software upgrade renewal for a large U.S. customer; $22 million next generation 911 expansion, and renewal order for the Greater Harris County, Texas area; $21 million system upgrade in multiyear services renewal for Lane County Oregon; a $15 million P25 and command center upgrade order for Columbus, Georgia; and a $15 million license plate recognition camera system expansion order from the Illinois State Police. For the full year, revenue was $3.4 billion, up 8% on growth in video LMR services and command center. Revenue from acquisitions was $68 million and currency headwinds were $118 million. Full-year operating earnings were $1.2 billion or 35.3% of sales, down 110 basis points versus the prior year, driven by mix and higher acquisition expenses. Looking at our regional results. North America in Q4 revenue was $1.9 billion, up 18% on strong growth in both segments and in all three technologies. For the full year, North America revenue was $6.4 billion, up 15% with double-digit growth in both segments and in all three technologies. International Q4 revenue was $808 million, up 15% versus last year with growth in all three technologies. And for the full-year, International revenue was $2.7 billion, up 5% inclusive of the significant FX headwinds. Moving to backlog. Ending backlog was a record $14.3 billion, up $788 million or 6% compared to last year, inclusive of $418 million of unfavorable FX and a $99 million reduction related to the exit of the ESN contract. The backlog growth was driven by the continued record demand we're seeing across all three technologies. Sequentially, backlog was up $837 million, despite the record Q4 sales with growth in both segments. In the Products and SI segment, robust order demand in both LMR and video continues to drive record backlog, which was up $894 million or 22% compared to last year. Sequentially, Products and SI backlog was up $68 million. This was our 10th consecutive quarter of sequential backlog growth in this segment. In Software and Services, backlog was down $106 million compared to last year, which included $367 million of unfavorable FX, driven by Airwave and ESN revenue recognition and the ESN exit, partially offset by strong growth in North America multi-year services, and software contracts. Sequentially, Software and Services backlog was up $769 million or 9% driven by strong orders in North America and favorable FX adjustment from the prior quarter. Turning now to our outlook. We expect Q1 sales to be up between 12% and 13%, with non-GAAP earnings per share between $2.02 and $2.07 per share. This assumes $40 million of FX headwinds, a weighted average share count of approximately $172 million shares, and an effective tax rate of approximately 23%. For the full year, we expect sales between $9.65 billion and $9.7 billion and non-GAAP earnings per share between $11.10 and $11.22 per share. This assumes $40 million of FX headwinds, a weighted average share count of approximately $172 million shares and an effective tax rate between 23% and 24%. We expect full-year OpEx to be up approximately $150 million versus last year, driven by acquisitions we've made, and our continued investments in video. And we expect full year operating cash flow of approximately $1.9 billion. And finally, the reason our effective tax rate is expected to be up 300 basis points to 400 basis points over last year is due to lower excess tax benefits on share-based compensation in 2023 and a higher U.K. tax rate that takes effect in April. We're also anticipating approximately $300 million of higher cash taxes compared to last year, inclusive of a one-time $75 million tax payment that relates to an IP reorganization we did in 2022. Before I turn the call back to Greg, I wanted to update you on some strategic decisions we've made with respect to our PCR business. First, in order to further optimize our supply chain, we have moved the lowest part of PCR, which is sold to small businesses and some consumers to a licensed model with a third-party manufacturer. As a result of this change, we will only recognize revenues equal to the margin from the product. In addition, we made a decision to exit some PCR markets in Asia. We expect these changes together to constitute an $80 million headwinds to our 2022 -- 2023 revenues, which is fully contemplated in our full-year revenue guidance for 2023. And finally, we enter the New Year with an even stronger balance sheet. We ended 2022 with $1.3 billion of cash and a net debt to adjusted EBITDA ratio of less than 2 times. In addition, our U.S. pension is in a strong funding position with over 80% funded reflecting the numerous actions we've implemented over the last several years. We have also proactively refinanced our debt maturities with fixed-rate long-term debt and established a balanced maturity profile with an average duration of approximately eight years. All of this gives us the flexibility to continue to deliver on our capital allocation framework and be opportunistic in M&A. Thanks, Jason. First, 2022 was a phenomenal year for the company. We achieved double-digit revenue growth for the second consecutive year with record sales in both segments and all three technologies. We expanded operating margins despite the continued supply challenges related to semiconductors and we ended the year with a record $14.3 billion of backlog, up almost $800 million versus the prior year. Second, our acquisition of Rave Mobile Safety during Q4 was our seventh acquisition last year. Rave adds approximately $70 million of annual recurring revenue for 2023 and expands the company's addressable market by approximately $7 billion. Whether it's a student or a teacher alerting public safety with the push of a button or 911 call takers coordinating a more informed response, Rave Mobile Safety amplifies the connection between our video security and Command Center portfolios. Since 2015, we've invested almost $6 billion in acquiring companies that have helped us create a broad set of public safety and enterprise security solutions. These assets have helped to accelerate our revenue growth, diversify the composition of our revenue streams, and more than quadrupled our addressable market to what we now estimate to be $60 billion. And finally, as I look ahead, the momentum of our business remains strong. The funding environment for public safety and enterprise security remains exceptional. Our investments in APX NEXT device portfolio are driving a refresh cycle that is still in the very early days with less than 10% of customers' installed base upgraded to date. Our AI and Cloud solutions continue to help drive market-share gains in video security and command center software, and will continue to navigate the ongoing supply-chain challenges, I'm extremely pleased with how we're positioned as we enter this year and I expect it to be another year of strong revenue and earnings growth for the company. Thanks, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to accommodate as many participants as possible. Operator, would you please remind our callers on the line how to ask a question? Yes, sir. The floor is now open for questions. [Operator Instructions] Thank you. And our first question will come from Tim Long with Barclays. Your line is now open. Thank you. Greg, maybe could you just give us a little sense of the backdrop, it sounds like obviously backlog was pretty strong, but talk a little bit about kind of federal ARPA and other revenue sources? How is that starting to flow through? How are your customers taking advantage of that and what do you think that means to visibility over the next few years? And then Jason, for you on the clarification, just talk a little bit about gross margins. Maybe walk us through the next year at some point we should be getting some bounce-back from components and logistics and maybe just touch on price increases that we've seen and how that would flow through the model and hit the gross margins next year? Thank you. So, this is Jack. I'll take the first question. I think it was regarding the federal funding, but really good news. So we had over $400 million of orders in 2022. But I think most importantly, the $350 billion that was allocated state and local is a multiyear funding phenomenon. So we look at our multiyear funnel out through 2026 at being north of $1 billion. Some of the deals that Jason cited were funded in part or in -- completely funded by ARPA dollar. So we've had good success. Our team is really -- our sales team in North America traditionally really understands funding models and I think they're working it well, and we've seen good results. And Tim, I'll also remind you that the ARPU funding, $350 billion for state and local, $170 billion earmarked for education, but most importantly, it's multiyear funding and much of this will go into and through 2026. So, the foundation of funding and the strong environment Jack described, we capitalized in 2022 as he talked about the robustness of the funnel this year. But the best part of all is, it's multiyear dimension in nature. And Tim, I'll take the second part of your question. So as you recall, as we navigated through 2022 and having to secure parts from brokers, that year 2022 last year, we incurred about $165 million of higher costs for semiconductors in 2022 than 2021, that was a headwind for us. We -- we're able to get access to some parts in Q4. That's in part what helped our Q4 performance. So as we plan for 2023 now, we anticipate still needing to run the play of buying broker parts, it's still remains a difficult environment, particularly for automotive-grade semiconductors, but we do believe and are planning for about a $50 million tailwind in the total amount of dollars that we will allocate and spend to secure parts as for the plans we have in 2023. So $50 million tailwind in 2023 relative to 2022's cost profile. And Tim, from a gross margin perspective overall for MSI, we expect gross margins to be up in 2023. We also expect operating margins to be up in 2023. Hi, guys. Thanks very much. It sort of feels like somebody forgot to tell you guys that we're in a recessionary environment. The business seems to be cranking on all cylinders here. Greg, anything you worry about in terms of a recessionary environment at all? I mean, I get it the ARPA funds are kind of backfilling maybe for any softness that you could see out over the horizon. But any thoughts about tax receipts, whether its property tax or income tax receipts ultimately slowing down a year or two from now impacting the business? George, the answer is, no, to be candid with you. The environment is strong, the funding environment, as we talked about is exceptional, 75% of our business, as you know, as government and public safety, 25% is enterprise. We still see continued strength. This year we expect growth in all three technologies LMR to be mid-single digits, video security to be about 15%, command center to be about 20%. So -- and there was an article in the journal last weekend, the state budgets are as flush as they had been in several years. We talked already about the multiyear funding horizon for ARPA. Now, nobody is immune from a recession. We've always been diligent in managing the expense structure of the firm. The majority of the driver of higher OpEx for this company year on year and period on period is generally acquisitions. So, I think we have a great portfolio, a fantastic environment, strong demand, and we are acutely focused on continued execution, new product development, acquisition integration, and growing faster than the market versus our competitors. So, now I -- look, sometimes they worried that I'm not worried, okay? But the team is aligned and we feel really good about where we are. Appreciate the question. And then just one quick follow-up, if I could. Any -- what kind of impact are you getting in the business, from higher pricing, just thinking about the growth rate as we look out to 2023? So, I would say the growth that we had last year, full-year was driven by both volume and price increase. I'd weight it a little bit more toward volume last year. That composition that drives our growth rate overall for this year is also volume and price. And I would weight it slightly towards volume again this year. We've exercised surgically and responsibly certain price increases that we've talked about a number of times last year. So, I think we're well-positioned going forward. Greg, the other thing that I’d offer insights into are our PCR business which in 2022 grew nicely. It's now back to 2019 levels. And a part of our backlog or unfulfilled orders for us or delays are in PCR. So we have a sizable amount of PCR backlog and demand, which we will continue to fulfill into 2023. And it's a great point, Jason because despite the fact that we had a great PCR Q4, really strong growth for the full year to Jason's point back to 2019 pre-pandemic levels. And he referenced an $80 million PC-oriented headwind, which represents a business model change even with those -- all those ingredients into the blender, we still are expecting PCR growth for 2023. Okay, thanks. Good afternoon. I wanted to start with the question, Greg. If there was any potential updates that we could give our guardrails on the potential outcomes for Airwave at this point? We understand, obviously, you've got some tailwinds to the model from managing costs and supply chain. The potential headwind looming is what could happen with Airwave. So just want to make sure that we're netting those things out and any guardrails you can give us on where that could potentially shape out? So what I'd say is, I'd remind you that CMA their stated intention is to make a final decision this month, maybe it's next month, but it's relatively soon. We remain unchanged in our finding and belief that with full conviction that their effort is disproportionate, it's unprecedented, it's overreaching. So our view on that is unchanged. Now recall the investigation -- the market investigation is grounded around Airwave and ESN. What I can update you on is that, we have successfully signed a contract with the UK Home Office to exit ESN. I think it was a good multi-month effort where both of us are satisfied, that will result, Adam, in us exiting ESN earlier than anticipated. We are doing a transition services agreement in 2023, but then effectively after 2023 we are out of ESN. So, I think that is an update that's worthy of sharing because a quarter ago we talked about our intention to do that, but that was before we actually codified and signed the agreement. Now having said all that, I think, look, as we guide the full-year we guide the full-year with the $80 million business model change around PCR. We guide the year both top and bottom with continued supply constraints and I think it's important to know that, because there's a lot of reports that supply chain is a lot better but for the businesses that we're in and we compete primarily with industrial providers or automotive for the semiconductors that we're contending for, it's not that changed, lead times actually are largely unchanged. So that informs our guidance as well and as we sit here, on February 9th, we think all-in, it's a prudent and balanced view of the year all things considered. All right. And maybe just a follow-up on Rave. Obviously, spending over $0.5 billion, I'm sure there was a lot that went into that decision. Greg, I'd love for you to maybe just talk about the expected ROI in any financial metrics. Sorry, if I missed any that you could provide related to that acquisition to justify that level of capital allocation? Thank you. Yeah, so we are very excited about the asset. And the important thing, Adam, is it's an asset that's worth more to us than anyone else. So when you think about the capital deployed against the backdrop of an addressable market that expands $7 billion and all ARR, annual recurring revenue with a run rate of $70 million that we like those attributes, their verticals. 80% of the business is profiled around state and local and education, which that too is absolutely in the sweet spot of what we do and how Molloy goes to market. So the asset we're excited about, I think it's worth and we think it's worth more to us than anyone else and we've done an extensive view of the industry as well and we're excited about what it means. A few more things to add on this. Greg already mentioned the vertical alignment that we have here, state and local government, education, which is significant for us, healthcare and corporate buildings. All of these are key areas where Rave plays a very important part. In Rave very critically as we mentioned before, connects enterprise security with public safety in some very unique ways and augments both sides of the portfolio. Probably three areas, technology areas that I want to highlight. The first is Rave enhances individual safety with mobile apps. So think about that as the Rave prepared capability where people with special needs can actually create a profile and offer information ahead of potentially something happening so that the response can actually be more effective. The second is the panic button. The ability to push a button and get help as needed, benefiting from what profile was created previously as needed as well. Rave Alert, which is a mass notification capability to keep people informed. So think about that as everything that covers people -- people's in safety, individual safety. The second area is facility preparedness. So think about the Rave facility capability where information about a facility can better inform a public safety response, including keeping responders safe and that's a very critical capability. Rave Collaborates help set up standard operating procedures of how someone should respond for various incidents ahead of when an incident actually happens. This very uniquely enables us to coordinate the ability that we have on the video security side and the command center side to make sure that the standard operating procedure along with the automation that sits behind it can orchestrate a very successful and capable response. And lastly, the third area is that it accelerates response as a whole. The Rave 911 suite provides very critical information to both 911 and dispatchers in terms of location information of where individuals are, other information, such as video directly from the site, and also Reva allows for cross-jurisdictional information sharing. You take all those three capabilities with enterprise security and command center, it really enhances our overall portfolio. And as Greg said, the one plus one here is actually much greater than two. Great. Thanks. Maybe following up on kind of that Rave response, which was very helpful just kind of in laying out the integration. I guess just is there any timeline to kind of integrating the solution that your Video solution or Command Center could kind of interoperate more seamlessly with Rave, or is that already kind of built into the solution? Just kind of getting a sense of when the one-to-one really does become more than two and if there's any timeline to that? And then maybe just a second question. Obviously, the backlog has grown pretty significantly. Are there any meaningful changes to duration that we should just be mindful of when thinking about that backlog and how it would peel off? Thank you. Just starting with the timeline elements. There are many elements of what I just outlined that already exist today, and they are integrated in various ways today. What we would like to do, and that's -- this is the future-looking element of it where we unify more of these solutions within our Command Center product portfolio, but also the Video Security and Access Control portfolio. And that is to come, and that it helps us enhance the use cases and make our products more differentiated. But some of the key capabilities in terms of being able to connect a detection that happens on the public safety side, and that's leading to an informed response on the command center side, whether that's 911 or dispatch, those capabilities exist today. And along with the incident, mass notification capability, being able to appropriately alert people, inform people during a situation, all those capabilities exist today. So there's more to come on this, but the base capability where the one plus one is greater than two, that's today. On the backlog. So our backlog, not only is it up in total to the $14.3 billion, it's up $900 million in products. And the duration of our backlog is even better than it had been last year. So we're in a strong position for backlog as well as the continued expectation for the orders that we execute on during the year. Hi, thank you very much, and congrats to what's a very robust 4Q and very robust 2023 guidance. My question has to do with the APX NEXT orders and just the typical refresh rates of public safety institutions and how they order your radios. The question is, are the ARPA funds and are the elevated levels of state and local budget catalyzing a compression in the typical refresh rate of LMR radios, which is partially explaining the strength you're seeing in LMR? Sami, it's Jack. So as I said, I believe it was in the August call that we're in the early innings of the P25 upgrade cycle in North America. A couple of things to point out. Number one, APX NEXT was introduced at the highest tier of the market, and that's where it's been focused. Just recently, meaning the second half of 2022, we've filled in that portfolio. So now we have a mid-tier APX NEXT available. That in and of itself will be an accelerant for a lot of what you call suburban and county municipalities outside of the big cities. We've done $370 million of orders since the product was announced. To give you a feel for the accelerant, $210 million of orders in 2022. And without question, the ARPA funding will be an accelerant to -- it used to be a 10-year kind of refresh cycle, we've seen that pull into like a seven-year refresh cycle. But I'd point you to the City of Houston that actually leverage largely ARPA funds, but actually use some budgets that they had surpluses in their own budget to move forward this device. I think there's a few things that really driving this. People want to do more with their device. And so, clearly, the ability to extend the network as people go to do mutual [indiscernible] events, SmartConnect, the owner experience. I mean a big city police department, it's tough to get technicians. It used to take them 10,000 man hours to actually upgrade software, cyber fixes and those kind of bug refreshes, that can be done in 10 minutes now, leveraging the LTE compatibility. And the last thing is location matters. And what we've seen is GPS provisioning that capability even through our CAD networks has been a big add for our customers. And so there's clearly been a lot of excitement. You've seen a lot of very marquee police departments. And I think with the mid-tier series launching, I think we're going to continue to see that accelerant. And just to be clear, we did $210 million of orders last year. I expect to do double that this year. And it's fair to say I think -- I think APX NEXT is probably the most successful LMR product we've launched, certainly in my tenure and the most successful for all of the reasons that Jack talked about, private network, public network, seamless roaming, LMR to LTE and all the operational cost savings. Yes, obviously, the funding environment helps, but the product itself is so strong in what it does and unique in its capabilities, I think that is as significant as anything. Got it. Thank you for giving us color. The one other follow-up question is, I think we can clearly see where you guys are going with Rave mobility. But I think the bigger question for analysts is when we look at Rave, when we look at Ava Security, and we look at a bunch of these other acquisitions you have made, they all look like they're going to have to be integrated on the back end and then offered in a much more broader way to a lot of your customers for much bigger type of consumption model. How far away -- how far away are you guys from offering this or being market-ready with a fully integrated suite in the back end that can really service the front-end consumption side? So I think we've talked about our Safety Reimagined program a few times before. And a key element of that Safety Reimagine program is actually to bring all these elements together in an integrated fashion and facilitate the orchestration of incident response in a manner where that response is more effective. So with that in mind, we have actually spent time developing a piece of software called Orchestrate which actually starts connecting these different pieces together and very visually allows enterprise security professionals and even public safety professionals to be able to say, this is how the automation behind the scenes of events going from, say, us being able to detect [indiscernible] visually in the field of view of camera should trigger, say, an access control lockdown, that access control lockdown in turn can perhaps trigger a mass notification to people in the facility, that mass notification then -- following that triggers a call to 911, dispatchers are now informed as to where individuals are. This is -- these are capabilities that between our Collaborate platform, our Orchestrate platform we're able to do today. And I think as a solution, we are starting to sell Safety Reimagined as a solution. In addition to the product integration and the road map that Mahesh described, I think, as Greg mentioned earlier, we're excited about Rave because it allows us to extend our sales channel to selling into public safety and education. So immediately, that organization gets the power of Jack Molloy's entire sales organization, selling the product as it is today into those accounts. And that in part is why we believe we're the most valuable owner of that asset. Sami, just a couple of other points I think are important to point out. We see the video security market, in particular, fixed video security, there really is a little bit of divergence in terms of view of on-prem customers that want an on-prem solution for certain critical infrastructure markets. And then you've seen another market that without question, from VMS -- from a video security, but also from an access control standpoint, they are starting to accelerate to cloud. We've done a couple of things to take advantage. So moving forward, we're going to have the capabilities to deliver if you're an on-prem customer or you're a cloud customer, you'll be able to leverage the analytics that we've cultivated within our camera portfolio. That's important. The other thing that's important is, as you remember, we also acquired IndigoVision and Pelco. And we had three different essentially VMSs that we had to support. We've unified that experience under ACC8, Avigilon Control Center 8, which is our VMS. So there has been progress to your point. I just want to make sure you understood a couple of those things as well. Thank you for taking my question. I wanted to kind of look at the linearity of your outlook, you're guiding 1Q 2023 revenue to grow 12% to 13%, yet full year you're guiding maybe at 7% year-on-year growth. So kind of -- I understand lead times haven't changed for your supply chain, but the global supply chain outlook is indeed improving, you might see it later in the year. But still, I'm trying to question the linearity that you're implying it implies almost like a slowdown in the second half of the year, which sounds counterintuitive. So can you walk me through your assumptions? Sure. Fahad, I would point you to, first, the comp set from last year where in the first half, we grew at a rate of 8% and the second half a rate of almost double that. So if you look at last year's comps, it in part informs our expectations for growth this year. Secondly, we talked about this $80 million PCR business model change moving to license. The majority of that impact is occurring in the second half for us. That helps inform what we expect for growth all year, but higher growth in the first half. And as Greg mentioned, with lead times unchanged, we forecast the business based on the lead times that our suppliers commit to us, and we update it as the year progresses. And our current guide is informed by our supply commitments. We just had a summit with our top 20 suppliers yesterday and have the latest information and commitments from them. And we'll continue to work the supply environment proactively, which we did in 2022. For my follow-up, I wanted to ask your thoughts on your revenue growth outlook for video surveillance. You've been talking 20% growth. But over the last two years, you've grown that business 30%-plus. If I'm not mistaken, the FCC has now recently announced a more wider band of that [indiscernible] Dahua products that has far bigger implications probably favorably for your business. So how should we be thinking about and how are you thinking about your video surveillance revenue growth in 2023? And how does this new SEC ban impact your business? Sure, Fahad. So our outlook for the 2023 is 15% growth. But I'd point out 15% off a pretty significantly difficult comp, we grew 24% in 2022. We've kind of said in general, we think the NDAA is generally conducive. And we think it's -- within the mix, it's a tailwind to the business. But we don't think it's going to have any real profound impact over the course of 2023. But we're really excited, particularly as the things I just outlined. Our portfolio is coming together. We now have offerings from an on-prem standpoint as well as a cloud standpoint. But again, I think 15%, I also think it's important to take a look at where we're getting that -- where we're generating that growth. Government and education are two largest verticals. And we think they're a little bit insulated in terms of if there is any kind of economic slowdown. And the other piece of it is health care and the commercial market space as well. Fahad, I'd also point out that some of the higher growth rates of Video Security, like in 2022 or before, the top revenue growth rate was in part driven by acquisitions. As you normalize those acquisitions and they go into the base and you look at the underlying strength of the growth rate between 2021 and 2022 and into 2023, it's much more comparable on a year-over-year basis. Hi, thanks for taking my question. So can you talk about kind of the operating leverage benefits you're seeing in the model? And I mean, you saw kind of modest growth in OpEx despite record revenues this year and very strong organic top line. So as we think about next year, how do we think about the pace of spend, kind of incremental costs related to Rave and other acquisitions? And you also mentioned gross margins up this year. Can you expand on the magnitude of your expectations there and the shape throughout the year? And I have one follow-up. Sure. So I'll start with OpEx. I mentioned that we expect OpEx to be up $150 million this year. The primary drivers of that are, in fact, Rave, the recent acquisition, combined with investments that we continue to make within video, which is our fastest-growing technology. In terms of leverage, we saw the leverage that we expected in the second half of 2022 on the operating line, and we expect continued operating margin expansion in 2023. I mentioned in part, $50 million of a tailwind in lower costs for us to attain the supply in 2023, then what we had to pay in 2022, that will largely benefit the product segment. And we'll continue to expand operating margins with both the volume and price growth drivers that Greg mentioned earlier. Okay. Great. And then on free cash flow, very strong performance here to end the year and despite $300 million working cap drag. It's always nice to see very strong earnings contribution kind of driving that free cash flow. But as we look to 2023, how do we think about working cap dynamics and overall trends for 2023, which could be a record year for free cash flow? Thank you. Sure. So we out looked $1.9 billion in operating cash flow. CapEx will be pretty similar to last year. For a number of years now, our CapEx as a percent of OCF is around 15%. It's actually less than the 20% that we have in our capital allocation model, and that's likely to continue. We are a low CapEx asset light kind of model. So as OCF, we expect growth in OCF, we'll have higher earnings. I did mentioned $225 million higher cash tax amount that we are incorporating into 2023 as well. But we'll see good earnings growth, good cash flow growth, and we'll continue to work through inventory. Inventory has been a helpful investment for us as we navigated 2022. We'll plan and are planning for it to come down in 2023 as we fulfill record demand, but we'll continue to use it as an asset. It served us well in getting customer and meeting customer demand, but we'll continue to work through lower inventories in 2023. Good afternoon, guys and congratulations on a great quarter and our consistent performance for you guys. As we think about your product and system integration business, obviously, we saw you guys call out a lot of the APX NEXT refreshes, but there's only one systems update that was included in that list. Can you guys kind of talk about the mix between the system upgrades versus the device upgrades that you guys are going through? And are you guys seeing more of a movement back toward your device upgrades? We're seeing both, Keith. The one thing I'd point to is that over the past several years, our customers have been transitioning to an always current upgrade arrangement, we call it SUA. It's a more predictable arrangement for them and keeps them on their journey technology wise. That revenue stream is more predictable for us. And a large number of customers in North America are on that journey for their infrastructure needs, which is a less lumpy systems business for us. So we'll continue to see devices upgrades. We told you where we are in the early innings of that. And we'll see systems upgrades, but we'll see it come through the P&L in both a product-related upgrade, but in some cases, higher services revenue for systems upgrades. Jason, that's a good point. It's also -- this is pivoted more into a recurring revenue model and it will. There'll be elements of it in terms of replacing base stations for these networks that will continue to be an opportunity for us. But largely, it's come into software, meaning, it's an SUA program, as Jason pointed out, but also it's been -- it's been an accelerant for our Managed and Support Services business as well. Great. Thanks. And as a follow-up question here. [indiscernible] the guidance here, Command Center growth expectations above 20% for 2023. Is the primary driver of that is the integration of Rave? Or are you guys seeing success elsewhere starting to pay dividends? 20% includes the inorganic addition of Rave, but the rest of Command Center software also expected to grow low double digits, which is consistent with the expectation that we had and executed too in 2022. Thank you. Our next question will come from Louie DePalma with William Blair. Your line is open. Louis, please make sure that you're unmuted. Doing well. Related to your Video division, the topic of artificial intelligence and machine learning has been in the financial mainstream recently with ChatGPT. Can you discuss how Motorola deserves to be in the conversation of leading AI vendors with some of your video analysis automation tech that you showcased at the IACP conference? And in general, how powerful are your AI tools now? And how has that progressed over the past couple of years? Thanks. Sure. So ChatGPT, the technology that I think has been in development for quite a long time, and it really benefits from lots of advances in natural language understanding, reinforcement learning, the GPT, that stands for generative pretrained transformers, and it's the third generation of that tool. Now if you kind of break that up a little bit, the natural language elements of it, think of what we do on the smart transcription side, where we understand natural language, we are able to pick out entities that addresses names, license plate numbers, et cetera, and then map that into a capability to fill out forms, give supervisors a heads-up when a call taker potentially needs help, et cetera. On the video side, think of it as what we're doing, where we're taking video and actually converting that to language, so facilitating things like natural language searches. So being able to understand what is the user asking for and mapping that effectively into a set of results that are returned based upon our automated analysis of video. And we're able to do that at the edge. And with our acquisition of Calipsa, we're able to extend that capability into the cloud. And one of the things that Calipsa with the cloud AI allows us to do is very rapidly give -- provide this capability to multiple different cameras across the board, across all our portfolios, Pelco specifically, Avigilon inclusive of that as well. So those two things together give us the capability now to say, okay, if there's particular events that are happening, we can alert on them unusual activity being another one of them. So ChatGPT, I think, is just an indicator of one element or one area of machine learning that is really advanced. We're benefiting from multiple pieces of that across video understanding, across language understanding and audio understanding to the point where we're now implementing it across all our products. So hopefully, that's a rough answer to your question. Thanks. That was helpful. I'm sure you could talk for dozens of hours on that topic. One more question. Last week, Yes. Last week, the city of East Chicago and Indiana announced that it was deploying portable solar-powered video analytics platform from Avigilon. I was wondering, do you view solar powered cameras as a significant growth area for the Motorola video group? So there's probably two areas, I'm not entirely sure of the specific opportunity you're talking about. But more broadly, we do have Avigilon cameras that are deployed today with solar platforms for [indiscernible] deploy applications. Many times, this is for construction sites for sort of sports events that happen or concert events that happen and you need a rapidly deploy solution. That is 1 part of it. The other part of it is on our automatic license plate recognition solution. We introduced the L6Q camera towards the end of last year. And that is a fully wireless solution. So it is a camera that is equipped with both video and radar as a detection mechanism. It is solar powered. It can be solar powered or it can be powered with a regular AC or DC connection. It also is LTE capable. So it is fully wireless in all its capabilities. And we are seeing a fairly rapid uptake in that solution because of its ease of install -- it is probably the easiest to install a video camera device out there today. Good afternoon, everyone. Thanks for taking the question. The first item I had is, I'm curious, could you talk through the K-12 trends that you've seen as of late, talk to maybe materiality and how some of the COVID relief funding is starting to manifest. Mahesh talked about safety reimagine, but any other types of projects that you're seeing in that space would be helpful. Sure. So I pointed out earlier, but education is -- it's our largest vertical in terms of Video Security & Access Control. There's been 170 million billion allocated to funding school safety. And it continues to outpace -- as much as we grew 24% last year, education continues to even outpace our growth in the overall business. It's one that school safety is paramount to what everyone is doing. And it's not only video security, it's access control, but it also brings in PCR radios and their ability to interoperate, to provide intelligence in terms of if there's an ingress/egress at a door, there's things that happen. I mean analytics play a huge role in driving a lot of our education success in terms of unusual motion detection, if there's an altercation in a cafeteria, think of things like that. Stadiums things happen with teenage kids in stadiums and those kind of things. So all those things have kind of culminated in a great opportunity. One of the things we did early days is we actually went out, hired a team to -- all they do is get up and focus every day in the educational space because one of our core beliefs here is we believe domain expertise, market knowledge matters in terms of going back and work with the product group and making sure we're making the right definition. The other thing I'd add, public schools get a lot of attention. But one of the reasons we look at Ava is we actually looked at a lot of private schools who actually wanted a cloud solution. We didn't have a solution before we bought Ava and we've identified opportunities to accelerate growth in the private education system as well there. Okay. That's great. The follow-up is within Command Center, Greg, you spoke to 20% growth in 2023. Jason, I think you said ex Rave low doubles. If you look at Command Center as a percentage of mix, it's been pretty stable, about 7 points of revenue over the last several years. A lot of things going on. Could you talk a little bit about the sales motion there, the complexity of the systems and longer term, when you think that might be a bigger driver to the overall mix or grow as a percentage of the total, if you get a more widespread investment among those customers? That's it. Thank you. Yeah. I mean I think the primary thing I'd point to there is we have -- you have to think about the Command Central market in terms of its very widespread. There are 6,500 public safety answering points in North America. And what you see taking place, and I think where we've talked about is, you've got -- historically, you had three to four different RFP cycles, meaning CAD RMS, you had a 911 system, you had consoles and radio consoles in some respect as well as Aware platform, which is more of a proactive mechanism to look at police. And what we're seeing, I think, particularly as we start to see newer and probably more technology savvy dispatchers enter the market, they want a unified experience. They want to look at a piece of software that is commonality instead of looking at four different things, operating with multiple different screens, different ways to interface to the technology. So I know that everybody would like this thing just to turn on and everybody go to kind of a Microsoft suite, the reality is, they've made investments. Some of them maybe just bought a new RMS system three years ago. And there's a cycle to that. But we think there's a cycle, and it's a benefit to us. And I think one of the things that Mahesh and his team have done a great job of is they put us in a position to have a conversation with a customer. It isn't bad for us if they buy those things in three different cycles because they buy from us. As long as they like the experience we deliver, we think there's a margin opportunity there as well. [Technical Difficulty] And just looking at how we performed over 2022, our SaaS growth was actually 2 times that of command center total revenue. And today, about one-third of our command center software customers are actually they have at least 1 cloud-hosted hybrid solution in the mix there. And then we mentioned Greater Harris County as one of the deals this year -- or last quarter. An important element of that solution was -- the smart transcription solution that I mentioned previously and Greater Harris County is actually the largest smart transcription deployment to date. And so we are seeing more adoption of hybrid solutions going into that, and that's growing well for us. I appreciate that. I hope [indiscernible] last I could ask an awful lot of questions. But on a serious note, Greg, the guidance you'll give in organic terms, what does that translate to stripping out what you're expecting from Rave or any other contemplated acquisitions? And how does that compare to organic growth in 2022? I assume Rave is the only -- or the biggest inorganic piece this year? Yes. It's largely Rave. Last year, inorganic revenues contributed $121 million to our -- and this year, it's largely the Rave of around $70-plus million from Rave. So that's the bridge. You don't have -- in that guidance, you're not putting in anything in terms of prospective acquisitions other than Rave that was disclosed, and it's obviously less, a fair deal less than what acquisitions contributed? All right. I appreciate that. And which ties into the next question, your LMR business just grew 9% last year following 7.6% growth the year before and 3.9% a year before that for a business that you historically have characterized understandably, I think it's low single digit. And so it came off a very strong year and had even strong growth. In terms of -- relative to the mid-single-digit guidance on LMR, I'm trying to understand the upside potential [indiscernible] assume the downside of this is one of the -- I'm trying to understand upside potential. Can you just review -- I know you've touched on it throughout the call, but can you review what were the key drivers in that? You mentioned that PCR was up. I don't think you gave us a number. I assume it was back up to the $1 billion level that you referenced in 2019. I think that was the level. But can you go through the various drivers, APX, PCR, et cetera, that contributed to that awfully strong growth? And what you're expecting going forward? So Paul, I'd say let's start foundationally and thematically. I think it's a statement about the strength and durability of land mobile radio, first and foremost as a platform. LMR versus an LTE or cellular alternative, number one. Number two, we talk a lot about APX NEXT, APX NEXT being the premier high-tier device, most successful product launch MSI has ever had. Where customers are clamoring for it given the feature functionality, the LTE roaming, the over-the-air software efficiency that eliminates or minimizes their operating expense. And then we're taking APX NEXT, and we're introducing the APX NEXT mid-tier refresh. So you think about more broadly, there's 13,000 LMR networks around the world. You take a subset of that with better North American centric and P25 and you have a whole device portfolio refresh high-end led by APX NEXT, mid-tier then APX NEXT mid-tier. By the way, we're refreshing the TETRA portfolio as well, and we've continued to add and enhance the PCR portfolio. Then you add the backdrop of ARPA funding and state budgets that are as strong as they've been in years and PCR up [indiscernible] had best quarter it's ever had in and it has returned to prepandemic levels. And to your point, it's back to about $1 billion. And even with the business model change around PCR exiting certain countries in Asia, recognizing margin instead of full top end revenue, we still not expect to grow off of a record 2022. So you have device portfolio refresh, best-in-class product. This is a need to have, not a nice to have. That's not just a slogan. That's a reality and the demand for LMR [indiscernible] and the platforms and the feature functionality that comes with that, not to mention the integration of the Command Center and things like video security and Access Control are powering this technology forward. Now why mid-single digit? Because I remind you, we're still in a supply-constrained environment. Lead times are still the same as they were a quarter or two ago. if there's relief on that front or that changes throughout the year, we'll inform you. But that's what's driving that guide. Greg, I think you just told us that if supply permits, demand would accommodate more than that mid-single digit, 5% guidance. But my last question, any update with respect to you all being able to collect on that not in substantial Hytera litigation award? Work in progress. By the way, it's worth saying, Paul, that our expectation for cash flow in fiscal 2023 assumes no collection in that year. They owe us about $60 million. We've collected some a relatively de minimis amount. Our trial is the Civil trial. They have a 21 count criminal trial that begins at the DOJ federal level in February of 2024. We've asked the court to hold Hytera in contempt for failing to make a royalty payment. Look, it's a long slog. It's a multiyear fight against Hytera, but it's the right thing to do. We're going to protect the intellectual property of this firm. We'll see how it plays out. We had, by the way, they're defendant, [indiscernible] and plead guilty in the U.K., that's the senior engineering executive for Hytera that reported to the CEO, he changed his fee several months ago to guilty. So I know it takes long, and the wheels of justice grind relatively slowly, but we'll stay tuned and update you accordingly. But in terms of our forecasting or assumptions for fiscal 2023, there's zero from a cash standpoint. I appreciate that. Guys, can I just clarify one thing going back to 1 more question. Greg, I think you and Jack and Jason have made the point historically previously that the new APX handsets accommodating the richer applications that require the new APX handset in order for your customers to deploy. I trust that's still the case, assuming the fact that there's a strong take-up of APX NEXT bodes well for take-up of the incremental command center software and LMR services, et cetera, and so one goes hand in hand with the other. Well, the fact that the APX NEXT has software applications that are embedded in the capability of the device themselves. That platform is there to upgrade and add apps over time. All right. Thank you. This does conclude the question-and-answer session. I would now like to turn the floor back over to Greg Brown, Chairman and Chief Executive Officer, for any additional and closing remarks. Thank you, everybody, and thank for joining the call. I would just summarize by saying what we do has never been more important than it is now. I mean, last year was a truly outstanding year. second consecutive year of double-digit top line revenue growth. We expanded operating margins despite the higher input costs around semiconductors. We acquired seven companies for the deployment and utilization of capital of $1.2 billion. The demand environment remains exceptionally strong, heading into this year. We've got strong multiyear funding. We've got record orders. We got record backlog. The exciting part is, we're at the intersection of public safety and enterprise security. And the width and breadth of our technology ecosystem, I think, further fortifies our role as a trusted adviser to our customers. I want to thank every single Motorolan that's listening into this call. This is an incredible company with this very strong purpose, passion, reengineering, innovation mentality. And as we heard yesterday in the supplier conference that Jason referenced and Jack, Mahesh and I participated in, these are special people with a commitment to serve and the commitment to the community. It's above and beyond. I appreciate everybody on the call. Thank you for joining, and we look forward to updating you again in a few months. I appreciate you all. Ladies and gentlemen, this does conclude today's teleconference. A replay of this call will be available over the Internet within two hours. The website address is motorolasolutions.com/investor. We thank you for your participation and ask that you please disconnect your lines at this time.

EarningCall_171

Good day, and thank you for standing by. Welcome to the Frontier Group Holdings' Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is recorded. I would now like to hand the conference over to your speaker today, David Erdman, Senior Director, Investor Relations. Please go ahead. Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2022 earnings call. Today's speakers will be Barry Biffle, President and CEO; Jimmy Dempsey, EVP and CFO; and Daniel Shurz, Senior Vice President, Commercial. Each will deliver brief prepared remarks, and then we'll get to your questions. First though, let me cover the safe harbor provisions. During this call, we will be making forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those predicted in these forward-looking statements. Additional information concerning risk factors which could cause such differences are outlined in the announcement we published earlier, along with reports we filed with the SEC. We will also be discussing non-GAAP financial measures, which are reconciled to the nearest comparable GAAP measure in the appendix of the earnings announcement. Thank you, David, and good afternoon, everyone. Frontier posted strong fourth quarter results, achieving an adjusted pretax margin of 5.7%, our third straight quarterly profit. Results were underpinned by a record ancillary revenue performance along with meaningful improvements in our unit cost and utilization. The strong result was hampered by major disruptions followed by winter storm early during the busy holiday travel period. However, we were able to minimize the impact through the recoverability of our modular network and the dedication of team Frontier who worked tirelessly to ensure our passengers arrive safely at their destination. I'd like to extend my gratitude and recognize the team's efforts as they overcame treacherous weather conditions with extended shifts and managed customer disruptions to get them to their destination safely. At our Investor Day last November, we've highlighted how leisure travel demand has undergone a fundamental shift and how we're uniquely positioned to exploit it. Customers have more flexibility and more propensity to traveling than they did pre-pandemic and its compelling evidence points to the resiliency in the leisure travel segment. We expect the benefits from this resilient demand to be amplified by industry capacity constraints predominantly by pilot shortages and supply chain bottlenecks. But this creates a significant opportunity for Frontier. Although we're not immune to these issues [indiscernible] dominated by the A321neo, together with our Robust Pilot Recruiting and Training platforms uniquely provides us the foundation to harness the growth opportunity before us. Last year we launched our Cadet and [indiscernible] Program, and both are driving strong demand in candidates who applied to Frontier. Over 100 pilots have already been accepted into the Cadet Program, and we have nearly 5,000 applications last year through all of our hiring channels. In fact, the first cadets from the program will be joining us as first officers in just a few weeks. Although aircraft manufacturers are dealing with supply chain issues, the delays we're experiencing from Airbus are between 1 to 5 months. While we're disappointed with these delays, they effectively represent a manageable 1 quarter shift on average across our orderbook. Our strategy has been to focus on the areas that we can control. We'll focus on hitting our near-term target of $85 in ancillary revenue per passenger, and we achieved $82 for the fourth quarter, enhancing our confidence that hitting the $85 in the fourth quarter will happen. Moreover we lowered our total adjusted CASM, including interest by 8% from the prior quarter and widened our total cost advantage with the industry to an equivalent of over $70 per passenger. Our costs are our competitive edge, and we expect to maintain this advantage for years to come. Put simply, our strong ancillary performance and industry-leading unit costs are the variables that make it possible for us to capitalize on the strong leisure market and stimulate profitable growth for the rest of the decade. All of the team Frontier are unified in this pursuit and it gives me confidence to reaffirm our target of returning the airline to pre-pandemic profit per plane by the second half of 2023 on a run rate basis. Thank you, Barry, and good afternoon, everyone. Fourth quarter revenue was $906 million, a 38% increase from the 2019 quarter, marking the fourth consecutive quarter in which revenue has grown by double-digits over the respective 2019 quarter. Travel reached [indiscernible] a high level of capacity. Total revenue per passenger was $133 supported by impressive performance on the ancillary front, which, as Barry mentioned, reached a record $82 per passenger. Our ancillary performance demonstrates our customers' preference for unbundled products, enable them to personalize their travel experience [indiscernible] for a more stable and predictable source of revenue. This has affected our [indiscernible] ancillary performance that we saw throughout 2022 with [indiscernible] achieving our target of $85 per passenger in the fourth quarter of 2023 as well as our long-term target of $100 per passenger by 2026. [indiscernible] utilization improved by approximately 25 per day over the prior quarter to 11.5 hours, on average daytime [indiscernible] to 1,032 miles. With the continued progression in our utilization [indiscernible] throughout 2022 towards pre-pandemic levels, we're on track to achieve average daily utilization of over 12 hours and an average [indiscernible] of 1,050 hours during 2023 as set forth at our Investor Day. In the fourth quarter, we opened [indiscernible] market were 140 [indiscernible] now based. With the [indiscernible] we launched in the fourth quarter was [indiscernible] and that's up 23 destinations [indiscernible]. Additionally, during the fourth quarter, we announced a new [indiscernible] in May 2023, where we expect to employ 120 pilot from 220 [indiscernible] by the end of the first year of operation. We've been the fastest-growing carrier at DFW since 2019. And once we launch [indiscernible] will be the first largest carrier at the airport based on destinations served. And last, we announced [indiscernible] service point of retail. With additional long-term routes to [indiscernible] a new service to [indiscernible] key destinations on the island. Once the [indiscernible] we also have more destinations from the Caribbean Island than any other airline. Finally, since we launched in November [indiscernible] have been strong. This unique product provides travelers the opportunity for unlimited flights to all of our domestic and international destination for one low annual price. Just last week, we introduced the second [indiscernible] product to travel during the summer months. We're seeing strong demand since it went on sale. Thank you, Daniel. We generated a pretax margin of 5.5% on a GAAP basis, 5.7% on an adjusted basis during the fourth quarter, above the midpoint of our guidance range despite the impact of the holiday winter storm. Our adjusted pretax margin excludes $2 million in employee retention [indiscernible] termination -- terminated the combination with Spirit, the recognition of which is expected in the March 2023 quarter. The sequential margin improvement hampered by storm impact was largely driven by record ancillary revenue and lower fuel cost per day. Adjusted CASM ex-fuel declined sequentially to $0.64, which was 7% lower than the prior quarter, the lowest expense since exiting the pandemic. The decline was driven by higher utilization along with the timing of aircraft deliveries and aircraft returns, partially offset by higher other nonfuel expenses, particularly lease return costs. We ended the year in a strong financial position with $761 million of unrestricted cash and cash equivalents and $332 million of net of total debt. In addition, as previously highlighted, we have the ability, if needed, to access substantial liquidity through our loyalty program and brand related asset. We had 120 aircraft in our fleet at year-end after taking delivery of 2 A320neo and 3 A321neo aircraft during the quarter. We expect to take delivery of another 6 A321neos in the first quarter of 2023, of which 3 are direct leases. As noted in our earnings release, Airbus' delay in aircraft has reached by 1 to 5 months for delivery scheduled in 2023. Accordingly 9 A321neo aircraft deliveries previously expected this year will shift into 2024, resulting in about 5% capacity in 2023 than we expected in November. We therefore expect to encounter slight upward pressure on adjusted CASM ex in the near term given the unit cost efficiencies unlocked by the A321neo. Accordingly we anticipate being below $0.06 during the second half of 2023 and largely above for the full year, a level which we believe is materially below the industry average. Recap and guidance, first quarter capacity is anticipated to grow 17% to 19% over the 2022 quarter, while full year 2023 is expected to grow 23% to 28% over the prior year. Fuel costs are expected between $3.50 and $3.55 per gallon in the first quarter and $3.05 to $3.15 per gallon for the full year 2023 as of the [Brent] fuel curve on January 30. Adjusted nonfuel operating expenses in the first quarter are expected to be between $570 million and $595 million and $2.425 billion to $2.525 billion for the full year. Our effective tax rate is expected to be 24% for the entire year. Finally, first quarter adjusted pretax margin is expected to be in the range of minus 2% to minus 6%, largely reflecting elevated fuel prices and seasonal softness. Thanks, Jimmy. Our objectives for 2023 are clear. All 13,000 members of team Frontier are focused on completing the post-pandemic turnaround. I'm confident we can sustain the momentum from the last 3 quarters as we execute on widening our relative total cost advantage as we deliver on revenue enhancements, particularly on the ancillary front. Together these 2 factors will enable us to return the airline to pre-pandemic profit levels. Definitely appreciate the color and everything you mentioned about the cadet program and what have you, and that's great to hear. I was wondering if you wouldn't mind giving us some color on what you're seeing in terms of mechanics and sort of availability of mechanics and if you're seeing sort of any hiccups in terms of engine maintenance throughput issues of any kind? Yes, thanks, Steve. So look, we've been talking about the mechanic shortage for years, and everyone is focused on the pilots, but actually the mechanic shortage is just as problematic. We have seen some of our business partners. As a reminder, the majority of our maintenance on the line is actually provided by business partners, and we have seen some challenges there. In particular, we've seen issues, especially in places where we have still on-call maintenance where we don't do maintenance every day. Sometimes the availability, lots of times, how quickly they respond has deteriorated a lot as a result of their staffing levels. But we are working with them. We've had a lot of talks with them recently. The other thing that's been impacting us, you mentioned the engines which hasn't been a major issue for us. However, there has been significant challenges with parts overall. And we have seen in many cases over the last several months, we've had multiple instances with aircraft out 5 to 7 days, waiting on parts. And so we've kind of seen the supply chain issue that a lot of people have had. And so we are working with all our providers and spending a lot of time on that, but the supply chain issue this year across other industries, and including our own, they are real. So this first question, I wasn't planning to ask until last night. Of your total ancillary take, what percentage comes from the seat assignment fees on reservations with more than one traveler in the PNR? Jamie, [indiscernible] we don't disclose the breakdown, that's something I don't have breakdown of. I don't have a breakdown of exactly what -- what the mix is of how many passenger is on the PNR and what's going on [indiscernible] we're obviously conscious of the things that you've talked about. Well, Jamie, I know why you're asking the question. And first of all, we have 4 years and is the standard practice across the industry, we have shown every option available to a customer before they complete their booking. So everyone knows prices well in advance. If a flight is canceled or if they're significantly delayed, we provide prompt refunds on request. And also as it comes to families and seating families, we actually do that today for free and we have high success in actually getting families seated together. There are operational challenges last time, and flexible and there is plenty of other seats in, the last few seats were sold to a family, it's a little harder. But we do a really good job with that. So, I think there's a lot of confusion with that. Well, and I appreciate that, Barry. So let me just ask, and I apologize because I'm going to give away the fact that I don't fly Frontier very often. But if I go to book a flight right now for a party of 5 for travel in June, you're telling me that all 5 of us will be able to make adjacent seat assignments for free? No, no, we will make every [indiscernible] if you don't have seat assigned, we'll make every effort to get you together, but not the whole family together, we will put an adult with the smaller children. Okay, fair enough. I'll experiment more with it in a second. I'm sure, the 5% reduction in 2023 capacity, it takes some pressure off pilot hiring and I know you made an excellent point at Investor Day emphasizing new crew bases out and back flying as lifestyle benefits. But given the recent wage increases, it looks like you're now bringing up the rear in the industry in terms of pay save, I guess, for maybe Avelo and Breeze. Obviously this will change the new pilot contract in 2024. But until then, why shouldn't we assume that the pilot shortage hurts you more than other low-cost airlines in the U.S.? Because it happened. We have an aggressive hiring program and we’re not bringing up the rear. I think we’ve gotten the brunt of a lot of this dialog. This is a regional situation, right. We are significantly higher than the regionals and we are successful in all of our classes and we’re still getting over 10 applications a day of qualified applicants. So I think you’re welcome to come out, Jamie. I’ll introduce you to recruiting, go around the recruiting, we can show you our classes. It’s not the problem that I think that the perception is out the there. In fact, we’ll have to slow our hiring in order to accommodate the Airbus. Appreciate the color. Just 1 or 2 questions here. I heard what you said about demand in the fourth quarter. But as you're looking at the cadence of demand in the first quarter, can you just talk about what you saw in January and what you're seeing for the rest of this quarter into maybe the second quarter? Yes. So look, we've seen continued robust demand for leisure travel, and it continues to do very well. In fact, I think if you look at our results, you can see in the fourth quarter, I think we were second place in terms of capacity compared to 2019, and we put up an impressive RASM number against that. And in Q1, we continue to see that trend continue. We're going to be in a really good RASM position even though we are now the largest carrier in terms of size relative to our 2019 size. So even with significant growth in capacity, we are seeing continued strength in leisure demand and especially when we look to the peaks, and we've got presence there right around the corner, and we've got the spring break period. We see really robust demand, probably the best we've ever seen. And I expect at the current rate, we will have never seen a spring break that is as good as this year. That's hugely helpful. And then I think -- I don't know if it was the last earnings call or the one before that, you talked about seeing trade down from other carriers to you guys. Are you still seeing that among maybe a nontraditional Frontier customer? We’ve seen a significant uptick in customers that did not fly us before. So as a growing carrier, you’re always seeing new customers because you’re in new markets and so forth. And you’re always adding new customers and say, I think that you already applied to. But we did see a significant uptick in customers over the past year that has not flown us before. We’ve seen a significant uptick in customers that are buying our GoWild pass, as an example, who we’ve never seen before at Frontier. It’s hard to say if that’s a price pressure of them being priced out of the legacy carrier or is it just simply that our brand is getting that much stronger. It's hard to say. But yes, we continue to see a significant amount of new customers. I guess to Barry, I guess you're sort of in a unique position in the sense that you're one of the few carriers that I think you have both the LEAP engine on your A320neo and I believe you're bringing in the GTF on your A321neos. Curious if you're seeing anything now or is it just because you just started getting the GTFs in your fleet? And what -- from maybe conversations that you're having with the OEMs, what is the issue? What do you think is the root cause, so that when a year or 2 or 3 down the road, you're not taking engines off the way? Well, I think that's a question for the engine manufacturers. But yes, we operate both engines. We -- in fact, it seems like yesterday, but we've been operating the neo now for, oh gosh, for 7 years. And we had a lot of teething challenges with the LEAP. There were shroud issues. There were a number of challenges of fuel nozzles, all types of things as there is with every new technology that has come in. We are past most of those issues now, there's maybe still a few lingering. We're not as familiar with the GTF, as you pointed out. We just started operating this aircraft basically in the fourth quarter. And so we're very new to it. We haven't had many of the issues. A lot of the issues, as we understand them, are earlier production series parts [indiscernible] and we're fortunate to have many of those upgrades later, but there obviously could be challenges. I think the biggest issue is not -- is the reliability is there, but the turnaround time on the engines themselves. So how long it takes, if you have an engine come off wing, how long it takes to get that engine overhauled and back. And I think what we're seeing, not just in engines, but in all types of components, we're seeing it take longer to get components repaired and back to the airlines. This is one of the challenges we're seeing with our provider on parts. It's just things are taking longer to get repaired. And so it takes longer to get them back on the shelf. And I do know, yes, there's another airline that called us out recently in the United States, but there's several around the world that have, in the engine space, that actually have aircraft sitting without engines. And so we're watching this closely. But yes, we're pretty good ways away from having any of these challenges and hopefully, given the improvements that they've already made to the engines, it's not as profound at Frontier. Okay, that's helpful. That kind of reinforces the adage that you kind of never want to be first in line for the new technology, let it teeth and be the airline #4 or 5. So that's good. And then my second question, and maybe this is Barry, to you, and Jimmy, the comment in the release about second half of 2023 getting back to the profitability per aircraft in 2019. I go back to 2019, and I see 14% pretax margins, that makes me salivate, probably makes you guys salivate as well. Is it a margin? Is it EBITDA per aircraft? What are you referring to? What metric do you hope to hit in the back half of the year? Yes, Michael, we have an internal target of getting back to pre-pandemic profit levels, obviously. I think the entire industry is trying to do that, but like we have a real line of sight to moving back to a pre-profit per plane on a net income basis, on a run rate basis in the second half of the year. Obviously there's a lot of work to do to get there, moving our unit costs and widening the cost advantage against the competition and gives us a real runway to moving margins higher. And obviously we want to move margins higher, but it's not necessarily a margin race. It's more of a profit level per plane. Yes. So Mike, it’s total dollars of net income per plane. And again, and just what we did with the fourth quarter kind of illustrates, if you look sequentially at the last 3 quarters, you can see the cost trajectory is clear. And so – and you can see that the ancillary revenue trajectory is clear. And so it’s just math. And if you look, we’re already back pretty close to pre-pandemic utilization. We got maybe half hour to go, but we already did 11.5 hours just in – just in the fourth quarter. So it’s all systems go, and then we have a clear path. It’s not a maybe, someday, it’s right upon us. Yes, the takedown on full year growth makes sense. More near term, can you just speak to the March quarter? How many -- how much of this is just short on deliveries in the here and now versus some increased conservatism in your planning assumptions? Duane, it's all delays in aircraft deliveries. We have been working with Airbus for some time on understanding the supply chain issues that they have in their business. And we've been notified recently of significant delays across this year that we were previously unaware of. What we have been seeing is delays of between 4 and 6 weeks in aircraft deliveries. We've now seen that extend out between, as we said in the release, between 1 and 5 months. So the change in capacity is really driven by those aircraft delivery delays. Well, in Q1, in particular, this is the first time we've had kind of this close in with this many aircraft be late, but we had full 4 lines out as a result. So it's pretty significant, even close to it, Duane. What we're seeing, Duane, is aircraft delays start to like extend it. So you're seeing today that were occurring months, 6 weeks, 2 months, now going to 3, 4 months. And so that's what you're seeing cascading across the year. So if you go all the way to the end of the year, given the profile of our delivery schedule, you see 9 aircraft actually dropping out of the fourth quarter and into the first quarter and a bit beyond the first quarter of next year. And so that's what you're seeing. Right now, we've taken, as Barry said, 4 lines, we expect it to be 4 aircrafts. And there was already one. So we're actually down 5 now end of this quarter, and it grows to 9 by the end of the year. Okay. That's helpful. And then just maybe a hypothetical, maybe more than hypothetical, on Spirit, slots and gates, if there was a package that became available, can you comment on your willingness to bid on that? Any thoughts on that conceptually? Barry, can you talk to, I guess, the resiliency of your network and your operation? I mean I know I hear you on the pilot issue that maybe that's not really one that's fair to apply to you guys. But last summer, you did have constraints across the network, whether it was like airport capacity or FAA, ATC capacity. So what are you doing to mitigate those challenges this year? And what gives you the confidence you can grow at the levels you think you are? Yes, so actually it wasn't the summer. It was actually in the spring, we saw some challenges, particularly in Florida. Some carriers got, I guess, a bigger run than we did. But what we did is we reoriented our flying on pairing, crew pairing actually cross Jacksonville Center. And so effectively, you don't have any aircraft or any crew that actually crosses Jacksonville more than twice. And so this helps mitigate if we ended up with 3 and 4-hour ground lay programs again, we can just trim the flying and [indiscernible] for ATC, but it doesn't disrupt the aircraft for the next several days, right? So you don't get any situations where these carriers that have airplanes that are kind of duties daily chain, multi-leg all across the United States that lead through all super cities, we don't -- we're not impacted by that. And so that's one of the reasons why I think you look at the storm, we did so much better, I think, recovering after the fact, even though we were much more impacted than most when you look at our geography. I don't know, Dan, do you want to talk about scheduled construction? Well, I was going to say one thing I'll say is, one thing that's changed since last spring and summer is we've increased the level of modularity. We've further tightened up in terms of -- with a higher percentage of crew just during the 1 day pairing, we've got on almost 4 are flying in 1 and 2-day pairings from a crew perspective. We've got more aircraft. We've got more aircraft based overnight in our biggest crew base. We've just simply -- we've simply created more resiliency with the [indiscernible] further increase in the modularity of the network, but it sets us in a good place going into the summer of 2023. I guess I appreciate the outlook as well for second half profitability, just like the earlier question. But Barry, what's the view, or Jimmy maybe, right now that you can't generate that profitability? Because you have got your cost down here recently, aircraft utilization is coming up. Is it really just the outlook for lower fuel prices, that's the difference? I mean, there is a relationship between fuel prices and revenue that we've seen over the course of the last year. And so, I mean, no, it's not just lower oil price. If you look in our guide today, we've given you the market price for oil for Q1. We've given you what the curve is for -- that we're seeing for oil prices for the year, and that's reflected in what we believe we can achieve throughout the year. What we've seen so far this year, particularly going actually towards the end of last year and going into the peak parts of this quarter, there is a real strength in demand coming through into the business. And that allied to $82 going to $85 in non-ticket plus your unit costs moving towards $0.06 plus the business in a really good position to improve profitability, which is really the objective that we're working towards. Specifically to your question, Brandon, about why not now, well, seasonally in Q1 is actually the worst for our network, the lowest random time. So the seasonality does come back. But also, your costs continue to sequentially go down. And so it’s just mechanical. I mean, as the revenue comes up seasonally and the costs continue to go down and we’ve also got further tailwinds coming in the ancillary that Daniel kind of mentioned, 82 going to 85 by year-end. Those things come together to put us back to pre-pandemic profitability. Maybe talk a little bit more about just the pilots in general and staffing. So some of the other airlines have talked about needing to be like 5%, have 5% more pilots to hit their like prior production levels. And you appear to be overstaffed right now, but I assume it has to do with delays and hopes of growth. But just long-term, do you think that there's a structural change in staffing and maybe employee productivity at Frontier? We don't completely understand that. We've heard that commentary, but we do not have more pilots per plane. We don't -- we have not seen a need for more pilots per plane. There is slightly higher pilot costs because we do have attrition that we've talked about in the past, we have a higher level of attrition causes, you'd have to train more. But if you look at like [indiscernible], for example, that's the main source. In fact, we see more efficiencies as Daniel kind of talked about the modularity network, we actually see more efficiencies come to this. So we're not sure what those businesses -- what other things are doing, but we don't understand why they would need a more positive plan. Okay, I'll take that. And then just on crew bases in general, you've opened up a lot, and I understand the idea around the modularity of your network and I get the benefits to the operational side of the business. But when a crew base is opened, why shouldn't we just turn around and assume that there's a -- there's an additional cost to Frontier, like a structurally higher cost, the fact that -- I mean, it is a much different stance than you had pre-pandemic. So just curious on how you think about crew bases and the impact to your overall profitability? Yes, so we spend a lot of time on this, and Daniel can spend hours with you explaining it. But as long as we have a minimum amount of sizing, in fact, today, we’re in Phoenix hosting the call, and we just opened a base here. And we’re already at the minimum scale that we need. So the only inefficiencies, if you will, that you get with a base are in reserves. And so as long as your reserve ratios don’t get too high as a result of your base coverages, it’s not a big deal. Sometimes what we have learned is depending upon the windows that you cover for your reserves, you could end up with percentages that don’t make sense, if the base gets too small. But we believe we’ve largely cracked the nut on this, and we are not opening bases that we don’t believe fit our efficiency on a ratio perspective. And then when we think about from a reliability perspective and resiliency, there’s just – there’s not a better way to operate. Barry, the -- going back to the outlook for pre-pandemic profitability per plane, what are the assumptions around seasonality there and utilization? Does the outlook assume any macro softening or is it seasonally in line plus or worse? Any color here on how you're thinking about demand as we move through the quarters and utilization? Yes, so from a utilization perspective, we look to be at 12 hours. We were actually at 11.5 in the fourth quarter. We've been operating plus that level now. So there's not much more to go in utilization. So utilization will be what it is. The big leverage that you get is the delivery of the 321neo, I mean, with 240 seats. It just simply delivers as a major CASM advantage. We actually do assume, as a result of that, that RASM is going down. I mean, we actually have assumed that those incremental seats will come at a marginal fare. So we expect that there will be a kind of ability to withstand any kind of weakness, if you will, in the economy by us further reducing our cost levels. And so-- but -- and we plan on a major 2009 type event, no, but we can withstand a medium to mild recession. And my follow-up, so November's outlook modestly above 6, I think it was to -- or yes, today's outlook, modestly above 6 to November is less than 6. I understand the slippage here. But if there are more delays, you called out the 4 to 6 weeks, has moved to 1 to 5 months. What are some of the levers that you could pull here because it sounds like an 11.5 or 12, there's not much more you can do on utilization to offset what could be perceived as upward pressure on unit cost should the additional tails slip? Well, let's just start. Our trajectory on unit cost is heading in a really good direction. What you're -- what's happening with the Airbus delays is a delay in that benefit of the 321neo coming into the fleet. And that's maybe a quarter. And so you're on a very strong trajectory on a unit cost benefit and efficiency benefit in the business. In order to mitigate the delays, I mean, we've certainly looked at infilling some capacity by extending leases or looking at distressed aircraft around the world to replace some of the capacity. What we believe is that this is not a single year event where the manufacturer has delays and supply chain issues and deliveries. We believe this is a multiyear event. And so we're looking to plan our business accordingly. And so we may look to infill some capacity from outside of the business probably from within the business by expanding some leases in order to manage the capacity profile of the business because the changes that we're seeing in deliveries create some lumpiness in capacity [indiscernible] the business, and we may choose to smooth that out. And just to clarify on the – what we thought versus November, I mean, we were looking at sub-6 and now we’re talking low 6 for the year, right? And we expect it to still be below 6 in the second half, even with the delays. Just for the first question, just a follow-up on fourth quarter, your cost came in much better than you had thought, even though you had these storms. So I was just curious what was driving that and just trying to gauge what level of conservatism might be there in your kind of nonfuel guide here for 2023? I mean, look, the big driving force in our business, as you know, is overcoming the fixed overhead exits and moving utilization to 11.5 hours for the full quarter as it has a big impact on unit cost metrics, if you measure CASM ex-fuel or something like that. And I mean, look, I mean, we are giving you what we know today in terms of our outlook on costs for the year. Where the business is very focused is ensuring that we have a structural cost advantage versus the industry that's sustainable. And so as we move towards the $0.06, that puts us in a very strong place versus the competition. I mean, if we come in at $0.06 or $0.061, I mean, it still puts us in a place overall on total cost less net interest somewhere in the mid-30s percent lower cost than the entire industry average. And I think Barry talked about it earlier, like we were over $70 a passenger, a lower cost than the industry average in the last quarter, and that's moving higher as your unit costs come down. So that's in a great place to grow the business in the short-term, in the medium-term. And that's something that we're very focused on achieving. What we're trying to do with you guys is educate you on how we get there. And in the fourth quarter, you're seeing a really good move towards $0.06. If you look sequentially across the year, utilization was lower, came up, unit cost came down, and we expect that to continue as we progress through this year. That's where we get our competitive edge. And just to clarify, we were $70 -- over $70 advantage for the full year of 2022. And by the fourth quarter, that has expanded to over $80 for the past year. So with this cost advantage, this is what gives us the confidence that the momentum is going to continue, and we'll be back to a pre-pandemic profit per plane in the second half. That makes sense. And then if I might, at the Investor Day, you talked about some of the moving from high touch to self-service and some of those things should drive some cost benefits as well, not as much as A321s. But I was curious on how the kind of the switch in call center and saw how some of those initiatives are being kind of accepted by customers? Yes, so look, I think contrary to maybe some of the news reports. So we’ve actually seen really good performance. In fact we were just reviewing it this morning. We’ve seen NPS go up dramatically compared to the call center. And the reality is, I mean, if you just think about it in your personal life, how often do you text versus how often do you call. And I think this is the way people want to interact. And as long – what we see is the biggest driver, can you solve their issue and do you do it promptly. And when I think when you compare to some of these other carriers that recently have had 10, 20, 30-minute waits to get a hold of an agent, that’s [indiscernible]. So look, customers like it, and it’s working well. So if I look in the fourth quarter, capacity is up about 15% versus 19% and CASM ex is up low 20s. If I look at Q1, capacity is now going to be up about 40% versus 2019, but CASM ex is still up low 20s. Why aren't we -- I guess my question is, why aren't we seeing better sort of unit cost leverage as capacity is really already ramping up pretty meaningfully? Well, Q1, you have a lower utilization quarter than is typical in our business. So you've got to see that progression throughout the year where utilization moves higher in the second, third, fourth quarters on those than Q1. So just purely comparing Q4 and Q1 was a challenge under unit metric. But we've made no -- we haven't hidden behind the fact that the 321 introduction to the fleet drives substantial efficiency into our business. The 321neo, just sort of to remind you, has 240 seats. Our fleet today is dominated by the 320neo with 186 seats. So your average seats per departure moved quite dramatically creating a lot of efficiency in the business. So the more deliveries of those, they operate in our business, more efficiency that comes into our area. So that's a large part of the efficiency and drive from where it is in Q4, $0.064 CASM ex fuel down to where our targets are greater. Sorry, Scott, and look, we like to look at total unit costs. And so one of the things that we've watched in our business as a metric is watching our comparison total cost versus the industry. And that includes that is CASM including fuel because we have a very fuel-efficient fleet. It's very important to how you price your tickets. The input cost of fuel is very important, plus also net interest. And so if you're looking at just purely our CASM ex-fuel and you're ignoring the ownership cost that a lot of the other airlines have in their business and also the investment that we've made in our business on fuel-efficient aircraft over the last 7 years and continue. Yes, that's a good point. Can you just talk about within your view of getting back to the margins you are at or the profitability you are at per plane, what -- how should we think about full year revenue growth or RASM? Just what's in the plan? We don’t guide at unit revenue. It’s obviously a function of what happens with oil prices across the year. We’ve given you a sense of where we see oil prices at the moment based on – I think it was January 30 [indiscernible] but we’re not guiding unit revenues across the year. I'm not showing any further question in the queue. I'd like to turn the call back over to the company for any closing remarks. I want to thank everybody for joining our call today. I especially want to thank the Phoenix Airport for hosting our call. And we look forward to talking again after the first quarter. That concludes our call. Thanks, everyone.

EarningCall_172

Good morning. And welcome to S&P Global’s Fourth Quarter and Full Year 2022 Earnings Conference Call. I’d like to inform you that this call is being recorded for broadcast. [Operator Instructions] I would now like to introduce Mr. Mark Grant, Senior Vice President of Investor Relations for S&P Global. Sir, you may begin. Good morning. And thank you for joining today’s S&P Global fourth quarter and full year 2022 earnings call. Presenting on today’s all are Doug Peterson, President and Chief Executive Officer; and Ewout Steenbergen, Executive Vice President and Chief Financial Officer. For Q&A portion of today’s call, we will also be joined by Adam Kansler, President of S&P Global Market Intelligence and Martina Cheung, President of S&P Global Ratings. We issued a press release with our results earlier today. If you need a copy of the release and financial schedules, they can be downloaded at investor.spglobal.com. The matters discussed in today's conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. A discussion of these risks and uncertainties can be found in our Forms 10-K, 10-Q and other periodic reports filed with the U.S. Securities and Exchange Commission. In today's earnings release and during the conference call, we're providing non-GAAP adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with US GAAP. I would also like to call your attention to a specific European regulation. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should contact Investor Relations to better understand the potential impact of this legislation on the investor and the company. We're aware that we have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to our media relations team whose contact information can be found in the press release. Thank you, Mark. Welcome to everyone joining today's earnings call. We're looking forward to a very exciting and innovative year at S&P Global. As we shared with you at Investor Day, we're accelerating the pace of innovation and taking advantage of all we have to drive profitable growth over the next three to five years. In 2022, we built on our incredible history at S&P Global to position the company to create significant value for our customers, our people and our shareholders in 2023. 2022 was a year of resilience, decisive action and discipline. As we look at our financial highlights, I want to remind you that the financial metrics that we'll be discussing today refer to non-GAAP adjusted metrics for the current period and for 2023 adjusted guidance. And non-GAAP pro forma adjusted metrics in the year ago period, unless explicitly called out as GAAP. Adjusted results also exclude the contribution from previously divested businesses in all periods. Adjusted revenue decreased 4% or 3% on a constant currency basis. As everyone on this call knows, we saw dramatic decreases in debt issuance, which drove the decline in our revenue and earnings. But what you would not be able to tell from the headline revenue growth rate is that our business has become far more diversified and resilient. While we saw a 26% decrease in our ratings revenue, the vast majority of that decrease was offset by a 6% growth in our other businesses. That growth came despite FX headwinds, and unstable macroeconomic environment and the suspension of our commercial operations in Russia. We also took decisive action to preserve margins in 2022. Despite significant inflation throughout the year, we were able to keep our adjusted expenses relatively flat year-over-year due to outperformance on our cost synergies and management actions around incentive compensation, discretionary spending and the timing and prioritization of strategic investments. Our teams have a lot to be proud of, and we've done a remarkable job setting the company up for a strong 2023. We introduced our initial guidance today, which includes 4% to 6% revenue growth and a 10% to 12% EPS growth. Importantly, we're not moving Engineering Solutions to discontinued operations, so both of these figures include the half year contribution we expect from Engineering Solutions in 2023, excluding the impact of Engineering Solutions, we would have expected revenue growth to be approximately 6% to 8%. Amongst the impactful accomplishments in 2022, we completed our merger with IHS Markit and took important steps to optimize both our operations and portfolio of businesses. We optimized our capital structure as well, lowering our average cost of debt at fixed rates, protecting our earnings from further interest rate volatility. We introduced a bold strategic vision at our Investor Day, Powering Global Markets, and outlined our key growth priorities for the next few years. We're looking forward to updating our investors on our progress against those initiatives as we move forward. We also continue to shape the secular transition from active to passive asset management, and just last month celebrated the 30th anniversary of the first index-based ETF, which was based on our S&P 500 Index. As we look to the strategic initiatives we had at the beginning of 2022, it's clear that we continue to make great strides. We outperform our original 2022 cost synergy targets by more than 20%, generating $276 million in cost synergies fully realized in 2022 compared to original target of $210 million to $240 million. We successfully integrated our major infrastructure software systems, including what our ERP vendor told us was the fastest integration ever for a company of our size. We continued to drive commercial momentum, generating nearly 7,000 synergy cross-sell referrals post-merger. We also made great progress with our strategic investments and our transformational initiative to optimize our technology spend. Lastly, we continued our relentless focus on making sure S&P Global remains a destination of choice for our people and candidates. Our Internal People Survey indicated 90% or more of our employees endorse our culture and our efforts in diversity. We continued to invest for long term growth in 2022. We made several small acquisitions to bolster and round out our offerings in private market solutions, as well as sustainability and energy transition. We also had several important new product launches and upgrades that will drive customer value and financial performance in 2023 and beyond. We took steps to optimize the portfolio of businesses at S&P Global. We made several merger related divestitures that were required by regulators, but we also decided to divest the Engineering Solutions Division and announced an agreement to sell the business to KKR. These decisions help position S&P Global in growth markets where we can leverage our strengths across the entire business. As always, we will continue to be disciplined stewards of the business and periodically review the portfolio of assets to determine the optimal structure at any given time. Shifting to our financial performance, the largest macro contributor to our 2022 results has been the sharp decrease in global debt issuance, which continued to deteriorate as we move through 2022. For the full year, we saw 28% decrease in global rated issuance or a 31% decrease when including the impact of leveraged loans. This is particularly noticeable in high yield issuance, which decreased 77% from the extraordinarily high levels we saw in 2021. The issuance environment certainly impacted our financials in 2022, but we were pleased with the execution from the teams across the company despite those challenges. As I mentioned previously, our aggregate financial results provide clear evidence of our commitment to disciplined execution. Excluding the ratings business, revenue growth would have been 6% in 2022 and adjusted operating margin would have expanded by approximately 200 basis points. Ewout will discuss the fourth quarter financials in a moment. Each of our divisions performed admirably in 2022. We saw positive revenue growth in four of our six divisions and constant currency growth in five of our six divisions. We believe the strength and discipline shown in 2022 sets us up for a return to positive overall revenue growth and margin expansion in 2023. We continue to deliver impressive results in Sustainable1. In 2022, we grew ESG and climate revenue by 50% year-over-year to more than $200 million. As we outlined at Investor Day and as you'll see in the appendix, we've updated our methodology beginning in 2023 to include all of our sustainability and energy transition products and we'll be disclosing sustainability and energy transition revenues rather than just ESG revenue going forward. Under the new methodology, we generated $247 million in 2022 and we expect growth of more than 30% from that base in 2023. We ended 2022 with ESG ETF AUM reaching $40 billion. That growth is particularly impressive when you consider it is the net impact of an 18% increase in AUM from net flows and a 14% reduction in AUM from price depreciation resulting in 4% net growth year-over-year. We continued to launch new indices based on climate or sustainability factors in 2022, including the new S&P/BMV Green, Social & Sustainable Target Duration Bond Index. We also launched new products in market Intelligence, commodity insights and mobility. Within ratings, we completed 133 sustainable financing opinions, 33 green evaluations and 102nd party opinions. At the core of our sustainability efforts are the corporate sustainability assessments. This remains a key differentiator versus our competitors as they enable us to collect an enormous amount of data directly from corporations around the world. For the methodology that ends in March 2023. We have already increased CSA survey participation to more than 2,900 companies, representing a 30% growth year-over-year. We expect more than 3,000 companies to participate by the end of March. The company also continued to advance its own industry leading practices in sustainability. We issued our 11th annual Sustainability Impact Report and fourth annual TCFD Report. We launched $1.25 billion in sustainability-linked notes and adopted the sustainability-linked bond framework. We ensured the long-term funding for the S&P Global Foundation via a onetime grant of $200 million, and our efforts continue to receive recognition from several leading third parties. I'd now like to shift the presentation to our outlook for 2023. The latest global refinancing study was issued earlier this month. The total amount of global debt maturing in this study is $11.1 trillion over the next five years. This is actually up 3% from the study a year ago and up 7% from last year's study when looking out over the full nine years. Importantly, this shows us how the maturities have evolved over the next few years. While 2023 expected maturities have unsurprisingly decreased over the course of 2022, if we look at maturities in the years 2025 to 2027, we see a 12% increase from last year's study. That increase jumps to 23% looking at maturities in 2027 to 2029. The bottom line is that there is a very healthy pipeline of debt maturities coming over the next several years. Now, looking at total rated debt outstanding, we continue to see a compound growth rate of 5% and a continued year-over-year increase in total debt outstanding on a constant currency basis. Historically, outstanding debt usually gets refinanced. And we don't see any reason why this decades long trend would change. After marked declines in issuance in 2022, our ratings research group anticipates that issuance will return to positive growth in 2023. The forecast calls for issuance gains of 8.5% for non-financials, 3% for financial services, 5% for US Public finance, and a decrease in structured finance of 7%. Please note that this is an issuance forecast, not a revenue forecast, and it does not include leveraged loans. Our financial results and guidance are more closely tied to build issuance, which can differ materially from market issuance as we have described in recent quarters. For 2023, we expect build Issuance to be up approximately 2% to 6% for the full year. Now let's move to the latest view from our economists. They're forecasting global GDP growth of 2.2% in 2023. While GDP growth is expected to be positive, we also expect it to be a story of two halves. Right now, we're assuming a mild recession in the first half followed by stabilization in the second half. Each year, we carefully assess the external factors facing the company. This slide depicts those that we think are most important going into 2023. There are a number of potential positive impacts this year and potential headwinds, many of which we've outlined on this slide. There are also a number of factors that could impact our business positively or negatively or different ways in different parts of the business. Volatility in the equities and commodities markets is a great example, as it can be a headwind to certain parts of our business while serving as a tailwind to global trading services and commodity insights and exchange traded derivatives in our indices business. While we certainly aren't immune to the macroeconomic environment, we're confident that investing for growth in these times of uncertainty and through the cycle is the right way to create long term shareholder value. While others may give in to the temptation to hunker down, we want to make sure that we're aggressively taking the steps to position S&P Global for years of profitable growth. That's why I'm so excited to finish my prepared remarks on this slide. We're optimizing our technology spend for growth, and we're leveraging the most powerful platforms available to make sure our product development teams can rapidly bring new features and products to market. We recently announced a long-term strategic partnership with Amazon AWS to further technology vision we laid out for you at Investor Day. This agreement allows us to consolidate contracts and drive long-term savings through a collaborative relationship with one of the world's most innovative technology companies. Kensho continues to be a key contributor to the culture of innovation within S&P Global. We have a bold vision for how to leverage the newest breakthroughs in machine learning and artificial intelligence and not only make those technical technologies available to our customers, but truly embed them throughout the organization to drive growth and efficiency. I visited Kensho's office this last fall and was impressed to see the work that Kensho's R&D team had been doing with respect to large language models and their transformative potential. Since then Kensho has made significant progress on models that leverage unique data across the enterprise, with the potential to power innovation using AI and machine learning to accelerate product and technology agendas across all of S& Global. This is very exciting. We'll also continue to make strategic organic investments in areas like private markets and sustainability and energy transition, and we'll selectively pursue opportunistic acquisitions that enhance our growth and innovation. As we begin reporting our vitality revenue this year, we will continue our long practice of transparency and accountability. It is truly an exciting time to be at S&P Global. And now I'd like to turn the call over to Ewout Steenbergen, who is going to provide additional insights into our financial performance and outlook. Ewout? Thank you, Doug. The adjusted financial metrics that we will be discussing today refer to non-GAAP adjusted metrics for the current period and for our 2023 adjusted guidance and non-GAAP pro forma adjusted metrics in the year ago period, unless explicitly called out as GAAP. Adjusted results also exclude the contribution from previously divested businesses in all periods. Let me start with our fourth quarter financial results. Adjusted revenue decreased 6% to $2.9 billion, largely driven by a challenging issuance environment and macroeconomic conditions. Excluding ratings, fourth quarter revenue would have increased 4% year-over-year. Adjusted corporate and allocated expenses improved from a year ago, driven by a combination of synergies and reduced incentive costs. Adjusted expenses were roughly flat for the full year, demonstrating strong expense discipline across the company. For the fourth quarter, expenses decreased to 4% compared to prior year. Adjusted operating profit margin contracted by 160 basis points to 41.2%, primarily driven by revenue declines in ratings. Excluding ratings, adjusted margins would have improved more than 280 basis points year-over-year. Our adjusted net interest expense increased 9%, driven by higher total debt levels, partially offset by lower average cost of debt. Adjusted effective tax rate was up modestly, but right around the midpoint of the guidance range we provided for the full year. We exclude the impact of certain items from our adjusted diluted EPS number. Among those items in the fourth quarter were approximately $175 million in merger related expenses, the details of which can be found in the appendix. We generated adjusted free cash flow, excluding certain items of $1.4 billion in the fourth quarter. In 2022, we completed our $12 billion accelerated share repurchase program with final share delivery executed earlier this week. Turning to expenses, as I noted, we managed to keep adjusted expenses roughly flat for 2022, despite a high inflationary environment. I'm pleased to report we acted decisively and delivered more than $400 million in expense reductions for the full year. Actions taken include pull forward and synergies, a reduction in incentive accruals, adjustments to the timing of certain investments, selective hiring and limiting consulting spend in some areas. Looking more closely at the largest contributor to those expense savings, I would like to provide an update on our synergy progress specifically. In 2022, we have achieved $276 million in cumulative cost synergies, and our annualized run rate exiting the fourth quarter was $422 million representing 70% of target after only ten months. We continue to make progress on our revenue synergies. With $19 million in cumulative synergies achieved and an annualized run rate of $34 million, the cumulative integration and cost to achieve synergies through the end of the fourth quarter is $807 million. For 2023, we expect to achieve cost synergies and revenue synergies of approximately $510 million and $60 million respectively. We originally targeted 80% of cost synergies in 2023, but with the outperformance in 2022, we are now targeting 85% of the $600 million target. We also originally expected 50% of our revenue synergies in 2024, but with the divestiture of engineering solutions, we now expect approximately 45%, though the full target of $350 million is unchanged. Now let's turn to the division results. Market Intelligence revenue increased 3%, with strong growth in data and advisory solutions, offset by slower growth in desktop and declines in enterprise solutions. Adjusted expenses decreased 2% this quarter, driven by continued realization of cost synergies, lower incentive compensation and real estate spend. Segment operating profit increased 16% and the segment operating profit margin increased 360 basis points to 31.4%, on a trading 12-month basis adjusted segment operating profit margin was 31.8%. Looking across market intelligence, there was growth in most categories and on a pro forma basis, desktop revenue grew 3%, data and advisory solutions revenue grew 7%, enterprise solutions revenue was down 4% and credit and risk solutions revenue grew 4%. For desktop, we continue to see strong demand for our subscription offerings like Capital IQ. Overall, desktop growth was below our expectations though, due primarily to the impact of some onetime sales from products reported in our desktop line. For enterprise solutions, softness in our capital markets volume-based products continued to weigh in on the business line's performance as revenue decreased 4%. This was partially offset by strength in private markets software solutions. Now turning to ratings. Ratings continued to face difficult market conditions this quarter as issuance volumes remained muted with revenue decreasing 29% year-over-year. Transaction revenue saw slight improvement sequentially, but decreased 51% compared to the prior year on continued softness in Issuance. Non-transaction revenue decreased 6% on a reported basis and 3% on a constant currency basis, primarily due to lower initial issuer credit ratings and rating evaluation services, partially offset by increases in CRISIL. As a reminder, ICR and RES revenue are historically correlated with the relative strength of the Issuance environment and M&A activity, respectively, and the declines we are seeing here are purely indicative of those market conditions. In the fourth quarter, surveillance and frequent issuer fees increased year-over-year on a constant currency basis. Adjusted expenses decreased 13%, primarily driven by disciplined expense management and lower incentive expenses partially offset by increased salary expense. This resulted in a 40% decrease in segment operating profit and a 910-basis point decrease in segment operating profit margin to 48%. On a trading 12-month basis, adjusted segment operating profit margin was 55.9%. Now, looking at ratings revenue by its end markets. The largest contributor was the well documented decline in Issuance, partially offset by 6% growth in CRISIL and other revenue. And now turning to Commodity Insights, revenue increased 4% driven by solid performance across all business lines. However, debt growth was impacted by a $13 million headwind due to the Russia- Ukraine conflict and a $4 million commercial settlement in the fourth quarter of 2021. Excluding the impact of Russia-Ukraine in this commercial settlement, Commodity Insights would have grown approximately 8% year-over-year in the fourth quarter. It's important to note we suspended commercial operations in Russia in March of 2022. Therefore, the first quarter of 2023 is the loss remaining period that we will see a material impact in the year-over-year growth rates. Adjusted expenses were roughly flat for the quarter, primarily due to higher compensation, an increase in T&E expense and bad debt provision, partially offset by merger related synergies, lower consulting spends and advertising and promotion costs. Segment operating profit increased 10% and the segment operating profit margin increased 230 basis points to 44.6%. The trading 12-month adjusted segment operating profit margin was 44.3%. Looking across the Commodity Insights business categories, price assessments grew 5% compared to prior year, driven by continued commercial momentum and strong subscription growth for market data offerings, particularly in gas and power and liquefied natural gas. Energy and resources data and insights grew 4% in the quarter, driven by continued strength in gas, power and renewables. Advisory and transactional services increased 3% in the quarter as we saw higher demand from energy transition advisory solutions, partially offset by revenues generated from a 2021 event that wasn't repeated in the fourth quarter of 2022. Moving to Upstream, I'm pleased to report the business line grew 4% in the fourth quarter, while upstream ACV has had good momentum ex-Russia, the revenue growth this quarter was primarily driven by upfront revenue recognition of certain software products that are not recurring. We expect upstream growth in the low single digit range for 2023. In our Mobility division, revenue increased 9% year-over-year, driven primarily by strong and broad-based performance across dealer, manufacturer and financials. Adjusted expenses increased 15% in the fourth quarter, driven by increases in headcount versus a year ago period. Timing of advertising spend and cloud expenses. We expect expense growth to moderate in 2023. This resulted in a 2% decrease in adjusted operating profit and 380 basis points margin compression year-over-year. On a trading 12-month basis, the adjusted segment operating profit margin was 39%. Dealer revenue increased 9% year-over-year driven by strong demand for CARFAX subscription products. Manufacturing grew 8% year-over-year driven by strength in Polk Automotive Solutions and the conclusion of several major recall deals. Financials and other increased 10%, primarily driven by continued strength in our insurance underwriting volumes and new business. Turning to S&P Dow Jones Indices, revenue increased 4% year-over-year as growth in exchange rated derivatives offset declines in asset-linked fees revenue. During the quarter, adjusted expenses increased 8% as there was an uptick in one time outside services spend and continued strategic investments partially offset by decreases in compensation and other discretionary areas. Segment operating profit increased 2% and the segment operating profit margin decreased 140 basis points to 62.2%. On the trading 12-month basis, the adjusted segment operating profit margin was 68.4%. Asset-linked fees were down 2%, primarily driven by lower AUM in ETFs. Exchange rated derivatives revenue increased 34% on increased trading volumes across key contracts, including a more than 70% increase in S&P 500 Index options volume. Data and custom subscriptions increased 6%, driven by new business activities and price realization. Over the past year, market depreciation totaled $506 billion, ETF AUM net inflows were $157 billion, and this resulted in quarter ending ETF AUM of $2.6 trillion, which is a 12% decrease compared to one year ago. Our average ETF AUM decreased 8% year-over-year. Engineering Solutions revenue declined 4% in the quarter, driven primarily by the negative impact of the timing of the Boiler Pressure Vessel Coat, or BPVC, which was last released in August of 2021. Adjusted expenses increased 5% due to planned investment spend, offset by favorable FX. Before moving to guidance, I wanted to highlight some of the key drivers of our expected 2023 results and how these tie-ins with the core messages we delivered at our Investor Day. S&P Global is all about growth. 2023 will be a year of growth across the company, driven by customer growth, product enhancements, revenue synergies and strategic initiatives. We'll continue to invest in our people and you will see the annual reset of our incentive compensation targets. We'll also continue to invest in technology as we drive innovation and position the company for accelerating growth in order to help investors see and assess the positive impact of these investments, we'll begin disclosing a few new metrics with our first quarter 2023 results, including our vitality revenue, which is the revenue generated by innovation, either new or enhanced products from across the organization. We'll also disclose the revenue generated from products in our two key strategic investment areas private markets, as well as sustainability and energy transition. In addition to these new disclosures, we'll begin a regular cadence of inter quarter disclosures to help investors measure performance of market observable products. We'll begin disclosing ETD volumes and the year-over-year growth rate of build issuance on a monthly basis in area starting later this month when we will disclose the January 12, 2023 data. In addition to the monthly disclosures I just outlined we will also disclose build issuance volumes on a quarterly basis broken out between investment grade and high yield. We know that in a volatile and potentially uncertain market, transparency and accountability are more important than ever. And S&P Global maintains its commitment to best-in-class disclosure and reporting for our shareholders. Now moving to guidance, as noted in our press release, due to the pending divestiture of Engineering Solutions we will not be providing GAAP guidance at this time, and this slide depicts our initial 2023 adjusted guidance. For revenue, we expect 4% to 6% growth, reflecting our continued belief of a mild recession in the first half of 2023 and then some economic strengthening in the back half of the year. Excluding the impact of the divestiture of Engineering Solutions, we expect revenue growth to be between 6% to 8%. We expect corporate and allocated expense of $140 million to $150 million. The year-over-year growth is driven in part by a reset of incentive compensation and the expectation of approximately $10 million to $20 million in stranded costs from Engineering Solutions post divestiture. We expect to expand operating margin to the range of 45.5% to 46.5%. Diluted EPS, which excludes deal related amortization of $12.35 to $12.55 which is an 11% year-over-year increase from the midpoint. Adjusted free cash flow, excluding certain items is expected to be approximately $4.3 billion to $4.4 billion. We continue to target a return of at least 85% of adjusted free cash flow to shareholders through dividends and buybacks. We also to plan to utilize the net after tax proceeds from the Engineering Solutions divestiture for share repurchases. As such, our board has authorized a $3.3 billion share buyback for 2023, which we plan to begin with a $500 million ASR, which we expect to launch in the coming weeks. Lastly, we expect a quarterly dividend of $0.90 share. The following slide illustrates our guidance by division beginning with Market Intelligence, we expect growth in the 6.5% to 8.5% range and margins between 34% and 35%. As we mentioned at our Investor Day, this is skilled business that's well positioned in growing markets such as private markets and supply chain, and we're confident in our ability to accelerate growth as we lap the 2022 headwinds from volume driven businesses and FX. In Ratings, we expect revenue to grow between 4% and 6%, with growth to be driven by volume and price and continued growth in non-transaction revenue. Our assumption is for build issuance to be up between 2% and 6% in 2023. Margins for Ratings are expected to be between 56% and 57%. In Commodity Insights, we expect revenue growth in the 6.5% to 8.5% range and margin between 46% and 47%. We expect continued strength in commodity markets generally and look forward to lapping the Russia impact after the first quarter. Similar to our Market Intelligence division, we expect Commodity Insights to see expense benefit from further realization of synergies in 2023. In Mobility, we expect revenue to grow between 6.5% and 8.5% and margins between 39% and 40%, driven by some normalization of auto supply chain, price realization, new business and new products adoption. Importantly, we expect expense growth to moderate quickly and substantially from the outsized increase in the fourth quarter, we expect expense growth to be below revenue growth in 2023. In indices, we expect revenue to be flat to up 2%, with margins of 66% to 67%. As we indicated at our Investor Day, revenue from asset-linked fees lags movements in underlying asset prices. So the 2022 decline in the S&P 500 will negatively impact this year's revenue, we will also lap the very strong comps in exchange traded derivatives. Before we turn it over for Q&A, I would like to take a moment to thank our people at S&P Global. The highlight of 2022 was the closing of our merger with IHS Markit. But what made it a highlight was the incredible dedication and execution demonstrated by our people. We saw strong, decisive action in the speed of execution of our cost synergy plan. We delivered critical system integration along a very fast timeline, rationalized our real estate footprint, and at the same time continued our strategic investments. 2022 truly was a year of transformation. But it was also a year of foundation. We intend to build on that foundation and drive strong growth in 2023 and for the years to come. And with that, we'll have Adam and Martina join us and turn the call back over to Mark for your questions. Hi, thanks. Good morning. You expect 2% to 6% growth in build issuance in 2023. Can you bridge your expectations for build issuance with guidance for ratings revenue growth of 4% to 6%, including how you expect pricing and issuance mix to impact revenue? Good morning, George. This is Ewout. Let me give you a couple of those components. As you know, we are always breaking out ratings revenue in two categories transactional and non-transactional. What you see in the transactional category is a combination of price and volume. And on the volume side, we have stated that 2% to 6% growth for build issuance. And then if you think about non-transaction, we continue to see, expected to see growth in the annual fees. Also, continued positive growth in Ratings is to be expected. And then ICR and RES, that's a bit uncertain because that depends very much on the overall economic environment. So those are some of the components that will add up to that range of 4% to 6% revenue expectation for Ratings in 2023. So I would say overall quite constructive after 2022. Got it. Market intelligence revenue growth decelerated in the quarter due to slower growth in desktop and declines in enterprise solutions. Can you elaborate on trends you're seeing in desktop and enterprise and why you believe performance may improve in 2023? George, this is Doug. Before I hand it over to Adam, I want to welcome Adam and Martina to the call today. As you met our presidents at the Investor Day on December 1, we're pleased to ask a couple of them to join us on each of the earnings call. And today it's going to be Adam and Martina. But Adam, over to you. Thanks, George. We're very confident in our desktop business, but our desktop revenue in this quarter didn't perform how we expected. Let me give you a little bit of color on that. Financial services industry obviously under pressure. You see that belt tightening, now some of the largest sell side banks, and they're taking a cautious approach right now, and we're not immune to that. That said, our core desktop offering continued to grow extremely well. Within that desktop revenue line, you have certain products that are non-recurring in nature. Consulting and advisory engagements tied to our desktop offering. These are the products that saw that impact in Q4. As we look out to 2023, we remain confident in our desktop growth, and we're excited about our forward competitive position. We saw active user growth up 9% this year. This is great growth in a challenging year. An important driver for us as we renew and expand our relationships with our customers in 2023. We're delivering significant upgrades in the offering. Speeds increased dramatically. New features being released. You saw we announced our ECR data live on our desktop in 2023. Fixed income and loan capabilities coming. So while Q4 not quite the quarter we expected, we're very confident and excited about that growth forward. I'll just spend two seconds on enterprise solutions. I know you asked about that as well. Understand that revenue line as really two separate components. Software solutions our customers use for workflow compliance and portfolio monitoring. And a section for industry platforms that are really directly impacted by capital markets activity and volumes. That first group performed really well this year, and we expect that to continue to perform really well into 2023. A lot of those are double digit growth businesses. The second bucket, the industry platform, is really impacted by significant drops in capital markets activity that saw a negative double-digit impact in the current year. When we look forward into 2023, we expect that negative impact to moderate as we lap those comparables and as markets stabilize. So we do have a very positive outlook for enterprise solutions as we go forward into ‘23. Yes, hi. This is Alex Hess for Andrew Steinerman. Maybe just start with the 2024 revenue synergy target that was lowered modestly. And I believe it was mentioned that principally reflects engineering solutions. But with the focus of Investor Day having been on innovation, can you maybe update us on where 2022's vitality index came in, how promoter score is tracking, and sort Good morning, Alex. Thanks for being on the call. You ask a couple of questions, so let me walk through each of those. 2024 revenue synergies are slightly tuned down due to the divestiture of Engineering Solutions. We had assumed a number of revenue synergies, both in Engineering Solutions as well as in some of our other segments in the collaboration with Engineering Solutions, for example, Commodity Insights shares a number of customers together with Engineering Solutions. But we are not concerned about that at all because we are finding so many new revenue synergies across the company that we are still firmly committed to the $350 million in total over the five-year period. You're also asking about, in general, the commercial momentum within the company. We're actually really happy what we are seeing. There is a lot of innovation, a lot of new product development, lot of really very strong customer interactions around all of that. You're seeing that we hit our revenue target for ESG sustainability for 2022. And with respect to vitality, what we told you was that we have a target to get vitality over 10% over the next few years. I'm actually very happy to report that we already got there in 2022. So our vitality was just over 10% last year as another indication of the level speed of innovation that we're increasing within the company. Great. Thank you so much. And then maybe to turn to your build issuance assumptions, can you maybe walk us through the degree to which that is weighted to the back half of 2023 versus maybe facing some steeper comparisons in January and the front half of this year? Thanks for the question, Alex. This is Martina. We consistent with our overall view for 2023, both for macroeconomic as well as market Issuance not feeding into our build Issuance. We would see the chances for a mild recession in the first half with some recovery in the second half. And so you could expect to see a little bit more softness in Issuance in the first half followed by some recovery in the second half. Thank you so much. I wanted to ask about multi asset class indices. I know it's a really meaningful opportunity and you're investing a lot there. And it seems like the market opportunity is really massive. You have leading brands within index products. And so my question is right now, do clients think that there's a need for multi asset class indices or will it be a matter of convincing them that it's better than having a combination of separate equity and fixed income indices? Like a hybrid, like, is being used now. Just what makes multi asset class indices better than just weighting equity and fixed income indices? Thanks. Yes. Thanks, Toni. As you know, the basis of the index business that we have is about transparency. It's independence. It's the ability for a client to understand exactly what's in the portfolio at any point in time. Where we're especially seeing multi asset class demand is in the insurance industry. The insurance industry, which has many types of products, is looking to multi asset class. They use it for annuities, they use it for wrappers. And we're also seeing that bank structured product desks are also looking at multi asset classes. So we're seeing a lot of growth in this. You asked the question about what is the difference? The difference is that you can put together a single product which meets the needs of a client. And we're seeing that this is right now very high demand coming from those two industries. As ETFs are built from the multi asset classes, then you start getting trading around them. So we see the entire ecosystem starting to grow. And it's also part of the trend when we see active to passive anyway. So I think it's very important you ask the question. It's one of our growth areas and across all of the index business. This is one of that we're most excited about, finally, because we have within S&P Global now one of the leading franchises of Fixed Income with IBOX, CDX and iTraxx, we can actually produce these products on our own all-in house. Terrific. Then as a follow up, I wanted to ask about Commodity Insights growth. I know long term sort of thinking about 8% at the midpoint. And when I look back at sort of legacy platin and resource within IHS, I guess plat wasn't really there, resources on its own wasn't there in sort of a normal market. Is it the sustainability part that's really going to drive you to that higher level of growth or I guess what's the bridge to get from sort of like normal mid-single digit level up to the eight? Thanks. Toni, if you think about the overall market dynamics in the commodity markets, we think that currently those markets are very constructive for our customers and that is going to be helpful also for the growth of the business over the next few years. Well, first, one point to highlight is that in 2022 we saw some headwinds from Russia, from the Russia-Ukraine conflict and the fact that we stopped our commercial relationship with Russian customers. So obviously that headwind is going away going forward. Secondly, what we are seeing is that our customers are both focused on traditional energy resources and new energy resources. So we're benefiting from both trends at the same time where there is of course a lot of activity going on with respect to the current market prices in terms of exploration and additional capital expenditures that we're seeing. But our customers at the same time are also focused on energy transition and needs help from us. So we are providing data, insight, research, advisory, all of that around energy transition at the same time. So we believe this business has a lot of secular tailwinds over the next few years. What we told you is that at Investor Day that we expect this business to grow into 7% to 9% range in 2025 and 2026. And we think absolutely that is possible. We are very committed to hitting that number. Hey, good morning, everyone. Maybe you can touch on the margin outlook a little bit, but particularly interested in the quarterly seasonality or cadence. I know in the past there's been some surprises here and there in some of the segments. So maybe Ewout you can help us between synergies coming in and maybe typical seasonality, what would you call out in particular as it relates to maybe the seasonality, we saw in 2022? I understand ratings is probably going to be driven a lot by Issuance, but maybe in the other segments. Anything to call out? Alex, a couple of items to think about, first in terms of seasonality, realize that we are facing still high comps for the first quarter because the economy started to go more south from March of last year, as well as the impact of the Russia-Ukraine conflict also started about in March. So first quarter comps are still a bit high. The second item to think about here is that we are now expecting, as we also said during the Investor Day, a mild recession in the first half of the year and then some economic strengthening in the back half of the year. And the third element that I can say is you know that we are running a very tight ship with respect to expenses. So we are definitely starting this year, given the economic uncertainty in a very careful way. And then we need to time this right because the most important thing is that we're going to benefit once the markets start to turn when the GDP is going up, that we're starting to benefit from a growth perspective. We have a lot of growth investments in our plan for this year, as you know. So we have to time it right that we're going to make those investments at the right moment so that we're going to be a large beneficiary once the markets start to swing up again. So those are a couple of the elements you should think about in terms of timing for this year. Okay, fair enough. And then maybe just a follow up to the market intelligence question to Adam earlier. Maybe you can be a little bit more specific what you expect in the more capital market sensitive areas. I know there were some clearly some headwinds that you discussed earlier. Do you expect those businesses to be kind of like flattish or do you expect capital markets activity to actually recover decently? So maybe you can just talk about that and if you can tie that in with maybe the selling environment a little bit more of what you're seeing right now, that would be helpful as well. Okay. Thanks, Alex. In the very first part of the year, you still have pretty significant year-on-year comparables because markets were still strong in the very early parts of 2022. As we come through 2023, we do see some resilience in the early part of this year, but we do see a lot of cautiousness still in markets, and you see aggregate activity levels as well as we do. As we get towards the latter part of the year, your year-on-year comparison starts to flatten out quite significantly. And for us internally, thinking about out what we expect in the year, we budgeted modest increase in total activity across capital markets platforms. We'll obviously see how the year develops, but we think that's the right call as we sit here today. Thanks so much. I wanted to dig a little bit further into your outlook for this year. You've talked about expecting a mild recession in the first half and recovery in the second half. I know it's early, but we're about six weeks into the new year, and if anything, economic growth seems to be better than expected. If that's the case, then we either avoid a recession or push it off a little bit. Where could we see the upside in your forecast? Jeff, the forecast, the guidance we're giving is middle of the road. It's management's best estimates. This is our best expectation for the markets and for the full year at this point in time. I can give you a couple of underlying elements in terms of assumptions that have gone into our plan. So, for example, with our market sensitive businesses, think about the index business. The assumption is flat equity markets this year for the full year. You could say January looks a bit better, and February so far as well. But we're not changing our plan on a month-to-month basis. So on average we're expecting markets to be flat. That is the assumption that have gone into the index outlook, as well as 20% declines in ETD volumes coming from elevated levels last year, as well as flows to be more or less in line with what we have seen in previous years. And then with respect to the other market sensitive businesses, we already gave you some of the assumptions for ratings, so that is has gone into the plan. We think this is our best estimate at this point in time, given everything we know about the company and the markets. Okay, I appreciate the color. Let me switch gears and focus on AI. Doug, I appreciate you addressing this issue. Obviously, it's a hot issue in the markets today. You guys seem to be ahead of the game with your purchase of Kensho a number of years ago. Where have you gotten the most traction there, and what should we look for going forward? Well, thank you, Jeff. We're very pleased by the investment we made in Kensho, in addition to investments we've made across the entire organization in decision sciences and AI and machine learning. I recently spent some time with Kensho in Cambridge, and they were able to show me some of the R&D they're doing on large language models, which is something that's in the press every day right now. We're seeing that for the financial markets, we've been able to harness the data and the language that we already have inside of the company to develop some very interesting products. But since Ewout oversees Kensho, I think I should hand it over to him to finish the answer. Jeff, let me first give you a number of data points in terms of what Kensho is exactly doing today for the organization. And it's actually really mind blowing if you hear these numbers. So a product called Kensho link has saved over 2-million-hour ingesting data sets, strategic data sets, expanding data sets for our customers. Also, link has at this moment achieved 1 million unstructured private market, private entity data into our database, into our platforms, and connected to the market intelligence ID numbers of those entities. There are two other products called EXTRACT and NERD that have enriched 73 million documents on the Cap IQ Pro platform. It has ingested $10.5 million investment research reports on the Cap IQ Pro platform. And Scribe, which is our language speech to text model, is saving 250,000 hours of men work per year for transcripts. Annual savings of that are approximately $9 million. And the list can go on. But those are some data points. Sometimes it's not really understood what Kensho is exactly doing, but it's really impressive. And I hope you agree with me when you hear those numbers. But now shifting to the future of Kensho, because you are right. Kensho's really sweet spot is natural language processing. And everything that we're reading today about large language models is exactly in that sweet spot. So Kensho is today already developing a financial language model called FinLM, which is trained on the S&P Global data assets. It's very expensive to develop large language models. The cost of the compute is very high. But if you have stronger data sets, higher quality data sets, actually that's a differentiating factor. So we're avoiding very significant compute time and costs, so to say. Also, Kensho is developing something new. That's the Kensho Solver which is the AI solution to answer the most complex financial number questions. You also can read about large language models actually not being so strong in math. And we are working on a solution in this area as well. So if you just add it all up, I think what Kensho can be doing for the company and where it's working on, it's very impressive. And we're very pleased that we are so far ahead in acquiring this company already five years ago. Great. Good morning. My first question let's focus a little bit, if we could, on the ratings outlook you have for build issuance this year. Curious if you could give us a little further thought on your outlook for this year for high yield and for bank loans. Maybe throw in CLOs if you would as well. Hi, Craig. Yes, it's Martina here. Thanks for the question. So our outlook for this year is overall up 2.5%. The underlying factors, everything Doug had highlighted in his presentation, but 8.5% on corporates, 3% on FS US Public finance around 5%. And we're projecting a decline in structured finance of about 7%. We don't break out high yield and bank loans specifically, Craig. But what I can say is as you all know, high yield in 2022 was a really low year. And so we see growth in the high yield market this year. I think on the bank loans and CLOs, maybe what I can just touch on is the expectation for the research team underpinning that 7% decline in structured finance does reflect some concern around the pipeline for CLOs which we characterize or capture in the Structured Finance Act. Okay, thank you. And my follow up. When you think about pricing throughout the portfolio, where should we expect pricing that might be higher this year than normal, maybe more normalized 3% to 4% price. What areas would you highlight the price might be coming ahead of that. Thank you. Craig, in general terms, we always start to think first about what we do for the customer, the value we generate. The good news is that most of our products are must have products with a very high contribution to our customers. And obviously, that is the first element we take into consideration when we start to think about pricing. Pricing obviously needs to reflect also our cost price. Cost price is going up given the higher inflationary environment. So we believe we have across the board, depending on facts and circumstances, customer relationships, depending on certain products in one area or another area. But in general, we have an opportunity to pass on higher price increases given the higher inflationary environment. Yes. Hi, good morning. So my first question is I want to take advantage of Martina being on the call. Martina, it seems like the high yield market has really outperformed expectations so far this year. It's only been a few weeks, but I think just today we have a new deal announced for [inaudible], which is high yield and I think has been surprising. So give us your view on has this been surprising for you and how do you expect sort of the high yield market to evolve through the course of this year? Yes, thanks so much for the question. Look, I mean, as I mentioned at the last point, ‘22 was just a really low base from which to compare so we absolutely do expect to see growth and high yield as it relates to January and this week, it's really too early to call. We still have quite a few puts and takes on this in terms of the macro variables. But overall, I would guide to what we've been saying around our expectations first half, second half, how the macro factors play into our overall issuance expectation and how that plays into our build issuance trends. Got it. Thank you. And then secondly, a bigger picture question around the revenue synergies. Question around revenue synergies. You've talked about an $85 million run rate for 2023. Give us some additional color on again, sort of where you've seen these revenue synergies take place, where you have the best result, and then how do we bridge sort of what's the next step to get to that at $350 million loan term. Faiza, let me start with a general answer, and then I hand it over to Adam for some additional color in market intelligence. So in general, what we are seeing is very good activity from a cross-sell perspective. We're speaking about 6,700 referrals or leads that have already been generated, both intra deficient and inter-deficient, with very positive conversion levels across the company. So what we're seeing in general is that customers are really happy to talk to us about what more we can bring to them, how we can add more value. The next phase is, of course, to start to focus on new product development. So that will be the next wave of revenue synergies. But we feel we're definitely well on track ahead of the timing and the planning that we had originally. And I handed over to Adam for some additional color. Thanks. It's a great question because this is probably the most exciting part of what happens in a merger and bringing together the set of capabilities that we now have. In 2022, this was mostly about cross-sell, selling our products to expanded customer bases that gave us a good early start. And in this first year, we were able to perform on that type of synergy realization. As we move into 2023, as Ewout described, it really becomes about building new products that we're able to now deliver because of a combined set of capabilities. Already in 2023, I think five of our combined product capabilities are already generating revenue. We have over 20 in the pipeline, and this is just in market intelligence alone. These are things like building our sustainability data and capabilities into our workflow solutions, expanding the capacity and capabilities of our desktop with fixed income and loans information, bringing together workflow solutions, and incorporating much larger data sets for customers to think about private markets customer who also wants to look at public company comparables for basic financial analysis. Those types of combined product offerings are what give us a lot of confidence in our total revenue synergy targets over $300 million as we get out into later years. And as I mentioned, the most exciting part of what we're doing. Hey, good morning. Thank you for taking my questions. Could you please add more color on your partnership with AWS, you announced yesterday? And I think it's also somehow related to how you will deploy Kensho in this partnership. But how should we think about the incremental revenue and expense control opportunity here would be great. Thanks. Owen, this is a relationship that we've had for many years. And when we put together the two companies and had our merger, we realized that both of us had already very strong relationships with AWS. We had been on a cloud switch for many years. A few years ago, before the pandemic, I was visiting an acre of a data site where we had hundreds and hundreds of servers. And I said, why do we have all these servers? Should we be in the business of having server farms? And we started a transition in moving to AWS. So over the years, we've developed an incredible partnership with them. And you saw yesterday the culmination of the merger where we've come together to combine contracts to come up with a new approach to how we're going to run our day-to-day operations. But most exciting is the opportunities as this brings for strategic cooperation, for developing new products, for being able to serve customers with completely new opportunities. When we look at our data sets that we have, some of the data that AWS has, how we can bring those together to do completely new innovation. We talked earlier about large language models, the other types of artificial intelligence and machine learning that are shaping markets of the future. We think that the two companies together can accelerate what we're already doing. We see that AWS has, for us been an incredible partner. We're pleased with this approach to a contract. We just signed the contract yesterday. In addition, that we will follow up with some strategic aspects later on and follow up. But you asked some questions about the financial aspects, and I'll ask Ewout to answer that part. Good morning, Owen. If you're think about the contractual agreement we're having with AWS, this is about a $1 billion spent in total over the next five years. And to put that in perspective, we will continue with a multi cloud philosophy and in total according to our forecast, we would actually be spending more than a $1 billion on cloud computes over the next couple of years. So this is not an increase in spend in total. This is exactly in line, or actually is our total cloud forecast is actually higher than this particular number. But what this brings to us is two very significant benefits. The first is of course that by combining the S&P Global and IHS Markit contracts at this moment in this new partnership with AWS, we will be able to generate very significant cost synergies as part of the new contract. And secondly, as Doug already said, and this is actually more important from my perspective is the strategic partnership because this will help to advance our technology innovation. We will be able to combine leading technologies and platforms and data sets of both companies. We'll be able to add specific capabilities that we are having on both sides, including the Kensho AI capabilities of course. And the most important that will end up with a really very incredible customer experience that we expect to enhance over the next few years. Got it. That's very helpful. And then the other one is on your investment in private market. So what kind of angle or what kind of new solutions you will be launching this year? And I know you're going to provide more disclosures on revenue this year, but do you have any target this year? Hi, Owen. It’s Adam. Happy to take that. So private markets continue to expand. You're seeing continued issuance of private debt, increasing regulatory pressures for disclosure, needs to monitor, report, test and report against sustainability metrics. Manage large private equity and private credit portfolios that requires things like valuations, reporting tools, portfolio monitoring tools. These are all areas where we already have a significant footprint, and we're well positioned to deliver additional solutions to the market. While you see in this year some tempering and fundraising, I think everyone agrees this is an asset class that will continue to grow. And the types of solutions that I described, workflow solutions, regulatory reporting, valuations, portfolio monitoring, all have significant room for continued growth. And Owen, this is Martina. I'll just add in a little bit here from a rating standpoint. So private markets, it does contribute quite a bit to our overall business, whether it's in syndicated loans through M&A, LBO activity, et cetera. And we also obviously rate the asset managers, the portfolio companies sponsor, BDCs, and we do quite a bit of credit analysis work to support multiple users in that sector. We have good relationships with key players, and we've been ramping up engagement over the last couple of years. A lot of good dialogue, a lot of interest in new opportunities. What we saw in private debt specifically in 2022, was a growth that was fueled somewhat by the closure of the public markets. And we have heard a lot of interest from customers with pent-up demand looking to come back to the public markets. But overall, we see there's a lot of opportunity here, not just in business and activity coming back to the public markets, but also in working very closely with our private market clients. Hi, good morning. Thank you for the question. I wanted to touch on the mobility business. I think there's a lot of dynamics that are happening in 2023, whether it's a decline in used car prices, increased production in new, how do you view the business is going to kind of stack up this year just given all these dynamics, I think in the CARFAX has proven to be pretty resilient, but at the same time, I think could benefit in this environment. But would love to get your thoughts that maybe that's not the right way to think about it or if there's other drivers that we should be aware of. Thanks. Yes, Stephanie, this is Doug. When you look at the mobility business, you have to think about all of the different capabilities that we have across the business. And this starts with CARFAX, which you mentioned. There's a set of products, automotive mastermind, Polk Analytics. What you think about is it all the way from the OEMs to the suppliers, to the dealers, to the insurance companies, to the financial institutions that are financing the automotive sector. All of them are looking for data and analytics. And we've seen an incredible digital transformation that has taken place over the last three years with a lot of volatility in the automotive markets. And all of this has driven all of these different types of players to the mobility business for data, for analytics, for research, for forecasting. In addition to that, we see an incredible transformation taking place in the industry with electric vehicles. And so electric vehicles are also introducing a new element which is also bringing all of these types of people back to the markets for more data and analytics. We've seen that we can benefit in different of types of markets depending on whether it's used cars, it's new cars, whether it's, how a dealer is going to be working with incentives. And so we believe that the market is’ that the business is very resilient depending on whatever the factors are. We're watching very carefully and we actually use our own data to forecast our own business. And, Stephanie, let me give you in terms of some of the revenue drivers a little bit, in addition to what Doug said. So with the market normalization, the higher inventory levels, the prices for new and used cars that are coming down, we see the following dynamics for our revenue drivers. On the one hand, that will mean that margins for OEMs and dealers most likely will come down a bit, having an impact on some of the retention levels. But on the other hand, we have the marketing and sales products that are being used and there will be a higher demand going forward for those products. So you could say there is a kind of an offset in terms of the new dynamics in the different revenue streams that we're having. Therefore, we are quite confident that we're able to hit that 6.5% to 8.5% growth level in the current automotive market and the new dynamics that we're are seeing. Thank you. And then, just given the current market dynamics, do you think that we could expect to see maybe more and potential M&A activity as well as, are there other opportunities as you kind of evaluate your current portfolio for maybe divestitures or sales that might make sense kind of going forward. How would you kind of characterize those opportunities? Thanks. As you know, we look at the key secular trends and drivers of value across all of the markets. And you heard us talk about those on Investor Day. They relate to things like the changes that are taking place in capital markets, internationalization of financial markets, private markets. We've talked about sustainability, the shift from active to passive, supply chain analytics, the approach to all companies looking at becoming digitized, and how data and analytics play. And so we look across our portfolio, we look at what are those growth drivers for each of our businesses? And as you know, we could be opportunistic if we looked at something for some sort of opportunity to bring a business into the portfolio. But we also know that we are going to look over the long run and see what is the type of portfolio we want to have. Are we the best owner of the businesses that we have in the portfolio? So you should assume that we're going to continue with the discipline we've always had when it comes to M&A. Good morning. This is Brendan on for Manav. Just wanted to ask on the ESG and climate transition revenue, which you guys are reporting on, which will be great. So what are you including in that and what's driving your assumption for the growth in 2023? Good morning. So if you look at the revenue that's we have reported for 2022, under the old definition and inclusion for ESG, $209 million. We're adding three new categories. And therefore we call the new revenue base sustainability and energy transition. You can find the details in the appendix of the slide deck. But the three main categories that we're adding is revenues from e-fees and that is coming from the mobility business, revenues with respect to energy transition for the commodities insights business and then thematic factors coming from the index business. So those three categories we are adding into the new definition that brings the baseline for 2022 to $247 million and then we expect to grow from there with the CAGR of about 34% over the next few years. And our expectation is still that this will become an $800 million business by 2026. Great, thank you. And then just switching over just to the maturity walls, I guess just what are you hearing from corporate treasurers? I know obviously the 2024 we expect to see pick up in the next couple of years, but they could still wait a little longer if they want to. But at the same time, rates and spreads have kind of settled. So just what are you hearing from treasurers on that? Hey Brendon, it's Martina. I can answer that question. So obviously, as part of our issuance, we look for associate the maturity wall data. It's a little difficult to figure out specifically the precise numbers around things like refinancing, which I think goes to the heart of your question. We know historically much of what gets labeled as general corporate purposes has been used for refinancing. What I would say is we're seeing, as you would have seen in our presentation, about $2 trillion to $2.5 trillion in corporate debt rated by us maturing over the next six years. 2023 still has about $1.8 trillion of maturities as of January 1. So we expect refinancing activity this year with any potential early refinancing coming from 2024 maturities. A couple of the key points in terms of what we hear, we don't see any indication of deleveraging, for example, on a meaningful scale. We also are paying close attention to what we see in terms of inflation and interest rates stabilizing somewhat in the second part of the year. So there's still some room for opportunistic issuance, but it's pretty uncertain, as I'd mentioned earlier. Yes, thank you. I think, for Martina, how closely our current resources within ratings aligned to recent volume trends. Obviously, there's been a lot of ebb and flow in volumes in recent years. I guess just wondering to what extent you have excess capacity. And we see good incremental margins other than the incentive comp normalization with incremental revenues or I don't know if you're running tighter than it may appear, given that maybe things were stretched in a couple of years ago. Thank you. Thanks for the question, Jeff. Well, we try to manage our business to absorb shocks, and you'll see that we've maintained our analytical capacity over the last couple of years in some higher growth areas, we've invested a little more capacity ahead of a recovery that we're expecting later this year. The market, as you know, needs our research or insights around the ratings. And the demand for this increased dramatically during the last couple of years with the uncertainty and the volatility. So we've worked very hard to maintain our capacity for that, as well as to anticipate increases in the latter part of this year in volumes. We have done some small changes in the past year or so as part of continuing to enhance our operating model. And as I said during Investor Day, always prudent with our expenses, very disciplined around all the levers that we have, whether it's location, strategy, T&E. And of course, we have benefited substantially from the shared cost synergies with the merger. And the last point I would make on this is in any extreme scenario, we clearly examine all of our options, but right now, we are very comfortable with the analytical levels that we have. Hi. Thanks for taking a question. I just wanted to, I have two-part question on the market intelligence, first is on the credit and risk solution. There was a modest slowdown there. There was a reference to financial risk analytics. I was wondering if you can talk about how should we think about those trends going into ‘23? And then my second question was just on the data and advisory solution that continues to be pretty strong. And I was wondering if you can talk about how the combination of IHS and S&P data on global marketplace has been driving more customer conversations on that front, and also how the cloud distribution can potentially -- sorry, has the potential to further accelerate the growth in that business. Thanks. Ashish, thanks for the question. First, let me just take the credit and risk solutions piece of the question. We mentioned FRA, this is a business that is a large software delivery, had a large delivery in Q4 of 2021. So you have a year-on-year comparable that made Q4 of 2022 a challenging quarter. So I think that's the thing that Ewout called out earlier that you're referring to, the underlying business remains very strong. This is our ratings direct; ratings express capabilities and they continues to grow as it has historically. Actually it has a really exciting path forward as we move more and more capabilities into our corporate customers and in particularly our credit analytics capabilities. So quite excited about that forward. Second, I think you asked about our data and advisory solutions. This is the broad set of data capabilities that we can bring to bear for our customers. Even just this morning, I saw a large win with an Australian bank where because of the combined sets of data that we now have in the combined enterprise, we're able to respond to very broad RFPs to satisfy needs of customers across a wide range of applications and credit and risk management within their firms. So I do expect that to continue. I think even as the synergies come more to the front and we're able to integrate those data sets together. And this will lead into an answer to your cloud question, I think as we integrate those data sets together more and more, we're increasing the scope of opportunity we have to even further accelerate in our data advisory businesses. On the cloud, many of our applications today already run in the cloud, as Ewout highlighted in the description of the AWS relationship. This is a long-standing relationship. What we're about to do now is to launch the next phase and really complete that full cloud migration. Once all applications and our data capabilities are in the cloud and we've launched a full multi cloud capability across our data sets, this gives us the opportunity to be much more efficient in developing new products, delivering those products out to customers in the way that they want, making available wide sets of data for the application of data science and artificial intelligence. I really do think this is a very important part of the continued acceleration and the broad scope of capabilities we have within market intelligence and you'll see that reflected in that data advisory business and many of the other solutions that we deliver out to customers. Yes, thanks very much. First question is on buybacks. This may just be a check, but when you return the after-tax capital from the Engineering Solution sale, will that be considered part of the $3.3 billion permissible buyback for 2023, or would this be incremental to that? That’s included in the $3.3 billion, Russell, so how that build up is how you can take our free cash flow forecast and guidance for this year, 85% of debt deduct, the dividends that we will pay out after the $750 million proceeds for Engineering solutions. And that brings you to the $3.3 billion capacity for buybacks for 2023. Perfect. Thank you. And my second question is probably for Martina, it is for Martina. The chart on slide 15 shows maturities is always expected to be about $1.8 billion, if I get my [inaudible] out for this year. Can you give us an idea of how big maturities were last year in 2022 so we can back out what the impact of maturities is on expected growth versus pricing and new issues? Yes, thanks for the question, Russell. I don't have the ‘22 maturity numbers in front of me. There's maybe a way to let me know if this is helpful. 2022, we saw overall lower volume of maturities, and the reason why is because you actually have to go back two years prior to that, there was a ton of pull forward done and opportunistic tapping to the market done in 2020 and 2021 because rates were so low. So not sure if that's helpful for you, but the number you're seeing for 2023 in our charts is $1.8 trillion as of the 1 January of this year. We're anticipating that. We think there is possibility for a little bit of pull forward from ‘24, but we really have to see how the year plays out between the first and second half. Okay, yes. Sorry. That's a billion. Yes. So just to check your answer there so the number of $1.8 trillion is higher than what you saw in 2022 or lower than what you saw in ‘22? Hi, this is Adam for Shlomo. What were the onetime expenses for indices? And can you provide more color on the strategic investments in this unit? I know you mentioned multi asset class indices earlier. Can you talk about anything else beyond that? So, if you look at expenses for the index business in the fourth quarter, you should see that in the context of that, this is a business that is investing in the context of driving faster future growth. And one of those things that you see in the quarter is some consulting spend to help the business with a very large transformation to move to more agile working environment, to be much faster in terms of product development, much faster in terms of new entrepreneurial initiatives. And that needed some investments in the quarter from a consulting perspective to make those changes. Also, what you see is strategic investments in new product areas like multi asset class that was already discussed early in the call, but also sustainability, thematic factors, et cetera. So that should position the index business very well to deliver on the double-digit revenue growth in 2025 and 2026 that we discussed during our Investor Day with margins in the high 60s level. So really, I have to say I'm really impressed by the index business. They take very decisive actions. They're transforming their business and setting themselves up on a faster growth trajectory. And the expenses you see in the fourth quarter, you should interpret in the context of that. Well, thank you everyone. As I mentioned earlier, despite the challenging market conditions, 2022 was a year of resilience, decisive action, and investment for the future. We're really proud of all the accomplishments we had last year, especially the merger with IHS Markit and our bold new strategic vision powering global markets. This is going to allow us to take advantage of secular trends that we've been mentioning throughout the call, like energy transition and private market markets, and the need for analytics and insights in turbulent markets. And we think we're very well positioned for growth in 2023 and beyond. But the reason we're successful is because of the tremendous people that we have in this company. And I want to thank them again for all the work that they did throughout 2022 and all they're doing to help shape the future of S&P Global. I also want to thank all of you to join the call today for your excellent questions. We are very excited about our future and can't wait to share more with you throughout the year. So thank you for joining us today. That concludes this morning's call. A PDF version of the presenter slides is available now for downloading from investor.spglobal.com. Replays of the entire call will be available in about two hours. The webcast with audio and slides will be maintained on S&P Global's website for one year. The audio only telephone replay will be maintained for one month. On behalf of S&P Global, we thank you for participating. And wish you a good day.

EarningCall_173

Hello and welcome to W. P. Carey’s Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Donna and I will be your operator today. [Operator Instructions] Please note that today’s event is being recorded. After today’s prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. Before we begin, I would like to remind everyone that some of the statements made on this call are not historic facts and maybe deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey’s expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately 1 year and where you can also find copies of our investor presentations and other related materials. Thank you, Peter and good morning everyone. 2023 marks several anniversaries for W. P. Carey. It was 50 years ago that Bill Carey founded the company, 25 years ago that we became a public company. It was also 25 years ago that we began investing in Europe, where we pioneered sale-leasebacks. Company has evolved considerably over the last 50 years. The most recent development being our exit from the non-traded REIT business, culminating in our merger with CPA:18. The completion of our transition to a pure-play net lease REIT in 2022 reflects our focus on real estate AFFO growth, driven by accretive investments and rent escalations. And despite the challenging market backdrop in 2022, we generated real estate AFFO growth of 6.3% per share for the year. This morning, I will focus my remarks on our recent investment activity and outlook and Toni Sanzone, our CFO, will cover our results, the 2023 guidance we announced this morning and our balance sheet positioning. We also have our President, John Park and our Head of Asset Management, Brooks Gordon, on the line to take questions. Starting with externally driven growth, over the course of 2022, the U.S. 10-year treasury rate rose over 200 basis points, while cap rates lagged well behind as sellers were slow to adjust their expectations. Buyers fought to preserve spread with transactions often take longer to negotiate and close, especially sale-leasebacks tied to corporate M&A. Overall, our investment volume for the year totaled $1.4 billion at a weighted average cap rate of 6.3% and a weighted average lease term of 20 years. In addition to the more than $2 billion of real estate, we added at a cap rate in the mid-6s through the CPA:18 merger. With interest rates moving another leg higher in October, we actively exerted our pricing power during the fourth quarter, requiring higher yields and willing to be patient as cap rates began to move, creating opportunities to transact at more attractive spreads. As a result, I am pleased to say we executed investments at meaningfully higher cap rates during the fourth quarter, although on investment volume that was lighter than we anticipated, totaling $159 million. Overall, these investments blended to a weighted average cap rate of 6.8%, primarily reflecting warehouse and industrial investments with going in cap rates in the high 6s and into the 7s. While interest rates have fallen somewhat since the fourth quarter, the large majority of the investment opportunities we are evaluating today also have cap rates in the high 6s and into the 7s resulting in investment spreads that are considerably more attractive than they were for most of 2022 and at levels where we are comfortable transacting. Looking ahead, we are well positioned to take advantage of the current market environment. Our diversified approach gives us the ability to invest across property types, both in the U.S. and Europe and ensures we have the widest possible funnel of opportunities with companies across a variety of industries. And while we currently see more actionable opportunities in the U.S. where cap rates have adjusted more quickly, we do expect cap rates in Europe to catch up with higher interest rates. Furthermore, the environment for sale-leasebacks is as favorable as we have ever seen it as high-yield debt and leveraged loans remain very expensive. Companies are increasingly exploring alternative sources of capital, including sale leasebacks. In fact, private equity firms that we previously never saw use sale leasebacks are now looking at it as a source of capital, enabling us to develop new sponsor relationships. We expect these market conditions to continue for the foreseeable future and that we will be the major beneficiary of the increased deal flow as the market leader in sale leasebacks. And of course, the strength of our balance sheet including significant liquidity, gives us a competitive advantage with sellers who remain concerned about execution risk. Our competitive position is especially compelling compared to bidders who rely on asset-level debt, which has either become prohibitively expensive or unavailable, particularly for tenants just below investment grade that we target. Currently, we have a strong near-term pipeline with over $500 million of investments at advanced stages or under letters of intent. This in conjunction with about $156 million of capital investments or commitments scheduled to complete in 2023 and the deals we have closed year-to-date gives us a visibility into at least $700 million of deal volume a little over a month into the year. Overall, given what we are seeing today, we expect to close meaningfully higher investment volume in 2023, totaling roughly $2 billion at higher cap rates and wider spreads. Moving to our capital markets activities, despite sharply higher interest rates in a turbulent capital markets backdrop throughout much of 2022, our stock price held up extremely well. We ended the year as one of the top performing REITs. The relative strength of our stock has enabled us to raise well-priced equity capital and we currently have about $560 million of equity available for settlement under forward sale agreements, raised at an average price of about $84 per share. On the debt side, we were one of a relatively small group of REITs to issue attractively priced debt in 2022, with our inaugural €350 million private placement bond offering in September at an interest rate in the mid-3s. And I am pleased to say that the improvement in our credit profile was recognized by the rating agencies, with Moody’s upgrading us to Baa1 in September, followed by S&P upgrading us to BBB+ a few weeks ago. These upgrades incrementally improve both our access to debt and cost of debt, which is currently among the best price in the net lease sector. Our ability to raise well-priced capital in 2022 in conjunction with our revolving credit facility has ensured we have entered 2023 exceptionally well positioned with more than enough dry powder to execute on our near-term pipeline on a leverage-neutral basis. Given where this capital was raised, we are very comfortable with our ability to deploy it accretively through the deals currently in our pipeline and into new investments given that transaction cap rates appear to be stabilizing around current levels. We are also comfortable with our ability to continue investing accretively at tighter cap rates than our current targets, if we see interesting opportunities, given where we expect to be able to raise capital in 2023. Lastly, I want to touch briefly upon the quality of our portfolio amid concerns about inflation and the potential for at least a mild recession. We remain uniquely positioned within net lease with best-in-class rent growth and proven resiliency, be on a well-diversified portfolio of critical real estate leased to large companies on long-term leases with a weighted average lease term of just under 11 years. It also remains healthy, with occupancy at 98.8%, fourth quarter rent collections of over 99% and a benign watch list. Before I hand over to Toni, I’d like to take this opportunity to thank our employees, past and present who have helped shape W. P. Carey over the past 50 years into the company it is today. All of the milestones we are celebrating this year and the solid results we have achieved would not be possible without our dedicated and talented team. And I am proud that we have been included in the Bloomberg Gender Equality Index for the third year in a row, one of only a handful of REITs selected this year, highlighting our longstanding commitment to gender equality and an inclusive culture. Thank you, Jason and good morning everyone. This morning, we reported AFFO per share of $1.29 for the fourth quarter, bringing full year AFFO per share to $5.29 and real estate AFFO per share to $5.20, an increase of 6.3% over the prior year, reflecting the accretive impact of both new investments and our merger with CPA:18, which closed in August as well as the strength of our rent growth. During the fourth quarter, we continued to benefit from inflation protection built into our portfolio. Overall, contractual same-store rent growth remained at a record 3.4% year-over-year, which is up 160 basis points versus the year ago quarter. Given the timing lag on which our inflation-based leases escalate, we expect contractual same-store rent growth to remain elevated throughout 2023 and well into 2024, even if inflation comes down. We estimate that it will increase to around 4% in the first quarter when roughly 40% of ABR with rent increases tied to inflation will go through scheduled rent bumps and remain around 4% for the full year. Comprehensive same-store rent growth for the fourth quarter, which is based on the pro rata net lease rent included in our AFFO, was 1% year-over-year, primarily reflecting elevated rent recoveries in the prior year period. Normalizing for these recoveries brings comprehensive same-store above 2%, which is about 100 basis points below our contractual same-store and in line with historical trends. Comprehensive same-store in the 2022 fourth quarter also included downtime on vacant assets, the large majority of which are in the process of being repositioned or expected to be sold during the first half of this year. Fourth quarter leasing activity comprised 9 renewals or extensions. And overall, we continue to achieve positive rent recapture totaling 110% of the prior rents driven by warehouse and industrial and adding 8.3 years of weighted average lease term. Other lease-related income for the fourth quarter included the $5 million settlement of a claim on the guarantor of a prior lease the timing of which was accelerated, bringing the full year total for this line item to $33 million, just above our expectations for the year. For 2023, we are currently assuming that other lease-related income remains relatively consistent with 2022 levels. Non-operating income for the fourth quarter primarily comprised realized gains from currency hedges totaling $6 million, down from almost $9 million for the third quarter. For the full year, non-operating income totaled $30 million, including $24 million in realized gains from currency hedges. Our 2023 guidance assumes currency rates remain at or around their current levels, which would result in expected gains from currency hedges of approximately $15 million. As a reminder, a strengthening euro would positively impact our cash flows and earnings with lower hedging gains as an offset. Non-operating income in 2022 also included $4 million in dividends received from our equity interest in Lineage Logistics. We have not received and do not expect to receive a dividend from our investment in 2023. Lineage continues to perform well and our investment now totals just over $400 million, including a $39 million mark-to-market gain during the fourth quarter based on its most recent offering valuation. Disposition activity during the fourth quarter comprised 6 properties for gross proceeds of $68 million, bringing total disposition proceeds for the year to $244 million, a large portion of which were legacy CPA:18 assets whose disposition was contemplated in conjunction with the transaction. Operating properties generated NOI of $17 million during the fourth quarter, up from $12 million for the third quarter with the increase primarily reflecting a full quarter contribution from the operating self-storage portfolio we acquired as part of the CPA:18 merger. At year end, our operating assets comprised 84 self-storage properties, 2 student housing properties and 1 hotel. Separately, in January of this year, 12 of the Marriott hotels we own, which were previously net leased, converted to operating properties upon expiration of their master lease. Marriott will continue to operate and manage these hotels under long-term franchise agreements and we expect their NOI contribution to be marginally higher than the $16 million of ABR they generated in 2022 as net lease assets. These are non-core assets that we plan to sell with the exception of 3, for which we are pursuing very attractive redevelopment opportunities. We will provide updates as we make progress with the Marriott sales, but for purposes of our 2023 guidance we are assuming they occur late in the year, recognizing they have the potential to move into 2024. For 2023, we expect NOI from all operating properties to total around $100 million, with roughly three quarters of that coming from self-storage, which is expected to achieve NOI growth in the mid to high single-digits as compared to 2022. As a reminder, the same-store metrics I discussed earlier reflect only net lease assets and non-operating properties. Turning now to expenses, interest expense totaled $68 million for the fourth quarter bringing the full year total to $219 million, up 11% over the prior year. The weighted average interest rate on our debt was 3% for the fourth quarter and 2.7% for the full year. Our guidance currently assumes higher base rates will result in our weighted average cost of debt approaching the mid-3s, although this is dependent on the specific timing and execution of capital markets activity as well as further interest rate movements. Non-reimbursed property expenses were $14 million for the fourth quarter, bringing the full year total to $51 million. The amounts for both periods were elevated as a result of higher vacant asset carrying costs, higher maintenance and legal expenses as well as real estate tax accruals. For 2023, we currently expect non-reimbursed property expenses to decline to between $43 million and $47 million for the full year as a result of anticipated vacant asset sales and lease up. The resolution of certain tenant-related back taxes and the timing of asset sales could move us to either end of that range. G&A expense was $23 million for the fourth quarter, bringing the full year amount to $89 million, in line with our guidance range. For 2023, we expect G&A to be between $97 million and $100 million, which includes loss of reimbursements from CPA:18 and reflects our larger asset base as well as inflationary increases. Tax expense totaled $10 million for the fourth quarter on an AFFO basis, which is mainly comprised of foreign taxes on our European portfolio. We expect tax expense to total between $40 million and $44 million for 2023 driven by the inflationary impact on foreign rents as well as the addition of assets acquired in the CPA:18 merger. Turning now to the 2023 guidance we announced this morning. We expect to generate AFFO of between $5.30 and $5.40 per share, all of which will come from real estate given our exit from the non-traded REIT business, implying about 3% growth on real estate AFFO at the midpoint. This is based on expected investment volume of between $1.75 billion and $2.25 billion. And as Jason discussed, we currently have good visibility into at least $700 million of that. For now, we are assuming investment volume occurs relatively evenly throughout the year. Disposition activity for the year is currently assumed to total between $300 million and $400 million, with the majority assumed to occur late in the year, reflecting our anticipated timing for the Marriott operating hotel sales, which I covered earlier. Moving to our capital markets activity and balance sheet positioning. We remain in a very strong capital position with significant dry powder, ample liquidity and moderate use of leverage, which is further supported by our capital raising activity. Towards the end of the fourth quarter, we settled just under 2.6 million shares of our outstanding equity forwards, which will, therefore, be fully reflected in our first quarter diluted share count. We also issued additional equity forwards through our ATM program, both during the 2022 fourth quarter and in January of this year. In conjunction with the existing equity forwards, we therefore currently have about $560 million of forward equity available to settle. We ended 2022 with $276 million drawn on our $1.8 billion revolving credit facility, which, in conjunction with our undrawn equity forwards, maintains an excellent liquidity position, totaling just over $2.2 billion, providing ample liquidity to execute on our near-term pipeline on a leverage-neutral basis and ensuring we continue to have significant flexibility in when we access capital markets. We currently have $430 million of mortgages due in 2023, a portion of which will be retired as part of our disposition plans and no bonds maturing until 2024, all of which we continue to view as very manageable, especially given the improving debt capital markets and our proven ability to access capital even during turbulent markets as was the case in 2022. At year-end, our leverage metrics remained within our target ranges. Debt-to-gross assets was 39.8% at the low end of our target range of mid to low 40s and net debt to EBITDA was 5.7x relative to our target range of mid to high 5x. Cash interest expense coverage was 6.3x, which moderated compared to the 6.7x for the third quarter, largely reflecting rising interest rates. Lastly, we continue to provide stockholders with growing well-covered dividend income with a payout ratio of 80.2% for the year and an attractive dividend yield currently around 5.2%. In closing, despite the challenging market backdrop, we produced solid full year results, primarily reflecting the accretive impact of new investments and our merger with CPA:18 as well as the strength of our rent escalations. And as we look ahead, we have a strong near-term pipeline, which we are well positioned to execute on given the strength of our balance sheet. Hey, guys. It’s Derek on for John. I was just curious if you could kind of walk us through the puts and takes of AFFO guidance. What’s the per share impact from OpEx and then from interest expense? Thanks. Yes, I got that one. Thanks, John. So yes, I think we’ve highlighted a number of factors on the call. I think just to kind of summarize, we are seeing a fair amount of growth from the investment activity and from the embedded CPI-based increases in our portfolio, but we are seeing a number of offsetting factors. On the interest expense, I think that’s really the biggest headwind that we’re seeing, and that’s roughly about 3% growth on the offset. On the FX side, I’d say it’s less so in terms of what we’re projecting for 2023, just given kind of where rates are now, and where they settled in over the last part of the year. So I would say FX potentially could have a tailwind for us as opposed to the way it worked against us in 2022. So I definitely would say the largest drivers on the interest expense side. But in addition to that, I highlighted some other points, which included leakage that we would expect from vacancy or downtime in certain assets and then a few smaller items, which are the dividend payments that we’re not receiving from Lineage and Walt that we received prior year as well as some higher G&A and tax expenses. So, all of that really aggregates against the growth that we’re seeing gets us to about 3% for the year. Right. Appreciate that. And then I appreciate the color on cap rates kind of widening out as we move into the first quarter of the year. Can you just kind of walk through what the different cap rates are amongst the sectors and geographies? And where is the biggest spreads you’re seeing today? Yes, sure. Yes. So we think that cap rates kind of finally reached a bit of an equilibrium in the fourth quarter, and that has carried over to this year. Fourth quarter cap rates was about 6.8%, which was 50 basis points higher on average or higher than the full year average, I should say. I think that’s flowing through the transaction markets as well. In terms of regions, U.S. and Europe cap rates. I would say there maybe similar ZIP codes at this point in time. I think the U.S. has maybe stabilized a little bit more, I think, given where the cost of borrowers in Europe, we could probably – would probably want to see a little bit more cap rate increases to generate the type of spreads that we think we want to transact at in Europe. And then across property types, I would say on the – maybe the low end of the increase is probably in U.S. retail that has proven to be a little bit stickier. And maybe that makes sense, it’s a bit more crowded in terms of competition within net lease and maybe there is still some 1031 trades lingering. I think on the high end, it’s where we’ve seen cap rates move would be in the industrial segment, in particular, sale-leasebacks. I think when you think about corporates and in private equity firms utilizing sale-leasebacks. They are really looking at what are their alternative sources of capital, and that would be mainly the leveraged loan market or the high-yield debt markets and those are still largely dislocated. So I think we have some pricing power right now within that market and cap rates are reflecting that. And thank you for the very robust opening remarks. You can’t leave me with many of my questions that I was going to ask. But I do still have a couple of reserve here. So one, Jason, if you could just touch on the types of assets in the pipeline right now? Where are you seeing the most success in terms of assets with the more reasonable cap rates from a tenant and property type perspective. Yes, sure. So just to kind of go through the kind of the visibility and the deal volume that we have, I mentioned over $700 million, and that’s comprised of about $500 million of pipeline that we call investments at advanced stages. The rest of it is either deals that have closed already year-to-date or these capital projects and other commitments that we have each year that are scheduled to complete in 2023. That’s probably about $150 million of that $700 million. In terms of the types of deals in our pipeline, it’s more weighted towards the U.S. right now and maybe North America more broadly. That seems to be the source of more actionable deals, as I mentioned earlier, transaction markets in Europe are still a little bit left to room to go to adjust to the sharper rate increases we saw in Europe. So a little bit more weighted towards the U.S. and North America. Property type is consistent with what we’ve been buying in the past. It’s 2022. I think 70% of our deals were industrial, both warehouse and manufacturing and some R&D. And I think the remainder was probably retail. That’s true for the pipeline as well. It’s going to be predominantly industrial, R&D, warehouse production, and then we do have some retail both in the U.S. and Europe that we’re looking at. And I should say the bulk of what we’re doing, again, or sale-leasebacks, the larger transactions in this pipeline are private equity-backed deals and really in support of M&A activity. So there is a little bit of uncertainty on how the timing works, more moving parts when you’re closing transactions concurrently with the buyout. But of course, execution plays or execution risk is something that the sellers are much more focused on. And I think for that reason, we’re a great partner in and it’s reflected in the pricing we can get from those deals. Okay. Thank you very much for the color there. Just a couple of quick questions on lease expirations. First is does the 3.9% that’s expiring in 2023 include the 1% for Marriott. And then recent rent recapture has been fairly strong, especially on the industrial assets. Can we view this as maybe more of a new normal for those warehouse and industrial leases? Sure. So the 3.9% does include Marriott. So if you back that off, it’s about 2.8%, another, call it, 50 basis points has sort of already been resolved since. And so that leaves about 2.3% of ABR expiring in 2023, so quite manageable. With respect to your question on the actual leasing metrics, certainly, we’ve had a good run of results there, and we’re quite encouraged by that. That said, I wouldn’t extrapolate any specific quarter or even a couple of quarters. We really like to look at more of a trailing eight number and that’s in and around 102% recapture. So hard to extrapolate a given quarter, it’s very transaction-specific. But I agree there are some tailwinds, especially in our warehouse and industrial assets that have been benefiting us, and we look to keep capturing that. Hello. Excuse me, Jason and John. It’s Joshua Dennerlein. My question is, what are your expectations for same store in 2023? And any additional commentary on what’s driving your guide would be appreciated. Thank you. Yes, on the same-store side, I get some comments there. We are expecting to continue to see inflation push through just given the lag in our leases. So we do expect that to tick up to about 4% and remain right around that level for the full year, and that’s on the contractual same store side. I didn’t catch the second part of the question. Yes. I think I did just mention a little bit of the headwinds that we’re experiencing in the upcoming years, the interest expense being the largest factor, as I mentioned. And then there is really just an aggregation of a number of other smaller items that I highlighted being tax expense, G&A expense and some of the dividend that we would have received this in 2022 from Lineage and from Walt to an occur next year. So those things are aggregating in addition to some leakage that we’re seeing on vacancy and some downside on certain assets downtime. Yes. Thank you. Just on the Marriott assets, I understand that you are going to provide more color as you go along. But just curious if you can just comment at a high level on how that – how the market looks currently for these assets? Sure. So, yes, as we noted, the 12 of those assets converted to operating in January, that’s a very seamless transition. Marriott continuing to operate those and they are operating well. Hard to gauge in terms of exact timing and execution. But we think interest is going to be pretty strong. And we were looking to sell nine of those assets were in our guidance, assuming that closes at year-end. But again, hard to specifically tie it down timing, we wouldn’t comment on pricing at this point. Three of the assets which we will retain are really excellent development opportunities. One is an industrial opportunity in New York. Another is really well-located potential lab opportunity in San Diego, and then the third is in Urban, California. And again, those will operate seamlessly in the meantime as we pursue those opportunities, but very good redevelopment sites there. Thanks. And then maybe just more broadly on the transaction market. Can you guys just provide some color on how total deal volume that you have sourced thus far in the year in both the U.S. and Europe compared to last year? Yes. Just trying to get a sense of how the overall like market looks, just maybe not on everything that you are seriously underwriting, but just in terms of like total deal volume just out there being sourced? Yes. Look, I mean it’s – as I mentioned earlier, I think that the sale-leaseback market right now is probably as strong as we have ever seen it, and there is a number of factors leading to that. One of which is private equity firms and how they capitalize their businesses. I think the alternatives are just not as competitive, cost-wise, mainly high-yield debt or leverage loans. I think the second factor, at least in how we compete within the sale-leaseback market is that mortgage availability really is still not all that strong or the execution is a little bit uncertain. So, a lot of the traditional real estate private equity buyers that we compete with I would say they are still largely on the sidelines. So, I think those two factors are really kind of coming together to – not to mention the fact that debt rates have stabilized a little bit, which has led to maybe a tightening of the bid-ask spread between buyers and sellers for deals. I think all of that combined has really set us up well for a transaction market. Compared to this time last year, I mean look, when we started last year, we were quite bullish. And obviously, the sharp interest rate increases in the first quarter kind of changed the trajectory of kind of the pipeline from last year. But where we sit right now, this is as strong as the beginning of the year pipeline as we have had in a long time. There are some chunkier deals in there. As I mentioned earlier, several of those are supporting M&A activity so that timing can be a little bit uncertain, but we feel good about where we sit right now. And so I think it’s a good market, and we will see how the year progresses of course, but it’s quite favorable right now. Thank you. The next question is coming from Mitch Germain of JMP Securities. Please go ahead. Mitch, your line is live. Please go ahead. Make sure your line is not muted on your end. Sorry about that. Sorry, I guess it’s only about 5% of your debt that’s coming due this year. What’s the strategy for that mortgage debt? Yes, that’s right. I think it’s about a little over $400 million of mortgages maturing this year. I think in the context of the size of our balance sheet and really our positioning, we really see that as being pretty manageable. I think we have a lot of optionality. We have over $1.5 billion of capacity in our credit facility and about $560 million of equity forwards that are sitting kind of on the balance sheet, waiting to take out. So, I think we have a lot of options in terms of how we address that. You will expect to see us in the market on the debt side, given some of the size of the pipeline and the deal volume we expect this year. But I think we are in a good position with the $430 million being really manageable for us. Yes. I mean look, we are still evaluating it. It’s a property type that we have – that we like. We have owned it for a long time. We have good property managers supporting us in Extra Space in CubeSmart. So,I wouldn’t say that the thinking has evolved. We are still considering all the options. We can continue to own these. We can convert some raw to net lease. We can also look at selling some of them at attractive prices if we think that’s the best way to fund new transactions. So – and it certainly could be a combination of all the above, but nothing big has changed. I think in the meantime, we like the fundamentals. Growth has maybe slowed from the industry’s peak of 2022, but we are still expecting a really strong same-store growth for this portfolio this year. I think based on our property level budgets, we are probably in the mid to high-single digits for this portfolio. So, I think that we can be patient and continue to ride some of the increases. And overall, it’s a nice complement to our net lease portfolio. So, I think we will just be more opportunistic on what path we chose here. Thank you. First one is just on Lineage. I think you marked it up, but you talked about not getting like a dividend this year. Just wondering if you could reconcile that on what’s happening there. Yes. We received a dividend from Lineage in the January of 2022, which we believe was reflective of kind of in their taxable income positioning. We didn’t get that same dividend in January of this year. But I think as you have highlighted, it’s really the value of the investment is what we are looking at, and it continues to appreciate. We have marked it up with an offering that they did this year, and we are at about $400 million. So, we really think they are performing continually well, but the cash flow that they are generating off of the investment is probably somewhat variable from year-to-year. Okay. Understand. And then Toni, you addressed the gap between the same-store sort of bumps year-over-year versus the comprehensive same-store in 2022. So, as we are thinking about ‘23 that 4% that you outlined, do you think that’s the number that converts down to AFFO, or like as the comprehensive same-store, or do you think there are some drags to that? I think you are right, the 2022 and even 2021, there was somewhat of a kind of a lot of moving parts and comprehensive with rental recoveries and that sort of thing. So, it did move from period-to-period. I would say pre-pandemic and kind of historically for us, we are seeing usually about 100 basis point drag or so from the top line kind of contractual same-store. And I think that’s a reasonable expectation for us into the future is that there will always be kind of some offsets that run through there. But that 100 basis point drag against the top line is probably a good expectation for us. Okay. And so I think, I guess just to make sure I understand it. So, if we are thinking about a build, you start with the four, maybe there is 100 basis points of drag and then we make whatever FX assumptions we want, I guess would be on top of that, kind of think through what really slows down. Okay. And then just last one, just to clarify. I think you said $100 million in operating property NOI for ‘23. And I didn’t catch if you said this, that include 11 months of the Marriott properties, or does that not include the Marriott stuff? Yes. Hey everybody. Jason, you have talked about the sale-leaseback market being really robust. I guess I am curious if you are seeing any better lease terms in addition to the higher volumes and cap rates things like higher escalators, longer duration, better lease protections, anything like that? Yes. I think I would say all of the above. I mean that’s one of the benefits of sale-leasebacks as we write our own leases, negotiate our own leases, I should say. And to some extent, we can dictate the terms that are important to us. Lease term has been one we focused on for 2022. Our weighted average lease term, I think was 19.9 years for new deals, which is in line with where we have been. I would expect that to be in line or 2023 to be in line with that as well. But we do focus on that. I think in addition to cap rates, we still are seeing some upward pressures on the type of bumps that we get. I think we are getting some pushback on inflation-linked increases as you can imagine. But our caps that we put in place from time-to-time and that’s maybe more of the conversation now. Those are higher than where they have been historically. And some of that has flowed through to the fixed rate increases as well. I think historically, we have probably been around 2% fixed increases on average, and we are going to be a little bit above that is my expectation this year. I mean we are above that for the leases that fixed increases for 2022. So, look, I think that we have maybe a little bit more negotiating leverage in some of these deals given that there is fewer alternatives for firms to raise capital. I think sale-leasebacks are really good opportunity right now. There is fewer competition that target sale-leaseback and there is even fewer that have – and maybe none that have a history as long as ours in terms of execution. So, I think all of those factors lead us to having incremental structuring abilities and we will kind of measure what’s important to us and what we get. Okay. Thanks for that. And then I was wondering if you could talk through the watch list. Has it expanded or contracted? And I guess is there anything that we need to be keeping an eye on that maybe isn’t obvious from the 18% of ABR that you disclosed the tenants for? This is Brooks. Yes, Credit quality overall is quite good. Again, reiterate about 32% of ABR is investment grade. We are largely dealing with large companies with great access to capital and collecting materially all of our rent. From a watch list perspective, it’s in and around 2.5% of ABR – to put that into context, maybe the COVID peak was just over 4%. So, credit quality has improved since then. That said, we are certainly watching closely both macroeconomic and industry-specific headwinds. There is not really any trends or themes in the watch list. It’s very anecdotal and tenant specific. But certainly, at this point in the cycle, we want to pay very, very close attention and we are doing that. So, that’s kind of the status of the watch list, and I wouldn’t characterize it as anything different per se in recent quarters. Good morning. Maybe going back to the acquisition side of things and sale-leasebacks in particular, are you seeing a divergence in terms of pricing between investment-grade rated tenants and kind of non-investment grade rated tenants? I know the latter is kind of where you tend to do deals most often, but just kind of has there been a change in terms of pricing expectations for those two different buckets of potential tenants? John, we are not – I would say we are not really seeing many investment-grade rated leasebacks. And as you mentioned, that’s typically not where we have focused. I think the real opportunity here where – and I suspect there is a pretty big divergence. The real opportunity here is just below investment grade, where those companies and those credits have much fewer alternatives to access capital. So, I think again, not that tuned into where investment-grade sale-leasebacks are, but I am guessing that’s been much more stable and probably hasn’t increased as much. Just like the investment-grade bond markets haven’t moved as much as the high-yield markets. I think that’s reflective in the pricing on sale-leasebacks as well. Okay. And then in terms of your own balance sheet, how are you thinking about leverage today? It sounded like guidance kind of implies a relatively flat leverage versus where you are 4Q. But maybe given where equity pricing is, especially relative to debt pricing, does it make sense longer term to kind of bring leverage down just because the pricing differential is pretty attractive, particularly versus historically? Yes. I think we are still looking at kind of our target leverage levels in that mid to high-5x range. I think we have leaned into our equity. Our equity pricing has been pretty favorable as a source of our cost of capital. I don’t think we view kind of the future environment in terms of where we can issue debt is keeping us out of the market long-term. So, I think we will continue to kind of stay in the range that we are in right now, so somewhat leverage neutral to kind of what you are seeing there. But I agree we are definitely leaning into the equity, given how well priced it’s been. But I guess no philosophical change in that maybe mid-4 to 5 is the new kind of target range just because of an opportunity set here in the current environment. No. I would say we continue to kind of look at the existing target range. And look, I think our credit profile was just reaffirmed with the upgrades we got from the rating agencies. So, I think we are comfortable with the target ranges that we have in place now. Hey, sorry. Just one quick follow-up. Toni, I appreciate the color on the expected income from the operating properties. I am just curious on looking at the normalized pro rata cash NOI for self-storage and other operating properties. I saw that dropped this quarter from last quarter. So, just wondering what’s going on there? Yes. There is really nothing of note kind of going from quarter-to-quarter there. I think we continue to see the storage performed well. I highlighted sort of what our expectations are for the upcoming year. And we think that mid to high-single digit growth on storage. There is probably some seasonality in there. We have one hotel portfolio or one hotel asset rather in the portfolio that runs through that line. So, annualizing that is probably taking that number down a bit. But I would say, just to look more to what we are projecting on a full year basis, which is for all of that portfolio, $100 million. Thanks Donna. And thanks everybody on the line for your interest in W. P. Carey. If you have additional questions, please call Investor Relations directly on 212-492-1110. That concludes today’s call. You may now disconnect.

EarningCall_174

Good morning and welcome to the Orion Energy Systems Fiscal 2023 Third Quarter Conference Call. [Operator Instructions] Today's conference is being recorded. Thank you and good morning. Mike Jenkins, Orion's CEO, will open today's call to provide perspective on Orion's current business and outlook. Per Brodin, Orion's CFO, will review the company's Q3 and year-to-date results, financial position and other matters and then we'll take investor questions. A replay of the call will be posted to the Investor Relations section of Orion's website at orionlighting.com. Remarks that follow and answers to questions may include statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect or similar words. Additionally, any statements that describe future plans, objectives, goals and the business outlook are also forward-looking. These forward-looking statements are subject to various risks that could cause actual results to be materially different than currently expected. Such risks include among others matters that the company has described in its press release issued this morning and its SEC filings. Except as described therein, the company disclaims any obligation to update forward-looking statements that are made as of today's date. Reconciliations of certain non-GAAP financial metrics to the corresponding GAAP measures are also provided in today's press release, and available in the Investor Relations section of the Orion's website. Thank you, Bill. Good morning everyone and thank you all for joining our call today. As previewed in January, our third quarter results continued to reflect the impact of customer delays in the initiation of several large LED lighting projects. Specifically the previously announced $4 million plus project for our longtime automotive customers started more slowly than anticipated in Q3, but is now accelerating in Q4, and the start of a $9 million Department of Defense project shifted from third quarter of this year into first quarter of 2024. As mentioned previously, these projects are fully booked, and we look forward to their full activation and completion. We also saw some softness in our electrical contractor distribution channel, which seems largely due to the softening economic environment. We also experienced a modest decrease in contribution from our Energy Service Company or ESCO channel in the quarter. The ESCO softness is more related to project timing as longer term opportunities continue to gain traction in this channel which is focused on delivering both environmental and energy efficiency benefits to end customers. We have been working hard with our ESCO partners and have built a strong pipeline of opportunities that should drive significant positive growth in fiscal year 2024. Offsetting these factors was a better-than-expected contribution from our new EV charging solutions business and steady growth in our maintenance services business, largely due to the two acquisitions we completed over the past 12 months. We reiterate our fiscal 2023 revenue guidance for the balance of the year and reconfirmed our outlook for revenue growth of at least 30% in fiscal 2024. Our fiscal 2024 outlook reflects a growing array of significant retail logistics public sector and automotive projects in our LED lighting pipeline, as well as strong growth in our EV charging solutions and electrical maintenance services business. We plan to provide more color on our 2024 outlook in early June when we report year end results. Overall, we are seeing growing interest in our expanded array of products and services that meet rising demand for energy savings, environmental benefits, safety, workplace and efficiency enhancements and improved customer experiences. We are pleased with the reaction from our customers on our growing value proposition of multiple platforms that help our customers with their energy and carbon footprint reduction goals. Leveraging our unique turnkey, design, build, install and maintenance solutions along with industry-leading customer service, we're able to deliver substantial value particularly to large or regional organizations that manage hundreds and sometimes thousands of locations. These characteristics provide Orion a unique competitive advantage that creates complementary paths to grow both by expanding the base of customers we serve and the array of solutions we are able to offer. To lead our internal sales efforts we recently recruited a new Executive Vice President of Sales, Ken Poole, from outside the lighting industry. As we continue to evolve as an organization, we are focused on building greater value for our customers through expanded product and solution offerings, coupled with execution models to best meet their needs. We have talked about the strategic value that ESCOs bring to Orion and Ken comes to us from a super ESCO and understands the world of project business. He is also very familiar with multiple go-to-market models and his sales management acumen will be an important asset supporting our future growth strategies. While our history has been enlightening, we have expanded into new complementary areas including electrical and lighting maintenance services, and electric vehicle charging solutions. We believe that our competitive advantage and customer service and turnkey project management complement these new businesses. We know from direct experience that many of our customers have specific interest in one or more of these areas, and therefore they build on our customers for life commitment. We work to educate our customers on the total cost of ownership of lighting and other energy systems, so that they can truly appreciate the substantial long-term ROI advantages and reduction in CO2 emissions provided by Orion's high quality, energy efficient products. We have three primary paths to market which include our ESCO channel with partners who focus on delivering energy efficiency benefits to their customers. ESCOs value the industry-leading energy efficiency and high quality and reliability of our LED fixtures made with the highest quality components. Second, we serve the electrical contractor channel providing a range of lighting solutions to meet a variety of needs and price points with a focus on new construction and agricultural markets in their local geographic areas. The third, we have our national account group that is focused on developing long-term relationships with major national and regional customers across a range of industries and helping them to address their complex lighting, IoT solutions, maintenance or EV charging needs. To differentiate ourselves and adding value for these large enterprises, we are developing turnkey capabilities for executing lighting, maintenance and EV charging solutions, from start to finish all from one centralized Orion point-of-contact and accountability. True turnkey solutions are highly complex to execute as they involve input and coordination across the entire organization, from initial site audits to design and planning, to product development and customization, to product manufacturing in our facility in Wisconsin, through to shipping and on site installation and system commissioning in hundreds or even thousands of customer locations. We also offer customers, ongoing lighting and electrical maintenance support tailored to their unique needs. Now, turning to our new growth opportunity and EV charging solutions. Obviously the electrical vehicle market is a high growth area with EVs expected to become nearly a 1/4 of new vehicle sales by 2025 and continue to grow from there. This trend is generating demand for EV charging stations at stores, businesses, schools, offices, housing complexes, healthcare, and other facilities. The ability to charge your electric vehicle will become an increasingly important component of high quality customer experience for many and also important to attract and retain employees and visitors. $5 billion in Federal and state funding under the National Electric Vehicle Infrastructure or NEVI Act has been authorized to support EV adoption and infrastructure over the next five years. And many states are also supporting EVs in addition. For example, in Massachusetts, the Utility Commission recently approved approximately $400 million in funding over the next four years to support EV related infrastructure. Other states are reviewing and implementing similar programs in addition to the NEVI funds. Our Voltrek subsidiary as well positioned to benefit from these and other project funding sources. We are currently working to integrate Voltrek Solutions into our organization and adding personnel and infrastructure to expand their reach. This includes building out a nationwide group of qualified electrical contractors to execute EV charging installations or broader rollouts for larger organizations. We recently announced a significant project providing Level 3 DC fast charge infrastructure for an electric school bus pilot program in Massachusetts. This project is broken into phases, and we announced the commencement of the first phase to support charging systems for 20 buses out of a fleet of a possible 145. The first phase of this project should provide Orion revenue of approximately $1.5 million. To support our growing base of product and service revenues -- or service offerings, we launched a new website in December. The objective was to enhance the site's value and ease of use for customers and partners. Initial feedback has been good and we are already seeing higher overall website traffic and more targeted lead generation benefits from the overhaul. We encourage all of you to check it out. Before I turn the call over to Per, I wanted to make it clear to our shareholders that despite an anticipated $50 million year-over-year decline in our business from our largest customer and online retailer through the first nine months of fiscal '23, the balance of Orion's business grew by approximately 9% year-to-date and 5% in quarter three over the prior year periods. Our EV charging segment is off to a terrific start in its first quarter contributing to our results and our maintenance business remains on pace with our prior growth expectations. This confirms that the investments we are making to diversify and grow our business are working, though we are still in the early stages of integrating the new businesses and building out systems, management, sales and marketing and cross selling initiatives. We expect these segments will represent a significant portion of Orion's revenue moving forward in fiscal '24 and beyond, both with project work as well as a growing base of recurring maintenance revenue. We look forward to continued progress sourcing significant projects in our national account business, though the timing of these larger projects can be impacted by customer variables, or other factors outside of our control. We continue to build out our base of productive ESCO partners and a pipeline of new product sales opportunities, including a few seven and eight figure opportunities, some of which we expect to initiate in the first half of the fiscal 2024. Reflecting these factors, we are excited about our growth prospects for the next several years. Now I will pass the call to Per Brodin to discuss our financials and specifics of our financial outlook for the balance of fiscal '23 and '24. Per? Thank you, Mike. Fiscal '23 third quarter revenue was $20.3 million versus $30.7 million in Q3 '22 and $17.6 million in Q2 '23. Through the first nine months of fiscal '23, revenue was $55.8 million versus $102.3 million in the prior year period. As previously discussed, the current year has been largely impacted by the wind down of the multiyear project with our largest customer, which had an $11 million impact on the third quarter. As Mike mentioned, excluding revenue from our largest customer and a large global online retailer, year-to-date revenue increased 9% over the comparable prior year period, reflecting our success in diversifying the growth drivers of our business. Our gross profit percentage decreased to 23.6% in Q3 '23 compared to 24.9% in Q3 '22 and 25.3% in Q2 '23. The decrease principally reflects lower absorption of overhead costs and reduced revenue and a higher mix of service revenue, which operates at lower margins. Gross margin for our EV business outperformed the overall average. Third quarter fiscal '23 operating expenses were $9.4 million versus $6.3 million in the year ago period. The increase was principally because of $1.9 million of acquisition costs, and higher general and administrative expenses associated with the inclusion of the Voltrek and Stay-Light businesses in our results this year. The acquisition costs incurred in Q3 include $1.5 million toward the accrual of the Voltrek earnout and transition costs -- transaction costs associated with the Voltrek deal closing. Orion reported a net loss of $24.1 million or $0.75 per share in Q3 '23, compared to net income of $1.1 million or $0.04 per share in Q3 '22, primarily due to our establishing a valuation allowance against the company's deferred tax assets. Orion recorded the valuation allowance, because we are now projecting a 36-month cumulative taxable loss through March 31, 2023, which requires the recording of this reserve. This non-cash entry does not impact our ability to offset future taxable income through existing NOLs. However, it will result in effective income tax provision rates that do not reflect statutory rates. Importantly, cash flow from operations was $1.3 million in Q3 '23, reflecting a benefit from the timing of accounts payable and accrued expenses partially offset by other working capital items. As of quarter end, net working capital was $24.5 million, including inventory investments of $19.3 million, which includes finished goods associated with our large automotive project, the addition of Voltrek inventory, and the balance of inventory intended to support product sales volume increases in the coming quarters. Orion had quarter end liquidity of $19.4 million, including cash of $8.1 million and $11.3 million of availability on our credit facility. This compares with $23.7 million of liquidity at the end of Q2 '23 prior to the funding of the Voltrek acquisition. As of the close of the third quarter, we had $5 million drawn on our revolving debt facility, the proceeds of which were used to fund the Voltrek acquisition. As you review our 10-Q, you will note that we have begun reporting Voltrek as a separate segment. Please note that the earnings reflected in that segment data include the allocation of some corporate overhead costs that are not incremental to Orion. The Voltrek business was EBITDA positive excluding those allocations. Turning to our outlook, we expect further sequential revenue growth in Q4 '23, which would result in our strongest revenue quarter of the year. Accordingly, we have reiterated our fiscal '23 revenue outlook of between $77 million and $80 million. While we expect an overall use of cash in Q4, we believe our cash and liquidity position will remain healthy at year-end, providing us a solid position to support growth initiatives across the business in fiscal 2024. As for M&A, while we continue to develop a pipeline of future opportunities, our near-term focus is on integrating our recent acquisitions, ensuring their success and investing in internal growth initiatives. So I think I'm going to focus on Voltrek here for my three. But, maybe first, could you just provide more color on the build out there, sales and service infrastructure? Maybe the timing and milestones we should look for? And when do you think you will have that in place and have the appropriate market reach that you're looking for? Great question Eric, we're actively working on that now. So as we -- we are adding to the team as we speak. And in our budget for this coming year, we certainly plan to continue that and accelerate that. I would say that we look to be at a different level of capacity, probably somewhere around -- by certainly a second quarter of our fiscal year, and be fully active in cross-selling activities at that time. And then maybe a follow-up. I mean, when you think about how Voltrek plays out. How do you see the end market breaking down? I know your first award, or at least the one that you have announced is an electric school bus pilot program but I also know that specifically some of your national account customers really were kind of pushing you to get into this area, are very interested in you getting in this area. So I mean, do you think this is more on the school bus side? Do you expect it to be more national accounts? Or how should that play out going forward? Yes, another good question. I would say all of the above. Voltrek has got great momentum right now, with a lot of municipal work, fleet work, which the bus project is an example really of both government as well as fleet. So we plan to expand that. And then as I referenced earlier, in terms of the cross-selling, that's really where we get the leverage and the synergy from our existing base of customers. And again, all of them really are considering at this point, their strategy for EV moving forward, because it is such a large mega trend in the U.S. right now. And then I guess last one would just be, obviously you mentioned, the significant funding that's out there, just curious steps you're taking to make sure that you're involved. You're part of that funding, and I don't know if there are steps you're able to take, but if there are it’d be great to get some color. Sure, sure. Well, I would say that's part of the infrastructure that we're further building out. I mean, Voltrek has been very strong and understands the processes well to access those types of funds. So certainly as we look to scale the business, we'll be adding resources in that area as well. And maybe a little more color for you, Eric. That comment we made about the funding in Massachusetts was in the backyard of Voltrek. So they're very tied in to that piece of it. And then Federal basis, we're obviously continuing to look at that, as Mike said. A couple of quick questions here. Any way to quantify the EV charging station backlog or pipeline or sort of market/bidding opportunities that you see in the intermediate term? Nothing specific at this point, I think maybe the best way to think about it, just for some context is, when we announced the Voltrek deal in October, we said we expected them to do about $3 million to $5 million of revenue in the second half of the year. On today's call, we said that they essentially exceeded our expectations in the third quarter, coming in at about $2.8 million of revenue. We expect them to continue to operate at that level and above so it will be exiting the year at a nice rate. And then given the infrastructure that we're adding, we expect to see significant growth above that in the coming year. And then also as it relates to your ESCO business, any way that kind of frame the size of that business today and what the backlog or pipeline opportunities could look like over the intermediate term? As I referenced in the call, we have been working very hard with our ESCO partners, and have a number of very large projects in the pipe. Those projects are in the seven to possibly eight figure range that will initiate in the first half of next year. In terms of total backlog or total pipe, we don't really share that. But I can tell you that the -- what we're seeing is a growing pipeline on a year-over-year basis with some very large projects. Several questions, I'll ask my three and get back in line. Regarding your large customer, I think it's Home Depot when it goes unmentioned. A few. When of the decline from this customer anniversary and what are the prospects of a return of some of the business? Were these deferrals of needed improvements and conversions for them? Was it saturation and completion of the roadmap? Or was it lost market share to a competitor? Andrew I'd say that we are pretty much at the point of having anniversary that project. The project was a discrete project with multiple components that involves the retrofit of their -- the majority of their retail outlets, the indoor lighting for those retail outlets. So we've accomplished that. And I think, as we've said on previous calls that there are additional projects that we continue to do for them. And we also are doing maintenance work for the company, for that customer. So we expect them to be a significant customer in the future. We think that -- and they've said that they may be in the $20 million range per year in the next several years. So that's a little bit of context to where they are. It's not that necessarily any work went away. It’s that it was a very defined program to retrofit the indoor lighting in their stores. Okay. Second question, is on the revenue delays that you refer to. Can you provide a little more context or color on the delays in the DoD and automotive industry projects? Are they the same causes? It sounds like they might not be. And what are those causes or what are the big issues in each? Sure. On the automotive front, it was really around project timing, we work with this automotive company, we work with a lot of their labor. And so it's a jointly scheduled. And those schedules, there were some conflicts in it on their side. And so that caused some delays. So it was not related to any macro factors outside of their own dynamics around their labor. On the DoD side, this is a very large, complicated project. We are part of a broader project on this for the Department of Defense, and that overall project has experienced some delays. So again, it's just the dynamics that are unique to that situation. Okay, I don't know if that's completed my three, I do have other questions. I'll back into the queue if you need me to. So with respect to Voltrek, now that you've run the business for few months, Mike, how should we think about the potential operating leverage? You did mention, you have some synergies and leverage opportunities on the customer side? But on the operating side, how should we think about operating leverage for that business? Well, I think, clearly, this is an investment year for us. We're investing heavily in the business. We still think it'll be EBITDA positive business this year, and we think it's -- we're looking forward to rapidly scale. As we continue to look out in the horizon, we'll start getting more and more operating fixed cost leverage as we move forward and continue to grow the top-line. And does the EV charging opportunity now exposing new opportunities in storage, et cetera as well? Or are you not sort of entering or not looking to enter that segment? Well, we're not actively in that segment now, but it is definitely a tangential area and could be part of a broader solution. So it may -- it's something for us to look at as we move forward. Just last one for me. Is there any inventory et cetera, that you guys are sitting on related to the DoD and auto project push outs? There is some. I mentioned in my remarks, Amit, that there is some -- a fair amount of inventory for the DoD project, the way that project -- I'm sorry, the automotive project, that project is underway and the way that project works is that we actually recognize revenue associated with the service over time. But some of the product does not get recognized until later in the project. So there is over $1 million of inventory just on the books for that project that hasn't yet been recognized as revenue and cost of sales. So that's one piece of it. And then another piece I mentioned is, there is the Voltrek inventory that was added in the current year. You can see -- you will see in the 10-Q, where you'll see the opening balance sheet broken out for you in that footnote, the acquisition footnote that when we acquired Voltrek, they had about $880,000 of inventory. We don't separately disclose the 12/31 balance, but that'll give you at least some context of magnitude for inventory in that business. But there's not meaningful inventory on hand for the DoD project at this time. So little follow up on that DoD questions. Your DoD project, is it one of your first as a subcontractor for the DoD? And is there a potential pipeline of additional projects to come based on whatever theme that is driving this DoD project? Great question, Andrew. No, this is not our first project working for the DoD. And we are working with what we call a super ESCO who has the prime contract and then we are a sub. We have worked with this super ESCO on other DoD projects. There are some others that are in the pipe that we're working with other super ESCOs as well. So that's really one of our core models of working with the DoD, is working with ESCO partners. Yes, I was just going to clarify. We do occasionally and have historically done some work direct. We do have the ability to work direct on government contracts. Some we do direct, some we do as a sub. And some questions around the Voltrek acquisition and forecasts, supplementing what others have asked here. You have a bunch of costs that are in this quarter's results that you've called out to be part of the -- having acquired Voltrek. Of the cost that you have there that you called out, about how much or what's the range in dollar value of those expenses in the quarter that you would consider one-time related to the acquisition rather than an incremental ramp up that is our ongoing expenses? I'd say the high-level way to think about the items we put in the acquisition related cost line are things that we don't believe, are part, are related to the ongoing operations of Voltrek. It's either part of closing the deal, which is the majority of the costs incurred away from the earnout accrual in this third quarter. So the parts, anything that relates to their ongoing operations would not be included in that line but would be related to closing the transaction, accruing the earnout or some integration costs which are not a big portion of that. And just to clarify one thing for the audience on the earnout, the $1.5 million we accrued in the third quarter, if their performance continues, at the level it is, we would expect to record an additional $1.5 million accrual in the fourth quarter of our fiscal year, and then the expectation would be that, that would be paid sometime mid to late summer. So to be clear, then it sounds like the whole line item that you've broken out and called acquisition costs, those are all one timers? It's a three-year earnout. This would be year one and ending at the end of our fiscal year for the first year. So as I've indicated, I believe if we continue on the pace we're on, we believe that will be earned. Second year, is again the next fiscal year. And then there's a third year in what will be our fiscal '26 -- '25, I am sorry, fiscal '25. There's three years current year, $3.5 million in the second year and $4 million in the third year. There's also a cumulative kicker at the end of the third year, under which you could earn an additional $4 million -- up to an additional $4 million. And you're adding a bunch of people to build out the sales and service infrastructure required to extend Voltrek reach across the U.S. from its current focus in the Northeast, as your quote is. This people hire -- and is this primarily internal and fixed cost or outsourced and variable? It's a combination of both, we execute the model through independent contractors in terms of site installation, but the internal resources are really on the project management side, the sourcing opportunities, and then the project management side of the business. And are all of those costs then allocable towards the Voltrek side of the house and built into them the measurement of EBITDA? And the other costs that are referenced or referred to here, are these like onetime investment costs or most of them ongoing and fixed costs? I think in your -- the text of your press release, and in your script, you refer to people and other costs. The other costs that are being incurred to build things out and the infrastructure out, are they onetime shots, maybe capitalized or are they ongoing costs? Yes. This is predominantly adding staff and people to do the work that I just spoke about on the sourcing and the project management side. The infrastructures -- any infrastructure expense is relatively minimal. That concludes today's Q&A session. At this time, I would like to turn the call back to Mike Jenkins for closing remarks. Great. Thank you, operator. As many of you know today, marks my first time with this call as CEO. I certainly look forward to meeting and engaging with all of you and other stakeholders in the coming months and quarters as we execute our growth plan. If you have any questions or comments in the interim, or would like to schedule a call with management, please contact our IR team whose information is included on today's press release. Thank you all again for joining us today and we look forward to talking to you soon.

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Greetings. Welcome to VistaGen Therapeutics Third Quarter Fiscal Year 2023 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. Thank you, Sherry. Hello, and welcome to VistaGen's conference call covering our third quarter of fiscal year 2023 financial results and a business update. Thank you for joining us today, and welcome to our stockholders, analysts and anyone taking an interest in VistaGen. Joining me today are Shawn Singh, our Chief Executive Officer; and Jerry Dotson, our Chief Financial Officer. The format for this call will consist of prepared remarks from management, followed by a brief opportunity for questions from sell-side analysts. This call is being webcasted and will be available for replay. The link to access the replay can be found in the Investors Events section of our website, vistagen.com. On today's call, we will make forward-looking statements regarding our business based on our current expectations and current information. The forward-looking statements speak only as of today, and except as required by law, we do not assume any duty to update in the future any forward-looking statement made today. Of course, forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated by any forward-looking statements that we may make today. Additional information concerning risks and factors that could affect our business and financial results is included in our most recent quarterly report on Form 10-Q filed earlier today with the Securities and Exchange Commission, or SEC, and in future filings that we make with the SEC from time to time, all of which are or will be available on our website and the SEC's website. Thank you, Mark, and good afternoon, everyone. Thank you for joining the call. There is an active and growing need for new faster-acting treatment options for anxiety and depression disorders. Treatment options without negative side effects and safety concerns that are often associated with the currently approved medicines. We remain focused on addressing the significant mental healthcare need for individuals across a broad range of demographics and in communities across the globe. Our team is committed to developing and commercializing multiple differentiated treatments that align with our mission to shift the treatment paradigm for anxiety and depression disorders and improve the trajectory of mental healthcare, One Mind at a Time. We'll start this call with a brief update on PH94B and our Phase III program in Social Anxiety Disorder or SAD. During the quarter, we further analyzed PALISADE-1 to obtain a better understanding of the unexpected results from that study. As a reminder, the study involved only a single dose of PH94B to subjects who were randomized to the treatment arm in the study. All subjects were given a highly provocative public speaking challenge conducted only in a clinical setting before a group of strangers and their change in the subjective units of distress or SUDS score was determined and measured as the primary endpoint. We move forward with this study – the study methodology following our discussions with the FDA back in mid-2020, during the early phase of the COVID-19 pandemic, when the world was sheltered in place and social interactions and even exposure to the outside world were not encouraged. Following are among the hypotheses, we believe are potential explanations for the unexpected outcomes in PALISADE-1. The study was conducted through surges of the COVID-19 pandemic, introducing significant additional variability in terms of changing social dynamics, subject stress, study site and CRO personnel turnover, mask wearing and scheduling and monitoring complexities. Also, the public speaking challenge study design may not have been scalable to a large Phase III study, especially during the pandemic, given the various complexities of consistently administering the highly provocative challenge and requirements for rigorous adherence to the study protocol across numerous sites and over an extended period. And also, some subjects in the study may have had a reduced response to PH94B due to impaired olfactory cell function, potentially caused by the COVID-19 virus or even nasal swab testing for COVID-19 or influenza. After receiving the topline results from PALISADE-1, we paused PALISADE-2, which involves the same single dose, post-randomization public-speaking challenge methodology as PALISADE-1. We then engaged independent biostatisticians to conduct an interim analysis of available data from the 140 subjects randomized in the study at that time. Based on their independent review of the unblinded data from those 140 subjects, data we've not yet seen, independent statisticians recommended that we continue PALISADE-2 as planned. Accordingly, during the quarter, we submitted protocol amendments to the PALISADE-2 study protocol to the FDA. Amendments that are aimed at minimizing the potential issues that may have played a part in the unexpected results that we saw in PALISADE-1, if we decide to resume PALISADE-2, we believe these protocol changes could considerably increase the probability of favorable results in the remaining one-third of the trial subjects. However, a new and another important factor to note regarding our considerations for potentially resuming PALISADE-2 is that in December 2022, a couple of months ago, two of our peers announced topline results of their recently completed SAD studies using a single administration public-speaking challenge study design with SUDS as the primary endpoint. Neither study achieved its primary efficacy endpoint. So after reviewing the information and data available to us at this time, we believe it is not yet advisable to resume PALISADE-2 before discussing our broader Phase III development plan for PH94B in SAD with the FDA and assessing the results of the other two recently completed SAD public speaking challenges conducted during the pandemic that also did not achieve their primary efficacy endpoints. We remain confident in PH94B's potential to be a game changer for individuals affected by social anxiety disorders. We have been and will continue to explore all of our options for what we believe will be the best path forward with the highest probability of success for our Phase III program in SAD. We are currently preparing to meet with the FDA to discuss our broader Phase III development plan, which includes the possibility of conducting a multiple administration, randomized double-blind placebo-controlled Phase III study of PH94B in adults using the Liebowitz social anxiety scale, or LSAS, as the primary measure to evaluate the efficacy of PH94B over time, in patients with SAD to support a potential PH94B NDA for treatment of SAD. Unlike the PALISADE-1 and 2 Phase III studies, which involved assessment after only a single administration of PH94B in a clinic-based public speaking challenge, with SUDS as the primary outcome measure. The Phase III study contemplated as part of our broader plan would involve multiple administrations of PH94B on an as-needed basis up to four times a day in a real-world setting over multiple weeks, with the LSAS as the primary efficacy endpoint. Using the LSAS, would be consistent with the design of all registration trials supporting the FDAs three precedent-setting approvals of treatments for SAD. Given that the LSAS measures overall improvement in disease severity by measuring, both the reduction in fear and anxiety over time about social and performance situations, as well as the reduction in avoidance of those anxiety-provoking situations. We believe the LSAS is appropriate to measure and reflect the true impact of PH94B on patients' daily lives. We expect to announce our plan for PALISADE-2 concurrently with other updates to our broader PH94B Phase III development plan for SAD. Another important component of our Phase III program in SAD is the PALISADE Open Label Study, which we initiated back in October 2021 to evaluate the safety and tolerability of PH94B in adult subjects with SAD taken as needed prior to anxiety provoking social and performance situations in daily life over a period of up to 12 months. In addition to assessing safety and tolerability of PH94B in that study, we also included several exploratory objectives, including PH94B's potential to achieve overall symptom reduction and improvement in severity of SAD as measured by the LSAS. Again, it's the primary endpoint is required by the FDA for all prior SAD approvals. In August 2022, we closed recruitment and enrollment in PALISADE Open Label Study, a preliminary analysis of the final data set observing nearly 400 subjects in that study is encouraging. And although from an open label study, when considered with our prior placebo-controlled, multiple assessment Phase II study of PH94B in a real-world setting, that study has helped inform many important aspects of our broader Phase III development plan for PH94B in SAD. The open label study results reinforce our beliefs in the potential of PH94B used overtime as needed up to four times per day in daily life to provide rapid onset, clinically meaningful and sustained response with a favorable safety and tolerability profile. We expect to have the final data readout of observations from this study in the first quarter of calendar 2023. Moving next to our exploratory target indication for PH94B adjustment disorder with anxiety. We've completed our small Phase IIa double-blind, placebo-controlled clinical trial to evaluate the efficacy, safety and tolerability of PH94B as a potential treatment of adults with adjustment disorder with anxiety. Subjects self-administered PH94B at prescribed intervals, four times per day for 28 days. We anticipate announcing topline data from this exploratory Phase IIa trial by the end of the first quarter of calendar 2023. During the recent months, we achieved several milestones in our PH10 program in major depressive disorder or MDD. We submitted our U.S. IND and subsequently received the U.S. FDA's green light to conduct the Phase I randomized, double-blind, placebo-controlled safety study in healthy volunteers. That study is now underway and is intended to both confirm the favorable safety profile of PH10, establishing three previous clinical studies conducted in Mexico, including positive published Phase IIa study of PH10 for the treatment of MDD as well as to facilitate our plans for Phase IIb development of PH10 in the U.S. as a novel standalone treatment for MDD. We anticipate completing that study – Phase I study by the end of the first quarter of 2023. In all clinical studies to date, PH10 like PH94B has been well-tolerated, has not caused psychological side effects such as disassociation, hallucinations and the like or other safety concerns that may be associated with other rapid onset depression therapies such as ketamine. Also of note, we recently received the FDA's Fast Track designation for development of PH10 for MDD. Similar to the large and growing anxiety market, there is significant unmet need for patients with MDD, where the current treatments are either undesirable or inadequate. With a differentiated mechanism of action that is designed to be fast-acting, non-systemic and non-sedating. We believe that PH10 has potential to shift the treatment paradigm for MDD considerably. Having PH10 in the clinic in the U.S. and under the FDA's Fast-Track designation are important recent milestones in our plan to bring PH10 to many individuals battling MDD and potentially other depression disorders. As to AV-101, our Phase Ib drug-drug interaction clinical study with oral probenecid is ongoing. We anticipate completing that study during the second quarter of calendar 2023. After its conclusion, assuming no unexpected safety issues, we will crystallize the final components of our plan for exploratory Phase IIa development of AV-101 alone or in combination with probenecid and on our own or with a collaborator, as potential oral treatment for one or more CNS disorders involving the NMDA receptor. Finally, I'd like to make a few comments about our recent acquisition of Pherin Pharmaceuticals. Now that this transaction has been completed, we have full ownership of worldwide intellectual property rights to PH94B and PH10, which previously were under exclusive licenses to us from Pherin that included customary milestone and royalty payment obligations overtime. As a result of the acquisition, we've eliminated all future royalty and milestone payment obligations for PH94B and PH10, which significantly improves the potential commercial profile of these late-stage assets, should they be approved downstream. In addition, we will retain all licensing revenues, including pre-commercial licensing revenues, should we enter into such transactions as we have in the past. Further, as a result of the Pherin acquisition, we've added three early clinical-stage pherine product candidates to our pipeline, PH15 for cognition improvement, PH80 for migraine and hot flashes, and PH284 for appetite-related disorders. Also of note, VistaGen did not assume any debt as part of this transaction, any other liabilities from Pherin nor did we bring on any Pherin employees or take on any Pherin facilities. I would now like our CFO, Jerry Dotson, to summarize some highlights from our financial results for the third quarter of our fiscal year 2023. Jerry? Thank you, Shawn. As Shawn mentioned, I'd like to highlight a few of the financial results from the third quarter of our fiscal year 2023. I would also encourage everyone to review our quarterly report on Form 10-Q that we filed with the SEC earlier this afternoon for additional details and disclosures. During the three months ended December 31, 2022, we recognized $179,600 of revenue related to the AffaMed Agreement, compared to recognizing $357,900 of revenue for the three months ended December 31, 2021. As a reminder, the revenue recognized in both of those periods is non-cash in accordance with the applicable accounting standards. We received the related cash from AffaMed back in August of 2020. Research and development expense decreased by $0.9 million from $7.9 million to $6.9 million for the quarters ended December 31, 2021 and 2022, respectively. This decrease is primarily due to reduced expenses related to the PALISADE Phase III program for PH94B, which, as Shawn has described, includes PALISADE-1, PALISADE-2 and the PALISADE Open Label Study as well as the PH94B Phase IIa study in adjustment disorder with anxiety and other non-clinical development, regulatory and outsourced manufacturing activities for both PH94B and PH10. We expect R&D expense in the final quarter of our fiscal 2023 to decrease as well as we wind down these trials that Shawn has mentioned earlier. Our general and administrative expense was flat at approximately $3.1 million for each of the quarters ended December 31, 2022 and 2021. Our net loss attributable to common stockholders for the quarter ended December 31, 2022, was approximately $9.8 million versus a net loss of approximately $10.7 million for the quarter ended December 31, 2021. At December 31, 2022, the company had cash and cash equivalents of approximately $25.0 million. Again, please refer to our quarterly report on Form 10-Q filed earlier today with the SEC for additional details and disclosures. I'll now turn the call back to Shawn. Thanks, Jerry. We remain unwavering in our core mission to improve mental health and well-being worldwide. As we continue to advance the next stage of our corporate development, we move forward with a strong team, a strong pipeline and a strong mission that drives us to innovate better solutions for mental health disorders, all with significant unmet need. This is an exciting endeavor for our company, and we believe that we are very well positioned for 2023. On behalf of the VistaGen team, I want to thank you for the privilege and the opportunity to make a difference, One Mind at a Time. Thank you, Shawn. This concludes our prepared remarks. Sherry, we would like to now open the call up for questions from sell-side analysts. Thanks. Hi, everyone. Good afternoon. Appreciate you taking the questions. First one is that your upcoming FDA meeting, in terms of discussing a possible pivot in the Phase III design using LSAS and then multi-dosing over a long period of time. So can you kind of talk about the scenarios here if the FDA says, okay, do a pivot, what would you do with PALISADE-2? And if the FDA says no, what would you do with PALISADE-2? So basically, what I'm trying to get at is, in what scenario could we see the PALISADE-2 results at the end of the day? Even though it hasn't finished, you did see a signal in the interim analysis. So that's why I asked? Thanks. Thanks, Andrew. Good question. Look, we still have to assess really what would be the best path forward after not only we take a look further at what happened in the peer studies. So there are questions associated with scaling up that methodology and executing on was a very highly provocative challenge that requires exquisite adherence to protocol recipe. We've submitted some protocol amendments to the FDA. So we'll see what their feedback is on that, things that we think can overcome some of those methodological challenges. We'll see what their opinion is on that, as well as which direction things go in the meeting, where we're discussing a potential next step forward with LSAS as the basis, just like with the three approvals. So it's possible that we would simply unblind PALISADE-2 as it is and in the study there and see what we find from those unblinded data on 140 subjects, it could be denting, it could be soft trend, it could be positive signal, decent effect size, it could be a lot of things. We know what the interim analysis said, but we haven't seen the data. It's also possible of resuming PALISADE-2 depending on which direction things go with the FDA. Look, the good thing going into the discussions with the FDA is that there is a lot of evidence already, there's Phase II placebo-controlled studies in PH94B in SAD that have substantial evidence showing its rapid onset of effect following the acute administration. That was – we talked about that study quite a bit. Then the placebo-controlled crossover study that was two weeks of real-world use, then that amplified by what we've seen so far, we haven't yet reported, but we'll assume observations from the long-term safety study in the LSAS component of that study in particular. So there's a lot of things to ask to the FDA. There's a lot of things to get feedback from the FDA on, and we'll make some decisions on the basis of that interaction as well as what we might learn more about. We need to do some work again with sites. We need to figure out some more information about what sites are around and are willing to be involved. And if we were going to resume, would we want changes to be made, that they may or may not be able to execute, depending on staffing and expertise. So we're set to see. Right. Okay. Very, very helpful. And so speaking of the open label data coming up, what exactly do you plan to share with us? Basically, how much data can we expect to see in the topline release? And then secondly, part of my – this long kind of question, but one of the issues – underlying issues, in general, of the open label study is, there's no placebo. We don't necessarily know what the placebo would trend. That said, I can think of the epilepsy space, where there is an efficacy measure called seizure freedom because placebo can barely achieve seizure freedom in epilepsy. So that is perhaps why looking at seizure freedom rates in an OLE could make sense. So as we get back to the social anxiety space, I guess the question is, what percentage of placebo patients can achieve remission in theory over, let's just say, six to 12 months? Because – and I guess, would you agree looking at remission rates could be valuable of a data point basically? That's something we can discuss with the FDA. All of the approval studies were registrational studies for the three antidepressants approved for SAD. Those are all 12-week study. Again, look, we obviously acknowledge the absence of a control group in any open label study by definition. But the data from – again, I noted this before, nearly 400 subjects observed in that study. They provide very important additional information regarding PRN dosing of PH94B. And we take that together with the data from the placebo-controlled Phase II study, where the real world study, there – those studies provide a lot of evidence on how SAD patients would use PH94B, for example, the frequency of use in the real world setting and the appropriateness also of assessing improvement in SAD over time, utilizing the LSAS, obviously, as the key measurement. For that, given that, that's the historical precedent, that's the historical compare to three of them now. So we know each SAD patient is different. We know SAD treatment is individualized and tailored to the situations that patients encounter in their daily life. We think PRN use is the most appropriate dosing strategy for the treatment of SAD unlike the single highly provocative administration assessment that was in the PAL-1 and PAL-2 studies. And that these feared situations that people encounter, they are very predictable and are awaited with fearful and anxious anticipation. So the LSAS, which again, long established by Dr. Liebowitz, who's the PI of the Phase II studies and also currently working with us, that remains the most appropriate outcome measure for the type of study we might next do, right, a double-blind, placebo-controlled study that evaluates the efficacy of as needed use of PH94B, but overtime for the treatment. Because what we're trying to essentially do is reset the mind, similar to how cognitive behavioral therapy works. And rather than taking, say a snapshot with SUDS and with the public speaking challenge, they all assess more like a movie, assessing the improvement of the patient over time. And again, having those – having the LSAS is the primary endpoint is consistent with the registrational trials for the existing approved treatment. So it may be prudent, as you said, to follow beyond 12 weeks. We know this is a chronic disorder. So repeat dosing is exactly the way we've long envisioned using PH94B to help people. And again, a lot of the reason we moved into the PAL-1 was where the world was at the time, in the middle of 2020 when we last met with the agency about Phase III study design that you couldn't even go outside as you all remember. So exposing people to stressors over a long period of time, six weeks was probably what we would see in a Phase III study, given the way that PH94Bs onset is rapid, what we would see say in the six-week study would be really what the antidepressants achieved in a 12-week period, since they have a long onset of action. So what we would show to your first part is, we would certainly want to show improvement on the LSAS at least one month and probably two month given that we're aiming for a study design somewhere in the four to six-week range. So what we're looking for there is, are we seeing a significant drop. Again, this is observed data. We understand how the control group, but it definitely informs when you have nearly 400 subjects. It gives us a lot of information to tack on top of really the other crossroad we were at back in 2020. We could have gone to the real-world study then, but for the fact that we're in COVID. And now I think we have that opportunity given that the world settled down a bit, vaccines are okay, and we have a lot more understanding of the safety associated with having people record their stressful events and having LSAS assessments for a long period of time. Right. Thanks. Last one and then I'll hop in the queue is, on the adjustment disorder data coming up, it is also dosed chronically placebo-controlled 40 subjects, I believe. So I think the primary endpoint is day 20 HAM-A scores. So can you kind of give us a reminder what existing drugs show at four weeks, just so we can have a comparator when that data comes? They have not a lot of competitors. That's a challenge with this disorder. It's in DSM-5, but there really aren't a lot of controlled studies. That's why this really lands in exploratory study zone. HAM-A, you had to have somewhere around 20 to be enrolled and people had to be on if they were on anything, there were stable background antidepressants, but we'll – it's an exploratory study. It's a small study, as you said, around 40 subjects. We're looking for a signal, as you'd expect from IIa study. It's not heavily powered as you'd expect with the exploratory design. So we'll see. The 300 meds are used. But unfortunately, they're just – it's the same sort of collection of meds that we see in social anxiety disorder that folks that had never really had experience with anxiety, but for, in most cases, something here associated with the chaos, the domino effect from COVID, job loss, relationship loss, isolation, those things started to impair their functioning. That's adjustment disorder and anxiety that disrupted routines and so forth. So benzos, beta blockers, antidepressants, alcohol, all kinds of things that really aren't optimal for SAD or also not optimal for adjustment disorder. Thanks for taking the question. For the upcoming adjustment disorder study, can you remind me how many doses these patients are taking per day? And I guess, following up with the prior question, do you have a sense of what the placebo rate is in this setting? I guess there's any sort of historical that you can compare to? Yes. I'll take that part first, Tim. There's just isn't a lot of traffic historically in this disorder. And so I can't really give you a well-grounded number. In terms of the dosing regimen, we had, again, a [indiscernible] support early on showed a lot of safety from PH94B taken up to four times a day. So we sort of force that into this exploratory study. There wasn't a lot grounded that necessarily said four times is what was needed. But part of it was to also establish safety associated with taking the drug four times a day because that crosses over into thoughts about safety related to taking PH94B, four times a day in multiple different SAD related anxiety-provoking episode. So there was a little bit of crossover intention by that study regimen. So in this one, it's four times a day. It's recommended to be spaced out an hour or so between doses in morning, early – late morning, early afternoon and evening, so four times is kind of spread out for an hour so in between. We know PH94B has a rapid onset. We also know it has a fairly short duration of effect. So that's part of the benefit of it being sort of a better benzo without the baggage, right, rapid onset, but without the lingering cognitive impairment. So it's four times a day split by a few hours over 28 days. Okay. That's helpful. And so outside of the upcoming PH94B meeting, it sounds like you got a couple of assets through the Pherin acquisition, PH80 specifically. Can you just – outside of PH94B, can you rank kind of where the rest of the pipeline is in terms of priorities for the company? Yes, sure. Well, PH94B, of course, way top of the list and across multiple indications in the two that we've acted on in the clinic SAD and adjustment disorder, PH10 following right after that. We have a IIa that was done outside the U.S. That's the POC study for that asset in major depressive disorder. We had to bring it back to the U.S. to a full IND enabling program, optimize the formulation a bit. The small Phase I that we're doing should be done here within a few months, and we'll announce on that probably early second quarter. That then lets us hopefully move right back into late-stage Phase IIb development with that asset as a standalone treatment option for MDD with the rapid onset and the same similar features in terms of no systemic uptake and to sedation as PH94B. And then it's kind of leveled out. There are early – there's early clinical data for PH15, P80 and PH284 done again outside the U.S. in most cases and some cases here. But we're going to need to do some IND-enabling work for those three assets, similar to what we had to do for PH10. We expect to be able to achieve some grant support for that work. That was non-clinical work that gets us back into the clinic. AV-101, we see probably more advanced than PH80, PH15 and PH284 at this point, because if we see the safety that we're hoping with this combination, we have a lot of preclinical data, really solid preclinical data across a few indications involved in the NMDA receptor. So levodopa-induced dyskinesia, neuropathic pain, some of the models that we've done in MPTP monkeys as well as in models for pain against Lyrica and gabapentin, so we'll have to decide which direction we want to go. But I think the IIa would be the next priority after PH10 for IIb with AV-101 and then we'll see how things go. We haven't had our hands on the new Pherin assets for too long. So we want to do a little more digging into the data sets that exist. But there are data, clinical data across all those that are fairly encouraging, and we just need to get more direct touch on all three of those as we see what we might want to do there. There's a lot of grant opportunities for those assets. The core focus, however, predominantly is on PH94B followed in by PH10. Thanks, operator. So speaking of the PH94B, you did mention earlier some competitors reported some SAD topline data. My understanding is one of the competitors did, in fact, see a signal when they – depending on how they analyze the data, they'll talk to the FDA is how I understand it. So I guess the question is, if the FDA buys into their SUDS and long-story short, whereas the FDA buys into your LSAS, let's just say that scenario happens, how do you guys decide to proceed because I presumably, you would have two options to go with here? We already know where the FDA is on SUDS. There's no question about that. It's a valid endpoint. That is, the public speaking challenge is a solid methodology. I have no issues about either of those. The question is, can you scale it effectively and into the size of a study that's necessary to be a registrational study. And that's what we're trying to assess at the moment, right? We know the challenges that are associated with the protocol, with the methodology that was – for example, do you – is it the surveillance to whether or not you have the right raters that are changed as you move from the different visits, making sure that people don't inhale the drug, making sure that people haven't destroyed the cells associated with where we need the drug the land. There's a lot of things that land on that one single administration assessment. And it's a very provocative trigger. I mean, those Phase II studies that the peers did their Phase II study. So it's a whole different ball game when you move into scaling that methodology up to the size and quality necessary to support a registration study. And that's what we're assessing. It may be possible with the changes we proposed to the FDA or it may be something that we say just isn't – isn't worth that risk? And isn't necessary? If PALISADE-2 at the end of the day goes all the way and what we end up having is a positive signal with a good effect size, but it's not statics. Well, then that isn't going to support an NDA. If we think that there is going to be rigorous adherence to the protocol with the sites that would be involved that the macro environment would be right. Those all go into the thinking. But the fact it's very unusual for three studies with the same methodology, but distinct drugs within a six-month period of time would not hit their primary endpoint, statics on their primary endpoint. So it's just that's part of our thinking. The other side of it is, as to the LSAS, a, we know there's historical comparators there. There are – although, we don't think there's a regulatory risk with SUDS, based on our prior interactions with the agency, there are three historical comparators that support LSAS as the primary endpoint for all six registration studies. All of the registration studies, by the way, for SAD using the LSAS, all of them were positive. That's big positive, not a single one wasn't. So that says a lot as well, right, in terms of downstream, risk assessment, discipline use the cash and resources, we'll just have to make a decision about what's the best way to put time, talent and cash towards ultimately what we want. We want an NDA that is approved. We want study designs that fit the way we think the drug best fits, how we think people can be helped by it in the world. So there is a lot of confidence behind the – if you look at those same drugs in depression Paxil, Zoloft effects are – there were a steady string of successes. There were multiple failures and multiple successes. But interestingly, in SAD for the registrational studies, all were positive and all use only to LSAS as the primary efficacy end point. So with a bit of a changed world now, where COVID's under control and a lot of other factors that we would improve on that some lessons learned from PALISADE-1 that transport into what we would do if the direction forward is a Phase III study with LSAS as the primary. The odds set pretty nicely. Right. Last question then is if you – ultimately, if you do proceed with LSAS, how fast can you get to Phase III studies up and running and having generated the data? Can you kind of walk us through the time lines? Yes. Well, of course, a lot of it depends on funding, right? Right now, we're not sitting on funding that supports all the way through those data readouts. But in an optimal scenario, we would be in a mode in about six months, it takes to get going for the type of study that we want to launch with the sites, we would want to be involved and now we've been involved with now around almost 40 sites across the two studies. We know the landscape very well. SAD is back in motion as something that's being studied it hadn't really been before we brought it back with PALISADE-1. So those studies, if we would start them sometime before the end of the year, we could see readouts in the fourth quarter of 2024. And it'd be a staggered start again, two studies running in parallel, both a little bit of a staggered start as we did with PAL-1, PAL-2, the LSAS based studies would run next to each other. And we think we could see readouts by the end of the fourth quarter of 2024 if we get going here within the next several months. Thanks so much. If you have any additional questions, please do not hesitate to get in touch with us by emailing ir@vistagen.com or contacting the individuals listed on our press release issued today. We also encourage you to sign up on our website to stay connected with the latest news from VistaGen. Thank you for tuning in and we appreciate everyone's attention and support. We look forward to keeping you current on our continuing progress. This concludes our call. Have a great day. You may all disconnect.

EarningCall_176

Hello, and welcome to Ares Management Corporation's Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded on Thursday February 9, 2023. I will now turn the call over to Carl Drake, Head of Public Markets Investor Relations at Ares Management. Please go ahead. Good afternoon, and thank you for joining us today for our fourth quarter and year-end 2022 conference call. I'm joined today by Michael Arougheti, our Chief Executive Officer; and Jarrod Phillips, our Chief Financial Officer. We also have a number of executives with us today, who will be available during Q&A. Before we begin, I want to remind you that comments made during this call, contain forward-looking statements and are subject to risks and uncertainties, including those identified in Risk Factors in our SEC filings. Our actual results could differ materially, and we undertake no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results and nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Ares Fund. During this call, we will refer to certain non-GAAP financial measures, which should not be considered in isolation from, or a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our fourth quarter and full year earnings presentation available on the Investor Resources section of our website for reconciliations of the measures to the most directly comparable GAAP measures. Note that, we will plan to file our Form 10-K later this month. This morning, we announced that we declared our first quarter common dividend of $0.77 per share of its Class A, and nonvoting common stock, representing an increase of 26% over our dividend for the same quarter a year ago. The dividend will be paid on March 31, 2023 to holders of record on March 17. Jarrod will provide additional color on the drivers of the significant increase in our quarterly dividend later in the call. Now, I'll turn the call over to Mike Arougheti, who will start with some quarterly and year-end financial and business highlights. Thanks, Carl, and good afternoon. I hope everybody is doing well. Despite significant volatility and uncertainty in the markets throughout the year, we generated exceptional growth and strong performance across our financial and operational metrics. Year-over-year, we grew 32% in management fees, 40% in fee-related earnings, and 30% in after-tax realized income per Class A common share, while also delivering a strong year of fund performance for our investors. This financial outperformance during challenging markets isn't new to Ares, as our management fee-centric business model and flexible investing approach have enabled us to accelerate our growth during past turbulent market cycles and recessions. The strong relative performance of alternative investments last year, compared to the publicly traded equity and fixed income markets only further reinforces our belief in the benefits of private market investing. Investors remain significantly under allocated to alternatives, which represent just over 10% in total global AUM. With a robust fundraising pipeline and our expanded investment capabilities heading into 2023, we believe that we're well positioned for continued strong growth as we expect investors to increase their alternative allocations. While 2021 was a transformational year for our platform, with multiple strategic acquisitions, 2022 was a year of integration, and platform building to position the company for future growth. During the year, we added approximately 450 professionals with 150 in origination and investing, and 85 in fundraising and wealth management, including new senior wealth management heads in Europe and Asia Pacific. We also spent the year enhancing our retail platform through product expansion, growing our distribution capabilities and deepening relationships with strategic distribution partners. Our affiliated insurance business, Aspida began directly originating annuity contracts in late June and finished the year with significant growth and momentum. We also continue to expand our relationships with existing and new institutional investors and experienced a significant increase in our institutional strategic partnerships. For the year, we added over 100 new institutional investors, while seeing over 90% of inflows coming from existing investors either through reups or commitments to new products. At the end of 2022, nearly 90% of our AUM was from investors that held multiple funds managed by Ares. We ended the year with $352 billion in AUM, an increase of 15% from $305.8 billion at the end of 2021 driven primarily by fundraising of $57 billion, including more than $12 billion in the fourth quarter. Although, we didn't have many large commingled funds in the market last year, our fundraising benefited from a growing base of capital from non-campaign fund sources, including our perpetual funds, certain managed accounts and other smaller funds. To that point of the $57 billion of fundraising in 2022, over $40 billion was capital raised from outside of our 20 largest institutional commingled fund families. We also continue to innovate and offer new strategies to our investor base. For example, more than 40% of our fundraising last year was from new strategies or products that didn't exist five years ago at Ares. During the fourth quarter, we held notable fundraises, including a first close on our fourth US opportunistic real estate fund of more than $1.4 billion; and a final close on Infrastructure Debt Fund V, which reached approximately $5 billion of committed capital including related vehicles. We believe that our Infrastructure Debt Fund V is the largest infrastructure sub debt fund ever raised and is a testament to our leadership in that segment of the market. Also our non-traded BDC Ares raised $847 million of equity commitments in a private placement in November through January and closed on a $625 million leverage facility. While we experienced a slowdown of net inflows into our two non-traded REITs flows remain positive with a combined $440 million of gross quarterly proceeds inclusive of our 1031 exchange program versus $157 million of quarterly redemption requests. We believe that our all-weather careful investment approach, lower use of leverage and sticky capital within our 1031 exchange program benefits our fee-paying AUM. In addition, we're still growing the distribution capabilities around the non-trade REITs. In December, we added a second large wirehouse for distribution and we expect to add two or more wirehouses or private bank relationships for our suite of retail products in the first half of this year. We anticipate additional inflows from these new relationships over time, as we continue to ramp our sales efforts. We are firm believers that the long-term growth opportunity for alternative products in the retail channel will be robust. Retail investors are meaningfully under allocated to alternatives compared to some institutional investors and key allocators across the retail space are looking to meaningfully expand their exposure to alternatives. Over time, we intend to offer drawdown and evergreen style strategies across our primary asset classes suited for both mass affluent and high net worth investors. As you may recall, we didn't expect 2022 to be a record fundraising year for us without many of our largest fund families in the market. For 2023, driven by the recent launch of several of our largest commingled fund families, we believe our aggregate fundraising will be well in excess of last year's and will approach our record in 2021 of $77 billion. In the aggregate, we expect to have approximately 30 commingled and perpetual life funds in the market this year including seven of our 10 largest institutional commingled funds. We're observing a flight to larger higher quality managers as investors are consolidating their allocations with preferred managers. Not only does this scale benefit us in fundraising, but it could enhance our competitive advantages as other players have less capital to deploy. As an example, late last year, we launched our sixth European direct lending funds and most of the predecessor funds largest investors are working towards making a commitment in the first close. We expect to have a substantial first close in this fund in late Q1 or early Q2. We also recently launched our third US senior direct lending fund and expect to see similar demand for that fund as well with the first close slated for the second quarter. The total capital for the previous vintages for these two European and US direct lending funds was just over $30 billion combined including fund leverage. Additionally, the second vintage of our alternative credit fund is in the market and we anticipate a first close in late March or April. As a reminder, our alternative credit strategy deployed flexible capital, focused on large diversified portfolios of assets that generate contractual cash flows. The fund carries a unique performance fee structure where 10% of the carry, half from the investment team and half from Ares goes towards charitable initiatives tied to global education, fighting global hunger, and the Ares Charitable Foundation. Initial investor engagement has been very active across all three of these large private credit funds and we expect strong demand for all of these products. We recently launched fundraising for our seventh corporate private equity fund, which we believe is particularly well suited for the current volatile market environment due to the team's flexible approach and ability to invest in distressed for control investments in addition to traditional buyout transactions. Turning to deployment. Despite the lower overall transaction activity, our market share gains in private credit continued to drive strong aggregate investment activity across the platform. In Q4, we deployed $21.8 billion of capital, representing a 19% increase compared to the third quarter. On a full year basis, we deployed $79.8 billion, which was flat compared to the $79.7 billion we invested last year which we believe is pretty remarkable given the slowdown in overall deal activity year-over-year. This drove our fee paying AUM to $231.1 billion, a 23% increase compared to last year. We continue to see very attractive investment opportunities across our private credit funds with all-in yields and fees on first lien direct loans of 10% to 13% with good covenant packages. In opportunistic real estate equity where we just held the first closing in the fourth quarter, we're beginning to see a small number of investment opportunities come to market, driven by liquidity pressures. In our PE business, our special opportunities team has been active with over $650 million deployed in the quarter in a mix of rescue capital, enterprise value-enhancing transactions, and stressed or distressed public credit purchases. In our secondaries business, we're seeing a growing number of both LP- and GP-led opportunities as certain LPs seek liquidity and fund sponsors seek to accelerate liquidity into legacy fund vehicles. Overall, among our many strategies that can take advantage of constrained liquidity in the market, we're seeing more activity for our private capital solutions. Going forward, with nearly $85 billion of available capital and several large first closes for our large commingled products in the coming months, we expect to have a strong capital base to take advantage of the market opportunities for our clients. I mentioned earlier that our affiliated insurance platform is gaining momentum after launching the annuity origination business in June. In the second half of 2022, Aspida nearly doubled its AUM to $6 billion, up from $3.6 billion in June including an additional $1.4 billion in the fourth quarter. We're now building an attractive portfolio of assets without the issues associated with the legacy back book. As we seek to raise additional third-party capital, we expect to scale our affiliated insurance platform further in the coming years. Our portfolios are generally defensively positioned as we head into the New Year. With nearly 60% of our invested assets in floating rate credit, we continue to benefit from rising interest rates. And these assets are generally in the top half of the capital structure which further enhances our positioning. In our US and European direct lending portfolios, we continue to see solid fundamentals, low defaults and resilience in our credit metrics with weighted average loans to value at year-end of 46% and 49.5% respectively, as well as continued strong EBITDA trends with last 12 months' comparable growth of 9% for both the US and European portfolios. Our global real estate portfolio continues to see strong rental growth and high occupancy rates, with our highest conviction sectors of industrial and multifamily, which comprises approximately 77% of our gross assets. In addition, other adjacent high-conviction sectors such as single-family rental, self-storage and life science accounted for another 11% of gross assets. Our non-traded REIT, AREIT reported multifamily rent increases on new leases and renewals of 13.1% and 11.6% respectively. In our AI REIT industrial-only portfolio, 99% of our space is leased. And during the year over 10% of the portfolio issued new or renewed leases at an average increase of 47% growth above the comparable or previous lease rate. Our global real estate portfolio overall continues to be underweight in office with less than an 8% allocation across the global portfolio and most of our exposure in the US is in the real estate debt that's largely senior in the capital structure. Our private equity group's portfolios continue to perform with year-over-year EBITDA growth of 9% and are positioned in more defensive sectors like healthcare, business services and light industrials. We believe that the strong secular growth that we continue to experience across our business is ultimately a result of our strong and consistent performance. In 2022, nearly all of our strategy composite returns outperformed comparable public markets for the year. And now I'd like to turn the call over to Jarrod for comments on our financials and additional details on the performance of our funds. Jarrod? Thanks, Mike. Good afternoon, everyone and thank you for joining us today. I'll begin with a review of the fourth quarter and the full year. Then I'll provide an update on our outlook for 2023 and beyond. As Mike stated, we experienced strong growth in nearly every financial metric, including management fees, fee related earnings, realized income, AUM and FDAUM for both the fourth quarter and the full year when compared to the prior year. In 2022, as we've seen in past markets, Ares Management fee centric and FRE-rich business model delivered strong results despite the turbulent economic environment. Starting with our revenues, our management fees increased 23% for the fourth quarter and 32% for the full year, driven primarily by the strong deployment of our invested capital. Our management fee stability remains a key differentiator for our business model and enables us to better manage short and long-term market dislocations. As of year-end, 95% of our management fees were derived from either perpetual capital or long dated funds, which reduces the risk of significant redemptions even during severe market movements. Other fee income was approximately $25 million for the fourth quarter and was just shy of $95 million for 2022, up 11% and 90%, respectively. Other fee income was spread pretty evenly among capital structuring, origination and administrative fees and credit funds, development leasing and acquisition fees in real estate and retail distribution revenues. For the full year 2022, we generated $239.4 million of fee related performance revenues or FRPR compared to $137.9 million for the full year 2021. The strong contribution from FRPR in 2022, of which about 94% was recognized in the fourth quarter reflects $164.3 million in annually measured performance income from our two non-traded REITs and $71.5 million in performance income from nearly 30 perpetual life credit funds that are eligible for two silent fee payments. As a reminder, the large increase in the non-traded REIT FRPR was partially driven by the fact, we received 100% of the FRPR in 2022 versus only 50% in 2021 as we closed the acquisition of Black Creek on July 1, 2021. Our underlying base of funds have generated FRPR continues to expand as AUM and these funds increased more than 35% to $22.4 billion during 2022. Looking forward, the outlook for FRPR from our non-traded REITs is harder to predict compared to our credit funds. We think it's reasonable to expect growth in FRPR in our credit funds in 2023 due to trajectory of interest rates as we anticipate earning higher base rates and fee income above fixed real rates. Our real estate funds will require some modest depreciation to meet our hurdle rates. And, therefore, the related future FRPR is harder to estimate. As it relates to our FRE, our FRPR margin when considering the associated compensation expense was 37.6% in 2022. Our margin on FRPR should remain below 40% due to our contractual compensation structure of 60% paying to employees and some associated payroll taxes. While the lower margin on our FRPR negatively impacted our overall FRE margin in Q4, it was still very accretive to our FRE during the fourth quarter contributing $85 million to FRE with $64 million from real estate and $20 million from credit. For the fourth quarter, FRE totaled $335.7 million, an increase of 33% from the fourth quarter of 2021, driven by higher management fees and FRPR. For the year ended December 31, 2022, FRE totaled $994.4 million, an increase of approximately 40% from the prior year. FRE accounted for more than 87% of our realized income, up from approximately 80% in 2021 and 74% in 2022. Our FRE-rich earnings are a key differentiator for Ares and we believe they add consistency and predictability to our overall earnings. This can also be seen by our compound annual growth rate and FRE over the past three and five years of 42% and 36% respectively. Our FRE margin for the fourth quarter totaled 39.9% and 40% for the full year. Excluding FRPR, which has a lower margin due to the compensation and related taxes that I previously mentioned, our margin was 40.6% for the fourth quarter and 40.2% for the full year. We continue to be on track to achieve our goal of 45% run rate FRE margin by year-end 2025, even including the margin drag from FRPR. Regarding the pacing of our margin expansion towards our 45% target in 2025, we have now made many investments in front and back office personnel in preparation for the upcoming fundraising cycle. The higher staffing levels dampened our margin expansion in 2022 and the full year effect of these hires will carry over into 2023. As we raised and deployed capital from these large commingled funds, coupled with an expected slowdown in headcount growth, we expect to see margin growth resume in the back half of 2023 with a larger step-up in 2024 and 2025. Our realization activity increased in the fourth quarter, with realized net performance income totaling $91 million, an increase of 10% over the fourth quarter of 2021. Net performance income included $36 million from our credit group, largely from European waterfall distributions and incentive fees from our US and European direct lending funds. Our private equity group also realized $33 million of net performance income largely related to EU waterfall distributions from ASOF fund. Realized income for the fourth quarter totaled a record $418 million, up 23% from the fourth quarter of 2021. For the full year, realized income exceeded $1.1 billion, a 28% increase from 2021. After-tax realized income per share of Class A common stock was $1.21 for the fourth quarter, up 42% versus the fourth quarter of 2021. For the full year 2022 after-tax realized income of $3.35 per share of Class A stock was up 30% versus 2021 and exceeded our 2022 dividend of $2.44 by 37%. As of year-end, our AUM totaled $352 billion, compared to $341 billion for the third quarter and $306 billion as of year-end 2021. Our fee-paying AUM totaled $231.1 billion at year-end, an increase of 23% from year-end 2021. Our growth in fee-paying AUM was primarily driven by meaningful deployment across our US and EU direct lending special opportunities and alternative credit strategies, which pay management fees on invested capital. Looking forward to 2023, we believe we are well positioned to take advantage of further volatility in the markets and continue growing our fee-paying AUM. Our available capital was $85 billion as of year-end, representing significant future earnings potential. We expect our dry powder will increase as we enter a period of accelerated fundraise. As a reminder, we earn most of our management fees upon deployment since the majority of our funds earn fees on invested capital. As a result, the prior vintages of these funds do not generally have step-downs on their management fees. We ended the year with $41.8 billion of AUM, not yet paying fees available for future deployment, which represents over $400 million in incremental potential future management fees. Our incentive eligible AUM increased by 11% from the end of 2021 to $204 billion. This amount $63.9 billion was un-invested at year-end. In the fourth quarter, our net accrued performance income stood at $832 million, a decline of $56 million from the previous quarter, due to $75 million of net realizations. Of this, $832 million of net accrued performance income at year-end approximately 65% was in European style waterfall funds. For the full year, our net accrued performance income increased by 3% versus the prior year. As we highlighted at our Investor Day, we have a substantially growing number of European style waterfall funds that accrued performance fees that pay the vast majority of their performance fees in the final years of the fund life. For example, European waterfall style funds, totaled nearly $100 billion of incentive eligible AUM at year-end. In 2022, we realized $114 million in net performance income from European waterfall style funds, which represented 79% of the total net realized performance income for the year. Importantly, we expect net performance income from European style funds to continue to account for the significant majority of our total net realized performance income in the years ahead. As we laid out at our Investor Day in 2021, we expect to see a continued increase in our European style funds as older release funds mature and enter harvest periods. Last quarter, we stated we had approximately $300 million in European style funds that were past their investment period, and expected approximately $40 million to be recognized in the fourth quarter. In the fourth quarter, we actually recognized $67 million of performance income from European style funds. Now at year-end, due to the interest generating nature of many of these accounts above their hurdle rates, we still have more than $300 million in European style funds past their investment periods. We now expect net realized performance income from European style funds of approximately $100 million and $175 million in 2023 and 2024 respectively. Beyond 2024, we currently expect annual realized net performance income to continue to grow as some of our larger direct lending commingled funds raised over the past few years entered their harvest period. As an update since our Investor Day of August 2021, the expected aggregate future net realized income from European waterfall funds raised through year-end 2022 has increased by approximately $1 billion to about $2.5 billion. In terms of our American style funds monetizations will be market dependent and episodic, and depend on market conditions and other factors. We have approximately $250 million in accrued net performance income and American style funds past their investment periods. For the full year in 2022, our effective tax rate on our realized income was approximately 9%, assuming all operating group units were exchanged fully into common shares. For 2023, we would expect a slightly higher effective tax rate ranging from 10% to 15% on a fully-exchanged basis, with the range depending on the level of realization. As Mike touched on earlier, the growth in our AUM in part reflects our consistent long-term performance and 2022 was another strong year. In credit our US senior direct lending strategies generated gross returns of 1.9% for the quarter and 9.5% for the full year. Our publicly-traded BDC Ares Capital just reported record fourth quarter core earnings and had another strong year, generating a net return of 1.9% for the fourth quarter and 7.1% for the full year. Our junior direct lending strategies generated a gross return of minus 0.8% for the quarter and positive 2.5% for the year, with much a decline related to market-based adjustments particularly impacting the fixed rate securities in those portfolios. Our European direct lending strategies generated gross returns of 2% for the quarter and 10.5% for the year. All of these strategies have returned significantly in excess of the comparable liquid markets for the full year. Although, US real estate equity composite gross returns declined 6% for the quarter, but were up 11.3% for the year, and our European real estate equity funds gross returns declined 7% in the quarter, and declined 3.8% for the year, still significantly outperforming the public REIT indices. Despite strong fundamentals in the industrial and multifamily sectors, market values have broadly declined as higher interest rates have weighed on discount rates and exit multiples. Within our non-traded REITs, AREIT generated a 0.3% net return for the fourth quarter and a 12.7% return for the year and AI REIT generated a net return of 0.1% for the fourth quarter and 26.8% for the year. Our performance was supported by the strong rental growth and occupancy statistics that Mike referenced earlier. In private equity both of our strategies significantly outperformed the broader equity markets during the year. Our corporate private equity composite generated gross returns of 0.7% for the quarter and 4.3% for the full year. Our Special Opportunities Fund I generated a gross return of 3.9% for the quarter and 9.1% for the full year. Our secondary strategy reports returns on a one-quarter lag basis. Private equity secondaries generated gross returns of minus 5.6% for the quarter and minus 4.9% for the year. Real estate secondaries generated gross returns of minus 1.8% for the quarter and a positive 20.3% for the full year. At the beginning of the year, we look to set our quarterly dividend at a fixed level for the coming year. Based on the significant outperformance of our fee-related earnings relative to our dividends and our strong growth prospects, we've elected to increase our quarterly dividend to $0.77 per share of Class A and non-voting common stock, or $3.08 annual, a 26% increase from the $2.44 dividend per share in 2022, as Carl mentioned. We believe this new dividend level is appropriate based on our current level of FRE and our growth prospects from our significant dry powder for deployment our flexible strategy and large fundraising pipeline. Before I turn the call back to Mike, let me touch on our forward outlook. As you will recall, we gave the market long-term guidance for 2025 at our Investor Day in August of 2021, including a target of $500 billion and more in AUM a run rate FRE margin of 45%, FRE growth of 20% per year and growth in dividends per Class A share of 20% per year. Up to this point, I'm pleased to say we have meaningfully outperformed these expectations with over a 40% FRE CAGR from mid-2021 through the year-end 2022. As FRPR was not contemplated in our Investor Day, 20% per year FRE growth rate guidance, we would like to clarify that we expect a 20% or more annual growth in our FRE from 2022 through 2025 excluding FRPR from our non-traded REITs. We do expect to generate attractive levels of FRPR on a growing base of eligible funds, but the growth rate is naturally harder to predict. We remain on track to meet or exceed the other elements of our Investor Day guidance. Thanks, Jarrod. So we spent 2022 investing in talent and strengthening our front- and back-office teams to set us up for strong growth in the years ahead. We believe that we're now in a position to capitalize on these investments with a large fundraising cycle, a strengthened capability to invest across a greater segment of the addressable market and an enhanced global platform. Based on the foundation that's already been laid, we have good visibility into the next several years of growth. In addition, we're seeing strong synergies, earnings contributions and future earnings potential from our recent acquisitions that have us all very excited. Our ESG and DEI teams are executing at a higher level as we continue to focus on our impacted areas. Overall, our culture makes us a stronger workforce and better investors, as we strive to make a positive impact for our stakeholders and our communities. As it relates to potential new acquisitions, our recent transactions filled specific product gaps in areas that we identified as high-growth opportunities. We now have a broader platform to build businesses organically. And as a result, the bar for new M&A activity is naturally higher. That said, we'll continue to look for strategic add-on acquisitions and strong growth areas, where we can leverage our platform advantages and bring attractive investment products to our LPs. Just this week, we agreed to purchase the remaining 20% of Ares SSG's management business still owned by the original founders, with the closing subject to receipt of regulatory approvals. Our purchase of the remaining stake was contemplated in the original agreement but both parties mutually agreed to accelerate the timing. In connection with this almost entirely all stock transaction, we're planning to rebrand the business Ares Asia, and expect it will be our platform for continued growth in the Asia Pacific region. I'm proud and grateful to the incredibly hard work and dedication of our team and for all that they do every day to deliver for all of our stakeholders also deeply appreciative of our investors' continuing support for our company and I want to thank you for your time today. Thank you. [Operator Instructions] Our first question today comes from the line of Craig Siegenthaler from Bank of America. Please go ahead. Your line is now open. So with US banks building up reserves and getting ready for a recession, we wanted to get an update on how Ares' private credit portfolio is prepared for a rise in corporate defaults. And also what have you seen in the fourth quarter in January in terms of early credit quality indicators across your portfolios? Sure. I think Kipp's on, so I'll give you my view but I think the good news is given the size of ARCC and the fact that they just announced, it's a good indicator of the state of play within the existing portfolios and probably a broader proxy for what we're seeing across the private credit portfolios here at Ares. We announced that if you look at year-over-year EBITDA growth in that book and it was true for our European, it was about 9.1% LTM period-over-period. So while I think like many we're seeing slower growth, there's still good fundamental strength within that book. Two and we've talked about this on prior calls, a lot of these private credit assets both corporate and real assets are sitting higher up the balance sheet than in prior cycles and are benefiting from a significantly higher amount of equity subordination than we saw in the last two credit downturns. And so if you look at positioning in terms of loan to value, they're generally speaking in and around 45% loan to value. And the reason I mention that is I think a lot of the impact from rising rates ultimately will be borne by the equity as the discount rate changes, valuation shifts and then there's a value transfer from the equity to the debt. Needless to say as we've seen base rates go up close to 500 basis points, it does put strain on interest coverage. Interest coverage in the portfolios though given the low starting point is still at levels that make us comfortable and are consistent with where prior cycles were. So what makes us so unique Craig is we're seeing strong fundamental performance and the conversation about defaults right now is actually happening at a time when rates are going up. And earnings are not necessarily slowing, whereas, in prior cycles we've seen rates going down and earnings beginning to slow at a much faster pace. So from the private credit perspective, it's a really interesting situation because we're accumulating significant excess return ahead of a conversation about any potential defaults. To that point, I still believe that while we will see an increase in amendment activity and default activity, it should largely be beneficial to total return. And to put that in perspective if you look at where ARCC's non-accrual rates stood at the end of the year, they're about 1.7% on fair value, which is well-below historical averages. So pretty unique position in terms of performance, a lot of liquidity and dry powder on the platform to both defend existing exposures and play offense if need be, but I think a pretty interesting vintage across the Board for private credit. I think you got most of it, Mike. Craig, the only other thing that we said on this call for the BDC yesterday was that we did see some modest increases in amendment activity through the fourth quarter and into the first and I'd expect that will continue throughout the year, but it’s not a huge cause for concern from our standpoint. Thank you, Mike, Kipp for the comprehensive response there. Just as my follow-up, I know Ares likes to be opportunistic in recessions. And I think we'll always remember the ARCC acquisition of Allied in the financial crisis. But how should we think about opportunistic M&A at the holdco level? And then also at the BDC level, should a recession here transpire? Yeah. Look I think we have a lot of experience being opportunistic on corporate M&A at the parent company within the publicly traded subsidiaries and within our portfolio. It's core to who we are as investors and managers. I would expect that those opportunities will present themselves given how liquidity constrained certain parts of the market are and certain competitors are. It's still a little early for that Craig, but needless to say to the extent that there are opportunistic chances for us to either acquire portfolios of assets or businesses at attractive entry points you should expect that we'll do Thank you. The next question today comes from the line of Alex Blostein from Goldman Sachs. Please go ahead, your line is now open. Hi, good morning everybody or good afternoon. Thanks for the question. I was hoping we could start maybe with a question around Mike just kind of getting your pulse on opportunities for credit deployment. When we look at the fourth quarter you seem to have been very active in what was generally I think a fairly slow environment for new deal activity. So, maybe expand a little bit where you guys were more active. And more importantly looking into kind of what you're seeing so far in 2023 areas where you expect to be a little more active and a little less active in how active are the banks. So I'm assuming not a lot of activity from the banks. But are they starting to come back to the market a little bit more given the fact that the market backdrop has gotten a little bit more constructive? Yes. Thanks for the question Alex. So, interesting we noted this in the prepared remarks, I was pleased to see that when we totaled everything up after what was a challenging year for markets generally that our deployment was right on par with what it was in 2021 and 2021 was obviously a different market backdrop just in terms of velocity of capital and transaction activity. And I think that that speaks to the breadth of the platform by geography, by asset class and it speaks to the ability of most of our funds to pivot opportunistically between liquid and illiquid markets and move around the balance sheet when the markets are transitioning. So, if you were to drill down into where the capital is being put to work, there was obviously a slight mix shift towards public markets as we were seeing. And we've talked about this before opportunities emerge in the public markets that were frankly more attractive than what we were self-originating in the private markets. As those markets start to come more in line with one another we were able to start to be more opportunistic on the private side of the house as well and that continues. So, look even in markets where you have lower transaction volumes given the competitive dynamic today, meaning challenged access to the public equity market challenged access in the loan and high-yield markets, lower bank liquidity, private market solutions are pretty important. Right now is the marginal liquidity provider. So, we're finding ample things to do irrespective of a lower M&A environment. When you look at ultimately pipeline development, I think we're not going to see M&A volumes at least in the private markets pick up to where they were until we all agree that we stabilized from a rate perspective. So, my own personal perspective as we get towards the end of the year and everyone has a general consensus view that the hiking cycle is over, I would expect that there's a fair amount of pent-up demand and we'll see the M&A machine turn back on. I'd also highlight obviously places like special opportunities where we closed our second fund last year has been, very active. Places like alternative credit, very active. Opportunistic real estate debt and equity, very active. So, a little bit of a mix shift but still really, really exciting investment opportunity. Great. Thanks for that. My second question Jarrod probably for you. I wanted to drill down a little bit into the 26% dividend growth that you announced this morning. Obviously, supported by a very robust outlook you guys have for fee-related earnings et cetera and all the things that sort of discussed already on the call. But is that a way of effectively seeing hey look FRE growth could be north of that and that's sort of what informs your confidence around raising it by as much, or do you partially incorporate the fact that European style waterfall contribution will continue to rise and those are FREs almost cash flows and that kind of what gives you confidence in going above the typical dividend increase that we've seen in the past? Thanks. Thanks Alex. Look, it's a number of those factors all wrapped into one. First is, yes, we have a lot of conviction on our FRE growth as I mentioned in the script. We reiterated our guidance at the 20% per year growth. That's ex the FRPR are related to the REIT, because that's a little bit more difficult to predict. So we know that we have that strength. We also just came off of a very strong year where we easily covered the dividend for the year based on our FRE growth. And then, going into next year, as you mentioned, we continue to see a nice pipeline of the European style waterfalls coming in. So when you mix all those factors together we have a high degree of confidence that that's the appropriate dividend level for the year. The next question today comes from the line of Benjamin Budish from Barclays. Please, go ahead. Your line is now open. Hey, guys. Thanks so much for taking my questions. I wanted to follow up on something Mike you said at the very beginning of the call. You said investors generally remain under-allocated to all with a little under 10% of global AUM. I'm just curious, how are your institutional clients sort of thinking about their allocations? I mean we've heard a lot from some of your peers about the denominator effect in private equity. Do they tend to think about credit separately? Is there a lot more room to run in private credit in particular? I'm just kind of curious how you're thinking about that. Yes. I think, the good news is we're in market and have been in market, with good success with private credit, private equity and real assets funds. I would say, generally speaking, denominator effect is impacting, what I would call, regular way private equity strategies or growth equity the most. You also have a little bit of a numerator effect in the sense that private valuations are lagging public comps and so, I think, it's hitting both sides of that equation. Our private equity business is, obviously, positioned a little bit differently with SOF able to invest around the balance sheet in distressed and transitioning companies in industries. And our core buyout franchise, as I mentioned in the prepared remarks, having the ability to invest in distressed for control in addition to traditional growth buyouts, which we think is a pretty unique setup. For private credit and there was an interesting article in the paper a couple of weeks ago, just talking about pension allocations, as an example, being just shy of 4% of allocations with a general commitment to see that doubling. And I would say that, that's probably true for most of the other institutional investor segments as well. So we are not seeing any reduced demand for private credit. And in many cases, we're actually seeing appetite increase. And I think the increased reflection, to your question, that people are going into the cycle under-allocated. Number two, it's easier to deploy in credit in a market like this and so, for folks who are looking to capture excess return in this vintage credit is an easier way to put money in the ground. And three, just to put it in perspective, if you look at, generally speaking, performing first lien senior secured credit across the private credit landscape, you're generating 10% to 13% rates of return, short duration floating rate. That's a really compelling place to be on a relative value basis, but it actually is liquidity-enhancing, because a lot of these institutional investors, whether they're pension funds or endowments or insurance companies are probably trying to beat a bogey of 6% on the low end and 8% on the high end. So if you're generating current short duration floating at 10 plus with rates still on the rise everything in excess of your hurdle is actually helping to refill the bucket of return that you gave up in your fixed income and equity book. So there's a lot at play here driving dollars into the private credit landscape and I would expect that to continue. Great. That's really helpful. Maybe one quick follow-up. You mentioned the -- you acquired the rest of the Asia business. It's a smaller part of the whole. But could you kind of give us an update on the strategy there? What sort of contribution to growth are you expecting from there over the next several years? Sure. Just to clarify we signed, but we're still waiting for regulatory approval. We decided to pull it forward really as an indication of the opportunity that we see there and just felt that by owning 100% versus 80% would give us just a better opportunity to align incentives along a shared vision for growth and really drive growth across the region under the unified Ares brand. So we're super excited about it. And this acceleration I think is a good indication of what we would see there. If you look at the businesses that exist today the legacy SSG businesses we bought was a leader in private credit in two fund families one being a distressed and special sits business, and the other being a more regular way senior lending business. And both of those families of funds have performed well and grown in our two years of ownership. We've been adding people and capabilities across the region. We've talked about on prior calls that we had a successful launch and closing of an Australian-New Zealand direct lending business. We have added senior folks in and around our real estate and infrastructure business. We've added secondaries professionals and raised capital to expand our secondaries business there. So I would say at a high level while a lot of those markets are still developing and don't necessarily offer the same scale of opportunity or breadth of opportunity that the U.S. and Europe do our vision for our APAC business is that at maturity it will be of a similar size as the US and European markets and all of our strategies will be represented there in each of the markets in the region. So it's going to take us a while to build that. And we're going to obviously need to see the markets mature and evolve from a capital formation and regulatory standpoint, but that's the vision. I think from a growth standpoint the good news is that they have been growing at a similar pace to the rest of the platform obviously off of a smaller base, but enjoying good growth and we'd expect that to continue. Thank you. The next question today comes from the line of Michael Cyprys from Morgan Stanley. Please go ahead. Your line is now open. Hi. Good morning. Thanks for taking my question. I wanted to circle back to some of the comments you made earlier about investments that you've been making in the platform over the past couple of years. I was hoping you could maybe elaborate on kind of where we are at this point. What's left in terms of the build-out? And then how we should think about that translating in terms of G&A and comp growth compared to the double-digit growth you guys put up here in 2022? How we should be thinking about that into 2023? Thank you. Yeah. Yeah. Sure. Thanks, Mike. The first thing, I'd say is that, as we went into 2022, we did talk a little bit about how that was really a year of growth of the platform and integration across the platform. That resulted in about 450 net new hires on the platform through the year. Now as that happens throughout the year, you do have that headwind coming into 2023 of those 450 hires being paid for the full year. We still certainly expect to be hiring a little bit throughout this year, but likely not at the same pace that we've seen in the prior year, as we've integrated those folks brought them in and really need to assess and evaluate the capabilities and get our fundraising off the ground. So once that fundraising then is completed and we deploy it as you look into the back half of 2023, and into 2024 and 2025, what you'll start to see is that's when you'll see more significant margin expansion. So as we kind of guided at the beginning of last year, we thought that we would have a very moderate margin expansion in 2022. I'd say that, it still won't be at the pacing that maybe we had stated back in 2019, 2020 and 2023 because of the headwinds that we received from that full year of hiring. And then as we deploy, capital from this fundraising cycle into 2024 and 2025 that's when you'll see that margin expansion really accelerate towards that 45% plus that we talked about. Yeah, I was saying, because you asked about G&A as well. So, about half of our G&A is headcount-related. So you see a very close correlation to G&A growth, as headcount grows. The other half is a little bit more episodic in terms of what events are occurring at what times, or where capital is needed across the platform in terms of investment. So when you're thinking about G&A, there is a pretty strong tie to our comp levels. Great. Thanks for all the color there. And just a follow-up question on the European style funds and the performance fees that you expect. So we hear you on the $100 million and $175 million in 2023 and 2024. So I guess, what's required in order for those fees to come through? I imagine most of these are credit funds, so it's just the loans maturing in the portfolio and then those performance fees get crystallized upon maturity of the loans as opposed to selling an asset like a PE fund. Maybe you could just remind us on that? And then just, how do you think about the potential for variability either upside or downside to that guidance? The macro environment say is more challenging in every recession or off to the races in its new cycle? Thank you. Sure. When you thinking about – think the portfolio you're thinking about exactly right that, the credit funds that are within there are much less episodic in nature. They are based on the duration of the underlying assets. Generally, those assets don't make it to the end of their life before they are refinanced. So that's what drives a lot of the payments within that balance and that's what makes it a lot more predictable. As those loans today yield above the hurdle rates, you're consistently building those amounts that you have on accrual. And as interest rates rise, as it's predominantly a floating rate portfolio, you do see the benefit of that. Now, there is a difference between the amount you'll actually realize in what's currently accrued today, what's currently accrued today does have some of the variability related to unrealized gain loss, which as you know as these loans mature they will mature at par and that full yield will come in. So there's a slight benefit that you get from that aspect of it. There's also a benefit that you'll get in future years that's not modeled into an accrued balance today of that increase in interest rate. So that's why you couldn't have a difference between what we've accrued on our books, and what we believe that we will recognize over that several year time period. We do believe that these balances are more predictable because of their credit nature. Now that being said, there are some private equity style funds in there that are from our Special Opportunities group and from our real estate group their European style, and are still more episodic as they get to the end of their life. But we generally know that those are later in their lives and we're starting to see monetizations come through on those already. So – but you're exactly right to think of it in terms of being credit-driven and therefore being more predictable in nature as well as there are benefits that we see in that portfolio from rising interest rates. Thank you. The next question today comes from the line of Gerry O'Hara from Jefferies. Please go ahead. Your line is now open. Thanks and good afternoon. Just thematically, I think renewables and energy transition are a couple of topics that we're kind of increasingly hearing about and I guess cited as high-growth opportunities. So Mike, would be interested to kind of get your thoughts on how Ares is thinking about these end markets perhaps what you're hearing from client demand or sort of positioning from a portfolio or solution set. Yes. Thanks for the question. I think you're spot on that energy transition and climate infrastructure are increasingly important topics across the landscape. I think the good news is we were early in identifying that transition as an opportunity. So as a reminder in our fifth infrastructure fund here which goes back now 2.5 vintages, we pivoted from more traditional energy infrastructure into renewables and renewable energy. And now in the rearview mirror when you look at that fund, about 60% of our deployment in that fifth fund wound up being in the energy transition and renewable power with appropriately high returns relative to traditional power players. That set us up to launch our first climate infrastructure fund, a couple of years ago. Candidly the fundraise took longer than I would have expected because I think we were a little early in recognizing the long-term secular trend there. Good news is it was well raised and well invested and we are now in the market with our second climate infrastructure fund and are actively raising that. And while it's not closed yet, I think given some of the demand for exposure to energy transition, we have confidence that it will be. Obviously, there's a lot of positive catalyst, particularly in the US market on the heels of the Inflation Reduction Act. That's also helping to bolster investor demand. Two, as we talked about in the prepared remarks, we obviously made the acquisition of the AMP infrastructure lending business. That team and fund family has been fully-integrated into the platform. We had a successful close on IDF V at $5 billion. Last year that fund is well deployed. And while it invest broadly across the infrastructure spectrum, not surprisingly they too were benefiting from the increase in appetite for in transaction activity within energy transition. And then probably most recently, which we're super excited about is the announcement that we made out of our SPAC Ares Acquisition Corp., where we are entering into a transaction to merge with Ex Energy, which is a fourth generation small modular nuclear reactor business, which we think is really at the forefront and cutting edge of the future of the energy transition. So we're very focused on it. We have multiple products and avenues to invest behind it, and I would think that with continued good performance that that's going to continue to be a good growth area for us. Thank you. The next question today comes from the line of Patrick Davitt from Autonomous Research. Please go ahead. Your line is now open. Good afternoon, everyone. Thanks. Most have been asked. Maybe could you speak a little bit how the wealth management flow experience has evolved since quarter end and if you're seeing any meaningful impact of the press noise, obviously, in that channel kind of late in the quarter? Yeah. So the good news is these numbers get publicly released so you guys will be able to see how we're doing. I think the good news from our perspective is that we've been having a different experience than some of the larger peers. If you look at our wealth management platform right now, we have obviously our two non-traded REITs AI REIT and AREIT. We have our interval fund. We have our recently launched private markets fund and as we talked about our recently formed non-traded BDC. And if you look across all four, we've actually had positive flows. So to put that in perspective, if you look at inflows into the non-traded REITs, Q4 inflows were about $430 million against outflows about $157 million, so a healthy cushion. Just to contextualize it that $430 million was down from a little over $840 in Q3. So not surprisingly given, I think some of the noise in the channel but also just some of the market reaction to transitions in the real estate business. We've seen slower inflows, but we haven't seen a disproportionate amount of outflows and that's generally been the case throughout the course of the year. Going into 2023, still too early. But again as we mentioned in the prepared remarks, while our two REITs are quite substantial, aggregating about $13.5 billion in the aggregate, we're just growing off of a smaller base. That puts us in a position where we can continue to add distribution partners. And as I mentioned in our prepared remarks, we fully expect that we'll be adding two new wirehouse partners for those products in the first half of this year. So some of the headwinds we're able to grow through just as we're adding new distribution relationships. And then we do have some unique elements to our business in terms of how we invest, but probably most importantly is we have a 1031 exchange program that feeds into both of our REITs that just promotes a stickier investor base if you will. So it's something we're watching closely. We are not slowing our investments in the channel. We're still very long-term believers in the growth in that market. And at least as we're experiencing it we've seen a modest slowdown in inflows, but we're not seeing net outflows. The next question today comes from the line of Adam Beatty from UBS. Please go ahead. Your line is now open. Hi. Thank you. Good afternoon. Just wanted to get an update on the secondaries business. I think last quarter there was a little bit of rebranding maybe some trunk A fundraising. Seems like an opportune time to be out in the market with something like that so I just wanted to get maybe some outlook on when you might be back in the market what kind of funds and maybe how -- what kind of magnitude we're looking at? Thank you. Sure. So the update is you're right. We have fully integrated what was the landmark platform. We're very pleased with the way that the integration has grown. We have added a significant number of new people across the platform here in the US and Europe and as I mentioned earlier in Asia Pacific. What we have tried to build just to leverage the strengths that we have within the GP and LP community is kind of a broader set of secondary solutions across the different verticals. We have added a credit secondaries business, which we think really plays to the strength that we have in private credit. We have spun up our team and are actively raising capital there something we're super excited about. We are in the market with our next generation of infrastructure secondaries, which is a big growth area for us. We are currently in the market with our ninth real estate fund, which was a fund that was ready to launch when we acquired. And we did to your point close out our prior vintage of private equity, and we'll be coming back into the market at some point with kind of the Ares version of what that strategy is going to be going forward. We're also excited that we're able to leverage the momentum we have in the wealth management channel to launch the public markets fund, which is largely anchored by our secondaries capability. We're seeing good scaling there and we would expect that to continue to grow. So the business has been fully-integrated. I think, we've repositioned certain of the strategies into higher growth parts of the market. We've opened up growth opportunities in credit and Asia and Infra in a way that didn't exist prior to the acquisition and now we're executing. So we'll keep everybody abreast of the progress there but a lot to be excited about. Excellent. Thank you. And then just maybe a quick one on the performance of the real estate strategies in the quarter. Obviously the full year was quite good. The underlying fundamentals the lease re-ups that Mike talked about seem very good. But in the quarter maybe a little bit more of a negative mark than some might have expected. So just want to get a sense if there's any time lag or other dynamics that played through there and anything that might be ahead for 1Q? Thank you. Yes. Look there's -- needless to say when you just think about real estate the impact of rising rates you have to just think about how interest rate increases correlate to changes in the cap rate and valuation environment and how increased rate challenges certain property sectors from a from a debt service standpoint. I think to your comment we are fortunate that close to 80% of our exposures are in multifamily and industrial and the fundamentals there have been very strong. And so even in a world where valuations may be coming in you're growing through them with an installed base of tenants that is continuing to drive pretty strong NOI at the property level. And I think that's kind of the way to think about it which is not all real estate is created equal. We're in gateway markets with great assets that are all performing really well. In terms of Q4 versus rest of the year, I would only read into that just the math of rates and not any kind of fundamental deterioration in performance. Because as you mentioned when you go drill down in terms of our re-up and re-leasing occupancy rates and what we're able to command given the assets we own the fundamental strength in the portfolio we think is pretty clear. I do think for what it's worth that the real estate markets are going to be one of the more challenging parts of the private market landscape. It's one of the reasons why we're so focused right now on our opportunistic real estate franchises just to make sure that we're appropriately capitalized to take advantage of the distress that should roll through certain parts of that market as rates continue to go up here. Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference call back over to Michael for any closing remarks. Please go ahead. No we don't have any. We thank everybody for their time. Sorry, if we went a little late but we appreciate everybody tuning in and for the support and we look forward to giving everybody the update next quarter. Thank you.

EarningCall_177

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Technologies, Inc. Fourth Quarter 2022 Earnings Call. [Operator Instructions] Thank you, and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings conference call. Joining me today are Bob Pagano, President and CEO; and Shashank Patel, our CFO. During today's call, Bob will provide an overview of 2022 as well as an update on our expectations for the markets in 2023. Shashank will discuss the details of our fourth quarter and full year financial results and provide our outlook for Q1 and the full year 2023. Following our remarks, we will address questions related to the information covered during the call. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of our website. We will reference this presentation throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix to this presentation. I'd like to remind everyone that during this call, we may be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, see Watts' publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Thank you, Diane, and good morning, everyone. Please turn to slide 3 in the earnings presentation, and I'll provide a recap of 2022 and some initial thoughts regarding 2023. I'd like to start by thanking the entire Watts Water team. We've continued to execute and provide outstanding service to our customers despite escalating inflation, supply chain challenges and labor shortages. The team's collective efforts delivered another strong quarter and record full year sales, operating margin, earnings per share and free cash flow. Organically, full year 2022 sales increased by 13%. Adjusted operating margin increased by 210 basis points and adjusted EPS increased by 29%. We delivered record operating margin while still investing in an incremental $23 million for the future, including spending on our smart and connected initiatives. We generated record free cash flow in the fourth quarter to end the year at $201 million, which represents an 80% conversion rate. Our balance sheet remains strong and provides us with the flexibility to continue to invest for the future through our strategic investments in R&D, smart and connected projects, factory automation and M&A. From an M&A perspective, we have signed a definitive agreement to acquire the assets of the Enware Australia, a leading supplier of specialty plumbing and safety equipment. This acquisition will expand our presence and scale in the Australian market and further provide channel access. We expect to close the acquisition later in Q1 and we'll discuss our expectations in our Q1 earnings call. Operationally, our team did an outstanding job executing through numerous challenges. We are able to deliver meaningful margin expansion in 2022 despite unprecedented inflation in material, labor, overhead and energy costs. Our teams overcame material availability challenges, drove cost savings and realized price increases to keep in front of our cost base. We maintained our focus on the customer and invested in inventory early to ensure we had stock on the shelves during supply chain disruptions throughout the year. We have been reducing our inventories as supply chains have begun to normalize. However, there are still some challenging areas, including electronic component availability. We successfully completed the closure and sale of our plant in Marie, France and transferred all production to sister facilities in France, reducing our footprint in Europe. Our focus on ESG is evident at all levels of our organization. Our employees, customers and suppliers are all engaged in expanding the positive impact we can have on our environment and communities. I'll talk a bit more on our sustainability progress in a moment. Now, I'd like to talk about our view of the markets in 2023. From a macro perspective, global GDP has slowed, but remains positive in our key markets. The North America repair and replacement market is currently solid despite lower GDP. Rising interest rates have significantly slowed single-family new construction, and this is expected to decline double digits in 2023. While multifamily new construction remains resilient today, some leading indicators suggest a slowing in multifamily as 2023 progresses. In the Americas, non-residential new construction indicators are mixed. The ABI dipped below 50 for the last few months, suggesting a slowing towards the end of 2023. However, the Dodge Momentum Index continues to be an expansion in our territory, suggesting growth in non-residential projects will continue into 2023. Other forecasts, including the AIA consensus construction forecast are slightly more optimistic with expectations of mid-single-digit growth in 2023. Certain sectors have been resilient, including health care, education, data center projects and food and beverage. In Europe, energy cost inflation and the war in Ukraine continue to have an impact on economic activity. Euro zone GDP has trended downward, although it is expected to remain slightly positive in 2023. We expect government-sponsored energy subsidies to continue to provide support in Germany and Italy. As a reminder, Europe represents approximately 25% of our business. In the Asia Pacific region, China's economy is now forecasted to grow in the low single digits in 2023. The China markets have been significantly impacted by the reopening after the elimination of the zero-COVID policy. We expect the aftermath to last at least through Q1. In addition, both Australia and New Zealand are seeing the impact of interest rate increases on residential markets. The economy in the Middle East region is expected to grow low to mid-single digits in 2023, and we expect the strength in the oil industry to support new construction. Now, a preview of the drivers for our outlook for 2023. We expect challenging comps for the year after a record 2022. Rollover price, repair and replacement activity and non-residential new construction will be supportive, at least through the first half of the year. Weakness in Europe will continue. The slowing volume will have a more significant impact on our earnings due to our higher fixed cost base in Europe. We did take additional restructuring actions at the end of the fourth quarter, which will help to reduce the impact of the volume deleveraging. In addition, we expect higher interest rates and inflation to unfavorably impact single-family residential new construction. As a reminder, this is less than 10% of our total business. Despite the tougher 2023 macro backdrop, we are continuing to invest in strategic initiatives, including our smart and connected enabled products and expect full year incremental investments of approximately $20 million. Now, I'd like to update you on our smart and connected initiative. Please turn to slide 4. As part of our strategic focus to grow organically, we're investing in innovative new smart and connected enabled products. We invested an incremental $15 million in support of our smart and connected initiatives in 2022 with more than half of our total R&D spend linked to smart and connected products. We have a team of over 100 engineers supporting this important initiative. We ended 2022 with approximately 19% of total sales generated from the sale of smart and connected enabled products. The percentage increased 300 basis points over 2021 and sequentially increased each quarter as we introduced 20 new products. These new products are contributing towards our goal of generating 25% of our sales from smart and connected enabled product sales by the end of 2023. Let me now highlight one of our new smart and connected product solutions. Our Aegis system by Lync provides building owners with a cost-effective hot water system that limits greenhouse gas emissions by combining innovative carbon dioxide heat pump with key ancillary equipment such as domestic water heater exchange skids, electric hot water tanks and mixing valves. The technology provides flexibility to build systems customized to unique applications. Integrated into a building automation system, the Aegis system can monitor unit status in real time, record operational data, check for faults with alarms and warnings and change set points in the operating moats. We are excited about the progress we have made in the future of our smart and connected systems. Our goal is to lead our industry in connecting our products and providing superior benefits to our customers. Please turn to slide 5, and I'll update you on our sustainability progress. Our mission at Watts is to improve comfort, safety and quality of life for people around the world through our expertise in solving water-related challenges. Sustainability is inherently part of how we fulfill our mission. We focus daily on improving sustainability outcomes for ourselves, our customers and our communities by aligning to long-term secular growth trends, including safety and regulation, energy efficiency and water conservation. We work to reduce the water, carbon and waste footprint across our operations and create innovative products and solutions for our customers to help them protect, control and conserve critical resources. Social responsibility is critical at Watts, where safety at our sites is always our first priority. We encourage a diverse, equitable and inclusive environment to ensure all employees are heard and we strive to make a positive economic and social impact on our communities. Recently, we issued a human rights policy aligned with the UN Global Compact. We also endorsed the CEO water mandate, expanding our commitment to water stewardship. Our Sustainalytics ESG score improved by 24%, promoting Watts to a low-risk category. Finally, Watts was again recognized as among America's most responsible companies for the fourth consecutive year. With that, let me turn the call over to Shashank, who will address our results for the fourth quarter and full year and offer our outlook for Q1 in the full year 2023. Thank you, Bob, and good morning, everyone. Please now turn to slide 6, which highlights our fourth quarter results. Sales of $502 million were up 6% on a reported basis and up 11% organically. Foreign exchange, primarily driven by a weaker euro reduced year-over-year sales by roughly $22 million or 5%. Sales were stronger than we had anticipated with double-digit growth in the Americas and APMEA and high single-digit growth in Europe. I will review the regional performance momentarily. Adjusted operating profit of $72 million, a 12% increase, translated into an adjusted operating margin of 14.3%, up 90 basis points versus last year. Benefits from price and productivity more than offset inflation and incremental investments of $8 million. Adjusted earnings per share of $1.60 increased 13% versus last year. Earnings per share growth was driven primarily by strong operational performance, up $0.25, which was partially offset by the net impact of interest expense, income tax expense and unfavorable foreign exchange movements. The adjusted effective tax rate in the quarter was 22.4%. The rate declined by 40 basis points compared to last year, primarily due to a more favorable state tax rate. For GAAP purposes, we took a $6.2 million charge for restructuring in the quarter, largely related to the continued rightsizing of our European cost structure, along with some smaller Americas cost actions. This charge was partially offset by the gain on the sale of our plant in Méry France after its closure. We also recorded a tax benefit of $18.2 million for GAAP purposes, primarily related to the modification of the structure of our Mexican supply chain operations. In summary, the better-than-expected global top line growth drove higher operating profit, margins and earnings per share compared to the fourth quarter of 2021. Moving to the regional results, please turn to slide 7. The Americas had a solid fourth quarter with organic sales up approximately 11%. The growth was driven primarily by strong price realization. Unfavorable foreign exchange movements in the Canadian dollar reduced reported sales by 1% year-over-year. Adjusted operating profit increased by 27% and adjusted operating margins increased by 240 basis points. The margin expansion was driven by price and productivity, which more than offset inflation and incremental investments. Europe also had a solid quarter with organic sales growth of approximately 9%, mainly driven by price. Reported sales were negatively impacted by 13% from unfavorable foreign exchange movements. We had organic growth across all platforms with double-digit growth in Germany and Italy, driven by our HVAC OEM business, largely due to government energy incentives. France and Benelux also saw strong growth through the wholesale channel and electronics. As a reminder, we stopped our direct shipments to Russia in April 2022, and we estimate the impact of that to be approximately $3 million in the fourth quarter. Operating margins declined by 320 basis points as price and productivity were unable to fully offset rising inflation, energy cost increases, volume deleverage and investments. APMEA sales grew organically by 17%. Reported sales growth of 5% was negatively impacted by 12% from unfavorable foreign exchange movements. China's organic sales growth was in the double digits, primarily driven by the valve business sold into data centers. Organic sales outside China were also up double digits due to strong growth in Australia and the Middle East. Adjusted operating margin decreased 260 basis points as price and productivity were unable to offset a reduction in affiliate volume, inflation and investments. On slide 8, let me speak to the full year results. As Bob mentioned, we delivered record operating results for 2022. Reported sales were $1.98 billion, up 9%, driven by a 13% organic increase attributable to solid price realization and higher volume. Americas and APMEA were both up double digits and Europe was up high single digits for the year. Foreign exchange, primarily driven by a weaker euro reduced year-over-year sales by roughly $72 million or 4%. Acquisitions accounted for $6 million of incremental sales year-over-year. Adjusted operating margins increased 210 basis points to 16.4% in 2022. The margin expansion was driven by price, volume and productivity, which more than offset inflation and incremental investments. We also benefited from the onetime price cost benefit that we captured in 2022 of $13 million due to our proactive investment in inventory. Lastly, we funded approximately $23 million of incremental investments in new product development, smart and connected Solutions and our ESG efforts. Adjusted full year earnings per share of $7.13 increased by $1.61 or 29% versus the prior year. Operating results drove approximately $1.64 of the increase, while acquisitions, lower outstanding shares and a lower adjusted effective tax rate combined for an incremental $0.27. Unfavorable foreign currency translation and higher interest costs combined to decrease earnings per share by approximately $0.30 for the year. Free cash flow for the full year was $201 million, a 26% increase compared to last year, driven by higher net income and a lower investment in inventory. We generated record free cash flow in the fourth quarter to end the year with free cash flow conversion of 80%. As a reminder, we had incremental restructuring and incentive payments in 2022, which reduced our conversion percentage. We invested approximately $28 million in capital spending, including investments in new product development, capacity expansion and automation. This capital investment is partially offset by proceeds of approximately $5 million from the sale of 2 facilities. Our 2022 reinvestment ratio was 102%. We returned $109 million to shareholders in the form of dividends and share repurchases in 2022 and increased our annual dividend return by 15%. Our net debt to capitalization ratio at year-end is -14.3% as compared to -9.3% in 2021. Our balance sheet continues to be in excellent shape and provides substantial flexibility to address our capital allocation priorities. So, despite significant inflationary pressures and continuing supply chain disruptions, we delivered record financial results in 2022. Our team did a great job proactively driving price, expanding margins and further strengthening our balance sheet. Now on slide 9, let's discuss the general framework we considered in preparing our 2023 outlook. First, let's look at the expected unfavorable conditions. As Bob mentioned, we do anticipate a tough comp in 2023 due to the strength of 2022 and the inflation-driven price realization. Higher interest rates are having an unfavorable impact on single-family new construction starts and could also impact multifamily and non-residential construction projects. Global GDP has slowed, but is currently expected to be positive in the U.S. and Europe. GDP acts as a proxy for our repair and replacement business. The European economy continues to slow as the war in Ukraine continues to put stress on the region. Higher inflation and general uncertainty may negatively impact purchasing decisions, especially in new construction. We expect incremental investments and inflation to be a headwind in 2023. Labor shortages will continue to be a challenge and could hinder our ability to manufacture and distribute product efficiently as well as impact our customers' ability to timely complete projects. In the middle column are themes that we'll continue to monitor. We have been able to maintain a positive price cost dynamic through 2022. However, inflationary pressures in labor markets continue to persist and impact overall customer project costs. Although supply chain disruptions are beginning to subside, we are still seeing pockets of challenges, particularly in electronic components. We have begun reducing our inventory levels to reflect the shorter lead times, but we'll continue to monitor and adjust as needed. As Bob discussed, the non-residential new construction indicators are mixed, but this is expected to be supportive in at least the first half of 2023. Some verticals will be more challenged, including office and retail. Some leading indicators, including the ABI Index, have dipped in recent months portending a potential slowdown in the second half of 2023. Now, looking at potential favorable conditions. Institutional and industrial new construction are expected to be a tailwind. Health care, education, data centers and food and beverage should maintain solid growth. We should have a positive carryover effect of last year's price increases into 2023. In addition, we plan to implement price increases during 2023 to keep up with continuing but moderating cost inflation. We expect to continue to expand revenue through our smart and connected product offering and other new product introductions. Productivity and automation investments are expected to provide cost savings in 2023. In addition, our Europe and Americas segments are expected to have incremental cost savings from the restructuring activities commenced in late 2022. As discussed, our balance sheet is exceptionally strong coming into 2023. We have the flexibility to pursue inorganic growth opportunities to augment the business, assuming a transaction meets our strategic and financial criteria. With that as background, let's review our outlook for the full year 2023 and our expectations for the first quarter of 2023. On slide 10, we have provided our major assumptions. Starting with the full year assumption, consolidated organic revenue is estimated to range from -5% to +2%, with regional expectations as follows: Americas from -4% to +2%, Europe from -7% to -1% and APMEA from -1% to plus 6%. As Bob mentioned, we have signed an agreement to purchase the assets of Enware Australia. This outlook does not include the Enware acquisition as the transaction is not expected to close until later in Q1. We will provide additional information on financial expectations after the transaction closes. We expect consolidated adjusted operating margin for the full year to range from between 15.4% to 16.0%, with both the Americas and APMEA down 60 basis points to flat compared to 2022 as price and productivity do not fully offset inflation, incremental investments and the onetime price cost benefit of $13 million we captured in 2022. We anticipate Europe's adjusted operating margin will decrease 120 basis points to 170 basis points due to the impact from inflation and volume deleverage. Consolidated margin declines may range from 100 basis points to 40 basis points. It is important to note that the range includes approximately $20 million in incremental investments. As for the other 2023 key inputs, we expect corporate costs to be about $49 million for the year. Interest expense should approximate $8 million. Our estimated adjusted effective tax rate for 2023 should be approximately 25%. Capital spending is expected to be approximately $42 million. Depreciation and amortization should be approximately $42 million for the year. We expect to deliver free cash flow conversion of greater than or equal to 100% of net income in 2023. For the full year, we are assuming a 1.08 average euro-U.S. dollar FX rate versus the average rate of 1.06 in 2022. This would imply an increase of 2% year-over-year and would equate to an increase of $8 million in sales and $0.03 a share in EPS for the full year versus prior year. We expect our share count to be approximately $33.5 million for the year. Finally, a few items to consider for the first quarter. Organically, we see sales flat to up 4% with low single-digit growth in the Americas and APMEA, offset partially by a low single-digit decline in Europe. We expect first quarter operating margin to be in the range of 15.7% to 16.2% or flat to up 50 basis points versus the first quarter of 2022. This is due to the impact of a tougher compare as well as higher investments and continued inflation. We expect incremental investments of approximately $4 million in the first quarter. Incremental restructuring savings of $1 million should be realized in Europe and $0.4 million in the Americas. Corporate costs should be approximately $11 million. Interest expense should be approximately $2 million. The adjusted effective tax rate should be between 23% and 24%. We anticipate foreign exchange to be a headwind in the first quarter. We are estimating a 1.08 euro-dollar exchange rate, which would be a 4% reduction versus the average rate of 1.12 in the first quarter of 2022. This equates to an impact of $5 million in sales and $0.02 a share in EPS. Thanks, Sashank. On slide 11, I'd like to summarize our discussion before we address your questions. 2022 closed out on a strong note with record Q4 sales, adjusted operating margin, EPS and free cash flow. Our teams did an outstanding job delivering on our customer commitments despite the many challenges. We expect a tougher 2023 with difficult year-over-year comps from 2022 and challenging market conditions with rising interest rates and an economic slowdown. We are focused on controlling what we can and will take advantage of market opportunities as they arise. Our business model, which includes a large repair and replacement component, provides a durable revenue base that in turn drives a steady cash flow stream. We have a strong capital structure and strong cash flow capability that provides flexibility to address our capital allocation priorities to create value for our shareholders. We remain focused on executing on our long-term strategy, continuing to invest incrementally for the future and driving our smart and connected strategy. We continuously monitor economic conditions and our markets. Our experienced team is well positioned to execute throughout the economic cycle and adapt to meet our customers' needs in any environment. So, just a couple of questions here. First, just on the non-res outlook, you talked about some of those leading indicators. Maybe just put it in context of the mix of business you're seeing, whether you're seeing any softness on the non-res side today, or if this is more prospective based on what those leading indicators are saying. And I know you guys referenced some concern on the office retail side, makes sense. Any other pockets where you feel particularly good about given the visibility you have? So, just some context around all those things. Yes, the institutional market, education, health care, data centers, food and beverage side has been strong, Mike, and we expect that to continue through the rest of the year. Like you said, the-- more office buildings, retail, that has been soft, and we expect that to continue to be soft. So, that's in our assumptions for the rest of the year. Yes, that's what we're seeing, that's what our team is seeing that and feel confident that institutional education and health care, all of that will continue to be fairly even-- continue its strength through the rest of 2023. And if you think about the sequentials that have been assumed in guidance, it feels like a more conservative back half of the year, which makes sense. Is the assumption here then that relatively normal trends into the front half of the year based on what you're seeing in 4Q and then tapers through the year with the hope that maybe the environment stays stronger, but might as well be cautious going into the back half -- is that the thought process? Well, yes, the thought process-- I mean, the big thing we're watching is multifamily because that's been offsetting some of the single-family residential side for us. So, those indicators, we're watching closely. We expect that to soften as the second half goes-- as well as repair and replacement, Mike, has been strong all year, and repair and replacement usually follows GDP. So, with GDP coming down, we're assuming repair and replacement is likely to come down because it's been very robust in 2022. Last one for me, if you don't mind. On the smart and connected side, when you're starting to see pockets of weakness, how are people reacting in the smart and connected adoption curve in those areas? Meaning, are you seeing people lean in as they start thinking how to manage people and cost in a weaker environment? Or you may be seeing the opposite, I'd be curious if there are any trend lines associated with that because overall, it seems like the trend line remains pretty healthy for you. Yes. I mean when you look at smart and connected, there continues to be a shortage of plumbers as well as maintenance personnel, right? And I think anything we can do to make it simpler for the building owners to look at their systems and not have to guess is important. So, we continue to lean in on that. Our customers are taking that very positively. Especially if you have a leak or an incident, you clearly want to look at our products because if you don't, your insurance is going to go up. So, we believe, as I've said before, 10 years from now, pretty much all the products are going to be smart and connected, and we just want to lead in that journey. This is David Tarantino on for Jeff. Maybe just starting off with Europe, I mean, organic growth in the region hasn't really shown any signs of cracks to date, which has been a positive surprise, but obviously, guidance implies a decent amount of slowing in the region. So, could you just give us a bit more color on what you're seeing on the ground in the region right now? Yes, I mean just what I talked to Mike about just now. I mean, when you look at it, we're seeing single-family residential softening been offset by multifamily residential. We're watching that very carefully because some leading indicators are now projecting that to soften, especially in the second half of the year. As I said, GDP is slowing down -- we tend to follow GDP -- and obviously, with interest rates going up, there's some concern longer term, especially in the second half that commercial construction may slow down. So, we're watching that carefully. We feel good about the first quarter and more in the first half. We're watching how the second half unfolds at this point in time. Certainly, in Europe, with the war, there's-- we're seeing a decrease pretty much on new construction. That's where the concern is. A lot of it has been finished, they're finishing up what they started. But, I think new construction is what we're watching very carefully there, and we think that's going to continue to slow down, and that's why we've assumed that in our overall guidance for Europe. Okay, great. Then, maybe, switching to price cost. I mean, you have that in the monitoring items, and we're starting to hear some signs of disinflation of certain commodities, but maybe could you walk us through the puts-and-takes here, especially within your own commodity basket? Yes, look, on the price cost side, we talked about the benefit of carryover price into 2023, as well as we're announcing price increases for 2023, and that's all going to be subject to market pushback, right? But, back to your comment on disinflation, when you think about commodities -- commodities did soften. I mean our biggest commodity is copper, and it did soften in the second half of last year. Since then, it's actually picked up, and the price today is slightly higher than the average price of last year. We've assumed about a 4% inflation both for commodities and other costs like compensation, et cetera -- compensation being one of the biggest costs that we have. But it is-- there is disinflation in the market. So, inflation will be lower than prior year. This is Michael on for Joe. Performance in Europe was probably much higher than most were expecting, and you had mentioned earlier that price was a large contributor. Can you just give us a sense perhaps on the magnitude for the quarter and perhaps describe the volume price relationship built into the fiscal year guide? Yes. So, look, overall, our price realization across Watts was approximately 10% in the fourth quarter, a little bit more than that in the Americas, a little bit less than that in Europe. In Europe, if you strip out price, volumes were slightly negative. Clearly, as we think about 2023 and the guide that we have, unit volumes will be negative. We talked about that when we talked about our margin expectations with the deleveraging we have with a high fixed cost base. So, that's what our expectations are, and specifically to Europe. Sorry, everyone. This is Miguel on for Brian, I was on mute. I just wanted to follow up on that last question and the answer around Europe volumes being down for the guidance in '23. Will volumes also be down in the Americas? Then, also just looking at the Asia guidance, it looks like volumes will be up there, but I just wanted to check on volumes across the regions as well. Yes. We did talk about Europe. If you strip out a little bit of the price we got going on, unit volumes will be down. In the Americas, if you strip out price, our expectation based on the guidance is unit volumes will be flattish to slightly down. Then, the APMEA region, unit volumes will be up a little bit, primarily driven in the Middle East-Africa market. Okay, great. That's helpful, thanks for the clarification. Then, yes, on APMEA -- this is my last question -- on APMEA, it looks like it either will be growing in '23, but the operating margins are down. Specific to that region, what's causing the pressure on margins this year? It was related to intercompany -- last year, in 2022-- in 2021, there was a lot of product sourced from North America. We don't put intercompany sales in that number, but it does have the intercompany profit that is made from its sales to our North America sub. So, again, it's solely due to intercompany volume. [Operator Instructions] There are no further questions at this time. I will now turn the call back over to Mr. Bob Pagano. Thank you for taking the time to join us today. We appreciate your continued interest in Watts and we look forward to speaking to you again in May to discuss our first quarter results. Have a good day, and stay safe.

EarningCall_178

Thank you for taking part in this little meeting. As is our custom, I'm with Christian Labeyrie. In the room we've also got most of the executive committee members including José María, Chief of Cobra IS who will be able to field questions later if anyone has questions in English. First of all to look at some pictures, they're very important. On the cover page, here we can see the establishment in the North Sea or the first conversion platform -- AC/DC conversion built by Cobra with a joint venture Simmons Energy. As you saw in our press releases, we've got five others on order. The last two are about twice as big as what we see here. Capacity is two times greater -- more than two times greater than the capacity of the first two stations. We can come back to the point. Now, this picture tells us again that France won't meet its carbon neutrality commitments by 2050 without a major and highly urgent effort to decarbonize roads, particularly motorways. We're already working very hard on our VINCI Autoroutes networks. But the bulk of the work remains yet to be done and will require significant investments. The picture illustrating the acquisition of 29.99% of the OMA company, OMA that manages a cluster of 13 airports in Mexico including the Monterrey Airport, which alone has about half of the 23 million passengers booked by the cluster in 2022. This picture is an illustration of the signature to buy the 35% of a company called Entrava which in turn is a concessionary of 570 kilometers of motorways in Brazil, a portion of this is being widened, 210 kilometers being widened. I'll come back to the point. Then many acquisitions at VINCI Energy, specifically under the ICT component information and communication technology through the takeover of ICT expertise that previously was held by the Kontron Company operating in 11 Eastern and Central European countries. This further strengthens VINCI Energy's axial specialty, which means it will be achieving around €3.3 billion or €3.4 billion in revenue in 2023. This picture is an illustration of a major deal won by Cobra, which will begin the work on the first land terminal for regasification of liquefied natural gas in Germany. As you know Germany was highly dependent on Russian gas. So, very urgently they quickly leased ships that could use to regasify LNG, four or five of these were installed. But of course that's a temporary solution. Germany must build land regasification terminals to diversify sources of supply for its gas. We won the first one simply because we -- Cobra had been working on this for many years and speeded things up further due to recent developments particularly the war in Ukraine. Now, here we have a picture which is an illustration of a major deal won recently by VINCI Construction. It's a joint venture with our Spanish comrades from Ferrovial, the very serious Gorged company. It's a design build contract for a significant portion of the new Toronto Metro subway in Ontario. This still prevent 28,000 vehicles worth of traffic every day, which will mean a significant reduction in greenhouse gas. Lastly, Vinci Immobilier will also make it in a timely fashion to deliver a major section of the athletes’ village. We're showcasing this because it's a beautiful example of urban regeneration in industrial brownfield. To come back now to our achievements in 2022, Vinci is doing well. In 2022 we booked strong growth in revenue and profits. Cash flow generation is at a record level. There has been a satisfactory -- highly satisfactory renewal of our order books and growth in our environment and social performance. This is an illustration of the resilience of our business model and especially our major ability to adapt as the case of all 4,000 of our business units highly adaptable. Firstly, Cobra IS now very well integrated. This is confirmed further that it's a wonderful driver of growth and performance together with Vinci Energy which was already growing beautifully. If we put both of these together, we're talking about an energy brand, making over €22 billion in revenue, because they are at the cracks of major transformations of foot right now that are caused by the energy transition and the digital revolution. Among other things, we're deploying renewable energy fields at our airports, our motorways and even at a bigger scale further in Cobra covered countries, such as Iberia and Peninsula, as well as Latin America mainly. The good news, our first renewable photovoltaic field of 0.6 gigawatts, 600 megawatts will begin producing -- generating green power as of 2023 and this is taking place in Brazil. VINCI Construction is reaping the benefits of this new organization and most importantly the benefits of its major highly disciplined way of accepting order intake. Next, a fairly spectacular recovery of VINCI Airports which speeded up throughout the year further recovery continuing in 2023 for airports. Good road traffic -- motorway traffic held up well especially in France. And in fact it's now above levels observed before the pandemic in spite of hikes in fuel prices. And all in all, we see net debt going down significantly. The debt down by €3.1 billion over a three-year period in spite of several major acquisitions such as Cobra, OMA and further press over the past three years, financial investments have been on the order of €8 billion. And in spite of the €8 billion, our debt is brought down by €3.1 billion as we can see. Lastly, I'll come back to the point quickly later. [indiscernible] methodically, we olled out our environmental strategy and all of our employees join in on this. Important thing to see here is that, all geographies are growing. North America, growing significantly, reaching around €5 billion, whereas Latin America, Europe and Oceania, are also growing very satisfactorily. Of course reaping the benefits of the strong positions that Cobra has as well in these various geographies. All in all, we can say that for the first time in our history, we're making over half of our revenue outside of France specifically around 45% revenues from France and the remainder from outside of France is very much in line with the strategic decisions we took around 10 years ago now. To delve into further detail on the business lines VINCI Autoroutes light vehicle traffic above the traffic levels in 2019 as I mentioned already in spite of increases in fuel prices. Furthermore, there were problems of fuel availability, which you all felt last fall in spite of growth. This growth, well, part of it is due to the return of our foreign customers, our non-French customers. This is readily apparent at several borders and several motorway sections. Heavy vehicle traffic was already doing well in 2021. You'll remember, it's continuing to grow by 22% in 2022. All-in-all this is beyond growth that goes beyond macroeconomic growth. This is to a large degree due to development of e-commerce. By way of illustration here I'd mention basically a doubling in the annual pace of construction of warehouse logistics, logistics warehouses alongside our motorways. That's a very good piece of news because it means -- well, it's not all of a sudden that road shifting will take some other means of transportation, because now the logistics warehouses have been set up alongside motorways particularly near the hub areas of the motorway sections. That's a done deal. And this is something that's developed in a very big way particularly since 2015. This illustration of our major efforts in decarbonization, 100% of our motorway rest areas at VINCI Autoroutes have electric recharging stations, 1,750 charging points. And an important thing is 1,400 of these are ultra-rapid charging stations of over 150 kilowatts. You can well-imagine people can't have their vehicles spending eight hours to wait to be charged on a slow charge when you're making a long-distance trip and you stopped at motorway rest area. VINCI Airports, I said the recovery is speeding up. Q4 2022 was just down 17% versus Q4 of 2019. Traffic more than doubled over the full year period versus 2021. Several geographies and countries have already reached levels above or near the pre-pandemic situation. The UK is recovering quickly. The Asia zone will be gradually reaping the benefits of the lifting of travel restrictions, particularly recent decisions made by China. We'd also observed that significant work being done over the past three years on OpEx has made it possible to see a significant impact on EBITDA, which is even above the level 2019. Net income is over €500 million. To tell you the truth, which is much higher than we were thinking and actually saying a year ago. Thanks to all this. And in addition -- and added to the fact that there's a cut in CapEx because we've frozen a lot of CapEx during the pandemic not all CapEx but much of it. So VINCI Airports free cash flow in 2022 goes beyond €1 billion. VINCI Airports also has an environmental targets. They are highly ambitious, targeting carbon neutrality in 2030. Several airports will reach this as of 2026. Particularly we're seeing a systematic rollout of PV farms whenever possible in airport areas. We have resumed external growth at VINCI Airports, for instance, the signature of 40-year concession for seven airports in Carpe Verde to be closed toward mid-2023. Then more recently we closed. So we're now owner of 29.99% of the OMA Airport cluster. Important to observe traffic here as of last July, reached the pre-COVID level. So it's a done deal. Just like in motorways we're seeing that there's a strong desire to commute, to travel, to be mobile. This is very strong. And what's striking in air traffic is this is remaining very, very high, in spite of significant increases in ticket prices which you'll all have noticed on average 30% increases in airplane ticket process and that has not held back people's desire to travel and be mobile amongst the citizen REIT to talk about VINCI Highways. This is motorways outside of France, plus other concessions. We're seeing the same positive trends for traffic, particularly motorway traffic in Peru and in Greece. All say, rail with SCA and then Interstadiums. To talk if you can say, traffic, stadiums, particularly the step deference which is actively preparing to accommodate the Rugby World Cup in the fall of 2023, as well as the Olympics and Paralympics games in the summer of 2024. Strengthening of our percentage stake in several assets such as the, Confederation Bridge concession in Canada a Rion-Antirion in Greece and then, the two Lusoponte in Portugal. Full acquisition of the TollPlus Company we mentioned this last time, I believe. They're an expert in one of our strategic business lines i.e. IT solutions for land mobility, then the acquisition of the, 55% of Entrevias that I already mentioned to you. To talk on VINCI Energy a really truly beautiful year at VINCI Energy, revenue up again 11% even further speeding up in revenue growth in Q4. VINCI Energy not only is growing but is also further improving its EBIT margin re-standing at 6.8% versus 6.5% in 2021 which is truly remarkable and further illustrates, I believe, the power and robustness of our business model is to accomplish, well established on the mega trend, which is energy transition and the digital revolution. These are mega trends which are going to be buoyant for quite some time to come. Furthermore, this is thanks to an excellent geographical diversification. Lastly VINCI Energy as always continues its strategy of growth through acquisition 31 small medium and sometimes biggest companies acquired particularly in the ICT area from the Kontron group that I just mentioned a moment ago. The first successful year for Cobra IS and the group is revenue about 45% in Spain and 35% in Latin America. And it breaks out basically into three main segments. First of all, flow business. Flow business representing two-thirds of revenue. The important -- this is very important. This is a guarantee for stability and resilience. Next, come to the EPC projects, Engineering, Procurement and Construction projects. They're ever bigger scale, Turnkey operations requiring many types of expertise. Think of the AC/DC conversion power stations we saw on the first slide. Furthermore, the re-gasification, the LNG re-gasification plants we already talked about. We're also talking about some very high voltage up to 500,000 volts transportation lines for power in Brazil. Also systems for transport, infrastructure management such as winning deal in 2022 for the same there in Tunnel. Here we also have teams working for VINCI Construction. This EPC portion, we can say the size of business fluctuates more here depending on how things vary. We're in a very positive phase right now. Many deals on offer to our various companies, particularly Cobra. This is once again because we're surfing the megatrends to the energy transition and development of transport. Virtuous transportation infrastructures such as subways, metros and other types of mobility that are kinder to the environment. Third segment at Cobra is to develop renewable energy production fields. The pipeline of projects under development standing at 15 gigawatts, the same figures what I mentioned one year ago, not exactly the same 14, 15. You have to add to this 2 gigawatts that now have all the authorizations, the building permit, the environmental permit, the permit to connect to the grid. This is 2 gigawatts. Some of this is the 0.6 gigawatts I mentioned to you earlier that will come on electricity production come online in 2023 plus 0.3 gigawatts also photovoltaic in Spain, which will see us work begin in 2023 and the 0.6 gigawatts in Brazil, again photovoltaic, which should begin construction in the next few months. All of this is an illustration the 2-giga add maturity now almost ready to build. And the pipeline we've still got ahead of us under development has been replenished so that it is still a significant volume 14 gigawatts. All of this is very much in line with our road map. In fact going beyond it because we indicated to you 1 gigawatt per annum initially. It's possible we'll be more in the neighborhood of 1.5 gigawatts, especially if you add the PV developments along our motorways as well as our airport assets. New VINCI construction is keep making good on its promises, strong activity in growing growth of revenue more than 11%, €29 billion, 55% of which outside of France the UK, France, the Czech Republic, North America and Oceania, important to point that out. We're seeing a ramp-up of the major projects won previously such as one in the UK just to and also a very good deal flow of big project and also a very good deal flow of small and medium deals and electrical engineering that's important to have to make sure you're highly resilient all sizes. EBIT margin growing 3.8% and will continue to grow. The key motto at VINCI Construction is selectivity, selectivity more than ever before. We don't talk about market share and volume. We are talking about striving for operational excellence and performance. The good news is the size and the quality of our order books give us the confidence we need to know that we're able to continue with this policy being highly selective. Yes order intake 2022 was very good. We can see it on the slide up 12% excluding Cobra, up 32% like changing the scope i.e. including Cobra. On the right-hand side we see a particularly significant harvest orders outside of France. This order intake bigger in non-branch Europe and international outside Europe than in France, even in France order intake is very good on the order of 10%. Lastly property development, the environment deteriorated here in residential property, pretty abrupt shift from the previous situation where you had strong demand, shift to the situation where we've got a scarcity of supply that's priced in line with the interest rates, but people's purchasing power has been cut by increased interest rates. That's on residential real estate. And then, we're seeing very clear wait-and-see stances taken by investors in office real estate wait and see, by the investors everyone -- pandemic. So housing unit reservations down, by approximately 17% even slightly more -- significantly more in the most recent months of 2022 and according to initial figures of 2023, even though obviously, we're not going to disclose annual trends, which is to say we're starting to movement in a more difficult period when it comes to residential real estate. However, there is a section of residential that's doing well, a niche, which we've begun developing. We began looking several years ago. Now here, I'm talking about serviced residences, both for students and seniors. This is particularly popular amongst seniors. These are not nursing homes. These are service departments for older people. These are not medical facilities. We are not in the same category, as the other guys. Another very important point, something I think I already touched upon. VINCI Immobilier was the number one developer -- the first developer, to set a target for zero ceiling of soil by 2030 in net terms, which will make for a major transformation in property development. We will tend to focus on urban regeneration operations such as, our new headquarters office or such as the athletes -- the Olympic Athlete Village that you saw earlier. No doubt about it. The property market will improve again, in the future. We feel it's going to see improvement fairly soon in residential, because the country more than ever before needs new housing units whether we're talking about housing that people buy, or housing to be rent -- social rented to social housing. We'll have a problem in this country, if a major gesture is not made to boost increased construction of new housing. Thank you, Xavier. So on revenue a lot has been said. Growth on close 25%, actual scope €60 million in revenue constant up 12%. Strong increase in concessions, plus 30% on the back of growing traffic of motorways. The rebound of VINCI Airports, VINCI Autoroutes revenue up 8% VINCI airports more than double that of 2021 slightly above 2019 pre-COVID level. VINCI Highways, essentially international order route activities and e-toll management activities. And as you said, the control of TollPlus, in the US in 2022 and the Prince Edward -- CDR bridge in Canada revenue, up 55% in real terms 24% like-for-like. VINCI Energy up 11% like-for-like 8%, accelerating quarter after quarter. Growth in revenue of VINCI Energy by France and internationally. VINCI construction up 11%, like-for-like 8.5% fully leveraging its international growth. Scope effect €5.5 billion integration of Cobra IS acquisitions, VINCI Energy some 30 and 22 the most significant cemented at the end of last year. Control AG added to that total 30 over the years some 60 acquisitions contributing for about €260 million additional revenue in 2022. VINCI Concessions the integration of the Canada bridge full year that's €40 million €26 million and €16 million in 2022. VINCI Airports integration since the 1st of January of the Amazon airport some €50 million in 2023 we'll have the integration of Oma, for close on €500 million. Cape Verde about €30 million full year half for 2023. Net impact of currency translation adjustments 1.5. That's the reveling at average rates of some 10% for the dollar as well as other currencies linked to the dollar. Next slide, gives you the split by geographic areas strong rebound in revenue versus 2021 driven by international operations plus 46% plus 70% like-for-like, thanks to Cobra for the actual change. But growth in France is noteworthy 6% pretty much on a par with inflation but differences by business. VINCI Energy is above 9%. VINCI Construction plus 2% illustrates our selective approach at VINCI Construction. In conclusion on this chapter, VINCI is accelerating the expansion of its international footprint. That's in line with one of our strategic goals set out a long time ago for the first time over half VINCI revenue 55% achieved internationally, as against 47% last year. Operating income from ordinary activities of each division. Overall, remarkable performance increases across businesses. EBITDA of VINCI highways over €3 billion 52% of revenue. Topping its 2019 level just below €3 billion. VINCI Airport thanks to accelerating traffic recovery throughout the year and drastic savings plans put in place during COVID sees its grow strongly. It now reaching close to €1 billion. That's pretty much the 2019 level. Other calls for satisfaction. EBIT of VINCI Energy VINCI Construction are up coming in approximately €1.2 billion, 30% better than in 2019. The operating margins of these two divisions continue to grow in spite of cost inflation and supply chain difficulties in certain markets. For VINCI Energy, operating margin reached 6.8% of revenue 30 basis points higher than last year, 80 bps higher than 2019. Majority of our businesses and geographies at VINCI Energy contribute to this excellent overall performance strengthening VINCI Energy amongst the most – the best-performing companies in its sector. Cobra delivering EBIT of over €400 million, excellent margin, in line with our expectations, above 7%. For VINCI Construction, operating margin up 10 basis points versus 2021, 3.8%. That's a good, even very good level, given industry characteristics, size of the company, even if there's room for further progress and it's a level never before reached at VINCI for over 10 years. VINCI Construction margin reflects good performance in major projects specialty networks Soletanche, Freyssinet, good profit margin internationally, North America, Australia, New Zealand. To preempt Jean Christophe's question, let's flag that there are no material claims to be noted that would boost these results. As always there are challenging work sites inherent to the business. They're also very good projects. HS2 in the UK or the start-up of [indiscernible] or the Greater Paris project and also VINCI Construction margin reflects the initial positive effects of the French reorganization into four subdivisions, building, road work, civil engineering, specialty, hydraulics, earthworks, demolition. We can of course do better, notably UK, Africa. So we can bank on continued improvement of VC margins going forward. Lastly, EBITDA VINCI Real Estate, amount is more modest, it's also up on the year as well as the profit margin, as Xavier said, this performance can't necessarily be extrapolated going forward, given the difficult climate in France, moving along the income statement. IFRS two to be related to a group policy, the 270,000 people, international headcount, more important. And we're striving to offer profit sharing systems linked to VINCI checkup, but contribution of subsidiaries consolidated at equity. There are pluses and improvements in Japanese airports, minuses, because there are acquisition costs under this item. Now, under the one-off items, no impairment test impact to be noted. As regards to the financial expenses, a bit surprising in terms of what you rent, slightly down 614 as against 658. The explanation is the rising interest rate hasn't yet impacted us a great deal in 2022. In fact, more in Q4, we benefited the positive rate of return on our cash. 2023 is likely to be less favorable with rising interest rates full year. And there's also swap rate variability that in the right direction, that is in the wrong direction last year. Other financial items, very positive, reflecting reevaluation of our stake in ADP. Let me say that, since we no longer have a seat on the Board, ADP chart marked to market which has improved significantly in 2022. Hence, a positive impact in our financials and impacted Gatwick of the early redemption of certain loans under par, generating a profit of ISL of those bond redemptions, because Gatwick had the necessary cash to do that tax-wise, an increase in the tax bill higher than what's shown here 2.6. We had an expense of €400 million linked to the revaluation of income tax in the UK was purely book impact on our deferred tax. Strong increase in the tax expense for France was spent just over €1 billion tax on profit. The same amount to be added in terms of production tax in the income tax, over €2 billion in taxes, which puts us quite well in the list of French tax payers. Net income after tax €4.259 billion. That's a record. I'm sure of that. That's EPS of close on €5.50. Next slide is the change in the debt of a year. The free cash flow record, free cash €5.4 billion, very much higher than what we could expect a few weeks before the end of the year. The last forecast was strengthened by Bloomberg. Consensus in November was 4.7. We delivered 700 better over half. This gap comes -- this variance comes from a strong level of cash in towards the end of the year down payments one received on the project in Canada, one in the final weeks of the year. That's remarkable performance. WCR improved sharply of late in 2020 and 2021 during COVID, because the admin teams were ready to call in receivables. But those benefits were not reversed in 2022. I tend to repeat this year, but it's the case this year. We can't consider that the 2023 cash flow level can be considered as normative going forward. All the more, the CapEx be it at Cobra to grow renewables in greenfield or VINCI Airports are set to rise VINCI Airports, in particular the 2022 CapEx is €200 million below what it was in 2019. Necessarily there'll be a catch-up in the lag here. Notably, Portugal, the UK and Cobra, we'll continue to invest significant sums in renewals about €400 million this year probably more going forward. Hence, a normative cash flow to make a forecast, our risk of the order of €4 billion to €4.5 billion, but not necessarily more. 2.7 financial investment, that includes the acquisition of OMA for €1.5 billion at the end of the year, partially funded in Mexican peso. €600 million at VINCI Energy, over half for Control, that was the deal that was cemented at the end of last year. VINCI Highways were about €300 million. If we include the consolidation of the debt of companies acquired, the Canada Bridge previously not consolidated about €100 million at VINCI Construction, essentially in North America. Cash out pertaining to dividend and share buybacks in the cash effect of the debt linked to the mark-to-market of our exchange rate derivatives all in all reduction of debt over a year of €1 billion. Next slide is the way in which free cash flow is crafted [indiscernible] first part of the year. We don't generate a lot of FCF up until July it's only after that the curve begins to arrive with December that's particularly significant. It has happened certain years that it even accounts 50% of the year's cash flow in 2022 was 44%. That's a lot more in certain businesses, a lot more in 2021 35%; in 2020 51%; 2019 24%. Hence the difficulty to give you a very accurate forecast, especially, at the start of the year. That's due to a very specific situation of receivables at the end of the year and that will be a VINCI Construction Energy and Cobra. Putting things into perspective. Next slide. On 10 years, we see that FCF generation at VINCI is rising incrementally very high-end recurring on average per year. Cash flows improved 11% per annum, but 17% over the last five years. That's way above the increase in profit on the average, 8% of the period accelerating since 2018. As I said once again we can't consider that levels reached in 2021 2022 over €5 billion. A normative reasons difficult to predict CapEx both at airports and Cobra. Balance sheet is of course very solid even more so equity of €4.6 billion WCR, negative WCR. It's a free resource. Obviously that's very appreciable let's strengthen further. Our long-term assets coming in at close to €5 billion. That will increase by close on €5 billion covering the large part of CapEx and acquisitions reduction in net debt by €one billion as I said free cash flow above €9 billion same level even slightly higher than last year's. So it means that if we reason EBITDA multiple not necessarily the right reason often we do. The debt ratio has improved because debt was 2.5 times EBITDA in 2021 and it's down to 1.8 in 2022. It's a level that may not be viewed by some as optimal if we want to reason in optimizing cost of capital. But we accept that. It's a consequence of our prudence. It's a vital asset gives us some leeway when it comes to M&A and also swiftness in our recovery since COVID. Next financial policy. Well you already know this. We attach great importance to liquidity ability to mobilize resources if need be to reimburse our loans in 2022 we reimbursed €2.6 billion maturing to optimize refinancing cost to pick the right time to position on the market in 2022. We issued two bonds one in all was ASF October for VINCI more recently January this year for ASF and also to seize M&A opportunities part of our strategy as we decided in December 2021 by writing a check to ACS close on €5 billion to acquire Cobra. More recently at the end of 2022 take 30% stake in Oman to acquire Cobra Advance Energy. All-in-all over three years. We achieved €8 billion in acquisition. That's a lot. Need to fund that in over four years over €16 billion in M&A. Debt reversals by VINCI. That's an average of €4 billion per year in spite of COVID. So have total liquidity including unused credit €20 billion increase in 2022 estimated over the uncertain period, especially during the summer, because of the Ukraine conflict it be prudent to up our credit lines. We did that with the support of our banks for €2.5 billion. So we're equipped to continue to meet contingencies, while continuing to expect credit rating confirmed both by Moody's and S&P. I appreciate the strength of economic model resilience business diversification and our cautious management. Thanks to these good ratings we can expect to continue to fund the company in good conditions even in the changing context and if rates aren't quite what they were one year ago. As I said we placed in 2022 two issues of €850 million ASF. Other of €850 million at VINCI, another €700 million ASF. So the average maturity of our debt is still around seven years had conditions higher than what they were previously remain okay given the current rate environment. Cost of debt is the next slide. Slightly increased weighted average in 2022 at 2.5%. That's due to the charts on the right given the cost of debt by currency, so you see in particularly euro debt the three main currencies cost of debt has risen and that the weighting by currency has changed, because we have a share of debt excluding Euro hire. We also have a debt excluding OECD strong currencies. Mexican pesos, Peruvian sols, et cetera. In spite of that it remains pretty much okay. Difference between the rates on the right led between two five is an average on the year doesn't fully factor in the full impact of rate rises, and on the right the end of year. So we see what happened notably at the end of years cross-currency with 200 bps increase the various costs by currency. Thanks. First of all, we were talking about 2023. At VINCI, we all share have this confidence very confident in the future, as Christian said. And the reason for this is because our construction, energy and mobility business lines really place us at the very core of major challenges in this world. What are we all about transforming cities? We can go back to the point later. Digital revolution in all industries and human activities, decarbonizing transportation, developing green electricity in the energy mix support, providing support for the emergence of low-carbon hydrogen for industry and large-scale transportation, also systematically tackling projects from the vantage point of preserving biodiversity and carbon footprint. It also means developing the circular economy. On all of these subjects we are very highly involved. We feel we are solutions providers in all these areas to rise to all of these challenges which we find very exciting. And it's the case for all 270,000 of our employees very enthusiastic. This really gives us a great deal of leverage for further future growth. At VINCI Autoroutes, we are realistic. We except the macroeconomic facts and also high fuel prices. For all these reasons, we expect stable traffic at VINCI Autoroutes in 2023. At VINCI Airports, on the other hand, what we're expecting is continued recovery in passenger traffic. Probably things will lag in Asia because Asia has just reopened more recently. So, I want to lag some forecasters worldwide are expecting resumption of traffic to pre-pandemic levels as of 2023 -- 2022 sorry. We're more cautious. We think it will be more towards 2024, but added 2023 beginning 2024 won't really change things in a big way. Anyway continued recovery in traffic at VINCI Airports. Clearly leading everything you could calculate in terms of impact on our business performance. On to VINCI Energy will continue to grow all the while maintaining the high level of EBIT margin already booked in 2022. Cobra is -- has a very strong order book, truly a record order book, probably the highest order book Cobra has ever had on hand in its history. This is where we expect growth of at least 10% in Cobra sales in 2023, all the while remaining top of the class and the profession in terms of EBIT margin. VINCI Construction reset our intention is not to grow VINCI Construction, but to continue growing the EBIT margin by being even more selective. It may happen that the consequence of that discipline might cause a tiny auto growth. We're not targeting growth though there may well be growth. We're going to be further improving operational performance though and EBIT margin which is to say all in all for VINCI what we're expecting is renewed growth in revenue and operating income to a lesser degree than 2022 compared to 2021. As a comparison, our net income should be slightly above that of 2022 in spite of increased financial expenses that are crystal clear that Christian has explained very clearly. With this great confidence, the Board of Directors met yesterday and decided to propose to our next shareholders meeting on April 13th, a dividend for 2022 of €4 per share payable in cash including €1 already paid as an interim dividend. The remainder of €3 will be payable in cash on 27 April this year. The dividend will we take into account the fact of the matter that you've seen i.e. the rebound after the crisis the new profile of this group with further development of concessions record levels of cash flow. This is also a way for us to demonstrate our confidence in the future. Lastly, I won't dwell on this, but let me just say that in the presentation you can find firstly three slides that give you details on our environmental social ambitions, how we're making progress in this area, how we're really bringing forward with us all of our employees takeaway point. We're very much on track in our road map, particularly when it comes to our CO2 footprint, down by 13% and also when it comes to using low-carbon concrete. Our intention is by 2030 to be using 80% low-carbon concrete or even better, ultra low carbon concrete. If you look just at France, we already stand at 30% usage of low carbon concrete in all of VINCI Construction's activities. Another important parameter is recycling a circular economy. We already stand at 46% using recycled road beds for construction of motorways in France and a very large proportion of our aggregates and other elements are from recycled materials at VINCI Construction. Our target is to reach 20 million tonnes in the next year. So we're somewhat ahead of schedule on that particular point. Lastly, we gave you -- this is a slide to be careful when you look at. We're looking at our socioeconomic footprint in France is done by outside firm, an independent firm called Utopies. We've asked them to do this analysis several times before they use methodology, which is a very strong sound methodology. It takes into account not only our impact in France. In France, we've got our own business impact. But we go beyond our direct effects. We also have -- they also study our indirect impact and we call the induced impact i.e. the fact we pay taxes has a knock-on effect in terms of jobs, because those taxes don't you stay in a box at the treasury department, but they're actually used do various things such as build schools, health facilities and so forth in the country. If you take into account all of these effects direct, indirect and induced, we are supporting in the angle in terms of the term supporting around 1.6% of all jobs in France. That's about 460,000 jobs 463,000 jobs representing 1.5% of the country's GDP. Another important parameter based on the Utopies survey. If we focus yet again on France 96.5% of our purchasing is done in France. And out of that amount, 50% purchased from small- and medium-sized companies within our ecosystem. So again, the figures possibly could be question because the modeling involved here is highly sophisticated. But the important thing is to track this to see what progress we are making in terms of our impact on the environment and society as a whole. There you have it. That's what I wanted to say to you. Now, we'd be happy to field your many questions. We will respect our tradition. As you can well imagine, we will give the floor. Yes, go ahead. Hello, everyone. I might disappoint Christian. It's not VINCI cost to extend this year and the compliance. But actually, I'm thinking of energy. VINCI Energy Cobra as well as E&R operations for yourselves. VINCI Energy, congratulate 30 basis points improvement in operating margin. Question, could we get more color and more information on the profits equation? In other words, is this by business line ICT industry? Are they explanation for the improved performance and the absolute margins, or are there geography considerations as well? They come in to pay further more regarding Cobra I suspect the margin above 7% is due to turnkey projects versus recurring business. Lastly regarding proprietary operations projects for your own account that are being developed. Will -- has VINCI managed to control its purchasing and the cost of purchasing? I know that there were issues I do believe for solar panels. Well, the problem with Jean-Christophe is that the labor in fine questions. I'll answer and let my colleagues maybe come in. The good news with VINCI Energy is that, it's very uniform in terms of business and in terms of geography, in terms of business and geography both. I'd say why? Well because the margin psychologically if you decide to do 6.8 doesn't happen at a drop of a hat. Everyone ends up by delivering six points. The margin is crafted in the mine. Second thing, VINCI Energy is a huge amount of relatively small deals. But with the systematic determination to seek out the technology value-added and not to follow deals, which would have low value added. And that's another way of boosting margins. So, at the risk of disappointing you Jean-Christophe, the margin is very uniform, both vertically and horizontally. There is no business driving the others. ICT business costs more than the others generally come at a higher price and over the long term tend to produce quite a good margin. But as long as you're capable once again of refocusing them on the right segments and they're good clients that generally takes a bit of time after the acquisition. Your second illusion would seem to indicate that the Cobra margin was in very large part coming from major EPC projects. I failed to see why you hold that belief. No, it's the same as VINCI Energy once again. The major projects have the advantage when they generate margins to rest that margin on big volume. The disadvantage is when things go sour, then you see a decrease in the average margin rate. You need to ensure that the margin is broadly equivalent across the two segments mentioned earlier flow business on the one hand and big EPC on the other. If I were to give you a more complete answer, so you may be right insofar as cyclically EPC tends to generate slightly more margin than the flow business segment, but it's not set to last. If my colleagues wish to add some value added to my words, they are most welcome to do so. Have I said anything silly? No, of course not. It's uniform in countries and businesses, not just in my mind. It's a bit in my mind. I mean point is that, these are really mega trends. We're also facing shortage. And so, we're all the more selective because to date, there's a lot of solicitation. Also, depending and that's the lower grade numbers that comes into play. Depending on business sectors, growth is more or less high year-on-year and it can evolve this year. We've seen a very strong momentum in industry, driven probably by energy efficiency and rising energy costs such that industry players need to invest in order to optimize their production, major projects, well less on major projects, but we're seeing notably there were issues in the tertiary major, fewer tertiary projects innovation with our characteristic agility we can grow all our business like for VINCI Construction, the aim is to be selective and to favor margin over volume. José María, would you like to come in and maybe enlighten us on the price of PV panels? What's true is that we've delayed a bit the start-up of the construction of this first project in Brazil. So it's not to pay over the odds for the PV panels. What's the situation? Linked with the price of panels, you know, that we bought in our last three years more than three gigas of PV panels. Then we have some advantage, but it's a fact that panels has increased the prices, 20%, 30%. But it's true that the prices of the energy has increased a lot too. Then the PPAs prices are better, and we can mitigate the price of the panels, the rise of the price of the panels due to our position and we can balance this with the increase of the video. We don't disclose our margin. We've got about 4,000 entities be never ending. The standard deviation of margins at VINCI Energy is far narrow than at Cobra. In fact, we can do a lot better when the standard deviation will shrink more Cobra units and geographies that have above par performance and others sub-par performance. Hi. Barclays. Three questions if I may. First to pick up on what you expect for highways in 2023. I'm not surprised about your message of passenger cars, stability trucks. The amount, the numbers isn't going to be a slowdown that could impact trucks more as we saw in more challenging macro situation in the past. If you could give us a bit more color on that? Second question on financial expenses in 2023, what type of increase should we work on a cost rate shifted a lot as of Q2, €300 million, €350 million. Is that the order of magnitude all other things being equal excluding acquisition costs? Third question on PV, so maybe mistaken, I thought your appetite for South American highways wasn't that great because of technical due deal issues what did you see in this asset that makes you confident? Is it the works aspect that attracts you, particularly you're going to do the works or other factors that came into play? Thanks. On truck traffic, Pierre Coppey will correct me if I'm wrong. What's driving truck traffic is the growth in e-commerce unless there's a collapse in the e-commerce segment, truck traffic is set to a level of in our view not decline significantly. I don't know if I said this, but the logistics warehouse is over. So there's not really any possible alternative to ship all these, small parcels from the growth of e-commerce. They can only be shipped by road, because the warehouses are longer roads. That's, a good news. I think I pretty much answered the question. Pierre, do you want to comment on that? I think, you've got a slide. I don't know, if it's in the deck or if it will be in the annexes, gives you the share of variable rate debt. Overall, debt you can do all, the math you like depending on the assumptions. That are yours or might be, a great change on average to the year. It's not easy to assess today. Answer to your question, isn't easy. What sure is there will be scope effects, because on the one hand, we've integrated companies that weren't previously consult. We recover their cost of debt in our numbers. There weren't a case of Canada. So there will be almost [ph] recourse has its own debt about 300 million 400 million in pesos. That's going to impact our financial expense, plus the cost of acquisition for €1.5 billion. That will also impact our acquisition cost. That alone is, a far from negligible effect. But then, as regards the additional cost of debt linked to rising rates on the variable rate, all depends on your assumptions with that, you can do the calculations. I'm not going to do the job in your stead. We did it with a degree of prudence, as always when we redo the math, a bit more specifically after the close, we see that our budgets were a little over cautious, but we can expect a significant hike in cost of debt in 2023 in light of what I said. Nicolas, on Travis. So trying to answer your question first of Brazil, is a country, part of the countries that have significant infrastructure needs. We think as we're managing airports, Salvador de Bahia for five years, Manaus and other airports in the Amazon for a year now, it's a country that has federal state administration works well. We found our balance in the country. That's the first part to the answer. Secondly, it's a yellow field project. We of course, audited the traffic segment that good in technical assistance and traffic and we're maintaining a partnership. We're taking 55 with an invest [indiscernible] Brazilian funds that has a contractor track record for the second segment. That's -- we won't be the constructor, selective strategy. Brazil, is not part of the country where we go and construct. We'll be concessionaire, in this entry and partnership in terms of contract. Also, we've worked on airports makes us confident. The grantor is the state of Sao Paulo, very big and the elected Governor is the Infrastructure Minister, who previously managed airports. So we're in total confidence on this contract. I would just add that our understanding and our confidence, in this major country with strengthened by the fact that Cobra is -- has been present there for a very long time, and one including very PP very significant deals, high voltage lines. José María, will correct me if I'm wrong, Cobra will have already achieved 20,000 30,000 kilometers of high-voltage power lines in Brazil and has ahead of it a significant potential to continue work on this segment, given the mammoth needs brought about by the energy transition. So it's a combination between the recent understanding that we have at VINCI Airports with the longer presence of VINCI Energy and very historical powerful presence of Cobra makes us believe that this country is a good country in which to invest. How are you? Yes, good morning. Thank you. From JPMorgan. A couple of questions. First of all a brief question on Slide 55 operating cash flow. I'm wondering operating cash flow at VINCI Energy. Why was it divided by two cut in half in 2022? Next question a few questions that are more about strategy. Growth through acquisition. External growth has resumed. You reinvested in airports. What should our expectation be hence forth? You've got enough in your balance sheet. Will it be further airports or in energy? Will there be other focuses for your growth, particularly the United States? You're well established there in construction and concession. You've got all the know-how. There's an infrastructure growth plan and the pipeline over there. So what are VINCI's infrastructure intentions for the United States? Lastly, do you have an update on the potential green CapEx plan extension of concessions now that rates have been set? I forgot to write down. I saw you were looking at the slide. Yes. Could you repeat the two, three; points first of all Slide 55 on operating cash flow at VINCI Energy. Next external growth where we headed hence forth and then the United States infrastructure. Any opportunities you will be moving on for at VINCI? And then the motorway concessions plan extension green CapEx any updates? I'll ask Christian to comment on Slide 55. I couldn't find it. I'm looking it up. Well cash flow. I know we’ve build on this if necessary. 2021 cash flow was an outlier. Cash flow was well above net income. But you can explain this. In 2020 we'd had cash flow levels that were way higher abnormal. So we're now coming back to the norm. And additional point at that to secure lead time for supply and secure job sites we had to do a lot of advanced purchasing of material. And that worsened WCR. But all in all we're in the neighborhood of record levels before the outlier years, the atypical years of 2020 and 2021. On external growth, we're not going to reinvent some new asset class or new business line. We've got enough. We're going to be really focusing on areas of energy and concessions. Our three main focuses: land mobility motorways air mobility airports and now energy and generation of green energy. That's enough. And we're at the very beginning stages of things in that third segment. The next question where we focus what geography to focus on. No doubt about it the North American continent is a place we will need to investigate be more assertive than it might have been in the last 30 years. But we would recall for you that in the area of highways for instance, we can say that the number of projects for concessions motorways, highways in the US. Well, there will be some increase? Yes, but not a huge thing. It's not going to be potentially a major market. So we take a look to see cautiously. In airports, Nicolas will check if I'm mistaken. The concessions model for airport, full airports in the US, I don't think we really have any sign that might develop in a large big way in upcoming years. Sometimes what happens is the terminals might be an offer as a concession. We're somewhat reluctant. It's a little bit risky to just be responsible and shoulder the risks of a terminal within a much bigger airport hub as a decarbonized energy, yes, a lot yet to be done. The Reduction Act is going to boost things. No doubt about it a huge boost to anything relating to the environment, particularly renewable energy, specifically -- especially, hydrogen in the US. But we have to move forward carefully. We have to be certain firstly we fully understand and are well rooted before moving on to new projects. But yes, overall we are going to be developing faster than previously in the United States and Canada. But of course, there we've already prospered quite well. So, no new business lines and a focus in all likelihood a greater focus on North America in addition to Latin America as well as Europe, which has been the case. I believe that I've covered most of the points. The plan nothing really to say here. Why? Well we did say this here in the past. Our whole strategy boils down to what? First of all, to make as many people as possible realize that we have a huge issue of decarbonizing our motorways in this country. If this isn't dealt with right now together, we're not going to manage to meet the targets of carbon neutrality by 2050, especially and this is how I temper recent communication done by the ART, the Transportation Regulatory Authority. We can't await new concessions to take over from the current ones to then begin making powerful gestures to decarbonize. We've got to start it now, start tackling this now. 2030, we're too late in the day to meet the deadline of 2050. So we're talking about this. Nothing specific to announce to you above and beyond, what I've said already. We're still explaining things. Last week there was a very interesting symposium organized jointly with VINCI Autoroutes and the [indiscernible]. So gradually, we're disseminating this information. We're getting people to realize and understand it's urgent to demobilize -- decarbonize mobility. We have to talk about that before we talk about how to finance it. Hi, Oddo-BHF. Two quick questions. One quick and one rather more strategic. The first on the Autoroutes and the toll price changes. In 2023 you announced a number of smaller major support measures for your users, notably reductions on short trips, what will be the impact? Will it be material financially for you? And a slightly more strategic question on expansion in renewables. You mentioned the fact that you confirm the pipeline of 14 gigawatts of projects saying that it's evolved. Okay there are projects that will enter production that are being replaced. But have you given up on certain projects or replace certain projects? If yes why? And lastly still on renewables. If we look 10 years out how do you view yourselves on that business? And it's one year just over one year that you've integrated Cobra. What are you see as your competitive advantages as in that business. I'll answer. I'll let José María come in if he. A year ago we said, we'd be capable produce one additional gigawatt per year. Today, we're saying it's probably a bit more than that. If we were to float a number forgive me if it's not quite right because it's not the same year-on-year. I'd say closer to 1.5 giga and then do the math over 10 years. No, reason why this demand doesn't continue to be there. 10 years at 1.5. That's 15 gigahertz. We plan to retain them even if it means showing the capital with others with ACS, because the company set up to receive the assets developed from scratch by Cobra. Well it means that in 10 years' time we'll have something of the order of 15 gig a bit more if in the meantime we decide to further on the gigawatt that can be developed on French motorways and 1.2 gigawatts potentially development that can be developed on our airport. So – and that's going to be heavy CapEx wise, but it can generate good EBITDA gradually as of this year, because we're going to have the first field in production. Competitive edges remain the same. What's Complicated in renewables is to develop from scratch find the land that can be negotiated potentially with its owner that can be quite readily connected to the grid close to a station who's far sufficient to receive the power you're going to produce that we sense, it's going to be not too difficult to develop in terms of environmental planning mission which is a growing concern quite rightly. What's complicated is that once that's done project engineering of course construction. We're talking about PV. It's not hyper sophisticated in terms of the technology and then production isn't rocket science either. One final segment, I have – has to be sold that power. And there we're agile Cobra's agile. That's to say there are times when you have to sell some in the form of a PPA because there's a strong appetite for electro intensive industrialist to secure their green power supply. You may know in Europe, there are no longer PPAs available to offer the electro-intensive players unless you wait for 2027 or 2028. There's a shortage of projects to meet the needs of PPA in green power from industrial. So the key is to take and it depends on the country better regulated tariffs sign a number of PPAs. But also to accept we're happy with that to retain some of the power that we're going to sell in merchant. That's to say we'll sell on the market. I need to be very agile. The good news is that Cobra is very agile when it comes to finding the right mix and possibly switching mix depending on changes in the market conditions. So our competitive edge is there. It's in the fact that we believe we have the right mix between a local understanding and the global capability so as to develop projects from scratch. Our purpose isn't to buy ready-made fields not saying that we'll never do it as we did for the highways. But our purpose is first and foremost to develop ourselves and the strong expertise at Cobra on that develop the fields ourselves takes time, but it generates far higher IRR. On the tariffs hang on José María. Okay. So on the tariffs well, yes, on the tariffs we worked on the acceptability of the increase by doing three things: a differentiated application of the tariffs depending on where short trips or long trips. We managed to block 70% of trips under 30Ks that is near urban ring rows and all the short trips that is home-to-work trips. We increased from 20% to 30% the rebate on the Ulys highway subscription passes for frequent users, which obtains a reduction on one regular trip and the E Ulys subscribers who pay their e-recharge 10% rebate secured as of May. We need to do the IT development the cost stemming from all these is a handful of millions. We're talking about 60,000 charging stations use electric. As I said earlier when mid-2023 we'll have that number of recharging stations. Ulys Electric goes well beyond the borders of motorways to give access and also payment for a network of recharging stations that's well beyond the number we have the 70,000 well beyond the number we have just in the motorways. And there'll be a 10% price reduction on offer. That's significant in terms of the service we're providing to the road customers broadly. Now questions from the telephone. We'll hear French language questions online first. [Operator Instructions] First question from Stephanie D’Ath from Bank of Canada. Go ahead, madam. Thank you very much. Great results. First question on free cash flow €5.4 billion this year. If I understood in the presentation you're expecting €4 billion to €4.5 billion in the current year. Could you help us understand what the negative impact would be on WCR and capacity increases? The two items that will have an impact on free cash flow in 2023. Could you briefly talk to us about CapEx in Portugal and development of Motus [ph]? Where do things stand there? The second airport that you want to develop the Montijo and you've also talked Elizabeth. Next dividend payout you usually pay out 55%, 50% 2022 the ratio of 54%. Can our expectation be a gradual increase over the years of the dividend payout ratio? Next question on the stimulus plan for highways stimulus is significant. What about investment plans? Oise CCI [ph] has announced second February €10 million investments plan. Is this something you're also working on? First of all, free cash flow complicated answer. Therefore I'll give you some time to think about it right or not? No the bulk of the difference aside from the WCR, which is impossible to predict at this juncture due to interior the fact we have interim amounts at the end of 2022 that you might not have ended 2023. Thinking of CapEx we'll hand over to Nicolas going to be CapEx from Mexico plus all the other CapEx that had been deferred. I don't know if you'd like to answer on this one. MLT show. We need Nicolas get a microphone. Under free cash flow 2022, you've got a major contribution from airports and the data about it. During the COVID crisis we'd cut works that weren't compulsory weren't indispensable. So free cash flow for airports around €1 billion in 2022 whereas it had been further negative in 2021. It's true we'll complete some of the compulsory work like Belgrade will be delivered as foreseen summer of 2023. We'll also resume around €100 million worth of CapEx that had been postponed. There'll be Gateway Portugal some pretty much worldwide order of magnitude between €200 million and €300 million in airport CapEx this year will be around €700 million and €800 million. That's the order of magnitude but this is wholly normal. We're coming back to the normative level. Specifically on Portugal traffic, very good in all the airport hubs not only Lisbon. CapEx will be as foreseen including existing airport. Lisbon the Portuguese government as expected did a strategic survey of the environment and it's going to be ongoing throughout 2023 so that they can select the best ways and means to continue with capacity in Lisbon. The solution that's interesting on the table, we make best use of the existing airport in the Montijo basis. And you know that we've got an exclusive relationship once this solution has been opted for to perfect the solution to put it together with the government. So growth is buoyant end of the year, beginning of the year in Portugal. Growth is well above 2019 at this juncture. And we're expecting -- awaiting the results of that survey. It's on time meeting the deadline by the end of 2023. Thank you. Payout ratio is not exactly 54%. It's 53.5% actually. This is very much in line of what we've said just before beginning of the pandemic. Back at that time we said we recognize the change in the group's profile considering the increasing proportion of concessions, the unchanging role for about 20 years of a 50% payout. We realized it gradually that would need to be increased, that payout. You will remember we had begun suggesting that present it for the dividend pertaining to fiscal 2019. If memory serves, we were to pay out a dividend equal to 52% payout. But we didn't do that in the end. We didn't pay out in the end due to the subsequent arrival of pandemic. We stand at 53%. Now this just means that we're coming back to the principal. We already talked about back at the end of 2019. Now as to how things will pan out in the future and it will all depend. It will depend on what we achieve and what our investment projects are in the meantime. Regarding talking about a master plan contract SANEF, in 2022 SANEF had a major plan that the negotiated ASF we had to bypass the western -- bypass of Montpellier. End of 2022, we completed negotiation for the master contract Cofiroute €400 million worth of investments needs to be brought before the ART as well as the state council to be fully authorized. And then we started ASF negotiations in Escota for master contract similar order of magnitude under the rates tariff laws between the different portions of these rates specific percentages there. Thank you very much. Hi, there. Thanks again for the presentation. I've got two questions here. Firstly on the concessions specifically in the airport. Can you -- where we are on the pricing negotiation with different airport portfolios for 2023. For instance in Gatwick, I assume it's RPA linked which is plus 12%. So what should we expect like an average price increase for 2023? And secondly on construction. Any color on what is your exposure to civil contracts there in that business? And where do you see like the impact of patient into those contracts? And do we have any pricing tax mechanism over there too? Thank you. Change in airport pricing. So for all our airports, we have tariffs that are not inflation index. I'll spare you the details very mechanism we got 65 airports, but we now have quite clearly we've fully secured the tariffs in Mexico, Portugal, Gatwick and all those prices are fully indexed on the country's inflation. So it's inflation slightly higher than what we see in France. And then there are a few exceptions. But for most of the tariffs, it's also the case in Serbia. It's fully inflation linked. And that's already acquired authorizations and concessions, the authorization of the grantors or the regulate -- obtained -- have been obtained in the country site. On construction, the situation is that if you look globally, we are in a phase that's very favorable to the growth in civil engineering, brought about by the needs for development and improved environmental performance of mobility, infrastructure, land mobility. That's why the -- we've treated a great number of projects in the four corners of the world, be it in Canada, the US, Europe, France through the Greater Paris projects in New Zealand, Australia. And I'm, no doubt, forgetting a few. This mega trend is set to continue and it's far and away sufficient to satisfy our activity until as to have this systematically selective approach. What we're seeing is that, once we've noted that the ability to achieve -- of achievement on these major complex projects, not necessarily can't be extended. Competition isn't as keen as it was 10, 20 years ago. So we can be more selective, but also to proceed in better conditions, because only companies that are capable having the engineering and construction assets to deliver these deals can submit a bid. So we are, I would say, in a favorable phase, not necessarily the case across all geographies in the world. In the UK, we're heavily invested in HS2. In France, we're cyclically heavily invested in the mammoth investments for the Greater Paris, four mega contracts in design and build will be awarded. I don't know, at least, we’ll submit our bids for these four mega projects during the course of the year. And looking further out, we will probably have a great many opportunities, given the energy transition and the paramount need to develop nuclear power in our country notably, with as you know, major projects of 8, 14 new generation EPR plants and existing EDF site. So one, the volume is there. Two, we’re selective. And three the key is increasingly the ability to have the engineering assets and to deliver which is favorable to companies such as ours. Hi. Good morning. Thank you for taking my questions. I've got a few actually. So firstly on airports. I think your margin is now actually all-time high. EBITDA margin 59%. But your traffic is still below. So I want to understand if that is expected to increase as traffic further recovers? First question. The second question is, I believe, in Portugal there was a bit of a dispute on the tariffs. Can you just sort of tell us what happened and whether you're going to get remunerated. I think you're under-recovering of what you're entitled to in the contract. The third question is, the oilfield you bought at the end of last year. Can you just explain a little bit what happened? What your plan is? How much you paid for it? I believe it sort of shows up in different lines. And then, finally, maybe a detailed question, I'm looking at the CapEx slide where Cobra's CapEx was quite high, I think like €500 million. Can we just understand what's going on there? What sort of a normal level? Yeah, if you could just help us out a little bit. Thank you. Okay. Margin, so if you compare 2019 to 2022, we didn't have the four months of -- the first four months of 2019 about Gatwick in 2019, [indiscernible]. Sorry, I'm going to switch line. We didn't have the first four months of 2019, which in 2022 are not so good months because the first four months of the year weren't great with Omicron and not the best months. That's the first point. Secondly, the non-consolidated assets don't include in revenue. EBITDA doesn't include Japanese airports. But with markedly higher traffic levels we went from 56 to 59 EBITDA between 2019 and 2022. So we are expecting going forward the recovery in traffic level. Continued growth of the EBITDA margin is not always steady, but we've reached cruising speed through M&A deals because the EBITDA margin of OMA is also useful in the regard. So all-in-all, we're looking at a rising trend of the EBITDA. In terms of tariffs in Portugal what you saw there were pretty technical discussions sometimes the rules for tariff hikes provide for certain metrics, notably safety. There's a sub metric of the tariff for which the interpretation of the contract could differ. It's not a key component. And it doesn't contradict what I said, which is tariffs in Portugal approved across airports in particular that of Lisbon are inflation indexed signed and granted. Sometimes there's a little debate on one of the components of the tariff inflated to security and safety. That's what you read in the media. But the tariffs finally approved are indexed on inflation in Portugal. Regarding Cobra investments, I'll hand over to Christian Labeyrie, quickly and José María if necessary. But let me just say, [indiscernible]. We have to look at it this way. What does it boil down to? We've got EPC activities in Engineering, Procurement and Construction in oil and gas. And we have had for a long time at VINCI Energy, also VINCI Construction. And very naturally this was also the case at Cobra. We do not intend to fully halt those activities EPC. As it so happens on that deal in Brazil, we've got a special contractual provision. We are paid for endeavors in oil not in money. So don't see this as our intention to branch out into oil production, but rather we intend to continue exercising our lines of business Engineering, Procurement and Construction. And with the next requisite flexibility to adapt to the various contractual points that are on offer and the methods of payment that are offered. I'll hand over to Christian Labeyrie, who will give you if necessary, if you want to give you some figures. And then, I will give the floor to José María, if he would like to speak. I'll try to not get lost in the table because they're all over the place. If you put aside the oil operation, I'll talk about later. CapEx 2022 for Cobra around approximately €500 million. You have to add concessions CapEx that's €150 million. Now the renewable portion here would be broadly approximately €400 million, if I'm not mistaken José María. Now on the oil point, we bought assets we didn't buy a company we bought assets. The booked cost in 2022 is approximately €800 million. Approximately, there will be an additional to be paid of €150 million approximately next year. The €800 million was more than offset by an advanced payment we received in phraseology called by the offtaker which is a British company that fully funded this acquisition. So this is a neutral impact actually a slightly positive impact on our 2022 flows. By the same token in 2023 there'll be additional advance. We sold in advance as this is done in the oil industry a portion of upcoming year's production. So ditto next year, this should have no impact or a slightly positive impact. Next operations as Xavier said will generate its own income, its own cash flow. And maybe José María could build on this to tell us how he sees the ramp-up of operation of this deal in terms of production. Just a couple of figures on possible production. We generate revenue to cover works construction. We invest in this asset okay? We – as Christian said, we collect a prepayment linked with our capacity, with our technical capacity to extract and a level of barrels okay? Then we have now –– and we are going to repay with the barrels to sell Selestatker we can say that. Then show by the whole production of the field to us with this prepayment they pay us for the next five years of the production of the field. And we have now done seven barrels per day. We're extracting that. And we think that we can go with our investments and with our knowledge to at least 20,000 barrels in next two years. With that we are going to cover by far the prepayment that shall give us. This is 100% fund. And as Christian said, this must be we must do an exercise of strategy in the future to see if we are going to put Shell for example of [indiscernible] as an investor and we only remind as the operator of the field. Yes, thanks very much. I'll make them two short ones. Maybe just on Energy's margins and the guidance. Just wondering why perhaps a bit more optimistic here given the strong trends that you're seeing in this business to go for slightly higher profitability in 2023 rather than defending the current position. And then similarly on Construction, maybe just on why you do have the confidence to push for margin expansion there. And maybe a bit more color on what the project inflow, where you're seeing those higher margins and what kind of projects you're seeing those in the construction business? Thanks. In Energy, we didn't say, we'd remain stable. We said, we'd be growing both VINCI Energy and at Cobra. We even said we'd grow by at least 10% at Cobra due to the scale of the order book, particularly the big deals in the order book acquired during fiscal '22. In addition, we said operating margin at VINCI Energy should remain at the record level where it set itself in 2022. Cobra's margin will remain among the top of the class, top of the standards in the global profession. So you can do your own modeling based on that. Regarding construction, we have to remember that in the world of construction, it's always allusive to think you can grow revenue and margin at the same time. And yet our view is that the current margin is highly satisfactory because it's growing, but we haven't yet reached the end of that effort. We feel we need to target operating margins above the 3.8% achieved in 2022. The only way to achieve this is to be ever more selective and to never target revenue growth. Revenue growth can happen after the fact as a bonus after adhering to your good principle, but not in addition any strategy designed to up margin via increasing revenues leads to problems and big disappointments in terms of margin. That's quite clear. This is very much in VINCI Construction's corporate culture. I don't know if I've said this right and I'll be corrected if mistaken. But I think 120,000 employees of VINCI Construction feel the same way. Okay. As everyone finished the questions, thank you to you one and all and we can now meet over lunch. Thank you.

EarningCall_179

Hello, and welcome to the LiveOne, Inc. Q3 Fiscal 2023 Financial Results and Business Update Webcast. My name is Elliot, and I will be coordinating your call today. [Operator Instructions]. I'd now like to hand over to Aaron Sullivan, Interim CFO. The floor is yours. Please go ahead. Thank you. Good morning, and welcome to LiveOne's business update and financial results conference call for the company's third quarter ended December 31, 2022. Presenting on today's call are Rob Ellin, CEO and Chairman; and myself, Aaron Sullivan, Interim CFO. I would like to remind you that some of the statements made on today's call are forward-looking and are based on current expectations, forecasts and assumptions that involve various risks and uncertainties. These statements include, but are not limited to, statements regarding the future performance of the company, including expected future financial results and expected future growth in the business. Actual results may differ materially from those discussed on this call for a variety of reasons. Please refer to the company's filings with the SEC for information about factors, which could cause the company's actual results to differ materially from these forward-looking statements, including those described in its annual report on Form 10-K for the year ended March 31, 2022, and subsequent SEC filings. You will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed today in the company's earnings release, which is posted on its Investor Relations website. And the company encourages you to periodically visit its Investor Relations website for important content. The following discussion, including responses to your questions, contains time-sensitive information and reflects management's view as of the date of this call, February 9, 2023. And except as required by law, the company does not undertake any obligation to update or revise this information after the date of this call. I'd like to highlight to investors that this call is being recorded. The company is making it available to investors and the media via webcast, and a replay will be available on its website in the Investor Relations section shortly following the conclusion of the call. Additionally, it is the property of the company and any redistribution, retransmission or rebroadcast of the call or the webcast in any form without the company's express written consent is strictly prohibited. Thank you, Aaron, and good morning, everyone. I'd like to thank everyone for joining us today for our fiscal year 2023 third quarter business update and financial results. The consolidation -- we are proud to say the consolidation, 18 months of work of 6 acquisitions and each of our subsidiaries, is complete. We have cut over 30% of our staff, and the stars of our organization have risen to the top. We've been humbled by COVID, COVID variances; epic market crashes, especially in media and technology, but we have survived and we have thrived. It's time to showcase our team's expertise at building billion-dollar companies. I can proudly tell you that all of our debt is now gone, converted into preferred equity at $2.10 this week, and we now have over $27.5 million in short-term assets. The company has repurchased 2 million shares of stock, and starting early next week, will start to buy back $2 million worth of additional shares. We've gone from a story stock to a growth stock to now a value stock, trading at 60% of revenues and 5x adjusted EBITDA while our peers trade at 3.3x revenues. As we've consolidated our Audio Division, delivered record revenues of $64 million and a record adjusted EBITDA of $15 million. When we acquired Slacker Radio and acquired PodcastOne, they were both losing substantial amounts of money. I can proudly tell you now, those combined businesses will do well over $85 million and over $18 million of adjusted EBITDA, an increase of 105% compared to adjusted EBITDA of last year. We're growing in every area. Our membership has exploded, adding over 620,000 paid members since December 31, '21, and a 45% increase, taking our total membership to 1.96 million and a total -- our total members, including free, of 2.8 million. What I've told the street is we expect to within 5 years get to 10 million members. This is a very tiny piece of the overall TAM of the Audio business. To all the stocks come out and said they're going to be 1.7 billion paying subscribers, up from this year's 375 million. This will be less than 1% of the TAM of the industry. We've hit record number of sponsors on the platform. We had 7 pre-COVID. We have passed over 300 this year and expect by March 31 to have over 400 sponsors on our platform this year. Our B2B partnerships are getting more and more exciting. Number one, obviously, is our Tesla partnership, which continues to grow. And we just see telltale sign this is going to be a spectacular year for Tesla and for LiveOne. We've added partnerships with Google Android Automotive to be able to white-label for other car companies as well as many other products across everything from retailers to sell carriers, to social meeting, to cable companies. Candidly, anywhere with 10 million to 2.5 billion eyeballs is going to need a music platform. We're one of 12 less than [indiscernible] that have all of the technology, partnerships with the record labels and the publishers and the ability to deliver subscription sponsorship as well as all of the great things we do in media and original programming. We recently launched a very exciting division, LiveOne brands. We've just announced a partnership between 2 pop culture stars, Jeremy as well as Winemaker Russell Beva, and we'll be launching the MVP version very shortly of our new consumer product. PodcastOne. We filed our S-1 on December 27, and we expect to begin trading very shortly. Company has delivered record revenues, has over 11 million unique viewer, listeners a month and growing, and we have over 300 podcasts in the platform and has grown from million for the quarter. That TAM as well. As you look at your opportunity of growth here, the TAM has just passed $1 billion in revenues for the overall podcast business, and it's on its way to $10 billion over the next 5 years. Now I'd like to hand it back over to Aaron, and I'll finish off with some comments at the end. Thank you. Thanks, Rob. I'll spend just a few minutes to provide an overview of the results for our fiscal '23 first 9 months and third quarter ended December 31, 2022. Consolidated revenue for the 3- and 9-month periods ended December 31, 2022, was $27.3 million and $74.1 million, respectively. Our Audio Division posted revenue for the 3- and 9-month periods of $22 million and $64 million, respectively. For the third quarter ended December 31, 2022, revenue was comprised of 49% membership and 51% advertising sponsorship merchandising and ticketing events compared to 33% membership and 67% advertising sponsorship and ticketing events in the prior year period. Consolidated adjusted EBITDA for the 3 and 9 months was $3.1 million and $9.4 million, respectively. On a U.S. GAAP basis, LiveOne posted a consolidated net loss of $3.2 million or $0.04 per diluted share in Q3 fiscal '23 and a net loss of $5.3 million or $0.06 for the 9 months ended December 31, 2022. Our Audio Division's adjusted EBITDA for the 3- and 9-month periods was also a record of $5.1 million and $15 million, respectively. As of February 7, we had approximately 1.96 million paid members, a net increase of 620,000 or 45% compared to December 31, 2021. Total members include free memberships or approximately 2.8 million at February 7, 2023. Included in the total members are certain members who are currently subject to a contractual dispute for which we are not currently recognizing revenue. Just to wrap it up, everyone, I just want to highlight some of the exciting points that we've hit on in our press release as well as in this conference call. Number one, record numbers across the board; number two, world-class management, world class board, huge growth in sponsorship as well as membership. LiveOne grows every time Tesla grows. Every day a car hits the road, we grow alongside of them. We're now in 68 of the cars and growing. And we now have a partnership with Android Automotive to be able to white-label for any car company, right, as well as many other industries in a similar fashion. We started our buyback. We bought back $2 million shares. Next week, we will begin buying back additional shares. I've personally been a buyer of stock. This company's stock is extraordinarily undervalued, and I'm extremely excited to see some of the new shareholders that have joined us, have been adding to their positions, and I look forward to a spectacular year for the company. And I want to thank everyone for joining us and be patient with us in a difficult market. We're going to be here for the long term, and we're going to deliver a spectacular year this year. Thank you. And it's great to see the job you've done in rightsizing the business. Can you quantify podcast download trends in December -- in the December quarter versus last December? And then I assume there, there is significant growth which is being offset by challenges in the advertising market. So maybe if you could quantify what you're seeing there as well. Yes. I mean I think it's going to be a very difficult year of advertising market. Part of the beauty of podcasting is that you have a huge direct response, and you actually have material numbers backing, right, because in the digital side of it in podcasting, you know exactly what the numbers are. So I think we're going to have to fight that trend. But at the same time, we're adding so many podcasts to our network. And we see just telltale really exciting signs that are happening in the industry, not just the TAM but also directionally, right? The competitors who are also partners of ours like Spotify and Apple and so on have really -- they've spent a lot of money acquiring a tremendous amount of companies at massive valuations. As you probably saw, our Sirius radio just brought out podcast business at 15x revenues. We just raised our money in PodcastOne literally at less than 2x revenues at a $68 million valuation. We're about to go public with it. We see the trends look great. We were ranked #4 on Podtrac as Best Sales Team. I think we have the best sales team in the entire industry. They come out of iHeart and Sirius and they've had that expertise. And I just see just terrific trends for our business specifically, but we will have to fight overall sponsor and advertising trends. And can you possibly -- if you're able to share the December quarter download trends in 2022 versus 2023 -- sorry, 2022 versus 2021 in the December quarter? I think you'll see that shortly as part of our first announcements that come out in the IPO. But I don't think -- and Aaron, correct me if I'm wrong, I don't think that we've reported any of those trends yet. Okay. From a high level, are they growing? With all the new content you're putting on a growing significantly? Or should we think about it is not growing significantly. Yes. All of our trends have been substantially up. It's kind of a self-fulfilling prophecy, Brian. As you know, revenues are driven based on traffic and audience, right? So our revenues have gone up substantially at the same time so as our traffic gone up substantially. And some of that is -- and fair to some of that is we added when we did our deal with Kevin Connolly and his company, we added an extra 14 podcasts. Every time we add podcast, you're adding additional traffic. Yes. And then can you update us on the strategy on tentpole events? Do you know of any LiveOne tentpole events that you will have in the next 12 months? And if so, can you tell us roughly when you think those might occur? Yes. I mean we just announced Music Lives, which is our biggest event we ever did in the history of the company, which reached 135 million live streams and did over 5 billion engagements, right? We just announced a competition that is the All-Stars of all of the LiveOne programming that we've done, right, to launch the All-Stars and Music Lives there'll be record-breaking number of artists. I think we had over 100 the last time, way higher than that this time. It will be a competition with the winter winning at the end of December, but there'll be an event in each of these quarters coming up. And then I fully expect our next social boxing coming shortly. As you know, I announced a partnership with Ben Silverman, where the great producers, right, of television Reality TV, including the office. We announced a partnership to launch a Reality TV show around social boxing. And as you know, we did well north of $15 million in year's EBITDA when the last one we did. So we took a little bit of a step back, right, for this year to consolidate, right, the 6 acquisitions internally. We cleaned up the balance sheet dramatically. We're now debt-free, and we now put ourselves in a position of really exciting to be able to move forward this year with multiple tentpole events. Great. And speaking of the debt conversion and the settlement of SoundExchange, those were both great. Can you tell us what the total shares outstanding are today with everything that's going on? Yes. We have about $85 million shares outstanding, right, in that range, right? And then you'll have -- the debt is now convertible -- is now preferred equity at $2.10. So of that $21 million converted, right, you're going to have about $96 million shares outstanding. So I say fully diluted, if that all was done, right? Obviously, the stock has to be extremely higher than this. You'd have about $100 million shares outstanding. Great. Lastly, Aaron, if you could quantify any nonrecurring benefits in the December quarter such as gains in accounts payable? And then if either of you could talk about when you expect to be free cash flow positive. I know I didn't see the 9-month number, but for 6 months, there were some cash uses. So maybe an update there would be great. Yes. So we haven't publicly put out any cash numbers. We will shortly. But obviously, with that settlement of sound exchange, which is extraordinarily exciting, right? We've had 5 years where we bought Slacker Radio. We took on $45 million of payables when we acquired it, right? We find we are now down to where we have no substantial payouts left that haven't been settled, which really puts us in a very different position with music labels, music publishers, multiple music partnerships have happened where they've taken equity at $2.10 or higher. Some as high as $4. So it really puts us in a great position. We haven't yet talked about free cash flow, but you can see our cash is up from the last time we announced. And separate from the old payables, right, you can really look at substantial improvement in bottom line and cash flows of the company. Maybe this is a question for Aaron, but operating expenses were $8.5 million this quarter. Could you maybe give us a little guidance about operating expense growth for the next 12 months or so? Jon, so there'll be a -- as I just noted, there was a onetime benefit in there of about $700,000. So you can expect to see that when you're trying to come back in, right? in terms of growth, in the expenses, I wouldn't expect substantial growth. Now you're going to see a little bit of kind of variability in terms of when expenses hit, and that's mainly around the corporate side where we have audit fees will kind of hit in certain quarters. But I wouldn't expect it to be substantially higher than where we're at. We've -- we're going to see the benefits of full year of cost saves going forward, right? We've continued to reduce expenses kind of throughout the year. So I would expect a pretty consistent run rate to what we have right now, adding the $700,000 back in. Okay. And then -- so you -- in the press release, you said that Slacker was growing about 40% on an annual basis. Do you have a number for that for the PodcastOne business? We don't have a number. As we kind of mentioned earlier, we don't have that download number yet, but expect to see that shortly. And obviously, Jon, as you know, we're in a quiet period in PodcastOne. We'll be talking a lot more about it as the SEC has approved the -- we just got back the comment letters, and we expect to start trading hopefully in the next 15 to 45 days maximum. Rob, you talked about the white-label with Android. Now is that baked in so that any car that runs Android Auto has LiveOne access? Or is it an additional thing that each car owner chooses upon purchase? Yes. So no, it's a little bit different than that. So the Android Automotive is the opportunity for us to white -- give a white-label solution. Now what are the advantages of Slacker Radio? Number one is our AI and our technology, right? And people just love the virtual behavior and the understanding of our AI and those 44 patents we have to be able to deliver your next song -- your next music, your next song, right? Number two is our pricing, right? We're less than 30% right of our competitors. And now they're all raising prices, right? Sirius just announced they're raising the price by $1. Spotify announced they're raising the price. So we're going to be even lower than that one, right? And number three is we're the only ones that I know of that are willing to white-label and give you Tesla radio, give you Cadillac radio, give you BMW radio. So there's a huge opportunity, and this is not just for the audio industry. It's for anything from watches, to gym equipment, to Walmart to Costco. As you know, I've built all my businesses off the back of massive partnerships with B2B partners. This is our opportunity now to really expand that business. And while we made all these cuts and cut 30% of our staff, we are adding in B2B because we're seeing unique opportunities to really grow the business with partners who have 10 million to 2.5 billion eyeballs. And for Android, it's just a great opportunity for them to sell -- to upsell to other car companies for them to be able to do what Elon did, which is just smarter than everybody else, to brand their radio, Cadillac Radio, a BMW radio is just brilliant. It's just a great marketing strategy. It makes it look cooler and smarter. And then can you give us an update on where you are in the international spectrum and attaining licenses? You can provide service there? Yes, Rob, I'm sorry. Just I'm curious about where you are in obtaining the licenses you need to offer service internationally. Yes. So great question. This is the year to pull that off. And I know we've talked about it before, but with market conditions in COVID really not raising capital throughout this process. It just took us time to clean up the balance sheet, clean up the payables, right, settle with the publishers and the record labels and really strengthen that position. I think this is our year to do that. I think it's a massive opportunity to expand overseas. And if you remember when I used to talk about digital turbine, every time I always repeat it. When the cycles change, right, you're going to see the carriers and others fight back, and they're going to start the battle to have a deeper and stronger relationship with their customers, right? And that means they got to have to own content. I see telltale signs that's going to grow dramatically. And we are in very active negotiations, discussions to expand our licenses in either a partnership and maybe with some who already has them or ourselves overseas. And obviously, Tesla would be number one, right? They're paying over $8 per sub to Spotify right now. It would be a huge cost savings for them. But I think there are -- every carrier car company, there's huge opportunities for expand, first and foremost, in Europe before anywhere else. But we are in discussion in India, Japan and many other countries. And as you know, almost every one of my company is -- have had partnerships with global carriers. And this time, because it's already owned video, it's way more than just carriers, right? It can be cable. It can be satellite. It can be Kindle. It could be any of the streaming platforms, I believe they all have to have audio on their platforms. And I think we offer them something so unique with the content we have. You mentioned, I think, what, 400 sponsors? It was -- you just offered a lot of data really quickly, and I can't hear that fast, so I apologize, but could you just review where you are with sponsors on which programs and which platforms rather and where you think that goes? I mean, with the sponsorship that you have with Slacker, the sponsors that you have with PodcastOne versus the LiveOne platform. Well, okay. So try to simplify it for a second, right? Start with the fact that we bought PodcastOne, right? We had 1 salesperson, right? We now have a 15-person sales team, right? Those -- that sales team, led by Sue McNamara and Alex Brough has combined 50 years background of selling for Sirius, iHeart and so on, right? Our sponsorships across the entire platform are growing. So we're growing our sponsors in podcasting. We're growing our sponsors across audio. We've just added podcasting to every Tesla car. And obviously, it's only in the free tier of audio that you're going to get sponsorship, right? Most of that is going to be programmatic. But in podcasting, you get both. You get programmatic as well as direct response as well has great sponsors. And then across our live programs, you've seen so many of them this year from Hyundai to Volkswagen to a huge event we just did with eBay, and you're just going to see those grow. You're going to see more and more of those. And the only events that we're doing now have to have a sponsor behind it, who was paying for it with at least 20% net margins on it. Okay. So -- all right. And just taking a step back, you offered in your prepared remarks, what -- I think it was, what, 400 total sponsors currently now across all of your platforms? By year-end. So I'm -- we're a March 31 year-end. So we've had over 300 so far, right, part away to closing the year with over 400. Okay. And then where were you -- I know you offered a data point for year-end March '22. What was that number? We've grown from 7 pre-COVID to about 300 last year to over 400 this year. And next year will be well over 500. Yes. Yes, we did. We filed it in 8-K. So we settled the SoundExchange lawsuit, paid out over 2 years with a healthy discount on it. What we announced is about $5.4 million of payables moving from short term to long term. So both the same day. It's a $42 million swing in getting all the debt converted at $2.10. We also moved $5.4 million in long term. So a really exciting week for the company and really strengthens our balance sheet dramatically. We also said this morning that our short-term assets went up by $2.5 million, from $25 million we reported like 3 weeks ago to $27.5 million. So it's very likely the next thing you got to see is a credit facility that we'll be able to borrow somewhere between $17 million and $20 million against those short-term assets. And so this is a dramatic improvement for us. And if the stock stays down at these levels, we'll increase that buyback from $2 million to weigh more than that down the line. Okay. Great. And then one other thing, you mentioned that probably going to spin off Slacker sometime this year. Is there any sort of timing on that as well as a paper view unit? Yes. I mean, I think you're going to see something happen pretty imminently. The success of PodcastOne and the fact that now the PodcastOne S1 is filed, right, and shortly be up and trading. We're aggressively and actively in negotiations for who will be the right partners to come in there. And obviously, Slacker, we've said, throws off over $10 million of cash. We just increased the EBITDA of the overall Audio business, right? I think we said $18 million today, right? So obviously, that $10 million of cash flow is going up substantially. So you'll see a much -- I would expect a much, much higher valuation like our peers are trading at 3.3x revenues, right. Our Audio Division does $80 million right, over $80 million, right? You're going to see financially higher than the $68 million that we did in PodcastOne, right? Otherwise, we'll pass, right? It's not -- if it's not a multiple of that. We would pass on it, but we're seeing a lot of aggressive active interest in it. And on the pay-per-view side, it's really interesting because we haven't really pressed the envelope on this year as we've spent most of the time, right, consolidating, right, taking EBITDA up dramatically, that pay-per-view business has $1 billion of upside. And we're seeing a lot of really smart, really serious interest around that division and that upside. And you probably know, I started independent entertainment 30 years ago and took that to like went over $1 billion but traded at almost $0.5 billion for an extended period of time. That's 30 years ago. I'm really, really excited about where we're going with pay-per-view. And we're doing an event. I think Aaron Windsor, Emblem3. We just shot at the other night. Wednesday pay-per-view.... Right. So we're doing pay per views. But this time, A lot of those are coming from. They'll come from the record labels, they come from publishers, they'll come for managers who are bringing it in. They're bringing it in with the sponsor with it. So it's really exciting and really energetic around it. And as you know, we've streamed over 3,000 artists, right? We've had about 5 billion engagements. The plan was always pre-COVID to launch pay-per-view for music festivals, big artists, right? We've done a lot of K-pop, as you probably read about the whole works. Now is the time to really step on the gas on that. We're going to be very cautious and very careful about, right, and really focus those on ones they're backed by a sponsor or they're backed and paid for directly from us. So we did pre pay and they paid us $75,000 upfront with 30% margins on it to stream it and then with the upside of the pay-per-view as well. Okay. And then finally, can you just clarify how much of PodcastOne will be spun off to shareholders -- existing shareholders? Yes. So between 5% and 10%. So think in between, thinking about 7.5%. So the public filing says it's going to start trading at $150 million valuation. So a lot of equity is going to be dividend out to our shareholders in the next few weeks. Yes, it's a little -- it's going to be less than that because remember, we sold $8 million at a $68 million valuation. So LiveOne's going to own about 80%. Yes, a little bit higher than 80% of it. And if you take 80% of $150 million, it's a big number. And guys, just to add to it, I just got to know from Sue McNamara, my Head of Sales telling me, our advertiser actually way higher than that this year including programmatic, we would add hundreds of additional advertisers is right on top of the 400 that -- of direct sales that we have. Yes. Just to wrap it up, I just want to thank everyone for their patience, right? This has been a humbling a couple of years. I think we recognize very differently than most, 18 months ago, that the market was going to change and the capital is going to change. I've gone through this before in my career for any of you that have been investors before. And I'm so proud of my team. They've come together. It's been a tough battle, making cuts. My team has come together. And we just have a world-class team, laser-focused on winning for all of our shareholders. And I think we're going to have a dramatic win this year.

EarningCall_180

Good morning, ladies and gentlemen, and welcome to the Bombardier Fourth Quarter and Full Year 2022 Earnings Conference Call. Please be advised that this call is being recorded. At this time, I'd like to turn the discussion over to Mr. Francis Richer de La Fleche, Vice President, FP&A and Investor Relations for Bombardier. Please go ahead, Mr. Richer de La Fleche. Good morning, everyone, and welcome to Bombardier's earnings call for the fourth quarter and full year end December 31, 2022. I wish to remind you that during the course of this call, we may make projections or other forward-looking statements regarding future events or the financial performance of the corporation. There are risks that actual results or events may differ materially from these statements. For additional information on looking statements and underlying assumptions, please refer to the MD&A. I'm making this cautionary statement on behalf of each speaker on this call. With me today is our President and Chief Executive Officer, Eric Martel; and our Executive Vice President and Chief Financial Officer, Bart Demosky, to review our operations and financial results for the fourth quarter and full year of 2022. I would now like to turn over the discussion to Eric. Good morning, everyone, and thank you for joining us today. I know that many of you listening today are eager to unpack our guidance figures and discuss where we see the business jet market going. Bart and I are excited to walk you through this in detail and showcase the team's solid work. I do want to take a few moments upfront to reflect on how great the last year has been for Bombardier. No matter how you measure our company, our products or our people, Bombardier has delivered excellent results and met or exceeded commitment across the board. I look at Bombardier's 2022 success through a few lenses. First, at the core of everything we do is the products. We announced that we are developing the fastest jet in the industry, the Global 8000. We then secured NetJet to fleet launch customer with a milestone order in Q4. This key customer will transition their entire Global 7500 fleet to Global 8000 aircraft. The team also brought the Challenger 3500 into service on plan. All of this keeps us, our portfolio at the top of each market we compete in when it comes to quality and performance. Next, services. With not one or even two major announcements, but five major facility projects announced or completed as part of expansions planned in Singapore, Australia, the U.K., the U.S. and the United Arab Emirates. Defense was another key market. We reoriented the offering under a fully integrated Bombardier defense banner. This team will play a key role in Wichita, which we designed at our U.S. headquarters. Defense will also be in Canada and the many other markets where governments and harms are proudly selecting Bombardier jets for their missions. On the financial side, I can't talk about 2022 achievement without mentioning deleveraging, what a job the team has done. We repaid $1.1 billion of debt with cash from our balance sheet and operations, $1.1 billion. And finally, ESG. Once again, we can point to efforts by talented Bombardier team member to lead the industry. In 2022, we revealed our EcoJet research project. Simply put, it is a tangible and promising solution for business aviation path to net zero. In the short term, we have adopted sustainable fuel for all of our operations through book and claims, which immediately lower our flight operation emission by 25% on an annual basis. I want to express my sincere thanks to the Bombardier team member who made all of this possible. I also want to recognize the many partners that supported us and our vision along the way. what a simply fantastic way to mark the company's 80th anniversary. All of these achievements also translated to business performance or in the most cases, over performance. I have certainly talked a lot about our proactive supply chain efforts. Let me be clear, managing supply chain has not been easy and will continue to require a lot of focus. The efforts we make allow me to sit here today and confirm 123 deliveries for 2022. This is a testament to our execution especially considering the work to deliver 49 airplanes in Q4 alone. We have successfully ramped up to deliver the growth we have been forecasting for this year. Bombardier is now expecting to deliver more than 138 units in 2023. This is well in line with the plan we have been sharing. Looking at this more closely, this delivery guidance will represent an increase of at least 15% in our deliveries versus 2022, excluding Learjet. Our facilities have this work in progress at the higher rate. We are also once again in a comfortable position with the Skyline full for the year. Our $14.8 billion backlog provides a high degree of comfort with our production plan well into 2024 as well. All this to say, we are operating in a sweet spot that allows us to remain predictable. I do want to pause for a moment here to speak about demand and sustaining a higher delivery profile. It is important to note that our plan is simply as it was presented in 2021 and did not depend on market upside. We did end up getting that upside in 2021 and in the first half of 2022. Now as we see the market stabilizing, we are not going to over-tweak our rates. We are going to stick to the plan and ensure our production remain derisked. I talked last quarter about reaching a book-to-bill cruising altitude of 1. That's where we are at today. You can expect quarter-over-quarter variances slightly above or below that due to the seasonability of the delivery schedule. The demand itself is stable to the level of full year production and further padded by our healthy backlog. The way to look at it -- the way to look at this for Bombardier is simple. We are seeing steady demand on the higher production base this year. Industry fundamentals remains favorable in the medium and long terms. And Bombardier has the right product mix to compete and win. Turning back to the results. I am delighted to confirm that our $6.9 billion in revenue included an impressive $1.5 billion from service activities. We have highlighted potential market share growth in this field, and I'm proud to see the execution as much the ambitions. Opening new facilities and expanding existing ones is a significant step. Now the hard work continues to ramp up, higher more skilled technician and capture the customer through a world-class offering. In 2023, our guided revenue of more than $7.6 billion reflects our increase in deliveries as well as continued and steady growth from services. Overall, steady and predictable growth is at the art of our success. That approach is accelerating our bottom line growth. In 2022, we came in well over guidance recording adjusted EBITDA of $930 million. This is a year-over-year increase of 45%. Our efforts to tighten our cost structure and generate recurring savings are ahead of plan with more than 80% of our target already benefiting our P&L. And we have full line of sight on the remaining initiative. In fact, Q4 2022 margin reached the most impressive levels we have seen in a while. Adding to this, we are where we need to be on key programs like the Global 7500 and now setting ourselves up to smoothly cut in the Global 8000 jet ahead of its plan entry into service in 2025. All in all, this puts us in a solid position to guide more than $1.125 billion in adjusted EBITDA for 2023. Making a jump of that proportion in 1 year is impressive. But a lot of our team members can take pride in their effort because 3 straight years of significant EBITDA growth is quite an accomplishment. When it comes to free cash flow and liquidity, Bart will go into much more detail shortly. I do want to highlight that overachieving on this metric is really welcome from a management perspective. We beat our revised full year guidance by million, and we again see positive free cash flow generation in 2023. We have a clear and repeatable ability to generate free cash going forward. The Bombardier team and I will continue to prioritize retiring debt or be opportunistic refinancing maturities. We have made significant moves towards this and in turn, lowered the cost of carrying what remains. Like on liquidity, Bart will deep dive into that shortly, but I want to highlight that in the past year, we have retired more than $1 billion of debt with cash from our balance sheet. We are ahead of our plan. We have flexibility. We are being proactive and opportunistic and most importantly, we are succeeding. I am encouraged by the credit rating increases we saw from Moody's and S&P as well as the simple positive energy that has surrounded discussion of Bombardier's future over the past months. To conclude, I am proud of how the team executed in 2022. We have built a strong business, which can grow volumes, generate cash and predictability deliver growing EBITDA margin. We are well placed to capture demand where interest is increasing to offset where it may plateau in the coming months after nearly 2 years of historical high. Before I leave the floor to Bart for the deep dive into our impressive number, I want to fully recognize all the people beyond the results. Today, there are 15,900 women and men at Bombardier that probably stands behind each of our products and services. They have all played a key part in winning as a team, and delivering today's exceptional results. It's also important to note that this is a team that is growing as we recruit all over the world. I am so proud of everyone's passion and commitment, and I am excited for our continued growth centered on our people and our customers. Thank you. And Bart, over to you. Thank you, Eric, and good morning, everyone. As we cap off what was clearly a very strong year, I am pleased to speak to you today about our outstanding results as well as how our company is set up for continued success. Today, we are confirming the very strong preliminary results we released a few weeks ago, and we are also sharing with you our 2023 outlook, which continues to demonstrate strong growth. We are planning for a minimum of 15% growth in our Global and Challenger deliveries versus the prior year, a more than 21% year-over-year growth in our EBITDA and most important, continued positive cash flow generation. I'll touch more on our guidance in a few minutes. But before talking about 2023, I will recap some of the progress we have made in '22 on our key strategic initiatives, starting with deleveraging. As Eric said earlier, we reduced our debt by $1.1 billion in '22, which came with a recurring annual interest savings of more than $80 million. That's a 15% reduction in our gross debt in a single year. And if we look back to December of 2020, we have reduced our debt by more than 40%. The significant amount we repaid in '22 was the result of several factors, which include a strong and consistent free cash flow generation, being opportunistic in the markets, timing of calls, tenders and open market repurchases. And finally, cash optimization through securing a 5-year revolving credit facility, allowing us to reduce cash on our balance sheet. Our vastly improved debt and leverage profile provided another benefit as our credit ratings were raised by both Moody's and S&P last summer. The benefits from our efforts can also be seen through our debt refinancing last month, where we were able to refinance some of our debt at stable interest rates despite the broader market seeing interest rates rise significantly. On that note, we have successfully called all of the outstanding 2024 maturities with the final settlement plans for next week. And while our tender on the 25 notes reached $258 million of our $396 million repayment target, we fully expect to deploy the entirety of the proceeds from our refinancing towards debt repayment. I'm also happy to say that the $400 million of restricted cash we have held on the balance sheet for the past 2 years has been released and is now sitting in our bank account available for us to use. At the end of 2022, inclusive of this cash, our adjusted net leverage stood at 4.6x, down from 7.7x in 2021, representing an improvement of more than 3x. Looking ahead, we continue to see many opportunities to further reduce our debt and leverage and deleveraging remains our top priority and #1 use of excess liquidity. Our operational achievements last year were equally as impressive. Our EBITDA grew 45% between 2021 and 2022. We did this while growing deliveries by 3 aircraft and growing revenues by 14%. This impressive margin expansion is attributable to the execution of our key priorities, maturing the Global 7500 contribution, delivery cost and productivity improvements and growing our aftermarket. The Global 7500 EBITDA contribution materially improved throughout 2022. In fact, we were at our targeted unit costs for most of the year. And during the course of '23, we will have fully transitioned from our launch pricing to current market pricing. Our cost reduction program continues to track exceptionally well, and we again outperformed the savings assumed in our original guidance, finishing the year at $330 million in recurring savings. The remaining balance to reach our $400 million run rate target is included in our 2023 guidance, and all of the initiatives have been launched to achieve that run rate. Last but not least, our aftermarket business had a remarkable year, growing its revenues by 22% versus the prior year, as we executed on our service center expansion strategy. Flight hours of Bombardier aircraft over the same period were up approximately 11%. Clearly, our strategy is working, and we are gaining market share and are now at $1.5 billion of aftermarket revenues on track with reaching our $2 billion objective. There are two other impressive metrics that I would like to highlight and that is our adjusted net income and resulting earnings per share, which, for the first time in many years, are both positive. These metrics really embody the reduction in interest costs coming from our accelerated debt reduction, the rapid growth in our profitability and the recognition of the significant tax attributes on our balance sheet. Furthermore, we believe we've reached the point where we are structurally able to generate positive adjusted net income on an annual basis. I'll now dive a bit deeper into our '22 results before talking about our 2023 guidance. We ended the year with revenues of $6.9 billion, resulting from 123 aircraft deliveries as well as $1.5 billion in aftermarket revenues. This represents a year-over-year improvement of 14%. Our aircraft manufacturing and other revenues grew by $557 million, largely the result of 3 incremental deliveries, further compounded by improved aircraft mix. As we replace -- our large cabin aircraft were up 4 deliveries and our challenges were up 6%. As I mentioned earlier, our aftermarket business also increased its revenues by an impressive 22% year-over-year, which also helped tilt our consolidated revenue mix in favor of aftermarket, now representing 22% of our total revenues versus 20% in 2021. I'm also very proud to report that in Q4 of last year, our aftermarket revenues topped $400 million for the first time. Another impressive milestone, illustrating the progress we've made from the $252 million we generated in Q4 of 2020. Moving to our profitability. Total adjusted EBITDA for the year was $930 million, representing an adjusted margin of 13.5% and a 300 basis point margin expansion over 2021. Our adjusted EBITDA growth is largely attributable to maturing our Global 7500, generating incremental cost reductions and our aftermarket expansion. Our adjusted EBIT totaled $512 million more than doubling our 2021 result of $223 million. As I mentioned earlier, our adjusted net income also had meaningfully improved to a gain of $101 million versus a loss of $326 million a year earlier. Turning our focus to free cash flow. We had an impressive '22 with a cash generation of $735 million, an improvement of $635 million from the prior year. In Q4, we saw a free cash flow generation of $169 million. This cash generation resulted from our strong EBITDA generation of $352 million, a positive working capital driven by a $481 million release in inventory from 49 aircraft deliveries, partly offset by a reduction in our accounts payable, a drop in advances of $312 million due to those same 49 deliveries and a book-to-bill that was a bit below 1, but again reflects the high number of deliveries rather than a drop in demand. Our CapEx finished at $337 million, a bit on the high side of the range we have provided previously, largely the result of greater investments to our Pearson facility as well as timing related to a land sale for which today, we continue to be active on. So now let's turn to our 2023 guidance. We are very pleased to continue demonstrating consistent progress towards our 2025 objectives. Our aircraft deliveries are expected to be greater than 138, in line with our prior commitments. We expect Global 7500 deliveries to remain stable and the growth to come relatively equally from the Global 5500 and 6500 platforms and the Challenger platforms, also offsetting the 3 Learjet deliveries we had in 2022. Given the strong backlog we have entering the year, we have very nice predictability and visibility in our top line. With the planned increase in deliveries, combined with expected continued growth in our aftermarket, we see our revenues being greater than $7.6 billion, which translates into a more than 10% increase versus 2022. On profitability, we are expecting to increase our EBITDA to greater than $1.125 billion, representing at least a 21% increase versus last year. We also expect our EBIT to grow to greater than $695 million, an increase of greater than 36% year-over-year. Our profitability growth is again outpacing our revenue growth, as we continue to expand our margins by delivering on our strategic priorities. The bridge from the $930 million of EBITDA in 2022 to our 2023 guidance of greater than $1.125 billion can be explained by margin conversion of the incremental revenues, positive tailwinds from the Global 7500 as well as delivering the last portion of our cost reduction plan, for which we have around $70 million to go. We do see some headwinds, which partly offset our growth drivers, including increased bill of material and production costs, resulting from the high inflation environment we have been in for much of 2022 as well as supplier disruption costs, as we continue to adjust to accommodate supply chain challenges. Earlier last year, we shared our expectation that pricing and inflation would offset over the next few years, and this is still how we see things playing out. Our free cash flow guidance is coming in at greater than $250 million, including a nonrecurring cost related to legacy RVG liabilities, which totals about $125 million for the year. The bridge from EBITDA is straightforward from our greater than $1.125 billion in EBITDA, we expect to remove cash interest, which should be in the neighborhood of $400 million to $450 million. And our CapEx is expected to be around $350 million. The CapEx for '23 is higher than our previously mentioned range, mostly a result from some higher construction costs at our Pearson facility. We do fully expect to return to a $200 million to $300 million range in 2024. Our working capital is assumed to be relatively neutral, as we are planning for a book-to-bill of around 1, and cash taxes continue to be negligible, even as we materially grow our earnings. From there, we must deduct the aforementioned $125 million in nonrecurring RVG payments to reach our guidance for '23. This is the last year of significant RVG payments. In fact, between 2021 and 2023, we will have paid out more than $225 million of RVGs within our free cash flow performance. So let me wrap up by providing some color on our first quarter of this year. We expect growth to both our revenues and EBITDA in Q1 when compared to the same quarter of last year, while delivering around 20 aircrafts, which is in line with our production schedules. Delivery ramp-up throughout '23 will be progressive, and we again expect to see a high delivery output in the second half of this year. We also expect our working capital to be negative in the first quarter, driven by a buildup of inventory in support of our higher deliveries later this year. We expect that this working capital build coupled with seasonally lower EBITDA and continued investments on our peers in global facility will result in a negative free cash flow. In conclusion, with the past 2 years of hard work, putting us on a very firm footing, the team is ready and focused to continue building on our success, and we look forward to another strong performance in 2023. I also look forward to sharing with you an update of our strategic plan during our March '23 Investor Day. Thank you very much. And with that, let me turn it back over to Francis to begin the Q&A. Thanks, Mark. I'd like to remind you that Bombardier Investor Relations team is available following the call and in the coming days to answer any questions you may have. With that, we will open it up for questions. Operator, we're ready to begin. Congratulations on the nice achievements. Just looking at the booking activity, could you mention some color in terms of what you're seeing by customer type model and geographies and whether you see any change in the market dynamics, given the fact that the used inventory are slightly increasing and maybe the higher production rate expected at Gulfstream. And I guess I think what we see is a resilient start of the year. So we all understand there's a nervousness in the economy right now, but we see our start to be a normal start. And I would call it resilient towards the market. So I think the category of customers that we are working with remain attracted by our products. So we see activity not just on one category of airplane, but very much across the board. So that's the -- maybe to answer your first question. And I think second also, we still see the activity well distributed with maybe a little bit more in Asia than we had probably over the last year. So that's how I would probably describe the activity so far. And maybe, yes, the used airplane inventory is going up very slightly when I look at our product, but it's far from being into a normal number. We're still at about 4.8% right now, I've used inventory by the end of Q4 when you and I know that usually things are around 10%, 12%, sometimes even 14%. So we're still way below what a normal situation would be. Okay. And maybe just a quick one for Bart. With respect to the CapEx of $350 million, how much is related to Pearson and maybe the trend going forward in terms of CapEx beyond 2023? Yes. Great question, Benoit. So we're looking in '23 for Pearson to be around -- it will be somewhere between 1/3 and 40% of CapEx during the year. It's the most significant use of CapEx of the $350 million forecast. It's the last year where we will be spending significant dollars on getting our Pearson facility up and running. I'm very pleased to say, Eric and I just took a review of the project this past week. We're absolutely on track to commission on schedule beginning in August of this year, which is quite an accomplishment for the team, just given how difficult labor markets and supply chain has been. So hats off to the team who has been working on the project. For the coming years, because Pearson will be out of the mix, we do see ourselves returning to a more normalized CapEx range of $200 million to $300 million per year. Congratulations on a very strong year. I just wanted to ask about the aftermarket and thoughts about -- I know tracking to the 2025 target, but we see the growth in flight hours kind of slowing. And as you think about the flight hour growth that's kind of required from here to generate the aftermarket for both in 2023 and beyond versus what comes from the additional capacity that you're adding in terms of service centers, how do we think about that? And does an environment in which flight hours are not growing or maybe even shrinking a little bit, still conducive to the targets that you have? That's a great question. But what we've seen so far this year is a very, very strong market on the after service. Actually, we see amazing spare parts ordering and sales we see our facility filling up very nicely. Of course, we emptied some of it by the end of the year. But we're going back to having pretty much everything sold out very rapidly in the year. And I think we still see the Bombardier airplane flying quite a bit. The fleet operator are still flying quite a bit. So the hours are there. And even when we compare 12 months over a year ago, we're pretty much being ahead across the board. And of course, we've installed, as you know, 1 million square foot of extra capacity, which allows us to go and bring market share at our place that we didn't have before. So all this together gives us a pretty strong start, and we feel pretty good about being able to meet our objective for the year. I want to touch a bit on your production guide. Eric, you're clearly pointing to what you had indicated of the 15% guide to 2023. It looks like it's going to be in that kind of 140-ish range, and just on a go-forward basis. And I'm just curious, you mentioned that this is something that you want to maintained from a run rate perspective. Is that therefore something that we should just kind of model out that kind of 140, 145 for a number of years? Or is it -- and you touched a little bit on the supply chain issues, could you flex -- if you didn't have those issues right now, would you be flexing higher than that 140 to 145? And perhaps touch on how much higher could you go in that run rate or that line rate without having to expand your footprint? That's a great question. So first of all, we still have quite a bit of room to increase our rate without having any footprint. So our line actually that we have either in Toronto or Montreal, mainly could take on more airplanes. I would say in the magnitude, think probably of 200 overall capacity so that we still have quite a bit of room to get there before engaging into adding footprint. In terms of how I characterize our number is for this year, I think we were talking about being 15% higher than this year -- than last year, sorry, guiding greater than 138 and yes, we are recognizing in that guidance that there's supply chain risk and everything that we want to make sure we manage properly. So that's reflective of that. In terms of what we're going to be saying for next year, our backlog is super solid. We have all the reason to think about that, but I think at Investor Day at the end of March, I will be in a position with, Bart too, give you more precision probably about our intention for 2024. That's great. And really, it's on that '25 guide, and I know you'll give us an update in March, but I want to make sure that we're properly characterizing how you looked at 2025 back when you provided it a number of years ago. And I think I just wanted to, again, be clear, 2025 was not an end goal that's the run rate that growth after that is going to be just modest. I think what you've been indicating here is that it was kind of a first step in that. With 2025, we may see other aspects of growth, either on supply chain issues decline and you're able to potentially raise your run rate, but also looking at new revenue opportunities with certified preowned, is that the right way to look at it, that 2025 was just kind of your first step and that it's not over after that. You're going to be looking at some other areas of new revenue growth as well. Is that fair? Yes. No, you're looking at it exactly the right way, Walter. So 2025 was what we guided for in 2021. But clearly, last year, we've spent detailed time to look at post 2025. And clearly, you know exactly to what you said between CPO, defense and other things we're doing today, we definitely foresee growth in the future. If I could just add one small comment. In that first forecast and strategic plan we laid out, we gave a target of $7.5 billion of revenues for 2025. And our guidance for this year is $7.6 billion. So to Eric's point, there is a lot of work that the teams are doing to develop and ultimately deliver incremental growth. We're really excited about it, and we'll share more towards the end of March when we have our Investor Day. Bart, I just wanted to ask a few more follow-ups on the cash flow plan. Given how much you've done with the balance sheet, how does that cash interest line move into the 2025 target? Just want to confirm 100% RVG is 0 next year. I'm curious about the advances given how positive those were last year. Does that just kind of level out and it's a net 0? Or do we have to think of that as a headwind at some point? And on the capital plan, there had been this meeting piece of you had the placeholder in '25, then there was sort of a de facto raise but not raised because there was maybe some investments in the '25 capital plan? What's the latest thinking on that? Yes. Thanks, Noah. So let me talk about the cash flow first. You're essentially right on the RVGs. This is the last significant year. We do have a $10 million or $20 million left that will come off over the following couple of years, but it's -- we're basically down to 0. So you can -- for all intents and purposes, you can model that out now after 2023. So on the cash advances, the only thing I would say there is when we originally came over with our forecasts, our production and delivery levels were in the original model and we're a bit lower than what we're seeing in actual terms today. So if we look at a book-to-bill of 1 just for modeling purposes going forward, naturally, we're going to deliver more free cash flow than we would have otherwise. And with interest expense coming down a lot more quickly than we had built into even our modeling, that's a great help as well. For '25, what I would say today, given that we are going to talk more about this at Investor Day, is that because our debt is coming down more quickly, we've also been able to reduce our absolute average interest rate modestly, but that's helping as well. We do see a clear path now to delever to a level that's better than what was in our original '25 outlook and guidance. And we'll talk more about that at Investor Day, and we'll give you some clearer pictures as to what our longer-term goals are. Hopefully, that's helpful. That helps. And if I could just ask you on your margin goals. Obviously, the performance and the progression has been impressive. The '23 guidance, I think, implies the EBITDA margin up 100, 150 basis points, getting kind of in that 15% zone, you do still have the target of 20% in 2025 that still looks somewhat steep, I guess, despite everything you've accomplished. How do we still get to that target in 2025? Well, so again, I mean, we'll come to that in a little more detail both the longer-term goals and objectives when we were more at Investor Day. All I would say to this point, Noah, is that I mean, we came from about 5% to 15% in 3 years adjusting for Accounting differences, I think we're now getting very close to the point where we are on a margin basis, the leader in our space with the other OEMs. We do have incremental margin expansion coming this year and next year, a little bit from getting full pricing from our 7500 platform. We refreshed our Challenger 350 into the Challenger 3,500. The sales has been very impressive after that aircraft, just incredibly impressive. And of course, when you do a refresh like that, we get some margin expansion as well. And then, of course, we're growing our aftermarket, and it's becoming a higher percentage of our overall revenues annually. And so as it continues to contribute more and it's a greater than 20% EBITDA margin business, it puts us in a place to continue to see growth in EBITDA. So we're very pleased with where we're at today. We see a clear path or the $1.5 billion of EBITDA that we had projected a couple of years ago is clearly in sight for us. And we'll talk more about how much more than that is achievable and how we might get there when we meet on Investor Day here later next month. My first question is on the leadership changes that you guys announced pretty recently. I was just wondering if you can provide any color on what was the kind of basis of making those changes? Yes. Great question, Noah. So it's important -- First of all, I had one thing that one of my member of my team was going to be retiring mid-June this year, Michel -- and I just want to thank him also at the same time for everything is -- he's done an amazing job. He was behind the 7,500 and he had an amazing career, but he's retiring next June. So that has triggered, of course, for me, the ability to make a change. I was thinking about it for a while or two. I had some of my team members that were in their current job for at least two of them for more than 7 years. So all this to say that when you're the CEO, you have to think also about development of your team and where do I? And two things you're trying to do. First is make sure you keep the business running properly, make sure that you can still deliver the plan and the growth that you are anticipating. And believe me, that structure will. I had the opportunity also to bring a very talented person from the outside. Somebody that's been with us for 18 years that knows our business inside out also. So I feel that I have a very, very solid team. And the way we work together is anyway -- anything can happen when there's challenges in one area, everything stepped into this area to help. So I think in a spirit of giving -- making sure we can deliver our plan, making sure that we give opportunity for our people to develop and beef up our succession plan in the future, that's with the spirit of the most recent announcement we're made so. I hope that helps. No, that helps, Eric. And just maybe a quick follow-up. One of the comments I think I heard from you this morning was the Skyline is full for 2023 and maybe it extends into '24. But you are also assuming a onetime book-to-bill ratio. So my question of clarification is really, if you get any new orders this year, net new orders after cancellation and changes, would that mean that you might exceed the 138 delivery target or that supports the target? No, I think we're pretty much sold out right now. We still have a few airplane options and things like that, but we are on solid ground in terms of backlog. I think where there could be opportunity this year with the -- if we can have a better performance of the supply chain. And I think that's where the opportunity resides. Congratulations on the progress you've made so far. I have a question about the underwriting new projects or new programs going forward. I mean, I think with -- you kind of being more focused on the maintenance CapEx over the last number of years and bringing the Global 7500 and all those into production. Are you getting from a balance sheet perspective to a place what you -- makes you more comfortable to underwrite some bigger projects? Or is there a balance sheet target that you can have in mind before you can enter into those types of maybe larger programs that you need to support long-term growth? I think Fadi that's an excellent question that we've been discussing in detail here with the management team and the Board. But clearly, we are very disciplined in our approach to new program. And there's different criteria that we have, some are related to technology, some are related to the market expectations, some are related to what our competition is doing. But clearly, one of them and probably the most important or one of the most important clearly, is a clear criteria about our the state of our balance sheet and our ratios. And we're going to be very disciplined about it. The good news is that, that criteria is where, as Bart said this morning, we're ahead of plan in terms of improving our balance sheet. We still have work to do. So clearly, I want this to be clear, we still have work to do to get to our target that we had in terms of net leverage ratio. We're better than we were supposed to be this year. We're already at 4-point something and aiming to continue to improve that, especially with our EBITDA improving and as cash will become available, will continue as a priority to reduce that debt. But we are getting into a place right now. And if you do the street math, it's fairly easy. Bart did them with you this morning. And all of you guys can do it, but if we take our target of 2025, which for now remain $1.5 billion and we'll discuss that at the end of March. But you take the interest rate, the CapEx we're talking about, we have a lot of room, and we're generating some pretty solid cash as a business after the RVGs are done, so you have CapEx, you have interest rate, and it means there's a lot available. And then it's going to be a question of capital allocation. What do we do with that capital? And clearly, a new program will be an option if the other criterias are there too. So -- but we haven't crossed that road yet, but we are setting ourselves up for having the flexibility to make the right decision. Okay. Great. Appreciate the answer. On the $400 million of cash that freed up, I guess, now, is the plan to use that to repay debt? Or to kind of stronger liquidity, I guess, in an environment like this? Yes. Great question, Fadi. So we'll -- I think -- what I'm telling you exactly how we're going to deploy the cash. What I would say is that you should expect us to be consistent with the way we've done things in the past. And that -- by that, I mean, cash and liquidity that's available above $1.5 billion to us is excess. And what we've said is that excess cash will be put towards debt retirement. So with that money coming into our accounts and now being there, it would qualify as excess to our needs. I was hoping to go to Pearson, if I could, not physically, but mentally. And maybe you see the cut in that's going to happen in August, and I'm just wondering are the commissioning happens in August since is not trivial to lift and place a final assembly line for the Global. So is there conservatism based on the EBITDA margins due to that move, particularly? No, not really, Myles. I think we are still targeting all our delivery this year. The move is very well orchestrated and start -- will be starting this coming fall with, of course, a couple of months of moving station by station and our people and ramping up production. So we foresee the building still being ready on time and on track for this. And we'll be having a bit of working capital to transition because -- transition, but it's all in our plan, it's all budgeted and we're planning for that, but no impact on EBITDA. Yes. Myles, just to add maybe one or two other comments to Eric. The cutover on a production basis for our globals because it happens in the second half of this year would not impact any of our '23 deliveries if there was going to be any impact, it would be '24. We're not anticipating any impact whatsoever the cutover plan is very, very well laid out. All of the capabilities, people, machinery tool and everything is -- facilities are actually quite close to one another. So we're not having to travel long distances, and it's simpler for us. And we're doing a bit of a lift and shift into the new facility rather than building all kinds of new things that would add complexity. In terms of the margin, we're showing strong year-over-year margin growth. We still see a clear path forward for a lot more growth from here. And my only other comment would be that we've been very consistent since our first numbers we put out in early 2021 in that we are -- we tend to be a bit conservative in our approach and our guidance. And we'll be consistent with that today and going forward. And just one clarification, the land sale. Is that embedded in the CapEx guidance for '24? Or is that -- would that be a lower net CapEx if that occurred? Yes, there's a potential for a bit of a reduction, an offset from that land sale if we're able to execute on it. It's not a huge number, but it's an opportunity for us, for sure. So to maybe follow up on Seth's question, services, what sort of growth do you see this year? And what do you need for flights going forward because it looks like to get to $2 billion, you need 10% growth over the next 3 years. I think, Cai, that's a great question. We are clearly, as I said, foreseeing, the growth will come from different angles. One is market share gain because of the 1 million square foot we've added last year, there will be a significant part of that, that will come our way. I think we're being successful also in having more and more customer adherent our Smart Parts program. So that's another way for us to do that. So this is, I would call it, the market share category. Plus, of course, the activity level is very, very strong. Our airplane keep flying quite a bit. You have to also think about us as being clearly a leader in -- with the fleet operator. The fleet operator are flying quite a lot. And every airplane they have usually fly a 1,000 and more hours a year so -- which is a great business for us, also looking forward. So all this together, we do foresee a clear path to our objective of going to $2 billion over 5 years. So we've achieved $1.5 billion. And we do foresee with the 1 million square foot and everything else we're doing, the ability to get there. And so what sort of growth do you see this year? Because by my numbers, it looks like, obviously, your sales are going to be better than -- and it would look like aftermarket might be down as a percent of sales this year? Thank you. So maybe the first thing that I would like to say is thanks to all of you this morning for joining us. We look forward to connecting again during our Investor Day. There is a lot right now, I think, to be excited about when looking at Bombardier's activities and how we are realizing our potential. So overall, we have accelerated and plan to stay the course predictably. In March, we will be excited to dive further into the nuts and bolts and spend a longer morning together virtually. So thank you all for your time today and your continued interest and confidence in Bombardier. 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 that you please disconnect your lines. Enjoy the rest of your day.

EarningCall_181

Good morning, and welcome to PepsiCo's 2022 Fourth Quarter Earnings Question-and-Answer session. [Operator Instructions] Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President of Investor Relations. Mr. Pamnani, you may begin. Thank you, operator and good morning everyone. I hope everyone has had a chance this morning to review our press release and prepared remarks both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business and plans and 2023 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, February 09, 2023, and we are under no obligation to update. As a reminder, PepsiCo’s fourth quarter 2022 includes 17 weeks of results. And our fiscal 2022 year includes 53 weeks of results. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our Q4 2022 earnings release and 2022 Form 10-K available on pepsico.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. Joining me today are PepsiCo's Chairman and CEO, Ramon Laguarta; and PepsiCo's Vice Chairman and CFO, Hugh Johnston. We ask that you please limit yourself to one question. So I just want to focus on the 2023 topline growth outlook after another very strong quarter here in Q4. Can you just give us a quick update on the business so far in 2023, given there are some concerns around macros and the consumer? Are you seeing momentum continue or any signs of incremental consumer weakness? And then second, how does that translate to price mix? Obviously, very strong pricing in Q4. In theory there is need for more pricing given the continued cost pressures in 2023, but as I just mentioned there are some worries around the consumer and the theory for retailer pushback, so just help us understand within that organic sales growth outlook how much is price mix? Are you -- is a lot of that carryover pricing from 2022 or are you assuming more pricing in 2023? Thanks. Good morning, Dara, this is Ramon. Listen, the way, the way we feel about the consumer is based on employment data and wage growth around the world is positive. In our assumption for the year, we're thinking elasticities might get worse going into the second half of the year based on multiple scenarios that we have. Obviously, they are very changing. We just had some recent changes in some other in multiple parts of the world. But we’re feeling that that might happen that there are worse elasticities in the second half of the year. And that's why we're guiding to a 6%. We feel comfortable with the way the business is going as you could see from Q4 a good momentum in our brands and good share momentum in many geographies around the world. But the key, the most important thing for you to think about is we're going to keep investing in the quality of our products. We're going to keep investing in the strength of our brands. We'll keep making our go-to-market systems stronger. So no matter what happens with the consumer, we're going to be I think preferred choice for a lot of the consumers and our customers. And that's how we are planning for next year. Thank you. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays Your line is open. Great, thanks. Good morning. I was curious in the release there were a couple mentions of two things. One brand exits and portfolio management, and the other was there were a number of impairments. And I know, anyone who acquired a business pre pandemic is pretty much taking an impairment, so that's kind of due course. But I thought it might be a good opportunity to get an idea on how some of these businesses have been faring in the sense of what they've added capability or portfolio wise or maybe where they've fallen short. Again, notwithstanding the pandemic dynamics. And then just color on what some of those brand exits and portfolio management mentions were in reference to? Thanks. Hey Lauren, it’s Hugh. I’ll handle that one. It was really a couple of things that that drove it. Number one is obviously as you mentioned pre pandemic, interest rates were awfully low and prices were pretty high for a number of these assets. And as we've sort of moved forward, we've taken a hard look at the cash flows, sort of in a post pandemic world. Combine that with the fact that interest rates are obviously materially higher, so we're discounting those cash flows at a different rate. The couple that I'd point to, during the course of the year. Mabel in Brazil was one, Pioneer a little bit as well. And then SodaStream where, SodaStream is more of a consumer discretionary type of purchase compared to our -- the balance of our portfolio. And as you would expect, behaved more like a consumer discretionary purchase. So we took the opportunity to look at the numbers going forward on that, and the investment posture we were going to have in that business. And as a result, we wrote down a piece of that business as well. So I think we put ourselves in a spot now we're in a, in a higher interest rate world, we're in a better position in terms of where we've marked those assets to. Yes, Lauren, strategically SodaStream continues to be a very central to the transformation of the beverage category. We've seen that there is a huge opportunity to enable consumers to personalize their drinks and have a type of consumption where there's no plastics and where there's a lot of convenience for consumers at home or in offices or even on the go. So it continues to be very central. Hugh was saying there was obviously a situation, especially in Europe, with inventories and the discretionary consumption that we took this opportunity to reassess the value of the asset. Thank you. One moment for our next question. Our next question comes from Andrea Teixeira with JPMorgan. Your line is open. Thank you. Thank you, operator. Good morning, everyone. If you can talk about how to think about operating leverage, you have historically been able to use about 1 billion per year in productivity, to offset inflation. And now coming in to these year on top of like a very strong inflation, but also really healthy carryover from pricing. How should we be thinking in terms of like the ability to flex your P&L? Any particular you invested- I think we all appreciate that you invested a lot more in A&P, strong double-digit growth in the last quarter. How to think about A&P investments into 2023? Thank you. Yes, I'll take care of that one Andrea. I have a couple of comments on that. Number one, obviously, inflation is still out there, as a factor for us partly the fact that inflation is still high, it's not as high as it was before. But then the numbers are still relatively high. Number two, in terms of the way that we were approaching the year, we're looking to drive a lot of productivity this year. And at the same time, we're looking to continue to put investments back into the business because we think that's what's driving the top line, and consumers are clearly responding positively to it. So if you net all of that out, my expectation is that our gross and operating margins will be at least in line with where we were in 2022. And perhaps a little bit better. Thank you. One moment for our next question. Our next question comes from Bryan Spillane with Bank of America. Your line is open. Hey, thanks, operator. Good morning, guys. Hugh, I wanted to ask you a question about cash flow and capital allocation. And I guess in terms of cash flow, just the free cash flow this year stepped down versus last year. So if you could talk a little bit about just what's happening in cash from operations, is it a timing thing? It looks like working capital has ticked up a bit? And then second, the dividend going up 10% this year? Or just what you announced today. So can you just remind us again, just how you're thinking about capital allocation as part of a total shareholder return model? And, and just how that factors into decision making in terms of capital allocation going forward? Yes, happy to, Bryan. Let me start broad and then I'll sort of narrow it in. Very broadly, the capital allocation principles we have are no different than what we've had in the past, the four basics of make sure we invest in the business, pay the dividend, tuck in acquisitions and share repurchase. If I zero within a little bit more for the environment that we're in right now, with some of the changes, I think our biggest priorities right now we're going to be continuing to invest in the business and growing the dividend. And that's not a just a today's statement, although obviously 10% dividend growth is a pretty, pretty healthy growth in our current environment. But I think those are our bigger priorities, relative to perhaps tucking in there and relative to perhaps share repurchase. If the 10% dividend growth is bigger than what we've done in a number of years, and I think you'll see us prioritize that a bit more over time. So I'm sorry, and then the last piece is about working capital. Yes, the time -- we basically had a timing issue one that we're doing some IT implementations. And in terms of the IT implementations, essentially we paid for it about two weeks’ worth of payables, just to take some pressure off the IT systems because we had some freezes at the beginning of the year. So that's what pulled that number down. That was probably worth about 500 or so million dollars right at the end of the year. It's not a material change in cash flow. It's a two week timing issue. So I think you'll see that bounce back as we get to the end of 2023. Thank you. One moment for our next question. The next question comes from Bonnie Herzog with Goldman Sachs. Your line is open. Hi, thank you. Good morning. So you’ve worked out a new and improved Pepsi Zero Sugar. So just hoping for some more color behind this initiative? And really how incremental you think this can be? I mean, maybe you guys could give us a sense of how big your Zero platform is currently? And what percentage of your portfolio this could be in the next few years? And then finally, just maybe some insight in terms of how big of a push you plan to be making behind the rollout in terms of marketing spend, activation etcetera? Any color on some of these initiatives would be helpful? Thank you. Yes, Bonnie. Yes, listen. Yes, Zero is, is clearly a segment of the beverage category that is growing much faster than kind of full sugar all over the world. And Pepsi Zero has - or Pepsi Max as we call it in some markets has been very strategic product for us in Europe, and in other parts of the world. In the U.S., we were investing in other parts of the Pepsi brand. Now, this is going to be the center of the strategy for the Pepsi brand. We think that the non-sugar segment of Colas will continue to grow very fast in this country. We're seeing consumers pivoting. I think the R&D in our company has done a great job in giving consumers Zero sugar choices that are as good as full sugar choices or better from the taste point of view. And we're asking consumers Zero sacrifice to pivot to Zero Sugar version. So that's the principle why we've seen that the category will continue to pivot and why the brand will continue to invest in moving consumers into that space. How big it's going to be? I think eventually, it's going to be a large part of the brand, not only here in the U.S., but all over the world. We improved the formula. We moved the formula closer to the formula we have in Western Europe and some other parts of the world. It’s more refreshing formula, is closer to our original flavor. And I think I mean, the initial results are very good. The consumer testing was excellent. We're going to be investing now in the Super Bowl that we continue throughout the year is going to be one of the pillars of growth of our CSD business in the US. And Bonnie just to give you a data point Pepsi Zero Sugar grew 26% volume in the fourth quarter so that business is really growing. Thank you. One moment for our next question. Our next question comes from Peter Grom with UBS. Your line is open. Thanks, operator. And good morning, everyone. So I wanted to ask about the long-term organic revenue algorithm, 4% to 6%. And recognizing that a lot of the upside the past few years has been driven by pricing. But this is now the third straight year, you're excited to be at the high end or above the high end of the range. And I guess, as you take a step back and look at your performance and think about the path ahead, has anything changed in how you think about that target? You mentioned increased spending and driving the top line, do you have a higher degree of confidence that Pepsi can consistently be at the higher end of that range longer-term? So just like any perspective on whether you feel differently today about the building blocks of that algorithm versus maybe 2019, will be really helpful? Thanks. Yes, of course, we feel good about the return that we're getting on our investments that we've made both in our brands and you see the our A&M has gone up significantly since 2019 and the same with our CapEx, right? We've added a lot of capacity, a lot of go-to-market strength to our business. And we see the consumer reacting to that very positively. We've also invested a lot in quality and our brands, our products are better, are more consistent, are better tasting. So from that point of view, we're happy to the -- we're winning market share in many markets around the world. So yes, we're feeling good that we can be close to the top end of the -- of our long-term growth algorithm for the continuous future. Now obviously, the last two years, there's been a bit more pricing that would expect going forward long-term. But if you think about the mix of growth between developed and developing markets, I think we have tremendous opportunities for growth in developing markets. The per capita is still very, very good. And we have good playbooks to develop those per caps in a lot of those consumer bases. And we know how to grow developed markets as well. So you will see us continuing to invest in our brands, continue to invest in our go-to-market and what drives the top line, what makes consumers stay with our brands. And we'll guide every year to the particular circumstances of volume and pricing that we see for that particular year. And Peter, just as a reminder, both Ramon and I have said in the past that our goal is to be at the high end of that guidance. And also as a reminder, recall 5 years or so ago, our long-term guidance was 4% to 6%, but we were struggling to get to 4%. We were averaging somewhere in the low to mid-3s. So it's obviously a material acceleration where we've been as recently as 5 years ago. Thank you. One moment for our next question. Our next question comes from Kevin Grundy with Jefferies. Your line is open. Great. Thanks, good morning everyone. And congratulations on the strong results this year. I would like an update on PBNA, please, on 2 fronts, Mountain Dew and then segment margins more broadly. So market share, nice to see Gatorade performing well, though the company's market share continues to slide here a bit in CSDs, most notably with one of your power brands in Mountain Dew. So Ramon, perhaps an update there on your investment plans behind Mountain Dew to try to turn around some of the share loss. And then just relatedly, how does the scope of your investment, not just in Dew, but broadly in PBNA, how does that impact your other key priority within that segment of restoring margins towards mid-teens? So thank you for that. Thank you, Kevin. We feel good about or very good, actually, about the progress that PBNA is making in this triangle of growing the top line, improving the margins and keeping share. And that's the balance we're trying to strike every year as we go forward. Now there are things of the portfolio, we feel very good and things that we have to do work, things that we feel very good as you mentioned, all the sports nutrition category. Gatorade, obviously but Propel and some of the other brands are doing very, very well. That's a big area of investment. We're getting the returns. We feel very good about the Pepsi brand. Pepsi brand is growing well. Now we're investing behind Zero, as we discussed. We feel good about the coffee portfolio. Finally, we've gone beyond some of the supply chain challenges, and that Starbucks range is going to be very, very good for us. Already, we saw it in Q4. It's going to continue this year. We feel good about Energy. We feel good about Energy, the steps we're making to improve Rockstar, as I said, the coffee portfolio. And then the Celsius integration into our portfolio has gone very smoothly, and that brand has - keeps gaining market share behind our improved distribution, and I think the attractiveness of the product. So that is a very strong set of growth opportunities that we're going to continue to dial up in our investments and our execution and our customer plans, which are very strong for 2023. Now as you mentioned, an opportunity is Mountain Dew. Mountain Dew, we keep refining the positioning. We keep refining the product, and we're going to be investing. But this is just a small part of a very large portfolio, and there's a lot of positives in that portfolio. Now when you see the triangle, we're trying to improve the margins as well. As we said, we are not deviating from our long-term goal, actually, not so long-term goal to go to mid-teens with this business. You saw we're progressing in Q4. It was a good step forward, and that continues to be the plan for 2023 and beyond. So we're going to dial it up efficiency. We're going to dial up our investment behind the key brands. And we're improving our execution, which has been painful throughout the COVID and subsequent year, especially as labor market was very tight. And Kevin, just to add a few numbers to that. For the year, PBNA grew revenue 11%, which is obviously quite strong, and operating profit grew strongly as well. As Ramon mentioned, the mid-teens margin thesis is still very much intact and the drivers are still very much intact. For the year, we improved operating margins 43 basis points in the business. And in the fourth quarter, margins were up 110 basis points. So we're making good progress and good momentum on both fronts. Top line has obviously been terrific, and we're making good progress on the cost side as well, and I expect we'll continue to see improvement into 2023. Thank you. One moment for our next question. Our next question comes from Vivien Azer with Cowen. Your line is open. Hi, thank you. Good morning. I was hoping that we could dive into the Frito-Lay margin expectations, please. Obviously, the top line has seriously benefited from very effective advertising, but we have seen a couple of years of margin compression there. So how should we think about that going forward, please? Thank you. Yes. Listen, the Frito business is the jewel of PepsiCo. And this business, we've put a lot of investments in the last couple of years and continues to respond every year better to those to those investments. Investments went into quality of product, investments wanting to increased advertising, broader portfolio of brands that we're supporting. Investments wanting to go to market, even some infrastructure bottlenecks that we had in our distribution systems. The truth is that we feel very good about this business growing very close to 18%, I think, in the -- for the full year. And the operating profit growth of Frito this year is in the double digits, which we haven't seen in like in the history almost. So we're feeling good about the balance of growth, top line, bottom line that we see in Frito. And as you can imagine, we will continue to invest in Frito-Lay in the coming years because that's the highest margin business in PepsiCo and the highest ROIC that we can have in our investment. Yes. And again, just to put a few numbers to the points Ramon was making. We have a Frito business with a 27% operating margin for the full year, which is a really wonderful operating margin, obviously. And when you have a margin that high, your goal should be grow that business as fast as you possibly can. We grew at 18% in the fourth quarter and 17% for the full year. This is Frito-Lay, 17% full year revenue growth. So look, obviously, you can't continue to see margins go down. But at the same time, with 11% dollar operating profit growth for Frito-Lay, that's terrific operating profit growth. That's an equation we're certainly happy with for the year. We feel like Frito had just an outstanding year. We'd love to have a couple more like this one here. What we feel very strong is about the quality of our commercial execution in a broader sense from the way we're innovating to the way our brands are coming in front of consumers, both our large brands, right, Doritos, Lay's, Ruffles, Cheetos, but also the smaller brands, small portfolio there, we're building a beautiful small brands like Smart Foods or PopCorners or off the Eaten Path and some others that are completing that portfolio to compared to multiple occasions, different type of cohorts. And I think the team is doing a fantastic job. Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open. Great. Thank you very much. Just wanted to kind of circle back to Dara's first question and maybe if you could give us a little bit of sense. I mean the 6% sales growth, is there -- are you contemplating any volume in that? Or is it all -- you could almost be almost a rollover pricing from 2022. So just trying to get a little bit more granular on that. And then how does the -- in the U.S., how does the promotional environment look? Are you seeing any sense or any pull from retailers to do a little bit more promo? Thank you. Yes, Robert, it's Hugh. Let me try to take a shot at that. Look, obviously, 6% revenue growth in Consumer Products is still a very healthy growth rate, and we certainly feel good about that as the guide. Would we expect volumes to be down? Perhaps they'll be down a little bit. Let's see how the year plays out. Right now, the consumer is still quite good. But we also have to plan for multiple scenarios. And in the back half of the year, given interest rates are as high as they are, it wouldn't be shocking if there were a mild recession in the U.S. and in some of our developed markets. We've taken actions in terms of productivity to make sure in a recessionary environment, we're still well insulated to hit our numbers. But we've got to plan the business such that with interest rates as high as they are, you could certainly see some impact over time on the top line. So that's kind of the way that we're thinking about this one. And then let's see how the year plays out. If the year plays out better, then that's great. We'll invest back. And I think we'll -- everybody will be happy with that outcome. Yes. I think we've discussed in previous conversations. The way we do these processes, we have multiple scenarios of things that could happen actually the last few years, if we've learned something is that we should expect the unexpected. So all these scenarios, we feel good about delivering our guidance in any of those scenarios. Now the role of each one of our business unit leaders is to beat the plan. So that's how we're starting the year and how we will play the year. Thank you. One moment for our next question. Our next question comes from Nik Modi with RBC. Your line is open. Thank you. Good morning everyone. Two quick questions. First, Hugh, on China and just the re-opening. Just wanted to get your thoughts on how we should be thinking about some of the implications and if it's been kind of contemplated in your guidance. I mean, obviously, oil and gas pricing could -- is the obvious. But is there anything else we should be thinking about? And then Ramon, I wanted to ask kind of how perhaps you close things about various substrates within the Frito-Lay business. So you think about cauliflower rice, I mean, Frito-Lay dominates corn and potato. And just given long-term, consumers seem to be kind of adopting some of these new substrates. Just wanted to understand the plants PepsiCo has in terms of capacity build? Or if you don't think these substrates are actually going to be meaningful in the future? Thanks. Yes. I mean you mistake that. I'll cover the China consumer business well. I think, listen, China, obviously, we're seeing the consumer happy to be free kind of. And the consumer will obviously spend more. I think that's obvious. So there is an opportunity in reassessing the China demand and what it means for all the businesses in that country. So obviously, we have two meaningful businesses, snacks and beverages. And we'll -- I think we'll benefit from that increased demand. Will it change the PepsiCo growth? No, I think that it's an important market, but not to that extent. Now with regards to the Frito-Lay innovation portfolio beyond our potatoes, our corn or wheat, we have already large businesses in rice snacks, for example, you think about the Quaker snacks. We have a pretty sizable business that is in rice snacks and it's growing very fast. Within the Frito portfolio, there are also different substrates that we're playing. Off the Eaten Path is a great example. You have multigrains, then you have smaller substrates. One substrate that we like a lot is Chickpea. Chickpea has a high nutritional values, and it's I think it's a substrate that we are starting to work on agro, and we're starting to work on different layers to create advantage in that substrate. So yes, we see that strategically as an incremental opportunity to broaden our portfolio beyond the more traditional substrates where we build a lot of supply chain advantage and innovation advantage and brand advantage. But I think our brands can expand into other spaces, especially some of those smaller brands, but also we're thinking about some of our bigger brands as well. And Nick, just to put a finer point on Ramon's narrative around China. Well, it's strategically quite an important market for us, obviously, given the size and potential there. Currently, it's about 3% of PepsiCo's sales. So it's not going to be a major driver in the numbers for a few years. Thank you. One moment for our next question. Our next question comes from Kaumil Gajrawala with Credit Suisse. Your line is open Hi, guys good morning. Can you elaborate a bit more perhaps on the beverage alcohol strategy? It's been a bit of time now since you first kicked it off. And maybe the big question is you talked about Frito-Lay. You have several very large, very profitable businesses. This isn't yet one of them. But how big or how far does it have to get before it can be more relevant to the overall Pepsi story? Yes. Listen, we see an opportunity in expanding our distribution capabilities to other spaces in the U.S. and maybe eventually in other parts of the world in beverages and also in snacks. So the alcohol distribution strategy that we have is one that is, I would say, embryonary in the way that both geographically and from the amount of brands that we carry in our portfolio. We are very focused in getting it right, in getting the learnings, getting the execution right, is different, right, and selling our soft drinks, our sport drinks or other brands. There are more nuances, regulatory-wise and execution-wise. So we're in that process of learning. I think strategically, you should see this becoming an important part of our business in the U.S. But we're going to learn before we scale up. And I wouldn't think about this as we're going to be an alcohol distributor. I think we're going to choose a few partners that will create brands with us and products, and we will be distributors of a small portfolio of high-potential brands rather than just a lot of brands in our distribution system, which will be too complex and probably little value for us. Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo. Your line is open. Hi, good morning. Hugh, I wanted to actually ask about just SG&A. Certainly, investment has been a key topic for the company as ever, but including this year and especially in Q4 with how the year ended. But I'm also looking at your filings this morning, which show that distribution costs have probably been the one line item where the SG&A increases have been most significant. Clearly, marketing is growing, but not as big of a contributor. And so I'm just trying to understand what's going on here specifically. Is this your being offensive with investments into your shipping and handling network? Is this natural inflation? Should this level of inflation on that line item specifically continue? Or as freight rates are starting to ease, should we start thinking about inflation here easing and perhaps you can start investing in other areas? So I'm really just trying to understand the complexion of spending here just being a little bit different than where I would have thought it'd come in. So any context would be very helpful? Thanks. Sure. Sure, Chris. Let me just share a couple of thoughts on that. Number one, just as a reminder, distribution is obviously highly variable with the volume and with revenue as well because we paid salesman on commissions. So that's obviously going to be a factor in the numbers. Number two, the costs that are embedded in there also include the cost of creating displays in the marketplace. And that's part of what we represent as investments. So whether it's coolers on the beverage side, either in convenience stores or front-end coolers and supermarkets or in mass merchants and the like, and also fountain equipment in the food service channels, where we're growing at a very healthy clip, is a part of all that as well. In addition to that, even on the food side, display racks and POS, all of those things that are really outsized contributors to growth that frankly, we've created a ton of win-win solutions with our customers on is part of what makes them continue to vote for us as the number one supplier in Cantor. Those investments are value-producing investments for both the customers and us. And so without getting into the granular details of how much exactly is in each of those buckets, I think a lot of what you're seeing is a reflection of the things that we're doing in the selling and distribution system to drive the kind of growth that we've been seeing. Yes. And to your question on Q4, yes, we decided to invest both in consumer, as you saw from our A&M growth in the quarter, and also as Hugh was saying, in making sure our installed equipment base in the market, and this is very relevant in the U.S. But also internationally, we continue to gain space, space being a key lever of for categories like ours that are input-based categories, space and it's a critical lever of performance in the marketplace, and it is a driver of share of market. So those two were there. We also invested in systems and some of the capabilities, especially digitalization capabilities that we thought we had a window of investment in Q4. Thank you. One moment for our next question. Our last question comes from Gerald Pascarelli with Wedbush. Your line is open. Hi, good morning. Thanks very much for the question. Mine is actually on energy drinks. So now that the Celsius transition has been completed, I was just looking for some color around your market strategy for driving distribution for both Rockstar and Celsius in tandem. Are there any specific strategies or considerations around channel mix to be mindful of, in particular given how under-penetrated the Celsius products are at convenience? Any color you could provide on your strategy would be helpful? Thank you. Yes. Good question. And clearly, as we said, we have four pillars in the energy strategy. They all become an integrated portfolio as we execute in stores. So having this set of solutions with Rockstar, Celsius, Mountain Dew Energy and coffee gives us the opportunity to go to our customers and strategize with them new space opportunities that we didn't have in the past. So I think it's very positive for Celsius, and we're already seeing that. If you look at the Nielsen numbers or any distribution metrics that you want to check, distribution is improving. Displays are improving. The same with Rockstar. Rockstar was a brand that was very Western-based and some parts of the U.S., and now we're expanding to other parts of the U.S. So I think there is a lot of synergies in the point-of-sale execution as we have a portfolio that is catering to different cohorts, complements each other and gives our customers the opportunity to get better return on their space. So that's the strategy is working well. Clearly, Celsius is gaining market share. Rockstar is growing. As I said earlier, the Starbucks portfolio is growing very fast now that we have better supply chain opportunities. So I think we feel good about Energy. It's a category that is growing ahead of LRB again, and we need to play strong in that segment to be -- to gain share as we were planning to do, obviously, this year. Great. I think this is the end of our conversation. So thank you very much for joining us in the conversation today. And especially thank you for the confidence that you've placed in PepsiCo with your investments. We wish you the best and hope you all stay safe and healthy. Thank you.

EarningCall_182

Good morning, and welcome to the Hudson Pacific Properties Fourth Quarter 2022 Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Laura Campbell, Executive Vice President, Investor Relations and Marketing. Please go ahead. Good morning, everyone. Thanks for joining us. With me today on the call are Victor Coleman, our CEO and Chairman; Mark Lammas, President; Harout Diramerian, CFO; and Art Suazo, EVP of Leasing. Yesterday, we filed our earnings release and supplemental on 8-K with the SEC, and both are now available on our website. An audio webcast of this call will be available for replay on our website. Some of the information we'll share on the call today is forward-looking in nature. Please reference our earnings release and supplemental for statements regarding forward-looking information as well as a reconciliation of non-GAAP financial measures used on this call. Today, Victor will discuss our 2022 accomplishments and 2023 priorities, along with macro trends across our markets. Mark will review our office leasing and development highlights and Harout will review our fourth quarter financial results and 2023 outlook. Thereafter, we'll be happy to take your questions. Thank you, Laura. Good morning, everyone, and thanks for joining us. Let me start by highlighting Hudson Pacific's 2022 accomplishments, which align with the 5 key objectives centered around leasing, capital recycling, development, balance sheet management and ESG that I outlined on our call at this time last year. Let me start with leasing. We leased over 2.1 million square feet in 2022, just shy of our long-term average and up more than 300,000 square feet from 2021. We achieved positive GAAP and cash rent growth of 14% and 4%, respectively. We executed on all 4 of our planned nonstrategic asset sales, closing 3 last year for a combined $144 million of gross proceeds with our fourth Skyway Landing now closed for an additional $102 million of gross proceeds for total dispositions of $246 million. As part of our efforts to grow our portfolio, the world-class amenitized collaborative sustainable office and studio space, we purchased Quixote a leading stage and production services provider to an off-market transaction, and we made good progress on our 2 under-construction studio and office projects totaling 780,000 square feet, while securing entitlements for 2 future projects totaling 1.6 million square feet. We now have $1 billion of total liquidity and with a focus last year on using proceeds from asset sales and our successful $350 million green bond offering to pay down and refinance debt. We also reduced our interest rate exposure through caps and swaps to maintain our total fixed and cap debt at 85-plus percent. We continue to return capital to our shareholders throughout the year, repurchasing approximately $240 million of our common stock and maintaining our dividend with a stable full year AFFO payout ratio of just over 60%. We also continue to achieve sustainability and ESG excellence, ranking number one, in the office companies in the Americas by GRESB and winning NAREIT's Leader in the Light Award during 2022. And most recently, we were recognized by Newsweek as one of America's most responsible companies and included in the 2023 Bloomberg Gender Equality Index further aligning our platform with stakeholders prioritizing sustainable and equitable workforces. I'm also very proud of the Hudson Pacific team and our ability to execute and work towards creating long-term value for our shareholders in this complex and highly dynamic environment. Our strategy places Hudson Pacific at the confluence of several macroeconomic trends that we believe are transitory. Therein lies the opportunity as we leverage our unique industry expertise and full-service platform to position our company and world-class portfolio optimally for the next cycle. We continue to see utilization across our portfolio and prove with multiple assets trending towards 50% to 75% peak occupancy. Utilization remains very tenant and thus asset specific, but we believe growing employer mandates and employee willingness to return, especially in light of the recent layoffs will result in even higher utilization and reemphasize on being in the office to improve workforce productivity in the coming year. Looking at the 5 largest layoffs among North American tech companies over the last 6 months, only about 15% of those layoffs based on loan notices, impacted our U.S. markets accounting for about 1% of the company's total workforce. While hiring among tech and media companies was notably declined in the recent months. We recall these industries had massive hiring gains throughout the pandemic with little or no augmentation of their office footprint. In our target U.S. markets, employment levels in tech and media related sectors are still at or well above pre-pandemic levels, reflecting the inherent long-term secular strength in the case of Seattle and the Bay Area as much as 15% above. Software and IT job postings are still 20% to 25% above in the pandemic levels according to Indeed. And we know as big tech rightsizes, talent will spin out and build the next high-growth companies, the next Google or the next Amazon. VDC capital firms raised about $160 billion in 2022 and have record amounts of capital to invest in Series A and B rounds, and they're still very active. This will give rise to innovative small and medium-sized companies that will ultimately expand within our portfolio and beyond just as they've done in past cycles. As of the fourth quarter, top studios, including Apple TV, Netflix, Disney, Amazon and others, we're still projecting to spend a total of $140 billion on content this year, up 11% from last year to a new high. Original content spend, which typically accounts for 20% to 50% of the total spend and is perhaps a better indicator of production was expected to increase by a more moderate 2%. However, we did see production activity moderate in the fourth quarter, particularly here in Los Angeles, which we attribute to several factors, including studios growing austerity measures, the Amazon MGM and Discovery WarnerMedia acquisitions and caution ahead of the late spring Studio union contract negotiations as well as annual seasonality. We'll continue to monitor these trends but remain confident in the long-term fundamentals around content creation and the ability of our platform through a combination of long-term leases and increasingly diverse geographic footprint and product offering to meet the current and new client priorities and preferences. At Hudson Pacific, we're building upon a strong track record of execution, be it our ability to uncover opportunities, deliver premier office and studio space, execute leases and grow rents. And in so doing, we've set the bar when it came to creative, collaborative, high-quality, high-touch, sustainable work environments and related services to inspire the world's most innovative and creative companies and their employees. As these industries evolve and grow once again, we will be at the forefront of this next shift. We will leverage our platform seasoned cycle team that's fully tested our full service programs, vertically integrated platform and our unique strategy and value of our relationships to continue to expeditiously optimize our portfolio in ways that we could create significant value for shareholders. Looking ahead to '23, our priorities are as follows: to continue to successfully address our 2023 office lease expirations with the goal of preserving rent and occupancy, to execute on our near-term value creation office and studio development opportunities, specifically Sunset Glenoaks and Washington 1000 to further strengthen our balance sheet, by delevering through asset sales and reducing interest rate risk through hedges, and finally, to continue our ESG and sustainability leadership which has become a hallmark of our businesses and how do we create long-term value for our shareholders. Thanks, Victor. Our leasing team continues to hustle. And in the fourth quarter, we signed 517,000 square feet of new and renewal leases. This resulted in over 96,000 square feet of positive net absorption and drove our in-service office lease percentage up 40 basis points to 89.7%. This included a 100,000 square foot, 10-year lease with a large publicly traded software company at Metro Center in Foster City, which was not only the largest deal in our portfolio for the quarter, but also the largest along the entire San Francisco Peninsula and a win for the team. Our activity also included the full building 47,000 square foot backfill of Lockheed Martin with a 17-year lease with Stanford at 3176 Porter in Palo Alto, and a 40,000 square-foot 10-year renewal with SFMTA at 1455 Market in San Francisco. Both deals addressed 2 of our larger 2023 expirations. Our GAAP rents on fourth quarter deals were up 16%, while our cash rents were down 0.5%, driven primarily by Stanford's renewal at 3176 Porter. Adjusted for the Stanford lease, cash rents were close to 3% higher. Note that NFL, which vacated 10900 and 10950 Washington on January 1 of this year, is still included in our fourth quarter lease percentage. Although we continue to negotiate with a single tenant for the entirety of that asset, we're actively exploring redevelopment of the property as residential to take advantage of its prime Culver City location and pending Up Sony. This is a decision we expect to be able to make in the coming months as we review our options. Even as we continue to sign significant leases, we have 1.9 million square feet of opportunities in our leasing pipeline at multiple stages. We also currently have activity on both of our only 2 large block expirations in 2023. Specifically, we have 60% coverage on block space at 1455 Market in San Francisco, which expires in the third quarter of this year. We're negotiating with an existing 25,000-foot subtenant and a new tenant with a 250,000-foot requirement. If we can close on these, we'll have largely addressed our only material expiration in downtown San Francisco this year. We're also in discussions with Amazon to renew their fourth quarter 140,000 square foot expiration at Met Park North in Seattle and expect to have more visibility after their plans by the third quarter. We currently have 42% coverage on our 2023 expirations with an average tenant size of roughly 9,000 square feet. Approximately 50% of these are located in the Peninsula and Valley submarkets where we're seeing resilient, small to midsized tenant demand for our assets. According to CBRE, in the fourth quarter along the Peninsula, over 70% of leases signed were under 5,000 square feet. And in the Valley, over 60% of deals were under 10,000 square feet. We're staying disciplined in our approach to new development as we monitor market conditions. Our under construction development pipeline consists of 2 attractive and unique projects. Our Burbank adjacent 7-state Sunset Glen Oak studio, which will be the first purpose-built studio in Los Angeles in over 20 years is on track to deliver this year. We're in discussions with several tenants regarding multistage, multiyear commitments, including some single tenant users for the entire lot, but we're also prepared to leverage a more traditional show-by-show lease model for some stages. Construction also continues at our Washington 1000 office tower, which will deliver next year and is well positioned as the best of the best product in Seattle's Denny Triangle submarket. Over the last decade, we've established a proven track record of excellence in development with our platform and projects winning numerous awards from the likes of GRESB, NAIOP and ULI. Apart from our 2 under construction projects, we continue to progress entitlements and designs for the balance of our 3.6 million square foot pipeline of potential development opportunities, which contains unique projects like Burrard Exchange, which will be one of North America's tallest mass timber office towers and Sunset Waltham Cross, which will be one of the largest studio facilities in the U.K. We're taking this time to ready our pipeline to ensure we can commence construction and create value, but only when the timing is right. Thanks, Mark. Our fourth quarter 2022 revenue increased 12.2% to $269.9 million compared to fourth quarter 2021, primarily driven by income generated from our Quixote acquisition in August 2022 and the commencement of Google's lease at One Westside in December 2021, partially offset by Qualcomm's vacancy at Skyport Plaza in July 2022. Our fourth quarter same-store property cash NOI increased 2.7% to $126.9 million compared to fourth quarter 2021, primarily driven by increases in revenue at 1998, 11601 Wilshire, 45 market and Sunset Gower Studios, partially offset by Qualcomm's vacancy at Skyport Plaza in July 2022. Adjusted for Qualcomm, our same-store cash NOI would have increased to 6.7%. Fourth quarter FFO, excluding specified items, was $0.49 per diluted share compared to $0.52 per diluted share a year ago. Fourth quarter specified items consisted of transaction-related expenses of $3.6 million or $0.03 per diluted share compared to transactional expenses of $1.5 million or $0.01 per diluted share and a property tax reimbursements of $0.7 million or $0.00 per diluted share a year ago. Fourth quarter AFFO was $62.1 million or $0.43 per diluted share compared to $72.5 million or $0.47 per diluted share a year ago. Our payout ratios for the fourth quarter and year-to-date were 58% and 61.4%, respectively, underscoring that our dividend remains well covered. We continue to execute on financing and asset sales to fortify our balance sheet. At the end of the fourth quarter, we had $870.8 million in total liquidity comprised of $255.8 million in unrested cash and cash equivalents and $615 million of undrawn capacity under our unsecured revolving credit facility. We also had another $98 million and $59.3 million of undrawn capacity under construction loans secured by One Westside, 10850 Pico and Sunset Glenoaks, respectively. Upon repaying our $110 million Series A notes in January 2023 and using $102 million of sales proceeds from Skyway Landing to pay down unsecured revolving credit facility this February, we now have $1 billion in total liquidity. In January, we also entered into interest rate swaps on our $172.9 million pro rata share of our 1918 loan and $351.2 million net pro rata share of our Hollywood Media portfolio loan. Accounting for these debt repayments and interest rate swaps, the composition of our debt as of December 31, 2022, on a pro forma basis, results in fixed debt of approximately 82.8% and fixed end capped debt of approximately 86%. We currently have $210 million of debt maturing towards the end of 2023, which can be repaid from our line availability. This includes our $50 million Series E notes maturing in mid-September and $160 million note of Quixote secured debt maturing on December 31. Now I'll turn to our outlook for 2023. As always, our guidance excludes the impact of any acquisitions dispositions, financings and capital markets activity. We're providing an initial full year 2023 FFO guidance range of $1.77 to $1.87 per diluted share. There are no specified items in connection with this guidance. We expect same-store property cash NOI to grow -- growth of 2.5% to 3.5%, which reflects the additions to the same-store property pool of One Westside, 5th and Bell and Harlow and the removal of 10900/10950 Washington and Culver City, which we, for guidance purposes, designated as redevelopment to residential. Our 2023 full year guidance reflects for the first time, the full year benefit of our Quixote acquisition, which occurred in the third quarter of 2022. However, guidance does not reflect the potential disruption in studio production activity beyond the slowdown mentioned earlier, in the event, ongoing studio union contract negotiations lead to a strike and halt on production, which could occur as of May 1 and/or June 30 of this year. Maybe we can just start off on the guidance for '23. Victor, in your prepared remarks, you talked about preserving rent and occupancy for the year ahead. So I mean, should we read this as you expect the occupancy sort of to be flat? And then as it relates to the same-store, I mean it seems like it's more a function of just moving assets in and out of the same-store pool as opposed to more organic growth. I guess, do you have a sense of what that number would be if the NFL building was included in the pool this year? Well, let me start, and I'll get the guys to sort of jump in, Michael, on your second part of your question first. So we're not moving assets in and out. I think it's important to note on the NFL asset, we have limited activity from single building users. And when we recognize the fact that the interest was not as high as we anticipated in a marketplace that we know is in high demand for residential and the opportunity for the upzoning in Culver City, it's now being evaluated by our team, which is the highest and best use. The return on that asset would be obviously much higher in the residential capacity. But we're going to evaluate it. We'll keep you posted on what we think the returns are going to be in the construction costs and the likes of that. And whether we do it or not ourselves is TBD. That being said, the asset, if we had kept it in on a same-store basis, that asset was well below market anyway in terms of the NFL numbers. And I do think that we're probably looking at it -- we were always probably looking at a '24 occupancy, physical occupancy of that asset as the year went by in '22, and we saw where the activity was. Harout, do you want to comment on that? Sure. What we don't want to do is really do what you're trying to do right now, which is selectively add or remove certain assets that comply with our same-store policy, right? So in -- regardless of these assets, they were supposed to come in as our policy states, which is Harlow, One Westside and 5th and Bell and that's all being removed is because of a change in use. You noticed that Skyport is in the same-store because there is no change in use in the asset. And I don't think selecting one asset versus another to see what the impact of same-store is beneficial to anyone. However, if we ignore both Skyport and One Westside and leave 10950/10900 out our same for cash NOI would go up by 5%. So I do think that cherry picking certain assets doesn't move any of us. This is our same-store pool. And this is what we've guided on. We are -- I was just going to segue over to your question on occupancy. We started last year with 2 million feet of expirations beginning in '22 and signed 2.1 million square feet and that kept our lease percentage close to 90%. This year, we start with less expiration than we did last year. We're about 1.6 million square feet, but there are some pretty sizable expirations as part of that NFL and block being 2 decent-sized expirations. And so our view is that -- and we have 2 million feet of activity in the pipeline now or close to that. So we expect the full year leasing activity to be healthy on -- but our view is trying to pinpoint some ending year lease percentage, a bit of flow therein, because it's so tied to our success of either backfilling one or, let's say, the block space, for example, can fairly materially move the needle as of any moment in time. But I think we're set up to have a really successful year in any event. Right. And again, I don't want to hark on the moving assets [indiscernible]. It just seems to me that if there is potential office demand for NFL? I mean, I know you have your own same-store policies, but if that were to get leased, one would think that, that should still be in the pool. But I understand you have your own metrics for quantifying which is in or not in the same-store pool. And then one more, if I could, just quickly. Victor, you mentioned in your prepared remarks just a comment on transitory effects in the environment right now. I guess can you expand on that? I mean, is the long-term assumption that we go back to what the office was like at a pre-COVID level? I just found that they used the word transitory is sort of interesting, just given we're sort of in this what I would interpret as more permanent sort of hybrid -- remote hybrid work environment. If you could expand on that a bit, that would be great. Yes. I mean listen, I could sort of tell you what we're seeing on the ground region or region all the way through. But the reality is we are definitely in the latter stages of post-COVID and some sense of normality where the majority of our tenants are 3 days plus a week and some are fully up to 5. Some of our tech tenants are fully 5 days a week. Some of our fire-related tenants are 3 days a week. So on the average, we're seeing that. And we're seeing that shrink -- that number shrink from basically an overall 75% pre-COVID occupancy level -- a physical occupancy level to probably -- I don't know where that number is going to fall in place. But we're sort feeling it's going to be in that 60% to 70% anyways. And if you look at our portfolio today, I mean, we're at -- in Vancouver, we're at 75%. We're -- in Seattle, we're roughly at 75%, in the Peninsula, we're between 45% and 60% in our portfolio. San Francisco, we're looking around 25%. But if you take a look at the Ferry Building, we're at 75%. And so and in L.A., we've got assets that are 100%, and we've got our multi-tenant assets that are 50%. So the average is between 50% and 100%. So I do think that we're seeing a big shift. And that's going to continue to evolve as companies look to establish their presence both physically and then socially within their own environments and culture. Yes. I guess first on the leasing, you talked about 42% coverage on the expirations for this year, and I think you said 60% of block. Does that include leases that you've already just signed? Or is this still leases that you're negotiating. I just wanted to try to get a sense in those 2 particular instances, how much of that activity is already done? Yes. Most of it is in negotiation that we signed, I think, 3 deals, and most of that is in LOI stages right now. Okay. Victor, a second on the union negotiation. Can you give us a sense, I guess, across the studio business of how much of that business would that impact for you? Is that Star Waggons, Quixote like the whole services side as well as kind of the services you're providing or sourcing within the studios themselves. And I guess how much direct impact do you get on expenses, maybe, let's say, versus just the occupancy hit shutting the studios down? Yes, I'll start and I'm going to kick it over to Jeff Stotland because he's here also to sort of focus specifically on this. But yes, first and foremost, Dave, I mean, the unions negotiation between the 3 between SAG and DDA and Riders Union right now, it's an obvious hot button. Last time it was sort of -- contentious was right around 8. When we first owned our studios, we saw a 100-day strike -- it's a little bit of a land grab right now to see who's going to go first. Our preference, like everybody else is on the ownership, production side would be DGA because they seem to have great leadership and a direction. And so if they can get out of head and make a deal which is what we're all hopeful it may set precedent, but we don't know what's going to happen there. Specifically, we're looking time line May, June as some sort of emphatic time line when the actual strikes would occur. We obviously are not impacted by our sound stages that are on leases we are much more impacted on our operating businesses, which will produce content up until the strike occurs, and Jeff can get into a little bit more detail on that. Yes. So if the strike happens, obviously, it impacts occupancy and utilization and it's a high fixed cost business, right? So once those impacts happen, obviously, it ripples through and it rolls down to our profitability. We have 2 different sides of the business, as you know, on the Sunset brand. Most of our business, 80%, 85% of it is under long-term lease. So really, the vast -- there's much less of an economic impact on the Sunset side. On the Quixote side, which is our collection of the stages that are under lease as well as the service codes, that business is maybe 90% show by show, not sort of a short-term lease. So not under that long-term lease model. All in, the whole portfolio -- the entire portfolio is roughly 50-50. But the 2 different businesses are pretty different. I guess the last thing I would say is we look at this as, obviously, it's not great, but it's obviously fully out of our control, and it's a short-term impact. So ultimately, we do believe if and when a strike happens we expect to recapture a lot of that demand, whether it's Q3, Q4 or '24, we expect to recapture most of it. So that's kind of how we think about it. Just to recap that, about 50% of that could be at risk if all 3 are striking and the studio is shut down. Yes. Well, it's 50% of revenue. The impact to NOI would not necessarily be the exact same thing because of the cost nature of each business. But yes, 50%, about half of the revenue is under a short term and about half is under long term. Okay. That's helpful. Last one for me. Just on disposition, appetite and desire to get assets into the market currently and get those closed, to continue to create liquidity for the business. Listen, we have a few more that we are looking at. Market conditions will obviously dictate timing and pricing on that. Nothing is imminent. We did take our Arts District assets off the market last year and have not looked to revisit to bring them back at this time. But we successfully executed on our most recent disposition, which was last -- which was done this quarter, but we executed last year, and we closed it this quarter. So I think you could sort of anticipate that we'll let you know when we bring assets to the marketplace because we're not going to do them on our own. We'll bring third parties and it will be public, just like it was at the Arts District. Great. Just continuing on the studio business, you guys have increased the mobile studio business. So just want to know more about that. We've gotten used to the way the regular or the traditional downstage business works through the year. But now that you have more mobile studios, I want to understand the seasonality of that? And then also, just the depreciation, more of that is not an add back. So Harout, just as we think about the guidance and what's in there, any sort of adjustments that we should be mindful to make sure that we properly account for the depreciation now that we have sort of a full year of the big studio -- mobile studio platform. Thanks, Alex. So we provided that in the guidance section in the chart, we've kind of illustrate what our range is for 2023 in terms of the non add-back of depreciation or not real depreciation to be more precise. So that's in our guidance and the Q4 number is probably the closest to our run rate you'll see just because it has a full quarter of Quixote and obviously, the formerly Star Waggons and Zio products. So that's all in that number and the guidance is probably is our best indication of that. Yes. In terms -- Alex, in terms of your first part of your question, I mean, listen, if you recall, when we first got into this industry and this business, we were really running show-by-show variability, and we converted over to long-term leasing. So it's exactly what it was. I mean as each show goes in and the success of the show, it will be based upon the success of the pickup. The biggest difference though today than when it was some time ago when we first bought these studios and whatever it was at 8 or 9 is that now the shows that go in on a variable basis, which are for the small screen, the series episodic versus features. They're almost inevitably always picked up for 2 years. And unlike before, it would be much more seasonality and filming would be starting sometime in early -- late spring, early summer and carry through till March, April, and there would be a hiatus. Now filming 24/7, 12 months a year. But we do see seasonality around the mobile studio business, specifically in December, usually, we see it again around August. There's been weaknesses in quarters at various different times. And we pointed that out. The stickiness is what's going to happen between the increase on location shoots and the amount of days there versus in our sound stations. And what we've tried to message around this is we're capturing both. We're capturing production on location now at a level of about almost 70% that's filmed specifically in Los Angeles. And then we're capturing location shoots in studios that are not just all of ours, but now our competitors and our friends studios because we control a substantial amount of that business. Okay. Actually, that's helpful. The second question is just sort of L.A. has done a great job over the past several decades of diversifying its economy. I mean it still obviously content, but it's got a much deeper tenant base, if you will. Do you feel that Northern California and Seattle are too concentrated? And if yes, is there anything that the local communities -- business communities are trying to do to diversify? Or in your view, the upside when tech really works more than compensates for the tech downturns as far as owning and investing in real estate. Well, listen, I would completely concur with your statement in Los Angeles. I mean I think people do think of LA as the city of entertainment, but really, it is the most diversified of all the markets we're in. And whether it's entertainment, whether it's tech, whether it's small business, whether it's fire related businesses, I mean the diversity of our tenants is much more apparent in Los Angeles. How that has trickled through our portfolio in the Peninsula, in San Francisco, in Seattle, it is evolving by just what you're seeing statistically in our portfolio and the leasing that our team did. So if you look thematically at 2022, currently, the makeup of our portfolio is about 40% tech. You know that. Most people know that. But if you look back on '22, we did about 300-plus leases. Of that, I think it was somewhere around -- from a number of leases, less than 20% were tech and from a square footage about 30% were tech. And if you look at the quarter, we did about 76 leases. And if you look at -- and this is portfolio-wide. And if you look about 17% of those leases were tech and about 30% square footage. So it's consistent that you're seeing the spread. Now what are communities [indiscernible] listen, at the end of the day, I can't sort of comment on the political environment and community community. But I can tell you, there is still a welcoming thought process for small business growth, specifically in California, specifically in the valley that is spearheaded and you saw my -- you heard my prepared remarks. I mean, the next Amazon or the next Google is coming out of the divisions of those companies with the way VC capital has always attracted those types of tenants that start small and hopefully grow big and become successful. And they're not all tech clearly, and they're not all entertainment. And so the diversity will be there. It just takes a little bit of time. But the genesis of capital is driven on the success of the companies, which in the history of Seattle, San Francisco and the Peninsula, these companies have been tech-related because that's where the success has come from. Just going back to sort of the same-store NOI question. Maybe just thinking about it a different way, is there a way we could sort of break it out that growth? And what's occupancy, what's bumps, what's free rent burning off? Just trying to get a sense of what's driving that 3% at the midpoint. I don't know if we ever got that granular on our same-store disclosure I think I illustrated earlier where if you back out the big movers, which is Qualcomm, Google and I guess, NFL, we were still having a 5% increase of our same store, and I think that's just a product of either good leasing and/or ramp-ups and free rent burning off. Otherwise, I don't think we can get into the very granular detail, especially in our Northern California segment, which is an average occupancy of what, 5,000 square feet -- yes. So it's really hard to really break that down. But that's kind of the big picture of it. Helpful. Does that then just yes, I think that's helpful. Just moving on to sort of the leasing, I think you talked about sort of the $1.9 million pipeline that's in focus right now. Can you talk about sort of what the tenants are saying? I mean you hit on the Amazon thing, which has been in the news and so for just how are you guys sort of thinking about that? How are those conversations going? Well, let me sort of start by -- given the accolades of the leasing team. I mean 2 main square feet in '22 was literally end-to-end combat. And so when I just mentioned, Ronnie, that we did over 300 leases. I mean that was a lot of hard work. I think that's indicative of where we sit right now. We are still in a headwind position where tenants have choices. And so they're looking at the availability of space, the likelihood of the landlord to be able to write a check for TIs and the ability to execute at their time line, not our time line. And never before we've seen such a delay of tenants that are interested in the leasing space, but haven't committed because they don't have to until the absolute last minute. And if they're a leading space to come to our space or others, their current landlords are laying extend and hold over when times in the past, they said the holdover ratios are 150 or 200 over rent, and you have to pay that. Now they're waiving that. It's an absolute flat and you can take more time and make your decision. So with that as a backdrop, on our 1.9 million square feet in the pipeline, as Mark indicated in his prepared remarks, 400,000 feet -- sorry, 300,000 feet of that is 2 tenants at block. And so that takes us -- and there are 2 tenants, one's 250 and one is a little over 25%. Those 2 tenants, we are working hard on those 2 tenants. But if you take the next million fit, I can let Art sort of address that. Yes. I mean, Victor, you're spot on. I mean, the 1.9 is a very healthy level, as Mark had indicated earlier, that we carry in -- be mindful of the fact that we had just finished leasing 500,000 square feet plus. And so our ability to reload the pipeline in this environment has been a feed for our team on the ground. And so we do anticipate the demand to be a healthy level going forward because of the successes we've had. But that remainder of the square footage that Victor was talking about, I mean, we're chiefly talking about tenants that are roughly about 6,000 or 7,000 square feet. And these tenants have dominated most of the markets, I will say, with the exception of Silicon Valley where it's still tech driven. All the other markets have seen an uptick -- a significant uptick over the last couple of quarters in fire and -- fire sector and professional service firms. And as a matter of fact, it really -- which was shocking 2 quarters ago, that set those 2 sectors surpassed tech in the Seattle market. So those are the types of tenants we're looking at right now. And as you might imagine, this demand generally favors our portfolio. Why? Because we have our VSP program, which is the market-ready suites that have been super successful. I think as we build them out, we've over time, least submit an 80% clip. And so that's why we feel really bullish about the small tenant to be back in the market. So there's been a number of big tech firms coming out recently stating that they're planning to cut back on their office footprints, Google being the latest I know that your leases with Google are longer term, but I wanted to understand if you see any risks of subleasing or lease termination from them as they're your largest tenant in the portfolio. Yes. Well, listen, we're in constant contact with Google, and we have obviously several leases with them. I think we have not seen any indication of subleasing in any of our assets with them to date. I think in one of our assets, we have an early term at the end of '24, which is Hillview, and I think that's about 200,000 feet or so. And they've had some chat about keeping half and maybe terminating half, but that's moved because it's the 3 different departments. That's moved around. I think that's the only conversation that I can recall that our team has had to date. And as I said, that's at the end of 20 -- No. I mean listen, the only other one in the portfolio that everybody already knows about is Uber because they're at 1455 and they expire in '25. And into '25. They've been trying to sublease their space and one of the transactions that we're working on will include part of that, but that's it. Got it. And can you spend a bit of time talking about the Skyway Landing sale you recently closed on the types of buyers that you were seeing? And any color around how pricing came out versus your expectations? Yes. So I’ll just take that a little bit if you recall, we detenanted the building to approximately, I think, 30% occupancy over the last year plus in – on the ability for us to maybe convert this for life sciences for either ourselves to do or for a particular buyer. So the life science interest buyers were who was looking at this asset. I think we sold the asset for about effectively vacant for about 400-plus a foot. And so we’re pretty pleased with the number. And – and I think as a result, the execution was one that’s – in today’s marketplace, we did not entertain where we ask to carryback financing. So I think it was clean. Mark, do you want to add to it? Yes. I mean just in case you want it for your numbers, that’s less than a 1% GAAP and cash cap rate on Q4 annualized. So it makes effectively no difference to our operating results going forward. And as Victor points out, we did north of $400 a foot on the sale. So good execution on that. Going back to the same-store NOI guidance for this year, I wanted to see if you could break down the impact between office and studio for the components? Yes. Nick, we're guiding without that. We don't think -- I mean, first of all, our peers are not separating out when they have multi or whatever in their numbers, right? On life Sciences. I mean, suffice to say, office is the vast majority of that same-store NOI. And to get to the 3% at the midpoint, office would have to be darn close to that number to begin with. It ought to give you a pretty good idea of the composition of the 2 numbers. Okay. Got it. And then, I guess, just following up on that, in terms of I know you talked earlier about it's hard to forecast where the lease rate might be for the portfolio at the end of the year. But maybe you could give us a sense for an actual like a same-store office occupancy type of number that's embedded, the change in same-store office occupancy embedded in your same-store cash NOI growth. Look, Nick, I respect the tenacity. But look, we didn't -- if we were going to guide to it, we would have guided to it. Okay. All right. Just one last question is going back to 1455 market and the tenant, the prospective tenant you're talking about there. I guess at this point, are there -- is it solely reliant on that one tenant? And I think in a pithy might have said it's a government tenant. And so I'm just trying to figure out sort of the likelihood of risk of actually that deal getting done. Listen, I can't tell you if it can get done or not. We're the only place that they're looking at, I'll say that. And so it either makes or it doesn't with us. So I think I'm not going to put a number on what it is. We're hopeful that something comes out of it. And if it doesn't, then we'll figure something else out. But to answer your question directly, that's the only one tenant of size currently today that we're entertaining. I wanted to ask about your fourth quarter cash same-store growth, which in office was positive at 1.9%, but you also had occupancy drop 510 basis points year-over-year is a big, I think, headwind to overcome. Were there any onetime items in there, whether it's termination fee or free rent burn-off that really helps to this quarter's results? There were -- if there are any termination fees, there are probably de minimis. So I don't think there's anything in there. And it's a combination of partial quarter increases in occupancy and rent bumps. So there wasn't anything as I recall, onetime in those numbers that would drive it. It's just rental income. And maybe a collection of some rent stats basically rent burn off. We really haven't had much material termination fees unlike many of our peers, just not -- haven't played much of a role in our numbers. And the last time we had a big one, we were very clear on calling it out everywhere. So people understood the impact of them either in same-store or total even FFO. Can you talk about -- this might be a little bit premature, but can you talk about the conversion opportunity at the NFL Culver space whether it's multifamily or condo conversion that you're contemplating? And whether or not you're looking at other assets in your portfolio for either resi or life science conversions? Yes. Maybe a clarification around the conversion. What we're exploring at 10950 in Culver City is really a full redevelopment. It's not we're not additional taking 170,000 feet in sort of converting that to residential. Rather the upzoning that's currently underway in Culver City is to densify sites along transportation corridors. And we think our site could support as many as, say, up to 470 units. There are comps within, say, a mile radius of us that are good residential comps that are under development today that point to valuations for our site at that density level, it's somewhere maybe double our current GAAP basis, which is why we think it's a compelling opportunity to pursue. As for other conversions, it's obviously happening in various markets, residential conversions, more on B or even C quality type real estate. We don't really have that within the portfolio. We are looking at sort of what it entails to convert on assets that may be physically are well situated for conversion or maybe happen to be in markets that have nearby residential so that we're at least informed about what the opportunity for conversion looks like, but I don't -- I mean, I think we -- Victor has said on past calls, I don't think we think there's much of our existing portfolio that's a real candidate for conversion given the quality of the assets. Okay. Just one more for me on your dividend and your decision to maintain it. I think it's refreshing you're not going the herd necessarily, but how committed are you to maintaining the dividend for the year just given you're trading a 9% yield and you might have some use of proceeds on retaining that capital? And listen, we're completely committed to maintaining the dividend. I mean, you can see where our AFFO ratio is right now. It's one of the lowest we've had, I think, in quite some time. And I think it's whether we're following the herd of our we're creating our own, the reality of the situation is the amount of differential here for access to capital, given our liquidity position right now is not materially -- there won't be a material change if we lowered our dividend. And we just think that given this is hopefully an indication of the strength of the company, one and two, the position by which we're going to take going forward, which has been consistent throughout I mean at one point, last year, we were having conversations about increasing our dividend because of our AFFO where it's going to. And Harout, do you want to comment? Yes. I just wanted to add and not to take away anything that Victor said, we always evaluate our dividend policy and coverage and factor in current economic conditions, leasing activity, interest rates, everything that we also put into our guidance. So -- and again, thinking through all that, we've decided to maintain our dividend in the short term at least whether or not we increase or decrease later on is something we evaluate on an ongoing basis. Just wanted to go back to the commentary on Google. I think you mentioned Hillview as a potential early termination. But other than that, are there any other chunk here at least that we should be aware of that's coming up by end of 2024 that could potentially move on? No, there's nothing to the end of '24. The next lease is probably Foothill in 2025 sometime maybe. But it's in our supplemental lease expirations. For Google, yes, it's all laid out in our top 15 tenant listing and has all the breakdown of all the leases there. Okay. That's helpful. And then, yes, just since you mentioned Google again. what kind of utilization are you seeing at the different spaces like the leases? I think we'll -- I know at Hillview, they're almost 100% because it's 2 different groups. I think at Foothill, we have 2 buildings, one -- I'm pretty sure one is fully occupied. One of the buildings, I believe there was vacancy there that they never built out, but not a tremendous. I thought it was -- I'm going off memory like 20,000 feet or less, a little bit more. Got it. Okay. That's helpful. And Harout, I think you might have mentioned this when you were talking about guidance. So you're not baking in any potential strike on the studio side that's in your guidance right now, right? Okay. And what kind of FFO impact would there be if, let's say, the strike took place and then there was minimal kind of production for back half of the year? Yes, so I would say rather than attempt to quantify this now if the strike materializes because again, we don't -- we're not like 100% certain that it's actually going to materialize. But if it does, -- and it wouldn't really officially start until May 2 because the contract expires May 1. And I think we have our next earnings call like May 3. So Probably at that point, we'll have a better sense of the timing and the impact, maybe we can give you a better sense then. But right now, it's premature. Just curious on a capital -- from a capital allocation perspective, any desire to start some of the developments that you guys have laid out in your prepared remarks? Well, I think we did -- yes, we indicated that there's no -- we're not anticipating a near-term start on what are really kind of -- on the office side, we've got Burrard. We're monitoring it. We'll make sure it's ready to go if the market conditions support it or if we had some significant pre-leasing. The studio side is a bit different. We're pretty far along. We're fully entitled on Waltham Cross, which you'll recall is studio development site that we own in partnership with Blackstone, we own 35% of that. That one could start. Again, we're monitoring it. Market conditions remain very good. We are out looking for construction financing, which we'll have to -- we don't quite know yet how that pricing is going to shake out. But that it is feasible that, that could start this year. But other than that, we don't have any other near-term starts. Yes. So the spot mark-to-market across the entire portfolio consolidated is about 2%. The 2023 mark on expirations is about 4%, both positive. Just wanted to follow up on 2 specific tenants. Just see if there's any update on thoughts. One is just Salesforce given the news of them restructuring or terminating leases. Just wondering if there's any specific update you have on your sales force leaves. And then WeWork as well. They've already, I think, given back 40 buildings last year or 40 spaces -- any update on just how the WeWorks spaces are performing? So I mean, sales force, we still have a considerable amount of time on that lease. I mean, with the earliest expiration of 83,000 feet, not occurring until middle of 2025, then we have like sort of 2-year staggered expirations thereafter. It's fully subleased to Twilio. So I mean, there's really nothing immediate to update you on a sales force. Let me just add to that. Not only is like Twilio, it's somewhat an above market rate. So the idea of sales force returning that and giving up their upside profit would be strange. Yes. I'll clarify. Not necessarily above market, but above the underlying directly. So we're sharing in the profit of that. So Salesforce highly motivated to do whatever it can to maintain that lease. On the WeWork front, we have 4 locations with them. They've approached us and we're talking to them. For the time being, there -- they look to be pretty profitable on at least 3 of those locations, and they seem pretty incentivized to do whatever they can to maintain those locations. The fourth is that 1455 market, that one's been -- even though they've had higher attendance there, apparently, they're not generating quite enough membership. So we're in -- that one, we probably end up being in more of a negotiation with them at some point. Okay. That's helpful. So maybe I guess what you're saying, part of WeWork or 1 of the 3 could potentially be terminated or given back. But as of now, 3 of them are performing really well. Is that fair? Yes. I mean, at least really well, I suppose, is up to WeWork to decide. But from the financials, we review, they all look to be profitable. Okay. And then just on back to the occupancy, I respect that you can't give a specific number, but I'm just looking for like guardrails or ultimately just ranges. Assuming you do very new -- very little new leasing. And you -- we all know the known move outs as well as the expirations that are there in the book today. I'm just wondering like as a spot occupancy, if you can clarify where was spot occupancy on Jan 1? And if you were to do no new leasing or no new backfilling, can you just give us sort of the a range or sort of where you think the low point could be just trajectory-wise? It just would be helpful because -- it's tough to just say -- I'm going to stop you now, okay, because we're not going to go here, okay? You're the fourth guy in this call has asked the question, the answer still is the same, okay? It's the same question if you say, give me the high end. What's the best case scenario? We leased out 1.9 million square feet. We're not going to do that either. Let's go on, okay? Okay, fine. I mean, I guess, ultimately, for real estate, there's occupancy and rent. So it's just hard for us to sit here and say, where is it going to be? But I guess we'll be helpful if I be in midyear or you can give us for that. Maybe just last one on FAD. I guess the -- your comment was around this year, at least, you're committed to the dividend. If I just look at sort of CapEx, assuming similar CapEx levels that you saw last year, is it safe to say like based on your FFO range, a FAD of -- if my math is correct, FAD of around 130 to 140. Is that the equivalent to what you've guided to on FFO? We -- I mean, we can run the numbers. I mean, I guess if you're backing into it that way, I'm sure those numbers work. But first of all, I think when you say FAD, you mean AFFO, right, in my mind it's different calculations. But yes, I mean, look, you're sort of extrapolating which is fair, right? You're looking at FFO kind of year-over-year change on that and what that might imply in terms of AFFO. There's a lot of other adjustments, as you know, that make the correlation between FFO and AFFO a little trickier to pin down. I would say maybe to give you a sense as we look at the model between Google and Company 3 cash rents commencing this year on -- those significantly mitigate the impact of vacancy like Qualcomm, NFL block and should help us maintain an AFFO level pretty close to 2022, and that -- we have to normalize TI and LC spend in order to kind of get to that level, which is totally reasonable. I want to point out, by the way, because I think it gets lost a little bit as people think about just maybe the trend on FFO and AFFO, can be you can lose track of what's going on directionally in terms of TIs, LCs and net effective rents because those have a much more profound impact over the long term. And if you -- and especially if you look at the -- what's going on directionally in terms of average lease term, our leases signed in '22 were 17% longer than they were in the prior year. So we're elongating our leases. They were 5.5 years in '22. And I think what happened in the most recent quarter is also really important. Our TI costs were 36% below what they were in Q4 of '21 and 57% below on a per square foot basis than they were in '19. So I think these drivers of AFFO -- and I think that gives you some sort of some comfort in terms of how our coverage could trend. Operator, we're over our time limit. So I want to thank everybody for participating in the call, and I apologize that we're slightly over what our commitment was. Appreciate everybody taking interest in us, and we look forward to talking to everybody next quarter. Bye-bye.

EarningCall_183

Good day and thank you for standing by. Welcome to the Mr. Cooper 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. Good morning, and welcome to Mr. Cooper Group’s fourth quarter earnings call. My name is Ken Posner, and I'm SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, Chairman and CEO; Chris Marshall, Vice Chairman and President; and Jaime Gow, Executive Vice President and CFO. As a quick reminder, this call is being recorded. Also, you can find the slides on our Investor Relations webpage at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. Thanks, Ken, and good morning, everyone. And welcome to our call. I'll start with the quarterly highlights, as we always do. But first, I want to comment on Mr. Cooper's performance during 2022, which was obviously a very challenging year for the industry due to one of the biggest rate increases on record. Nonetheless, Mr. Cooper was able to deliver exceptional results, which I would summarize by focusing you on exactly two key metrics. We grew our customer portfolio by 23% and tangible book value per share by 29%. Relative to our peers, this is outstanding performance which validates our balanced strategy as well as the technology investments we've made in our platform and the skills, the commitment, and the hard work of our team members. And I will add that 2023 is shaping up to be a year of meaningful opportunity for Mr. Cooper. By executing on the strategy we've consistently shared with you and making the right tactical decisions, we stand to grow our customer base even further, plus put the company on the path to rising returns. Now, let's turn to slide three and review the fourth quarter highlights. In terms of financial metrics, I would point to a 200 basis point lift in operating ROTCE as servicing income nearly doubled in the quarter. And bear in mind, our current return on equity is impacted by a very robust capital base which you can see in the 31% ratio of tangible net worth to assets. Turning to operations, the servicing portfolio reached $870 billion or 4.1 million customers which, as I just mentioned, is up 23% year-over-year. And this growth plus rising rates helped push Servicing income to a record high $159 million in the fourth quarter that exceeded our November guidance of $140 million as CPR speed surprised to the downside. In Originations, as you know, we took rapid and decisive action last quarter to reduce capacity. And as a result, we were roughly breakeven in the fourth quarter, and are now on track for positive results which will be in line with what we guided you to expect. Shifting gears to capital management, we repurchased 1.3 million shares for $54 million as we continue to allocate capital, both to growing our portfolio and to stock repurchase, with the goal of maximizing investor returns. Finally, I want to mention that we've entered into a definitive agreement to acquire a registered investment advisor, called Roosevelt Management Company, and its sister company, Rushmore Loan Services, which is a highly regarded special servicer. This acquisition will provide us with an asset management platform to raise third-party capital on an ongoing basis from institutional investors who seek exposure to MSRs and other mortgage assets. We expect closing to occur at midyear following regulatory approval. And we plan to go to market in the second-half. We haven't disclosed the financial terms due to an NDA with the seller, but the cash outlay is not material. Now let's turn to slide four. I'd like to spend a moment on developments in the servicing industry and, in particular, what we see as an unprecedented volume of MSRs coming to market. The chart on this page shows you our internal analysis on the size of this opportunity. In summary, we're estimating that nearly $4 trillion will trade over the next three years, which on an annual basis is nearly double the historical run rate. Now bear in mind, this surge in volume is taking place in the context of a concentrated market with a limited number of buyers. And as a result, we expect pools will trade at very attractive yields. And in fact, we're already seeing some of the highest yields since the Great Recession. Let's talk about what's driving the market as I'd point you to two industry trends. First, during the pandemic, we saw a very noticeable change in originations behavior. Simply put, they chose to retain a much higher volume of MSRs than their historical practice for the obvious reason that they were awash in cash and they could afford to retain the servicing rights. Today, however, originators are facing the worst margins in years. In fact, we're expecting for the first time ever to see three consecutive quarters of losses in the MBA quarterly origination performance survey. And this also means, for many operators, that liquidity is becoming a pressing need. Based on data from nearly 500 originators, we estimate there is a backlog of as much as $1.5 trillion in UPB which needs to be sold. The second trend is consolidation. You've read public statements from industry leaders who decided to shrink their servicing portfolio. And I will tell you that there are other large operators who've quietly made the decision to exit. There's no mystery about the reason for consolidation pressure. It's the critical need for scale, technology, operational skills, and efficiency, just like in most other sectors in the financial services industry. Among a handful of large servicers, we believe Mr. Cooper is in the best position of any buyer to capitalize on this opportunity. We have unmatched operational capacity to onboard large portfolios. We have industry-leading recapture, strong relationships, ample capital liquidity, and a sizable scale advantage. Now, let's turn to slide five and talk about key investment themes for Mr. Cooper in 2023, starting with this MSR growth opportunity which will include both acquisitions for our own account and our sub-servicing business as we partner with investors. Additionally, when we closed the acquisition of Roosevelt and Rushmore, our asset management platform will generate sub-servicing plus investment management revenues from investors who seek exposure to MSR economics but don't have the infrastructure or licenses necessary for direct ownership. Let's talk about the second theme, which is earnings visibility. We've benefited from a very strong ramp in servicing, and we have clear line of sight into continued profitability. Specifically, we're now projecting more than $600 million in servicing EBT this year. And I'd emphasize, with the vast majority of mortgage customers well out of their money, this income stream will persist for years to come absent a major rate move. At the same time, we're laser-focused on driving operating leverage, as Chris will comment on in a moment. Now let's talk about our Originations segment. As we all know, the refi market is limited right now, with most customers well out of the money. Nonetheless, our platform is profitable and extremely scalable, as you know from watching us in 2019 and 2020. And I'd add that we're continuing to invest in automation and other enhancements which will put us in position for the next turn in the cycle, whenever that may occur. Finally for Xome, following a slow fourth quarter, we're now seeing stronger activity, including record net inflows and higher pull through rates, which suggest we may finally be passing through an inflection point. Based on our latest data, we're projecting a visible ramp in the second-half of the year, which should drive progress in our monetization strategy. To summarize, we're really excited about the opportunities in 2023. And we couldn't be more pleased with how we're positioned. I want to close by thanking every single member of our team for your commitment to Mr. Cooper's customers, your tireless work, and your enthusiasm. Thanks, Jay. Good morning, everyone. I'm going to start on slide six and talk a little bit about the Servicing portfolio, where you can see we really had a fantastic quarter. Total UPB was up 23% year-over-year to $870 billion, which represents the mortgages of 4.1 million customers. During the quarter, we purchased MSRs with $23 billion in UPB at excellent prices, demonstrating that we continue to maintain a very disciplined bidding strategy focused on portfolios with quality collateral and attractive yields that we're confident will help us drive higher return on equity. With our scale, we see virtually every deal in the marketplace. And more often than not, we're the seller's first call. And because of our long history as an acquirer we have vast amounts of data on how different types of seller portfolios have behaved, allowing us to form extremely accurate assumptions about credit and recapture performance. Now let me share a little more context on our acquisition process. In our most recent backtest, we reviewed the nearly 300 deals we were offered over the last two years. And over those deals, we elected to analyze about two-thirds, and then chose to bid on a little under half. We ended up winning 23% of what we bid on or 11% of the total deal flow. And going forward, we'd expect those ratios to remain relatively constant. We have a very good feel for what will come to market, and an even better feel for how those portfolios will perform, which is critical to earning our target returns. And I'd also point out that our backtest validated the accuracy of our underwriting, with 85% of our acquired pools modestly outperforming our deal models, and only 15% are delivering less return but only by a very, very small amount. Now turning to sub-servicing, we grew the portfolio sequentially, despite the de-boarding of $20 billion of UPB from a single client, which we mentioned to you last quarter, but at the same time we won two new clients. Having said that, some volatility in sub-servicing balances should be expected over time, we're privileged to service portfolios for some of the most successful companies in the industry. And we're committed to delight each one of them. But we also know our strategies won't always be perfectly aligned. In the long-term, we see significant growth opportunity in sub-servicing and to help maximize that potential, we've recently appointed one of our most experienced executives, Bryan Budd to Head our entire Sub-Servicing business, Bryan's charges to grow our portfolio with the best clients and to do that by ensuring that our best-in-class service gets even better. Now, moving on to slide seven, I'd like to highlight servicing earnings, which were very strong in the quarter, nearly doubling $259 million as a result of higher balances, lower costs and lower pre-payments. As Jay mentioned, CPR's surprises to the downside, averaging 5.3% for the quarter, and even dropping below 5% in December, which is something we've never seen before. For 2023, we expect to generate more than $600 million in EBT and I comment that we have very clear visibility into these numbers. If you remember our guidance, at the end of Q2, we told you to expect servicing earnings to double in Q3 and that double again in Q4. And that's almost exactly what happened. Just like those last two forecasts, our projections for 2023 are based on nothing more than the forward curve, which assumes the Fed funds rate reaches nearly 5%, mortgage rates settle in around 6% and CPR speeds average slightly under 6% for the year. Additionally, we have several initiatives underway that promise to reduce costs, while significantly improving our customer experience. And if you turn to slide eight, you'll see a chart with a multi-year perspective on our servicing efficiency ratio expressed in terms of basis points of the portfolio, you can see a very impressive trend with this ratio down 44% over the last five years. And just in the last year alone, our portfolio growth of 23% significantly outpaced expense growth of 13%, helping to shave another basis point off the ratio. Our strategy is to proactively drive down costs, so that we can realize positive operating leverage as we grow the portfolio while deepening the competitive moat between us and peers, to the point that no one will be able to compete with us. In pursuit of efficiency, we've developed innovative technology applications, and we obsess over process improvement. I personally spend at least 50% of my time every week evaluating process improvement opportunities. And I'd add that over the last two years, we've identified close to 100 separate processes with gaps or excessive variability, where improvements will drive down both lower expenses for us and better experiences for our customers. Just in 2022 alone, we drove a 16% reduction in inbound calls, a 31% reduction in customer issues. And by the way, a 75% improvement in compliments, all while growing the portfolio by over 20%. This slide lays out some of the many projects currently underway. For example, we have an initiative in place to drive down call volumes through for the implementation of AI, which will predict which customers will call us and why so that we can send them information proactively. We're also working to encourage better utilization of our state-of-the-art IVR as well as web tools and chat functionality. Payments and escrows remain focus areas where we believe we can further simplify the customer experience with easy to understand that more timely information, which will lower costs and delight our customers with a personalized friction free process. Now many of you have asked about the risk of a credit cycle change impacting returns and our response would be first that we purposely carry excess operating capacity to absorb higher levels of loss mitigation activity. And second, we would look at a higher delinquency environment as an opportunity to grow our Right Path special servicing business. As you may recall from our comments last quarter, we're very selective in the pools we acquire, focusing on those with very strong defensive quality. And for now, I have observed there are delinquencies barely moved in the fourth quarter, increasing sequentially by only 3 basis points. Now, let’s turn to Slide 9 and discuss the origination segment which is a critical component of our balanced business model. Last October as mortgage rates were trending higher, we took additional action to realign capacity to a much smaller market which included taking the difficult but necessary decision to eliminate over a 1000 positions. Most of which were in originations. Thanks to this decision, we were roughly breakeven in the fourth quarter. And are now on target to earn approximately $10 million in EBIT for the first quarter, which is consistent with the guidance we gave you last fall. And we feel good about driving these numbers higher if mortgage rates settle in at meaningfully lower levels or if MBS pricing improves. As for now, it’s a relatively small market as you know with very few customers in the money for rate and term refinance. We fine-tuned our marketing campaigns to focus on that subset of our customers who can benefit from Refi products including cash out. And at the same time, we are finding ways to drive incremental efficiencies which will pay very significant dividend when the market eventually recovers. I would add that that thanks to the company’s overall profitability and cash flow, we are able to continue investing in our originations platform. As you recall, Flash is our project to digitize our originations workflow. And I am pleased to report that in the fourth quarter we achieved our goal of extending Flash processing to 70% of our refinanced volumes. And now, we are working on it driving implementation to 100% which would also include purchase recapture which is an area of strategic focus for us. Flash is one of many innovative applications developed by the company in recent years, including the X1 title underwriting engine which we monetized in our sales of the title unit two years ago, our Pyro document processing engine, which gives us a huge advantage in rapidly due diligence and on-boarding large portfolios and which we are focused on licensing right now, and our native cloud-based servicing application suite which we sold to Sagent last year. And by the way, I should mention that Sagent just completed an agreement to integrate the FINSEC core that Pfizer just paid a billion dollars for. This is the final step in the launching a completely modern cloud-based platform that is decades ahead of the technology available in today’s market. Now at some point in the future, refinance volumes will return. And in that environment, you know we can scale and at extremely rapid pace and produce terrific margins. Now if you turn to Slide 10, I would like to share an update on Xome. In summary, while the fourth quarter was slow we are now seeing a measurable pickup in activity which leads us to project a substantial ramp in earnings in the second-half. To start with, we are seeing much stronger inflows from servicers as they are finally getting comfortable with the state and federal rules and investor guidelines issued during the pandemic. This drove stronger net inflows in January. In fact, net inflows reached the highest level we’ve seen since before the pandemic. And I would add that February is looking even stronger which bodes well for the pace of sales. And as you can see, sales were a little slow in the fourth quarter due to the further pressure on the pull-through rate which we commented on last quarter. But the good news is that so far this year, we have seen that rate begin to rise. We are also seeing stronger bidding activity, higher web traffic, and faster growth in new account registrations which together makes it feel like we are finally passing through an inflection point now that we have been through six straight months of home price declines. So, I would guide you to look for stronger sales in the first quarter and modestly positive EBT in the second quarter with a more significant ramp in EBT occurring in the second-half. Meanwhile, we continue to engage in discussions with perspective investors which we think will move forward in the productive fashion as Xome’s earnings potential becomes more visible. Thanks, Chris, and good morning, everyone. Let’s turn to Slide 11 and review the fourth quarter results. To summarize the quarter, net income came in at $1 million. At $82 in pre-tax operating income was offset by a negative MSR mark of $58 million and adjustments totaling $33 million. Adjustments included $23 million from severance and property consolidations that we mentioned last quarter and related to the right sizing of our origination business. And $10 million associated with equity investments which represents interest we took and the sale of our Xome businesses. As Jay mentioned, we bought back $54 million in shares this quarter. That drove our weighted average diluted share count from 72.9 million to 71.6 million shares, and ended the quarter at 69.3 million outstanding. Between operating income and the reduction in our share count, we saw a strong growth in tangible book value for share this year which increased by 29% since last year reaching $56.72 per share. We are obviously very pleased with these performances. And once again, validate our balanced business model. Now let’s turn to slide 12, and review our mortgage servicing rights. During the quarter, mortgage rates decreased by 29 basis points while swap rates increased by 16 basis points leading to a negative mark of $58 million which resulted in our MSR being flat at a 162 basis points. Now the servicing fee multiple which in our view is better high level comparison was at a multiple 5.1 times the underlying servicing strip in the fourth quarter. Slightly below the 5.2 times we saw in the third quarter. As you know, we have a very disciplined valuation process which includes marks from multiple independent valuation experts. We additionally benchmark our valuation metrics against the public disclosures of banks and mortgage companies. And generally find that our multiple lies right in the middle of the pack which we feel is consistent with having an accurate methodology. And it should give you confidence in our balance sheet and in our tangible book value. Now turning to Slide 13, let’s review the company’s liquidity position. At quarter end, total available liquidity remained robust at $1.9 billion, down from the record level in the third quarter, but still quite ample. $527 million of the liquidity was unrestricted cash with the remaining $1.3 billion being collateralized and available immediately. And as a reminder, the majority of our MSR line does not mature until 2024. Now during the quarter, we drew down an additional $370 million for MSR purchases bringing our total draw to $1.4 billion. This accounts for 33% of our debt which is somewhat higher than our historical ratio. Given our excess capital position, we are quite comfortable with it. In the near term, we may further tap this liquidity for value added opportunities as we continue to evaluate our overall capital mix. From a cash flow perspective, our advances remain a good story, down 17% year-over-year with over a billion in financing capacity for advances including facilities earmarked for Ginnie Mae advances. We believe that we are well prepared for credit normalization although Chris has mentioned we are not seeing meaningful pressures on our customers at this time. Our cash flow during the quarter benefited from the steady ramping and servicing interest income. And we expect servicing cash flow to remain robust in 2023. Now I am going to wrap up my comments on Slide 14 by talking about our capital position. Our capital ratio at quarter end as measured by tangible net worth assets was 31.1%, down slightly from 31.3% last quarter. Jay and Chris had commented on the massive opportunity in servicing market. And while there is no change to our disciplined and patient approach which remains appropriate in the current environment, we are now seeing a substantial rise in acquisition opportunities ranging from small pools to major transactions. As such, I would guide you to expect deployment of at least some capital in 2023 into portfolios for the right mix of collateral and yield. This capital deployment should help us generate higher returns on our equity over time. With that, I would like to thank you for listening to our presentation. And now, I’ll turn the call back over to Ken for Q&A. Good morning. Thanks for all the detail regarding the pipeline on the MSR portfolios out there. Could you provide us a framework or how to think about your decision-making on whether to deploy capital into MSR portfolios, is there certain hurdle rates that you lay out there, whether it's gross yield on the MSR or total return on investment? And then could you also help us think about do you include some level of refinance opportunity when making those decisions or maybe looking at external capital partners in order to finance those? Good morning, Kevin. It's Chris. That's a great question. And since we're in the midst of bidding competitively on a lot of things I'll answer it, but I'll do it generally. Yes, of course we look at everything you just said, MSR yields and total returns are essentially the same thing for us right now. We do consider recapture, refinance expectations, but of course for most of the pools that are coming to market right now those levels would be quite modest. But, of course, we look at them. One of the things, as we just mentioned, is we've got experience buying pools from virtually every seller in the market multiple times. So, we have a good idea how those pools will behave, even in an environment like this. So, I think we look at everything. And, of course, we do look at financial partners. We've been planning for this environment, as I think you well know, for two years. And so, we spent a lot of time building much stronger liquidity working with our bank partners to be prepared to take advantage of this opportunity because yields are very, very attractive. But, of course, our capital is finite, so should we be lucky to use our liquidity to its maximum then we're -- we will partner with other players, which we've done over the past couple of years very successfully. So, we see this as a great opportunity. We want to be able to take advantage of it to its fullest extent, but of course yields and target returns have got to fit our model. So, don't expect us to buy every pool that comes to market. We'll buy those that hit our hurdles that we know we can service very efficiently. And you shouldn't expect us to deviate from that at all. Yes. And I think, Kevin, the -- if you think about it from a return profile, again we're active as we speak, but I mean we're looking at mid-teen kind of unlevered, and in some cases higher returns. So, I think that's how we're thinking about this opportunity. Obviously that can change, but we -- to Chris' point, we see it as a massive opportunity. And we want to be patient because we do think there's going to be a lot coming to market. Okay. And then, on the flipside, I mean, I guess, you mentioned that if it's competitively bid or I mean, obviously, you're -- there's other bidders out there for these types of portfolios. But could you help us understand how deep the buyer pool may be in the current environment relative to what you've seen in the past? What I mean by that is like when you think about when you look at the tens of billions or hundreds of billions of potential servicing that could transact, how many bidders do you expect to be for those bigger portfolios or at least as a percentage relative to what you've seen, say, in '21 or 2019 or previous years? Kevin, I think the number of buyers is somewhat limited, especially as you get into the larger portfolios. So, I think you'd probably put them into three camps. You'd have the financial buyers, so there'll be handful of those, I think, that will participate. You'll have probably a few [strategics] [Ph], like us, that would participate. And then, the banks, potentially, but again I think the banks are pretty selective and are not a consistent participant in the market. So, as we step back and look at it I think we're best positioned. I mean if you look at the number of transfers that we've done, I don't think anybody's done as many or nobody's done the size and complexity of transfers that we've done. And I think that's a key ingredient because I think these counterparties, they really want a good customer experience. They want to make sure they can get approval from the other stakeholders, whether it Fannie, Freddie, FHFA, Ginnie, et cetera. And so, I think it's a very kind of limited population at the end of the day. The other thing I would say is, particularly in the Ginnie Mae side, like if you were to look at Ginnie Mae versus conventional; I think the population strength's considerably for the Ginnie Mae collateral for a variety of reasons. And that's -- we've seen that historically as well. Hey, thanks. Good morning. I've got a few questions here. The first one, does the value of the capitalized servicing retain the 212 basis points on slide 25, does that include the $23 billion of servicing that you bought in the quarter, like are there some low-coupon MSRs which get included in that or are they all current coupon MSRs? And then if you were to isolate the sub-servicing business and think about the earnings being generated there, what would you say is a good run rate or way to think about that, including the amount of operating leverage you have, like for every billion dollars of sub-servicing is there an approximate kind of pickup in earnings that you think you could get from that? And then I think Rushmore was in talks, maybe last fall, to be acquired by a different special sub-servicer. Can you talk about what transpired, what maybe led you to them, or them to you? Thanks. I think they were in talks to be acquired by a different special sub-servicer at some point last year. Hoping you can give some detail on that? We can't really comment on that. And I think, just to be clear, we're buying really the entity. And so, I don't think we can really comment the other process. But with regard to sub-servicing, I think your question was the pace of growth or profitability around sub-servicing. We think sub-servicing is a compliment to our own portfolio. We think we can continue to grow it in line with our own portfolio, as Jay just mentioned. Some of these large portfolios are going to trade through financial buyers that will seek us out as a sub-servicer because we consider our platform to be absolutely best-in-class. And in terms of profitability, we have a range of different services we offer our clients. Some I would characterize as basic and standard, some that are extremely sophisticated white label. I think we're the only sub-servicer that can provide differentiated service levels for sub-servicing clients. So, there isn't a single answer on profitability other than our sub-servicing clients are profitable. And, of course, you look at them differently because there is no real investment other than the pro rata share of investment we make in the platform. So, returns on investment are quite attractive, but obviously they're much more modest than those that we get when we buy the full strip. Yes, that's helpful. And then, I was looking at the 212 basis points of capitalized servicing retained, on slide 25, does that include the $22 billion or $23 billion of servicing you bought in the quarter, like what's the composition of that 212? Thank you. Hey, Eric, it's Ken. That's -- that disclosure is for the capitalized originated MSR. So, no, it does not include acquired MSRs. And bear in mind, we have another disclosure there; the value of the originated servicing rights at lock based on the base servicing strip was 156. Good morning, and congrats on a continued great execution. One thing I'd be curious about when you -- when you're thinking about the MSR funds or investment vehicles, I'd be curious if you're thinking about simply just managing third-party capital in the fund vehicles, or would you be willing to invest in those vehicles? And what I mean by that or what I'm kind of getting at is, would you be willing to put kind of a pro rata share of everything you buy into funds? Or would you be looking to acquire separate pools that would go into those fund vehicles? Giuliano, our intent is to use this to manage third-party capital. And we think there are opportunities for large institutional investors that have major exposure to MBS that would find MSR investments attractive. But obviously, you can't buy MSR unless you're a servicer. So, we'll seek to almost exclusively manage third-party capital. I don't want to rule anything out. There could be unique situations where we would certainly want to invest alongside those third-party investors if it made sense, but that's not the primary focus. And then, the second part of your question was -- I think that actually answered my question. I'll jump over to my next question, which is a bit more on the originations side of the platform. You have the note about roughly $10 million of EBT in the first quarter of '23. I'd be curious how you think about potential for that to step-up throughout the year just in terms of thinking about the primary drivers, it's primarily volume or where that would come from? And then somewhat related, obviously, corresponding volumes have come down significantly. I'd be curious from your perspective, is there a much greater incentive to buy both pools, if you can get more driver pricing on the bulk side and keep the correspondent business running at much lower volumes and probably higher margins from that perspective, some kind of interplay between those two different pieces. Well, as you know, we've got three channels that we acquire MSR and corresponded through our co-issue channel and then bulk acquisitions. Right now, our yields on bulk acquisitions, for the reasons Jay pointed out, there are limited buyers, and there was a lot of assets coming to market. Yields are more attractive there. But we pivot constantly. And we do have some expectation that corresponding yields will begin to pick up this year, and we've got a great team in place. But that's a fluid decision. It's literally in every Thursday meeting where we are reviewing our strategies. But I would suspect that bulk pools will deliver the best returns for most of this year. Now with regard to profitability in originations, our outlook is still pretty much where we guided you to expect things to be this quarter when we spoke last Fall. But there is some sign that rates may begin to stabilize. And I think that's the first part, right? Clients are still getting used to the volatility in rates. So, if they stabilize that, that will be one leg of things moving up. If MBS prices return to normal spreads, that's another factor. And of course, if rates settle in at lower levels, meaningful lower levels, then we could see much more material improvement. But for now, we'd rather guide you to where we have clear line of sight, there's upside, but we don't want to over-promise at this point. Yes. And I would add, Giuliano, that if you look at our platform and the investments we've made in Flash, the ability to scale up, it will be night and day versus what you saw in 2020. I mean we can scale our platform in a significant way and in a very efficient way, if so needed. So, the investments we've made have really put us kind of in a different category as we think about needing to scale up again. So, that, I think, we're really excited about. And the Originations team has done an amazing job there. But we really transformed the platform to be able to adapt quickly if needed to a more attractive environment. Thanks. Can you talk about, in your guidance for the $600 million of Servicing profitability, what that assumes for additions kind of given the pipeline that you see? Sure, Doug. We've got modest growth in that number, growth that we know we can achieve just based on performance over the last few years, the amount of capital we have. It doesn't anticipate the large bulk purchases that are potential. So, we're not committing to a number that requires us to go out and win $100 billion UPB, but -- so that's upside. I'd say the $600 million is a conservative number for the year if we have just modest growth. And I'd also point out that, as you probably know, the first quarter is seasonally low for the year. So, we'll see the fourth quarter results come down probably 10% or so just due to lower custodial balances and then return to slightly higher levels. But $600 million is a number we have a lot of confidence in. And again, with some success in acquiring some of the assets coming to market, we could see that number improve. And then on the opportunity for MSR, I guess, how are you thinking about the opportunity of kind of just buying bulk MSR versus possibly buying whole companies that has MSR that might also have some origination capabilities and how you would weigh those opportunities? Yes. I think, look, our preference would be our bias, I guess, is to buy portfolios. And if you look at our track record, we've consistently bought a significant number of portfolios over the years. We have bought a couple of platforms, and we will look at the platforms. But what comes with the platforms obviously is people, culture, technology, et cetera. And so, we approach that in a very cautious manner. So, I think our strong bias will be we continue to focus on portfolios. Hey guys, this is actually Mike Smith on for Bose. Maybe just another one on the capital deployment front, it sounds like you guys are pretty bullish obviously, on the opportunity with MSR. I'm just wondering how you're thinking about kind of balancing that with potentially buying back more stock just given the discount to book? Bose, you should expect us to continue what we've done in the past. We have plenty of liquidity. We think our stock is extremely cheap, and we've been consistently in the market, buying shares back at a measured pace. And unless things change, hopefully, our stock closes the gap to tangible book very quickly. But if it doesn't, you should expect us to continue to buy back shares. I think we're fortunate to have enough capital and liquidity to continue to do both. And you shouldn't expect any change there. Great, thank you. And then, maybe just one more on the Originations business, you guys have done a good job taking down expenses. Just kind of wondering how far do you think the industry is in terms of just pulling out broader capacity and kind of what inning you think we're in there for the industry? Thanks. Yes. I think, look, we were very proactive there, and we took out, as you know, significant capacity. But again, we also made investments where we do think we can ramp, if necessary, quickly. I think from an industry standpoint, we're probably, I don't know in the late innings. I think people have made adjustments and recalibrations. But I think there's still more to go. But I would say we were in the late innings of taking capacity out. Thanks. So, you had one portfolio running off in the sub-servicing and you had two new wins. Should we expect a decline here in the first quarter on the total servicing portfolio just because of that runoff? Or is that going to be held up fairly well just given near-term acquisitions? I think in the first quarter -- I don't expect a big change in the first quarter. It's hard to tell over time. That first -- a client that had a $20 billion runoff has additional UPB on our platform, and it will run-off as they are able to manage it, and we'll work with them to do that in a way that is smooth. But I think there's some fluidity to that schedule. And we'll give you guidance as that happens. But Kevin, we've been very successful in attracting other people to the platform. So, we don't expect any big change in the quarter. There could be some volatility either way. But long-term, we don't think that's an issue. So when we think about potential portfolio growth you have, what, roughly $60 billion -- $50 billion to $60 billion of sub-servicing rolling off and then other client wins that are going to come in that probably supplement that maybe over the next few quarters. Is that fair to say? And I think the $50 million to $60 million, Kevin, is moving out a bit. I don't think it's certainly not a first quarter. Yes. No, no, that was always going to be spaced out over the year. But I do think it's been extended a little bit. That could change, but I wouldn't consider that a big factor. Okay. And then, you made some comments about Sagent implementing some technology. It went pretty quick. I didn't quite get that. Could you give us a little more depth on what has been implemented there? And how that could potentially support your business or the potential return on investment on other MSRs, just given the technology advantage that you may have? Well, our application suite, as you know, we sold this agent, and that is a very modern native cloud set of applications that are, for a lot of reasons, way ahead of the competition. The one thing that was missing was a core. We ran on -- there's something referred to as [ELSAM's] [Ph]. It's a 50-year-old score. And by the way, every other platform out there is 50 years old. We had the only modern native application suite. Now Sagent has just signed an agreement with Fiserv to license their Finxact core. Finxact is a company we've been working with for the last two years. We were going to integrate it ourselves. And I don't want to get too far off, but Finxact is a company started by absolutely the most successful iconic software developer in financial services in the last 40 years. Frank Sanchez sold Finxact to Fiserv. Fiserv is going to replace the core in every application they have with this new core. Well, Sagent is going to use it. And so, that completes the platform. And I think it's going to be a massive differentiator because it's not -- the term cloud native doesn't mean that much to everyone, but having a modern application suite provides tremendous efficiencies for a servicer. Tasks that you had to do manually suddenly are done, is done faster. So, I won't spend a lot more time and steal Sagent's thunder, but we're very, very bullish that now that they've -- they will now be integrating Finxact into the Application Suite. It will be a massive differentiator. And you should really think of it, Kevin, it's going to be a game changer from both a team member standpoint. So, our actual servicing team members and also the customers. I mean to Chris' point, it's going to make it a much more efficient, automated, self-serve environment that will bring, I think significant efficiencies. Any way to quantify those efficiencies, I know it hasn't been implemented yet. But when you think about the stack of expenses associated, especially with labor or servicing being a fairly labor-intensive business, any way to like quantify that? I wouldn't quantify it. But the analogy I'd give you is, if you take the latest Mac and look at the power books that was out in 1990 and think about doing your work on one versus the other, and of course, it's a sea change. And it's that dramatic. So, I don't want to cite a number here. But when you think about the combination of our application in Finxact versus technology that everyone is out there trying to sell that's 50 years old, there's obviously going to be a major change in efficiency.

EarningCall_184

Greetings and welcome to the Aurora Cannabis Inc. Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Thank you, Ananth. You may begin. Thank you, John, and good afternoon, everyone. We appreciate you joining us today. With me are, CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our fiscal 2023 second quarter financial results. This news release, accompanying financial statements and MD&A are available on our IR website and can also be accessed via SEDAR and EDGAR. In addition, you will find a supplemental information deck on our IR website. Listeners are reminded that certain matters discussed on today’s conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our Annual Information Form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our analysts. We ask you to limit yourselves to one question and then get back in the queue for follow-up. Thank you, Ananth. First and foremost, we are very proud to have achieved what we set out to do several quarters ago, namely, reaching our objective a positive adjusted EBITDA by the end of the 2022 calendar year. We are confident that we can deliver positive adjusted EBITDA on annualized basis going forward. Although there may be some quarter-to-quarter variability due to the dynamic nature of the cannabis industry, and the seasonality we previously talked about at our Bevo business. Importantly, as part of our business transformation, we also completed the structural changes we had intended to make us part of our cost rationalization. These will certainly yield benefits for Aurora in both the near and long-term. Annualized savings now total approximately $340 million since February 2020, and included substantial progress in cutting quarterly SG&A to well below $30 million. Our next financial milestone will be achieving positive operating cash flow as part of our plan to build long-term shareholder value. We expect this to be a multi quarter initiative, and we will update the market on our progress to this new milestone. Looking forward our enthusiasm for the future is anchored by our number one position in global medical cannabis among Canadian LPs and the growth we've been able to sustain despite some quarter-to-quarter variability. With loyal patients and existing markets and more developing countries poised to open, we think the top line growth trend should continue. As a reminder, medical cannabis is a business we want to invest behind not only because of its growth characteristics, but because of its defensive nature in volatile times. It also enjoys enviable adjusted gross margins that consistently exceed 60%, twice that of consumer cannabis. Aurora is also ideally positioned because of our robust balance sheet and net cash position, which puts us in select company among our industry peers. This has allowed us to repurchase approximately $302 million in convertible debt in the last 12 months, resulting in about $17 million in cash interest savings on an annual basis. Finally, our investments in science, breeding and genetics have resulted in proprietary cultivars and driven meaningful improvements to yields and potency that have benefited all of our product lines. We also remain committed to furthering medical cannabis clinical research in Canada, which should position us for innovation, which will be a key factor to success going forward. So those key strengths as a backdrop, let's take a deeper dive into our global medical cannabis business. As we had expected, international medical revenue grow sequentially compared to Q1, which can be attributed to our strength in the Australian market as well as continued success in Europe. Our European business continues to demonstrate stability and growth on a year-over-year basis, anchored by the German medical market will remain number two in flower. Based on recent comments from the Health Minister, we expect further clarity around recreational legalization in Germany sometime this spring, with a potential start to the market there as early as 2025. We continue to believe Aurora's position as one of only three companies with a medical domestic production license will give us a significant advantage as the regulatory framework is developed. We are also bullish on the opportunities that lie ahead in our other key European markets, which include Poland, U.K, Czech Republic and France. While markets such as Australia and Israel continue to develop, our presence across nearly a dozen countries outside of Canada affords us relative insulation to individual economic and regulatory climates. Turning to the high margin Canadian medical market, most of the sequential growth in revenue was driven by a one-time benefit from Q1. However, even after normalizing for this adjustment, we still experience a 2% growth in revenues. We are extremely happy with this when coupled with recent cost reductions which drove meaningful improvements and profitability. Over the past several months, Aurora patients have been given access to the largest ever selection of products and formats on Aurora medical with over 75 SKUs launched in the medical channel between Q1 and Q2. These include products from our full portfolio of adult-use cannabis brands, such as Being Quickstrips, Greybeard premium flower, and new pre-rolls concentrates and minor cannabinoid oils. Notably, our Canadian medical business benefits from strong patient retention, with insured patients comprising about 80% of all medical sales as part of a concentrated market with significant barriers to entry. Our industry leading market share also remains at about 25%, roughly double that of our closest competitor. To sum up, we remain very optimistic for this segment as we are not only increasing the number of patients in the insured category, but I've also experienced year-over-year increases in basket size and participation rates. Note that only about 1% of the Canadian adult population is involved with medical cannabis. So any sort of movement makes a massive difference, but the benefits outsize to a very small subset of companies like Aurora and participate in the segment. Switching to Canadian adult rec, our Q2 revenue show sequential growth of 7%. This increase was achieved despite some temporary industry disruption and a reduced number of shipping days over the holidays. The key driver for us here was strong sales execution, coupled with a strong pipeline of innovative new product offerings. As you may recall, one of the key reasons for our acquisition of Thrive last year was their ability to manage our Canadian rec business, and we are thrilled to see our M&A strategy paying off. Finally, we plan to drive significant shareholder value over the long run. We are controlling interest in Bevo, which is one of the largest suppliers of propagated vegetables and ornamental plants in North America. We are currently repurposing the Aurora Sky facility for orchid and vegetable propagation with minimal capital investment. This will not only increase Bevo's production capability and extended shipping range in Canada and U.S., but also enable us to generate predictable, incremental revenue and adjusted EBITDA. Thank you, Miguel, and good afternoon, everyone. Before reviewing our Q2 financial performance, let me take a couple of minutes to discuss our balance sheet and cash flow. I'd like to reinforce what I said a number of times before and that is we take great pride in having one of the strongest balance sheets among Canadian LPs and are one of a very few net cash position. Of course, we're always on the lookout for further opportunities to improve through smart and defensive capital allocation decisions. As of yesterday, February 8, we have approximately $310 million of cash including $65 million of restricted cash. And we believe this is sufficient to fund operations into our cash flow positive. We have only $149 million Canadian of principal remaining on our convertible loans due in 2024. During Q2, we repurchased $135 million in principal on our convertible notes at a total cost of $128.7 million cash, including accrued interest. The debt we repurchased during calendar 2022 has resulted in cash interest saving, but now total approximately $17 million annually. We also continue to have access to significant capacity under our base shelf prospectus, including approximately $180 million remaining under our ATM program. During Q2, we issued 39.5 million shares for net proceeds of $68.8 million. The current shelf will expire in April and we do expect to refile a new shelf and ATM program at that time. And we reiterate that the proceeds from share issuance are expected to be used only for strategic purposes. Our operating cash flow in Q2 consisted of a net use of $60.6 million. But that included $15.5 million for a number of one-time payments related to our business transformation. $12.4 million for once a year payments such as insurance and Health Canada fees, and approximately a $12 million investment in working capital. So we are pleased with the positive impact our business transformation is having for our future cash flows. With the restructuring of our business now largely executed, we do not expect one-time payments to recur at these levels. And we do expect that the combination of reduced costs and increased revenue from the same footprint will be significant levers for the company to reach positive operating cash flow. At the same time, it is worth noting that there may be some quarter-to-quarter variability in operating cash flow. As we saw in Q2, when the company achieved significant increases to sales, the long cash conversion cycle of this industry means that investment in working capital may be required, which may negatively impact operating cash flow for that period. Quarterly capital expenditures were approximately $3.5 million, down 36% from the $5.5 million last quarter, and more than offset by $14.7 million of cash from the sale of our Polaris facility. Looking now to Q2 business performance. Q2 total net revenue grew 25% to $61.7 million, compared to $49.3 million last quarter. We saw strength across all business segments, while also benefiting from a full quarter contribution from Bevo. We achieved our goal of positive adjusted EBITDA generated $1.4 million. This was primarily due to growing revenue in our industry leading Canadian and international medical cannabis operations and from reductions in costs across our business, primarily in SG&A. We've now stabilized the company at a much leaner operating structure and see a real opportunity to drive more revenue from these assets in the future. Let me now address each of our businesses in a bit more detail. Canadian medical revenue was $25.8 million in Q2, up 10% from Q1. Much of the sequential growth in revenue was driven by a one-time revenue recognition benefit as more shipments than usual are in transit at the end of Q1. However, normalizing for this adjustment, Canadian medical still delivered a 2% increase. Performance that was important given that most of our final cost reductions were in the segment during Q2 2023. So looking forward to fiscal Q3, we expect the Canadian medical business to perform similarly to Q2 excluding that one-time revenue benefit of $800,000. International Medical revenue was $13.8 million and reflected a 69% increase versus Q1. The segment rebounded from Q1, as expected, through shipments to export markets such as Australia, Poland, U.K and Cayman Islands, and return to levels more consistent with Q4 of 2022. We expect our international business to deliver revenues in fiscal Q3 that are consistent with that of Q2. Taken together, our medical businesses in Canada and internationally generated $39.5 million of revenue, up 25% from Tier 1. Medical cannabis represented about 64% of our Q2 revenue, may be 7% of gross profit. Adjusted gross margin was 61%, down from 67% in the prior quarter. The decrease was primarily driven by higher sales into a certain international export market, which yield a slightly lower adjusted gross margin, but still contribute strong positive gross profit. Consumer cannabis net revenue was $14.6 million, a 7% increase compared to last quarter. The Q2 increase was driven by growth in both Aurora's premium San Rafael [ph] brand and by our value brand, Daily Special, which offers consumers a strong potency quality and price proposition. Looking forward into fiscal Q3, we expect the Canadian consumer market to continue to be fluid with Aurora's top line revenue being flat sequentially. Adjusted gross margin before fair value adjustments on consumer cannabis net revenue is 20% in Q2 compared to 25% in the prior quarter. The decrease was primarily driven by the incremental sales of value branded products we just mentioned. Going forward, we of course remain committed to maximizing profitability through low cost production and margin accretive categories and all supported by our science leadership. Our controlling stake in Bevo enabled us to recognize $6.6 million net revenue during Q2, up from $3.3 million in Q1. This increase is a result of a full quarter of contributions compared to only a partial quarter in Q1. Bevo is categorized as plant propagation in our financial disclosures. As a reminder, Bevo has a seasonal cadence with two-thirds of Bevo's annual revenue and EBITDA being realized during the period from January to June. On an annualized basis, Bevo's business is steady, predictable and supports our ability to generate positive adjusted EBITDA. Bevo's adjusted gross margin before fair value adjustment was 15% in Q2 compared to 16% in Q1. The adjustment primary primarily related to one-time [technical difficulty] impact on fuel costs, which management expects to be very transitory in nature. Due to seasonality, we would expect improved margins in the key spring and summer sales windows. Overall, Aurora has adjusted gross margin before fair value adjustments was 45% in Q2 versus 50% in Q1, still amongst the industry's best. Excluding restructuring and nonrecurring costs of $14 million in Q2, SG&A and R&D were well controlled, down 17% sequentially to $26.6 million. Notably, we have made good on our commitment to reducing SG&A to below $30 million as part of our business transformation plan, a rate that we can sustain going forward. So pulling all of this together, we generated positive adjusted EBITDA of $1.4 million compared to a loss of $7.4 million in the previous quarter. And finally, just a reminder that our fiscal year 2023 has only three quarters as we have changed our fiscal year-end to March 31. And that's in order to achieve certain internal costs and staffing efficiencies. So thanks for your interest. Thanks, Glen. At Aurora, our purpose is opening the world to cannabis. As a global leader in this very exciting industry. And in that spirit, let me share some final thoughts. First, we're very pleased to have completed our transformation plan, delivering on approximately $340 million in annualized savings since February of 2020. Our entire team's hard work resulted in positive adjusted EBITDA, while maintaining a strong balance sheet that will allow us to compete at a very high-level and take advantage of future global opportunities. Second, we've done this without sacrificing growth opportunities and our high margin domestic and international medical cannabis businesses, which remain one of the best places in the industry to invest. Third, we completed our plan during a period of volatility and uncertainty around the Canadian rec market. The good news is it continues to rationalize, which will give us added opportunity for market share improvement. Finally, our future success will be enabled by science through continued plant genetics, improving yields and better crop quality. We believe this will drive high margin, new cultivar licensing opportunities in the future and place Aurora at the center of industry wide innovation. Looking forward, we continue to focus on profitable growth opportunities across all segments, ongoing discipline in capital deployment and improving operating cash flow. Taken together, our ability to make progress in these areas will position our shareholders for significant value creation, especially from these levels. Thank you for your time and interest in Aurora. So I wanted to dig in on medical cannabis gross margins please, down a little bit year-over-year and sequentially clearly was not an impediment to you guys hitting your target for positive adjusted EBITDA, which is really, really nice to see and congratulations on that. But given the call out that the margin dilution was coming from frontier market, do you think that kind of current gross margin levels for that business are an appropriate run rate? It seems like you've got a lot of opportunity ahead of you and your mix to frontier markets might kind of stay at these levels and reclaim a little bit until there's a real catalyst in Germany? Thank you. Yes, I mean -- so, as it pertains to medical cannabis, I think structurally we don't see the margin compression that maybe you would see in the rec market. We're up to about 25% of the Canadian business. And the reimburse market, which represents about 80% of our revenues in Canada is at a healthy number that is part of the overall system. Some of that was mix, as you sort of mentioned in Canada, but structurally, we don't see anything there. When you look internationally, you also don't sort of see those impediments. And yes, there will be places, maybe where lower cost items gain a little bit of traction, but because the model is structured in a manner that most of the supply chain takes their margin off of percentage of the wholesale list and because you see reimbursement in those markets, there's not a structural reason to see margin compression. Secondarily, in the rec business in Canada, you're competing against hundreds of manufacturers, and in some cases, some that need to sell their product at a lower number. In most of the international markets, you really are competing against three or four other manufacturers because of the significant barriers to entry. So you don't see that competitive aspect where you play on price. And lastly, you really are seeing value from clinicians and physicians and patients, as they are interested in quality, which comes at a cost. So overall, we see this as a steady business from a margin standpoint. And we see consistency in market to market, and while there was a little bit of mix change that affect the overall margins, there's nothing there structurally that gives us pause. Just wanted to come back to the ATM, you mentioned you've got the remaining amount to go there. And if I caught it right, I think you also said you would anticipate renewing that. Can you just give us a sense, given where your balance sheet is already? What the thinking is? And I guess it's some amount of how much is enough? Is there a point at which you would feel like you've exhausted what you need on the ATM or something that you feel like it got a longer runway? How are you thinking about that? Yes, I think it's a great question because it's -- there's so much a point of interest right now, which is runway use of cash, what's the right amount of cash. I think, first and foremost, people should look at company's actions, maybe more so than even what they say and we've been very, very conservative in our balance sheet. Right from the beginning, when I got became CEO, the company really worked extremely hard to have a strong balance sheet. And we saw a lot of this disruption and clearly understand what using the ATM means and what that means to others when you look at it. But first and foremost, we believe that it was important for external stakeholders to see the company to have enough cash to be able to run the business, and obviously, that goes into how much cash you're burning. So we worked extremely hard and we've seen progression from at one point the company had over $100 million a quarter in SG&A, now to below 30 sort of beating the drum about our cost savings. But overall, it is my belief that the company has to have a certain amount of cash, maybe more so the normal to give people the comfort that we will be here for this inevitable upside for global cannabis. I mean, I think there's no question that at some point, you're going to see a significant amount of profitability opportunities around the globe, we believe in medical first, and the question is, who's going to be there, and we think we're going to be there. So the use of the ATM is used strategically. I think people have seen we've been good stewards of the cash, we've sold assets quickly and good prices. We've taken converts down in many cases below par. And, Michael, I think we'll continue to do three things. First, is always focus on having a strong balance sheet, so that we will have the wherewithal to be there when these opportunities hit as well as be there when potential M&A and other things happen, such as Bevo, which we thought was a great play. Secondly, we will be very judicious in our use of cash. And hopefully people have seen that here. And third, where possible, we will use it to find margin accretive and profit opportunities. And we were really thrilled this quarter, if you look at sort of cash use and where it went, that in each of our four key businesses we saw growth. And so I think you put that all together, and you can sort of see that the future will look very similar to how we've used cash in the past. Hey, thanks. Good afternoon. So I guess what I wanted to know is do you think you can achieve like strip out Canadian [ph] adult use? Do you think you can be positive EBITDA in that business considering kind of the difficult market? And just kind of a separate question, kind of how you, Miguel and the Board are looking at the business? Like I've got right now, yes, $274 million of enterprise value? Do you think that captures what the summer parts potentially is on the medical business, Canada Medical annuity? Bevo, what you can do there? And then also just the genetics investment difficult to value within the markets? And is that a consideration and something to keep in mind that potentially is a floor to consider here. Thanks. Welcome, Andrew. And I think I’m going to start with your last question first, and then absolutely not, we are strong believers in global cannabis as a macro movement and strong believers that medical cannabis in a regulated, reimbursed, compliant manner is going to be the first mover of all of that. And we are one of the leaders, if not, been leaders in that globally. So clearly, the valuation and where we see ourselves we don't think is representative of that opportunity. But we don't have complete control over that. The medical business that was built in Canada and now is finding its way all across the globe in key markets is wonderfully portable, wonderfully defensible and has extremely high margins, as I've talked about. And as we see new markets coming on, like Australia and Switzerland and Austria, those are tremendous opportunities that only a small subset of companies will take advantage of, and how people value that. So the genetics piece and the science piece has been sort of sitting there on the side all along and with having what may be one of the largest cannabis genetic libraries and what may be sort of possessing some of the most important IP around bio synthetics and others, there's going to be value in that, particularly as you get into clinical research and more value. And we'll have to see, but I clearly think our value overall. Now the rec piece, can you make money in rec as a standalone is sort of a tough question, because we see so many efficiencies and learnings and having both and it would be an easy sort of answer to say, Well, why don't you just get out of rec and focus on medical, which is really a strength for us? What you're starting to see that when you're in a market and you have both, there are significant advantages. And we see that with product lines, we see that with innovation, we see that with production. And I think really importantly, you will see that in Germany, and we're very bullish on not only the opportunities in the progression of medical, but also in rec and having that key learning facility and others and being able to be there at the beginning in medical, and then transition in rec will offer significant advantages. And so I get it's easy to sort of take the pieces of the business and compare medical and rec, but for us, particularly as the manufacturer, working with science and genetics, we see significant efficiencies and advantages in being in bulk, even if we're not going to be a market leader in every market, say in rec where we would be in medical. This is Matthew Baker on for Pablo. Thank you for taking our questions. I have a two part question. Firstly, what explains the stickiness of your market share in the Canadian medical market? And then on the other hand, why is your medical market share in Germany so much less sticky? And then as a follow-up, what are your latest thoughts of when German rec sales will begin? And do you still think imports will not be allowed? Thank you. Welcome that. So Canada, is a hard market, they're all sort of hard. But this -- the reason it's so sticky is we've made really significant investments in this, we've made a long time and we think we're pretty good at it. We have roughly a 25 share, the next closest competitor is at about a 9 share. So this is a piece of business where you have to make a lot of investments, experience matters, particularly with clinicians and physicians and clinics. And you have to continue to invest, call centers, innovation, support mechanisms, science, engagement with key stakeholders and veterans and others. And so it's just a commitment we've made, and I think you have to hit on all cylinders. And I think without being sort of arrogant about it, I think we're pretty good at it, been that in a long time long time in Canada. In other markets, some other folks got there first, and it's not always a first mover status matters. But I think it takes more time for the benefits of our program. So we're pleased with where we are in Germany, we don't have a 25 share. And there's some other good competitors in there. But again, it's four or five companies. So it's not like you're competing against 100 or 200. And so, I think, we're really pleased with that and where we sit in the German market. And as I mentioned in my prepared comments, we're one of only three companies that have a manufacturing license in Germany, which will play a significant role, we think, as they roll out legalization and for the rec. Now, in terms of rec, we're really excited about the German process. I think three primary reasons. First is they're actively engaging with the EU. And the expectation is with what they come up with would be applicable in other markets, Poland, Czech Republic, and others. And we've heard from those regulators in those markets, but they're looking to what happens in Germany and the EU. So it might take a little bit longer, but it'll be a much more substantive and much more broad reaching piece of legislation. We expect to hear some more from the regulator in late spring. And we do expect enhancements to both what we've heard on the rec side, but also on the medical side, which not a lot of people are talking about. And the current administration in Germany has a big initiative on reducing bureaucracy. And only about 30% of the patients day in Germany are able to navigate through the medical qualification process, for cannabis products. And if that was cleared up, you'd see a real big change. Point 1% of the adult population in Germany is in that system, I mentioned Canada, 1%. So any sort of change there will have really outside benefit. So more -- we'll know a lot more in late spring. And as soon as we hear something, we'll let people know. And we do expect some version of rec sales to happen day, mid 2025, which is when there's a critical action and there have been some promises made about when this is going to launch. Well that looks like, we'll see, but these things may take a little bit longer. But with a country like Germany, it may take a bit and be a little bit more long time period, but when it happens, it sticks. And so we're willing to work with them on that. Hi, thank you. Good evening. Thanks for taking my question. My question is just on [indiscernible] here in Canada. You mentioned that much of your sales increase coming from higher sales of value brands. Should we read into that, was that more opportunistic? Or is there any shift in strategy there, whereby you plan to rely a little bit more on the value segment to grow volume, and maybe accelerate growth in on the consumer side? Thank you. You’re welcome, Fred. No, no, there's no change in strategy. But I will say, one thing that people should take away from this quarter is in Aurora, almost has a unique ability to be opportunistic. So when there's a medical opportunity globally, we can take advantage of it when there's a medical opportunity domestically in Canada, we can take advantage of it. And so most of the change in what happened and Glen referenced this in his is we found ourselves in a very interesting situation where we grew some flower for Daily Special, and it came in at a 28 or 29 potency, which is absolutely a super premium potency band, but because it was already registered with the provinces, do we really have the choice? Do we want to sell it and see the benefit or do we want to hold on to it and relist it? We didn't want to relist it. And so, the reality was that product that was in extreme high potency and great quality went out under the Daily Special brands, and had a little bit of compression in our overall margin. So the Thrive team is doing an awesome job. And we do see incremental opportunities to continue to do what we said we're going to do, but where we see things hit in that rec market on the discount play, because we're focusing on operating cash flow, we'll take those advantages we can. So no, change in strategy. It was opportunistic because of unique situation. And listen, and you’re thrilled to have that and it's a testament to great genetics and good cultivation, that we found ourselves in that situation where we are thrilled to be able to have those sales. Thanks. Good afternoon. I wanted to ask about the Canada Health acquisition. I know this isn't hugely material, but $20 million in cash is not meaningless in this space either. So just I'd like to get an update on what this asset brings to the table and what the financial implications of it have been so far? Sure. I will happy to. I've been talking for a bit, Glen, do you want to talk about Canada Health in that deal. Yes, the folks at Canada Health are very closely attached to some of the key that influencers in that population, they've been extremely good at building relationships and supporting veteran patients in the medical system, finding the right medicines for them. And just actually kind of almost offering a little bit the counseling service. We thought that they're a very important part of our supply chain. And we thought since that business was so incredibly important to our profitability, we needed to make sure that we had that relationship locked up for the long-term. So I think the acquisition there is really about solidifying the long-term value of our medical business, in particular, the funnel of veteran patients and our ability to get very close to those patients, which obviously is critically important to understand their needs. And it is -- it has started paying off we actually launched a new product in our medical portfolio in the last month, a product called Valor have, which was the cultivars selected by veterans from our coast facility for terpene profile and various attributes. They picked the name and it launched and, again, it's just being that close to really critical patient population has been an important for U.S and Canada Health is a big part of that equation. Thank you. [Operator Instructions] Thank you. And the next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question. Yes, thank you. Good evening, everyone. Just wanted to touch on the adjusted gross margin again, and it'll go on, you had some prepared remarks about this. But when you kind of look at the overall trend, over the last, three, four, even five quarters, it seems like the ratio of these types of adjustments are still fairly meaningful in relation to the size of your overall revenue. So I understand the general buckets and categories, and you have in your press release here in terms of what those general categories are, but I'm wonder if you could speak to the changes of maybe what's going in and out of there. I know, historically, it was more inventory impairment. Now, there's more development costs, given that you're a variety of different growing medical markets internationally. I would expect these types of costs and these types of opportunities and challenges to continue sort of indefinitely. So I'm just wondering how you're anticipating this adjusted line moving just given that your actual, audited or reviewed statements have pretty nominal margins from unadjusted standpoint. Yes, thanks. So a couple things going in the market. They're certainly the mix across the category. Market-by-market, the margins are holding up quite nicely. So we still see a stronger medical margin as we've seen over the past several years, a number of quarters in the Canadian Medical. Consumer, the margin this quarter was generally mixed related as Miguel just described and opportunistic and certainly incremental. Don't mind the extra gross profit. And then the other key thing you were referring to, there are a couple of things in there that are hitting margins. What we adjust out of our margins are fair value adjustments, of course, because that's the non-IFRS thing, but it's confusing. And depreciation, we're trying to get to a cash margin that will allow you to understand the underlying ability of the business to generate cash. This quarter, there was an adjustment for a one-time effective level [ph]. I don't know if you're following natural gas prices, but they spiked tenfold in December, due to some weather in California, and then came right back down in January. So it was just the first time never seen that before, one-time transitory thing, we thought that wasn't very reflective of the true gross margin. So we will look at kind of paint a picture for you of the underlying ability of the company to generate cash flow. I think that we will see less adjustments through EBITDA as we go forward, now that we've finished the business transformation or completed our objective there. There has been through that transformation with facility shutdowns and changes in transferring manufacturing line as SG&A reductions , so a fair amount of noise in our financials. But I think we're while [indiscernible] SG&A reduction to a fair amount of noise in our financial, but I think we're past that now in Q3, you should see the level of those sorts of adjustments coming down. Thank you at this time. We have reached the end of the question-and-answer session. I'd like to turn the floor back over to Miguel for any closing comments. Well, first and foremost, let me thank everybody for your interest and time. We're thrilled to where we are. I would say this is absolutely not the finish line. If you take anything away from this call is that our strategic plan is working and we're thrilled what we did here, but we're also thrilled where we're going forward. Appreciate everybody what you're interesting. Look forward to talking to you in the future. All the best. Bye. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

EarningCall_185

Ladies and gentlemen, welcome to the DexCom Fourth Quarter 2022 Earnings Release Conference Call. My name is Abby and I will be your operator for today's call. [Operator Instructions] As a reminder, the conference is being recorded. And I will now turn the call over to Sean Christensen, Vice President of Finance and Investor Relations. Sean, you may begin. Thank you, Abby and welcome to DexCom's fourth quarter 2022 earnings call. Our agenda begins with Kevin Sayer, DexCom's Chairman, President and CEO, who will summarize our recent highlights and ongoing strategic initiatives; followed by a financial review and outlook from Jereme Sylvain, our Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions. [Operator Instructions] Please note that there are also slides available related to our fourth quarter performance on the DexCom Investor Relations website on the Events and Presentations page. With that, let's review our Safe Harbor statement. Some of the statements we will make in today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs and expectations about future events, strategies, competition, products, operating plans and performance. All forward-looking statements included in this presentation are made as of the date hereof based on information currently available to DexCom, are subject to various risks and uncertainties and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom's annual report on Form 10-K, most recent quarterly report on Form 10-Q and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this presentation or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP with respect to our non-GAAP and cash-based results. Unless otherwise noted, all references to financial metrics are presented on a non-GAAP basis. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our fourth quarter earnings presentation for a reconciliation of these measures to their most directly comparable GAAP financial measure. Thank you, Sean and thank you, everyone, for joining us. I'd like to start by reviewing some of DexCom's key accomplishments in 2022. Total revenue grew 20% on an organic basis driven by another year of record new customer starts. This translates into more than $475 million of organic revenue growth compared to last year as we saw another step forward for CGM awareness and DexCom brand loyalty. We added nearly 450,000 DexCom users to our base in 2022 and ended the year with close to 1.7 million customers globally. Our team did a great job generating this customer engagement and growth while simultaneously enhancing the scale and efficiency of our organization. Our operations team demonstrated world-class performance this year, ensuring adequate supply in a difficult macro environment and providing on-time delivery rates of greater than 99%. We drove over 500 basis points of operating expense leverage in 2022 despite broad inflationary pressure. This was not the result of reactionary cost cutting. Instead, it reflects decisions made years ago at our company to foster a culture of cost discipline as we grow. From a strategic perspective, we will look back at 2022 as a pivotal year for our company. We advanced several of our most important initiatives, including multiple new product launches, significant access wins, new market development and a further extension of our market-leading performance in connectivity. Everything we achieved this past year helps build a foundation for years of sustainable growth ahead. For example, in October, CMS published a proposed local coverage determination that would meaningfully expand access to CGM technology for the Medicare population. This proposal would broaden coverage to include people with type 2 diabetes using basal insulin only as well as certain non-insulin-using individuals that experience hypoglycemia. This result was led by the publication of DexCom's MOBILE study and furthered by a strong partnership with the diabetes community. We heard broad support and enthusiasm from key stakeholders during the comment period and expect the ruling to be finalized in the coming months. As a reminder, we size the basal-only type 2 population at 3 million people in the United States. Between this Medicare ruling and broader commercial coverage which we expect to follow shortly, this population has the potential to nearly double our addressable reimbursed market in the United States. Outside the United States, our team has been equally focused on building greater access. We drove many positive coverage decisions from Mobile payers over the course of 2022. These access wins were in response to the strong clinical evidence we continue to generate as well as the introduction of our portfolio strategy in many of these markets. 2022 was the first time that we brought multiple DexCom products to a single market and this strategy has enabled us to significantly extend our reach. By offering multiple products, we can provide a unique value proposition that meets the specific needs of our diverse base of customers, clinicians and payers. A great example is in the U.K., where DexCom ONE was added to the national formulary for all people with intensively managed diabetes. Collectively, our international access initiatives have helped us expand our reimbursed coverage by 3.5 million lives over the past 18 months. 2022 will also be remembered as the year of G7. We received both CE Mark and FDA regulatory clearance for G7 and initiated a full launch outside the United States. The feedback from our customers has been everything we'd hope for. We are hearing consistent praise for the new features, such as the 60% smaller form factor, shorter warm-up period and more engaging and consumer-friendly app. Perhaps the most encouraging is that 97% of initial users surveyed have found G7 easy to use. We designed this product to simplify the lives of our customers and we are thrilled to see that emphasis resonating. All of this leaves us incredibly excited to bring G7 to the U.S. In fact, we began shipping this week into our U.S. distribution channels to support our rollout. We have quickly ramped up production capacity to support the launch with our automated G7 lines already capable of producing more than 100,000 sensors a day. We want to get G7 into the hands of as many people as possible. So in conjunction with our launch, we've established a bridge program to simplify access for our early adopters. This program will provide new and existing customers access to G7 immediately and allow us to go to market in a broad and expedited manner. Behind the scenes, we continue to advance our discussions with payers to build reimbursement. Our conversations have progressed very well and we are well on track with our G7 coverage plans. More importantly, we are not going to be bashful about what we think of this product. G7 is the new gold standard in diabetes technology. This is the most accurate, easy-to-use and accessible CGM ever produced and we want to share this message with the world. As a result, we will be releasing our second-ever Super Bowl commercial this Sunday. We're again teaming up with one of our most recognizable DexCom warriors, Nick Jonas, to announce the G7 is here. This is a great opportunity to connect not only with our loyal G6 users but with the millions of people with diabetes that still do not use CGM. We want these individuals, their caregivers and their loved ones to know that DexCom can help them live healthier lives. Thank you, Kevin. As a reminder, unless otherwise noted, the financial metrics presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as on our IR website. For the fourth quarter of 2022, we reported worldwide revenue of $815 million compared to $698 million for the fourth quarter of 2021, representing growth of 20% on an organic basis. As a reminder, our definition of organic revenue excludes currency in addition to non-CGM revenue acquired in the trailing 12 months. U.S. revenue totaled $606 million for the fourth quarter compared to $517 million in the fourth quarter of 2021, representing growth of 17%. Our recent momentum in the U.S. continued into Q4 as we delivered another strong quarter of volume growth and solid new customer starts. We were very encouraged by the prescribing trends we saw in the fourth quarter and we closed the year with around 75% of our commercial scripts going through the pharmacy channel. This represents the endpoint of a multiyear channel journey. And we believe our current structure maximizes access for our users as the most covered CGM and supports greater customer choice in how they access the most accurate CGM. International revenue grew 15%, totaling $209 million in the fourth quarter. International organic revenue growth was 27% for the fourth quarter. We continue to take share in international markets as the introduction of new products and access wins over the past year leave us in a wonderful position to compete for new users. For example, in response to the sizable U.K. coverage decision we received last August, our revenue growth has accelerated over the past 2 quarters in that region. Even though this was already one of our largest OUS markets, there has been a clear uptick in demand following this broad expansion of access. Our fourth quarter gross profit was $544 million or 66.7% of revenue compared to 67.7% of revenue in the fourth quarter of 2021. Foreign currency was an 80 basis point negative impact on gross margin in the quarter. Operating expenses were $372 million for the fourth quarter of 2022 compared to $461 million in the fourth quarter of 2021. You may recall that in the fourth quarter of 2021, we recognized an $87 million expense associated with the contingent milestone under the 2018 collaboration and license agreement with Verily Life Sciences. Absent this, our operating expenses for the fourth quarter of 2022 would have been relatively flat year-over-year. This represents another quarter of very disciplined cost management as we generated 800 basis points of OpEx leverage. Operating income was $172.1 million or 21.1% of revenue in the fourth quarter of 2022 compared to $12 million or 1.7% of revenue in the same quarter of 2021. Even excluding the Verily charge from 2021, this highlights incredibly strong operating expense leverage in our current year which more than offsets our step backwards in gross margin. Adjusted EBITDA was $237.1 million or 29.1% of revenue for the fourth quarter compared to $67.3 million or 9.6% of revenue for the fourth quarter of 2021. Net income for the fourth quarter was $136.3 million or $0.34 per share. We remain in a great financial position, closing the quarter with approximately $2.5 billion worth of cash and cash equivalents. This cash level provides organizational flexibility to support our organic growth opportunity and assess strategic uses of capital on an ongoing basis, such as the accelerated share repurchase program we executed in 2022 and ongoing development of our Malaysia manufacturing facility. Turning to 2023 guidance. As we stated last month. We anticipate total revenue to be in the range of $3.35 billion to $3.49 billion, representing growth of 15% to 20%. This reflects another year of strong underlying volume growth which will again exceed our revenue growth rate for the year. To help provide some insight into the makeup of our guidance this year, we recently provided some additional color around our expectations. First, earlier on this call, Kevin discussed our plans to support our initial G7 customers with a bridge program. We expect this program to impact our revenue per customer early in the year as we provide G7 access at an affordable cash rate as we build reimbursement. We expect this impact to narrow over the course of the year as broader coverage is secured. Internationally, we estimate that around 1/3 of our new customer starts will come in through the DexCom ONE platform. Therefore, this business will start to have a more material impact on numbers this year as that customer base builds. For the type 2 basal opportunity, we anticipate CMS reimbursement to be finalized for this population by midyear and begin contributing to our results in the second half of 2023. We expect this population to contribute approximately 1% of our total revenue in 2023. Turning to margins. We expect gross profit margin to be in the range of 62% to 63%. This assumed year-over-year decline is primarily related to the impact of the broader G7 launch. As with any launch, we will initially be running at lower production volumes and it will take some time for our new manufacturing lines to scale. Importantly, this is a temporary dynamic and we still expect G7 product costs to be less than G6 at scale. Despite the step backwards in gross margin, we are guiding for operating margins to be relatively flat year-over-year at 16.5% which reflects another 150 to 250 basis points of operating expense leverage in 2023. This is the result of ongoing cost initiatives at our organization which continue to drive leverage even as we allocate greater investment to support our global commercial infrastructure and G7 launch. Finally, we expect adjusted EBITDA margins of approximately 26% in 2023. Thanks, Jereme. To summarize, we are incredibly excited about the opportunity ahead with G7 and we're rolling out product to our distributors as we speak and we're ready for a big launch in the U.S. Let me ask you just a 2-part question on G7, if I could. Kevin, on your website, you talk about adding more commercial coverage for G7 every day. I guess, could you give us a number of what percentage of covered lives or lives are covered currently in the commercial channel for G7 and where you expect that to go maybe over the next quarter or two? And I think Libre 3 has now been in the pharmacy channel for about 4 months or so in the U.S. Obviously, your business looks like it's probably safe with the AID users in the Medicare channel. But for your stand-alone T1 users, have you seen any change in your attrition rate? Anything as we kind of look at that Libre 3 versus G6 dynamic that has changed in the last few months that Libre 3 has been out there? Thanks, Jeff. Yes, I appreciate that. This is Jereme. So to your question on coverage, we're still in the throes of the commercial DME and the Medicare coverage. We talked about on G7 taking about 90 days. But on the pharmacy side, we're actually a little bit ahead of schedule. Kevin referenced, we're well on track to the point where I talked about, about a $30 million-ish hit in Q1 as a result of our bridge program. That number is more like $15 million now and that's because some of those pharmacy contracts are coming in earlier. So we are making great progress and we continue to get that every day. And the signs lead to more and more contracts coming over, maybe even ahead of schedule. In terms of the question then on competitive dynamics, maybe I can start and then Kevin will obviously have a few thoughts there. We had a record new patient start in Q4. If that gives you any context to we had another solid new patient quarter. So while we have seen competitive product out there, we continue to do very, very well with G6 to the point where we have seen incredible strength there. And that's, of course, on the heels of a G7 launch which as we referenced, is coming out here in the next coming days. No. I would tell you what we're also hearing is a great deal of excitement from our user base for G7. So with respect to your question regarding how our G6 users doing, they're very anxious to get G7 and very excited to go. So we're feeling good about where we are right now. Kevin, I wanted to ask about the ramp in the type 2 basal population. I think people were a little surprised you only expected 1% growth contribution in '23. I guess, that would be about $60 million on an annual run rate. At the last investor meeting, you said you expect $700 million in revenues in 2025 from sources other than insulin-intensive patients and I think this was mostly type 2 basal. So the question is, do you still expect $700 million by 2025 from these non-intensive sources? And how do you see the ramp in the type 2 basal population? Well, Larry, our -- I'm going to talk for a bit. I'll turn it over to Jereme. Our initial estimates, it's 1% of our total revenues would come from that. And that's a reasonably sized number. We plan for July, second half of the year, approval and rolling it out from there. It may go faster than that but we've been conservative in our estimates and we will make every attempt to beat those. As we look out to 2025, that non-intensive insulin space is not just basal users. We believe our CGM product will be very valuable amongst a number of markets in the type 2 space and also in metabolic health. So it's not just basal users there. It's a lot more than that. And many of the basal users, as you well know, move up to be intensive insulin users as well. So we view that population as moving and shifting with us as they go. Sure. Yes. Larry, so the $60 million number you're referencing would assume, say, everybody started on July 1 and they went through the end of the year. The reality is that some folks will start in July, some folks will start in December. And so really, the exit velocity is much higher than that on a run rate perspective. If you were to blend it, average it over the course of the year, you're really only getting 3 months of revenue contribution. And so you kind of do the math there and the exit rate is a little bit higher than I think what you're implying. So we are really, really bullish on it. But it is a recurring revenue business. So what we need to do is get those -- get that coverage out there, get the scripts in. And so, look, I understand the question. It's a big, big market with a big, big opportunity. We plan on playing in it and we plan on playing it in a big way. But obviously, we want to be prudent around guidance. And certainly, if things go better than that, then we'll always try to do so. We'll report back to everybody. I wanted to maybe take Larry's question a step further and just kind of talk about the potential pace of adoption within type 2 basal, maybe not just this year but really more over an 18-month, 24-month period? And is it fair at all to compare it to, I guess, what attritional type of insulin diabetic population is? Is it going to be easier, harder, I guess, to drive adoption or are there guardrails on penetration? And then just because you brought up metabolic health to non-insulin diabetics, 2025 is just around the corner. So should we expect, I guess, a more meaningful impact from here as early as next year? Yes. So let me start on the base and then I can turn it over to Kevin from that perspective. And so the ramp in basal is going to be a bit interesting. We'll give you kind of the way we think about it. Think about it as -- I generally start with type 2 intensive and you think about that ramp and you think about coverage and how that takes place. And if the coverage takes place over a similar time, you'd expect a relatively similar ramp. Now, I'd caveat that by saying there's more awareness today. And hence, the Super Bowl commercial is a good opportunity for us to continue to raise that awareness. However, the place in which the basal patients cede is a wider swath of physicians. And so we don't have an exact crystal ball here. If you're using prior analogs, the best analog is type 2 intensive would be about the adoption rate. But I think as time moves on, we'll be able to give you a little bit more color. But that's kind of our best crystal ball. No. As we look out to the future, Margaret, particularly with our easy-to-use G7 platform that we're launching today, we believe our future is very bright as we deal with metabolic health. We've changed our mission statement to help people control their health, not just diabetes anymore. We continue to see very positive results from several programs who are using sensors to assist people in these endeavors. And over time and particularly with type 2 management and all the type 2 drug alternatives on the horizon, we believe CGM becomes a very important part of that health equation. And we're continuing to work on product offerings and business models. So it will be differentiated from what we do today and geared towards that population. We're really excited about the opportunity. And it will continue to mature over 2023 and then we'll see what happens in 2024. We've got a lot of basal patients to reach first. So let's go after them and then we'll continue to move to the other areas as well. Congrats on a nice quarter. Wanted to ask about the European or OUS experience. And it looks like you're gaining share, you're doing well. How much of that is being driven by G7? And what's the feedback there? And any head-to-head color you could give us versus Libre 3 in the markets where it participates? And then also sort of same question on DexCom ONE and the impact you're seeing there. I will start off. With respect to the sales and the revenue numbers, G7 and DexCom ONE are still early enough in their launch life cycle that while they're additive, they're not what's driving a lot of the adoption, a lot of the growth that we've seen in European markets. A lot of that's been what we've established with G6, the additional coverage that we've obtained, as I talked about in the prepared remarks, in 18 months, we've added 3.5 million more reimbursed lives. That being said, initial response to G7 has been everything we'd hoped for. People love the app. They love the receiver. Again, in many of these markets, the receiver is a very, very strong tool. My most recent conversation with the G7 user focused completely around the 0.5-hour warm-up. A 0.5-hour warmup has eliminated 90 minutes of the longest 2 hours of somebody's life who ever used the G6. And certainly, in the comparative front compared to the hour warm-up, again, it is a much better experience. The majority of our G6 users are new to DexCom. They're not DexCom upgrade -- I mean G7 users, I apologize. The majority of our G7 users are new to DexCom. Some of them come from the competition. Some of them have not used CGM before but they're all finding it very easy to use and having great experiences. So we're very happy with the product to this point in time. We've done very well. So I'd like to spend just a minute on the gross margin and how you anticipate those ramping throughout the year. And then while I know we're sort of early to think -- be thinking about 2024, I do think people are looking at that as sort of a more normalized margin rate and if you could sort of shed any light on how to think about that. Sure. Thanks, Joanne. Appreciate that. And you start off with, obviously, the fourth quarter. We had a really strong gross margin. I think it's a demonstration of what's to come with what our teams can do when you give them time with a new product launch. So I think as you think about the year, the cadence for 2023, we do expect in the first half of the year margins to be a little bit lower. And that's because of, as Kevin referenced earlier, the bridge program. Certainly, that has an impact. But most importantly, it's the launch of G7. Volumes won't be at where they would have been, say, in a more mature launch and we'll still be going through some of those early manufacturing scrap and yield challenges we always see. But what we've proven time and time again is if you give our engineering and R&D team time with these lines, they continue to get yields better over time. And so our expectation is as we start to exit the year in 2023, we start to come closer back to that long-term guide of 65% gross margins. And there's nothing longer term structurally that we don't believe, especially as G7 gets to scale, that gets us back to those long-term guides that we've originally provided. So we'll continue to work towards that. Think about 2023 as the first half of the year as a little bit lower. As we ramp up those lines in the back half, you start to tackle some of that absorption of those fixed overheads. Just on the bridging program, can you tease out a little bit more, maybe, Jereme, on expectations there? I think you had said $20 million to $30 million. You said you're trending better than that for Q1 which is great to hear. But I don't think you ever said how much the bridging program is going to cost you for the full year. It seems like it's going to be even better than expected overall versus maybe what you were thinking starting off '23. But then also bridging is supposed to be more of a headwind on the gross margin side, too. And if it's less of a headwind, maybe that helps out the gross margin profile a little bit more, maybe sooner than expected. So I'm just wondering like based on all these things on the bridging program specifically being better than expected, should we start to creep up a little bit more as far as our expectations for top line growth and then even gross margins for the full year? Sure. Yes. I don't think we're at a point where we'd necessarily change our guidance. But let me take your question head on which is in isolation, what does this do? So certainly, what the bridging program, what this effectively means is we have contracts in place a little bit more ahead of when we ultimately expected. And so ASPs will be a little bit higher and that's as a result of most folks going through coverage as opposed to the bridging program. So that does a couple of things. Certainly, it does help revenue and it does help margin. That all being said, we're not changing guidance for the year. But I think what this does mean is, one, it's a great thing for patients who want to access the product. We talked about coverage being a key strategy. That's wonderful. It does help longer term for those margin profiles. And while I wouldn't necessarily guide you outside of our ranges, you are correct. It does help on revenue and gross margin on the full year. And the other question was how much for the full year. We expected a majority of it, almost all of the $20 million, $30 million, in the first quarter. We do expect a nominal amount in Q2. We haven't expected any of it beyond Q2. Really, a majority of your concern would be in Q1. Congrats on a strong quarter. Wanted to ask a little bit more on kind of the backlog around the Medicare decision making. I'm very curious how physicians and patients, how aware they are of that decision, whether we might see a bolus of patients sort of come on once that Medicare coverage took place. Thanks for the question. It will be up to us to drive awareness in that community to make sure people are aware of that decision. There will certainly be those very familiar with DexCom and with continuous glucose monitoring will be aware of it and will pick it up quickly. But it will be up to us to drive awareness in both communities. the physicians and users of the product to go and ask for it and to create that environment. So we're not going to sit back and wait. We're going to have to push. So U.S. growth the last couple of quarters has been around 17%. So second half of the year, I think, was record patient growth for both quarters. So trying to think about ex the contra [indiscernible] for the bridge program if we should be seeing an acceleration here in the first quarter and the U.S. growth specifically and how that builds over the course of the year. And then on the Super Bowl ad, what kind of impact did you see on U.S. new patient starts last time you did that? Sure. Yes. So I'll start with how we're thinking about Q1. And the way we've generally thought about Q1 is in terms of full year contribution, absent any sort of bridging program, to be a very similar contributor as a percentage of total year revenue in the first quarter. So that's total company, not just U.S. total company. And then, you add the bridging program and then you pull it down from there. And that's generally how we think about the quarter which is just an indication of continued strong new patient growth. Clearly, we'll be working through driving new patients and driving growth over the course of the year. In terms of the Super Bowl and then how to think about the Super Bowl and how that contributes, last time we did it, there were hundreds and hundreds of thousands of inbound leads. Not all of those obviously translated into patients but there was a lot of interest. One of the challenges, though, if you rewind the clock a couple of years, is there wasn't as much coverage there. And so I think what we're hoping this time around is, one, the awareness is the most important thing. And the awareness, as that gets out there, will be very, very helpful. But as coverage starts to come through and we have this bridging program in place, it's a real opportunity to take advantage of it. We're not ready to give exact patient numbers out there other than to say that the return on capital is a very strong investment. And so, you should expect we do that math before we sign up for this. And we wouldn't be doing if we didn't expect a return on investment that was commensurate with what you and we would expect. Just maybe an OpEx question. It looks like it's a bit bigger of a step up implied in '23. I know the Super Bowl ad is a contributor. But just wondering if you can comment on what are the sources of the OpEx growth and maybe hit on any planned changes to the sales force in support of G7. Thanks, Jayson. This is Kevin. I'll take it, rather big picture. We'll continue to invest in R&D. Our spend will grow some but not as rapidly as it has in other years. And quite honestly, as a percentage of revenue, it's probably come down a little bit. Same with -- on the G&A side, we'll continue to invest in infrastructure and build things out for our continued growth. But a lot of that investing has been done. Our biggest dollar investment, our biggest increases are going to be on the commercial side and in all areas, create awareness in the sales force, marketing across the board, we'll be spending on the commercial side. Those expenditures will -- could adjust and move over the course of the year as we learn more. We've always been very adept at channeling those dollars where they can be the most effective. We're analyzing some of that now. We certainly have a plan but we've never been afraid to deviate from it if it makes more sense. And so we're looking at all those things. A lot of international investment this year, quite honestly, as a percentage of our investment. International is getting a bigger piece of it than they have in the past because we really look at these opportunities. We've got G7 and several of these companies combined with the DexCom launch and all those covered lives we've added. We think there's great growth opportunities over there but we've got to invest in that infrastructure. Yes. And just to kind of add to that one, Jayson, just to give you some context. We launched outside the U.S. with DexCom ONE and G7, call it, in the first couple of phases. But we have more phases to go. And so we're going to make the marketing push obviously with G7 in the U.S but there's also a second phase of G7 launchings outside the U.S. and a second and third phase of DexCom ONE outside the U.S. So sales and marketing is really where we want to put our investment and we'll get leverage elsewhere. But hopefully, that gives you kind of some context for how we're thinking about that spend in 2023. So I just want to get some thoughts on gross margin longer term. I know you touched on this year. And obviously, with the new product launch, there's some initial depression and then you get spring loaded with leverage over time. So help us think about G7 over the next couple of years. Does that expand? How can that impact gross margins with and without the potential for a longer wear label? Yes. I can start there. You're 100% right. I mean, obviously, there's the levers to get the actual cost of the product and we've been very transparent about it. We want to get to basically $1 per day and a 10-day sensor or a $10 sensor. And then we want to go even beyond that. But that has always been kind of our public goal. Then, of course, as you move to a 15-day sensor, that cost is spread out over a longer period. So we have intentions over the long haul of doing all of that. Now the math, if you do that, would indicate there's some real opportunities in gross margin even beyond potential long-term guide. The one thing we want to be mindful of is we don't want to shortchange ourselves and other opportunities to either partner or otherwise over the long haul. So while the long-term guide remains intact, there are certainly levers and opportunities for us to do well there. And so I think you're hitting on all the right points. That all being said, we really hold to that long-term 65% gross margin. That's what we'll work to. And if there's other opportunities to get fill you in on some other things we're doing in the future, we'll certainly do so. Jereme, just curious, I appreciate all the inputs that you gave us that roll up to the 15% to 20% guide. I'm just curious, have you contemplated in that 15% to 20% range any competitive pressures in the event that your competitor gets approved to integrate with a pump sometime in 2023? Yes. Thanks for the question, Matt. Yes, we do. We've considered all of that when providing that guidance. I mean, when we think about all the competitive pressures and then we think about all the opportunities ahead of us, we consider all that in the guidance. And you are right, there is the potential out there, at least according to some of the commentary, that there could be some potential pressure out there. I would say that we've contemplated it. At the same time, we feel very confident in our product offering and what it ultimately does, how it integrates and the safety features that people rely on our product for the accuracy, the ease of use. So I think we feel very confident about it. But yes, we did contemplate that in our guide. Love the update on how you guys are thinking about price. You said in the past, your U.S. channel mix could start to stabilize once you hit 75% of the pharmacy. You're there now. But you also have D1 making a bigger portion of the OUS starts which I would imagine might pull down your international ASP a bit. So can you tell us what impact price had on revenue in '22 and then how you're thinking about the potential impact this year? Yes. So we'll talk about 2022 since we gave kind of a guide there which was around $200 million in the U.S. and around $50 million outside the U.S. And the full year of 2022 was generally in line with that. It was, I think, just south of $200 million in the U.S. and just south of $50 million outside the U.S. So basically right in line with that. So I think you can feel good about what guidance we gave there. Going forward, the expectation is in the G Series, that delta -- that price-volume delta starts to come down over time. What we would expect to see is -- and we're not going to give a specific number for 2023 since most of that migration is done but we will have to lap the 2022 migration. And then if there's drift, say, 75 say drifts to 80, you wouldn't expect material moves there. But those are all things we've contemplated in those figures. To your point and I think you're hitting out the way we model the business, we model the business as a G Series and a DexCom ONE. And I would suggest you do that going forward. And then to your point, DexCom ONE modeled as a percentage of total business will allow you to then understand the contributions to ASP there which is why it was important for us to give you our expectation of new patient starts in 2023 that 1/3 of them outside the U.S. will be on DexCom ONE. So I think the way you're thinking about the model is exactly the way we model it internally and that's the way I'd go about doing that for 2023 and beyond. I wanted to ask an additional question just on the commercial strategy moving forward. I understand the DTC advertising and you doubled the sales force a few years ago. But just as you prepare for basal approval in the U.S., how does the focus or the call point of the actual sales force need to change? Do you need to make additional investments in people? Just help us understand how the targeting goes moving forward. Yes. This is Kevin. I'll take that. Jereme gave us a bit of color earlier. 75% of our calls already by our U.S. sales force are in the PCP arena. And I think you'll continue to see that expand as our team spends more of their time addressing that marketplace, at the same time, not ignoring the places where we've been so successful in the past with the intensive management diabetes. So we will look at that structure in great detail. On a geographical basis, even within the U.S., there may be some places where we need to expand geographically versus large expansion across the entire country. We'll analyze that in great detail as we go. We're in the process of doing that now. We just brought on a new Chief Commercial Officer, as many of you will remember, in early January. And she's deep in the middle of that today as we manage those thoughts and the launch and everything else going on but we'll look at it very strongly. Question on DexCom ONE outlook. Can you talk about any major new geographic regions you expect to roll out the platform this year? And should we expect to see any movement in bringing DexCom ONE onto the G7 platform this year? Or is that a longer-term play? Yes. It's a fair question. Let me just say, we're not necessarily going to give the playbook as to what countries we are going into. Now we have launched recently in Croatia, Romania and Greece for DexCom ONE. That is out there now. So hopefully, that gives you some context but we will be launching in more countries. But rather than give the playbook publicly, we'll let our commercial team execute that and give you that feedback. But just know, we will go into more countries. So hopefully, that gives you at least some context. We will go. In terms of the movement from DexCom ONE to the G7 form factor, we are absolutely going to be moving to that factor. It's going to take a little bit of time and the reason it's going to take a little bit of time is, as we get economies of scale on G6 which we have today across the existing user base as well as DexCom ONE as well as a lot of opportunity for new users on G7, we want to make sure we prioritize G7 and that form factor for those patients coming on to therapy on the G Series. Make no mistake, though, as soon as possible, right after that, we will be moving DexCom ONE to that G7 form factor. Stay tuned. We'll have some updates as the years progress on. But you're thinking about it the right way. We will move there in relatively short order. I was hoping to follow up on the pricing question. And I'm not sure if you've given a recent update just on how investors should think about the average reimbursement DexCom receives in the U.S. for a G6 or a G Series patient. And then just a follow-up on that is, will that change with the G7 introduction for one? And then two, is it important the share shifts in the pump market just considering the reimbursement DexCom gets to the DME channel with the Tandem pump versus the pharmacy channel with the Insulet pump? Yes. It's a good question. Look, I think the way to think about the ASP is it's really more about channel than it is about version. And so as you think about where folks and who folks -- who gets access, the general way to think about it is Medicare which is publicly out there, I think after the increase, it's around $250 a month. There's a delta there which goes to the distributor who ultimately fulfills that. So the net price to us is south of that. But ultimately, that would be our price in that range; that's publicly available. Generally, commercial DME is higher than that and pharmacy is lower than that number. And so that's the way to think about it. In terms of then how ASP moves over time, think about it less of generation of product and think about it more as where folks want to get their product. And so I think you're thinking about it the right way. As we talked about, 75% of our lives covered in commercial. 75% of those patients, those patients obviously then come through at a lower price point. If that drifts to, say, 80%, you could see that having a potential tick on there. Again, most of that is behind us but that's the way to think about the split there. And then in terms of pump partners and how folks ultimately access it, it really depends again consumer preference. You're right, Tandem is generally accessed through the DME and Insulet's generally access to the pharmacy. So it makes sense that folks get their CGMs through that channel. That all being said, it's ultimately consumer preference. And we believe the consumer experience through the pharmacy is great. We have some really great DME partners. They do a wonderful job fulfilling product through that DME channel. And so we believe that, that folks can be fulfilled either way. Great. If I could sneak in just a quick follow-up. Just thinking about your CGM platform attached to pumps, is there a premium reimbursement that DexCom receives in that scenario versus standalone? Or is it all consistent across the board? It just depends on the channel, as you said? I was hoping to follow up. You talked, though, the last quarter just about rolling out cash pay models in the U.S. Just curious if you could provide more color as you're thinking about that opportunity today. And then for 2023, specifically, how we should think about potential incremental contributions from that? You bet. This is Kevin. I'll take it. Big picture, our cash pay program for G7 to start with is going to be our bridging program. And people will be able to pay cash for G7 that way. Ultimately, as we get access and coverage of G7, when people's co-pays will be significantly lower than the bridging program cost, we'll phase that out and have a cash pay program on G7 that individuals will be able to access. We continue our cash pay program on G6 but that is not a major portion of our revenues. It's just a piece of them. We do this to create access primarily where people's insurance doesn't cover it and they can't get access through the federal or the other governmental channels as well. It's not a huge percentage of our revenues. We need to continue to be cognizant of it and address those patients' needs. And that's why we have it there. If I could, just 2 quick follow-ups on some of the topics that were covered earlier. So on ramping production for G7 to the gross margins and the impact and improving on scrap rates and all that. And just wondering, by the end of the year, we're sort of hitting what you say about your manufacturing and sort of representative margins maybe in the facilities that you have. And the other was just on the comment you had on contemplation or competition on the pump integration front this year. And if that were not to come, I'm just wondering, not to put you in a tough spot or anything like that or credit margin the guidance range. But if that were not to come, does that -- is that sort of a slight tailwind to the -- to the top end of your guided range or how to think about that? This is Kevin. I'll take that bigger picture. Jereme has been very familiar with the numbers but I'll give you a bit of my perspective. With respect to no competition in the pump integration point, we may pick up more, we may not. What I do know is everybody using those pumps integrated systems right now uses a DexCom. And they're achieving remarkable results with the technology we've developed over the years and we'll continue to receive such. It is our position that the experience that they're going to have with algorithms based upon DexCom's CGM that have been developed through the data and the performance of our sensor will continue to make us the leader in that space regardless of who the competing sensor is. And so we're very confident there that we will continue to have a very strong product offering going forward. With respect to the margin change over the course of the year, there's a couple of factors in there. Obviously, Jereme has talked about the bridging program in the first half of the year bringing margins down a bit because the revenue per patient will be a bit lower there when we start. But as we see that pick up, we'll pick that up on the revenue side. Then you have basal come in and Medicare reimbursement is strong; so that will help on pricing. The flip side of that is it's sometimes lost on folks, everything we do with G7 is different. All these lines are completely different. All the capacity is different. But the only thing that's the same is we're building in Arizona and we're building it in San Diego. And that's not going to be the same for a good portion of the year because we expect the factory in Malaysia to be up and running in the second half and producing product there. So you have a number of variables with respect to scrap, with respect to purchasing components, with respect to how these lines run as we get them up and running and functioning at full speed versus where they are today and then bringing on a new factory. We have tried to contemplate every one of those variables as we've started and we'll update you as to how things are going as time goes on. But whenever you do a product launch, particularly when this significant because when we did our last big G6 product launch, we had similar margin activity but it was on a much smaller scale because we're so much bigger than we were before, there's just more variables that we have to plan for. We've tried to be conservative and thoughtful in our guidance based on the performance we expect of our teams. We also expect our teams to be better than this too. We don't ever lower the bar for them, as they will tell you. But we've looked at all -- every one of those things and contemplating that and we meet on this literally every day to make sure we're covering all of our bases. This launch is really important to us as are our margins. But it's really important to get product out to all the users that want it. I just wanted to follow up on first quarter to make sure I have my modeling square. Jereme, I heard in response to prior question using the full year guide, you're thinking about 1Q consistent with seasonal patterns. The last 3 years, I have 21% of full year revenue in the first quarter. If I use the midpoint of your range this year, that's $720 million. But then you made the comment about the bridge program down from there. So that would be another, say, $15 million or $20 million for the quarter. So I'd be at $700 million or $705 million. Have I put this together correctly? If not, can you help? Sure. Yes. I mean you're not far directionally off. I mean you are right, we do expect the Q1 contribution and really the sequential decline from Q4 into Q1 to be very similar to what you've seen in the past. And so that will help you get a little bit closer as you think about sequential decline as well from Q4 into Q1. That will put you into a ballpark. And then from there, you're right. We updated our number. It's about $15 million now as a result of the bridging program as opposed to the $20 million to $30 million. But that will get you in the ballpark. You're not far off but there's probably a little bit of tweaking to do around the edges there. But use that 21% contribution but think also 10% sequential. Those little rounding differences ultimately matter in there. Hopefully, that gives you the context you need though. And ladies and gentlemen, with no further questions at this time, I will turn the call back to Kevin Sayer for any additional or closing remarks. Thank you very much and thanks, everybody, for joining us today. We spent a lot of time in our fourth quarter call talking about 2023. I want to just step back again and thank all of our great people here at this company for their hard work in a year where we delivered on our revenue targets, we controlled our costs. At the same time, we've advanced our technologies, our infrastructure and we've advanced coverage and accessibility for our product all over the world to enhance people's lives. But we are very excited for this launch. This is my fourth major launch here at DexCom. And every single time, it's taken our company to another level. The first time was G4 and that was when accuracy really came to bear. And we truly established what accuracy standard should be for CGM and we will remain the most accurate system in the world. G7 is going to be a better experience than G6. Every time we try to make the product easier to use and this is the biggest ease-of-use advancement we've ever had as we look at the responses from our users so far. And as always, we will make this product as accessible as we can. DexCom has always been the most accessible brand CGM as far as coverage and we will continue to do so. That's our commitment to drive that very hard for our end users. It is going to be a busy and great 2023. I am very confident we'll be sitting here a year from now and I'll be able to say the same things. Thanks, everybody and have a great day.

EarningCall_186

Good morning ladies and gentlemen and welcome to Baxter International's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded by Baxter and is copyrighted material. It cannot be recorded or rebroadcast without Baxter's permission. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Clare Trachtman, Vice President, Investor Relations at Baxter International. Ms. Trachtman, you may begin. Good morning. and welcome to our fourth quarter 2022 earnings conference call. Joining me today are Joe Almedia, Baxter's Chairman and Chief Executive Officer; and Jay Saccaro, Baxter's Chief Financial Officer. On the call this morning, we will be discussing Baxter's fourth quarter and full year 2022 financial results, along with our financial outlook for 2023. With that, let me start our prepared remarks by reminding everyone that this presentation, including comments regarding our financial outlook for the first quarter and full year 2023, new product development, the potential impact of recently announced strategic actions, proposed pricing actions, business development and regulatory matters contain forward-looking statements that involve risks and uncertainties. And of course, our actual results could differ materially from our current expectations. Please refer to today's press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, on today's call, non-GAAP financial measures will be used to help investors understand Baxter's ongoing business performance. A reconciliation of the non-GAAP financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. On the call this morning, we will be discussing operational sales growth which for the fourth quarter and full year 2022, adjust for the impact of foreign exchange and the acquisition of Hillrom. Thank you, Clare and good morning, everyone. We appreciate you taking the time to join us. I will begin with a brief overview of Baxter's performance for the quarter and year and then provide some additional information on the strategic road map we announced on January 6. These actions, further outlined in this morning's press release, will help Baxter to emerge as a more agile, innovative market responsive enterprise with expanded opportunities to create long-term shareholder value. Jay will follow with a deeper dive on our 2022 results and outlook for 2023 and we will close with Q&A. Starting with our financial results. Sales for the fourth quarter 2022 were $3.9 billion, growing 11% on a reported basis, 17% at constant currency and 2% on an operational basis. Fourth quarter adjusted earnings per share were $0.88 came in below our expectations, primarily driven by foreign exchange losses and product mix in the quarter. For the full year sales of $15.1 billion advanced 18% on a reported basis, 23% at constant currency and 2% on an operational basis. Adjusted earnings per share for the year were $3.50. Jay will provide more granularity on the numbers but some themes are clear. Demand across our portfolio remains solid and sales rose across the majority of our legacy Baxter and Hillrom businesses, offsetting modest or expected declines in others, driven by factors such as generic competition or challenging year-over-year comparisons. As we've discussed previously, this top line growth was offset by weighing of macroeconomic and supply chain factors that has continued to put pressure on the cost of doing business. And as I have stressed many times, we will never pursue reduced costs in ways that could compromise our fundamental mission to save and sustain lives. But even factoring in these headwinds, we did not perform at the level we expected and demand of ourselves. And our ability to advance our mission is grounded, first and foremost, in our capacity to deliver steady, solid performance as a sustainable corporate enterprise. This is precisely why, earlier this year, we announced plans to accelerate our transformation journey, the actions we announced on January 6 and are expanding on today are as necessary as they are timely. As I shared in January, we spent the latter part of 2022 undertaking a comprehensive review of our operations focused keenly on opportunities to improve our commercial responsiveness, reinvigorate our innovation engine and streamline our operations. This work led to last month's announcement of our intention to spin off a new kidney care company, explore options for our BioPharma Solutions contract manufacturing business and implement a new operating model for our remaining Baxter businesses. These are 3 distinct initiatives with a single agenda, increase stakeholder impact with improved long-term shareholder value. Cutting across these actions are common goals, enhancing refining strategic clarity, increased accountability and line of sight, enhance agility and bring our global businesses even closer to the patients, clinicians and customers they serve. Today, I will share the next level of detail on the Baxter business model, we expect to begin implementing next quarter. This work entails a fundamental reconfiguration of how we operate and deliver products to the customers and markets we serve. This new operating model is focused on 4 vertically integrated global business units, or GBUs, grouped along general therapeutic areas encompassing multiple sites of care. These GBUs which will become Baxter's core operating and reporting segments when implemented, include medical products and therapies, comprising our current Medication Delivery, Advanced Surgery and Clinical Nutrition portfolios. Healthcare Systems and Technologies comprising our legacy. Hillrom businesses, including Patient Support Systems, Global Surgical Solutions and Front Line Care, pharmaceuticals which will include our current pharma portfolio as well as our BioPharma Solutions business until its potential separation. And finally, Kidney Care comprising our current Renal Care and Acute Therapies businesses to reiterate our intention subject to satisfaction of customary conditions used to spin Kidney Care into an independent publicly traded company in the next 12 to 18 months. Until then, this GBU will benefit from the strategic work we are doing right now helping to hone a well-focused and streamlined entity in preparation for its anticipated launch as a stand-alone company. In this way, we can think of Baxter as having 4 GBU structure, or perhaps a 3 plus 1 GBU structure once the model is in place later this year. Each new GBU will have its own President, reporting directly to me. Each will have full global P&L accountability. We will begin to realign our current 3 region global commercial structures. So the global commercial teams will report directly into each GBU. The dedicated R&D manufacturing and supply chain and functional support teams will also be embedded by GBU to optimize visibility and oversight. This restructure is designed to generate more direct, clear accountability across each business and promote more agile decision-making across sales, marketing, manufacturing, distribution and innovation. So what you see upon completion of this process is that each of the GBUs will have more autonomy and agility than the current businesses do today. GBUs will be able to respond to market dynamics faster, more effectively, accelerate commercial investments, design and produce products and prioritize R&D spending, all to help meet critical market needs and accelerate business performance. From a manufacturing perspective, Baxter will become more nimble with manufacturing sites mapped directly to each GBU leading to an optimized manufacturing footprint in a more resilient supply chain. Preparation for the new operating model is already surfacing opportunities for streamlining and efficiency that are intended to further bolster bottom line performance. The redesign being contemplated, coupled with additional actions the company has undertaken to enhance performance, are expect to deliver more than $300 million in total savings during 2023 and a workforce reduction of less than 5%. We plan to begin implementing our new operating model early in the second quarter. Looking ahead to 2023. More broadly, we expect to continue navigating a challenging operational environment, hand-in-hand with our transformation effort. We have been taking a hard look at our forecasting models and processes as we reflect on our performance last year and the lessons learned in an era of unprecedented macroeconomic challenges. We have taken the stance of incorporating more financial downside risks into our financial outlook for 2023. Jay will provide additional details on our outlook and various assumptions included. Before I pass it out to Jay, I want to close by reinforcing my confidence and optimism for the future in our commitment to continue to maintain the important work we do every day. Baxter holds a fundamental place in global health care, with a durable portfolio of essential products, market-leading position and passionate employees who bring our mission to life. We're setting out on a well-considered plan to redefine our operations and potential in pursuit of incremental long-term value for the stakeholders and shareholders that rely on us. 2023 now becomes a pivotal year. We are on our way to creating -- to leading health care companies with robust portfolios and strong market momentum. We look forward to sharing our progress and performance in the quarters to come. Thanks, Joe and good morning, everyone. Despite in line sales results, our fourth quarter earnings performance came in below our expectations. This variance was primarily driven by foreign exchange losses and product mix in the quarter. As Joe mentioned, we're not satisfied with our results and as such, we're taking a number of actions to improve our performance. Some of these initiatives are already underway and will be further enhanced with the cost reduction program that we are in the process of finalizing, in parallel with our operating model redesign. These actions are necessary and are expected to accelerate future performance. Collectively, these actions are expected to deliver more than $300 million in savings in 2023. Turning to our financial performance. Fourth quarter 2022 global sales of $3.9 billion, advanced 11% on a reported basis, 17% on a constant currency basis and 2% operationally. Sales performance in the quarter continues to underscore the strength of our broad portfolio of core therapy and connected care offerings across the care continuum. As we've discussed previously, supply for select products remains constrained and we estimate that these constraints impacted our revenues by approximately $50 million in the quarter or approximately 140 basis points. These supply constraints are a mixture of electromechanical components and shortages from other third-party suppliers. On the bottom line, adjusted earnings decreased 15% to $0.88 per share outside our guidance range of $0.92 to $0.99 per share. As mentioned earlier, this was due to unfavorable product mix and an approximate $0.04 headwind from foreign exchange losses on balance sheet positions, primarily due to the devaluation of the Russian ruble during the quarter. Now, I'll walk through performance by our regional segments and key product categories. Note that constant currency growth is equal to operational sales growth for all global businesses, in Baxter's 3 legacy geographic regions. Starting with sales by operating segment. Sales in the Americas were flat to the prior year on a constant currency basis. Sales in Europe, Middle East and Africa grew 5% on a constant currency basis and sales in our APAC region increased 2% constant currency. Quarterly sales in the region reflected strength in geographic segment sales offset by relatively flat growth in China due to the impact from various government-based procurement initiatives being implemented in that market. Moving on to performance by key product category. Global sales for Renal were $981 million, increasing 3% on a constant currency basis. Performance in the quarter was driven by solid growth in our PD business, where we observed an increase in PD patients globally, particularly in the U.S. which saw a sequential improvement in growth of 100 basis points and ended the year with patient growth of approximately 4%. Mid-single-digit PD growth in the quarter benefited from incremental revenues of nearly $20 million, resulting from a customer that was looking to build out a new business and did not meet its contractual minimum purchase requirements. This arrangement has been terminated and the related revenues will not recur in future periods. Performance in the quarter was partially offset by lower in-center HD sales due to HD monitor and associated consumable component supply challenges. Sales in Medication Delivery of $745 million declined 2% on a constant currency basis. Performance in the quarter was affected by a difficult comparison to the prior year which benefited from higher levels of infusion pump placements. Demand remains strong for Baxter's smart infusion pumps and as we have discussed, is currently outpacing our ability to supply, given continued challenges sourcing components. Our IV therapy portfolio grew low single digits globally, driven by strong demand internationally. During the quarter, we did not see pronounced impact from flu-related cases which, although reported case numbers were high, did not translate into increased hospital admissions. Pharmaceutical sales of $552 million declined 1% on a constant currency basis. Performance in the quarter reflects the continued impact of generic competition in the U.S. which was partially offset by increased demand for our drug compounding portfolio internationally. Moving to Clinical Nutrition. Total sales were $243 million, increasing 6% on a constant currency basis. Performance in the quarter was driven by demand for our broad multi-chamber bags and vitamins product portfolio. Sales in Advanced Surgery were $260 million, advancing 8% on a constant currency basis. Growth in the quarter reflects an improvement of electric procedures globally. Surgical volume recovery was strong across all regions. Sales in our Acute Therapies business were $182 million, declining 3% on a constant currency basis and reflecting a tough comparison to the prior year, where we had experienced elevated demand for CRRT given the rise in COVID cases. BioPharma Solutions sales in the quarter were $153 million, increasing 12% on a constant currency basis. Demand for non-COVID services more than offset the decline in COVID vaccine-related revenue compared to the same period last year. COVID vaccine sales for the quarter totaled $22 million. Legacy Hillrom contributed $734 million in sales in the quarter compared to $212 million in the prior year period after the acquisition closed on December 13, 2021. Hillrom sales included $360 million of sales in Patient Support Systems, $293 million of sales in Front Line Care and $81 million of sales in Global Surgical Solutions. Legacy Hillrom sales grew mid-single digits on a pro forma and FX-neutral basis as compared to Q4 2021. This growth reflects demand for the physical assessment and cardiology portfolios within the Front Line Care business. Within the quarter, we were able to secure some additional electromechanical components on the spot market which enabled us to address a portion of the backlog associated with the Front Line Care business. Sales in Patient Support Systems declined low single digits in the quarter, primarily driven by lower rental revenues in the quarter as the prior year period benefited from more than $10 million in sales due to COVID-related rentals. Moving through the rest of the P&L. Adjusted gross margin of 41.6% decreased 270 basis points versus the prior year, reflecting increased cost of goods sold, primarily driven by the factors we've discussed around inflation, freight and supply chain constraints. Adjusted SG&A of $797 million represented 20.5 as a percentage of sales, an increase of 30 basis points versus the prior year, driven by the addition of Hillrom as well as higher freight expenses. Adjusted R&D spending in the quarter of $157 million represented 4% of sales, an increase of 10 basis points versus prior year. Both SG&A and adjusted R&D reflected a benefit from lower bonus accruals under our annual employee incentive compensation plans which are directly tied to Baxter's performance. These factors resulted in an adjusted operating margin in the quarter of 17.1%, a decrease of 310 basis points versus the prior year. Adjusted net interest expense totaled $117 million in the quarter, an increase of $73 million versus the prior year, driven by higher outstanding debt balances related to the acquisition of Hillrom and the impact of interest rates on the variable rate debt. Adjusted other nonoperating expense totaled $12 million in the quarter, a decrease of $9 million versus the prior year, driven primarily by amortization of pension benefits. As I mentioned earlier, nonoperating expenses were unfavorable to our expectations primarily due to foreign exchange losses. The adjusted tax rate in the quarter was 16.1% compared to 18.6% in the prior year period. The year-over-year decrease was primarily driven by statute expirations on certain tax positions, partially offset by an increase due to a change in geographic earnings mix following the Hillrom acquisition. And as previously mentioned, adjusted earnings of $0.88 per share declined 15% versus the prior year period. Earnings in the quarter reflected the increase of cost of raw materials, freight and labor as well as the impact of rising interest rates and foreign exchange headwinds. Turning to full year 2022. Sales of $15.1 billion increased by 18% on a reported basis, 23% on a constant currency basis and 2% operationally. Legacy Hillrom's Front Line Care, Patient Support Systems and Global Surgical Solutions businesses contributed $2.9 billion to full year sales on a reported basis. On a pro forma basis and after adjusting for foreign exchange, full year legacy Hillrom sales were flat as compared to the prior year period, primarily reflecting the impact of supply constraints for electromechanical components. On the bottom line, Baxter's adjusted earnings decreased 3% to $3.50 per diluted share, reflecting the impacts we just highlighted. On a full year basis, we generated operating cash flow from continuing operations of $1.2 billion and free cash flow of $532 million. Throughout 2022, we remain focused on debt repayment following our Hillrom acquisition with 900 million paid boards deleveraging. We also returned approximately $600 million to shareholders through dividends and share repurchases. As we execute on our strategic actions outlined in the beginning of 2023, we are first and foremost committed to meaningfully improving our cash flow generation. Our priorities for cash deployment are focused on accelerating debt repayment, maintaining our dividend and resuming share repurchases over time. We are also actively pursuing strategic alternatives for our BioPharma Solutions business, while continuing to assess additional inorganic growth factors for products, therapies and connected care platforms for our new streamlined operations. As we progress towards the proposed spin-off of Kidney Care company, we'll look to utilize proceeds from these actions to accelerate Baxter's debt repayment schedule. We remain committed to an investment-grade credit rating profile, including taking actions towards achieving our previously stated commitment to achieve 2.75x net leverage. Although current business conditions might challenge our ability to satisfy that commitment, by the end of 2024, we do expect to make significant progress towards achieving the target during 2023 and 2024. Additionally, given the proposed spin-off and potential sale of BPS, we expect to provide additional information regarding our forward-looking outlook for both Baxter RemainCo and KidneyCo at a Capital Markets Day prior to completion of the proposed spin-off. Let me conclude my comments by discussing our outlook for the first quarter and full year 2023, including some key assumptions underpinning our guidance. On the top line, 2023 is expected to benefit from underlying volume growth, the pricing actions taken last year as well as new product launches across our GBUs. Some of these new planned product introductions include more than 5 injectable drug launches, a next-gen ICU bed, ExactaMix Pro, Nutrition Compounder, continued rollout of our Novum IQ LVP and syringe pump in Canada and launch of the Novum IQ syringe pump in the U.S. At this time, our 2023 guidance does not contemplate any U.S. revenues for the Novum IQ large-volume infusion pump. We anticipate submission of our final responses to FDA within the quarter. We continue to be very excited about the prospect of this launch and the benefits it offers our customers. Our objective remains to launch this pump in 2023. Throughout 2022, demand for our products and therapies remained solid but supply chain challenges impacted our ability to fully supply this demand. We experienced record levels of backorders and backlog, particularly for the legacy Hillrom business. And while we observed positive development and supply availability in the fourth quarter of 2022, we currently anticipate component availability will remain challenging and will continue to hamper top line sales in 2023. We are working relentlessly to secure components and address order backlog and our expectation is that supply for electromechanical components will improve in the second half of the year. As Joe outlined, we're implementing a series of changes across our organization that are designed to meaningfully simplify the operating model and manufacturing footprint drive strategic clarity, improve operational efficiencies and accelerate future growth. In addition to consolidating our operations into 4 vertically integrated global business units, we're also evaluating additional strategic actions, including potential product line and country exits to better position the company for more profitable growth over the mid to long term These exits are expected to reduce sales by more than $100 million as compared to full year '22. Lastly, as it relates to the top line 2022 results, included approximately $140 million of sales that are not expected to repeat in 2023 as well as the benefit of approximately $50 million due to lower customer rebate costs, this includes lower COVID vaccine revenue of approximately $100 million and 2 contractual payments which benefited Renal Care sales by approximately $40 million in the second half of 2022. Moving on to dynamics impacting the rest of the P&L. First, I want to point out a couple of factors that are impacting our 2023 performance as compared to 2022, such as higher annual incentive compensation payments for employees, increased interest expense and a higher tax rate assumption. In addition, while we see some improvement in the external macro environment, with select indices coming down from the peaks seen last year, our cost base is still elevated relative to historic norms. As such, cost of goods sold is expected to be a headwind compared to 2022. This is due to the rollout in the first half of 2023 of manufacturing-related costs capitalized into inventory in the second half of 2022 as well as a challenging comparison to the first half of 2022 prior to the start of significant increases in inflation. We expect the impact from these inflationary pressures to begin to ease in the second half of the year. Also, as mentioned earlier, in response to the significant macro challenges the company has experienced over the last 2 years, we will be implementing a cost reduction program in parallel with our operating model redesign that is expected to be finalized later this quarter. This initiative and additional actions the company has undertaken to enhance performance are expected to deliver more than $300 million in total savings during 2023. These savings are expected to increase over the course of the year, with the majority of the savings being realized in the second half of the year. The lower cost of goods, coupled with the increased savings, are expected to drive meaningful margin expansion and earnings growth in the second half of the year as compared to the first half. We also expect the impact from foreign exchange to lessen in the second half of the year. Finally, as Joe mentioned, with respect to our outlook for 2023, we biased our guidance towards capturing additional potential downside risks. We recognize that our performance last year disappointed investors and us alike. While we are confident the actions we are undertaking will set us on force for improved performance longer term, we have recognized that 2023 will be a transition year on our path to achieving this objective. Incorporating all of these factors, I'll now walk through our guidance and expectations. For full year 2023, we expect global sales growth of 1% to 2% on a reported basis and flat to 1% growth on a constant currency basis. We expect full year adjusted operating margin to be between 15% and 16%. Interest expense is expected to total approximately $540 million which reflects pass and potential future rate increases and adjusted tax rate of approximately 22% and a diluted average share count of 508 million shares. Based on these dynamics, we expect 2023 adjusted earnings, excluding special items, of $2.75 to $2.95 per diluted share. Specific to the first quarter of 2023, we expect global sales to decline by approximately 3% on a reported basis and approximately 1% on a constant currency basis. And we expect adjusted earnings, excluding special items, of $0.46 to $0.50 per diluted share. So I guess the first one is going to be on the operating margin expression. I guess, details on what the split is between SG&A, cost of sales and R&D. And can you point to the biggest pressure points in the gross margins? Is it diesel, resin, microchips, labor? I think investors understand the macro pressures for facing you guys, it's been challenging to understand how these macro pressures flow through the P&L? Any color there would be great. Sure, Pito. And -- is your question in reference to '23 or Q4 '22 -- or what is -- what period are you referring to? Sure. Sure. So overall, we are seeing increased pressure on operating margin in the first quarter and throughout in 2023. And a lot of that relates to supply chain costs that we've incurred in the second half of the year that start to roll out into 2023. And as we think about the timing of those pressures, really is most prominent in the first quarter of the year. So we'll have a trough margin in the first quarter of the year and then it starts to accelerate from there moving forward. As we think about where the impacts are, it is, as I say, largely related to gross margin. Although because of freight costs, we do see some incremental SG&A costs that show up throughout the year. And like I say, it starts to much more normalize by the fourth quarter of next year. Okay. And then would you have your talks to your customers about increased pricing? I guess, any color on how those are going? And what is your overall pricing view in 2023 versus 2022? And then if you break out gross margins from pharma specifically, do they have any outsized movement in your surprising for '23. Peter, I'll take the price question overall and Jay can give a little bit more detail. We are able to put price through where we can and we see price being neutral to slight positive in 2023 and for the company. Obviously, we have long-term contracts. As these contracts become available for negotiation will have a different viewpoint in how we're going to put in escalation for inflationary pressures the way we just saw them in '21 and '22. So in terms of the -- how that more specific about your question, Jay can comment. Sure. Overall, pricing is a net positive as we look at the year. So there is some benefit that we've reflected based on all the work that we've conducted over the last year, along with some existing contractual arrangements. There is some negative pricing pressure in pharma that offsets a higher number, excluding the impact of the pharma business. Great. Jay, maybe to start, I think it'd be helpful for everyone to try and get a sense of what's conservatism in the guide with some the new philosophy you talked about. What's -- and what's actually being contemplated? There's $300 million in cost savings but margin is down as you just talked about. So really just help us understand what are some of the negative assumptions in there that you're putting in to help add more cushion on the bottom after the 2022 cadence? Sure. Listen, as I mentioned in my prepared remarks, Robbie, we were disappointed with performance in 2022, clearly. And frankly, as we reflect back, it was a highly volatile and dramatic environment that we were faced with and that we were operating through over the course of the year. As we put together guidance for this year, I would say a couple of things. We've taken levels in terms of indices as they currently sit today. We've reflected continued supply constraints in things like electromechanical components. And then in addition to that, we've added margin of safety in terms of contingency to offset which is why you see a much wider range than we've had previously. I would add to that, we've also done things like taking out the LVP pump. We're really optimistic about the large volume pump getting approved this year. We're working very closely with FDA towards achieving that goal. But from a guidance standpoint, we've removed $100 million related to sales for that product. And so, I'm hopeful that these assumptions prove conservative. And that by the end of the year, we're looking at a very different world in terms of indices, electromechanical component availability and it really sets the stage up for a nice second half and a nice 2024 but we'll continue to watch these very carefully. Part of the issue, as we look at the 2022 to 2023, is the rollout of the very significant manufacturing costs that we've incurred this year. And so we have a big headwind that we're faced there. Offsetting that is $300 million worth of savings. Now that's not all incremental based on the new model. What I would tell you is approximately $200 million of that or so relates to previously discussed or identified initiatives, including the Hillrom synergies. There's roughly $100 million related to the new program that we put in place that will be reflected in our numbers. So really, that's the overall story. We've tried to take all of the learnings as we look at volatility and those items and reflected as we put it together. Great. And Jay, how should we think about cash flow going through the year here? And how it will play out in '23 relative to '22? Will these cost savings actually cost money in '23 to achieve? Or do you think you could see cash flow improve despite the lower margins? Sure. Robbie, we have an intense focus on cash flow. And I will tell you that the financial performance in 2022 was challenging. And certainly, the free cash flow performance reflected those challenges. As we move to next year, my expectation is that free cash flow will more than double relative to the 2022 level. And a lot of that has to do with improvements in working capital balances. If you look at the working capital balances, as I currently sit, the days inventory on hand has expanded over the course of the year, in large part due to missing components and having our plans run sub-optimally, longer lead times for products leading to disruptions of our supply chain, longer shipping lanes. All of those things have led to a higher days inventory on hand. Additionally, from a receivable standpoint, because of the cadence of sales, we actually had very strong sales in December, leading to a higher receivables balance than we would normally have relative to prior years. And finally, due to timing of some vendor payments, our payables balance came in low. So our clear expectation is each of these categories will improve. And by -- and along with careful CapEx management, our expectation is more than doubling free cash flow because, like I said, at the end of the day, that's an important valuation metric for us. In addition to that, it's an important incentive compensation metric for us. My first one, Joe and Jay, for you guys on revenues. If I go back to the third quarter commentary of that 4% [ph] organic growth assumptions for fiscal '23. The updated guidance here is reflecting a 350 basis point change. And I understand product exits in pumps or incremental rate, that's maybe 100, 150 basis points impact. Can you help us bridge what changed from that 4 to the 50 basis points? Because I feel like vaccine headwinds, these were known as of the third quarter call last year. Are you contemplating some incremental supply chain headwind here on revenues? Or what changed from the 4%? Sure. Vijay, let me walk through that specifically. To your point, we have a reduction from 4% which we talked about on the earnings call to flat to 1%. And there's really a few primary drivers of that. And interestingly, a lot of those impacts will be confined to 2023 which I think is really good news as we look at setting the stage for 2024. It begins with the large volume pump. And this -- in my view, this is really about conservatism on the sales guide. We've taken out $100 million relative to our prior expectations, roughly 70 basis points of growth relative to that 4%. The second item relates to the weighted average market growth. If you reflect back on our January 6 call, we talked about a slight lowering of the WAMGR of our markets on a compounded basis. But interestingly, a lot of that impact is most prominent and in fact, in some cases, confined to 2023. What I mean by that is the renal mortality issue that we face with -- that we've been faced with really collide into 2023. In addition to that, the acute growth challenge really is a 2023 impact. And then some of the capital assumptions that we've made which, again, is another area we hope to prove conservative, is really focused on 2023. And so as we approach year-end and refreshed our view of patient census of expectations into 2023, we did lower the WAMGR for 2023 by approximately 100 basis points which is included in the commentary that we made on January 6. In addition to that, we're looking very carefully at profitability by product line. At the end of the day, we're ensuring that every dollar in every market is a profitable one and a cash flowing one for Baxter. And so we have to made the decision to exit approximately $100 million or 70 basis points worth of sales. And then we did have roughly $50 million shift from 2023 to 2022 and I did make some commentary on this in the call. And so listen, we obviously don't like to lower expectations on the sales line. But what I take part in is the fact that many of these impacts are not sustainable impacts but are rather discrete to 2023. And then we'll expect to see acceleration from there. In the case of the pumps, let's watch carefully how that evolves over the course of the year. Understood. That's helpful, Jay. And then one on margins here. I think your prior commentary was 75 basis points on margin expansion and the current guidance is a decline of 150 basis points at the midpoint. So that's a 225 basis points change. Maybe can you bridge us to what's changed versus your prior expectations? Where the impact is coming from? Is this current guidance including any dis-synergies from spin? Or is that an incremental headwind as they think throughout fiscal '24? Sure. So overall, with respect to operating margins, we do now anticipate a reduction, as you pointed out. And I would say that there are a few drivers of that. First, the lower sales outlook. When you think about things like absorption, some of the higher-margin areas, the lower sales outlook does have an impact of $0.40 to $0.50 in earnings with an attending operating margin impact. Secondly, I'd point to supply chain headwinds that impact the first half of the year, most prominently. And these are incremental to what we previously said. As we went through the fourth quarter, we were still purchasing electronic components at much higher levels than we anticipated. The spot market was very challenging. So things like that led to incremental costs that roll out into the first half of the year. And then, we do have some benefits related to the incremental savings program and FX is a modest headwind overall. As we look at operating margin, it's basically flat, maybe a little bit of a -- maybe -- it's basically flat as we look at the bottom line. And so, those are the factors that impact the operating margin. But Vijay, I do want to make a really important point. As we think about the cadence of the story that occurs over the course of the year, first half of the year will be a challenging operating margin story, as I've discussed. But as we start to benefit from indices that currently sit at today's levels in the product that we sell in the second half of the year, as we start to benefit from more electronic component availability and only reflected modest, very cautious improvements in this area in the second half and as we add incremental sales to the second half as we always do, the second half margin starts to look a lot nicer and a lot more consistent with the trajectory that we expect to see. As far as the synergies and incremental costs and so on, from a cash flow standpoint, we've included roughly $100 million in our cash flow statement. There is maybe $0.03 or so of non-adjusted impact in the P&L for things that are suboptimized as it relates to the spin. So a modest impact in that regard. We've reflected that. It's a bigger impact from a free cash flow standpoint. I've discussed this with a number of you already. So I think we've got that correctly modeled. And like I said, I think the operating margin story really does start to look a lot better as we approach Q3. How are you guys looking at R&D into 2023? Do you have the flexibility to kind of speed up some projects, especially in the transition like this that sets you up for better growth in 2024 and 2025? We have earmarked some R&D dollars, in particular, for some of the Hillrom portfolio and some of the connected areas there in Front Line Care, in particular. I will say that as we look at the opportunities presented by the Hillrom acquisition, it's a really tremendous one long term. And we're talking -- once we've resolved the supply constraints, last year growth was essentially flat. We're seeing -- we're expecting mid-single growth -- mid-single-digit growth in the Hillrom portfolio this year in the face of continued supply constraints. And part of that comes from new products. We'll launch a new ICU bed, as I referenced in my prepared remarks. But to your point, Matt, there are some really interesting opportunities that will protect investment for as we go forward. And I think that should start to accrue to the benefit of frankly, both companies in 2024 and beyond. Yes. I just want to complement that we're planning for double-digit R&D increase in 2023 versus 2022. And we're going to do -- no, probably this cadence year-over-year. We found some debt in the Hillrom portfolio, primarily parts in Connected Care will receive a significant portion of our increase in research and development. This is one of the things that we discussed in the thesis of the separation but KidneyCo was the ability to allocate capital to the right places. So if you look forward to Baxter will be significant investment in connected devices as well as smart devices. So, you look at continuation once we get through the large volume rental pump approval is the next generation of integration of the pump and safety software. And you'll see us in Q3 launching the progressive FLOSEAL, really making solid our position in terms of market leader in beds. So there's quite a bit of change in how we've seen R&D. We think innovations a path forward to Baxter. And the way to do it is actually to do what we're doing in '23 and allocating dollars on a double-digit growth to that line. Okay. And then if I heard you right, I think you said a 22% tax rate for 2023. What's changing there? And then is that the go-forward tax rate for the core Baxter moving forward? Sure. We did have some onetime and planning benefits accrued to 2022. And then as we look at 2023, we included things like sort of modified assumptions related to FAS 123R benefits, among other things. And so it's hard to say what to go-forward is beyond 2023. I think we've got it correctly pegged. We'll -- the tax team is hard at work and I know many of them, coming to this call, looking at planning ideas for 2022. But as we look beyond that, so much of this will depend on the setup of the 2 new companies that it's very challenging for me to comment specifically in this forum around the tax rates for the 2 companies but 22% is a good number for this year. I wanted to just follow up on where things stand with the integration and sort of synergies for Hillrom. Maybe Jay, if you could talk a little bit about how some of the inflationary pressures, energy costs, et cetera, have weighed on that business? And whether this sort of change in componentry and supply chain is something that you expect to kind of be able to sustain here in the first half? Or is that still sort of choppy? And then I have one follow-up. Sure. So from an integration standpoint, I would say, overall, the integration is going very well. We had a disruption last year and that disruption has continued all the way through today. In terms of electromechanic component availability, the ability to procure at reasonable prices, all of those things has been very disruptive to the initial stages of the Hillrom acquisition. But having said that, we're very pleased with where we currently sit and the path forward. I commented moments ago, flat growth last year, largely driven by supply constraints. Ex-supply constraints, we would have seen nice mid-single-digit growth. We start to see some of that normalize but we do see residual impacts from supply chain into 2023. But despite that, we're talking about mid-single-digit growth this year. From a cost synergy standpoint, we're ahead of our expectations. And in the numbers that we've reported, there's a clear benefit included for Hillrom integration. And then as we look forward, I think we have a lot of optimism about the portfolio, the interaction with Baxter products and where we can take this going forward. And maybe, I'll turn it over to Joe to talk a little bit about some of the things that we've seen there. Yes. We have a pretty rich pipeline of products, starting with progressive FLOSEAL. As I said, it's going to really put Baxter -- continued probation of a very solid leadership position in the PET market. our Centrella bed has done a great job and is a product that continues to sell well. When we look at our Front Line Care, that business could have grown double digits easily in 2022 as well as in 2023. We're planning for Hillrom as a whole to grow around 4%. It could be north of that if few components become more available. We're starting to see that showing up the market, primarily from like [indiscernible] to see more components coming. We just look at them in the month of January. We're able to see some of that coming through. And also the innovation pipeline coming out of those 2 businesses look really good. And the Connected Devices, what we call care communications. We see good backlog coming into Nurse Call System as well as installation of Voalte. We see in the first half of the year a little bit depression in that as the nursing shortages continue to apply pressure the hospitals and also the macroeconomic indexes make hospitals be more cautious but we see that improving in the second half. So, you look at the market for capital, improving the second half. We look at the product launches that we have coming up. And the pipeline of innovation coming out of Hillrom is very exciting. Further to that, we're putting more money into research and development in 2023 disproportionately into Hillrom to accelerate the growth of that business. That's super helpful. And if I could, just maybe at a high level, Joe, you touched on some of the things just now but I think most folks are looking at the guide and more conservative than folks were expecting. And I think you get that and I think we'll be able to sketch out the script for today. They might have recommended something like that, given the struggles that the company and the sector really has had in energy and technology, everything last year. So, maybe -- with that in mind, if this is kind of sort of rebasing and taking all these things into account, what are some of the things that you think could kind of potentially present some bright spots and upside as we kind of get into -- from the year, getting to kind of a turning point in the business, turning point in some of the inflationary pressures that you're seeing? What are some of the things that you say could possibly go well or better this year? Listen, when I look at 2023, coming from 2022, we saw an incredible pressure in our manufacturing base. If you think about us, we're disproportionately affected by the significant increase in energy cost, transportation. Remember, Baxter's transportation as a percentage of sales is the high single digits. And go into some of our markets, it's even higher than that for some of the renal products. So what I think is remarkable is how we're able to get very quickly. Once we start seeing those things coming up so fast, we went on the other hand, we have created significant programs to offset -- the offset is not what transformed, what transforms Baxter is the amount of automation that we are putting into our manufacturing operations. The amount of plants we're going to be able to consolidate because of that. And this is all will take place in 12 to 24 months. We also looking at disproportional allocation of capital into businesses that are connected and have the possibility for growth. The market is very anxiously waiting for our pump. We feel optimistic where we are with the pump today. We don't speak on behalf of the FDA. Neither we're making a prediction about that but we're saying that we're enthusiastic because we know the products are doing very well in Canada. We just closed another -- a few thousand pumps deal in one of the provinces. So we are excited about the portfolio. So, when I look -- all in all, '23 is the year that has 2 different stories. The first half, the story of paying for some of the incremental cost and significant cost that we had in '22 coming through the inventory selling of the inventory that was produced with that incremental cost. I see the second half of the year becoming more focus on what Baxter used to be which is time to see leverage of the bottom line in bringing back the things that used to be part of Baxter. But this crisis brought to surface a lot of weaknesses in some of our supply chain operations. And while we took the opportunity was to regroup and understand how to modify this permanently and take away some of this variability from our future. I'm going to get out of being in the resin-based business, no. But we're going to make sure that our plants are in the right place. Our plants are automated and we have the ability to get really efficiency out of our system. So the cost reduction that we're putting, for instance, into 2023 are over $300 million. So that efficiency will pan out in '24 with another $300 million in '24 coming to our supply chain. So, all those things that we're doing is a transition year for Baxter. One that we reset, we regroup, look at our portfolio, restructure our capital structure with the selling of PPS, getting that to help us take the debt down but also feel future inorganic tuck-in opportunities. So this is the year that Baxter will execute in its final stage of the transition that we started 7 years ago. Jay, maybe it would be helpful to give us an update on the standup cost and the stranded cost. Is the right assumption about 1% of the respective company sales and the onetime disentanglement cost of 3% to 4% of total company sales? What's the timing on that? And will some of that impact non-GAAP earnings? And any -- Jay, I mean you know it's early but people are looking at '24 for valuation. Any framework on -- could margins get back to 2022 levels? Sure. No commentary yet on 2024. We are incredibly focused on delivering 2023, period. And we do believe that there are some discrete headwinds that we're facing in 2023 that abate in 2024 or go completely away. So as Joe commented just moments ago, we're really excited about where this thing goes into the future as evidenced by what happens in the second half of the year as we look at the operating margin of the company. So we're very optimistic. But at this point, I have to stand down in terms of giving multiyear guidance. As it relates to standup costs and dis-synergy or onetime costs, stand-up costs for NewCo, we've said around 1% to 2%. No real adjustment at this point. From a onetime cost, we've commented previously on the higher end of the 3% to 4% precedence that we've seen. But you're seeing some of that in the numbers that we shared today. Specifically, we have roughly $100 million in cash-related costs that impact cash flow but much of that is either CapEx or non-GAAP, so to speak. And so in our non-GAAP results, we have roughly $0.03 of impact costs related to this program in the numbers that we shared today. So that's really how we're looking at it in 2023. And the cash is a very real cost. And to my comments earlier, in relation to Robbie Marcus question, for us, cash flow is a crucial and important area of focus for us in 2023. So those are very real costs. But as it relates to what's impacting the P&L, it's a couple $0.02, $0.03. Jay, that's helpful. Just let me ask one quick one here. The backlog and backorders, can you quantify those? And do you expect to get those back over time? We have seen some companies report Q4 results where we've seen some benefit from those coming through. Sure. I won't get into too much specifics on this. We do have some benefit from improvement in backlog, where we have clear line of sight. And so we have reflected a little bit of that in our numbers. But what I will tell you is in the plan that we've reflected here today, there continues to be supply constraints on what we could otherwise sell. And so once we have line of sight to freeing up of electronic components among other key inputs, we'll hopefully modify that assumption to the better. But at this point in time, there is still some backlog that exists over the course of the year and we did comment in the prepared remarks on continued impacts in the fourth quarter. Yes, just I would add that the backlog. We're starting to see some movement -- positive movement in semiconductors, primarily Front Line Care. We're starting to see that and that is very encouraging to us. But I think it is early to take a victory lap here. I think our supply chain folks have done a lot of work. However, we're starting to see this progress coming through, hopefully continues on and we can actually, in the next quarter, speak more about the positive tailwind that, that can plus. Thank you.

EarningCall_187

Yes. Thank you very much. Good morning here from Dusseldorf. Welcome to our Metro Q1 2022-'23 results call. We are happy to present to you our most recent business developments today. As usual, I will present the Q1 development first, and then later Christian Baier will take over, and then we will have proper time for Q&As. What is new, and let me just reiterate that, you feel free to post your questions also in the chat during the presentation or then ask verbally as you used to be afterwards. Moreover, after the English-speaking part, after the Q&A session, we also reserved some time for German-speaking or German-only-speaking people to ask questions that we can actually then also answer in German language. So then let's directly -- before we jump into the content, let me give a couple of words to the situation in Turkey. As you're all aware, there is a massive -- 2 massive earthquakes there. We are impacted because we do have 4,300 people in Turkey. We have 34 stores there. So we have a sizable operation there. Thanks God, nobody from our employees is injured. Nevertheless, it's a devastating situation for the country. We have 5 stores in the area of the earthquake, 4 of them continue to operate with very small and light damages. There is one store that is currently being examined because of construction safety. But so far, thanks God, there is no major impact at least to our people and our structure. We are focusing now very much on giving aid and help in the moment. So that means we here made a donation of EUR200,000 to the Red Crescent. The colleagues on-site are providing structure, parking lots for help, food donations, chefs that are cooking for people, and while we are talking, there is a CHR or there is an HR conference hosted in the moment in Istanbul led by Christiane Giesen, our Board member responsible for HR. And they interrupted the conference, and they are right now, while we are talking, in the Istanbul store packing trucks with goods for aids with food that will be deployed then in the region of the earthquake. So the entire organization, obviously, is with the Turkish people, and we are providing aid on-site from here sort of mentally and physically, if you want. So that's now a focus in this very moment. We hope that we can add a little bit to alleviate some of the suffering at least. So then let's go back to our Q1 results and what I want to talk about today. I want to talk about business environment that eases. I want to talk about growth. We still -- we see growth momentum that continues to occur also in the first quarter. I want to talk about the cyberattack that is actually temporarily impacting performance in Q1 or has impacted performance. And I want to talk about sCore where our execution, nevertheless, progresses substantially. And I want to talk about the financial year outlook that we are confirming. So let's directly jump into the content and talk about business environment. So #1, food inflation remains high, but it has been coming down slightly in the course of the quarter and also this trend continues in this very moment. Also, inflation effects in gastronomy are lower than in food retail. The HoReCa sector is resilient, the out-of-home consumption is stable, and the consumer confidence increases. Latest HoReCa [indiscernible] show that the industry expects a growing sales and a stable-to-slightly positive market development in 2023, according to the Food Service magazine, which is very good news. The main challenge apparently is not a lack of guests, it's a lack of staff. So there is staff shortage in our -- at our clients in a significant amount. The digitalization of processes and like preprepared products like cleaned fish, pre-diced/sliced onions, meat and so on are key levers to really make our clients more efficient, and we are very happy to provide those things that can ease a bit the staff shortage that is apparently out there. So in this business environment, how did we actually perform? So let's look at sales first. Q1 reported sales is 7% plus against Q1 of the previous year in a reported view. The EBITDA adjusted decreases by €56 million versus the Q1 previous year also in the reported view. And apparently, both figures are strongly impacted by the cyberattack. As already shared in the financial year results, we estimate that the cyberattack had a low triple-digit million euro impact on sales and a mid-to-high double-digit million impact on EBITDA. Good news, though, is in January, apparently, we are back on track. We are back on growth. We are looking at a 16% sales growth in the reported view. So that means that, number one, we could regain the customers that didn't buy because of the cyberattack. And we are also looking at volume gains. So we are actually back on track. And the cyberattack was a temporary incidence that we have overcome, and we don't see a lot of longer-lasting challenges now from that one, which is good news. So we are back on track in terms of growth. Let's look a little bit closer at the channel view. You all remember this strategic visual of the 3 circles of growth. Growth continues to be driven by all channels. That's the measures you need to take. Our store-based sales grew by 4%. Our FSD investments continue to pay off with sales growing by 18%, even though the FSD, the delivery business, was more impacted by the cyberattack than the stores. And Metro Markets, as the gastronomy marketplace, sales increased by 46% and the marketplace volume -- marketplace sales has grown in all dimensions. And that means we are also looking at more than 100 more vendors and sellers looking at more than 700 new brands, and we're looking at more than 50,000 new active products listed that we have actually added in the first quarter of the year. Also, we see significant progress in digitalization. I was mentioning digitalization as the tool to overcome staff challenges at our HoReCa customers. So the hospitality digital number of subscribers increased 13,000 new subscribers in Q1. So that is a very healthy composition of the individual channels and of the growth. From the channels now, let's look a little bit more in depth onto our sCore KPIs that we are reporting continuously. So let's look at sales force. First, we added net 200 additional FTE in Q1 and thus making good progress towards our 2030 aim of at least doubling sales force. Sales force, to remind everybody, is important to push FSD and to push digital because we are moving from a pull to a push multichannel sales and growth model. The strategic customer sales share significantly increased from 68 -- from 65% to 68% versus the Q1 of the previous year. The FSD sales further grew by 2 percentage points to 20%, and the digital sales share grew from 7% to 8% of sales. Very nice development with own brand sales share. It increased significantly by more than 3 percentage points to 20%. The growth continues to be driven by HoReCa and by FSD. Those are the main 2 channels that are adding to our own brand sales here. And this is, again, an all-time record, and we are looking at a very good progress towards our 2030 target. We have big confidence that we will even increase even in this very year the share of the own brand even further. So here we are very, very happy actually with the development, very important movement here. The delivery infrastructure, we have no additional depots so far, but we have several ongoing projects that will come live in the coming quarter. It does not mean that we will not stick to our network expansion plans. It just is a matter of fact that we didn't complete any project in the first quarter of this year, but there is more to come in the upcoming quarters. Let's look a little bit more in digital -- digital sales share. So what are we doing to advance the KPIs. One of the key long-term drivers is the DISH POS rollout as it links our customers to us and will, at some point, enable a direct connection also with our sales channels. DISH POS covers the complete process from purchasing to billing and enables our customers to manage and to optimize their business out of one system. So there's one digital system for the gastronomy, and we are providing that now, with this DISH is de facto the missing piece of the puzzle regarding digitalization of gastronomy. In January, we announced this DISH POS rollout in France as a very important milestone for us because only our 10 months after we have successfully acquired Eijsink in March 2022, we are now having France as the biggest -- as our biggest HoReCa country, being the first country where we are doing the first steps in the internationalization. The tool was presented to a broad audience at the leading gastronomy and food in Sirha in Lyon. The full board has been part of the launch event. We were very impressed by the huge interest and the customer insights from the French pilot show, already a very positive feedback regarding system's capabilities and handling. And now, like we are also doing with Metro Markets, also with DISH POS, you can expect 2 to 3 countries per year now being hooked up, so to say, to the DISH POS system to where we will roll out the DISH POS system to. And Germany is going to be next. Germany is going to be the next country for that one. So we will push that throughout Europe in the course of the next months and years. Talking portfolio for a moment. In Q1, we've also announced that the strategic decision to exit the Indian market and divest Metro India to Reliance Retail Ventures Limited has become reality. The transaction includes the operations of 31 Indian Metro stores, representing sales of a bit more than €920 million and low-double-digit-million euro EBITDA figure as well as real estate portfolio of overall 6 stores. The decision was based on the rationale that the Indian trade industry is experiencing a tremendously strong consolidation and an increase in competition, which would require a sizable investments to further grow the business, thus being the right time to seize the momentum and enable Metro India into a future alongside a very strong local partner. The transaction values Metro India at an EV/sales multiple of 0.6x based on sales of the financial year '21-'22 and implies an equity value of roughly €300 million. This considers lease rental and other related reliabilities of €150 million. After closing, we expect a transaction gain on EBITDA level of approximately €150 million and a corresponding EPS gain. Both numbers are subject to exchange rates at closing. We expect the closing in the first half of the year of the calendar year '23, following governmental and regulatory approvals. Until then, the India sales and EBITDA continues to be consolidated and at the same time with the sale of India, we have completed the adjustment measures in our portfolio. We have completed the adjustment measures in our portfolio. In summary, we are very well on track towards our recently upgraded mid- and long-term targets. I am thrilled to see us turning the market opportunities and advantages of our multichannel business model into business growth. Yes. Thank you, Steffen, and good morning, everyone. So let me continue with the financial performance, and let's start with the high-level KPIs. So as shown by Steffen, we achieved 5% sales growth despite a low triple-digit estimated impact from the cyberattack. On the EBITDA side, it declined to €465 million impacted by a mid-to-high double-digit amount from the cyberattack. Our real estate team was able to close a very significant real estate development project in the quarter of around €200 million of gain. The EPS increased to €1.44 compared to €0.54, is benefiting from this development and also from some nonoperational effects that I will explain later on. So let's look at the details. The overall group performance is built on strong regions, and all regions contributed to the growth, except Russia. While cyber affected all regions, Germany and Russia were most impacted, and this is visible in their growth rates. And when we look into it more specifically, in Germany, reported sales increased by 4% versus prior year, supported by continuing execution of sCore and the strong implementation of buy-more-pay-less in more and more SKUs. This is also visible by the HoReCa sales growth and the reported sales reaching €1.3 billion. The sales growth in Germany translates into an adjusted EBITDA of €84 million. In the segment West, reported sales increased by 4% and reached €3.2 billion. The largest sales growth was recorded in France, Italy, Spain and in Portugal. The FSD companies all grew in the double-digit range. The reported growth rate of the segment West is adversely affected by the exit of the Belgian operations, while on the other hand, the acquisition of AGM in the course of the last financial year only partially compensated for this effect. The adjusted EBITDA in West reduced to €173 million as the strong sales development could not completely compensate the cost from the cyberattack. Especially in France and Spain, there was an impact felt. In addition, and also as anticipated, the expected cost inflation impacted some countries. When we turn to Russia, there sales in local currency decreased by 14% and the invasion of the Ukraine and the following sanctions affected the customer sentiment measurably in the country. Together with the cyberattack, this led to a significant decline. Due to a positive currency development though, reported sales increased by 11% to €0.9 billion. In Russia, the adjusted EBITDA at constant currency followed the sales development and decreased to €60 million. Currency adjusted, this is a reduction by €45 million versus prior year. In the segment East, sales in local currency increased by 15%, and almost all countries contributed to the sales growth, mostly through positive HoReCa development. Turkey achieved a highest sales growth that was also strongly supported by inflation. The Ukrainian business continues to show very high resilience with a stable number of stores open and sales at minus 20% in Q1, which is up from minus 45% for the comparable period in March 2022. Adjusted EBITDA increased to €146 million and up by €18 million at constant currency, also following the trend on the sales growth perspectives. In the segment Others, reported sales grew by €31 million to €51 million. It included Metro Market sales of €21 million, and this sales growth in the segment is mainly due to the expected growth in our digital business, with, on the one hand, Metro Markets in Germany, Spain, Italy, and Portugal, and also with our newly acquired POS provider, Eijsink. The adjusted EBITDA decreased to minus €2 million due to these expansion efforts and also other investments into digitization. When we turn to the market share development, since COVID, Metro has continuously developed above the HoReCa market. And this positive trend is driven by Metro's strong performance on both store and delivery channels, while the market is only slowly reaching pre-pandemic levels. This trend further confirms the effectiveness and strong execution of our sCore strategy. So let's sum up. The solid sales momentum and the successful implementation of the sCore strategy has continued, and we have overall reached 5% sales growth to €8.1 billion, as you can see on the P&L here. All channels have contributed to that growth. The store sales increased to €6.5 billion, up by 4%. FSD sales increased to €1.6 billion, up by 18%, and Metro Markets reached €21 million, which is plus 46% versus prior year. The sales development is generally also reflected in the earnings. However, it could not compensate the impact from the cyberattack, including additional costs for IT specialists, leading to the overall adjusted EBITDA decline. As mentioned before, in Q1, we closed a large real estate development project on our so-called campus area here around our Dusseldorf headquarter. Including the resulting roughly €200 million transaction gain, reported EBITDA grew to €673 million. Given the relevance of that mentioned real estate project, let's have a quick look at some details. So Swiss Life Asset Managers acquired a 73,000 square meter site in Dusseldorf for Metro to realize a comprehensive district development. The site holds significant potential from a real estate and urban development perspective. It will be a mix of gastronomy, residential, and office space, applying very high ESG standards. The current Metro store on the location will be replaced by 2 new stores: one at the existing and one at a new location in Dusseldorf. The Metro AG and Metro Germany headquarters will remain at the current location and will further develop their respective areas. This project is a very good example for the future focus of our real estate strategy. First and foremost, there the operational business is put at the center of our thinking, and this is to best support our sCore strategy. Secondly, there is a strong focus on project development where our team can create significant value-add also from a financial perspective. When we move further down the P&L, the interest and investment result improved mainly due to onetime interest income from tax refunds as well as lower financing costs. The other financial results strongly benefited from noncash and potentially reversible FX effects from Russian currency. And this is really the opposite effect to the ones that we have seen in Q2 and Q3 last year at that point with a negative connotation to it. The income tax is in line with expectations, and you might realize the comparatively low tax rate compared to the prior year, which is mainly attributable to the nontax effective income in the other financial results and also on the real estate development project. As a result, earnings per share increased to €1.44. And if we would adjust for the noncash FX effects in the financial result, EPS would have been around €0.90.So let's now look at the cash flow perspective, and there some of the mentioned effects are also visible in that development. The operating cash flow reached €168 million, and that's €328 million below the prior year. This relatively significant change can mainly be attributed to the net working capital development and is mainly driven by 2 key effects: one is the temporary inventory increase where we are prioritizing product availability during the sCore assortment transition. And on the other hand, it's also driven by increased receivables, where we have 2 effects. 1 is a bit more structural and the other one is very temporary. The structural one is we are increasing our FSD business and also showing a very solid financial profile there. This is increasing receivables. And on the other hand, due to cyber, we had some delayed collections, which will be compensated in Q2. And therefore, if you look entirely at the first half of the year, we will expect a very solid development also on the net working capital side. On the investment side, the investments are higher, mostly due to some Italian property CapEx that we had there. And in the coming quarters also, as Steffen mentioned before, we will expect more and more investments to happen from our network transformation, given that this is the key capacity building program for supporting our sCore strategy. In total, when we sum up the full free cash flow for the quarter 1 reached €115 million. And as a result of that positive free cash flow, net debt decreased again. In addition to the free cash flow, the expected Metro India disposal, and hence the first time reclassification of Metro India as an asset held-for-sale, has technically reduced our net debt. So what does that looking forward all mean for our outlook? We have guided that we expect 5% to 10% sales growth. And in the guidance view, when we adjusted from a portfolio perspective for the Belgian exit, we have reached 8% in Q1. This is a strong start to the year as Q1 was impacted by the cyberattack. As Steffen showed, Q2, namely the January month, is trading at 16% so far and, therefore, in a very positive territory. The adjusted EBITDA decline in Q1 also matches our full-year expectation. While Q1 is impacted by the mentioned nonrecurring effects, we expect growing cost inflation, especially on the [PEC] side in the course of the year. With the current status, we also foresee a further softening of the business development in Russia. Overall, the start to the year, hence, matches our full year expectations for sales and EBITDA, and we see ourselves well positioned roughly in the middle of the guidance range. In addition to that, we also confirm further expectations for the year as we have outlined already in the annual press conference. The expected €200 million rough real estate gains have already been booked in Q1.On the D&A, net financial results and taxes side, if we disregard the noncash FX effect, there is a very normal development underway. On the EPS side, we continue to expect €0.40 to €0.80 before factoring in the India transaction, which is to close in the next quarters. The cash invest of above €600 million for the full year is in line with our expectations and very much also with the sCore strategy. Hence, in sum, we expect a neutral to slightly negative free cash flow and a stable net debt. This concludes our presentation today, and Steffen and I are now happy to take your questions. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] We have the first question from Volker Bosse from Badder Bank. Yes, Volker Bosse from Badder Bank. Congratulations on the solid figures given that you had to deal with the cyberattack, great achievement. I would like to start with the EPS question, more for clarification. [indiscernible] EPS adjusted excluding the one-off. I think the €0.90, which you provided as an adjusted EPS still includes the real estate gains, if I'm not mistaken. So could you provide also an EPS adjustments, excluding real estate gains, please? A second question would be on the administrative expenses in Q1 were down minus 8%, and it's quite impressive. So I'm asking myself how is it possible that given that we see overall cost inflation trend and given your higher headcount. And last question would be on your strategy in Russia. Could you provide us here with any changes within your thinking about the business in Russia going forward? And also how do you see any changes on the operations? How is it running, especially in the light of the tensions, in the light of the capital transfer restrictions, and the underlying economic trends in Russia? [indiscernible] it would be great to have your insights as it's hard to look behind the curtains here from outside. So thank you very much for all the details. Great. Volker, we'll tackle your questions. So EPS Q1 tax inflation in Russia. Very happy to do that. I think on the EPS side, you said what is it excluding on the one-off side. Basically, what we stated is we had this €1.44. If you were to adjust for the noncash FX effects, this would roughly result in €0.90. And indeed, as you have mentioned, there has been that real estate transactions, which on the EBITDA side is roughly €200 million. And if you were to basically adjust that, although we certainly had planned and intended to do that. So the underlying business would be roughly on the PY level with respect to the EPS development and PY has been at €0.54. So I think that's a simple bridge to look at it. Certainly, on the real estate side, we will for the remainder of the year compared to the prior year, we'll then have less real estate gains. So there is a little bit of a quarterly shift in between those perspectives. With respect to Q1, there was -- it was not that easy to hear the question, but we understood it was mostly related around the [PEC] development and inflation there. Certainly, [PEC's] development across the year will deviate between the quarters in Q1, which is, for us, obviously, October to December. There has been so far a relatively limited impact. We are now seeing from Q2 onwards in various countries that the inflation impact is also coming into the [PAC] perspective where we have seen France and Spain, for example, with some adjustments, but these are all in line with our expectations also from a guidance point of view. For us, it's very important that in light of that inflationary environment, and that's not only on [PACs], but also on energy and other topics. We are very much focusing on the productivity gains, which is coming from sCore, and it's part and parcel of it. So we are very confident in our strategy there and in the guidance that we have given out that we are solidly in there. And Steffen will now comment on Russia. So we confirm our decision to stay in Russia. Apparently, we are focusing a lot, and let me put that even in front of that answer to help our Ukrainian colleagues. As you remember, we also have 3,400 people still working there. We are operating 23 stores on a continuous basis. We are one of the few networks for food supply, not only to the population but also to sort of governmental institutions. And that is our first priority, including also all form of as aid, you can imagine. So that's our first priority. And then on the same hand, we are confirming the decision, as I have said, we are -- the argumentation was clear, and there is no update to it. We still feel responsible for those 10,000 colleagues and the customer we are providing basic food. Of course, we are obeying all the sanctions possible. So in this very moment, we are in Russia maintaining the business. And in terms of business or customer sentiment, of course, we see a tense situation there. Christian was mentioning in his speech because there is challenges in a macroeconomic sense there, and we also feel them. We are now managing the business accordingly, trying to adjust capacities. We are not investing in growth. We are maintaining the business. Absolutely. I think there, just to reiterate of prior quarters. Russia itself, our business there is a self-sustained and self-funded business, which is operated over there. And when we are talking about potential transfers from Russia into the Group, basically by respecting all the sanctions, but also by aligning with the relevant authorities on all sides, we are able to also distribute funds in that perspective. So from that view, we feel confident and comfortable also from a financial steering and control perspective there. And Mr. Christian, you can be assured, just the last sentence, that we are continuing -- closely monitoring the developments there. And we are always assessing that situation basically on a continuous basis. You can be assured that we are closely watching it. Yes. Good morning, gentleman. 2, if I may. The first one, can you elaborate a bit more on the gross margin? It seems that it was done in the first quarter, but you also have a higher penetration of your private label, which potentially could help the gross margin. So can you potentially give us the big blocks to explain the potential decline of the gross margin in the first quarter? The second question is more about portfolio and assets you've got. So you said it's the right time to leave India today, but do you see other countries where potentially the competition is getting tougher, where potentially you require more investment and the decision is potentially on the table to know whether you have to stay or not. So any color here would be quite helpful. Thank you. Yes, Xavier. Thank you. I will go for the gross margin. Steffen will go for the India perspective. On the gross margin side, I think we see 2 developments. One is structural and very positive and the other one is tactical and has been obviously that impact. I think the structural one is when we look at our development of the business with respect to the sCore strategy and the buy more, pay less. Over time, we will see a slight reduction on the overall gross margin perspective. However, from a percentage view, but from an absolute terms, there will be a significant growth in that view. And that's exactly what sCore is about driving this forward. So increasing significantly absolute gross margin from that view and ensuring that below gross margin we have the productivity and efficiency to translate that to the bottom line perspective.In Q1, there has been also a bit of an impact from cyber in that view. Just to give you a bit of a sense, while all of the stores have always been operating, I think the agility and nimbleness that is required, especially in an inflation environment to adjust prices basically on a day in, day out and even intraday perspective has not always been there perfect, and that has been one of the impacts from a margin perspective. We do see already now in Q1 that this is solidifying and we have that -- sorry, in Q2, we have that agility very much back. So 2 effects, both very much explainable. The one has already evaporated in a positive manner. And on the portfolio, let me reiterate, we have completed now the adjustments of the portfolio. So now, we don't see any other country we are operating in where we don't feel that with our sCore strategy and with our execution focus, we are not being able to really deliver substantial growth and substantial increase of profitability to the entire Group. So that has been completed now. Let me also give 1 or 2 remarks on India. It's not only the high competition. It just -- it's also the changing of the business environment. There is massive capital inflow. There's a lot of companies that are investing billions now in India. The entire market dynamics are changing. It's a very e-business-driven market now, and we feel -- and we have done studies quite substantially to evaluate if there's any possibility for us in a risk return profile that makes sense to stay, but we came to the conclusion we rather focus on the existing portfolio, and we let them -- our new partner develop that strategy. They are more equipped than we are to actually do that and also to bear the capital investments that would be required. Hi, good morning. Two quick questions, if I can. So firstly, is it possible to get a bit more clarity on the cyberattack? There's obviously a big range when you talk about low triple digit impact on sales, so anywhere between more than €350 million. So just a little bit more clarity there, also on EBITDA? And then the second question, just on food inflation. You mentioned it's come down slightly in January. Are you able to just put an approximate figure, not necessarily on the inflation as you see it, but maybe just to change versus where it was in Q1. Thank you very much. Yes. Thanks, Andrew. With respect to cyber, the low triple digit on the sales side and the mid- to high double digit on the EBITDA side, that's basically our estimate. Just be reminded all stores at all times and all services have been up. However, the efficiency and effectiveness of those in the background have not been there. This also shows you that it's not entirely scientific that you can put a very specific number to it. We are very confident that the number that we are giving here is roughly that pointing out. I think it's also very important that this is now very much behind us. We have all systems completely restored since already mid and later December. So from that perspective, strong development that we see in January also free of that. With respect to the inflation, and you specifically asked about the delta between Q1 and then what we are seeing in January. Obviously, with quite significant inflation numbers where the central banks are working heavily against, it is also that one not too scientifically easy to look at, but we are talking about 1 to 2 percentage points reduction that we are basically seeing in January. And let's see how that will further develop. Just be reminded given that in our categories, lots of fresh and ultra fresh we are talking, there is quite a high volatility historically, which we now expect to come down somewhat. But again, the jury is a little bit out also from interventions from central banks there. Okay. That's very clear. Thank you. And then just to come back to cyberattack. I mean, obviously, there was some vulnerability in the system. With respect to -- it was not that easy to hear, but I will just go for the rough understanding what you provided. So the cyberattack has been basically hitting us in that Q1. We have had fended off very, very significantly in all the prior years heavily on that side, and we have continuously invested into that area, certainly now with a further and further intensity that is out there in the market, we have been unfortunately hit in that Q1. And we are continuously and further investing into upping our game given that this is an increasing threat across the entire industry, also from a macroeconomic perspective, and that will be continuously more and more on our radar screen also from a resource perspective. Yes. Good morning, Christian. Just 2 for me, please. When I look at the market share charts you shared, it looks like the outperformance has stalled and maybe even that the market is slightly growing during Q1 in Italy, Spain, France and Germany. Is that due to the cyberattack or is there a change in market dynamics behind that? And secondly, I was just trying to piece together the acceleration in sales growth in January. It looks like it goes above and beyond the cyberattack impact. So is there a regional mix of this? I think the comp was pretty stable in January from Q1 last year. Thank you. So we would attribute the sort of movements of the curve to this temporary impact from the cyberattak. And if we look forward and if we also look in this very moment, we are very confident that we -- with the implementation of the sCore strategy and the growth that we are seeing will also continue to gain market shares and to do further important step in the consolidation of that very fragmented industry. So here, we are -- judgment now it's temporary, and we continue to grow market share for the future. And behind the acceleration in sales growth in January as well in terms of just more breakdown of regional and maybe category mix as well. Thank you. I think when we look into the various regions that is quite consistent, if you just carve out Russia from that perspective, so the acceleration is happening everywhere. We are attributing that very much to our continuous rollout on the sCore side, including all the BNPL and volume perspective that we are driving there. So the underlying strategy in our view is working out well, and this is showing in the Q1 -- sorry, in the Q2 and therefore January numbers over there, and we expect that to continue. Yes, hi. Thank you for the opportunity again. I had some question on the free cash flow. You provided free cash flow of €150 billion and EBITDA [indiscernible] And it seems to be -- you know your ambitions -- so the question is about the cash conversion here. And could you provide us about the free cash flow target for the current year for the full year? Yes. Thank you, Volker, for the question. With respect to the full year free cash flow, we expect a slightly negative to stable free cash flow development. That's basically driven by a positive operation cash flow development and on the other hand, increased -- significantly increased investments that we would expect there, fully in sync with our overall strategy perspective. With respect to the first quarter, yes, there has been a significant different setup in terms of the net working capital. That's due to the mentioned before developments. On the one hand, the inventory that we proactively increased because during the way where we are basically redeploying our assortments in the sCore strategy, just be reminded, we are reducing the assortment -- the number of SKUs, but we are ensuring then by the ones that we focus on that they are always, always available. And that is so very critical in the very beginning. And therefore, that's where we focus on, so a slight increase on the inventory side and on the accounts receivable, 2 effects. One is on FSD, as we are growing significantly that business that's increasing and on the other hand there have been some delayed collections. Therefore, we will see in the Q2 pretty much full reversal of that slight net working capital inefficiency that we have now seen in Q1 for obvious reasons. So if we then look at the entire H1, that will basically show the full cash flow development, although just be reminded, Q2 always is a quarter where we have structurally a negative cash flow development. There are no further questions at the moment from the call, and we switch to the written questions via webcast. Thank you very much. I will read the first question from Marcus Schmidt at Adobe. He has 2 questions. The first one is, could you please explain what is included in the line other OCF in the cash flow statement? The change year-on-year is quite material? And the second one is you have a solid cash position, though you had borrowings in the quarter, could you please explain? Yes, Marcus, very happy to comment on. I think on the other operating cash flow, we are talking there, basically there is VAT refund claims that are in there that is swinging and that depends then very much on the seasonality on certain payment dates and so on. And therefore there is a bit of a delay from that perspective. So roughly a mid-double-digit euro amount that is in there and swinging. And again, that topic will be completely resolved than in Q2. But again, it's seasonal, and it also happens usually in that way.With respect to financing, we feel very confident from the overall perspective. So what you're seeing there is the various and normal swings. We are continuously active in commercial paper markets continuously throughout the year. Therefore, the borrowings that you see there is very very -- the very normal way. Just be reminded, in March of this year we have a bond to be repaid. And as we stated in December, at this stage, we do not expect that we will do a refinancing of it, but we will basically take it from our existing cash position and also the short-term perspectives and the access that we have to all those places.Just as a quick information. In December, we have also renewed our RCF, which is then €1 billion, which has been done in a very good manner in a tough environment. And in addition to that, we have further access to fully committed bank lines at all times. But again, that's normal course of business, and we are very confident to fund our sCore strategy operationally and in other pieces very much with our strong financial position. The second question comes from Ulrike Dauer from Dow Jones Newswire. The question is, good morning. One question regarding the cyberattack. Have all impacts announced hits to revenue and EBITDA being accounted for Q1? Or is the financial impact spread over several quarters? Thank you, Ulrike Dauer, for your question with respect to the impact, yes, this is all fully reflected in the Q1 in terms of the operational effects but also the remediation perspective. What is important, and that does not only apply to us, but also applies to other companies in the future while we did have significant investments in the past into that direction, we will certainly deploy continuously in a business-as-usual way more into that direction, but that's just the normal part of our IT upgrading and IT transformation perspective. So a quick answer on your question, yes, all relevant effects covered in Q1. And yes, longer-term even stronger focus on that overall. There's one more question from Matthias InVerde from [indiscernible] The question is, could there be a potential CE expansion after the [indiscernible] expand into Germany as well? Let me take that one. Thank you for the question, Mr. Inveradi. Regarding our coverage of CEE with our normal, I would say, normal in [Metro macro operations] we are fully covering CEE to my knowledge, right? I'm just going through the map mentally, but I think we are there everywhere. Number two, the expansion of [indiscernible] is very much focused on Eastern Europe. There is no current plan that the expansion will come to Germany. Yes. Thank you very much for the participation and for your questions. We speak to you in 3 months for the next update, and I wish you all the best and stay safe, healthy and go out eating. Goodbye.

EarningCall_188

Welcome to ITT's 2022 Fourth Quarter and 2023 Outlook Conference Call. Today is Thursday, February 9, 2023. This call is being recorded and will be available for replay beginning at 12 PM ET. [Operator Instructions]. It is now my pleasure to turn the floor over to Mark Macaluso, Vice President of Investor Relations. You may now begin. Thank you, Candice, and good morning. Joining me here this morning are Luca Savi, ITT's Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's call will cover ITT's financial results for the 3- and 12-month periods ending December 31, 2022, which we announced this morning. Before we begin, please refer to Slide 2 of today's presentation, where we note that today's comments will include forward-looking statements that are based on our current expectations. Actual results may differ materially due to a number of risks and uncertainties including those described in our 2021 annual report on Form 10-K and other recent SEC filings. Except for otherwise noted, the fourth quarter and full year results we present this morning will be compared to the fourth quarter and full year 2021 and include non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures are detailed in our press release and in the appendix of our presentation, both of which are available on our website. This morning, we will begin with an overview of results and our outlook for the year. Emmanuel will then review the fourth quarter results before we close the book on 2022. Luca will discuss some key commercial achievements and our 2023 guidance, and we'll have plenty of time for your questions at the end. Please note there is additional information on the quarter and full year results as well as planning assumptions for 2023 in the supplemental data to our presentation, which I encourage you to review. Thank you, Mark, and good morning. Before we discuss ITT's results, I would like to start by thanking our shareholders for their investment in ITT, our customers, we always keep at the center of everything we do, and our employees for their ongoing commitment to ITT. This quarter, more than ever, I was humbled by the efforts and resilience of all our ITTiers. First, in Wuxi, China, our employees delivered the highest production quarter ever despite COVID infection rate of more than 75% in December. Our China team's performance was the highlight of the quarter. Next, across all our factories. We navigated supply chain disruptions and ensure on-time delivery to our customers. And in Europe, our teams worked through the energy crisis, the impact of the war in Ukraine and an updating inflation. I am grateful for the resilience you demonstrated this quarter and throughout 2022. It was your efforts that drove the record performance we are presenting today, including 12% organic orders growth following 13% growth in Q3, over 17% organic revenue growth in all businesses delivering double-digit growth, a record segment margin of 18.6%, 22% EPS growth after 21% in Q3 and over $130 million of free cash flow up 58% versus prior year. In many regards, ITT's fourth quarter was another step-up in performance. Now to the details. Our seventh consecutive quarter of double-digit organic orders growth resulted in an ending backlog of more than $1.1 billion, up 22% versus prior year. Higher volumes and price recovery drove the strong organic revenue growth led by industrial process at 27%. This year, we drove over $170 million of price recovery with MT at the forefront. Execution momentum in IP continued across projects, baseline pumps and aftermarket resulting in 27% organic revenue growth in Q4. CCT grew sales by 16%, boosted by share gains in connectors and strong demand for aerospace components. And in MT, the outperformance continues in every region. For the full year, we surpassed global automotive market growth by roughly 400 basis points. Our price recovery, volume growth and productivity led to a record segment margin in Q4, overcoming cost inflation impact of roughly $50 million for all of ITT, a truly remarkable accomplishment indeed. And on cash, after a tough few quarters, we generated strong free cash flow with 17% free cash flow margin in the quarter by far the best performance of the year. The common thread that underpinned these achievements was our people and their commitment to deliver for our customers. I was fortunate to experience this in Saudi Arabia, where Halid and the local IP team performed flawlessly and achieved 100% on-time performance for our customers in 2022. In the flow industry, this is a differentiator. And given this performance, we are investing in new testing capabilities to grow our presence in the region. This has already helped us win more than $20 million in incremental project orders. Or in like -- or like in South Korea, which has become our new center of excellence for vertical pumps, also here, we continue to invest in more technology, engineering resources and lean. Speaking of lean, we are working now on our next transformation of the plant layout in Seneca Falls, to optimize material flows and efficiency. We are already realizing the benefits of IP's lean efforts with more than 40% incremental margin in Q4 and for the full year. This relentless focus on excellence, continuous improvement and commitment to quality enabled us to deliver on our original revenue and adjusted earnings per share guidance in 2022 despite numerous unanticipated macro headwinds. On capital deployment, we deployed more than $600 million in 2022 or 3.5x our adjusted free cash flow. CapEx increased 18% to support the growth of in electrified vehicles and productivity. On M&A, Habani was a strategic acquisition and a great deal. It expanded IP's valves business by more than 50% and was accretive to ITT's earnings. And with this strong performance, our effective purchase multiple is now 8 to 9x and dropping versus approximately 12x at the date of acquisition. This morning, we announced a dividend increase of 10% after increases of 30% and 20% in 2021 and 2022, respectively, and we repurchased over $250 million of ITT shares, lowering our share count by 3%. Finally, on our 2026 long-term targets, we are making significant progress. A few highlights. Our relentless focus on safety drove reductions in both injury frequency and severity rates, leading to a 32% decline in the number of incidents in 2022 to a much improved incident frequency rate of 0.55. On sustainability, we are reducing our greenhouse gas emissions, increasing revenues from green products and advancing our diversity, equity and inclusion efforts. And our financial performance, organic revenue and adjusted EPS growth in 2022 were in line with our long-term growth target. We are proud of what we accomplished in 2022 but never satisfied. And that is why we're encouraged by the opportunities we see in 2023. With that, let me turn the call over to Emmanuel to discuss our fourth quarter and full year results. Thank you, Luca, and good morning. Let's begin on Slide 5. Revenue growth of over 17% was driven by double-digit growth in all businesses. In IP, projects increased over 70% organically. Here, we continue to benefit from share gains in large capital CapEx spend and near-shoring activities that are ramping up. Short-cycle revenue increased on a year-over-year basis across baseline pumps parts and service aided by pricing capture. The strength of the commercial aerospace recovery and accelerating demand for defense applications drove strong growth in CCT as well. Our aero components business grew 26%. However, we remain somewhat capacity constrained due to continued supply chain issues. Connectors grew 13% driven by market share gains as the benefit of new product innovations, particularly in defense, began to materialize. In MT, friction OE share gains in all regions and price recovery drove 12% organic growth. Friction's on-time performance was 99% again this quarter despite rising COVID infection rates in China, order volatility and unplanned customer shutdowns. Our rail business grew 10% organically and orders were up 35%, with strength mainly in Europe. On profitability, volume and price added 800 basis points of margin expansion, which more than offset 650 basis points of cost inflation and roughly 100 basis points of FX. We're continuing the push on shop floor improvements as demonstrated by IP's margin of 22.9%, up 700 basis points year-over-year, even excluding roughly 120 basis points of onetime items, IP's margin was still above 21%. This is quite an improvement from what was an 8% margin business in 2016. Next, CCT's margin grew 80 basis points to 19.2%, driven by higher volume and price recovery. For the year, CCT's margin ended at around 18%, up 270 basis points. Finally, in MT, margins declined 500 basis points to 14.7%. This was driven by a combination of higher material, labor and energy costs and unfavorable mix stemming from auto aftermarket declines in Europe. We also had a tough compare this quarter given the gain on asset sale realized in Q4 2021. This margin performance was clearly below our expectations, but we expect that MT's margin will return to its previous level as cost inflation subsides and we sustain pricing benefits. On EPS this quarter, we overcame $0.48 of cost inflation, $0.15 of negative FX, $0.03 for the loss of business in Russia and $0.03 from higher interest expense. On cash, we improved significantly in the fourth quarter, exceeding our last forecast on the strength of AR collections. We're seeing the benefits of our daily collection efforts and expect further improvements as supply chain disruptions is. Let's move to Slide 6. I want to make a few additional points on this page. First, price recovery again exceeded cost inflation in Q4. This is a testament to the differentiation we provide compared to the competition. Second, foreign currency was a significant headwind given the strengthening of the U.S. dollar. Third, with interest rates rising throughout the year, our interest expense was $3 million this quarter. We expect it will remain at this level throughout 2023. Finally, despite the long list of challenges we encountered this year, we didn't lose sight of the long term and continue to invest in new product development, redesign and innovation. Let's turn to Slide 7 to discuss ITT's growth momentum. Friction continued to win content on new EV platforms. We're making progress in our -- on our 2025 EV market share target of 37%. Further, in 2022, our total electrified vehicle revenue was over $100 million. We're also beginning to see investments in rail infrastructure materialize. Even with the significant loss of business in Russia in 2022, rare orders were approximately flat for the full year. IP is seeing strong growth in project that will drive future revenue outperformance, enlarge our installed base and drive aftermarket demand. In CCT, we saw another strong quarter with commercial aerospace demand continuing to ramp. And we also drove significant orders in EV connectors. This business has grown organically to almost $40 million in orders in 2022. The orders growth in our ending backlog give us good visibility into the revenue conversion through at least the first half of 2023. Let's turn to Slide 8 to wrap up the 2022 discussion. Here, I'd like to quickly recap ITT's 2022 performance. The headwinds on this chart for cost inflation, foreign currency and the lost Russia business amounted to over $2.30 of impact, which was well above our expectations when we issued our guidance early last year. As Luca mentioned, execution was the differentiator, our commercial teams sprang into action to execute pricing negotiations. We ramped our effort on productivity to address rising costs, and we completed the acquisition and integration of Habonim. While we're incredibly proud of this performance and humbled by the team's achievements, there is still much more that we can and will do. We're driving improvements in our on-time performance in IP and CCT further expanding our value-based pricing strategy and increasing our cash generation to execute more strategic M&A, all of which will drive long-term value creation. With that, let me turn the call back to Luca on Slide 10. Thanks, Emmanuel. Before we cover our 2023 outlook, I'd like to share some examples of how performance and innovation are driving customer wins and market share gains across friction, pumps and connectors. As we discussed during Investor Day, Motion Technologies is strengthening its leading position by taking full advantage of the EV transition. This year, we won content on 78 new electrified vehicle platforms, with awards from leading global automotive OEMs, including Tesla, BYD, Rivian, Poster and Neo among others. Our best-in-class quality with defects below 1 part million and outperformance at 99% on-time delivery helped us win the front and rear axle pass on a premium German electrified platform that we launch in 2024. Electrification is also good for our connectors business. We developed and investing in an EV connectors portfolio catering to regional charging infrastructures, and we are seeing orders surge. Customers are choosing our connectors because of our engineering capabilities and responsiveness. In industrial process, we are capturing share in a market that's rebounding from 2 years of supply chain disruptions and component shortages. Over the next 2 years, will deliver pump systems to an independent oil company in Nigeria using our Bornemann twin screw technology. This unique offering will stop flaring at site and eliminate roughly 1,000 tons of CO2 per day. Orders for green projects increased 50% in 2022 compared to prior year. We are winning on near-shoring opportunities including a hazardous waste treatment system for a new semiconductor plant in Arizona and for a commercial EV battery recycling facility in Upstate New York. Finally, we are making progress on the embedded motor drive technology, or EMD, that we displayed at Investor Day. Initial testing showed that our Gen 2 prototypes exceeded expectations in energy efficiency, operating temperature and vibration. We are currently in initial discussion and field trials with 10 customers across various industries to demonstrate EMD's capabilities. In Connect and Control Technologies, we are qualifying new vibration isolation technology that reduces motor induced vibration for military applications with leading helicopter OEMs. We with custom designing to develop our Cannon connectors together with our customers to withstand the most harsh environment. And this quarter, we are launching a new family of soldier war connectors. We're also qualifying ruckedized connectors for the net warrior wearable Mission Command system. So clearly a lot of exciting innovations that you will hear more about throughout 2023. Let's now turn to Slide 11 to discuss the growth outlook in each business in 2023. Starting with Motion Technologies, we expect friction to outperform the market as global production continues to recover to prepandemic levels. We foresee auto production to be flat to up low single digits in 2023 and are planning for a slowdown in demand, particularly in Europe in the second half. On the auto aftermarket, we think the weakness we saw in 2022 will persist through Q1 and then begin to improve from there. On the rate portion of MT, after a long year of declines stemming from the war in Ukraine, we exited Q4 with strong orders in both KONI and Axtone. Passengers rail is ramping up and with our 2022 awards, we think 2023 will be a strong year despite a potential slowdown in freight activity in the second half. Longer term, this market will be strengthened further by the public investments in rate infrastructure in the U.S. and in Europe. Moving to industrial process. We are entering 2023 with a healthy backlog. The project activity in this segment should continue to ramp with investments to support infrastructure, near shoring and clean energy. Parts and service demand, the aftermarket in AP has been strong and this trend continued into January. On the other hand, baseline pump activity slowed in Q3 and Q4. So we are monitoring industrial orders closely. Moving to Connect and Control Technologies. In the Industrial Components segment, the outlook is mixed. In Q4, we saw sequential low in the short-cycle industrial connectors business but encouraging demand in the EV and medical connectors space is providing a partial offset. In aerospace, there is no change to our positive outlook. Build rates are improving and air travel is accelerating amidst the commercial aerospace recovery. In defense, demand remains robust given the current geopolitical conflicts and heightened level of military preparedness around the globe. Let's now talk about our 2023 guidance. We expect organic revenue growth of 7% at the midpoint. This is due to a combination of share gains and conversion of our backlog, tempered by slowing short-cycle demand, primarily in the industrial markets. In 2023, we will drive further value-based pricing actions with a notable step-up in IP and CCT, following an absolutely stellar performance in MT in 2022. To put this guidance into perspective, we expect to deliver approximately $3.2 billion in sales in 2023. On profitability, our productivity journey continues. We still see many opportunities to improve our supply chain effectiveness. Our assumption is that supply chain and material constraints will continue to ease and higher raw material costs will subside in the second half. I do want to stress, however, that we are still largely in an inflationary environment even though it may be at a lower rate than last year. Our productivity actions net of inflation, will drive adjusted segment margin expansion of 50 basis points at the midpoint to 17.7%. With the progress at IP and CCT and easing inflation at Motion Technologies, we are well on our way to the long-term margin target of 20%. The strong top line growth and margin expansion will drive adjusted EPS growth of 7% at the midpoint. On cash, improving our working capital will be a key priority in 2023. We expect to more than double our cash flow generation and drive free cash flow margin of 11% to 12%. On Slide 13, as you can see, our strong operational performance and pricing actions will outweigh cost inflation this year. However, we expect the other nonoperational headwinds related to foreign currency and interest will impact our results. Still, we anticipate a solid 7% growth in adjusted EPS. For the first quarter, we expect to deliver mid- to high single-digit organic growth led by industrial process followed by CCT, more than 100 basis points of margin expansion at the midpoint, led by IP and CCT with MT approximately in line with its Q4 2022 margin rate and adjusted EPS growth of over 15% year-over-year. We expect EPS growth in the first half of 2023 to be stronger than in the second half. We are prudently taking a cautious output to Q3 and Q4 until we have more clarity on the economic situation. Now before we move to Q&A, please let me share a few final points. First, all year, we executed for our customers, gain market share and grew orders across all our businesses. The result is a strong, profitable backlog on which to execute and outgrow the competition in 2023. Second, we see positive signs in several markets, and we expect to perform well. The foundation for this performance has been laid over the past 5 years. And once again, we are executing. Still there are signs that growth will slow in the second half in some end markets and so we're staying laser focused on what we can control. Third, as I said in June at our Investor Day, electrification is good for ITT. Frictions flawless performance and many competitive advantages are amplified as the industry transitions to EVs, and we are well on our way to achieve our EV market share target. Lastly, once again, in 2023, execution will be the differentiator and that is ITT's strength. I would like to thank all our stakeholders for their continued support of ITT. As always, it has been my pleasure speaking with you all this morning. Candice, please open the line for questions. Congratulations on 2022. I think that's a pretty phenomenal execution effort given all the incremental headwinds you had to deal with. A few questions on the guidance I'm going to go with. Just looking at the price versus cost inflation buckets in your 2023 bridge, I'm a bit surprised that they're largely offsetting. You had about $0.38, I think, of headwind from price versus inflation in 2022, but you were positive in the second half, and I would have thought that would carry over and you would make some of that back up in 2023. Maybe you can just give us some more color on price versus cost and why that's not reading through as more positive in 2023? Okay. So I would say when we look at 2023, we are getting roughly half the price that we got in 2022, and those are going to be incremental, right? So those are incremental to the price that we got in 2022. The other element that I would like to stress before maybe passing over to you, Emmanuel, is that when you look at 2023, we're going to be slightly price positive across all the value centers, something that we couldn't say in 2022. So it's a substantial improvement and is a continuation of what we have achieved in Q3 and Q4. Yes. And Nathan, regarding the -- we were pricing -- price cost positive in Q3 and Q4. However, this wasn't like a large beat. We were slightly price positive. And I think that we maintain that in 2023. Keep in mind, in 2023, that there is some headwinds from a commodity standpoint, notably chemicals in Motion Tech and also energy. And so we are going back to our customers for additional price increases to cover and compensate this commodity increase. Lastly, I would say, in the second half of 2023, we expect things to slow down also. And so we want to be mindful of that economic slowdown when we ask for price increase to our customers. Okay. And then maybe the operational performance bucket that's [52] to [60]. I think that implies an incremental margin of right about 30% which is kind of what I'd expect from the businesses in the absence of additional productivity, which you guys clearly over-delivered on in 2022, maybe talk about the expectations for productivity in 2023 and the potential for you to deliver better incrementals on that growth? I think that on the other side of that, Nathan, is that the -- all the investment in strategic initiatives that we do have that we are working on. Let me give you a couple of examples, is investment in products like the EMD that we talked in the prepared remarks, this mass pad in Motion Technologies or also the digital automatic capital that we are developing for Axtone or the SFO next lean transformation. We are going through a complete relay out of SFO to take that plant to the next level. and also the lean activities that we started in CCT in places like Valence Califone. So -- and that's on top of all the initiatives to sustain our growth. So that is something that we take into consideration when you look at the incremental margin. So I'm going to ask like a bit of a convoluted two-part question, apologies. So the first, you sort of highlight that IT projects were up 70%, citing reshoring, would love specific examples. But then a couple of slides later, you sort of talk about the fact that in the connectors business, you're seeing some weakness in short-cycle which I thought was sort of this lead indicator for potential weakness. So a, maybe specific examples of reassuring, but b, how do you square the circle with IP projects bookings so strong, which indicates very solid underlying activity. At the same time, right, your short cycle can air in the mine, and maybe I'm wrong about that is sort of flashing yellow. Yes. I think that when we talk about connectors slowing down, we're talking about orders ourselves is still very much growing very fast. I think that our connected business, industrial connected business is mostly -- is majorly U.S. And so what we're seeing is a decline in -- I think, a slowdown in U.S. activity. I think on the other hand, in terms of IP projects, we're seeing I would say, specific growth in U.S. We talked about the semiconductor opportunity or award. We talked about the battery recycling, but also a lot of international growth. we're seeing, as we mentioned, we gained some really good orders in energy. We talked about Nigeria, but we also won in Angola. We won also in Malaysia and obviously, in Saudi Arabia. So I think that's the project growth, there is some in the U.S., but also a lot international. Great. I appreciate it. And then another question, sort of more of a big picture question. So effectively, if I look at your top line growth, the midpoint is 7%, EPS is midpoint of 7% by the way, one of the best numbers in coverage. So I'm not saying it, but we look at Eaton sort of not dissimilar dynamic. We'll look at Honeywell where in a normal environment, you would sort of expect more operating leverage from this sector. And the question I have, is this sort of the new reality just less operating leverage as we sort of shift into this high growth, high inflation mode? Or does this normalize eventually? Well, we certainly haven't given up on driving incremental margin. I would say 2023 is a little bit peculiar because we continue, as Luca mentioned, to have significant cost inflation. And also at the same time, we want to solidify the growth and the performance that we have executed on so far. And so this comes with investments both in resources, we're going to -- we're investing in supply chain but also in products. And so I think that kind of limits a little bit our margin and EPS growth. But I think that we are very almost -- we're also very focused on productivity. So I think that in the future, especially when we think about our long-term targets, we are really driving for better than average in terms of incremental margins. So a couple of questions just to make sure I understand the guide. First, on the Motion guidance, Luca, I think you said flattish to slightly positive overall kind of global Stars type number. You guys typically have a level of outperformance that kind of puts you above what that mid-single-digit guide would look like. It seems like the rail commentary is at least directionally favorable. So is there -- what kind of sinks at all to get to the mid-single-digit guidance? Is it some negative price downs, kind of normal contract stuff? It doesn't seem like that's the case, but maybe just help us think everything together for me. Okay. So when you look at Motion Technologies that we have seen that the market will be, as I say, you said 0 to 2 points of growth worldwide. We tend to outperform the market on the OE side, absolutely correct. Now one thing that you need to take into consideration, if you look at the outperformance this year has been 400 basis. And as we continue to win market share and get higher market share, that outperformance cannot be in the 900 points like it has been in the past. So that is something to take into account. Then second, I would say, is the aftermarket. And in the aftermarket, we see that Q1 probably we still suffer like we have seen it offering at the end of 2022, and it will improve in the second half when it took probably the aftermarket. And I would say that is everything that needs to be taken into consideration for Motion Technologies. The other aspect that you might want to think about it is also the potential slowdown in the second half, particularly in Europe. And that's actually good rich to the next question. We've been pretty clear that there's some conservatism about in the second half of the year because you have concerns over the pace of global economic growth, which makes a ton of sense. If I think about those points of concerts, it's the European OE that you just mentioned, it's the shorter cycle IP pieces. Are there any other areas we should be thinking about? I mean, is this being reflected in how you're thinking about incremental margins as you move to the back half of the year? Is it being reflected in any of the other areas that you touch? Okay. So you're talking from a margin point of view, I understand -- I understood the question is really, we keep on working on our work chest of opportunities, right? Pricing is still a big component across the board and we need to really step it up, particularly in IP and CTT. We have the lean transformation that we're going to go through Seneca Ford is a completely re-layout as well as the lean transformation of the balance side in CCT. The other aspect to take into account is we talked in the past is that they make and buy. So we really are focused on having the proper make and buy strategy. So if you think about it, once again, in Seneca Force is the closing of the foundry. This is something we announced last year is a process that takes 2 years and will be completed by the end of 2023, as well as the in-sourcing of the contacts on the connector side. So all of those are the stuff that will help on the margin side. Yes. And I would say also in 2023 in many regards will be different from 2022. You have seen in 2022 that we had a ramp really in margin and in revenue also in the second half. And this is not what we think is going to happen in 2023. We think that 2020 -- the first half of 2023 is going to be pretty strong in terms of EPS growth and similar in so many regards to Q3 and Q4. But we think that the global economy is going to significantly decelerate in the second half. I was actually -- that was a really good answer, and I wish I would have probably asked the margin question now, but I was more focusing on just the revenue decel expectations. So any comments that you can maybe layer on what you just were talking about, Emmanuel, on the revenue side where those conservatism is embedded anywhere else beyond the European OE and the short-cycle IP? Or is that about it? Yes. No. So I think that if you think about industrial components, industrial connectors, we think that they're going to decelerate in the second half. We also think that industrial and chemical pumps are going to decelerate in the second half. And energy also. Keep in mind, energy has been really going on all cylinders. And I think that I think the second half, we're bound to see something a lot weaker. Not to pile on to the guidance questions, but maybe I'll just tackle this a little bit differently. In taking a look at the range, right, I don't think that we were surprised at all by the high end of the range, but the low end of the range came in a little lower than expected. And so maybe one way to address this is what percentage of your business do you expect to see declines, not just decelerate but actually decline in the back half of the year? And are you already seeing that in your kind of like leading indicators? Are you seeing it in your business today? Or is it more around just an expectation on the broader economy? Okay. Let me say, is definitely an expectation on the broader economy, Joe, that's number one. But as you know, we have some short-cycle businesses in the portfolio. That means the industrial connectors, it means also the short cycle in IP. So when you look at the short cycle in IP, even though we see still good numbers. When you look at OSAT Q4 is still good for service and good for parts but we saw baseline actually declining. Now service is growing, both because of price but also volume. Part is growing mainly because of price in Q4. So we start seeing some weaknesses there. And then when you look at the industrial connectors business, this, I would say, even though they are still growing year-over-year, which is good. I would say that if you look at the distribution in detail, you see that sequentially, the distribution orders have declined Q4 over Q3. So you start seeing these signs. Did I answer your question, Joe? Yes, you did. I guess maybe just to kind of contextualize it and we were talking about maybe about 1/4 of your business that you're seeing this potential weakness. So let me take you through the breakdown. So in IP, we're probably talking about something like 40% of the business. It's probably around 30% of the business. This is industrial connectors. This is industrial components. And MT is mostly driven by auto. Okay. All right. That's super helpful. And then my follow-on question is just around the IP margins, clearly a great story over the last several years. I mean, even adjusting for the onetime items above 20% is pretty incredible. As the business starts to shift more into projects, what's your expectation for the margin trajectory of this business moving forward? The trajectory doesn't change, Joe. The trajectory for this business is up. And we have been very, very rigorous, very disciplined, everybody understands in IP that the rigor and the discipline in pricing is fundamental for us to deliver the performance that we are delivering. So just to give you another data point, if we look at the backlog that we do have today, also the projects backlog is at a record high of profitability. So everybody understand it. we have the proper processes, and we are executing that way. I want to start off asking you about the friction. I know you mentioned with respect to EV still targeting getting to that 30% global market share by 2026 and share gains continued to be expected this year. But there have been some headlines out recently about the global market leader in EVs, losing some market share to some of the Chinese manufacturers. And in general, it seems that EV space is getting more competitive. So just curious to hear your guys thoughts on what it means for ITT friction, your market positioning and profitability. Well, that's very true, Damian. I think that the dynamic probably is changing, it's getting more competitive out there, a couple of things. I think that the market will keep on growing, growing very fast, that has not changed. When it comes to the competition, we are still able to differentiate ourselves when we're playing against the competition. So you're still facing challenges when you are designing the braking system for EVs that are still relatively new. And therefore, the speed to solve those problems is something that really helps you to differentiate. And this has really helped us so far, and we believe it's going to help us for the years to come. We haven't -- and this is demonstrated by the number of electric vehicle platforms that we have been winning in 2022 with 78% for the full year. And Damian, I would say that the greatness of friction is that we play with everyone. And so whether it is a Chinese electric vehicle or a more traditional OEM also continuing to develop ICE platforms, we made a point to apply the same focus and to defend our existing business and go after the competition. And so I would say that even if there's a transition that changes a little bit or slows down, this does not impact our business. Understood. And as it relates to capital deployment, it doesn’t seem like you’re planning for much buyback this year. Are you maybe expecting some acquisitions to hit or – why is that? If not on the deal front, would it possibly make sense to repurchase more shares or offset some of the higher interest expense. Really appreciate just any thoughts around that. Sure. So as you mentioned, Damian, we are really focused on growing this business through M&A and adding complementary businesses to really strengthen IT. And so we mentioned several times that we have a very healthy pipeline. We’re going after great opportunities. And when we travel around to see all these opportunities, it’s really refreshing to see that the team can relate immediately to the business opportunity or even the customers. And so we feel pretty good about our M&A activity in 2023. And that’s why it’s going to take precedence above repurchases. If that doesn’t materialize for whatever reason, then we’ll continue to be aggressive in repurchases as we’ve been in 2022. I just wanted to start on the cost side for expectations into '23. So the cost inflation, I know it's less than -- you're guiding to less inflation than what you had in '22, but it's incremental inflation off a high number. And Emmanuel, I think you called out chemicals, you called out energy. I'm sure there's some labor in there. But I just want to understand the lags here because if it's like chemicals and energy and things levered to oil prices and gas prices, I mean, in the U.S., they're down and in Europe, gas prices are down like 85% versus the peak and they're down -- they're at late '21 levels now. So just curious as to like how -- what those exposures are and what -- it seems like there has to be some give back on the energy side pretty soon. No, no, we agree, Joe. I think that for the moment, there's -- we're still in a period where we have high cost. And one thing that we have to keep in mind is that even if the markets show a significant decline, whether it is in energy or for the price of steel or those type of things, there's still a lag before we can experience it. And I think that what you're seeing here is that Q1 is really very much in line with what we've seen in the second half of 2022. And we're going to start seeing progressive benefits in Q2 and later in the year. So I think that a lot of the incremental inflation that you're seeing is on the chemical, the other raw materials. We buy aromatic fiber, for instance, and that has shot up through the roof, 10 is not easing up either. But on the commodities that are going to go down, we're going to experience that decline later in the year. Okay. And then if I could just follow-up on MT, specifically on the margins. Obviously, there's a lot of upside to where you used to be there. How much of this is like specific COVID-related costs in China, just for like having to keep people on site and all the extra stuff you had to do during shutdowns? And if that -- if we get back to China, just living with the virus like we do here now -- how much does that give you back like almost immediately if you can take some of those precautions away? So I would say when it comes to -- that is a known issue, Joe. As I think that China has been able to go through all of that performance, those costs have been fully compensated by productivity and the volume. And so not at all. That's the short answer. Maybe just following up on Joe's question there and I'll ask them in a different way. So I think about the progression of MT profitability going forward. Can you talk about the path back to high teens margins in that business? And sort of given what you know today, how you're thinking about the time line to get back to those prior peak-ish ranges? Okay. So when we think about MT, the long-term target that we shared at Investor Day have not changed. Within, MT can reach the operating margin long term. That's for sure. And when we think in terms of time line, just because of what has happened probably, they're going to get there a little bit later than CCT and NIP. But that 20% is there can be achieved. We just have to get a little bit of this since they go through this make out of this NIC. But we have a clear visibility to get there. Yes. And I would say, Vlad, that when you think about the past, obviously, maintaining pricing is important for us, while commodities are slowly declining. I think productivity has been has been a war machine in terms of productivity. And obviously, we continue to count on that. And then when you think about the other businesses out of friction, they've been also quite impacted by commodities inflation business like Axtone [indiscernible] Steel, for instance, Wolverine as well. And so we're really driving the recovery in those businesses to help us get back to that 20% margin target. That, as Luca was saying, may not be around that 3-year horizon, but more around the 5-year horizon. So Vlad, if you think about Axtone, I mean 25% of Axtone business disappeared overnight and that was a very good profitable Russia business. Now despite all of that, Axtone was profitable in the mid-single digit. But as you see now, they have to recover and have to rebuild with a different footprint with a different market. Maybe just as a follow-up, Wanted to ask you a little about Habonim actually. That business seems to be performing quite well versus your expectations, and you highlighted how the business expanded IP's valves portfolio. So could you talk about sort of your opportunity in VAVE and how you're thinking about the potential to continue expanding your presence there either with Habonim or through incremental capital deployment in that end market? Thanks for your question, Vlad. That's spot on. I think the VAVE is an area where we are investing and growing organically and inorganically. We have some very differentiated products with IP, with intellectual property that can be used in pharma and biopharma that happens when with some key accounts. And we keep on investing on that front. On an organic point of view, we have opportunities in the pipeline. So we will keep on investing also inorganically and as well as leverage the Habonim acquisition to expand more with -- more with the Habonim happening products in North America. So all of that is happening. And there are some key markets where Habonim is strong. It might be cryogenic, pharma, hydrogen that we are penetrating more and more, that in terms of investment, in terms of opportunity for the future, M&A, et cetera. When it comes to the results, it's been a great acquisition. It's been a very well-executed integration that was not so focused on the integration as much as value creation. And if you think about the multiples related to today is between 8% and 9%. So it was, as I said, a great deal and very well executed by Ilan and by Kasturi by the entire team. And I would add to this that as we had previewed when we acquired Habonim, it is also helping that acquisition is also helping us see things differently in the way we manage our existing engineered VAVE business. And so we've been driving a lot of the margin up in that business, which has participated in the margin expansion story also of IP. And I would say on that business, engineer Valves, which was the legacy business of ITT, we are seeing significant opportunities from the biopharm standpoint. So also in that regard, Habonim as well as our existing business are expected to grow significantly in 2023. I think you gave some good color on the segment guidance for 1Q, but I'm just wondering like if you can rank order kind of confidence in the level of margin expansion for each of the segments or where you see the most and least. So when I look at the 3 different businesses, they are facing a little bit of a different challenges, Jeff. In terms of IP, we have a very good momentum there, and we are taking to the next level. We need to invest. We need to invest there and keep on investing in this business. But we need also to keep a very close eye because you have a short cycle business that is slowing and a long cycle with big projects that is really hard. So you really need to wait and decide properly where to invest. So good momentum, keep an eye on what is going out there in the industrial. When you look at Motion Technologies, is working like crazy on the operational efficiency while sticking on the pricing and negotiate as well as you can on the pricing. So that there is still quite a lot of work to do, and it's quite difficult because you are dealing with automotive with a very difficult market scenario. When it comes to CCT, CCT has got plenty of opportunities and in terms of -- because of the aerospace that is growing. But at the same time, what we experienced in CCT in Q4 was challenged on the supply chain that were higher than expected. So if we look at Q4, probably we were not able to deliver roughly $10 million, $20 million of revenue just because of supply chain issues and labor shortages and CCT is probably where we need to pay more attention because of those kind of issues. So Jeff, in terms of margin trajectory, I think that if you think about IP and CCT, as Luca mentioning, they are in a different dynamic than MT, where if you think about IT, we probably closed from a sustainable margin performance in IP at around 18% in 2022. And so we're going to drive roughly 100 basis points higher in 2023 than that. CCT is going is also going to drive significant margin expansion a little less than 100 basis points compared to the 18 -- roughly 18% in 2022. So really good momentum there. In MT, we're clawing our way back into the high teens. And so I think you're going to see a nice improvement, but still very much affected, as we mentioned, by material cost inflation that still remains pretty big. Okay. That's very good color. Maybe I guess, within MT and maybe broader just -- you talked about particular, I think, aftermarket weakness in Europe in the front half, production slowdown in auto in the back half in Europe. Maybe just dial in a little more on how you're thinking about North America and China? And just more broadly, what's your expectation for kind of rate of recovery here? We hear a lot of different things on China in general and just want to understand what's kind of built into your guidance? Okay. So when we look at the market for 2023, I said, we said 0 to 2 the market, 2% growth, we will outperform that. And then Europe, probably we estimated flat also China and low single-digit growth for North America. That is our expectation. And we expect -- our forecast and we expect to outperform that, as I said. When it comes to the second point in terms of China, from an economy point of view, I think it's going to -- China is going to do fine. If I think about the difficulties that we had in Q4 in December, 75% of all our people got COVID, never heard of. And guess what? They're all back in right now and they're all working. So my view on China is actually a positive one. And so in terms of outperformance versus all the different regions, we expect that we're going to have first overall global an outperformance in the market in '23, that's going to be a little higher than what we've seen in '22. And then all the different markets are going to be -- we're going to outperform all the different markets with the highest outperformance probably in China and an equal outperformance in both Europe and North America. I guess following up on the frictional outperformance question, it sounds like step up a little bit relative to the 400 basis point run rate at least globally that's certainly below the 900 that we've grown accustomed to over the years, but it makes sense given the share gain trajectory that you've been on for so long. If we think about the next few years? Is mid-single-digit outgrowth the right place to kind of hang our hat and modeling friction OE? And how should we think about that? By region, we've also gotten accustomed to strong outgrowth in China, really significant outperformance in North America and then more modest just based on your elevated share in Europe. Spot on, Brian. So I think it would be different, different geography and what you said is correct. So probably lower in Europe and more in North America and in China. I would say, even higher in China because also our performance in terms of award has been outstanding also in 2022, thanks to [indiscernible] and our sales team over there. One positive tailwind that might be on top of that, on top of what we said is the EV. And the reason why I'm saying that is because our win rate in electrified platforms is much higher than our market share. So that might feed a larger outperformance in the years to come. So we don't see that yet because the start of production is going to be in the next 2, 3 years. But with them materializing, that could be a tailwind to our -- to a lower outperformance. I appreciate the detail. And following up on having that seems to be a win for [indiscernible]. Could you offer some finer points on exactly how it's pacing relative to your initial deal model? And if there is a figure you can speak to, how much your new energy project funnel has expanded since acquiring the asset? Yes. So I think that what we're seeing is that hydrogen -- the hydrogen opportunity is definitely there, and we're expanding really very much on that end market. bone is gaining share. It's taking share from everyone. I would say from an order standpoint, we're seeing some really nice number clearly outperforming the model. from a revenue standpoint also and for a margin. So really across the board, including cash, where we -- and we've seen some nice improvement in the fourth quarter in terms of working capital reduction also. Well, we -- the next opportunity that we have with Abom, is to really drive the productivity in there. They are producing -- let me give you an example. They're still producing in batch there. And so that's limiting their production capacity. And so very constructively, we're going to implement lean and so free up a lot of capacity, which is going to allow us to support future growth without making CapEx investment, but just reorganizing the line. So we should see in addition to volume, really, the margin taken off.

EarningCall_189

Hello, and welcome to the Lancashire Holdings Limited 2022 Year End Results. Throughout the call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. Please note this call is being recorded today. Okay. Thank you, operator. I'll just give a brief overview of 2022 and then I'll be handing over to Paul, who will give you some details on our underwriting highlights of the year and then Natalie will give you the financials. If you look at our growth for the year of 35%, it's incredibly pleasing to achieve that level of growth for our business. As part of our long-term strategy, we very much believe that you have to grow in excess of the rate change at this point in the underwriting cycle. So clearly, if you just move with your rate change and actually grow you're not moving our business forward. So it's very important that we grow at this part of the cycle. And clearly, our belief is that other parts of the cycle has to shrink your business back or cut your risk levels. So we're very much in a period where we want to grow. Our premiums, of course our books, it's very pleasing to grow for 35% to $1.7 billion of premium. In fact if you look at our business and what we've done since the market turned, at the end of '17, we've grown substantially in excess of rate every single year and we've written more than $1 billion of premium since the end of '17. So at the end of '17 our business was relatively small, as $600 million of premium and went out to $1.7 billion. We also expect 2023 to be another good year of opportunity for Lancashire, where we expect to grow in excess of rate for '23 as well, but we expect the growth to be more muted than '22 and more muted than our number in '21. So that's what we think we can achieve. We've added more product lines across our book. We've had lots of great people for more diversified business, thus allowing us to move our business forward. When you look at '22, clearly, it's been another year where the increasing, sort of, a high level of loss activity. Hurricane Ian was the second largest catastrophe loss on record, very large events. Clearly the War in Ukraine or the conflicts in Ukraine has created some loss events and a very difficult loss experience or very different scenarios from that terrible event. We've also experienced some losses in our -- in some of our energy lines for the year. So not a year without events and things to consider. So to achieve the combined ratio of 97.7% when looking into all those things have happened during '22 is incredibly pleasing. I think what it demonstrates as well that business is more robust. It allows us to navigate years such as this better and I think you're seeing the true benefit of the growth and the diversification coming through to our book. So I think we just built a better business over time. It allows us to absorb year such as this and navigate through large loss events. Obviously, '22 was a year where the end of free money arrives rapidly and clearly, there was a change in our investment return, which was mostly unrealized during '22, and clearly we will benefit from better investment returns throughout '23. So if you think about it, we're getting better margins on our underwriting portfolio, we could see more investment income into our books for '23 again more margin in a system allows us to navigate any losses that may come into our '23 book. Just moving on to capital. We've always been very active managers of our capital whether that's in a soft cycle or a hard cycle, and clearly with the changes to the reinsurance market 1st January with some better modeling that we've achieved through our book. There's been a lot of movements in our capital base and clearly the benefit of diversification is clear to see now. We also have very good support from long-term reinsurance partners. We spoke a lot over the years about having the right reinsurance strategy, where is the best long-term partners. As most of you will be aware, it was a very difficult renewal, whether that be for cat business or specialty RI, but we had a lot of good long-term support. We went early as we generally do and Paul can give you some more details later. But lots of support from our long-term reinsurance partners allows us to continue with expanding our footprint, better use of our capital with the business, more diversification. And as I said some better modeling, which is all factored to a very, very strong capital ratio, which is exactly where we want to be. We want to be positioned for '23. We want to be in the strongest capital position that we can, which we are gives us more opportunity, more flexibility as we look forward. So with that, I'll just hand over to Paul to ask him to give you some more data on our underwriting activities. As Alex has described it's been another year of full momentum that seen strong premium growth of 35%. Market conditions in every segment of the portfolio continued to improve with an overall portfolio RPI over 108%. We've now had five years of positive rate movement. In line with our strategy of underwriting the cycle, we've grown our underwriting footprint significantly during this period. Since the start of the hardening market in 2019, as Alex has already alluded to, we've added over $1 billion of gross written premium. This growth has come from expanding our traditional product lines, as well as consistently adding new teams and product lines to the business. The $1 billion of premium growth during this five-year period has been split pretty evenly between expansion of those traditional product lines and the addition of new teams. For 2022 we guided to $50 million to $60 million of additional premium from the new teams that joined during the course of 2022, and we ended up marginally above the top end of this range. These product lines will continue to mature over the coming years. The aim of the past few years growth has been to build a more robust and balanced portfolio that can better absorb the natural volatility of our products. We are now seeing the benefits of this strategy with the portfolio remaining profitable, despite the second-largest U.S. windstorm on record and the Ukraine, Russia complex the impact multiple lines of business in which we specialize. In the next two slides, I'll cover off our reinsurance and insurance segments. We will cover off a few highlights of 2022 and then look forward to 2023 and our view of how it may evolve. Moving to reinsurance first. In 2022 we have once again seen very strong growth in our reinsurance segment as rates continue to improve. The majority of premium growth came from the continued build-out of our casualty reinsurance segment and the lines of business that sit within this. For classes within the casualty reinsurance segment, RPIs were marginally positive. Rating adequacy remains robust and we are very happy with the progress we've made over the past two years building out this segment of our portfolio. Moving on to property and specialty reinsurance classes, RPIs were approximately 110%. As previously guided, our intention in the natural catastrophe expose classes was to maintain a stable footprint and take the improved margin. We are successful in this regard with these classes growing marginally ahead of rate. For specialty reinsurance classes such as aviation, energy and marine, we grew ahead of rate as we continue to build out these product lines. Now moving onto our 2023 outlook for the reinsurance segment. In summary, we expect a continuation of these trends. The casualty segment, we anticipate stable market conditions as rating levels that remain very robust. We witnessed this at 1/1 and our anticipation is that this continues through the year. We will continue to mature our casualty reinsurance during the year, albeit likely at a slower rate than the past two years, given the progress made thus far. Specialty reinsurance particularly for aviation and political violence hardened significantly at 1st January with rates and retention increasing and terms and conditions tightening. We aim to grow our specialty reinsurance during 2023 as market conditions remain favorable. For the catastrophe exposed reinsurance lines, we entered a true hard market. The imbalances demand and supply had already been building during 2022. And Hurricane Ian just push the market over the precipice. There was a significant pricing correction, a reset of attachment points and restriction of terms and conditions, all of which feed into a very healthy RPIs we saw at 1/1. These are undoubtedly the best trading conditions we have seen for many years. Broker reports placed risk adjusted rate change for property cat and retro in the range of plus 30 to plus 60, and this ties in with what we saw in our book. Just as a reminder, our property cat and retro has recently made up approximately 20% to 25% of our gross written premium. Our plan for 1/1 was to maintain a broadly similar net cat footprint in news market conditions to optimize our inwards portfolio and significantly improved margin. As a result, we took the decision to retain more risk by buying less retro protection, as we optimize our inwards portfolio accordingly. This puts us in incredibly strong capital position with dry powder for the remainder of the year. Our anticipation is that the robust market conditions endure, which will provide plenty of future opportunities. I'll now move on to our insurance classes. We continue to grow the insurance segment ahead of rate with 22% premium growth and an RPI over 108%. Almost all of our insurance sub classes had positive rate movement, and for some of these classes, 2022 was the six-year of positive rate movement. As a result of this and as previously guided, the rate increases of some sub classes has slowed albeit importantly is still improving. A large proportion of growth came from property insurance class due to the addition of the construction team and the opening of our property offering in Australia, and also a very strong rating environment. Every class within the insurance segment grew premiums year-on-year. For 2023, we expect to see continued rate improvement in every product line as dislocation in the reinsurance market flows through. We expect to see more significant rate increases in classes such as aviation, terrorism, political risks and property insurance as well as more gradual rate improvement across marine and energy. To conclude, I'm very pleased with the 2022 underwriting result in the context of the loss activity. The investments and decisions of the past few years are paying off. More importantly, we see a significant opportunity in 2023 to further build out and enhance our portfolio, whilst importantly maintaining portfolio balance and ensuring we continue to selectively underwrite the opportunity. Market conditions in many of our product lines are excellent and the catastrophe exposed classes the best we've seen for many years. For underwriters this is an exciting market and provides a fantastic opportunity to build on the work of the previous years, and more importantly, improve the underwriting contribution to ROE. Summary of our results for the year is laid out on Slide 10. 2022 has allowed us to demonstrate the benefits of our successful growth and diversification strategy in the last few years. We are now much better equipped to absorb significant catastrophe losses such as Hurricane Ian and still return on underwriting profit. This is a positive development for the business. The benefit of our growth over the last few years comes through the net premiums earned. These have increased by 42% since last year. With additional premiums written this year, yet to earn three, we will continue to see the benefit of this year's growth over the next few years. Some of the newer lines of business that we're writing, such as casualty, tend to earn over a longer period than our historical book and with our prudent reserving, we expect to deliver profits over a longer period. Our operating expense ratio is lower than in previous years at 13%. This reflects the benefit of the increase in net premium. The small increase in dollar terms in G&A expenses is largely due to higher employment costs, which were somewhat offset by the favorable sterling to dollar exchange rate. The operating expense ratio has also benefited from lower variable pay in 2022 as well as in 2021. The acquisition cost ratio is higher than last year, this is due to business mix changes with more proportional business written. This tends to have higher commission rates. Our overall expense ratio, just under 40%, is in line with initial guidance given. Moving onto losses on Slide 12. Catastrophe and weather-related losses for the year was $718.4 million. These losses included impacts of Hurricane Ian, the Eastern Australian and South Africa floods, U.S. Midwest derecho storm and Winter Storm Elliott. In addition to the catastrophe and weather losses, we also incurred large claims totaling $90.4 million, including $65.8 million related to the ongoing conflict in Ukraine. The increase in Ukraine related reserves in the fourth quarter incorporates an additional management margin over the previous estimates. To case the potential indirect exposure as a result of the conflict, weather remains a high level of uncertainty. The remaining large losses defined as risk losses over $5 million relates to few losses in our energy and power lines of business. These are well within our expectations for these classes. Despite the active loss environment, we delivered a healthy combined ratio of 97.7%. This is a clear demonstration of the successful implementation of our long-term strategy to better balance our business. Turning to reserve releases. We have had a overall favorable prior year loss development in every calendar year since the company was formed. For 2022, our total favorable prior year development was $100.5 million, in excess of the original guidance of $70 million to $80 million. The favorable prior year development was positively impacted by IBNR releases from 2020 and 2021, as well as releases from individual losses from earlier accident years. Our history from reserve releases is done for a prudent reserving approach. Now turning to Slide 12. As we've been talking about over the last few years, continued growth in the new more attritional lines of business will offset the volatility of our catastrophe exposed classes to some extent. Although these will have an impact from the underlying attritional ratios. The underlying attritional ratio for 2022 was at the top end of our initial guidance. It's around 37% compared to 36% in 2021. The impact are changes for business mix, increase this ratio in the region of 11% compared to 2021, which more than offset the benefit of rate rises across book. The charts on Slide 13, demonstrate our improved ability to absorb catastrophe losses, reinforcing the benefits of our growth and diversification strategy. As we have said before, our new lines of business are far less exposed to catastrophe losses, and are not as capital intensive as catastrophe exposed classes. They help to diversify our book and give us a stable income stream to help offset volatility from the catastrophe and large risk exposed business that we write. They are accretive to the change in fully converted book value per share. Without these new lines, our earned premium would be lower, and this year's catastrophe events would have resulted in a higher combined ratio. Our investment return increased slightly in the fourth quarter, resulting in a negative portfolio performance of 3.5% for the year-to-date. The negative returns for the year, with the result of significant rate rises, and the widening of credit spreads, resulting in losses across our portfolio. The majority of these losses are unrealized and should unwind fairly quickly given the short duration of the portfolio. Our investment portfolio remains relatively conservative with an overall credit rating of AA minus. We aim to invest in largely low risk, short duration and liquid investments, whilst taking more risk on the underwriting side of the business. We do not intend any material changes to our investment strategy in the medium term and we'll keep the overall portfolio duration short. Given the short duration of the portfolio, we will start to see the benefit of interest rate rises relatively quickly. We do not anticipate major changes to our investment portfolio in 2023. Moving on to capital on Slide 15. Even given the overall comprehensive loss in 2022, we retain a strong and robust capital position. We finished the year with an estimated solvency ratio of 300%, which would reduce to approximately 250% following a 100 year Gulf of Mexico wind events. The increase in our solvency ratio in the year is due to changes in our inwards business mix and outwards reinsurance, as well as modeling enhancements in the second half of 2022. As I previously noted, we generally expect our BMA solvency ratio will be comfortably above 200% going forward. At this level, we are more than sufficiently capitalized from a rating agency perspective. Finally, moving on to forward guidance. With the implementation of IFRS 17, 2023 is a tricky year to provide forward-looking guidance. For simplicity, we will focus guidance from the underlying combined ratio, excluding catastrophe losses and reserve releases. We will then be able to update this guidance on an IFRS 17 basis, post the publication of IFRS 17 interim financial statements in August. On the current accounting basis, we expect the underlying combined ratio for 2023 excluding catastrophe and large risk losses to be in the region of 74% to 79%, with reserve releases in the range of $100 million to $110 million. Catastrophe losses are impossible to predict, but with better pricing and improved terms and conditions, plus the growth in our non-catastrophe exposed lines of business, it is reasonable to expect that we will continue to be able to absorb higher dollar amounts for cat losses on historically. So just to summarize, our long-term strategy doesn't change, the underwriting opportunity look strong. So we expect to grow our business again this year. As you said, the capital base is very strong. We expect to probably use some of that capital to grow our cat book this year, if we see the opportunity there. So I think everything that we -- everything where we want to be we are. So our position is exactly where we want to be. And we expect some really good opportunities for the [2023] year. [Operator Instructions] Our first question comes from Freya Kong from Bank of America. Please go ahead. Your line is open now. Hi, good afternoon. Thanks for taking my questions. Firstly, could you talk us through the moving parts of your regulatory ratios, which was up 30 points in the half, despite the impact on shareholders' equity? How much of this was a reduction in exposure of cat, driven by reinsurance changes or how much of this was due to the modeling changed and this is factor in forward looking assumptions? And secondly, could you just give us some color on the modeling changes that you've made and how much of this benefit transfers into your credit rating models? Thanks. Hi, Freya. It's Natalie. I'll take those questions. So, first one on the regulatory ratio, as we've said in the scripted remarks, we were looking to retain about the same amount of cat risk as we had last year. So the change in the ratio that you can see since Q3 is predominantly due to modeling enhancements rather than any change in the risk in the underlying portfolio. And then what we've done on the modeling side, we've been looking over the last few years to try and get a better view of secondary perils, such as flood and fire. So the modeling enhancements that we have done actually increased results for those types of events, that lower return periods, but they also lower results for extreme tail events extreme end. So that means the PMLs effectively that drive the capital models have come down and you can see that in the PMLs as well that we publish in the financial statements. So I think -- you said, that they are forward looking, they use the PMLs at 1/1. So yes, so that -- to that extent they are forward looking. And then you don't get the same benefit exactly in every single capital model, but it save a few while benefits across the capital models. Okay. Thank you. And when you're saying -- when you say you want to retain the same net cat footprint, is this '22 versus '21 or '23 versus '22, just to clarify? I think Nat that was making reference to '22 versus '21 which is, if you remember at the start of the year, that's what we guided to for last year. Oh hi, everyone. Thanks for the questions, first of all on the BSCR just trying to understand how much of this move was denominator versus numerator you've touched on it a little bit I just struggle to get my estimate my estimate probably looks a bit silly now. Trying to understand really that capital requirement has reduced materially year-on-year or whether it's to benefit from assumed future profits? And the second one is thanks very much for the attritional guidance, I guess just trying to reconcile that to 2022 would that look to be around 77% in 2022 and so it sort of pointing to the same mark or could my math gone a bit right? Thanks. Okay so, on the first question. The BSCR doesn't assume future profits at all. The benefit that you've seen between Q3 and Q4 is largely due to the enhancements we've made to the model, so that's the capital required benefit that you're seeing. And that would have been very hard for you to model correctly, because obviously, we didn't give any indication that we were looking to enhance the modeling last time we spoke. And on the guidance here, we're looking at the combined ratio guidance. The underlying combined ratio guidance is pretty much in line with this year give or take. Okay. And I guess just as a challenge on that. I guess with all - I appreciate the mix change, but with all the growth in the better pricing would you consider there is extra conservatism in that guide or - what would be being not to sort of including - because it would be quite simplistic maybe to assume that that would improve year-on-year? Yes, I think what, when the pricing goes up at beginning of the year, that does take a while for that come through. And I think Paul is talking about the pricing. Remember that's only on about 20% of the portfolio and that's part of the portfolio that doesn't really impact the attrition either because we're talking about and - he's been talking about cat and retro. So it's really predominantly business mix. There are a lot of earnings coming through from this year into next year and earnings from this year will come through over the next like 18 to 24 months. Yes sorry, I didn't quite hear the operator. First question, I didn't quite understand. You made a comment about dry powder talking about. I think you're talking about retro that you didn't use, you took a bit more risk on your book net that - to me, that would be the opposite of dry powder if you'd used that more capital. But can you just clarify what you meant? I think maybe did you mean there's some unused retro capacity for later renewals. But just clarify that first of all? Second question, if 2022 happens again with respect to cat losses, based on what you've seen in renewals and what's likely to happen on things like attachment points. Do you think your cat loss would be lower? And then the final question you've helpfully provided the underlying combined ratio ex casualty. I think it's on Slide 12. My math is going to be proved here, but when I back sold, I'm getting to an underlying loss ratio for casualty of about 95, which still seem very, very conservative. Can you just confirm that's about the right number? Thanks. Hi, Andrew, so I'll take the first two of those questions and apologies. I wasn't very clear in my script, but to clarify so 1/1 we kept our net cat footprint broadly stable. We proactively decided to buy less retro limit protecting our own portfolio going into 1/1 and retain more risk. And then we managed our inwards portfolio accordingly to end up in a position where we're broadly at the same position on a net basis. And again, that's something we've spoken about over the last three to six months. Given our strong capital position that we have, if market conditions continue to remain strong and there are good opportunities to increase on certain client then we have the capital position to do it. That was the reference to dry powder. That doesn't obviously mean we have to, but we just in a very strong capital position if those opportunities do manifest. So hopefully that brought to be a, - clarity there. And sorry - because I just because want to speak to, when we talk about net cat footprint, you're referring to limits of - it's not premium it limits? So if you - on your second question, of its first point I'd make is if you take something like Hurricane Ian which I think you're referring to obviously, a large proportion of the book that would have been impacted by and hasn't yet renewed. But let's just assume a broadly similar inwards portfolio are you then kind of the things you need to think about. It sounds like you're already thinking about. On the inwards portfolio for both property cat and retro, retention levels have moved up and in some instances quite significantly so, very simply that pushes more loss onto the cadence and less loss into the reinsurance market. Offsetting this a little bit is, of course, we buy our own retro and we have retained a bit more also, we're part of the retro market and we have to take slightly increased retentions ourselves, albeit they weren't that material in all honesty. So those two things combined I think in pure dollar terms, if you had exactly the same event, which never happens, by the way. You would be looking at slightly less dollars and also kind of [Hama Home], the point that we've been making through the scripts, you're just going to have a more robust portfolio with the rate environment we're going into the bigger business that we have, the broader spread of business that we now have. So the portfolio overall is obviously going to be much better positioned - to take those kind of hits. Paul is actually thinking less about in a way, more about the other stuff. The other weather stuff, you know, Elliott? Yes look, I think on those smaller type events of which the market in - has a lot over recent years. I think that's why you're seeing the real focus on increasing retention levels at the 1st of January, which I completely expect to continue through the remainder of the year. And it is exactly those type losses that will be pushed back to cedence. There will always be types of losses that are of a certain level that could still find its way to reinsurance market let's be clear about that. But the level at which the market is now attaching and that applies obviously to our portfolio as well. We're in a far healthier position. So your assumption is correct. The impact of those type of events at the levels we've seen will be both less material than we've seen in the past few years. It's just worth noting as well. Obviously, we talk about rate increases on property cat and retro not all of that rate just country premium, a lot of that risk adjusted rate change has come through these movements in attachment points. Hi Andrew it's Natalie. On your third question, I think we've said over the last few years since we started writing the casualty book that we were going to start off and we're saving it incredibly prudently and that that is what we have been doing. Do you have any sense as to where you'd want to ultimately develop or will you expect it to be available? If you think about any new class of business for us, we'll always start and we're very conservative sort of loss pick, I think casualty is notoriously difficult we're fully aware of that. So, I think we're in no hurry to sort of change our assumptions. And I think our strategy is exactly the right one. We definitely aim to that class of business in the right time, but we are more conservative on that class than any other class that we write and it will take a longer period of time. So we're not in any hurry to change assumptions and we're - I think our approach is 100% right on that portfolio. Okay. It'd be useful to carry on what you said on Slide 12, if you could see it again in future periods that would be great. Thanks. Yes, we could do. So you might have to rethink a little bit when we have IFRS 17 coming in because the way you disclosed losses the premiums and everything slightly different, but we can think about that for sure. Hi, I've got two questions, the first one is just on the, I guess the underlying combined ratio and how to think about that. I guess within presentation you obviously highlight that cat is less an impact than it should that has done in the past. I guess my conclusion is therefore that catalyst assumptions should be materially lower for the group than they were in the past. I think 15 is always a number that was the historical average, not forward guidance. How much leverage do you think that number should pay now or how should we think about that, is it lower should it be lower [at potential] premiums? So that's the first question. The second question is on growth. I think in your opening comments, Alex, you said at this past year cycle, when rates are going up, and to increase exposure, you talked about property cat going up, we're taking the midpoint of 45% and then appreciate some of that is retentions, changes in structures, et cetera. Would it be outrageous if I assume that 20% of the book at 45% gets you to 9% so you should have double-digit growth I'm just trying to figure as well. Just any thoughts around are they really interesting? Thank you. Yes, so on that I'll let Paul answer that question. But my comment really is a strategic one in that if you believe in the cycle as we do so much. You have to point real growth now. So it has to be in excess of rate, you can't describe the rate because there's no real growth. But, I'll let Paul answer your question on your assumptions. Yes, I think it's very fair to assume Kamran that will be growing this year. I don't think it will be at the same pace as we've seen in the last two years in all honesty. And I think I had to look at the consensus numbers with Helena this morning, which would definitely suggest double-digit. And I'm very comfortable with the numbers in consensus just a couple of points to pick up on, just to add a little bit more color. Obviously not all - and I did mention this a little bit earlier, but not all the rate change in cat reinsurance will be seen in premium. Be the risk adjusted rate change. So it does factor in things like increased retention level, tight in terms and conditions et cetera. And if you look at our inward retro portfolio a lot of the rate increase that we got on retro was actually driven by an increase in retention level on that portfolio. So they're where you're pay quite high rates online, the clients the ATM which that we underwrite. And so a lot of them, we've got very strong risk adjusted rate change, but a lot of that came through levels. So you don't necessarily see that flow through in premium. Some of the newer lines like casualty as I alluded to in my script, they will still grow at a slower pace, we made more progress than we thought we would in the last two years. So again, to maturity quicker than we thought so that will slow the growth. It will still grow, but be slower than previously seen. And then just lastly, we haven't currently added any new teams for 2023. Obviously, those in 2022 will continue to mature. This could change. We're always looking at new opportunities and obviously we'll update people and if we do bring in new product lines. So in summary, yes, more growth this year consensus looks very sensible to me. But just remembering that point on cat, it doesn't all flow through in premium. But I'm very happy that we get level, level is really important. Hi. Kamran on the cat ratio question, as you know, we don't guide for cat. Ratio and you write the 15% that we refer to is the historical average cap losses. But you're also right that we're seeing our strategies to grow the non-cat lines and we're trying to become - or we are becoming a more resilient business and we're better able to absorb cat losses than we have been historically. Sorry, so if I just put the two things together, it probably suggests that I mean, maybe I'm putting 10 tailing on 5, but the number should be lower if - I had. So if you've been growing your own statutory you know your cat footprint stays the same risk is - that number should come down? I think the way to think about it is it's more the impact of cat losses, right? So we got bigger business. We've got more revenue in the system. So we can absorb more dollars. But as you see, it's very hard overlaying different years on to '23. But I think all in all, I think the message we're trying to say is that we can absorb more cat dollars is less disruptive to our business in the bumpy years due to the diversification plan and the other products that we now have. Hi, good afternoon, everyone three questions please. Firstly on property cat just similar subject I guess to what has already been asked but slight different perspective. When you take into account the additional rate you've achieved and high attachment points, what degree of risk-adjusted margin improvement should we be thinking about in property cat is it possible to quantify that? And then secondly just a couple of small ones actually LCM the fees have gone down quite significantly, is that indicative of a similar reduction in assets under management. And then lastly, there has been an increase in intangible assets. Can you just talk about the reason for that? Thank you. Okay Nick. So I'll take the first one, I can start on LCM and then and I can probably provide a bit more detail. So look on property cat, it's definitely fair to say that year-on-year within increased margin. Obviously, we've seen increase rate come through. We spoke about increased retention level. We have had to pay more for our outwards protections on our retro and retentions have gone up slightly. We've of course decided to retain more as well. I'm not going to give you the specific increase in margin. Obviously, we've got a lot of the year to run as well. We roughly write about a third of our property cat business in Q1 so there's approximately two-thirds less to go. But what I can say and confirm is our net expected margin on property cat has increased significantly year-on-year. On LCM, obviously, the fees we earn about could look in. Some of it is impacted by timing, three things like profit commissions, et cetera. So it is not necessarily indicative of what's happened. But you will recall in Q1, '22, we were very candid that we're in very difficult environment for raising funds. There's a lot of the investor fatigue in the ILS world and our 1/1 draw for 2022 did go back reasonably significantly. We did have a raise it was significantly less than we've seen in prior years. So that hopefully should all be known. Looking forward, for 2023, we did engage in a number of conversations. That fatigue in that world certainly hadn't eased in fact I'd say, it got somewhat worse. So we did engage with both existing and new investors, but given the lateness and complexity of the renewal, we had to make a call at one point as to whether we were going to continue because we had to make decisions for inward clients as to obviously we've underwrite the business and we decided not to do raise for LCM at the 1st of January 2023. Obviously, we'll continue to assess opportunities, et cetera, et cetera. But there were numerous opportunities for all parts of our balance sheet and we were still able to service and not or to worry which clients. So that's kind of where we stand on LCM. Just so when you say them to raise, just because does that mean that there's no inflows or does it mean that there's no money at all in LCM at the moment? No, we didn't say, if you recall Nick with LCM with LCM, we raised for every renewal period. We can do it outside of renewal periods as well. So we didn't write any new business at the first of January. Obviously, there are older years that remain live, that will be managed, et cetera. But at the first of January, which has historically been the time when we've done our biggest raise, we didn't raise any new funds. Yes Nick, its Natalie, there's two drivers of the intangible asset, increase we purchased more of the names, capital Syndicate 2010 so that increase the intangible syndicate participation rights and then we have also been making a lot of investment into technology. So we've got some internally generated intangibles as well. Yes hi all right a few questions. I'll ask them one at a time, if that's okay. The first one is just on that underlying combined ratio guidance of 74% to 79% what's the expense ratio component within that, please? Yes, so on that, we're not going to split that ratio out going forward, because it just going to become really confusing with IFRS 17. So we're just going to stick to the total underlying combined guidance. Okay, that's fine. And then secondly, the solvency ratio at 300%, does that already account for the gen renewals and any other retro changes? Right, but I mean, that was for the retro changes in '22, right? Does that also reflect any other changes that you did in '23 along with any capital that you've deployed out of the general renewals? Right, right, got it. And lastly, just on that internal management restructuring, I mean, do you have any insight beyond that, please? Is that to improve operational efficiency or I mean, any comments at all there? Thanks. Yes okay. So really that's just to reflect how we look at the business on a day-to-day basis. You may recall the earlier in kind of mid-2022 we made gains through to James Irvine, CEO of Insurance and Reinsurance. So the changes in segmentation just reflects how we look at the business from an underwriting perspective internally. And our next question comes from [indiscernible] from KBW. Your line is open now. Please go ahead. [indiscernible], your line is open Oh, I didn't hear my name. Thank you. Just one question. Is cat conditions really this good? Can you help us understand why you decided to maintain net cat footprint the same and highlight that you have dry powder? I'm just trying to understand if you're sort of positioning for June and July when the U. S. renews or are you more focused on managing earnings volatility now meaning that your cat exposure will grow in line with the rest of the business? Thank you. Yes, look, we've been quite clear over the past 12 months or so that the intent -- certainly for 2022 is to keep our cat footprint broadly the same. We grew our cat footprint quite significantly in 2021, obviously following the capital raise in 2020. So I think that's been pretty well documented. Obviously, as we went into 1/1, there's a lot of moving parts It was a very late renewal. It wasn't entirely clear to very late in the day. What reinsurance protection you were going to be able to get. Exactly where the invoice portfolio is going to land. So our view was, if we can look to maintain broadly same net cat footprint, which we've successfully been doing, then that would be a very good start to the year and put us in a very strong position, which as you can see from our capital numbers is exactly the case. We definitely do not want to unbalance the business after all the hard work that's been done. But as I spoke to, there are still lots of opportunities outside of cat, our specialty insurance lines are continuing to see rate improvements. Our newer lines are still continuing to grow in things like specialty insurers where historically we've been quite light. We've had a very successful 1/1 and been able to grow our footprint there. That just allows us obviously along with a strong capital position to take a view on cat as we move through the year. So we're just in a really strong position. We can see how the market plays out. We definitely don't want to imbalance the book, but that doesn't necessarily mean we can't also grow given what's going on in the rest of the portfolio. I think as well, but one thing to remember is that if you look at, we are - we did currently write a lot of cat business already. So it's not that if we are not in the cat game, so we're probably more leveraged than some to the cat opportunity already. So I think we just have to remember that as well. Hi. Just two quick questions from me. I guess taking everything into account on your inwards versus outwards book, how -- should we expect the ceded premiums as a proportion of your gross to go down year-on-year? Just trying to be mindful of the fact that you're purchasing less retro but obviously your retro cost is going up. So just maybe some color on the dynamic of that ratio. And then the second question on reserve releases. I appreciate the guidance. It's roughly the same year-on-year based on absolute number. But on my numbers, your net premiums earned should go up substantially next year. So how conservative is that guidance assuming some of the new short tail lines of business entered a couple of years ago should obviously start to mature as well. So just trying to start how you think about that guidance on the one-off. Thank you. I'll take the first question. Yes, look, the dynamics on the outward spend and remember, it's obviously not just catastrophe protection. We buy a lot of protection for our specialty lines as well, but very simply pricing for those products did increase on the cat side. As I've mentioned, we did decide to retain a little bit more overall. And there are other lines of business continuing to grow, which obviously attracts increased reinsurance spend. So in dollar terms year-on-year and this is going to be a very similar message in the last couple of years. In dollar terms, reinsurance spend will go up, but as a percentage of inwards, it will continue to reduce. On the reserve releases question, you're right, as a proportion of premium, the reserve release number that I gave might look low compared historical average. But remember, as we've been talking about, we've been reserving very prudently for casualty and some lines like that which will release over a longer time period than our historical more short tail book. And then also on reserve releases, because we have reserves there for some large risk losses and large cat losses, its quite hard to predict how they might run off and when you might get a release or even adverse development on those. And so that can impact the number year-to-year as well. Hi, guys. Thanks for taking my question. Just one question remaining, I think on growth. What are your constraints or to growing over the next couple of years if rates do indeed come in at the top end of your own expectations, and you write mix in line with your own plans or even broadly similar to this year. I'm assuming that you don't tap the capital markets. I'm just trying to triangulate what else are you thinking about? I know you're thinking about retrofit. But you have a sort of clear view, have you just gone through the 1 Jan renewals, and you have an intention to grow exposure. I'm just kind of wondering how hard it could be pushed in terms of growth. What are the constraints? I think it's more about balance. If you think about a lot of things we said on today's call, it's making sure that our portfolio is balanced correctly. So the message we have to go about, even on the cat book, we are going to grow start with maintaining the balance that we have across the portfolio. So clearly, it depends what happens to rates and depends on what classes of business growth. So let's just take an example of that Terra. If the Terra market gets super interesting, that's a very capital light class of business. You can grow that materially. There's no real sort of limit to your growth in Terra, it'll just be driven by the opportunity. So -- but I think on the cat book, we're trying to say is we've built diversification into our portfolio. We're a much more robust business. Clearly, cat losses can disrupt your earnings quite materially. So we're just making sure that even with the growth in the cat book, we're not undoing some of the work we've done in the last five years. And just coming back to that, are you sort of -- are you seeing the level rates that you had hopeful outside of cat. I know cat is the hot topic at the moment. But what about outside of that. Are you are you seeing adequacy there? Yes. I mean, I think outside of cat, let's talk about the insurance lines first. Most of those lines been improving for the last five years and will continue to improve next year. That will be six years of compound rate increase. So there's always exceptions within that, but the vast majority of those product lines are really healthy rating levels. So we're happy with where they are. If you look at something like specialty reinsurance, which is again something with more recently started to expand in. The rate environment 1/1 was actually very healthy. So we will look to grow our footprint there as we move through this year, made a very good start doing that at the first of January. So in summary, we're really happy with the vast majority of the non-cat lines and where ratings fit. We obviously would like them to continue to go up, but I think we're in a pretty good spot.

EarningCall_190

Good morning, ladies and gentlemen. Welcome to the ATS Corporation Third Quarter Conference Call and Webcast. This call is being recorded on February 9, 2023 at 8:30 a.m. Eastern time. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] Thank you, operator, and good morning, everyone. On the call today are Andrew Hider, Chief Executive Officer of ATS; and Ryan McLeod, Chief Financial Officer. Please note that our remarks today are accompanied by a slide deck, which can be viewed via our webcast and available at atsautomation.com. We caution that the statements made on the webcast and conference call may contain forward-looking information and our cautionary statement regarding such information, including the material factors that could cause actual results to differ materially from the statements and the material factors or assumptions applied in making these statements are detailed on Slide 2 of the slide deck. Thank you, David. Good morning, ladies and gentlemen, and thank you for joining us. ATS is proud to report another quarter of record bookings, backlog and revenues. Adjusted earnings were in line with our expectation and as anticipated, cash generation was strong as EV programs progressed. Despite continued economic volatility, our performance in this environment demonstrates the strength of our strategy and market focus and an unwavering commitment to the ATS business model, which is at the core of everything we do. In the quarter, we announced two acquisitions, made further progress on current integrations and published our sustainability report. We also completed a corporate name change and rebranded to reflect the evolution of ATS as a diversified technologically advanced organization, delivering solutions that positively impact lives around the world. Our new name ATS Corporation under the new trading symbol, ATS, better reflects the Company we are today and creates consistency in our brand presence. Today, I will update you on the business and Ryan will provide his financial report. Starting with our financial value drivers, Q3 revenues were $647 million up 18% from Q3 last year, driven by a combination of acquired businesses and continued strength across our core operations. Organic revenue growth was 10% year-over-year, reflecting good execution across our strategic markets. Order bookings for the quarter of $979 million were another record, up 46% year-over-year, including 355 million of life sciences bookings and 392 million from transportation. Our adjusted EBIT margin in Q3 was 12.5%. Moving to our outlook, we finished the quarter with a record backlog of over 2.1 billion. Our backlog once again, provides us with a solid base to work from in key markets. Life Sciences backlog was 739 million. And in the quarter, we drove strong organic bookings growth versus last year. Our funnel has progressively strengthened throughout the year. We're also building our integrated funnel across the life sciences businesses and see momentum continuing to build with great examples of ongoing collaboration between SP, Comecer, Life Sciences systems and BioDot. For example, this quarter SP partner with Comecer and booked an integrated solution that included a flexible filling line for vials, syringes and cartridges with an isolator. Synergies like this support our direction and the value proposition of our integrated Life sciences group. Transportation ending backlog was 887 million, up 350% year-over-year, driven by the shift to electrification of vehicles. Subsequent to the end of the quarter, we announced another $120 million and follow on work from EV. Our experience in this space, combined with market dynamics creates further opportunity for us to support key customers and the challenges they're facing in transforming their production capacity. In Food and Beverage, we're seeing a strong funnel, particularly in the produce processing and keg filling spaces. Our backlog is now at its highest level since we entered this space. Our energy efficient solutions continue to be in demand and a higher energy cost environment, particularly in Europe. In energy, governments are moving to decarbonize and boost energy security. Our focus remains on supporting nuclear customers as well as those working in such areas as grid battery storage. In Q3 received an order from a leading small modular reactor customer in the U.S., which sets us up for additional orders for their production plants. And consumer products our backlog and funnel remains stable; however, inflationary pressures in this market can impact and consumer buying habits, which drives our customers automation needs. On our digital journey, connectivity, visualization and data analytics can improve production outcomes for our customers by capturing and leveraging data in new ways and converting it to meaningful actions with our existing and expanding capabilities in PA along with other ATS offerings such as illuminate. We're providing new opportunities for our aftermarket service teams to deliver collaborative value added services. Aftermarket services remain an area of strategic focus across all parts of the business. Our funnel remains strong and our regional networks are now some reporting more of our acquired businesses, including CFT and SP in addition to all their operations. On supply chain, we're still experiencing higher prices. Despite some improvement in lead times within the quarter, overall lead times remain extended and the situation remains challenging. Some of our components suppliers are experiencing gradual improvement. That said, we expect continued pressure until they're able to work through their backlogs. We are prepared to operate with ongoing volatility in our supply chain. And our teams are focused on minimizing disruption to schedules and budgets through ABM savings workshops and other events. Our ABM continues to drive the business forward. During the quarter, we completed 37 ABM events across all business segments and affecting all of our value drivers. Key events in Q3 targeted on time delivery with a focus on process improvements and time savings, as well as margin expansion with a focus on material usage and cost savings. As you know, ABM events are directly aligned to enhance our eight value drivers. The ABM also creates a continuous improvement culture that underpins our focus on profitable growth. On M&A integration of previous acquisitions across the business is progressing the plan and our funnel development remains active and healthy. During the quarter, our PA Group announced and finalized the acquisition of IPCOS Group based in Belgium and agreed to acquire ZI-ARGUS, a well established automation systems integrator in Southeast Asia and Australia. These acquisitions add to our advanced process optimization and digital solutions and further strengthen our position in key regions and markets. On sustainability the report that we released in Q3 highlighted our 2030 targets including three new ESG goals and strengthened our commitments to our employees, customers and shareholders. I encourage you to review our report if you have not done so already. On innovation, we constantly work to strategically deployed capital and talent to create differentiated, enabling solutions and drive return. A few highlights and energy, we're developing a manipulator system prototype for fueling small modular nuclear reactors as part of the order I mentioned earlier. Then Food and Beverage, Raytec launched two new specialized machines to provide better imaging of produce, lead generation for both is positive. Within Comecer, we're testing a new solution for faster decontamination of aseptic, pharmaceutical isolators and hot cells, so the additive to our radial pharmaceutical product and technology portfolio. And finally, we held our fifth Global Innovate Day. Event featuring over 100 people from four participating divisions plus participation from a local college as part of our focus on community outreach. The winning idea is expected to allow us to add laser marking functionality to our high speed Symphoni platform. All teams focused on ROI and quickly advancing concepts to refresh your innovation funnel in a single day. Innovate Day is a powerful way to bring our teams together to drive creative, faster and innovation. In summary, we are encouraged by Q3 performance including our record bookings and revenue. Notably, our order backlog gives us an extended platform work on hand that contains high value mission critical work for customers. We are pleased to be recognized again as both the best employer in Canada by Forbes Magazine, as well as a Waterloo Region Top Employer. And in Chicago, ATS was recognized as being one of the best and brightest companies to work for by the National Association for Business Resources. These are meaningful acknowledgments that help us retain and recruit top talent and drive further growth. We are excited to refine and improve the ABM as a truly drives a competitive advantage for us. Despite economic uncertainty, our performances validating our strategy and we remain confident our ability to generate profitable growth across the business. We look forward to continuing to deliver on our commitments to our customers and our shareholders. Thank you, Andrew, and good morning, everyone. I'll start with a review of our Q3 operating results and then provide details on our balance sheet. Getting with orders, bookings were $979 million, up 46% compared to Q3 last year. The increase was driven by organic growth of 38%, an additional 6% growth from acquired companies and a 2% benefit due to foreign exchange translation. During the quarter ATS booked another $221 million U.S. dollars in EV orders from an existing global automotive customer as an expansion of their program. Bookings were up sequentially by $175 million compared to Q2 of this year. Our trailing 12-month book-to-bill ratio for Q3 was 1.29 to 1 positioning as well for continued revenue growth. With Q3 revenues of $647 million, total top line growth was 18.3% over last year. Organic growth was strong at 9.6% and related primarily to increases in the transportation and consumer verticals. Wired companies added 7.5% to revenue growth and foreign exchange translation created a 1.2% benefit compared to Q3 last year. Sequentially, revenues were up 9.9% compared to Q2 of this year, and we're in range with our backlog conversion expectations based on program timing, including stage of completion of some of our large enterprise orders. Our Q3 ending backlog of $2.14 billion was 45% higher than Q3 last year. With continued positive growth in our order backlog, our revenue conversion for Q4 is estimated to be in the 29% to 32% range of backlog. We make this assessment every quarter based on revenue expectations for both the execution of projects from backlog and work that will be booked and built within the quarter. Strong growth in order backlog combined with the presence of longer duration enterprise programs has changed the ranger backlog conversion for this quarter. Overall, the increased size and duration of our backlog serves as well. Q3 gross margin of 28.4% was 140 basis points lower than adjusted gross margin in Q3 last year. The year-over-year change was primarily due to the timing of execution of higher margin programs in Q3 last year as well as higher than normal inflation and longer lead times in your supply chain this year. Sequentially, our adjusted gross margin compared to Q2 was up 30 basis points as we continue to effectively address challenges in our supply chain. During the quarter, we saw some reductions in lead times on several key components and some price relief on raw materials from Q2. However, electrical mechanical and fabricated parts were impacted by inflationary pressures and lead times remain longer than normal. We expect the environment to remain volatile through Q4. And we are seeing continued price increases in some areas. As I've noted previously, overtime, we were able to pass along many of these increases through our pricing. And we're actively mitigating in other ways, including accelerating vendor order timing, passing along increased pricing contractually where possible, and securing alternative sources of supply. Moving to SG&A excluding acquisition related amortization and transaction costs, as well as $10.5 million of restructuring costs. Q3's SG&A was $93.2 million $13.3 million higher than last year, primarily reflecting incremental SG&A costs from acquired companies. Third quarter stock based compensation expense was $9.9 million, down $2.8 million from Q3 last year. Sequentially stock based compensation expenses increased by $4.6 million. As a reminder, our stock-based compensation expense is subject to mark-to-market adjustment is impacted by approximately $1 million for every $1 change in our share price. Q3 adjusted earnings from operations were $80.6 million or 12.5%, up $10.2 million compared to last year and up $5.5 million sequentially. Compared to both periods, this primarily reflected revenue growth, partially offset by increased SG&A. On restructuring, actions are underway to implement or previously announced plan to improve our cost structure and efficiency, primarily through management headcount and other cost reductions. We expensed $10.5 million in Q3. Out of the total estimated cost of $20 million to $25 million for this plan. The majority of the remaining costs are expected to be incurred in the fourth quarter. Our estimated payback period is approximately 18 months. Moving to the balance sheet. In Q3, cash flows generated from operating activities were $116 million as we reduced our working capital, primarily driven by timing of receipts against key building milestones on some of our large AV projects. Our non-cash working capital as a percentage of revenue was 13% in Q3, this is better than our stated target of 15% and an improvement from 16.1% in Q2. Over the next several quarters, we expect our period and working capital to fluctuate as we continue to work through large program milestones. This may cause some variability to our working capital percentage over the next several quarters. We invested $25.5 million in CapEx and intangible assets in Q3 compared to $11.3 million last year. We've had incremental spend this year to support our growth. Our year-to-date spend is approximately $47 million and we expect to spend around $80 million to $90 million for the entire year based on the needs of the business and timing of projects. On leverage, since our acquisition of SP in December of '21 and our net debt to adjusted EBITDA ratio was 3.1 to 1, our leverage has reduced to 2.8 to 1 as of the end of Q3. As noted in previous quarters, we generally target to be in the range of 2 to 3 times but are willing to increase our leverage for acquisitions or for short-term working capital needs. During the quarter, we extended our $750 million revolving credit facility to November of 2026. We also added a two-year $300 million term loan to our capital structure in order to provide flexibility and support our growth. Our focus is on maintaining a strong balance sheet while giving us the flexibility to execute our strategies and drive long-term value creation for our shareholders. In summary, ATS produced another quarter of record revenue and bookings as well as adjusted earnings in line with our expectations. We ended the period with record order backlog that support sustained growth, and our global teams are working hard to pursue new opportunities to continue to drive this growth. With our commitment to the ABM, our objective remains clear to deliver value for our customers and our shareholders. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Cherilyn Radbourne with TD Securities. Please go ahead. This is Patrick Sullivan on behalf of Cherilyn Radbourne. In the commentary around gross margins, it was mentioned that execution of higher margin programs in the prior period. And some of those supply chain headwinds and inflation played a part on the slight year-over-year decline. Looking at next quarter or next quarters, would you again be comparing to higher margin programs executing the prior period? And I think you said that you're still seeing price increases, but would you say that the length of lead times has peaked or has moderating? Hi, good morning, Patrick. So, a couple items and I'll try and address all the points, but if I miss one, please come back. So, first of all on the comparison to year-over-year, you'll recall we booked a large life sciences program a year ago and as I said most of that was completed over the last year. And so, that's really what we're referring to in terms of year-over-year. And so that was part of our Q4 results as well. In terms of going forward, if we start with where we are in Q3 as a jump off point in terms of margins. The environment and the dynamics we're dealing with today are similar to what we had in Q3. So, we're in the early stages of some of these newer large enterprise projects, which will be additive and improve margins over time. Supply chain challenges do remain a part of what we're dealing with in the short-term and that's both from a cost and lead time perspective. We've mitigated a lot of this today, but it is still what I would characterize as a dynamic environment. Our target remains to perform and drive margin expansion over the long-term. And certainly as the environment improves, that is our expectation. If I can have another one. So sticking with the supply chain team. You've mentioned in prior periods that food and beverage saw elevated impacts based on the need for certain materials like stainless steels. As you begin executing on more of these large EV orders, is there anything specific to those projects that may be impacted from a parts or material availability standpoint? Short answer is, no. Nothing of note, with food, what we've talked about in the past was, there's a higher exposure to raw materials. And as an example, that business is a consumer uses a lot of high grade stainless steel. Within what we're doing in EV, we don't have that same raw material exposure. Good point. This is Andrew. Just to add, we have a very collaborative discussion with the customer on when there's challenges how we both come together to ensure that we minimize impact. And so, while there is certainly challenges we look to overcome those and I've mentioned this in the past, but just as a reminder, we go to daily visual management across the board here, we've aligned around ensuring that we look at short-term, mid-term and long-term countermeasures, and the team continues to drive to minimizing impact across ATS. If I take a look at all your large EV awards, they've all been for one program with one North American OEM. And you guys are opening up a second facility in Ohio. So, I'm guessing that that facility isn't just for your one customer. So maybe you could speak to where you are with other OEMs as it relates to battery pack assembly? Absolutely and good morning. Look, we have an important customer and we continue to execute. And as we look at the work we've done, we're very, very proud of what we've accomplished to-date and continuing to execute to align around this specific customer shift. That said, as you're well aware, we've been in this market for over a decade. We've won work and executed work in Europe. We have multiple customers in the U.S. And therefore, while we're very pleased with our progress, and our continued alignment with a value for this specific customer, we work with many of the OEMs that are moving into this area and this space. And then, Ryan, I missed this on the on the call as a cut off for me. But the backlog turnover that that remains low just because of the EV related awards. But how should we be thinking about the range in terms of turnover as a go forward basis? I'm just trying to get a better sense on what we should be running through our models, not just for the upcoming quarter, but for future quarters as well? Yes, David, it's going to continue to be a little bit variable and it's really going to depend on future bookings, duration and bookings and so forth. There's been a shift in the portfolio given the growth in EV. And these are longer duration projects than what we would have typically had in our backlog in the past. So, these are from start to finish typically 18 to 24 months where is the average prior would have been in the 9 to 12 month range. So, as these are part of our backlog a generally expect it to remain low. Now, we also have shorter cycle business, we have product services, original equipment, which is more standard that does have a shorter book-to-bill cycle. All of that work is growing, but the growth in these large programs has caused this shift in the conversion rate. I just want to start with the Life Sciences segment. So if we're thinking, I know, you don't provide specific guidance, but if we're thinking over fiscal '24 and '25, you refer to the strong funnel. I'm just wondering, how you think that translates into organic revenue growth in the segment? Hey, Michael. Just minor correction, it's actually $73 million in backlog in this area and I did comment around the strong funnel. And let me pull a little bit. Let me get back on this market, we've seen nice booking growth. More specifically, some of the areas we're seeing around this is, auto injectors continues to be a strength area And if you're following some of the FDA approvals around the obesity aspect, certainly, this is an area that will help and an area that ATS can really support as customers drive here. We're also seeing an impact and continued kind of alignment on growth on eye care. And then in our radiopharmaceuticals space, there's a new radioisotope that's coming out a two to five that we view, we've got a position that can really help customers as this new isotope helps with the discovery and treatment of cancer. Then as you step back, and I talk a bit about this, the total impact of our life sciences group together and what that means on pharma and other industries, in other spaces. We've seen an increased growth in our funnel across whether it's our SP working with Comecer, which was in my prepared remarks as well as we're seeing the likes of IWK engage and really align around this with BioDot and our Life Sciences systems group really bringing higher level of value to our customers. So, overall, we view this as a key market for ATS, one that we see. And I mentioned it continued increase in our funnel, and areas that we really can help our customers as they navigate and launch products on time on budget at the highest level of quality. I just want to add a bit of color around some numbers too. So, EV has been a large part of our growth, but life sciences order bookings also grew 30% organically in the quarter. So, we are very pleased with the performance there. The book-to-bill over the last six months has been 1.11 to 1, so the business is performing very well and it's still 40% of our total corporations bookings over the last four quarters. And just on to switching over to some additional info on the EV business. So, a couple questions that we do receive frequently on this topic. So A, I mean, as we think about you refer to these milestone payments that come in from the OEMs. Can you identify what some of those specific milestone items are that trigger payment? And then, the other part of the question, too is, I know that you do look to mitigate cost when you build out programs or bookings. Are you able to secure enough of the cost input so that you're comfortable with the margin profile on these larger programs? Yes. So I'll start on milestones and it's not unique to EV. This is when we're doing turnkey or even any equipment build. We have milestone payments in all those contracts. And they do vary from contract to contract or customer to customer. But the typical milestones will be there could be an upfront deposit, there could be a milestone around completion of design, there could be milestones related to receipt of materials, power on completing the equipment in our factory or factory acceptance testing, and of course, site acceptance testing. The level of milestone or the percentage of the total contract associated with each does vary. What's a little bit unique in EV is we do get we get milestones, but typically, these contracts don't have an initial deposit. So as we take orders in, there is a working capital build, and some of the bookings we won earlier in the year, so back in Q1, Q2, we have received milestone payments on those. As we look forward in some of the bookings we did in the most recent quarter over the last three months, those will get into billing milestones in the short-term. So, all that drives drive some variability and given the size of these EV orders, we do as I said, expect some variability there. In terms of your cost question, so our typical process is to go out and when we're bidding on work and quoting work, we are going out to our suppliers at that time and locking in pricing on major components. And it varies from contract to contract, but typically, it's in the 60% to 80% range of materials that we are locking in, and that gives us a lot of cost certainty on these contracts. There's other things we do too. So, if a customer requires us to use a certain component or a certain supplier, we will build in terms in the contract that allow us to pass on any changes in pricing. And so for these longer term projects, yes, we are able to mitigate a lot of that margin risk from inflation. And we also we also build in expectations around our own costing too, whether its labor increases and so forth, but we don't do 100%. It's not practical at that bidding stage. We haven't done the complete design, but we do get good coverage through that process. Good morning. Thanks for taking my call and nice to see the momentum continued in the business. On M&A, we saw two relatively smaller acquisitions contribute in the quarter. I'm wondering in a more broad sense, how would you describe the funnel currently, if there's been any changes in multiples and any possible verticals of focus that you would be looking to acquire into? Yes, and good morning, Justin. So, if I step back and characterize our funnel, I would characterize it as it is and remains healthy. And as you've heard me talk in the past, our focus has always been around how do we cultivate in strategic areas of focus and what we've seen in -- what we've seen in the evolution of ATS and our leadership is, our leaders are now driving that cultivation and their businesses and their divisions. And so, not only do we do it from a corporate perspective, we also are aligning this with our leadership and just a case in point, ZI-ARGUS was really aligned with the PA business and they cultivated and they aligned with, talking with this new ad still needs to close to the ATS group and convincing them that they should be a part of the family. And so our funnel remains healthy. We have key targeted areas, no secret we like Life Sciences, we like regulated Food and Beverage. We like the digital journey and continuing to add to the digital journey. And we have done that, we've continued to align around that. So, you're going to see us really continuing to monitor, build out and stay very close with companies and technologies that we view will help ATS and continuing to create strong shareholder value. As far as multiples, we haven't seen a marked difference as of today. We have four criteria, and our financial criteria is around ROIC so that takes that into account. And for the right acquisitions, right areas of focus, we would move forward. Thank you. Appreciate that. And we saw the good cash generation in the quarter. And we also saw some large EV contracts, I don't know subsequent to the quarter. Maybe a question for Ryan is how do you see the working capital needs moving into Q4 and next year, and if it will remain below the target range? Yes, good morning Justin. So, Q3 was a good cash generating quarter for us as we expected. I would say, we do expect variability going forward in this. And the contracts that we announced early or late last quarter, early this quarter. Those will have an initial working capital build with them. And some of those milestone payments associated with those will fall right around quarter end. And so, if we get cash payments through March 31st or April 1st, it can drive a pretty big difference in that working capital percentage. So, over the six month bit longer term period, we do expect to continue to operate in the range of that target, but we certainly could see that target exceeded at a particular quarter end as we saw it last quarter. Understood. And we saw the deleveraging occur in the quarter. Ryan, is there a comfort range that you target where the leverage ratio could come up a bit on potential M&A? So, we talked about two to three times and in operating within that, and with the ability to go above for certain M&A targets. Now, in order for us to do that and it's part of our normal diligence process. But in particular, this kind of environment where there is a little bit more uncertainty. We're going to have to be really comfortable on the target and where they are, in their cycle, their working capital needs, their CapEx requirements, profitability. But assuming, we could get comfortable and tick all those boxes, we wouldn't be willing to add leverage to the balance sheet up into the mid-3s. Just I guess question on sort of the EV side and M&A. It is becoming a larger category for you. And as you look at M&A, is there a potential that maybe you look at other opportunities to get involved within the EV space? Maybe just beyond kind of the battery side or is the focus still really on some of your legacy business categories like Life sciences, Food and Beverage? Just curious how you're thinking about this sort of going business? Look, our funnel for M&A has many industries in it and EV is a portion of that. And I would say, we do look for to be very specific for mission critical areas. And when I step back and look at where we are today, with battery pack so many pack out, we would view this as a mission critical niche with a lot of potential. And so, we would look for those are continuing to build on that area, as we review that really does allow us to have a unique value into the markets. And so, if and or when that becomes available, we would be in a position to move. We're patient. And you know, we look at the four criteria, we want to ensure that that any new ad will check off for and really align with longer term shareholder value creation. Ryan, I think you provided some color earlier on just how the milestone payments work. Just big picture question, I got a typical project that I think some of these give you orders in over a course of 18 to 24 months. How many milestone payments are there over that period? Just trying to understand, how we should think about maybe cash flow from some of these larger projects or the orders? So, on average, it's going to be in the 4 to 6 range. Variation outside of that as well, but that would be the best way to think about it. Andrew, I was wondering if you don't mind providing a bit of an update in terms of the CFT asset integration and how the cost base has been adjusted there? Yes. Look, we're -- the headline here on track on plan for this business, and I'll just tell you, the teams have done a very nice job of aligning this organization around the ABM, continuous improvement. They were part of a recent fairly large kaizen event across all of ATS. And this team continues to make progress. We measure things aligned around when we do an integration around 30days, 90 days, 6 months, and we have a year look back. And I would say they're on track on plan. And we're pleased with the progress, and Ryan can provide little more specifics around performance now. Yes, good morning, Max. From a cost synergy perspective, well on track, so you'll -- some of the areas we targeted. I mean, there's some day one clause from the public company that are out. There's been improvements made in the cost structure through some of the reorganization and rationalization actions we've taken. Their supply chain savings funnel was very strong and we've seen really good alignment with our team there. It's made good year-over-year progress. It's up several 100 basis points from a margin standpoint, and as Andrew said, really benefiting from the ABM. And then, Andrew just wanted to circle back to one of the earlier comments he made around COVID storage. And I'm just curious if you've tried to potentially wrap your head around sort of the scale of this opportunity to just given the need for that. And obviously, I presume the client bases are going to be somewhat different. Is the go-to-market sort of strategy is going to be different relative to OEMs on the EV side of things, just maybe any color there? Yes, good morning, Max. So, let me start by walking a little bit around this market. And we're able to utilize the knowhow that we've created for the EV shift. It's really benefit the customers that we're working with on this shift. And so, that allows us to take the experience and knowhow the strong brands, the presence with our service support, and technology to this market. And so, while it's early in its journey and it is early in his journey, we do view that there is, I would say nice upside for the potential growth. But it's early. And I would say, when we think about this space, and I use the phrase mission critical, we would be considered mission critical on this move to this area. And so early days, not giving you exact number on market size, because the market is new and it's growing significantly, but we need to execute and we need to deliver the value for that for our customers. Thank you for taking my follow-up. So many, many months ago, discussions around nuclear, specifically opportunities within nuclear decommissioning were being had. I was wondering you talk about the opportunities you're seeing there or more recent world events and focus on energy security has shifted the context of those questions. It sounds like from your prepared remarks that the answer might be yes. So can you just talk a little bit about that? Thank you. Yes. Good morning, Patrick. So, while we've continued to see potential in this area in the space. I would say, as a whole, we've continued to expand around offering value into the refurbishment, and we just signed a longer term service agreement in that space. And the recent award, our second award in the small modular reactors is really taking shape. And so, decommissioning will certainly be an area of continued focus, but we're pleased with our ability to expand into this new area. And again, early days, but certainly one, as governments go into either decarbonizing or energy security. And when you step back and look at that nuclear is viewed as a greener option to be able to provide that energy efficiency and energy usage, and so, pleased with the progress, more work to do here. This is a niche area for ATS. And it's one that we view that that when aligned can offer high value for our customers. Just to come back in on the EV discussion. So if based on the work that you see right now, I guess you have a pretty good sense of where the margins sit. And I think the verbiage you have used is that, this will be margin enhancing over time as a scale. So can you give some idea of the path towards that work being enhanced overall to your margins? I'll speak to this in a couple of different areas, just to be clear. So from a gross margin perspective, this accretive business was, it is generally in line with where we are from a corporate average. But it will drive operating leverage in that part of our business over time. Now, in the short-term, as I've talked about, there's a lot of dynamics that we're dealing with, and so forth. But what we're doing for customers here, as Andrew talked about, it's strategic and so it has enabled a different conversation commercially with them. But as it stands right now, are the margins you're seeing, are they in line with the overall company average or somewhat meaningfully different? That's correct. And as I noted or as it came up on the call, we have a couple of expansion initiatives underway. One is a facility which we expect to come online early in the next fiscal year. And that's what's driving a lot of the spend there those growth initiatives. Maybe, Andrew, if I could maybe just follow-up on some of the commentary earlier about nuclear. I think you mentioned a couple of times some of the work you're doing on the SMR side. We've recently heard one of the companies involved in this space talk about the TAM could be very, very large globally. Maybe if you just share some color on the type of work or the type of involvement you could have on the SMR side. Obviously, still, a lot of uncertainty there, but just curious kind of the work you're doing there, and if you know you're involved with a recent project here announced in Ontario as well? So, let me work backwards on that. So the reason announcement is potential. So, I'll just leave it at that it is potential. Look, it's early in this market journey. And while it's been around for a while, it's got a bit of a resurgence. And again, we've had more than one award in this space on the SMR space. And our mission is to really help these customers and this most recent customer, prove out their technology, prove out their capability. And pleased with the order. We do view this has nice upside for ATS. That said we need to ensure that they can prove their technology before we start to build out kind of the full thinking on the markets. But if you step back, what do we do? And if you could see me right now, it's you look like there's multiple tubes, we actually enable and help that as they're changing out the refueling process. And it utilizes ATS core experience knowhow capability, it's one that is really aligned with what we can provide for strong value into the space and really aligns to their ability to execute what they set out to execute . And so, we do view this as having nice upside, but the technology needs to be proven and the capability needs to be proven. Thanks for the follow-up. On the aftermarket services, I know there's been good progress in this area. Are you able to provide the growth in the quarter? And what percentage the aftermarket services is for the overall sales? Good morning, Justin. So after sales in the quarter, it grew in the low double-digit range. As a percentage it is high teens. So Justin, you're well aware, I mean, our target is to be over 20 and then continue to drive this. We have divisions and our business is that are close to 40, and so, when we -- and we have others that are under the mark of where they need to be. And so our view is this is strategic, it's an area we've invested in, it's you know, and when you look at the customer behaviors, COVID has gone from this as a nice to have to mission critical. So, our customers look to us to really drive this value and drive their ability to get their product out on time on budget and at the highest quality. And we've invested here. We now have a North American service center. We have a European Service Center. We've got digital tools. We've got an online ordering process. And so all that to be said, we do view that this is a growth engine, a growth driver, it is one that we when acquire a business, it becomes one of the core things we bring in early on in the integration because it's one we can help with. And our teams in these regions can do different markets, different capabilities and really help expand that penetration. And so, we're pleased with the progress to Ryan's point, low double digits and growth in the quarter, early days in our journey, and one we think we can continue to drive. Thank you, operator. We look forward to staying focused on our goal of creating value for our customers and shareholders as we continue to execute. Thank you for joining us today. I look forward to speaking to you on our year-end in May. 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_191

Good day everyone, and welcome to the SmartCentres REIT Q4 2022 Conference Call. [Operator Instructions] I would like to introduce Peter Slan. Please go ahead. Thank you and good afternoon and welcome to our fourth quarter and full-year 2022 results call. I’m Peter Slan, Chief Financial Officer; and I’m joined on today’s call by Mitchell Goldhar, SmartCentres’ Executive Chair and CEO and by Rudy Gobin, our Executive Vice President and Portfolio Management and Investments. We will begin today’s call with some comments from Mitch, Rudy will then cover some operational items and I will review our financial results. We would then be please to take your questions. Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward looking information which can be found at the front of our MD&A materials. This also applies to comments any of the speakers make this afternoon. Thank you. Good afternoon and welcome everyone. Well start with this quarter strong operational results, which is taking place in near every category, as well as our success and achieving some significant mixed use entitlements. This sets the stage for an even stronger 2023. With the completion of Transit City four and five condominiums and the Middle Way apartments, all scheduled to occupy in the coming quarters. The fourth quarter capped off a year of resurgence both in consumer traffic and retailers wanting more space. Not only are we seeing continued demand for space in most of our nearly 35 million square foot value oriented portfolio, but we are also welcoming new retailers to our centers in many segments, allowing us to provide a more compelling and diverse offering to every community we serve across Canada. We are also seeing consistency in our industry leading occupancy rate of 98%, which is back to pre-pandemic levels. We continue not only to expand in our existing footprint, but demand for new retail construction is also growing in various segments, which Rudy will speak to shortly. All-in-all, our tenants are adept and most with strong e-commerce, delivery and/or pickup channels. From a portfolio perspective, we continue to work towards derisking our tenant base as reflected in our improving tenant covenant liquidity and collections. Retailers have for the most part, figured out how to best adapt their product offering store sizes and distribution to fit the needs of Canadians. Thus, tenant collections are now an industry leading 99% and continue to improve with provisions for non-payment of rent near zero. On the land use permission in development front, we continue to move the goal line forward, not giving way to these challenging times. For 2022, we achieved over 6.1 million square feet of new mixed use permissions in various urban locations with high demand for housing. Given that development is a long-term game, we are committed to unlocking the tremendous value embedded in our existing owned lands, which I will remind you sit in the midst of highly populated communities in nearly every major market across Canada. While you can read the details of many of our developments planned for the portfolio in our MD&A here are a few highlights of what is currently underway. Construction of the 4 and 5 Transit City condo towers at SmartVMC comprising 45- storey and 50-storey respectively, are nearing completion and remain on budget and on schedule with first occupancies starting later this quarter. Also within smart VMC the Middle Way, our 36-storey apartment building is also nearing completion. Occupancy commenced just last week, and we expect continued lease throughout the year, which we are all very excited about. Our apartments in Mascouche and Laval suburbs of Montreal are near completion and demand for rental suites in those markets is also reflecting the high level of interest. Construction of a 240,000 square foot 40-foot clear industrial space on 16 acres of a 38 acre site on the 407 in Pickering is in its final stages, with half of the space already preleased and return over scheduled for next month. Construction continues on new Seniors Residence apartments totaling 402 units at Ottawa, Laurentian. Our investment made me aware. Our JV partner on this project Groupe Sélection is currently taking some financial steps. However, construction is continuing. SmartCentres continues to support this project, and we are confident in a path to substantial and successful completion. In Vaughan Northwest with our partners, we recently commenced the construction of our townhouse subdivision including 174 homes with site servicing now completed. Lastly, in addition to our seven self storage facilities already opened, and high demand in other markets across the GTA. We are under construction on three additional storage facilities in Markham, Brampton and Whitby. You can see this current construction activity is all in our expanded disclosures in the MD&A, as well as the list of additional 48 projects scheduled to commence construction in the next two-years, subject always to satisfy our many internal risk hurdles, while again demonstrating the tremendous opportunity that lies within our underutilized lands that we already own. On the financial side, maintaining our conservative balance sheet remains a priority with an unencumbered pool of assets of $8.4 billion a 43.6% debt level and significant liquidity which Peter will speak to shortly. As I have mentioned previously, we are not bound to the commencement of any project and will await the proper economics timelines and funding before initiating any project. In today’s market of higher interest rates, higher inflation, economic and political uncertainty, we may selectively determine it prudent to sit back and wait for a safer environment. However, sitting back is not in our DNA. Over the past 30-years, we have consistently navigated and push forward in many market conditions, building a dynamic and resilient portfolio, starting from 1994 with the opening of the first newly built Walmart in Canada at our very south site. At SmartCentres, we are far too forward thinking to be distracted by noisy headlines to take our eye off the long-term vision and objectives of building lasting value for communities across Canada and hence value in growth per unit holders. We will get you there in one piece. Environmental, social and governance issues for example and have always been woven into the fabric of our organization. They are embedded in everything we do and how we oversee our business, interact with our tenants and engage our associates and communities and of course, impact on the environment. Although ESG is getting more attention as of late, it has always been part of our DNA. Since the beginning and when you assess our portfolio, you can see that ESG principles have been applied throughout. In our approach to building and design energy utilization of social interaction with tenants and their customers especially evident during the pandemic cost savings to communities and of course convenience. So such that Canadian families are able to live a better life. That is not to say we can’t do better. We are committed and energized to find new and innovative ways to share ways, innovative ways and do more than our share of good in this important area. On a final note, I would like to offer my sincere appreciation to our exceptional team of associates for their commitment and dedication to delivering on this long-term vision of improving the lives of the communities we serve every day. Thanks Mitch and good afternoon, everyone. Operationally, what started earlier in the year as a strong rebound in customer traffic and competing leasing interests for space in our centers, carried all the way through the fourth quarter, with over 700,000 square feet of vacancy leasing, completed in the year 2022 ended with a strong performance all around and back to our pre-pandemic occupancy of 98%. Demand was driven by a wide category of retailers including full line grocers, pep and dollar stores, pharmacy, the TGA spanners of course, and health and beauty. Also in the non-urban markets, with consumers spending more on their own, additional demand emanated from the furniture stores home decor, appliance stores, daycare and craft stores. Given that virtually 100% of our SmartCentres portfolio already have a full line grocery, and nearly 70% with a Walmart Supercenter, it should not be a surprise that all of our centers are doing well and in smaller markets especially so as the center’s are 100% leased and occupied. Now for a few operational highlights. Rent collections, as Mitch mentioned earlier, are now in excess of 99% and along with the fact that we have settled and collected virtually 100% of our deferrals offered during two tenants during and since the onset of the pandemic, the covenant quality of our portfolio is now even stronger than it has ever been. By year end, we renewed nearly 90% of all maturing tenancies are 4.5 million square feet, again strengthening the portfolio with the best retailers in the country and at a 3.1% increase over maturing rents. In addition, as of today, we are already at 50% renewed of our 2023 maturities. Demand for new build retail space, as Mitch mentioned earlier, as well is also growing in a number of categories, such as grocery, pharmacy, dollar stores, liquor stores, bank and QSR. And we intend to meet these demands where it makes sense to do so and where it does not interfere with our mixed use development plan. Other signs that physical retail is quickly improving which reflected in the lack of any bad debt provisions being booked in the quarter, but rather, throughout the year, we reflected our recovery and I might add with no tenant restructurings or filings during the quarter. Regarding our Premium Outlets, it is difficult to believe that we will be celebrating our 10-year anniversary of Toronto Premium Outlets in August of this year, what a landmark and draw it has become. And Q4 ended with 100% occupancy and sales and percentage rent exceeding pre-pandemic levels in many categories. EBITDA is expected to be the best year yet in 2023. Montreal opened later and in Q4 sales are also exceeding expectations and for 2023, we also projecting a similarly strong performance. As Michelle said before, this resurgence in customer traffic and adaptiveness of our tenancies speaks to the resilience of this portfolio, which was built for heavy weather. From virtually every perspective 2022 was a strong recovery and 2023 is shaping up to be more of the same. Physical retail and especially our value oriented unenclosed centers continue to be in high demand and communities across Canada. Tenants are continuing to adapt to the needs their customers through best locations store sizes and merchandise mix. Aligned with our tenants SmartCentres will continue to deliver value each community by meeting the individual needs through a comprehensive tenant mix, ease of access, and optimal shopper driven experience. And most importantly, all of this is happening concurrently with our extensive mixed use developments already underway and in the pipeline. Thank you, Rudy. The financial results for the fourth quarter reflected continued solid performance in our core business with results that are now trending above pre-COVID levels by virtually every measure, including net operating income, payout ratio, and average rents per square foot. For the three-months ended December 31, 2022, FFO per fully diluted unit, with adjustments and excluding various anomalous items with $0.60, an increase of 7% from the comparable quarter last year. Please note that these results include the non-cash impact of a $6.2 million gain for marking to market the total return swap for the quarter. Higher rental income was more than offset by higher interest expense. However, an improvement in G&A expenses helped the bottom line during the quarter. As in prior quarters, we have also presented FFO information net of the impact of certain anomalous items including the gain from a total return swap of $0.04 per unit and the dilutive impact associated with units issued pursuant to the acquisition of VMC West Lands of $0.02 per unit. Net rental income for the quarter increased by $2.2 million, or 1.7% from the same quarter last year. Including our equity accounted investments, however, net rental income increased by $4 million, or 3.1%, largely due to exceptionally strong performance at our Montreal and Toronto premium outlet centers that Rudy just mentioned. Same property NOI including equity accounted investments increased by $5.1 million, or 4% in the quarter. Leasing activity remained strong, which is expected to drive continued, but modest growth in NOI over the coming quarters. Our occupancy levels, including committed leases was 98% at the end of Q4, virtually unchanged from the prior quarter, but up 40 basis points from a year earlier. In terms of distributions, we have maintained our annual cash distribution level of $1.85 per unit throughout the COVID-19 period. For the full-year 2022, our payout ratio to ACFO excluding the impact of the total return swap, condominium and townhouse closings, and the smart VMC West Land acquisition was 92.6%, representing a significant improvement from 96.5% in 2021. Total assets include including our proportionate share of equity accounted investments were $12.1 billion at year-end, compared to 11.5 billion in the prior year. For the quarter IFRS, fair value adjustments in our investment property portfolio, resulted in modest net gains of approximately $13.4 million, principally reflecting additional leasing activity. We did not make any portfolio wide changes in our capitalization rate assumptions this quarter. During the quarter, we repaid $176 million of debt. The release of cash held us security for our TRS liability, as well as proceeds from the repayment of loans receivable during the quarter were the primary sources of capital used to repay debt. We expect to continue to repay debt over the course of 2023 using proceeds from our upcoming condo closings at Transit City four and five, as well as from the recently completed sale of some park lands at the Vaughan Metropolitan Centre, which closed earlier this week. At the end of Q4, our debts aggregate assets ratio stood at 43.6% and our unsecured debt to secure debt ratio was 74%. Total unencumbered assets to unsecured debt was 2.2 times at year-end up from 1.9 times a year earlier. In terms of debt to EBITDA, our ratio on an adjusted basis, including equity accounted investments was 10.3 times at Q4 compared with 10.2 in the prior year. Excluding the liability associated with our total return swap brings this ratio down modestly to 10 times, both in Q4, and a year earlier. We were pleased that our credit rating was reconfirmed at the BBB level during the quarter, and we remain focused on continuing to strengthen our balance sheet and improving the outlook for our rating. The weighted average term-to-maturity of our debt, including debt on equity accounted investments is approximately four years and it bears a weighted average interest rate of 3.86%. We remain comfortable with our conservatively structured debt ladder where the most significant aggregate maturities are in 2025 and 2027. We do have an upcoming maturity this spring with a $200 million debenture and we are currently exploring multiple refinancing options. Approximately 82% of our debt is at fixed interest rates, which has been a significant benefit to us during the recent rising rate environment. In short, our balance sheet remains strong, it withstood the pandemic well, and we believe that we are extremely well positioned to fund the various growth oriented development projects that are currently in our pipeline. Just before we open up the lines for questions, I want to touch briefly on some of our various mixed use development projects that are currently underway. We have added some new disclosure on page 22 of our MD&A this quarter, as Mitch referenced earlier, that we hope users find helpful. As you will see, we have 11 projects under construction at the moment, including over 1000 condominium units. Another 1000 rental units comprising conventional apartments, seniors and retirement units, along with 174 townhomes, 240,000 square feet of industrial space, and more than 2600 self storage units. All of these projects are expected to be completed by the third quarter of next year, with the first ones Transit City four and five, the Millway Rental Project expected to be finished later this quarter. Collectively, the REITs share of the total expected project costs including land is $539 million, of which 304 million has been spent to date, we have more than adequate liquidity to finance the remaining $235 million of construction costs associated with these projects. We intend to update this table quarterly. So I expect that as the year progresses, you will see certain projects come off the list as they reach completion, and other projects get added as construction commences. Later this year for instance, we expect to add the Canadian Tire side and lease side and the ArtWalk condominium and rental developments at SmartVMC. Project financing work on these developments has already begun, upon completion, each of these project projects is expected to drive continued FFO growth, as well as allow us to recycle capital into other opportunities in our development pipeline and facilitate prudent management of our capital and liquidity needs. And with that, we would we would be pleased to open up the line to your questions. Operator, can we have a question on the line? Hey good afternoon. I wanted to touch quickly on the operational side. And just trying to establish kind of the building blocks in terms of potential kind of same-store NOI and an ethical present growth in 2023 versus 2022? So Rudy on the 50% of the 2023 maturities, lease maturities have been renewed. Can you give us a sense of what the lease renewal rates have been both including and excluding anchors? Most of the 50% we have done now are actually higher than this year’s renewal rate so far. And I don’t know if you recall last year when we were doing this each quarter, and we give the updates. We tend to have a strong list of tend to want to renew earlier in the year. So right now, we are north of 3% increase into 50% already renewed compared to this year. So it is looking very good. I don’t have the breakdown area with regard to what it is with or without our anchors, but that is an all in number. So it is looking stronger than 2022. And then in terms of the occupancy, I think in your disclosure, it was noted there was an expectation for higher occupancy in 2023. Given you are already kind of at a sector leading 98% at least. How much higher do you think the occupancy gains can go and then conversely if Canada was to revert into an economic recession. How should we think about potential downside to occupancy levels in that scenario from here? I will start with that. First of all, we try to go and try to increase that by 3% of occupancy. But we actually do well in, first of all, COVID, did do a lot of things with respect to a little bit of down went on around COVID. So we don’t really have and it is really, and we, I think we have all actually touched on the focus on strengthening, even strengthen even more our tenant profile from a credit worthiness point of view. So combine that with the fact that we are sort of value oriented here, and we make up two-thirds or more of our portfolio is basically just essential services. We actually do well in both strong economic times and tough economic times. So, we anticipate, for a variety of reasons that just stated that we don’t see a lot of exposure for downwards. I can see about consumer recessionary type environment. In fact, given what is going on, we might be actually a little bit stronger. So, that is my part of the answer Rudy. That is a two maybe talked about a lot of different types of tenants who have come to the table wanting space, everyone from logistics to distribution to last mile to furniture and crafts. And so we have a number of new tenants to the portfolio of wanting space and it adds a really nice mixed use to our centers. So they may see some turn, like I mentioned earlier, where we were at 90% retention. So that 10% of our maturing maturities, which is around roughly five million square feet a year churns. So all - at any one point in time, it may be plus or minus, but generally, we expected to maintain and improve that throughout 2023. Got it okay, and then maybe just shifting gears to capital allocation. What are your updated thoughts on the magnitude of potential asset dispositions in 2023? We are open to that subject to of course valuations, what can be achieved in terms of prices? We are not going to reconcile our assets short, if you will. So, we are open to it, the last few months has certainly not been conducive to that we had a number of different capital raising activities going on, going back a year-ago, but that certainly just kind of came back, sort of inflationary [Technical Difficulty] started. But we stay in touch with all of the institutions who are interested in teaming up and of course, we get approached all the time from people who want to acquire our assets, but we are open to all the above subject to the details and it is certainly, I would say, possible that something along those lines could happen this year. Got it, okay and then my last question, I believe in the last call, the Q3 call, you noted that a development budget for both 2023 and 2024, roughly about 250 million. Is that still a fair assessment or has anything changed in the past three-months that would either accelerate that figure or decelerate it? Yes, it is decelerated. As we said on that call, I’m glad that you guys are listening. Actually, it is great. We are going to slow it down, because as we say, on bad and other calls we will always look at the environment and make development decisions based on playing it safe. So we have decelerated some of our development initiatives. I think that are under construction are all locked in for pricing and pre sales and so on. But going forward, each and every one is being assessed very, very carefully. ArtWalk is highly likely to go ahead, and I think Peter mentioned that already, couple storage, probably proceed, as well. And a few other things we are looking at very closely. But others other things we have definitely sort of the approval process now, drawings now. Testing on some tendering, but we are definitely going to slow down a number of our slowdown initiating a number of our developments. Got it, okay. So look in terms of the 250, let’s go through the math, in terms of the cost or some of the things that you mentioned, but that 150, 200 versus 250, is that kind of the quantum of the slowdown, those you think about? It is hard to say right now, because there is a couple of big projects that if we don’t proceed, it is big money, like so we are actually in the process of really very much daily going through the handful of projects that could for candidates to start, but their implications are huge whether we proceed or not. Yes. So you saw in our MD&A, Mario, we have got $235 million left to go on the 11 projects that are currently under construction. But that, of course, is over both 2023 and 2024. And so we haven’t provided the breakdown of how much of that is in 2023, and how much we will be in 2024. And some of the new projects that Mitch described, won’t start until the second half of this year. So the heavy lifting from a budget perspective is into next year really. Hi, good afternoon. Just in terms of the disposition of that small piece of land there at the DMC what was the motivation there to sell and/or maybe just versus retaining it? And I’m just curious, how the job price compared to the IFRS values? Yes, I mean, it was not so much a motivation. I mean, it is part and parcel of the process of developing requires some contribution towards parks and so we wanted a large park in terms of the overall development of the VMC, SmartVMC, so in certain respects exceeds what we are currently begin obligated to. So the settlement of the city resulted in a firing the nine - what is ultimately the nine care park there, which is was always going to be a park. And in the valuation of the park was based on appraised values, it was all third-party. It was all third-party appraisals to the satisfaction of the city staff and city council. And then ultimately by us, because we had to agree with it as well. So, yes, obviously, it also is consistent with what we paid ourselves for lands recently on the west side of the SmartVMC. And just in terms of your question on the how it compares to the IFRS values, Pammi it, there was no material gain or loss either way. As you know, it was two separate parcels of land and so they had slightly different valuations on our books. But the prices Mitch notes was consistent with both appraisals and our recent acquisition price. And so there was no material gain or loss either way. Okay. And maybe just switching and wanting to maybe just touch on the self storage business. How much have you invested in that, you know, that segment at this point, and I’m just curious, it seems to be going quite well. I think last quarter you had provided the disclosure on the occupancy levels I’m not sure if it is still in there but just curious how you are happy, you are going to be the target. I was just questioning the how the yields are coming in relative to the target. I think your range is like [6% to 8%] (Ph). The business seems to be doing quite well, but just wanted to see how it is tracking relative to expectations? Yes, you are right. Number of years ago, when we commenced this program, we sort of targeted the 7% range. Excluding by the partner, but it is exceeding that. We are very pleased with the performance, both in terms of path stabilization, and also just overall NOI total investment. I don’t know you have actually got that. Okay and then just a couple of housekeeping items, I believe there was a larger increase in the capitalized amounts to G&A and interest in Q4 relative to last quarter. Were this year-end type catch ups or are those the sort of the reasonable run rates. It just didn’t really see a big change in the development or the properties under development? I’m just curious how we should think about that for the year ahead? No, I wouldn’t characterize it as year-end catch ups. I think it is more a combination of rising interest rates on the interest capitalized and the G&A. I think it is pretty normal course, there is a few puts and takes but nothing unusual this quarter. Okay. Last one for me, just on the Transit City four and five condo closings. Are those should all of those should be done before Q3? And then I guess maybe an add-on to that is seeing any risk of any of those units perhaps not closing? First of all, the first part, I would say that by the end of Q3, that will all be closed. And we haven’t seen any sign of defaults, a couple of assignments. But we have seen aside. I would also point out that third deposit was doing ArtWalk for 36 storey tower that we haven’t commenced construction, but will be. And they were for all intents and purposes, all received in January of 2023 just last month. Thank you and good afternoon everyone. Mitch, I think you may have just answered my first question, which is what has changed at ArtWalk to give you a little bit more confidence in proceeding with construction, and it sounds like the receipt of those deposits might have been add to that. Is that fair to say? Yes. It is a separate building, shared underground, shared underground everything, obviously parking but other things, too. And it is 15. storeys. And it is a separate rental building. Yes. It is also going to go at the same time. I mean, it still hasn’t a final decision to go by the way yet, but looking like we are a step closer, for sure and there also be a small for story office building along with that. Okay. And just on sort of a similar vein with the guess the Vaughn Northwest townhomes that construction. I think you said it may have actually already started. The sales levels still at 60%, I think I read what is you know what is going on in terms of sales there you expect those to resume or pickup in the near-term and are you going to build the ball and without pre sales potentially? With servicing, we disclosing the percentage sale there. So it is there about 50% sold, the sales is being done by our partner. And yes, I mean, they are townhomes in a, townhomes a very desirable product in a desirable, census tract. So sales continue. We are not going to build the actual townhouses. If they are not sold, the servicing for them is always for all of them. So it is quite normal to do that. But we are optimistic about being able to sell the balance. That is great okay. Just final one is on the potential headwinds. I guess that is our excuse me, Bed Bath and Beyond has been in the news over the last few months with the sale, Lowe’s Canada to Rona, now all branded has grown and now complete, or at least in process. Are you concerned about any closures impacting your exposure to either of those retailers in the coming year? So Bed Bath and Beyond we have a sum total of two. One of them, we have, we already have interest on the space and have for a long time before they even sort of went public with some of their financial situation and the other one in Cambridge, is very close to where we are intending to do some residential developments. So there was a scenario we were actually looking to relocate the Bed Bath and Beyond there, but did not because for various reasons, including that one. So that would be the height, that would be the height of our concern. With respect to I will let Rudy illuminate a little bit more on in a second from our portfolio, our portfolio and the other one, sure, which was in Rona and Bed Bath and Beyond. As I was implying earlier, there was some turnover over the last three years. We have, we have replaced a lot of that with strong tenants and, and the tenants that did do some closing have reconfirmed their interest in our center. So we are actually in not bad shape. I would say for the certainly the foreseeable beating the next 12-months. I just add to Mitch’s comment, Sam. We have eight locations with them and we have a very strong relationship with Lowe’s Canada, U.S. as well, for that matter all of their locations when we met with them at the ICSC last month, they communicated all of them are in good shape, good standing and intended to remain that way. It is about I don’t know, 850,000 square feet or so. And as you can, you may recall, a couple of them Lowe’s took Sam’s boxes back in the day and, of course, in those leases, the rent, their rental rates are good rental rates for Lowe’s, and for that size project. So in one in fact, they have come to us and asked to expand the store, because it is too small. So very good, a very good tenant for us, and we are seeing things remaining strong with them. And I also add to that. You mentioned sale, I forgot sale. We have one situation with them set a vacancy. And we actually have interest for the entire 70 - we have multiple interests. We have more than 70,000 square feet of interest over the one that is vacant, the other one that we had been become vacant has been leased on a temporary basis and at market rent. So actually, I would say at the end of the day, we will probably end up a little bit ahead with respect to the sales that we got back sales meaning the store. Hi good afternoon everyone. Let’s just start with a Millway. Where do you see asking rents as you start to lease up the building? Are you big - candidate? So yes, I mean it depends on which unit and which building you are in. I mean, Millways in a sense, sort of four different types of spaces. That is their podiums of four and five, podium of the tower and the tower itself. So it really depends, but I will just say that our leasing to-date is exceeding slightly our original budget, original pro forma? Okay got it. And then just with the delivery schedule you have got for this year, is it possible to estimate what you think like the NOI is that sort of the yields you are getting on the stuff you are completing this year or should it vary a bit by asset type, because obviously, there is a mix of stuff in there. But I’m just wondering if we can get some sort of estimate of what you think the income is going to be on these projects? [Technical Difficulty] and as you know in terms of building gets stainable states. There will be a lot of space that is not least up until again, it gets to that sustainable occupancy level. So we are in lease up here. We have the Jackal building in Montreal, Laval, under construction. And the first building is obviously fully leased. And Millway as Mitch mentioned, is just started. So were you talking about those or something else? I’m just looking at what you guys intend to deliver through 2023 and 2024. And I’m thinking you have got okay, you are spending about 540 million bucks here. Are we looking at yields of like, five to six? The storage is seven to eight, the rentals are lower. Roofer shares were here with residential rental. I think, you know, the range of residential rentals. I mean, obviously, it makes up the bulk of the capital investment. And then the really, I mean, the rest of it is condo. And you can, I think we have given you all the numbers more or less on the condo, so you can probably do the math on that one. So, I mean, I would say, I hope, I think you can do the math with what I just summarized. Okay. And then just on, I think bill 23 is kind of shown that for the municipalities, especially those that were using development charges, I think, to finance growth arguably more through sprawl that rather than density in some of the suburbs, like obviously, places like Mississauga and Vaughan, Aurora sort of stick they stick out and come to mind. These mayors now, or in the press talking about, having to increase property taxes dramatically to make up the shortfall from the development charge relief. I think the CVC as the mayor of Vaughn talking about cut 75% plus increases in property taxes. I’m just wondering, what your intelligence in the community is kind of thing about how this shift here, like, are we going to see material increases in commercial tax rates in some of these suburban communities that have financed a lot of their growth through sprawl? I mean, there is no question. We are in the political rhetoric stage on that. We have a provincial government who are very familiar with municipal politics, they come from their origins or our local government and now they are, a lot of them are running the provincial government. So it is a tension that is there, between the province wanting to stimulate growth and the municipalities wanting to provide local services and community services such. So I think it is a lot of rhetoric, but offstage, how it is going to end up getting resolved. It is anyone’s guess, I think it’d be pretty risky for I mean, municipal politicians to just vote higher property taxes as a replacement for development charges, but maybe some, maybe some variation or permutation on tax increases. But I don’t know, I think we have got a ways to go on that and don’t forget provinces, ultimately, big brother, to the municipalities. So I guess this is going to bring it to a head and eventually there will be some kind of an agreement on how municipalities can, how they can both be happy. I think the province is basically communicating municipalities were getting a little bit gold plated with their expectations, and laying onto development, development laying it on to the public. And this is a way to try and get back to something a little bit more sustainable. I think it is a stay tuned situation. Okay. And then I guess, just lastly, you have had Mauro, obviously, retired, believe you are kind of retired of the last little while and you are part of a team who is from another firm, can you just talked sort of about some of the changes that have gone on, on the development side and how do you see that structure working going forward? Yes, the bottom line is, I mean, we are in great shape in terms of our overall staffing. Mauro, who is 20-year plus veteran here, did a fantastic job. But there is 150 or 160 people in the development department here and so, a lot of horsepower, a lot, a lot of experience, a lot of veterans, a lot of 15-year, 20-year people in that department. And then in terms of construction, yes, Bhupesh did retire, but, we had made plans around that. So we are in good shape. We did acquire a team construction, a crackerjack team of construction people recently and they are primarily high rise focused. Whereas our construction of R1 was built step-by-step around the originally the construction of excuse me, Walmart stores and winters and Loblaws, Canadian tires, and Home Depot’s and, and so on and so forth. And they have done a great job supering the supers, that is the PCL the Brookfields who built our high rise for us, but we want to be able to, we want to be able to do everything that we are doing a lot of and that is why we don’t outsource our leasing. That is why we have - it is legal - we have in house sales for our residential. Now we have in-house construction for our low rise. And we have now in house construction for our high rise. So we are feeling very, very good about our construction department and our development department. Okay. And then just lastly, with the Walmart Canada leases, do they all have like going to bungle the wording here, but like an exclusive restriction on like, Walmart can be the only food retailer on site? Good question. It depends. Some do, some don’t. So, it really depends in our portfolio, I would suggest that it is probably anything over a past a certain date. I don’t even want to try and come up with that date right now but probably they do have food restrictions but before that date, or rounder, before that date, probably, maybe not so much. We did the vast majority of them before that date. So, that is why I say with us it really depends. I think all of ours, except maybe one have full, fresh and departmentalized supermarket offering. And by the way, I do want you to know that Walmart does I mean, not just Walmart, in Canada, we have a very, very - our food store offering in Canada is among the best in the world. And so they actually do okay, even when they are on the same site. And they also are often across the road from each other, and so on. So even though the food lots of retailers want, and try to get restrictions on certain things with each other. But when it comes to food at the end of the day, you can look around and you can see food stores next to Walmart’s and Loblaws stores next to Walmart and Costco is next to Walmart spent. Without getting into all the reasons why we would have to do sort of footage of per capita. But suffice to say that they actually often do better when they are next when they are near next to each other than when they are not. So they all know that to just FYI. Thank you and good afternoon everyone. Since it is the last question, I was just very curious to understand your comments further about the slowdown and future development initiatives. I’m just wondering if there is a certain asset class or property type, which is leaving that slowdown over the others? Yes, it is residential. Because it is the most, capital intensive to take the longest term and longest range class. It is still comparison is not that tough. And it is also if it is multi res, it is the lowest yielding initial storage comes out of the gate, red hot, and it is low capital intensity. And retail there hasn’t been a lot of it in the last number of years. But there is a little bit of an uptick in that here, from our core retail base. But again, that one is a little bit more capital intensive, it is all going to be subject to construction prices. But they are dwarfed by the capital investment involved in our residential program. Fantastic. And the next for Peter, but with the upcoming 200 million refinancing, would it be possible for you to discuss how pricey currently stands in the conversations that you are having? Sure Gaurav, I can give you a little bit of color there, maybe not too much, but a little bit. So right now, while the bond market appears to have tightened over the last couple of weeks, and pricing on a new issue basis, hypothetically, has improved a little bit. It is still fairly expensive, and it is certainly more expensive by maybe 50 or 60 basis points relative to the current cost of bank financing. So we are looking at it, we still have several months to go between now and the maturity as you know, and so hopefully, that will tighten a little bit we certainly like the idea of replacing a debenture or I should say maintaining debentures to diversify our funding sources. But we are not going to pay a big premium for that for that benefit. So we are watching the market carefully. And we will make a decision with plenty of time prior to that upcoming maturity. Okay, so thanks, everybody for participating in our Q4 analysts call and please reach out to any of us for any further questions and have a great day. Ladies and gentlemen, this concludes the SmartCentres’ REIT Q4 2022 conference call. Thank you for your participation and have a nice day.

EarningCall_192

Good morning, ladies and gentlemen, and welcome to Veru Inc. Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After this morning's discussion, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference call over to Mr. Sam Fisch, Veru Inc.'s Executive Director, Investor Relations and Corporate Communications. Please go ahead. Good morning. The statements made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, statements of the company's plans, objectives, expectations or intentions regarding its business, operations, regulatory interactions, finances, and development, and product portfolio. Such forward-looking statements are subject to known and unknown risks and uncertainties and our actual results may differ significantly from those projected, suggested or included in any forward-looking statements. Risks that may cause actual results or developments to differ materially are contained in our 10-Q and 10-K SEC filings, as well as in our press releases from time to time. Good morning. With me on this morning's call are Dr. Gary Barnett, Chief Scientific Officer; Michele Greco, the CFO, CAO; Michael Purvis, EVP, General Counsel and Corporate Strategy; and Sam Fisch, the Executive Director of Investor Relations and Corporate Communications. Thank you for joining our call. Veru is a biopharmaceutical company focused on developing novel medicines for COVID-19 and other viral and ARDS-related diseases and for oncology. The company has its commercial sexual health program, called Urev, which includes two FDA approved products; ENTADFI, a new treatment for benign prostatic hyperplasia; and FC2 Condom -- internal condom, for the dual protection against unplanned pregnancy and the transmission of sexually transmitted infections. The revenue from the sexual health program is being used partially to fund the clinical development of our late-stage therapeutic candidates, which aim to address multi-billion dollar premium market opportunities. This morning, we will provide an update on our COVID-19 sabizabulin clinical program, the clinical development of our oncology drug pipeline, and the commercialization of our products in the Urev program. We will also provide financial highlights for our first quarter fiscal year 2023. First, I will update you on the status of sabizabulin, an investigational drug candidate for the treatment of hospitalized adult COVID-19 patients and high-risk for ARDS, which is the lead indication for our infectious disease program. We reported positive results from the Phase III COVID-19 clinical trial, which is a double-blind, multicenter, multinational randomized placebo controlled study evaluating daily oral 9 milligram dose of sabizabulin for up to 21 days versus placebo in 204 hospitalized moderate-to-severe COVID-19 patients who had high risk for ARDS and death. On April 8th, 2022, the Independent Data Monitoring Committee conducted a planned interim efficacy analysis in the first 150 patients randomized in the Phase III COVID-19 study. After reviewing the unblinded clinical data, the Independent Data Monitoring Committee unanimously recommended that the Phase III study be halted early due to clear clinical efficacy benefit. The Independent Data Monitoring Committee also remarked that no safety concerns were identified. In this interim analysis, sabizabulin treatment demonstrated a statistically significant 24.9 percentage point absolute reduction and a 55.2% relative reduction in all-cause mortality by day 60, the primary efficacy endpoint of the study with a P value equal 0.0042. The efficacy was further supported by the consistency of the mortality benefit across subgroup analyses of the primary end point. Clinically meaningful reductions in deaths with Sabizabulin treatment compared to placebo was observed regardless of the standard of care treatment received, baseline WHO, ordinal score, sex, age, baseline comorbidities, BMI or geographic location. In the full final data set of 204 randomized patients the all-cause mortality benefit was similar to the positive clinical results observed in the interim efficacy analysis population with Sabizabulin treatment resulting in a 51.6% relative reduction in deaths compared to placebo -- P Value 0.0046. Data from the key secondary efficacy endpoints demonstrated Sabizabulin treatment resulted in a significant reduction in days in the ICU, days on mechanical ventilation, days in the hospital compared with placebo. Sabizabulin also had an acceptable safety profile significantly fewer adverse and serious adverse events were reported for Sabizabulin compared to placebo. There were also fewer treatment discontinuations due to adverse events in the Sabizabulin group compared to placebo. The Phase 3 reported safety profile suggests that Sabizabulin treatment may have resulted in fewer COVID-19-related morbidities, especially, respiratory failure, pneumothorax, acute kidney injury, cardiac arrest, sceptic shock and hypotension. Next, I will update you on the U.S. and international regulatory progress for Sabizabulin for the treatment of COVID-19. On May 10, 2022, we had a pre-emergency use authorization meeting with FDA. In this meeting FDA agreed that no additional efficacy studies would be required to support an Emergency Use Authorization or an NDA pending review. FDA also agreed that no additional safety data will be required to support in the EUA, but the collection of safety data under the EUA will satisfy the safety requirement for an NDA. FDA confirmed these positions in writing in the meeting minutes, which was sent to us after this meeting. Based on the FDA's feedback from this meeting on June 6, 2022 we submitted a request for an EUA application to FDA. On November 9, 2022, the U.S. FDA's Pulmonary-Allergy Drugs Advisory Committee met with the company to review its request for EUA of Sabizabulin. Although the advisory committee voted eight to five that the known or potential benefits of Sabizabulin when used for the treatment of adult patients hospitalized of COVID-19 and high-risk RDS do not outweigh known or potential risks to Sabizabulin there was additional discussion by the advisory committee around possible clinical trial design aspects for a potential confirmatory Phase 3 clinical trial as a post EUA authorization requirement. FDA is supposed to consider the input of the advisory committee as part of its review of the EUA, but FDA makes the final decision on the emergency use authorization application. We believe we meet the criteria for EUA issuance based on FDA guidance. One, COVID-19 is a serious or life-threatening disease or condition. Two, based on the totality of the scientific evidence available, it's reasonable to believe that Sabizabulin may be effective. Three, risk-benefit analysis the known and potential benefits of Sabizabulin which is the mortality benefit outweigh the known potential risks. There were no adequate approved and available alternatives to the candidate product for treating the disease of condition. It's been three months since the FDA Advisory Committee meeting and we have been in contact with FDA and they have communicated to us they are still reviewing our request for EUA. We however do not know when the FDA will act on our EUA. January 30, 2023 the White House Office of Management and Budget announced that the Biden administration plans to terminate COVID-19 national and public health emergencies on May 11, 2023. The United States Department of Health and Human Services also known as HHS, however, also had declared a national emergency which is a separate one from the White House in 2020, and which is still in effect and based on current information is expected to remain in effect beyond May 11. As HHS governs the FDA, the FDA to avoid confusion also announced on January 31, 2023 that the May 11 termination would not impact FDA's ability to authorize new treatments for emergency use that existing EUAs would remain in effect and that it may continue to issue new EUAs on criteria to issuance or MET. As for our regulatory progress outside the US on July 27, 2022 we announced that the European Medicines Agency, the EMA, Emergency Task Force had informed the company that it has initiated the review sabizabulin for the treatment of hospitalized COVID-19 patients and high-risk for acute respiratory distressed syndrome. The review will assist the 31 EU member states that may consider allowing use of the medicine before a formal marketing authorization is granted. The reviews of sabizabulin are the first to be triggered under Article 18 of the new EU regulation that expanded the role of the EMA during public health emergencies in 2022. We have been in active communication with the Emergency Task Force as they complete the review of sabizabulin, and once the Emergency Task Force completes their review they will submit their formal recommendation to the EMA's Committee for Medicinal Products for Human Use, also known CHMP and CHMP then reviews the recommendation of renders an opinion whether sabizabulin qualifies for emergency use in Europe. If the EMA authorizes if emergency use under Article 18 then the individual nations in the EU may authorize sabizabulin for use. We've also completed our final rolling submission to the access consortium nations, which is composed of the following regulatory agencies. UK's Medicine and Healthcare Products Regulatory Agency, also known as MHRA. Switzerland's Swissmedic, Australia's Therapeutic Goods Administration, known as TGA and the Access Consortium a coalition of certain regulatory authorities with therapeutic products that work together to promote greater regulatory collaboration and alignment of regulatory requirements. This month, we expect to also complete our final rolling submission to Health Canada. In summary, we have submitted regulatory requests for emergency authorizations to the European Union, United Kingdom, Australia, Switzerland and Canada. We're also in various stages of discussions with regulatory agencies and other countries to obtain emergency or expedited authorizations for sabizabulin including South Korea, Israel, Egypt, New Zealand and South Africa. Turning to our US and international special and commercialization preparation update. In anticipation for the potential commercialization of sabizabulin, we have scaled up manufacturing processes and have enough commercial drug supply on hand to address the expected drug needs following the potential authorization in the US and Europe as well as other potential international authorizations and approvals. As an update for the commercialization of sabizabulin in the US, we currently have in place an experienced team to commercialize sabizabulin. We have also executed contracts with wholesalers for specialized hospital distribution services for sabizabulin. We believe we're ready to launch sabizabulin to hospitals across the United States if we're granted emergency use authorization soon. We also have established Bureau International to commercialize sabizabulin to the rest of the world. We are making great progress in the potential international commercialization of sabizabulin. On January of 2023, we had additional discussions with the Health Emergency Preparedness and Response Authority, also known as HERA, which is part of the European Commission. HERA is responsible for joint procurement framework contracts, which offers 36 participating countries the possibility to jointly procure medical drugs and countermeasures as an alternative or complement to procurement at the national level. Joint procurement framework contracts have been previously signed with Gilead, Hoffmann-La Roche, GSK, and most recently on November 23 with Pfizer. Companies also making great progress in signing up international commercial partners to assuming appropriate regulatory approvals facilitate securing Sabizabulin government purchase orders for COVID-19 as well as ensuring seamless flows of Sabizabulin into their countries. So Mezzion Pharma in South Korea, Valeo Pharma in Canada have publicly announced partnerships with Veru. We also have signed commercial partnerships in China, Australia, New Zealand, and Egypt with highly regarded local partners. And although they have not publicly announced these transactions yet, they have been diligently working on the commercial opportunity for several months now. We have been engaged for some time in negotiating partnerships also with Germany, Italy, the United Kingdom, Ireland, Spain, Switzerland, France, Israel and Taiwan. We're also excited to expand the investigation of sabizabulin into other infectious disease indications based on the drug candidate's novel mechanism of action. If we receive an emergency use authorization, the US or other authorizations outside US that leads to substantial new revenue. As we have preclinical in vivo data that demonstrates that sabizabulin has activity against H1N1 variant of Influenza A, also known as swine flu, we plan to conduct a Phase 3 clinical study to evaluate sabizabulin in hospitalized adult patients with influenza A, who had high risk ARDS. Influenza A virus causes up to 52,000 deaths and 710,000 hospitalizations each year in the US. Similarly, as sabizabulin is authorised and commercialize, we also plan to conduct a Phase 3 clinical studies of sabizabulin for the treatment of hospitalized adult patients with viral ARDS, which would include Respiratory Syncytial Virus, which alone causes 14,000 deaths and 177 hospitalizations each year in the US. As we've outlined above, sabizabulin has a novel anti-viral and anti-inflammatory is positioned to potentially become a valuable treatment option for multiple infectious diseases that can lead to ARDS, a life threatening lung condition that has a high mortality rate. I will now briefly discuss the progress of our oncology drug portfolio focused on advanced breast and prostate cancers. In advanced breast cancer, we have been actively enrolling two registration clinical trials, the ARTEST Phase 3 clinical trial in approximately 210 patients to evaluate Enobosarm monotherapy for third-line treatment of AR positive ER positive HER2-negative metastatic breast cancer. And number two, second trial Phase 3 is the ENABLAR Phase 3 clinical study in approximately 186 patients to evaluate the efficacy and safety of Enobosarm and Abemaciclib combination therapy versus an alternative estrogen-blocking agent in subjects with AR positive ER positive HER2-negative metastatic breast cancer who have failed first-line therapy with palbociclib, which is a CDK4/6 inhibitor, plus an estrogen-blocking agent. We have a clinical trial collaboration and supply agreement with Lilly for the ENABLAR-2 Phase 3 clinical study, under the terms of the non-exclusive clinical trial collaboration supply agreement, Veru is responsible for conducting the clinical trial while Lilly is supplying a Abemaciclib for this study. Veru remains full exclusive global rights to Enobosarm. The Phase 3 ENABLAR-2 study has two stages. Stage 1 is a pharmacokinetics and safety assessment of the combination of enobosarm and abemaciclib to make sure there are no drug-to-drug interactions resulting in changes in blood levels of either drug and that there are no added safety concerns for going to Stage 2. Stage 2 is the actual Phase 3 study. We have completed Phase 1 which consists of three patients and there are no changes in expected blood levels for enobosarm or abemaciclib been given in combination and the combination is well tolerated. Interestingly, evidence of objective of antitumor activity was observed in target lesions at the eight-week CT scan in all three patients as follows. The first patient had a 50% reduction of adrenal metastasis. The second patient had a 21% reduction of a liver metastasis, and the third patient had a 71% reduction of liver metastasis. Full trial the Stage 2 portion of the trial as I mentioned is enrolling. In advanced prostate cancer, we have been actively enrolling a Phase 3 and Phase 2 clinical trial. We have been actively enrolling an open-label randomized multicenter Phase 3 VERACITY clinical trial evaluating Sabizabulin on 32 milligrams versus an alternative androgen receptor targeted agent for the treatment of chemotherapy naive men with metastatic castration-resistant prostate cancer, who had tumor progression after previously receiving at least one androgen receptor targeted agent. The primary endpoint is radiographic progression-free survival. Enrollment for the Phase 3 VERACITY clinical study is ongoing. A second clinical study in prostate cancer is evaluating VERU-100 GnRH antagonist three-month depot formulation in a Phase 2 dose-finding clinical study for the treatment of hormone-sensitive advanced prostate cancer. As we will discuss later, we're currently evaluating our clinical trial priorities and spending as we await decisions by FDA European regulatory and other bodies on Sabizabulin for COVID-19 and we're working to conserve cash. When decisions on reprioritization is a suspension of any trials, the termination of any trials, or programs, or any modifications to R&D efforts have been finalized, we will communicate them to you. Veru has a commercial central health program called Urev, which includes two FDA-approved products FC2 and ENTADFI. We have built the infrastructure to allow for broad market access to FC2 across the US. As a result, FC2 is now available through multiple sales channels. We have partnered with telemedicine platform sexual health companies to bring FC2 products to patients in a cost-effective and highly efficient highly convenient manner. Fortunately, the telemedicine sector and global public sector order have underperformed across the board this past calendar year. It does appear, however, that market conditions are improving and we are seeing revenues increase in Q2 fiscal year 2023. We also have ENTADFI, an FDA-approved new treatment for benign prostatic hyperplasia. It's currently prescribed BPH medicines may lead to the most common side effects of sexual adverse events. ENTADFI has demonstrated its faster and more effective treatment option for BPH and financial alone and does not cause sexual side effects. We've launched this product during the fourth fiscal quarter of 2022, with a focus on payer agreements as well as executing distribution wholesaler Medicare contracts. In addition to the traditional distribution, we're also seeking distribution to GoodRx and telemedicine partners. Thank you, Dr. Steiner. As Dr. Steiner indicated, we continue to have a lot of ongoing activity at Bureau. Let's review the first quarter results. Overall net revenues were $2.5 million, compared to $14.1 million in the prior year quarter. The US prescription business net revenues decreased to $163,000 from $11.6 million in the prior year period. The reduction is due to some business challenges experienced by our telemedicine customers in recent quarters, which results in a slowdown in orders. Net Revenue for the global public health sector business was $2.3 million, compared to $2.6 million in the prior year period. Overall, gross profit was $700,000 or 28% of net revenues, compared to $11.8 million, or 84% of net revenues in the prior year period. The decrease in gross profit and gross margin is driven primarily by decreased sales in our US FC2 prescription business. Operating expenses for the quarter increased to $36.3 million, compared to the prior quarter of $16.8 million. The increase of $19.5 million is primarily due to research and development costs, which increased $8.7 million to $18.7 million from $10.1 million in the prior year period, and the increase in selling, general, and administrative expenses of $10.8 million from $6.7 million in the prior year period to $17.5 million in the current period. The increase in research and development costs is due to the increased costs associated with the multiple in process, research and development projects, mainly for the Phase 3 Sabizabulin COVID-19 registration trial and manufacturing costs of $8 million for pre launch inventory, and increased personnel costs resulting from increased headcount and an increase in the fair value share based compensation. The increase in selling, general, and administrative expenses is primarily due to commercialization costs of $8.4 million, related to preparations for the potential launch of Sabizabulin for COVID-19 incurred in the first quarter of fiscal 2023, and an increase in share based compensation costs resulting from increased headcount and an increase in the fair value of share based compensation. The operating loss for the quarter was $35.6 million, compared to $5 million in the prior year quarter. The change of $30.6 million is due to the increase in research and development costs and selling, general, and administrative expenses during the current period, and the reduction in the net revenues and gross profit during the period. Non-operating expenses were $1.3 million for the current year quarter and for the prior year quarter, which primarily consisted of interest expense and change in the fair value for derivative liabilities relate to the synthetic royalty financing. For the quarter, we recorded a tax benefit of $68,000 compared to a tax expense of $115,000 in the prior year quarter. The bottom line results for the quarter was a net loss of $36.8 million or $0.46 per diluted common share, compared to $6.4 million or $0.08 per diluted common share in the prior year quarter. The company has net operating loss carry-forwards for US federal tax purposes of $112.5 million, with $29.7 million expiring in years through 2042 and $82.8 million, which can be carried forward indefinitely. And the UK company net operating loss carry-forwards of $63.1 million do not expire. Now, looking at the balance sheet. As of December 31, 2022, our cash balance was $46.9 million and our accounts receivable balance was $3.9 million. Our net working capital was $32.9 million at December 31, 2022, compared to $63.3 million to September 30, 2022. During the quarter ended December 31, 2022, we use cash of $34.5 million for operating activities. The expected future revenues from Sabizabulin for COVID-19, if authorized, and the continued revenue from the sales of FC2 in the US prescription channel and the global public sector added to our current cash balance, should continue to be the primary sources of funds we use for commercial activities and to invest in our promising pharmaceutical clinical development programs, as we continue to focus on developing novel medicines for COVID-19 and other viral and ARDS related diseases and for the management of breast and prostate cancers. If sabizabulin is not authorized in the US, or elsewhere, in this current calendar, then we may have to seek additional sources of funding if we are unable to reduce our spending to a sufficient degree. Thank you, Michele. In January of 2023, the Los Angeles Times published an article by Doyle McManus entitled "Biden said the pandemic is over, but the pandemic won't cooperate." McManus further states, "But the pandemic isn't over. We're just pretending it is". So last month WHO, so the World Health Organisation, has concluded that COVID-19 remains a public health emergency of international concern. This declaration underscores that the COVID-19 virus and its resulting impacts warrant long term public health action as we enter the fourth year of this COVID-19 pandemic. According to the CDC in the United States, there have been 1,106,824 deaths related to COVID. Currently, the weekly average for new deaths is 3,452 people or approximately 500 deaths per day. The weekly average for new primary COVID-19 hospitalizations is 24,213 Patients or 3,459 new admissions per day. COVID-19 is the third leading cause of death in the United States behind heart disease and cancer. COVID-19 is a serious disease. And an effective and safe oral therapeutic to treat hospitalized moderate-to-severe COVID-19 patients who had high-risk for ARDS that prevents death is desperately needed. We strongly believe that sabizabulin, an oral therapy with dual antiviral and anti-inflammatory properties can serve as this new treatment modality that addresses and overcomes the threat of death that hospitalized moderate-to-severe COVID-19 patients continue to face. We have pivoted our company to establish an infectious disease program with sabizabulin as the lead drug candidate. In a Phase 3 study, sabizabulin demonstrated clear clinical benefit in hospitalized moderate-to-severe COVID-19 patients high-risk for ARDS and death and because of sabizabulin’s mechanism of action, it has the potential to treat other virally induced ARDS. ARDS remains a worldwide unmet serious medical need. In addition, we continue to advance our late -- core late clinical stage breast cancer and prostate cancer programs. For our cash burning position, we have been able to pause some of our spending, as we're now in a waiting mode, while multiple regulatory agencies across the world review sabizabulin as a potential option for emergency use. Over the past few months, we have been proactively preparing multiple work streams for commercialization in the background. For instance, manufacturing, drug supply and scale up activities are in place. Our US and international commercialization infrastructure is ready to provide access to sabizabulin to hospitalized COVID-19 patients and high-risk for ARDS and death, if authorized. We're working to prioritize our clinical development portfolio. We have begun to slow our clinical development spend, and we continue to evaluate the appropriate timing and spending of our planned clinical studies. Furthermore, we have a near-term strategy to drive FC2 sales as follows: we will seek to initiate additional and strengthen current telemedicine and internet pharmacy service partnerships. We have created and launched our own dedicated direct-to-patient telemedicine and internet pharmacy services portal. We're pleased with the telemedicine portal as a growing source of revenue, making this strategic move has allowed us to both supply FC2 to other telemedicine providers and to have our own dedicated FC2 telemedicine portal that we can control and grow. The website can be reached at fc2condoms.com. We expect to continue to increase US public sector sales through our new agreements with the New York Department of Health and the new distribution partnerships with global protection as well as faxes. And we're also starting to see again an increase in global public health sector orders. As I mentioned, we're seeing improvements in FC2 revenues in our second quarter fiscal year 2023 and ENTADFI may also generate revenue and authorized we expect to also have substantial near-term revenue from sabizabulin 9 milligrams for hospitalized COVID-19 patients and high-risk ARDS. Yes, thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Brandon Folkes with Cantor Fitzgerald. Hi, thanks for taking my question. So, maybe the first one from me. What gives you confidence that HHS won't follow the White House in winding down the COVID emergency? Have they been public about anything? Is there any precedence -- obviously that's a tough one there? And then secondly maybe just on the cash situation can you just elaborate when you paused spending? Was this post quarter end or during the quarter? And then any color on the magnitude of the spend you've been able to reduce and maybe just the urgency to either pour some of the clinical trials or shore up the capital situation? Thank you. Yes. So, HHS as I mentioned in my remarks, they're a separate group and they govern the FDA and they declare their own declaration of emergency. And so based on that, the FDA came out the same day the Biden administration made the comment they're going to stop the national and public health, which more has to do with policy and payments and that kind of stuff in May 11th, 2023. The FDA stated that in no way are they going to not be able to continue to issue new EUAs and furthermore, EUAs that are in effect remain in effect until HHS decides otherwise. So, everything I've seen at this point, if you go back, it's called -- 524 is the name of the public health declaration and they have very, very specific times that for example HHS decides that they want to pull the declaration then Medicare and Medicaid and some of these other things will continue until the end of that calendar year. Also interestingly the Omnibus bill that was passed also contains provisions to help transition from emergency use national declaration by the government to a non-emergency. So, for example, for COVID drugs and they mentioned specifically Part D that they can go until the end of 2024 and actually be paid for. And so even though May 11 is the date, so there are transition provisions to not lose anything that we've done that has been helpful and not go back into chaos. As it relates to your second question, our biggest spend was as you would imagine in the first few months after we heard about the go-ahead and submit your EUA. And as you know when we met with the FDA, we submitted the EUA very, very quickly and then we went on the wait. But we knew that we could hear at any time, so it means that even back in the summer we were increasing our spend to put the US commercial team in place and put a commercial team, a small commercial team in Europe and more importantly get ready for commercialization of our product, which is the manufacturing piece of it, which means that we have to scale up. So we can provide commercial drug as soon as the FDA told us; you are authorized. We hear from many of those then we're ready to go. So the spend happened then. Once the spend was done then we're basically in a holding pattern. And as you've seen we've had a couple of planned clinical trials that we just have not initiated there's two in breast cancer for example. And we're just holding on because we've got a whole -- cash is that we want to make sure we can hold on to the cash so that we can understand at the time we hear an authorization, or not that we know what our situation is if we've got revenue coming in from sabizabulin anywhere in the world that's going to be significant then that will help us judge what we can do going forward. Priorities, for example, is that as you heard from the AdCom, one of the discussions was around the agency being interested in a condition for EUA would be that you have to do a Phase 3 confirmatory study. So we've been again proactive in putting together the Phase 3 study and submitting it to the FDA. But in terms of the number and the scope and all that stuff we just don't know at this point do we have full agreement. So there's a lot of unknowns, but our focus is going to be on doing what we need to do to take a valuable drug like sabizabulin and get it to patients, and then to focus on our oncology programs that will get us to the finish line sooner and then to focus on driving revenue in our base business. I would just add that as Mitch indicated, we needed to ramp up. I mentioned during my comments we spent $8 million during the quarter to get enough drug in place. And as we've been working on our prioritization and pushing back on cash that started, we believed we were going to be hearing soon. So that we start talking about that making lists, prioritizing things towards the end of our quarter and now into this quarter here. So a lot of the spend takes time for it to come through and materialize but we're actively working on this. Good morning. Thank you for taking my questions. Just wanted to ask as you control the spend, as we await the potential EUA, with respect to spend on the enrollment in the oncology trials. Are you kind of pulling back there? Is that enrollment now expected to take a bit longer? If you could just kind of let us know what the timelines may be for updates on the oncology trials. Thanks. Yes. So the answer to that is that as soon as we have a better understanding of what's coming in and what's coming out and we're evaluating, as I said, actively evaluating. I mean we did not expect to be sitting here seven to eight months later and not hearing from the FDA. Now there is precedent. There's a company called Sobi Pharmaceuticals that submitted their EUA to the FDA back in January of 2022 and it took them 11 months and it was not until November of 2022 they heard that they have the EUA. So we're completely at the mercy of the regulatory bodies to make a decision. And so what we have done now that we've entered this phase where we're still waiting and they're still reviewing that – and you can see we still have sufficient cash but we want to make sure the cash lasts. And as you know, because we have cash coming in and as I mentioned our second quarter, fiscal year second quarter numbers are starting to move towards where we would expect them to be after having a little bit of headwinds over the last three quarters then we got own money coming in too. And as you know, we've done very well matching our expenses with what we bring in but we just have to spend a little bit more time and then we'll roll out what we're thinking. Thank you for taking my questions. So without waiting for FDA response? Can the company advance Sabizabulin into a clinical trial for hospitalized patients with ARDS but excluding COVID-19 patients? It's a very good question. If we do that then that would have a – so – so far our discussions have been under the EUA and then if we did that that would go under an NDA. And technically it doesn't matter, right because you have to do a study before you can get into for example ARDS-related to influenza and that kind of stuff. And so you touched on a very important point. I mean the thing that we cannot lose sight of is that we have an agent that even after all of these COVID drugs have been tried over the last three years and whether they're new drugs, whether the drugs have been repurposed, whether they're biologics, at the end of the day here we are now in the fourth year of the pandemic and there's not much we can say. I mean in fact we have fewer drugs today than we had when we started because all the monoclonal antibody drugs have been pulled because they don't have activity against the current strain. And the best we can do is dexamethasone at 2.8% in baricitinib and tocilizumab and again they're marginal. And that's what we have. In comes Sabizabulin and Sabizabulin has a completely different profile, and it has a different absolute and relative risk reduction in the sickest patients. And we also know that the mechanism by which it happens is a similar mechanism that you see with influenza RSV and many of the viruses that use microtubules to get in and out of the cell, and also set off the cytokine storm that's responsible for ARDS. And right now we don't have great ARDS treatments. So in some ways the reason we pivoted to ARDS, is because it's such an unmet need people are still dying. When people die from flu, and they die from RSV and dying from COVID the dying at the end the multi-organ failure and ARDS and we could make a big difference. So your point is well taken. That is that the company should be focused on the long-term which is we'll see what happens with the emergency. But more importantly, out of the ashes of COVID comes, a drug that came from nowhere basically because we were developed and its oncology. And so yes, I think we do have a responsibility, just like I said in my earnings calls before, we were duty bound to keep moving with Sabizabulin and it turned out, it played out to be a highly significant clinically meaningful drug and it deserves to go into other ARDS. So what we need to do now is to pause and we need to get past some of these regulatory decisions. You have to believe they have to come soon. But again, Sobi waited 11 months but I'm not -- I have no information to say that I know exactly when. Once we get clarity, then, the assets are as it's an asset that's going to give resources now through potentially multiple regulatory bodies saying, yes. But it's also an asset that if it doesn't qualify for emergency use as well established itself as an asset that should be continued to go into the big unmet need of ARDS and people at high risk for ARDS and death. So yes, influenza, it's definitely one of the -- as I mentioned in my comments, it's definitely one of the studies, because we're still stuck with a shot once a year. It still affects the elderly. We still have to modify it. And there's still the death rate has been depending on the year because it's seasonal can be up to 60,000 people a year dying and as I mentioned over 0.5 million in hospitalizations. And most of the ARDS, is virally induced they don't even check and see what virus it is most of the time. And so, it's just a big area to go into. So the wake-up cough of Veru, is that we have a real asset and we're going to do everything in our power to get it out there. Got it. My next question is, do you expect the FC2 sales to return to the levels seen in the fiscal first and second quarter of 2022? And if so, how soon do you expect to return to that level? For this quarter, we're starting to see our revenues coming back to that level that we saw in our quarters, first quarter and second quarter. As we've said before, our customers experienced some headwinds as Mitch said, one of them had some issues. They had leadership changes. They had rebranding issues. They've rebranded again. And so it's taken them a while to fix some of their internal issues. Another customer had similar internal changes, and some other problems that they've been sorting through and it's taken them a while. It sounds like, they've worked all that out. We stay in close contact with these customers. We've pushed through some of the issues as we've developed our own portal. We've had some issues to tackle. We've been working on those and clearing those up so that we're starting to see, an increase. But our visibility right now is into the second quarter, where things look good for the third and fourth quarter, but a lot of it is still dependent on how quick that do you see their customers fix their issues but all signs are pointing to it coming back to those levels. Thank you. And my last question is just to confirm that Veru, may terminate one of the ongoing breast cancer or prostate cancer trial, due to budgeting priority. Is that, correct? Again, we have not made a decision and we're looking at all options sometimes, one other extreme is just modifications or that kind of stuff. That's why I said, it's just too early to say. But what I can tell you, is that we want to decrease our spend, we want to prioritize the ones that are closest to the finish line. We want to ensure that we do everything we can to focus on that, because at the end of the day what matters is data. So we've got to get the clinical data. And then we'll put a strategy in place to do that so that 2023 is sort of the year of enrollment and 2024 will be the year of data. Especially now that COVID-19, even though it's still around, it really impacted all clinical trials by all companies, because of all the rules that were put in place for COVID-19 management, the lockdowns and all that stuff, it affected everything. But now, it's kind of moving the other way. Even though the endemic numbers are pretty high, but we're definitely seeing that the world is starting to come back. And a lot of these sites were fatigued, because they were pulled to help with the pandemic. And you've heard over and over about the craziness that's going there. But again, that's kind of passing as well. So let us spend the time to come up with a plan to understand how we want to position our oncology program. What I can say for sure is Sabizabulin and infectious disease is here to stay. We have a real opportunity. Oncology, we're committed to oncology. That's our other core asset. We have unique assets that need to make their way through. And as it relates to sexual health business, it's always been a good source of revenue, so that we can partially fund our clinical development and we're not beholden to the marketplace. It feels good after seeing the Q2 numbers, the fiscal year Q2 numbers. As Michele said, it's kind of moving back to a position where a significant revenue will come in, and so that we can move these trials forward and offset some of that cost with what we bring in ourselves. Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference call back over to Dr. Mitchell Steiner for any closing comments. Thank you. I appreciate everyone who joined us on today's call, and I look forward to updating all of you on our progress in our next investor call. Thank you again. Thank you. The digital replay of the conference call will be available beginning approximately noon Eastern Time today, February 9, by dialing 1-877-344-7529 in the US and 1-412-317-0088 internationally. You will be prompted to enter the replay access code, which will be 9127050. Please record your name and company when joining. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

EarningCall_193

Good morning and welcome to the PennantPark Floating Rate Capital's First Fiscal Quarter 2023 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference. Thank you and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's first fiscal quarter 2023 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Floating Rate Capital and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. Thanks, Rick. We're going to spend a few minutes discussing how we fared in the quarter ended December 31, how the portfolio is positioned for upcoming quarters, our capital structure and liquidity, a detailed review of the financials, then open it up for Q&A. The combination of excellent credit quality and higher yields on our portfolio matched with a visible pathway to more optimized balance sheets at PFLT and the JV positions us for stable and growing NII over the coming quarters. For the quarter ended December 31, our net investment income was $0.30 per share. The credit quality of the portfolio remains solid. As we guided last quarter, we have placed one new loan on non-accrual. As of December 31, we had only three non-accruals out of 126 different names in PFLT. This represents only 1.9% of the portfolio at cost and 0.6% at market value. Our credit statistics are among the most conservative in the industry with an average debt-to-EBITDA on our underlying portfolio of 4.7x. With a debt portfolio that is 100% floating rate, we are well positioned to continue to grow our net investment income as base rates rise. For the quarter ended December 31, our weighted average yield to maturity was 11.3%, which is up from 10% last quarter and 7.5% last year. With this backdrop of consistent earnings and stable portfolio, the Board of Directors has approved an increase in the monthly distribution to $0.10 per share beginning with the March distribution. This represents a 5.3% increase in the monthly distribution. We believe net investment income can continue to grow as we optimize the balance sheets of both PFLT and our JV. With PFLT leverage at 1.3x debt-to-equity and target leverage of 1.4x to 1.6x, we plan on thoughtfully moving towards our target. GAAP NAV decreased to $11.30 or 2.7%, which was due primarily to market related fair value adjustments to our equity portfolio and our new non-accrual, partially offset by an increase in GAAP NAV, due to fair value adjustments on our credit facility and notes and net investment income in excess of the dividend. During the quarter, we continued to originate attractive investment opportunities for both the PFLT portfolio, as well as the JV portfolio. For the quarter, PFLT invested $66 million in new and existing portfolio companies at a weighted average yield of 11.2% and had sales and repayments of $63 million. For the new investments and new portfolio companies, the weighted average debt-to-EBITDA was 3.7x, the weighted average interest coverage was 2.3x, and the weighted average loan-to-value was 22%. At quarter end, the JV portfolio was 751 million and we will continue to execute on our plan to grow the JV portfolio to $1 billion of assets. We believe that the increase in scale and the JV's attractive ROE will also enhance PFLT's earnings momentum. We believe that the current vintage of middle market directly originated loans should be excellent. Leverage is lower, spreads in upfront fees and OID are higher and covenants are tighter. In January, we issued 4.25 million shares and raised $48 million, which provides the company with additional capital to invest in this excellent vintage in order to grow NII. From an overall perspective, in this market environment of inflation, rising interest rates, geopolitical risk, and a potentially weakening economy, we believe that we are well-positioned. We like being positioned for capital preservation as a senior secured first lien lender focused on the United States where floating rates on our loans can protect us against rising inflation. We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities where we are an important strategic capital to our borrowers. We have a long-term track record of generating value by successfully financing high growth middle market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask and have an excellent track record. They are business services, consumer, government services, and defense, healthcare and software and technology. These sectors have also been resilient and tend to generate strong free cash flow. It is important to note that we do not have any crypto exposure in our software and technology investments. In many cases, we are typically part of the first institutional capital into a company and the loans that we provide are important strategic capital that fuel the growth and helps that $10 million to $20 million EBITDA company grow to 30 million, 40 million, 50 million of EBITDA or more. We typically participate in the upside by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall for our portfolio and overall for our platform from inception through December 31, we've invested over 375 million in equity co-invest and have generated an IRR of 27% and a multiple uninvested capital of 2.3x. Because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive upfront fees, and spreads and an equity co-investment. Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. With regard to covenants, virtually all of our originated first lien loans have meaningful covenants, which help protect our capital. This is one reason why our default rate and our performance during COVID was so strong and why we believe we are well-positioned in this environment. This sector of the market, companies with 10 million to 50 million of EBITDA is the core middle market. The core middle market is below the threshold and does not compete with a broadly syndicated loan or high yield markets. Many of our peers who focus on the upper middle market state that those bigger companies are less risky. That may make some intuitive sense, but the reality is different. According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate and a higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of core middle market loans, more careful diligence and tighter monitoring has been an important part of this differentiated performance. The borrowers in our investment portfolio are generally performing well. As we said earlier as of December 31, the weighted average debt-to-EBITDA in the portfolio was 4.7x and the average interest coverage ratio, the amount by which cash income exceeds the cash interest expense was 2.8x calculated upon LTM interest expense. The interest expense coverage ratio when calculated using the annualized interest expense and the current LIBOR and SOFR base rates is 2.2x. This compares very favorably to the market average of 1.6x, which is [according to] [ph] Lincoln International. Credit quality since inception over 10 years ago has been excellent. PFLT has invested $5.1 billion in 455 companies and we have experienced only 16 non-accruals. Since inception, PFLT's loss ratio was only 6 basis points annually. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors. Our mission and goal, our steady stable and protected dividend stream, coupled with preservation of capital, everything we do is aligned in that goal. We seek to find investment opportunities and growing middle market companies that have high free cash flow conversion. We capture that free cash flow, primarily in first lien senior secured instruments and pay out those contractual cash flows in the form of dividends to our shareholders. Let me now turn the call over to Rick, our CFO, to take us through the financial results in more detail. Thank you, Art. For the quarter ended December 31, net investment income was $0.30 per share and operating expenses for the quarter were as follows: Interest and expenses on debt were 9.9 million, base management and performance based incentive fees were 6.4 million, general and administrative expenses were 850,000, and provision for taxes were 534,000. For the quarter ended December 31, net realized and unrealized change on investments, including provision for taxes was a loss of 15.4 million or $0.34 per share. The unrealized appreciation on our credit facility and notes for the quarter was 2.1 million or $0.05 per share. As of December 31, our GAAP NAV was $11.30, which is down 2.7% from 11.62 per share. Adjusted NAV, excluding the mark-to-market of our liabilities was 11.22 per share down from 11.59 last quarter. Our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. Our GAAP debt-to-equity ratio was 1.3x. As of December 31, our key portfolio statistics were as follows: Our portfolio remains highly diversified with 126 companies across 44 different industries. The portfolio was invested in 87% first lien senior secured debt, including 17% in PSSL, less than 1% in second lien debt, and 13% in equity, including 4% in PSSL. Our overall debt portfolio has a weighted average yield of 11.3% and 100% of the portfolio is floating rate. Thanks Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PFLT and its shareholders. Thank you all for your time today. And for your investment and confidence in us. That concludes our remarks. Gentlemen, thank you. [Operator Instructions] We'll go first to the line of Mickey Schleien at Ladenburg. Please go ahead. Your line is open. Art, I wanted to understand your view on the outlook for credit. There are certain investments in the portfolio marked in the 80s or even below, which obviously indicate some distress, but meanwhile, we had a very strong January jobs number, and perhaps the possibility of a soft landing is even more real than we thought maybe even a quarter ago, but the consumer is retrenching. So, when we think about all of that, what do you see in terms of trends in terms of the portfolio's credit quality as this year progresses? Thanks, Mickey. It's a really good question. Let me just state that, when we underwrite new deals, today, we're assuming a soft economy out of the gate. That's our going-in assumption. That's how we need to underwrite. And usually, when you're – in our business when you're doing a 5-year to 7-year loan, you need to put a downside or a recession case in the model. At some point anyway, these odds are over a 5-year to 7-year period. You're going to hit a period of economic weakness. When we're underwriting our new deals, we're assuming that there's a weak economy out of the gate. That said, it's not – you're right. It's not as clear given the data that we're all seeing that there really is that much of a soft economy, at least at this point. Certainly, the consumer area is one of most focus and how the consumer is doing. Walker Edison, our one new non-accrual is evidence of that. We've done extra scanning of our consumer portfolio recently in light of that. Consumer, we always upfront put less leverage on out-of-the-gates than we did the rest of our portfolio. So, even though the rest of our portfolio at inception may have been underwritten at debt-to-EBITDA of 4.5x, our consumer names, we would typically underwrite even before this, kind of with a 3 handle on the 3x, 3.5x zone debt-to-EBITDA. So, we were always upfront, kind of extra cautious on that. We've done an extra scan of the consumer companies. We've had external scrubbing, and we feel actually pretty good that the companies we've selected in that space have a real reason to be. People care about them. Their customers care about them. Their margins are sustainable. They've got real brands that have value. So, there's never any guarantee, but we feel fairly decent about that piece of the portfolio. The rest of the portfolio, which is in our key industry is health care, government services, business services, technology, and software. Those names to date are performing pretty well, and we feel pretty good about that. Again, the comfort you get or we get is, we're conservative going in. We underwrite [below multiples] [ph]. That was the – that's been the key of PFLT from the get-go. We've specifically wanted a lower risk portfolio, knowing we would get lower yield as part of that. And now for 11 years, that seems to be working out. I appreciate that in-depth explanation. That's really helpful. And just one follow-up question. On the right-hand side of the balance sheet, the balance of the principal on the 2023 notes is due at the end of the year. Just from the use of proceeds of the common equity offering, are you targeting some of those proceeds to go towards that or do you expect to use the credit facility or just proceeds from sales and repayments? How should we think about financing the maturity of those notes? Mickey. So, the maturity is December of this year. So, right now, we're not specifically earmarking some of the equity proceeds for that refinancing. We do have the capability today to repay those bonds using the revolving credit facility. So, we're continuing to look at other refinancing options, knowing that we could use the revolving credit facility we have in place today to refinance that debt. Hi, good morning guys. Thanks for taking my questions. Just given the overlap portfolio with the JV, just wondering if you have any thoughts around the nonaccrual, Walker Edison, if that should affect the ROE or the distribution rate from the joint venture at all? Yes. Thanks, Paul. No, the JV – it's a relatively small piece of the JV. It's a relatively small piece of PFLT. So, given the JV's high credit quality other than Walker Edison, as well as the anticipated growth, I think the JV was about 750 million of assets at quarter-end. We're targeting over time to get that to about 1 billion. So, we feel as though the NII there coming out of the ROE, coming out of that JV should continue to grow. Okay. Thanks. And then just one investment, I had a question on, one particular credit research now was just marked down this quarter. I was curious if that was credit related, if there's any, sort of mark-to-market going on there and just, any sort of description of what exactly that investment company is? Yes. So research now is traded and actively traded in the BSL market. It's a company we've financed for a long-time. It's one of the predecessor companies called Survey Sampling we did a [private loan] [ph] for. So, we followed it over the years. We thought the credit was a solid credit. It did hit a little pocket of weakness recently. We don't feel as though at this point, there's accrual risk with research now. They seem to have ample liquidity. There's a big slug second lien beneath it, a big chunk of equity beneath that. We feel our loan-to-value is in good shape and that even with – if they have soft results going forward, even with continued soft results, the first lien will be money good in any scenario. Hi, good morning guys. And thank you for taking my questions. My first question is a platform level 1 on your deal selectivity rate and deal volume. Could you remind me where your historical average – sorry, what your historical average deal selectivity rate is and how that has trended recently? And then second, could you give us an idea of the total dollar value or number of deals you review on an annual basis? Yes. I mean, our [deal activity] [ph] rate is usually typically around 5% of what we track. There's a lot of deals which come in that are kind of what we call desk kills that don't even kind of get logged into our system. It's amazing once you have a publicly traded BDC or an [SBIC license] [ph], the amount of incoming e-mails that an organization can get. So, very high [deal activity] [ph]. The good news is our team knows really what fits our box. We have these five key vertical sectors where we have domain expertise. We can get to, kind of what's a PennantPark deal really quickly. What’s not a PennantPark deal, and then it's always about how you look at all the shades of gray and figure out whether you actually want to commit capital. So, usually, it's about 1,000 deals a year. We usually pick 50 or 60, and that's, kind of been the historical kind of hit ratio. In terms of deal activity, certainly, it's slowed down, and that could be – at least this past quarter where it – today, the quarter ended March, it could be a couple of reasons for that: a, there's a typical seasonal slowdown first quarter. If anyone wanted to get a deal, typically, they'd like to get it done before December 31. So, part of it that we are sure that there's some slowdown due to the new equilibrium in the market. Are people paying the multiples that they weren't paying a year ago or are they going to pay multiples a little bit less? Are sellers going to accept those multiples that are now less than they thought they could get a year ago? So, like in any market, that shifting, the equilibrium – the buyers and sellers need to find their equilibrium. And we sense that, that's going on right now, as we speak. We're still active. We still get lots of things. We're still deploying capital. As we stated, it's a really good vintage. Leverage is low. The interest coverage is high, and loan-to-value is still – is excellent. I think the stat I drew out there was like 22% loan to value, 25% loan to value. It's really attractive. So, we'll take it as it comes, deal by deal, and try to pick the right deals. I don't know if I answered your question, Kevin or anything else that you had in that question that needed an answer. You hit all the points. Thank you. And then my follow-up is on how you're structuring new originations. Now that we're in a higher rate environment, are you negotiating higher interest rate [indiscernible] the new deals that you're doing? Well, the new deals that are coming in, just to give you a sense, on the senior side, a year ago, we might have been LIBOR or SOFR [575] [ph], you know 4.5x debt-to-EBITDA. And today, we're more like LIBOR, SOFR 650, maybe 700, maybe for the static quota for the actual deals we did was under 4x debt-to-EBITDA, but call it 4x debt-to-EBITDA. So, less leverage, more spread, more yield, obviously, because base rates are much higher. So these new loans are 11%, 12% yielding loans. And the thing you got to look at is obviously interest coverage. The interest coverage statistic is because we're getting now 11%, 12% versus 7%, 8%, interest coverage credit stat is one that we all need to look at more carefully and make sure that the companies are in [good stead] [ph] as the types of companies we finance typically are more services businesses with low CapEx, working capital that's not that high. So, [2.4x] [ph] interest coverage, we still feel pretty strong about with our companies. Thank you, good morning. Art, is there any notable trend in EBITDA among your portfolio companies generating growth, the pace of that growth over the last 12 months? Yes. Look, as I said – good question, Mark. As I said a moment ago, the only sector where we're seeing a little bit of weakness is consumer. The other sectors, we're still seeing revenue and EBITDA growth, call it, 5% to 10% year-over-year on average. So, consumer has been the one that's been flattish. Some of the consumer names are up, some are flat, and then some, like Walker Edison, are down. So, that's the only one where we're seeing a more mixed picture in that sector. And then the mix, when you look at your new commitments, new investments in the quarter, how much of that was with existing borrowers versus new borrowers? And how has that trended lately? Yes. I mean, most of it has been new. Most of it's been new, but there are delayed draws that we have in the portfolio where the – that's part of the arrangement we have when we [indiscernible] with these companies that are these middle market growth companies where there's add-on acquisitions to do. They want to grow their EBITDA. We will, in many cases, do the initial term loan and then structure a delayed draw term loan, where there's an add-on to finance add-on acquisitions or growth. So, that's usually a substantial part of the pipeline as well. Yes. And I know this probably depends on market circumstances, but the – what's your latest thought in terms of timing? You want to grow the JV to 1 billion, any thoughts on the pace you can do that? Yes. And you're right, it depends on deal activity. So, if [indiscernible] there are $15 million or $20 million, and we're at $750 million now, and we're trying to grow to 1 billion, that's kind of 8 to 12 deals. So, that's probably a 12-month methodical growing of that JV. And at this time, we have no further signals from our audience. Mr. Penn, I will turn it back to you, sir, for any additional or closing remarks. I just want to thank everybody for their participation this morning. And the next call we'll be doing is in early May. So, we look forward to speaking to you then, and we appreciate all your support.

EarningCall_194

Good morning, and thank you for joining Lincoln Financial Group's Fourth Quarter 2022 Earnings Conference Call. At this time all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. [Operator Instructions]. Good morning, and welcome to Lincoln Financial's fourth quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, including those regarding deposits, expenses, income from operations, share repurchases and liquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties and that could cause actual results to differ materially from current expectations. These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued yesterday as well as those detailed in our 2021 Annual Report on Form 10-K, most recent quarterly reports on Form 10-Q and from time-to-time in our other filings with the SEC. These forward-looking statements are made only as of today, and we undertake no obligation to update or revise any of them to reflect events or circumstances that occur after this date. We appreciate your participation today and advice you to visit Lincoln's website, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include full reconciliations of the non-GAAP measures used on the call, including adjusted return on equity and adjusted income from operations or adjusted operating income to their most comparable GAAP measures. Presenting on today's call are Ellen Cooper, President and CEO; and Randy Freitag, Chief Financial Officer. After their prepared remarks, we will move to the question-and-answer portion of the call. Thank you, Al. Good morning, everyone, and welcome to Lincoln's fourth quarter 2022 earnings call. Before we begin, I am excited to discuss the news we released last night that Chris Neczypor, currently Lincoln's Chief Strategy Officer, will be appointed Chief Financial Officer effective February 17th. Chris has more than 20 years of experience in the industry. He joined Lincoln in 2018 as Head of Investment Risk and Strategy and was named Chief Strategy Officer and a member of our senior management committee in 2021. In the strategy role, quarter back the organization's shift to our current strategic objectives, working closely with the finance organization and our businesses and built dedicated team focused on corporate development including evaluating potential transactions. Before joining Lincoln, Chris held a variety of roles in the life insurance industry, including as an analyst and an investor after having started his career as a CPA and auditor of life insurers. Throughout his career, he has cultivated a deep knowledge of the complexities of insurance financials. Chris' leadership will be critical as we continue to fortify our capital position. Chris and I have worked alongside each other for five years, and I know that with his deep financial acumen, analytical expertise, and strategic understanding of our business, he will be focused on our balance sheet resilience and the overall drivers of our valuation. Chris will be succeeding Randy Freitag. Randy will remain CFO through February 16th, and continue to work with us through the end of the first quarter to ensure a smooth transition. Randy has made many contributions to Lincoln over the years, and I would like to take a moment to recognize Randy and wish him the absolute best for his next chapter. I know you'll join me in congratulating Chris and also thanking Randy. This morning, I will provide an update on our strategic progress, followed by some key business unit highlights. Since our third quarter earnings call, our new leadership team has been taking the necessary steps to rebuild capital and strengthen our balance sheet, while positioning the overall franchise for profitable, capital-efficient growth. We have a differentiated business model with a powerful distribution franchise, broad product offerings and a diversified, high quality investment portfolio. These strengths set the foundation for successful execution of our enterprise-wide priorities. And as we move forward, we will continue to focus on the following strategic objectives. First, maximizing distributable earnings and improving capital generation; second, reducing capital sensitivity to market volatility; and third, further diversifying our earnings mix. To this end, we have taken quick actions and made substantial progress in the last quarter to rebuild capital and our ongoing pace of capital generation, including raising $1 billion of preferred capital, further improving our new business capital efficiency, fully repositioning our VA hedge strategy, putting a partial tactical hedge on our VUL in-force, continuing to implement our Spark enterprise-wide expense initiative, enhancing the profitability of our group business and seeking to unlock the value of our in-force book. I will further elaborate on each of these at a high level. As a result of the swift and targeted action we took in the fourth quarter, we raised $1 billion of capital through a preferred issuance and expect to end the year with an RBC ratio of approximately 383%, an improvement as we drive towards our target of 400%. Turning to new business capital efficiency. Across Retail Solutions and Workplace Solutions, we are focused on delivering a more capital-efficient product mix, which will continue to produce a robust level of sales, while requiring approximately $300 million less in new business capital this year. We are selling on our terms with new sales in all four businesses meeting or exceeding target returns. This focus on capital efficiency and profitability will also contribute to higher present value of distributable earnings from new business going forward. We are able to make this pivot by continuing to evolve our products away from long-term guarantees and to provide more options that are attractive for customers involving risk sharing. More tightly focusing this capital where we have differentiated products and long-standing relationships with key distribution partners with, for example, more of a focus on permanent products over individual term life, using flow reinsurance to enhance capital efficiency and focusing on higher-margin, more capital-efficient products and segments across both our Retail and Workplace Solutions businesses. Next, we fully repositioned the variable annuity hedge program to align with our objectives of maximizing distributable earnings and providing explicit capital protection. As a result, we expect to see less capital volatility in Linbar [ph]. In addition, as we focus on improving profitability as well as future capital generation and earnings growth potential, we continue to make substantial progress in the implementation of Spark, our enterprise-wide expense initiative expected to contribute run rate savings of $260 million to $300 million by late 2024. We are also progressing on our group protection margin expansion efforts. We ended full-year 2022 with an underlying margin of 5.3%, within our 5% to 7% target range, with a focus on disciplined pricing and underwriting, providing optimal return to work outcomes for our claimants and implementing segment level strategies to build a more diversified and balanced book of business. We expect over time to sustain a group after-tax margin in the 7% range, inclusive of pandemic claims. Finally, to maximize the value of our in-force book of business, our fully dedicated team remains engaged in evaluating internal and external opportunities including possible block reinsurance transactions designed to advance our strategic objectives. As we focus on these capital and profitability improvement actions that will positively impact distributable earnings in 2023 and beyond, we are also experiencing headwinds, which we have discussed in the past, such as near-term capital market impacts, pressure on the life business and higher inflation driven expenses that Randy will discuss further. Accounting for these pluses and minuses, our 2023 distributable earnings remain in line with our prior expectations. And as we look to 2024 and beyond, several of the initiatives that are well underway are expected to drive further improvement in capital generation. We generally expect the 2023 headwinds to begin to dissipate in 2024 or be offset by larger positives. For instance, the growing benefits of our profitability improvement initiatives. Going forward, over the longer-term, we expect the distributable earnings and GAAP earnings power of our business to reemerge. Moving to the quarter's results. We demonstrated improving loss ratios in our group business, positive flows in both Retirement and Annuities and a sequential increase in life insurance sales. Let me now discuss some key business unit highlights. Fourth quarter life insurance sales were up sequentially in all products except for terms where we took pricing actions. Fourth quarter life sales were down from a strong prior year quarter, though sales were up for the full-year, particularly in indexed universal life. We have a broad, diverse product portfolio, and as we previously indicated, our distribution leadership is most effective in permanent life products. Annuity sales increased 7% from the prior year quarter with positive flows reflecting continued strength in index variables and fixed index products. We continue to see a mix shift away from products with long-term guarantees in both our sales and our in-force. Our Workplace Solutions business included a strong year and remain key to our long-term strategy. Group Protection had a year of solid top-line and overall earnings results. Premiums grew 7% for the full-year, as strong persistency and organic growth continue to generate premium increases. While fourth quarter sales declined 8%, full-year sales rose 15% with increases across all products and case size segments. We continue to see heightened interest in our supplemental health portfolio, and we're pleased with the sales in this category. In Retirement, despite a 7% decline in fourth quarter total deposits from a strong prior year period, full-year total deposits rose 10%. On a full-year basis, net flows were a record $2.9 billion, marking the eighth consecutive year of positive flows for our Retirement business. Finally, Lincoln's investment portfolio continues to be well positioned in the event of a potential credit cycle given its diversification and high quality nature. In closing, we have been fortifying our capital position, increasing our future capital generation and positioning the franchise for future profitable earnings growth. While there is more to do, we have accomplished a great deal in a short period of time and have built the foundation and put the leadership team in place to execute successfully on our plan. Thank you, Ellen, both for those words and our 10 years working side-by-side. Before I get to our results, I'd like to let you know what an honor it has been to serve as Lincoln CFO for the past 12 years. And thank you all for your contributions to this industry that we are so fortunate to work in. While we have had both agreements and disagreements over the years, I'd like to thank that we learn from each other unless are all better for our interactions. Thank you again, and I wish you all nothing, but success as you progress through your careers. With that, let's get started. Before discussing our earnings results today, I will expand on Ellen's comments regarding our capital position. Statutory capital at year-end was $9.6 billion. We down streamed a $780 million of the preferred proceeds to our life company and expect to end the year with an RBC ratio of approximately 383%. This compares to the previous guidance of 360% as the contribution of the preferred proceeds was partially offset by $116 million legal expense in other operations. In Linbar capitalization improved sequentially and is in line with our long-term target. Cash at the holding company stands at $960 million, up $200 million sequentially, the result of retaining a portion of the preferred proceeds to complete the prefunding of our September 2023 debt maturity and book value per share, excluding AOCI, ended the year at $63.73. Now let me turn to our earnings. Last night, we reported fourth quarter adjusted operating income of $170 million or $0.97 per share. As we noted in the earnings release, adjusted operating income included a net unfavorable notable item of $116 million or $0.68 per share from legal expenses, pandemic-related claims of $41 million or $0.24 per share and below-target alternative investment income of $43 million or $0.25 per share. Net income for the fourth quarter totaled $6 million or $0.01 per share. The difference between net income and adjusted operating income was primarily due to hedge breakage and nonperformance risk. Now turning to segment results, starting with Life Insurance. Operating income for the quarter was $46 million compared to $80 million in the prior-year quarter. The drop was primarily driven by alternative investment results and the quarterly run rate impact of the third quarter unlocking, partially offset by improved pandemic claims. Base spreads were 122 basis points for the quarter, down from 135 basis points in the prior-year quarter. This was due to the impact of certain duration extension programs put in place during the low rate environment. In addition to the life business, not yet fully benefiting from higher interest rates due to the long duration and low turnover of its investments. At today's rate environment, we anticipate that 2023 spreads will stabilize about 10 basis points below fourth quarter 2022 levels before beginning to expand in 2024 and beyond. Average account values net of reinsurance fell 6%, reflecting the impact of lower equity markets, while average in-force space amount grew 11%. The Life Insurance business faced many challenges in 2022 and will continue to be pressured in 2023 by pandemic claims, higher reinsurance costs with some additional spread pressure. All that being said, we remain confident in our ability to improve the business over time. Annuities reported operating income of $238 million compared to $332 million in the prior-year quarter, reflecting the decline in the capital markets in 2022. Given the market decline and excluding the benefit of the third quarter unlocking, we are pleased that our Annuities business delivered a 2022 return on assets of 68 basis points and return on equity of 18%. Our net amount of risk for living benefits and death benefits improved to 5% and 4% of account values, respectively, reflecting the sequential rise in equity markets during the quarter. As we continue our progress in diversifying the Annuity business, VAs with living benefit guarantees now represent 45% of total account values, a decrease of five percentage points from the prior-year. Looking ahead, we expect our diverse product portfolio, revised VA hedge program and the benefit of higher interest rates to help drive future earnings and cash flow generation. Turning to Group Protection. We reported operating income of $47 million, an increase from an operating loss of $115 million in the prior-year quarter, aided by lower pandemic-related claims of $116 million and improved underlying disability results of $35 million. Group's underlying margin was within our target range of 5% to 7% for the quarter and the full-year at 5.2% and 5.3%, respectively, when adjusting for the pandemic and unfavorable alternative investment income. The loss ratio adjusted for the impact of the pandemic was 77.1%, a 420 basis point decrease from the prior-year quarter reflecting improved group life and disability loss ratios. Overall, 2022 was a year of progress for the Group Protection business, and we are well positioned to achieve and sustain a 7% margin over time. Retirement Plan Services reported operating income of $49 million compared to $57 million in the prior-year quarter, with the reduction primarily driven by the impact of lower equity markets on fees and alternative investment income, partly offset by higher spreads. Average account values declined by 10%, as lower markets more than offset the benefit of full-year net inflows. Turning to spreads. Base spreads, excluding variable investment income expanded over the prior-year quarter by 30 basis points. For the full-year, base spreads expanded 10 basis points, which is a level of expansion more in line with our view of the go-forward rate of improvement. Reported spreads declined eight basis points over the prior-year quarter. In 2023, we expect reported spreads to be in line with 2022 results as lower variable investment income is offset by base spread expansion. The improved rate environment, coupled with our proven track record of delivering positive flows, positions Retirement to continue to deliver strong results going forward. Moving to investments, where we continue to report excellent credit results and increasing new money yields. The portfolio's credit quality improved throughout 2022, as we benefited from net favorable credit migrations. At 97% investment grade, the portfolio is at its highest quality in the last decade. We continue to leverage our multi-manager platform to perform name-by-name scenario analysis across the entire portfolio under a range of scenarios and are well positioned in the event of a potential recession. Fourth quarter new money yield rose 70 basis points sequentially to 5.7%, 160 basis points above the 4.1% yield on the fixed income portfolio. Lastly, our alternative investment return was a positive 0.4% this quarter. For the year, we achieved a positive 2% return below our long-term target of 10%, but materially outperforming major public equity indices. With LDTI going into effect as of January 1, I will provide a few brief updates. First, as noted on our LDTI initial disclosure call in September, we continue to expect a minimal impact to overall operating earnings. Within the business units, we expect Life Insurance to be negatively impacted by approximately $100 million to $120 million, which will be offset by a positive impact in annuities of a similar size. As we also mentioned in September, adjusted operating EPS will exclude market risk benefit fair value changes and will include an estimated $800 million of VA hedge costs. Second, we estimate that the impact of LDTI will increase year-end total book value by about $300 million and reduce year-end book value excluding AOCI by $900 million. These figures represent improvements from the second quarter estimates we disclosed in September, largely driven by the positive impact of higher interest rates on market risk benefits in the second half of 2022, partially offset by the negative impact of the removal of shadow DAC. As a reminder, under LDTI, we will introduce a revised definition for adjusted book value ex-AOCI that will remove variances in MRV fair values and changes in the values of the related hedge instruments. Turning briefly to our 2023 expectations. There are several headwinds that we expect to impact distributable earnings as well as adjusted operating results this year. First, pressures that are capital markets related, including higher borrowing costs and floating rate debt, and certain duration extension programs as well as lower prepayment income. Second, while reduced from 2022 levels, we would expect some ongoing pandemic claims. Third, outside of the benefits of Spark, we expect some pressure on expenses, including those tied to inflation levels as well as costs associated with our legacy pension plan. And in the Life business, we also expect a further increase to reinsurance costs. These headwinds notwithstanding, our view of 2023 distributable earnings remains in line with our prior expectations. Against the volatile market backdrop, I'm pleased with what we were able to accomplish in a short time, particularly strengthening our balance sheet and implementing our new hedge program. Although it was a tough year for the Life business, our other businesses performed quite well, and there are many initiatives underway to improve our capital generation and earnings power. Thank you, Ellen and Randy. We will now begin the question-and-answer portion of the call. [Operator Instructions] With that, let me turn the call over to the operator to begin the Q&A. Good morning. First, Randy, best of luck to you. It's been good working with you over all these years. Ellen, my first question is just on, you mentioned exploring block reinsurance deals. Can you comment on whether this is mainly focused on life insurance and GUL specifically or you're also exploring VA transactions? And then just second part of that is, are you also open to considering strategic transactions at this point? I'm kind of referring to what AIG did with Blackstone or something along those lines? Thanks. Sure. So Tom, as it relates to our overall focus, we're really focusing right now on opportunities that will maximize the value of our in-force. And we're doing that right now with a much wider lens, and we're evaluating both internal and external potential solutions. So what we have said is that we have a fully dedicated team right now that is actively evaluating that the opportunity to do something externally has clearly expanded as we know that there are more buyers out there, first of all, and secondly, there are more buyers out there that would be interested in the potential for complex liabilities. And most importantly, whatever we would do here would be supportive of the enterprise strategic objectives that we've laid out. So we would be looking ideally for some opportunity here that would improve, first of all, our ongoing capital position, but also improve the rebuild of capital as well. So really the ability to be able to, to do both of those things at the same time. So more to come as we're able to communicate this going forward to you. I'm not going to give you, at this point in time, a specific product orientation because really, the reality is, is that if there's an opportunity that makes sense for us and it's good for shareholders and is at the appropriate price, we would look to transact. And then, Ellen, on the strategic side, are you -- is that something you're considering with a strategic partner or are you really focused on financial transactions at this point? So at this point in time, we're really focused on financial transactions that at the end of the day would optimize the value of the in-force, if there was an opportunity out there that was along the lines of what you were talking about, again, and it made sense, we would clearly evaluate that as well. Great. And if I could slip in one numbers question. The $300 million of lower strain from new sales in 2023, was there a consideration of doing a bigger amount of flow reinsurance to provide more cash flow relief or is that sort of the max benefit that you could get from the flow reinsurance? Yes. So in this number, Tom, are quite a few management actions. And one of those actions is to be expanding and extending some of our flow agreements to be focused on capital efficiency. And the other thing that I want to mention here is that in addition to the $300 million, and I highlighted this in my upfront comments, but I really want to stress that we've got the expectation of robust level of sales across all four businesses -- excuse me, with the expectation of freeing up $300 million in terms of capital efficiency. And we also expect to be improving the forward distributable earnings go forward, of that block of sales going forward. So we expect an ongoing capital generation improvement as well. Hi, thank you. So you've guided to $600 million to $800 million of distributable earnings for 2023 before interest expense. I was just hoping you could help us think about how that will build over time, maybe expand on some of the levers for improvement, Ellen, that you talked about in your script? Sure, Erik. So we have guided to $600 million to $800 million range of distributable earnings coming from the life companies. We back out of that $300 million of an annual debt expense, debt interest, which includes the preferred. So we're really talking about a range of $300 million to $500 million from an overall free cash flow perspective. And that's our range as we move into 2023, assuming normal capital market environment. So as we move forward and we think about '24 and we talk about the number of ongoing initiatives that we have underway. And so I'll highlight a few of them for you right now. One of them is Spark. And we talked about the fact that at the end of '24 that we expect $260 million to $300 million in terms of run rate. We talked about GP margin, and we're seeing steady improvement there, and we ended the year with a 5.3% margin. And we firmly believe that we're well on our way to a sustained 7% margin. Randy also highlighted the fact that we're seeing improvement in terms of our capital position of Linbar and so that's clearly something that as we move forward, we'll continue to evaluate as another improvement as well. And then the other piece that I want to highlight, again, is that while we're going to see $300 million of capital efficiency improvement in '23, we're also expecting, as we go forward, to be able to see an improving contribution to distributable earnings of that sales mix that will continue to grow over time. So those are some of the things that we're spiking out. And then in addition, there were a number of other actions. Again, we've been at this for about a quarter now. We feel really good about the action plan. We've got a lot of initiatives in place. And additionally, we're looking at additional levers, additional potential actions that could even further support this year or 2024 and beyond that. Thank you. That's helpful. And just -- sure, I have it, too. I think this year's plan includes a reserve release from SGUL, which we should probably think of as one-time. Is that correct? Erik, let me take that question. So when you think about RBC more broadly. As we mentioned, we expect to end the year at approximately 383%. We talked about the couple of big levers, right, the contribution of the preferreds, the legal settlement going the other way. Additionally, beyond that, we did a step where we're going to establish the AP reserve associated with the third quarter unlocking. We currently expect that will come in a little better than the $550 million we guided to. We're still doing the work. We don't file our statutory blue book for a little bit. Now on the other hand, that a little bit better was offset by some other reserve movements during the quarter that I described as one-time. So you're not seeing a net-net benefit, but we do expect to come in a little better. As we come a little better on the amount we post, we'd have a little less release, but as both Ellen and I said, we're still able to reiterate that same level of expectation for free cash flow. So I think there are some other positives that are driving from our standpoint, a better durable result than before when we had -- did have some element of that one-time release in there. Yes. And an example of that, Erik, is that we had pointed to, last time we spoke, a range of new business capital efficiency in '23 of $200 million to $300 million, so we expect to be on the north end of the range for that. So that's an example of some of the pluses and minuses that have us very comfortable in our expectation of $300 million to $500 million range of free cash flow for '23. Hi, good morning. The first question I had is just around the common dividend. And I listened to a lot of the comments you made around the investment portfolio and your confidence I just wanted to better understand, as you kind of look at different stresses and think about the environment, when you run those scenarios, I mean, how would you describe your commitment to the common dividend and how well the balance sheet holds up and your ability to cover the common dividend in those types of scenarios? So Alex, I will start and then Randy, of course, will continue and fill in. So first point is that we remain committed to returning capital to shareholders by way of dividend. We've talked about the fact that you all know that we're focused on the rebuild of our RBC and improving our capital generation. We've talked about all the improvements and what our expectation is in terms of our range of free cash flow into 2023. The Board has approved the dividend for first quarter of '23. Just as a reminder, the dividend is under the Board's purview, and we're not going to get ahead of the Board here, but we remain committed to returning capital to shareholders by way of the dividend. As it relates to the overall investment portfolio, and Randy mentioned a couple of things. One is that it is of the highest quality that we believe it's ever been. We've talked to you for some period of time about the significant amount of stress-testing and scenario analysis and name-by-name analysis around credit deterioration. The team does that again on an individual basis. And based on the outlook and based on our expectation of credit deterioration at this point in time, we believe that if we were to hit a credit cycle that it would be quite manageable in the overall realm of our overall current investment portfolio in this scenario. And so that from our perspective is, again, quite manageable. Yes. I think, Ellen, you hit it perfectly. Alex, I think hypothesizing about what you might do or might not do during a time of stress is premature. I think the reality is, if you think about Lincoln, our capacity, one, we have a strong balance sheet at 383%. Yes, it's below where we'd like it to be over the long-term, but still a very strong balance sheet. We retain a significant amount of cash to the holding company. We do have access to a $500 million contingent capital facility. So I think there is a lot of capacity, and we would think about all the levers should our industry or the economy enter a period of stress. And presuming which one you would pull, which lever you would play out, I think it's premature and will act as appropriate if and when that happens. Understood. Second one I had for you is just thinking about free cash flow over a longer period. Some of the things that are affecting you right now are somewhat temporary. I'm cognizant of the fact that you used to generate a much higher level of free cash flow, and you have talked about making the products and so forth more capital light over-time as well. I mean do you expect to be able to get back up to the kind of cash flow that you've earned in the past? How long do you think something like that could take? And are some of the actions that you're targeting and maybe the strategy and direction of the company could it actually cause you to get to even better cash conversion over the long-term? I guess I just want to understand sort of where we're at and how temporary versus long-term the impacts are going to be? Yes. So Alex, great, great question. And again, I just want to remind all of us that we have made substantial progress in the last quarter. And exactly as you're pointing out, we feel really good about where we are, what we have done and also the expected improvement going forward. And we completely agree that as we move forward with the lens of a real focus on improving overall capital generation that over time, everything that is going on to the books is we're really focused on maximizing profitable growth in a capital efficient way and that, over time, that clearly will have a multiplier effect. We're not at the place right now where we can provide a range or provide a steady state of capital generation or any specific timing around that. Most importantly, a couple of points here. One is we focused and highlighted today on the fact that we're rebuilding capital, we're improving ongoing capital generation, and to your point, we are making sure that we are also preserving and really investing in the future of the franchise, and that includes allocating a significant portion of our overall organic capital generation into that new business that will provide us with that profitable growth. So we can assure you that we're working swiftly, and I remain very confident that we'll continue to execute, deliver strong results, and we'll be back with you as we continue to deliver. Hi, thanks. Good morning. Ellen, I think you had previously mentioned that one thing that has negatively impacted free cash flow is term life statutory reserving strain from PBR. I guess for you or Randy, can you help give us any sense of the magnitude of that item specifically, and if that's something that could potentially be dealt with internal reinsurance? Thanks. Ryan, I'll not get into the specifics of any particular products. I think inside of the amount of capital we expect to allocate to new business, which, as we mentioned, we expect to be $300 million lower next year, are a lot of actions, as Ellen mentioned, is more than just a flow reinsurance deal, including the mix of sales. And I would expect that you would see next year that in that particular case, term insurance that we would just be selling less than we did in 2022, because it is a very strange product that doesn't fit with the future strategic direction of the organization at the same level it did in the past. So that is an expectation. But in getting to that $300 million, right, at the north end of where we guided, there are a lot of actions: term is one, flow reinsurance is the other, broader product mixes, actions are inside of there. Hope that helps, Ryan. Yes, I was thinking I guess also, but is there a level of existing redundant reserves that have been built up now over the last few years from PBR that could be released if you used reinsurance either externally or internally? Ryan, yes, I don't think there's much of that. I mean I think we've been pretty proactive over the years in the case of term insurance of really using financing, et cetera, to really bring forward distributable earns in a product like that. I'll just come back to the fact that as we had mentioned, we are really focused on levers that can maximize the value of the in-force. So if there was an opportunity like that, we absolutely would be focused on executing on it. And at the same time, we're also focused on our new sales going forward really maximizing the present value of distributable earnings there as well going forward. Yes, thanks. Good morning. And best of luck from us to you, Randy. I wanted to ask a bigger question about the capital structure, because it looks like your debt to capital is still pretty elevated. You issued these preferreds that are callable, I guess, in five years, but they're pretty expensive. You've talked about dividends, but you haven't really mentioned share buybacks. So I guess, maybe can we just talk about your priorities in terms of the capital structure and maybe fixing some of the things that seem a little bit overextended at this point? If you think about three big buckets, which we've talked about over the last couple of quarters, the Life company, right? We ended the year at 383%. We expect to continue to strengthen that with a longer-term target of 400%. So a little work to do there. Linbar I think we are super happy and excited that relative to where we were at the end of the third quarter, we ended the year in line with our long-term expectations. And I think that puts us in a better position in that particular case, when we think about future sources of capital. So in Linbar in line with our long-term expectations and with a hedge program much more aligned with a focus on capital protection and the protection of that stream of distributable earnings looking forward. And then the last big thing I think, and you mentioned it, is leverage. Yes, absolutely. We do see our leverage ratio is elevated beyond where we want it over time. Now I'd point out, we've prefunded a $500 million maturity that cash sits at the holding company that's coming towards the end of September 2023. So we'll take down $500 million of leverage there. But I think there's more work to do there. I think there is a lot of actions that are going to occur over the next few years, as we think about how best to allocate the capital that we're going to generate -- with all the actions that Ellen has talked about, the growth we expect from the capital, but then how we allocate it as we think about broadly about the financial structure of the organization. And then any comment on the buyback? I know you ruled it out for this year. I think there's an expectation in the market that there will be something in 2024. I just want to give you the opportunity to comment, if you'd like. Yes. And so Suneet, as it relates to buybacks, at this moment, we are focused on really continuing to grow our free cash flow and also to really take our risk-based capital, which ended the year at 383%, and we feel really good about the improvement that we made there and really rebuild back up to 400%. As we're getting closer to that point, we'll be able to give you some estimate around how we think about time and expectation there. We have, as I mentioned, a number of initiatives that are well underway. We feel really good about the progress that we've made, and we have a number of additional as we move through 2023, and we start looking forward with a number of additional actions that we're also evaluating, so more to come there. Got it. And then maybe just one more, if I could. Just are you seeing any commercial impact from a lot of the headlines that we've seen, I guess, since the charge? I mean sales were down in a bunch of areas. You'd mentioned good results for the full-year. But just trying to think through any potential impacts from a ratings downgrade or just from the headlines, if it's having any impact on your ability to generate commercial growth in terms of products? Thanks. Suneet, thank you -- I'm very grateful that you asked this question. We have seen no disruption across any of our businesses as it relates to overall distribution. We feel very good about the overall volume, both volume of sales that went on to the books in the fourth quarter and also the expectation as it relates to the profitability of those sales on the books as well. What I can tell you is that I recently attended the annual sales conferences across all four of our businesses. The sales teams are fully behind the shift that we're making. They're highly energized in terms of our overall partners. We continue to add and actually win back producers across all of our businesses. So it is business as usual and completely aligned and on board with the shift that we're making as it relates to improving our capital efficiency. Hi, thanks. Good morning. My first question on Individual Life, I think the earnings are around $107 million if you back out COVID in half, can you just help us think about the run rate earnings for that segment. I know you guys spoke about 2023 having some headwinds from higher reinsurance costs. So just trying to get a sense of just the earnings you see in that segment on a go-forward basis. Elyse, without getting into the run rate, let me point out a few facts, right? With the third quarter unlocked, we mentioned this -- we did have an expectation that Life earnings will be reduced by $45 million a quarter. So if you just started out at the 150, we used to remit the 107 you've got to is sort of right in line with $45 million lower than we were at. Additionally, I did mention, while in total, we expect LDTI to be neutral from an operator standpoint -- that is a negative $100 million to $120 million in the life business, offset by a similar size positive in the Annuity business. So there's another factor that I would take into account. We do expect some level of ongoing pandemic. We're really happy that the pandemic is -- seems to be fading the back room, but we're going to see some ongoing level. And then there were a couple of headwinds individually for the Life business that we mentioned. For instance, we do have some expectation of higher reinsurance costs next year than we experienced in 2022. I mentioned that we expect Life spread to sell down about 10 basis points or so from where it is today before it starts to grow in 2024 and beyond. So yes, I think there are some near-term headwinds, I think we did a good job of covering them. But in terms of 107 itself, it sort of is in line with where we were less the $45 million impact of the unlocking. Thanks. And then my second question, obviously, a bunch of questions on capital on the call. And I know you guys don't want to comment about buyback specifically beyond this year. But it does seem like you guys could be precluded for a bit longer from buying back your stock based on distributed earnings expectations. So at some point, Ellen, like would you guys consider something more transformational, potentially considering selling a business as a way to free up capital and potentially have additional capital flexibility sooner than otherwise? Yes. Elyse, I'm going to go back to and reiterate the fact that we laid out a quarter ago a number of initiatives and that are well underway, and we feel really good about them. And we're clearly going to see improvement from '22 to '23, and the number of initiatives are going to continue to accelerate improvement beyond '23 into '24 and beyond. And we are continuing to evaluate. So I want to be very clear about the fact that we're continuing to evaluate other actions that can continue to even further really enable us to get our RBC back to the target level as absolutely quickly as possible. So we're going to continue to take swift actions. We'll be back in touch with you. We're not going to give a timeframe today. And as we are executing, we'll continue to deliver those results for all of you. Thanks. Randy, first, good luck in the future. I had a couple of questions on your comments on spreads and then also on reinsurance costs. When you talk about reinsurance costs being up, is it up beyond what you had indicated previously? And if yes, why? Or is it just consistent with what you'd said. And then on spreads, the decline sequentially, is that a function of the crediting rates being up or is there something else that's driving that? So on the reinsurance costs, we've talked about this over the years. We have, over the last five, six years, spent a lot of time working with our reinsurance partners on the topic of reinsurance rates, especially on the in-force books of business. And we have steadily worked through our back book. We've continued that process in 2022. So we've reached some additional agreements. I think we're getting very close. I think we're up into the 90% range-or-so in terms of what we've put in the rearview mirror. But we have reached some additional settlements, which involve us paying some higher reinsurance costs. So just on a year-over-year basis, we're going to see some of that in 2023. In the context of spreads, I think you're talking specifically about the Life business. And as I mentioned, we expect that spread to settle down about 10 points. In my script, I mentioned that the Life business is not seeing the same benefits that we've seen in retirement and annuities. And you can definitely see those benefits inside of that. But then in case of Life, look, it's a very long-duration portfolio. It doesn't have a huge amount of rollover in any given year. And then additionally, during the low rate environment, as we sought to maintain our discipline around ALM matching, we were doing some things to lock in rates into the future. We had a couple of programs in place to add duration to the life business so we could stay in line with our targets. A couple of things I'd mention is that we would typically -- we've been doing this for like eight years, go on a couple of years and lock in the underlying treasury rates. Now that is painful in 2023 as those TLOCs will burn off over 2023, but over the last eight years, I would tell you, in total, it's been a net positive, but it is painful a little bit in 2023. And the other thing we did is that we would do some pre-investing. We would borrow short and then we would pre-invest those dollars and then pay off those borrowings with cash flows of the business, and we'd also expect that to trend down over 2023. So there's just a couple of temporary headwinds I would describe before we start to expand in 2024 and beyond. Broadly speaking though, Jimmy, once again, you see the Life business or the Annuity business, you see the Retirement business, those spreads are expanding nicely as they experience a more immediate benefit of higher interest rates. And then on your pivot away from term life, how much of that is a function of just maybe the capital profile of the business versus maybe the margin profile? And the reason I'm asking is I think you've raised prices in term life as well and you're deemphasizing sales. In the past, when companies move away from something like a few years later, you start seeing reserve issues and stuff. But what's the motivation for you guys on deemphasizing the Term Life business? So Jimmy, there are a couple of things. We -- first of all, we are deemphasizing parts of the Term Life business. So there's a piece of the Term Life business for us that we see as basically a pure price competitive, not utilizing our distribution leadership as part of the overall sales process is the first thing. And the second thing is that what we see is that, it overall is a pretty significant amount of capital and surplus strain for that portion of the Term Life business that doesn't really have the margins associated with it. That's the part that we're going to shift away from, but not the broader overall term life market. And Randy, is there anything you want to add to that? Yes, I agree completely. And I hope I didn't overemphasize term. We're going to still sell term insurance, but I think we can be much more strategic. We can focus on the areas where we use the strength of our distribution. We can move around inside of the term marketplace into pockets that are, from a distributable earnings pattern standpoint, just better. I mean the reality of a 30-year term product sold on one of the big aggregator platforms is that the breakeven year is very, very far out there. And as we think about the future strategy, that just isn't a place that makes sense. But there's still a little a lot of areas, and I'm sure we'll sell a fair amount of term insurance just not at the same level we were in 2022 and prior. Exactly. So I expect the term that we will put on the books going forward will be more focused in partnership with distribution. It will be higher face amount and it will be higher margin and also improved overall distributable earnings profile. Okay. And then just lastly, on the preferreds, they are obviously fairly expensive and you did what you had to do. But do you -- should we assume that that's a normal part of your capital structure going forward? Or is it reasonable to think that you're going to be putting away some capital to be -- every year to be able to retire at some reasonable point in time or as soon as you're able to do it? So Jimmy, we know that the preferred is callable at the five-year mark. That's obviously a long way away. We've talked about the fact that we have many initiatives right now that are supporting the ongoing capital generation. We're going to continue to -- we'll evaluate as we get closer to that call date and see where we are. We continue on the track that we are. I think that, that will answer the question for you about what we'll do five years from now.

EarningCall_195

Good morning to those joining from the U.K. and the U.S. Good afternoon to those in Central Europe and good evening to those listening in Asia. Welcome, ladies and gentlemen, to AstraZeneca's Full Year and Q4 2022 Results Conference Call for investors and analysts. Before I hand the call over to AstraZeneca, I'd like to read the safe harbor statement. The company intends to utilize the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to the operations and financial performance of AstraZeneca. Although we believe our expectations are based on reasonable assumptions, by their very nature, forward-looking statements involve risks and uncertainties and may be influenced by factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Any forward-looking statements made on the call reflect the knowledge and information available at the time of this call. The company undertakes no obligation to update forward-looking statements. Please also carefully review the forward-looking statements disclaimer in the slide deck that accompanies this call. There will be an opportunity to ask questions after today's presentations. [Operator Instructions] I must advise that this conference is being recorded today. Thank you, operator and good afternoon, everyone. I'm Andy Barnett, Head of Investor Relations at AstraZeneca and I'm pleased to welcome you to AstraZeneca's fourth quarter and full year conference call for 2022. We will also present our guidance for 2023 on today's call. As usual, all materials presented are available on our website. Please advance to Slide 2. This slide contains our usual -- this slide contains the -- our usual safe harbor statement, where we'll be making comments on our performance using constant exchange rates, or CER, core financial numbers and other non-GAAP measures. A non-GAAP to GAAP reconciliation is contained within our results announcement, numbers are a million dollars unless otherwise stated. Please advance to the next slide. This slide shows the agenda for today's call. Following our prepared remarks, we will open the slide for questions. We will try to address as many questions as we can during the allotted time. [Operator Instructions] Please advance to the next slide. Thanks, Andy, and hello, everyone. Welcome to today's call. We can move to Slide 5. We delivered a strong 2022 performance, finishing the year with total revenue and EPS at the upper end of our guidance range which I'm sure you will remember, we have graded twice during the year. We reported total revenue for the full year of $44.4 billion which represents an increase of 25% at CER. Core EPS was $6.66 which is up 33% compared to the prior year. Our business fundamentals remain strong, supported by our diverse portfolio of products and also our broad geographic footprint. It is from this base of strength that we are announcing our 2023 guidance. We expect core EPS to increase by a high single-digit to low double-digit percentage. Given that we anticipate a very substantial decline in demand for our COVID medicines in 2023, this guidance is clear evidence of the strength of the underlying business as well as our commitment to delivering improved profitability. Please advance to Slide 6. Excluding our COVID medicines, we now have 12 blockbuster medicines and we've made remarkable progress in our pipeline over the year with 8 positive Phase III readouts and a record Study 4 regulatory approvals in key markets. Our pipeline momentum continues to build and I'm pleased to tell you that we are planning to initiate more than 30 additional Phase III studies in 2023 and we believe 10 of these trials have blockbuster potential. Here are just a few examples of Phase III trials we are initiating based on promising data we saw in the year. In oncology, we are moving our next-generation oral [indiscernible] into the adjuvant breast cancer setting and we are progressing 2 bispecific antibodies into several new Phase III trials. Following our proposed acquisition of Simcorp, we intend to initiate a Phase III trial of baxforstatin hypertension. And lastly, we have an opportunity in rare diseases to raise the standard of care once again for patients with hypophosphatasia with Alexion 1850, our next-generation asfotase alfa. Please advance to Slide 7. In order to stay at the forefront of scientific innovation, we are also making strategic investments in new platforms and technologies that have potential to drive additional waves of innovation with a few examples listed here. To date, we have not only been able to build a sizable pipeline but one with the potential to add significant value to patients and their treating physicians as is clearly evident from the many accolades that our medicines received this past year. So as you can see, we are working on today. We are working on tomorrow which is 2025 to 2030. We're also working on the long term with those new investments in new technologies. Please advance to Slide 8. Today, we are announcing our ambition to launch at least 15 new medicines by the end of the decade which will support our ambition to deliver industry-leading revenue growth over the long term. Looking first at 2023, we are confident that the strength of our underlying portfolio will enable us to hold grow expected revenue declines from our COVID-19 medicines. Over the midterm, excluding the carbon medicines, we are on track to deliver on our previously stated ambition of low double-digit total revenue CAGR growth for 2025 which is expected to come from our existing medicines and new launches. When we look to the long term, we are on track to deliver industry-leading growth well beyond 2025. Underpinning this confidence is the strength of our commercial portfolio but also the extensive pipeline we are developing. Additionally, while the portfolio has a relatively low exposure to loss of exclusivity compared to peers, we take a very proactive approach which starts many years in advance. As you can see here, we have 3 examples where follow-on medicines have been identified and trials underway or being initiated to replace revenues that may be lost following the few pattern expiries that are expected to occur before 2030. And of course, the focus here is on Farxiga franchise management, Lynparza replacement with the Part 1 and the switch of [indiscernible] to Ultomiris. Coupling the scale and promise of our pipeline with our strong track record of delivery and the growth outlook for our company is very exciting indeed. Importantly, we also have a clear trajectory to reduce greenhouse gas emissions with targets that have been verified by the science-based targets initiative. And finally, we remain focused on our ambition to improve operating margins, as we stated before. And now I will hand over to Aradhana to take you through our financials and provide more insight into our 2003 guidance. Please turn to Slide 9. As Pascal mentioned, total revenue increased by 25% in 2022, ahead of our fiscal year guidance of a low 20s percentage increase. Excluding COVID-19 medicine, total revenue increased by 15%. Collaboration revenue increased by 56%, partially driven by higher and hurdle sales. As a reminder, we book our share of gross profits from most major markets as collaboration revenue. For Test buyer, we book our share of gross profits from the U.S. collaboration revenue and ex-U.S. sales booked as product sales. Please turn to the next slide. Our core gross margin on product sales increased by 6 percentage points to 80% in 2022, driven by lower rexevria sales compared to the prior year and favorable product sales margin with higher proportion of oncology and a full year of Alexion medicines. In the fourth quarter, a $335 million cost of inventory write-down and other termination fees negatively impacted core gross margin by approximately 3 percentage points. Core R&D costs increased by 24% in 2022, driven by initiation of a number of new late-stage trials in areas where we have seen promising data as well as a full year of Alexion R&D costs. We have also increased investments in early research, including discovery and new platforms and technologies to maintain scientific leadership. R&D as a percentage of total revenue remained in line with our expectations around 21%. SG&A investment increased by 21%, reflecting a full year of Alexion costs as well as new launches and prelaunch support. As Pascal mentioned in his introduction, we received 34 regulatory approvals in major markets last year which also impacts SG&A cost as we need to invest behind these launches. However, core SG&A cost as a percentage of total revenue decreased in line with our commitment to deliver operating leverage. Our core operating margin was 30% in 2022, an improvement over 2021 where our operating margin was 27%, reflecting the impact from Rexebria sales. We continue to focus on steadily improving our margins without compromising on our top line growth ambition. Core EPS of $6.66 was in the upper end of our full year guidance and was impacted by the bushel cost I previously mentioned but benefited from a lower tax rate for the year, partly as a result of much lower tax rate in fourth quarter of 2022. The core tax rate in the fourth quarter was 10% due to favorable one-off adjustments, IP incentive regimes, geographical mix of products and profits an adjustment to prior year tax liabilities. Please turn to Slide 11. Our cash flow performance continues to improve. And in 2022, the net cash inflow from operating activities increased by $3.8 billion to $9.8 billion, driven by strong conversion and continuous focus on cash generation. We saw CapEx of $1.1 billion, driven by investment in manufacturing capacity, R&D equipment and Alexion integration. We anticipate CapEx to increase in 2023 to support business growth and sustainability priorities. In 2022, we had deal payments relating to past transactions of just above $2 billion and we anticipate a similar level in 2023. Our net debt decreased by $1.4 billion to $22.9 billion. Our net debt-to-EBITDA ratio decreased to 2.5x. If adjusting for the Alexion inventory fair value adjustment which does not impact our cash flow, the ratio decreased to 1.8x. Most of the fair value inventory from Alexion has now been expensed with just over $100 million more to come in 2023. Our capital allocation priorities remain unchanged with number 1 priority being reinvestment in the business. Please turn to Slide 12. I am pleased to share our 2023 guidance with you. As a reminder, all our guidance is at constant exchange rates. We expect total revenue to increase by low to mid-single-digit percentage. Excluding our COVID-19 medicines, we anticipate total revenue to increase by low double-digit percentage. As implied by the guidance, we anticipate a substantial decline in COVID-19 revenue with minimal Vaxzevria sales. This guidance assumes some antibody sales, including revenue in 2023 from our next-generation antibody, ASD3152. We anticipate the core gross margin will benefit from lower COVID revenue and that we will see a slight improvement versus pre-pandemic levels. We will continue to focus on continuous margin improvement while managing the impact of inflation on the cost of raw materials and goods. In China, we expect to return to growth in 2023 with 2022 having been more of a transition year due to pricing dynamics relating to VBP and NRDL. Of course, the shorter-term impact of the current COVID wave in China is difficult to predict. While maintaining our strong focus on cost management and operating leverage, we will continue to invest in the pipeline and core operating expenses are anticipated to increase by low to mid-single-digit percentage. Collaboration revenue and other operating income are anticipated to increase versus 2022. Increase in collaboration revenue is partly driven by continued strength in HER2 sales as well as certain success-based milestone payments. Other operating income anticipate certain expected transactions that may or may not materialize during the course of the year. The core tax rate is anticipated to be between 18% and 22%. We have previously highlighted that the U.K. tax rate is anticipated to increase from 19% to 25% in April. We will also start seeing implementation of the global minimum tax rate in many countries. Core EPS is anticipated to grow by a high single, low double-digit percentage at constant exchange rates. Based on average January FX rates, we anticipate a low single-digit adverse FX impact on both total revenue and core EPS in 2023. Thank you, Aradhana. We're pleased to report -- please turn to Slide 15. Oncology total revenues for the full year 2022 grew 20% year-over-year, underpinned by 19% growth in product sales. In the fourth quarter, oncology delivered total revenues of over $4 billion, reflecting a 12% increase year-over-year. We saw strong double-digit growth in product sales across the U.S., Europe and emerging markets with established rest of world impacted by rising COVID-19 hospitalization rates in Japan. Turning now to our individual medicines. Tagrisso global revenues grew by 12% in the fourth quarter. In the U.S., fourth quarter growth was fueled by continued Adora momentum and increased fluoro duration of therapy. We saw solid growth of 17% in Europe despite impact from pricing clawbacks in certain markets. China Tagrisso revenues in the fourth quarter were impacted by hospital budget management. Execution in China remains strong and we expect demand to outpace the pricing impact following NRDL reenlistment which will take effect in March. Lynparza remains the leading PARP inhibitor globally with fourth quarter product sales growth of 17% and we received a milestone tied to the European approval of Propel in the quarter. We saw double-digit sales growth in the U.S. Europe, established rest of world and the emerging markets, supported by increased penetration in breast, ovarian and prostate cancers. Turning now to Imfinzi. Revenues grew 27% in the fourth quarter, fueled by new indications in the U.S. and Europe. We saw robust U.S. growth of 37%, reflecting rapid launch uptake in biliary tract cancer. We saw strong initial demand for Imjudo for use in combination with Imfinzi following FDA approvals for HIMALAYA and POSEIDON. In the fourth quarter, we reported Calquence total revenues of $588 million reflecting 53% growth driven by increased penetration across key markets in the growing BTK inhibitor class. In the U.S., we saw destocking in the quarter which reduced by half the third quarter inventory build following the launch of the Mali tablet formation. We expect this inventory build to be fully depleted by the end of the first quarter this year. And finally, in ENHERTU total revenue was up 224% in the fourth quarter to $216 million. In the U.S., ENHERTU achieved approximately 50% new patient share in second line HER2-positive metastatic breast cancer and over 40% of HR-positive HER2-low post-chemo new patient share. Turning to Slide 16; you'll see important near-term performance drivers across our key oncology medicines. Turning first to Tagrisso, we anticipate gradual DOT expansion in the frontline setting and continue to dore momentum. As previously mentioned, we still anticipate a mandatory price reduction in Japan to take effect in 2023. To date, we've seen a strong launch for Imfinzi and biliary tract cancer and we're establishing Imfinzi in combination with Imjudo in lung and liver cancers. These are both tumor areas where we're building out our global presence and these investments will position us well to deliver on future launches across the portfolio. Lynparza remains the leading PARP inhibitor in first-line HRD-positive ovarian cancer, where we continue to improve HRD testing rates. In BRCA-mutated breast cancer, we continue to drive testing and share, particularly in early HR-positive breast. In late December, Lynparza in combination with abiraterone received European approval in prostate cancer with an all-comers label, reflecting the strength of the Phase III PROPEL trial. In the U.S., we continue to work with the FDA on the PROPEL approval following the agency's request for more time to conduct their review. Calquence continues to gain momentum in frontline CLL and exited the fourth quarter with 64% new patient share in the U.S. which we expect to be durable in the face of competition. We're excited about the recent positive CHMP opinion for the Mali tablet formulation which will address an important patient need and allows for combination with PPIs. We see continued demand for Enhertu in second-line HER2-positive metastatic breast cancer and strong adoption Enhertu low. We're excited to expand Enhertu low in Europe following the recent approval of DBO. Finally, as Susan will the next recap, we look to file Capitalo 291 for HR-positive advanced breast cancer patients following strong Phase III results. With that, I'll now hand it over to Susan, who will cover key pipeline progress since our last report as well as new opportunities we're progressing into late-stage development. Thank you, Dave. Please turn to the next slide. We had our largest set of presence at the San Antonio Breast Cancer Symposium in December of last year, demonstrating the high potential of our breast cancer portfolio to redefine the treatment paradigm. A key highlight with Phase III data for Capitala 291 which demonstrated that capivasertib plus AZADEX led to a statistically significant and clinically meaningful improvement in progression-free survival versus an active control of placebo plus FaZe with a 40% reduction in the risk of disease progression or death in the overall trial population. CAPItello-291 validates the use of AKT inhibition to address acquired resistance to endocrine therapy and CDK4/6 inhibitors regardless of a biomarker and offers a potential new standard of care in second-line therapy for patients with estrogen receptor driven disease. We look forward to the submission of the data with the U.S. FDA granting us a fast track designation. The camizestrant resistant, our potential best-in-class next-generation oral SERD -- the Phase II SARHENA-2 trial showed improved progression-free survival, providing confidence that camizestrant can become the backbone endocrine therapy of choice across all ER-driven breast cancer with 2 pivotal Phase III trials in the metastatic setting ongoing SERENA-4 and SERENA-6. We'll soon initiate our first trial in the early setting with CAMBRIA-1. This is an extended adjuvant trial that will evaluate whether switching from standard of care endocrine therapy with or without abemaciclib to camizestrant after 2 to 5 years, improves invasive breast cancer-free survival in patients with ER positive and HER2-negative early breast cancer at high risk of recurrence. CAMBRIA-1 is a critical opportunity with the potential to increase cure rates in a population at moderate to high risk for metastatic recurrence. Plans for additional trials with camizestrant are at an advanced stage. Please turn to Slide 19. Towards the end of 2022, we reported Important data for our hematological portfolio at ASH. This included new long-term follow-up data from the Phase I/II trial, ACECL001 for our BTK inhibitor, Calquence, in both the treatment-naive and the relapsed/refractory chronic lymphocytic leukemia setting. We also presented interim Phase I data for our AZD0486a, our CD19 CD3 next-generation bispecific T cell engager. We're very encouraged by the strong objective response rates and favorable tolerability profiles seen in heavily pretreated patients with diffuse large B-cell and follicular lymphomas. Further development is planned as these results reinforce our belief that AZD-0486i provides an opportunity to reach patient populations beyond those reached by current CD20 therapies. Please move to the next slide. As we have signaled the development program for our top 2 ADC data DFD continues to expand with a new Phase III trial in lung cancer. Avanza will evaluate data DXD plus our PD-L1 inhibitor in Imfinzi versus pembrolizumab plus chemotherapy in first-line advanced non-small cell lung cancer. This trial allows recruitment of patients regardless of their tumor histology or PD-L1 status and will be the first to use TRP-2 as a biomarker in both the primary analysis and as a stratification factor with co-primary endpoints in both the TROP2 and ITT populations. AVEMZA complements 2 other ongoing trials that investigate combinations of data DXD and pembrolizumab Tropin Lung in the PD-L1 less than 50% population and toping 08 in the PD-L1 more than 50% group. Please move to the next slide. Finally, I'm excited to update you on some progression for our bispecific programs, Bolustamig and Rivigostomig, both of which will be moving into Phase III this year. While Mustamig is our PD-1 CTLA-4 bispecific -- and based on the longer-term follow-up data of the 750-milligram dose, we're confident to move this into late-stage trials in CTLA-4 sensitive tumors. We will be initiating 5 Phase III trials with Vovastemeg this year, including in non-small cell lung cancer. In addition, our PD-1 TIGIT bispecific, Riverosmic, is continuing to progress with the first patients being dosed in the Phase II cohort of the ARTMIDE-01 trial in first-line non-small cell lung cancer. Our Phase II program continues to grow with the GEMINI trial in gastric cancer. We plan to start the first Phase III with more details available later in the year. Please advance to the next slide. Please turn to Slide 22. Total revenue from biopharmaceuticals grew 11% at constant exchange rates to $20 billion in 2022. Total revenue from CVRM was $9.2 billion, growing at 90% in the year with Farxiga delivering over $1 billion in every quarter and growth of over 50%. In our Respiratory & Immunology business, we saw strong growth in our biological medicines such as Fasenra, the Spire and Sotelo. Along with continued progress for breast, that growth offset the generic pressure on all the medicines such as Pulmicort, Symbicort and Delibes. Overall, R&I total revenue grew 3% Total revenue from our VNI portfolio was up 8%, with COVID-19 broadly flat as expected. Please turn to Slide 23. In 2023, we are proud to be bringing the transformative benefits of our modern medicines to more patients around the world and we will continue to expand a base into new geographies with plans for launches in over 30 countries for Tezspire and nearly 20 each for breast and Sanel. Tezspire has seen very strong momentum since its launch this time last year and it has already achieved new-to-brand share of over 20% in the United States. In 2023, we will look to extend that trend and replicate it in other major markets. Breztri is also enjoying good growth, doubling revenues in 2022. In 2023, we intend to capitalize on the growth of the fixed-dose combination triple class and raise awareness among patients and pulmonologists of the benefits that this medicine brings. Airsupra is the first and only rescue therapy to treat underlying inflammation in asthma. This year, we will educate practitioners and patients about this new class of medicine and building up market taxes ahead of commercial launch. Saphnelo is the first new treatment for lupus sale in over a decade and has quickly become the new to brand Shale in the intravenous segment in the United States. We have successfully launched in 8 markets at the end of 2022. And by expanding across Europe and other markets, we can bring this medicine to even more patients in 2023. And of course, Farxiga is continuing its impressive growth, helped by its expansion into heart failure with preserved ejection fraction following the DELIVER results. With such a strong portfolio of innovative products, we remain very excited about the long-term prospects for our biopharmaceuticals business. Please turn to Slide 24. I want to start by providing some highlights from our mid- to late-stage pipeline in CVRM, demonstrating the depth and breadth across our portfolio. I won't go through all these assets in detail but I wanted to draw your attention to the areas we're focusing on, namely cardiorenal, metabolic and liver diseases. Supporting our commitment to cardiorenal diseases, you will see in the quarter, we announced our plans to acquire SynCor adding baxotostat, a novel aldosteronesase inhibitor which further strengthens our pipeline. And I'll go into more detail on this in the next slide. The other thing to point out is our progress with mitiperstat in Phase II for NASH. Mitiperstat is also being investigated in heart failure with preserved ejection fraction which is currently in Phase Ib and also in COPD which is in Phase IIa. This is a mechanism, first-in-class mechanism targeting myeloperoxidase which is known to cause the formation of hyperclurous acid which interferes with microvascular function in our preclinical models we've seen robust efficacy which reduced inflammation, fibrosis and also improves microvascular function. We see it as a very exciting first-in-class mechanism with broad application across our portfolio. I'm also very excited about some of the progress we've seen with our earlier stage assets, such as our long-acting relaxin in heart failure with pulmonary hypertension, PNPLA3 and censorioucleotide for genetically driven NASH and our small molecule oral PCSK9 inhibitor for dyslipidemia and I look forward to sharing updates on these molecules with clinical data in the coming quarters. Please turn to next slide. And I want to showcase in more detail our Farxiga combinations and how they're differentiated from each other. First, balcinrenone is a selective mineral cortico receptor modulator which believe could have reduced risk of hyperkalemia versus conventional MR antagonists. We have an ongoing Phase II study looking at CKD patients with heart failure, a population which has limited treatment options. Second is zibotentan, our endothelin A receptor antagonist which has been shown to improve renal blood flow and reduce albuminuria and vascular stiffness. The selective profile of zibotentan combination with placebo is expected to reduce significant side effects of fluid retention, a hallmark of traditional endothelin receptor antagonist. We have an ongoing Phase II trial in CKD patients with macro albinuria. And this combination is also being investigated in liver cirrhosis than recently dosed in Phase II. And finally, Baxdostat, currently being investigated as a monotherapy for treatment-resistant hypertension. We believe when combined with Farxiga would significantly benefit patients with hypertension and several other cardiorenal diseases. Faust has shown to be effective at reducing systolic blood pressure without off-target inhibition of cortisol synthesis. And this treatment paradigm would offer a much-needed option for patients with CKD and hypertension and we're planning to initiate Phase III trials for this molecule through the course of this year. Please turn to the next slide. Here, I'm highlighting some key late-stage assets that have progressed or planned to progress during the year. Our IL-33 monoclonian antibody, tozarakumab entered Phase III trials for adults hospitalized with viral lung infections with acute respiratory failure. Emerging IL-33 science in viral lung infections provided confidence to advance to Phase III. During the quarter, we also dosed our Phase I/III Super NOVA trial which investigates the safety and efficacy of our next-generation, long-acting antibody, AZD3152 in COVID-19 preexposure prophylaxis settings in immunocompenized patients. AZD3152 neutralizes all known variants from Alpha, all the way to XB1 -- and the immunobridging trial design has been agreed in principle with both FDA and the EMA shortening the time between discovery and approval. We will aim to make the new lab available in the second half of 2023, subject to trial readouts and regulatory reviews. And finally, we're expanding Safenelo into new autoimmune diseases, playing in 2 new Phase III starts this year in scleroderma and polymyositis. Please move to the next slide. In 2022, Rare Disease total revenues grew 10% on a pro forma basis, contributing $7.1 billion. Throughout the year, we saw continued durable growth of our C5 franchise which grew 7%. Ultomiris grew 42% in the year and 62% in the quarter, reflecting an accelerating and successful conversion from Soliris across PNH atypical HUS and MG. Consequently, Soliris declined 5% in the year which was partially offset by the growth in where Soliris remain the market leader. Beyond the C5 franchise, Strensiq delivered 18% in the year and 27% in the quarter due to increased awareness and diagnosis as well as geographical expansion. Koselugo contributed significant growth in the quarter and is now available in 20 markets. markets. Our geographic expansion continues, leveraging AstraZeneca footprint and we launched in 11 more countries in 2022. This figure includes China where Soliris has launched in PNH and atypical HUS late in 2022. Our rare disease medicines are now available in 57 countries and we are well on track to achieve 100 countries by 2030. Please move to the next slide. I wanted to spend some time discussing our approach to where conversion from Soliris to Ultomiris is now well over 80% for both patients and payers who switch for both convenience and cost reasons. PNH is a little rare life threatening, blood disorder characterized by intravascular hemolysis, IVH which is caused by an uncontrolled activation of the complement system. Elevated LDH is a biomarker for EVH and our C5 inhibitors have over 83,000 patient years of experience and long-term safety and efficacy data, demonstrating C5 continued and sustained LDH reduction for patients. The large majority of the patient on Ultomiris are very well controlled. There is a subpopulation about 10% to 20% of patients that do experience clinically meaningful extravascular hemolysis while they are on C5 inhibitors based on patient data from the 2 larger studies conducted in PNH patients. We have developed danicopan an oral Factor D as an add-on therapy for these patients and we plan to submit our data to regulators in the first half of this year. Please move to next slide. Here, I wanted to showcase 2 of our planned Phase III trials for the year. The first is Ultomiris in cardiac surgery associated acute kidney injury, part of label expansion plans for Ultomiris. Acute kidney injury is a high unmet medical need, causing patients to endure loss of kidney function, renal replacement therapy and risk or mortality. For patients with CKD, the risk of following cardiac surgery is increased by 60% to 80%. We will focus on the subset of those patients with kidney ischemia where complement laser. This program is unique as we plan to use Ultomiris in a preventative way a single dose given prior to surgery in these ages patients, an exciting opportunity with blockbuster potential. Another Phase III plan for this year is 1850 which is our next generation as [indiscernible] 1850 has been optimized by our researchers for longer half-life to allow for less frequent dosing. We have also built it to have a better enzymatic activity so that we can dose at lower volumes and to have a superior manufacturing process. We believe that this improved therapy will allow us to deliver more than 2x the addressable population relative to Strensiq. This gives us great opportunity for geographic expansion, bringing this medicine to more HPP patients where there are no other treatment options. Thank you, Marc. Can you move please to slide -- to the next slide. As we said before, we delivered a great performance in 2022. And very importantly, we made significant progress with our pipeline. We are very confident that 2023 will be another great year for our company with the growth of our underlying business more than offsetting the decline in demand for our COVID medicines. We're expecting to announce the results of at least 18 Phase III trials in 2023. And of course, had a handful of significant ones to look at for -- on this slide, as you can see on the left-hand side. Our pipeline progress, together with the strength of our strategic product portfolio makes us confident to deliver -- to deliver industry-leading growth for many years to come. We expect to launch at least 15 new medicines by 2030. Lastly, we have set bold targets for our company to reduce emissions. And I very much hope that leading by example, to address climate change will inspire others to do so as much as they can. Thank you, Pascal. And our speakers now will be joined by other members of our executive team to go to the Q&A. [Operator Instructions] And apologies for the background noise. First question in relation to risk and this is an observation rather than a criticism. You're expediting a number of particular oncology programs into Phase III from Phase I. Obviously, you've been involved in by some of your peer experiences with data DXD and low HER2, for example. But how do you think about managing that risk in the balance of return within the overall portfolio? And then second question in relation to your prophylactic COVID-19 antibodies. Do you hope to get approval under EUA or this full approval? And does that impact how you're able to use your field force to promote the drug. I note there's a significant uptick in the fourth quarter prior to the removal of the EUA. So I care about this from an ongoing revenue perspective. Thanks, Andrew. So maybe Susan, you can cover the first question. And Iskra, you'll cover the second one which is a pro and use of field for. Okay. Thanks for the question. So I think in terms of the acceleration of products from early phase into late phase, we do have efficacy expansions in all of the trials where we've moved products into late-phase decision-making. So we have a robust dose selection data sets and we have robust both efficacy and safety data sets to support those investments. And in the case of the ADCs we've got a clinically validated linker warhead combination. And based on the data we've already seen within HER2 which together with the data that we have, with datopotamab deruxtecan across multiple trials gives us confidence in the profile. And similarly, with the bispecifics, I would just comment that I think CTLA-4 is a very well-validated target. The challenge has been the tolerability and the design of a Rustenberg is designed to address specifically that challenge and we're encouraged by the data that we've seen, particularly with longer follow-up to support that. So I feel that we're not just accelerating them. We're accelerating on the base of good data that convinces us that this is a good balanced risk. Yes. So thanks, Andrew, for the question. As you fairly noticed, we are definitely advancing the development of our new antibody and we do aim to make it available to the patient in the second half of this year. Obviously, while developing the clinical development program, we also consulted with the regulators, including FDA, -- and there is an agreement to basically look at the immunobridging data from the study and the grant emergency approval based on those data. And the key reason for that is the significant unmet need and this long-acting monoclonal antibody the same as the shale they remain the only option at a given time for the protection for immunocompromised patients. On your second part of the question on the promotion, that is absolutely correct that any emergency approval dictate how much you can do and the promotion with the Fiore in U.S. But it's also important to note that during the care because of the high unmet need, there were different exceptions because all stakeholders do understand the importance of education and raising awareness, both in a patient population that needs protection as well as with the health care product professionals. And we do believe that, that will continue, again, given the high unmet need and given the fact that COVID is here to stay and those patients will need protection going forward. Two questions, please. First, on manufacturing capabilities. The company is known as 1 of the strongest in small molecule manufacturing within the industry. But as the company moves into more complex modalities within R&D like cell therapies, I'm curious to hear if in the medium term, there is a need as well to step up in-house capabilities within manufacturing for those areas as well? And then secondly, when I look at consensus projections for both '24 and '25 top line is below double digit for '26 and '27 around 45% growth which I doubt would be enough to qualify as industry-leading growth. So which areas are perhaps beyond 25 areas where the company remains underestimated by the Street. Thank you, Mattias. So let me just try to cover the first one. We think we have strong manufacturing capabilities in small molecules but also in large molecules, we have been developing this over the last number of years. And as you've seen from our presentation, we have now several biologics. Now in terms of new technologies, it is true that moving forward, we will need new capabilities and we're working on this in cell therapy, of course but in other fields as well. So we definitely are looking at this and we will build the capabilities we need as the pipeline progresses and we develop -- we get data from products that give us confidence that we need to scale up. But definitely, we are looking at it from a CMC viewpoint already on with many technologies. The second question, we don't actually guide by products. So not exactly sure how to answer your question, really, in terms of your judgment based on the consensus. Consensus is looking at a variety of products. This -- I would only say that we think we can derive growth across the totality of our portfolio, first of all, managing dependent expiries, as we've explained here; secondly, launching new products; and thirdly, growing the existing products we have in the pipeline. Now I don't know if any of my colleagues want to add and he's saying here. It's a little bit difficult to give you guidance by products. [Indiscernible]. Yes, we have 15 new launches. And definitely, lots of growth in our so-called commercial portfolio, our existing products. But the 15 new launches of these are NMEs. And beyond this, we have a large range of line of life cycle management programs. We launched 30 new Phase III this year. A lot of those are life cycle management programs that will add sales to existing products will become part of the consensus as people realize what those studies are. I think that a yes, we can't say much more than this. Two questions. On Dato-DXd, the decision to move into a new Phase III trial in frontline lung could be interpreted as you having even higher confidence in the pending TRC101 readout in second line. Is that a fair read through that we can make? Or is the decision to move into a new frontline trial totally independent of what Trop-1 shows? And then second question is on earnings guidance. you're kind enough to give us revenue guidance for '23 excluding COVID revenues. The earnings guidance still contains COVID contribution and that distorts results year-on-year. Could you give us an idea of what that earnings guidance would be if you excluded COVID from the base in 2022 as well as 2023? Great question, Tim. So the first one in, you can cover on the second one, even though we don't split our EPS or our profit by product or franchise. I think Aradhana, you could give some color to this. Susan, do you want to cover the first one? Yes. Thanks for the question. So the confidence in Dato-DXd is monotherapy in the second line is built from the monotherapy experience that we've got previously and the confidence to move into the van study is built from the -- some of the data that you've seen with the TropiNLUNg-02 data set with the combination with different I/O immune checkpoint inhibitors -- so I think what that shows is there's also activity in PD-L1 low patient population with that combination as well. And then, of course, we've been working and developing chip to biomarker based on the initial data. So I think there's different elements that are involved in the Avanza study. But I would just say that we have confidence built across multiple data sets for the Dato-DXd program. Yes. And as it relates to COVID-related contribution for 2023. Again, we don't break down profitability by product but I can just say that the COVID contribution is not material to profitability in 2023. We did mention that we are advancing the next-generation antibody. Obviously, we have some expectations before year-end. But we're also obviously spending money on clinical trials and actively recruiting that. So the net contribution is not expected to be material. Thanks, Aradhana. So Tim, I'm sure you will triangulate those numbers. But if you do that and you combine what Anna told you which is very minimal profitability for COVID in '23. And you look at what you could estimate for '22, I'm sure you will realize the underlying profit growth for the rest of the business is very substantial. So definitely, we are on track with growing sales and profitability from the underlying business. On Alexion really. So one for Marc, just in terms of confidence in the complement area given some of the recent competitors launching and having data -- and perhaps you could also highlight the advantages of your own subcutaneous C51720 which I think is just starting Phase I myasthenia gravis. So when might we see some data for that? And what are the advantages that you could offer? And on the cost side here, there's a lot of commentary around some of your savings after the deal, it looks like synergies are higher but this seems to be on a gross level. So before any reinvestment, should we expect any of that increase in cost savings to fall to the bottom line? Or do you plan to reinvest? Thank you. Thank you for the 3 question. I will take them in order. The first one is our confidence in C5. The -- it is absolutely true that there are growing competition in C5 and we had always modeled that. We always said the -- our franchise -- our C5 franchise would be durable, sustainable but it would not be static. In other words, we are going to lose to some competition in our earlier indications but we are going to go into new indication and we are continuing to pioneer development on Ultomiris. But as you mentioned, 1720 and other products in the complement cascade to gain pioneering a new indication. Today, I described one of them, the cardiac surgery-associated AKI. But there are several other new indications that we would pioneer for the C5 inhibitors. Talking about 1720, it is absolutely right that we have initiated a Phase III trial in Mastenagravis. The trial has initiated late last year. We expect to read out in a number of months. It's obviously a field we know well. It's a subcut formulation as you have emphasized and we have a big hope with this product. we will also study potentially other indications for this bispecific 1720 in the coming months. Talking about the synergies, it is a fact that we have been able to find quite a lot of synergies in manufacturing, in enabling functions but also synergies in the scientific world where we can -- when Alexion can now tap into many of the existing capabilities in research and development and a lot of change of animal models or chemical library, high scope screening. I mean, the variety of synergies is wide. And we do reinvest part of the synergies into beefing up our own research and development capabilities for us to develop more molecules. We expect to have by the end of 2023, about 10 products in Phase III trials. So far, this is a great increase in comparison to what we had in the past. And of course, we will provide when these products become ready for Phase III, we will provide visibility and explain what they are going to produce this. Thank you, Marc. Maybe add just some other color on Alexion. It is a very good company, a very strong company. It's a very strong team, good science, good products. So essentially and then also very high profitability, as you know very well from past numbers that Alexion was publishing -- so our goal is really not to try and optimize the cost base we're generating a lot of cost synergies and we're investing quite a bit of this in the pipeline because our goal is to drive the top line. If we drive the top line, mechanically, we will improve the operating margin of the overall AstraZeneca. So we're really investing in the pipeline. We are investing in expanding the coverage globally in China, emerging markets, et cetera, et cetera. That's really the goal we have. Operating margin improvement as a percentage, they really have to come from other parts of the company. But for Alexion, it's really a top line-driven focus. James Gordon, JPMorgan. I'll try and restrain myself with a number of questions and just ask 2 about upcoming pipeline data points. The first one was on Dato-DXd and upcoming TL-1 data. So this data is in refractory lung -- and assuming you do show a significant benefit versus chemo how should we extrapolate that to the TL07, TL08 and the Avanza trials that have been front line. Would we extrapolate just the absolute benefit on PFS OS? Or would it be the proportional benefit, the hazard ratio that we would extrapolate? That will be the first question, please. And then the second question, also upcoming, so you've got FLORA2data, Tagrisso and chemo. How confident are you that's going to show a clinically meaningful benefit to justify extratox and extreme convenience from chemo? And how do you think now that might stack up versus what J&J might show from our poster with their combo approach where we're also going to get Phase III data at the end of this year? Okay. Thank you. Thanks for the questions. So the Dato-DXd, again, as I said, I think the data in the second line show the potential for improving on the current standard of care. But of course, you're going to get in the second line responses in a subset of the total patient population. It's really the durability of those responses that drives the confidence in that efficacy component. The first-line trial isn't just about data. It's about combinations of data DXD with the immunotherapy agents. And again, we have seen is something where you're seeing enhanced response rates beyond what you would just look at from what you would expect from the individual components. So I think that's really what gives us confidence about the first line and I don't think it's a straightforward extrapolation from the data that you've just seen in TL 01. It's taken into account the other data that we've got across the portfolio. The floor 2, the confidence for that is based on the -- again, we've got a Phase II data set that's already been published, the Opel data set which showed really high response rate of around 90% and a high durable progression-free survival which if recapitulated in the floor to would represent a significant improvement over the standard of care and something that's in line with what the much smaller data set that we've seen from the an avant combination has seen. So, I think that's what gives us confidence. Yes, it does come at a tolerability profile but there are some patients who are symptomatic in first line because of their disease that might want a higher response rate and the opportunity to have that longer time off therapy. And again, the chemotherapy is only given for a fixed duration in the floor. So I still think that it represents a reasonably convenient overall regimen for patients in that setting. One is just a follow-up on bushel which is -- can you tell us what proportion of it roughly has actually made it from shelves into arms I'm thinking about this stat article mid last year but tracking sales for this one doesn't work like other drugs. Then -- so yes, if there are any ways that you can use to -- that you could share with us, that would be great to hear. And then the second question, so Calquence going forward. I noted your remark about durability. But Obviously, the competition is sort of now better positioned than Calquence. So strategically, obviously, Calquence is supposed to be a backbone of, I think, a budding hematology franchise built on combos. So how do these recent competitive advances affect that strategy and your outlook for Calquence going forward. Thanks, Christopher. So maybe Iskra you can cover the second one. The second one is for you, Deb. It's a provocative question. We don't agree with the fact that competition is stronger but I'm sure you can elaborate on this. Over to you, Iskra. Let's start with a simple one. Thanks for the question. And when we look overall, I mean there are such huge differences across geography that is really difficult to give you 1 number. But it's also true that if you look at the countries where Ivus was available earlier basically from December 2021, you will see the numbers that go up to 80% or 90% of the delivered doses that are utilized in the hospitals and obviously in the arms of the patients. There is also a note to mention that in some geographies, like, for example, Japan, where a few months ago, we actually got the approval, obviously, those numbers will be very, very low. All in all, I think what is really important is that as this is a new market and there is a huge need to increase education and awareness around the need and the availability of those options within the hospitals. It is important to continue helping patients and HCPs to understand that. And I do believe that, that will definitely then impact the utilization across the globe. Okay. So, I think on -- Chris, for the first piece and Pascal alluded to this, I mean, we really do believe that Calquence is well positioned within the next-generation BTKI class. And I think that it's worth spending a minute on a couple of the things that underscore that conviction and are also part of the readiness and training that we've got across the globe as we do come into a more competitive space. I think first and foremost, it's important to note that we've done our own important work to be taking a look at a matched indirect comparison which is important to do. And as you do that, Ascend and Alpine really do show very similar results. We're in the midst of doing a similar piece of work to look at ELEVATE-TN and SEQUOIA. And I think that the reason for this is pretty straightforward which is that the indirect or the cross-trial comparisons that were being made between the 2 head-to-head studies where really not very appropriate comparisons to be made because they're looking at very different treatment populations. So on the efficacy dimension, we see very well positioned. I think also of note in terms of hypertension and also neutropenia. Calquence absolutely could have some opportunities for differentiation there. That's resonating with our advisers as well. So when we take a look at the exit share that we had in 2022 and the frontline CLL setting, we eclipsed 60%, getting close to 65%. We see even in the early January movement, certainly that there's been uptake of zanubrutinib but the uptake we believe, based on our charts is predominantly in later lines which doesn't come out of some of the acute via claims data that you see. And we're well prepared to take on competition in the year ahead but we think we are well positioned to be able to do it. Okay. Sorry. So a couple of questions. First, a couple on the financials. First on CapEx. The first growing companies those days are suggesting a significant increase in CapEx Novo now there's a doubling CapEx this year versus last. Could you quantify maybe the level of increase in CapEx in '23 versus '22 please? And a pretty similar question about OOI. You're expecting an increase in other operating income this year versus last. We're coming from very high level of $1.5 billion not so long ago. So how should we think about any figure between the $450 million last year and the $1.5 billion 2 years ago. So that's for the financial part. And then maybe a question for and Marc. Thanks, Marc, for clarifying about the C5 franchise. Can I try to be even more specific about the incoming competition from iptacopan in PNH since you show a slide on PNH. How do you see this new drug competing with Ultomiris and ultimately, the kind of market share split between base drug and the existing C5 franchise of AstraZeneca, please? Sure. So we do expect an increase in CapEx and we won't give specific CapEx guidance, obviously but I can give you some color on where that increase is coming from. So firstly, as you can imagine, we have the addition of the full year of Alexion CapEx. And as Pascal mentioned, we are investing more in Alexion. The second example is we did announce a new API facility that we're going to put in Ireland and that CapEx is going to add to the CapEx. Thirdly, we do have, obviously, investments in several sustainability initiatives and including our next-gen propellant. So that's another investment that we're making both in propellant as well as other sustainability initiatives. And then we are, as part of our sort of continuous improvement, making several systems and infrastructure investments in our operating systems that will also add to CapEx. Again, we're not giving a specific guidance but those are some of the elements that go into potentially increasing CapEx. As it relates to your question on other operating income, we're giving some color on that as part of our overall guidance based on what our current view is today. I did mention that we expect an increase in collaboration revenue as our partnered products are very successful. We expect some increase in milestones and we do expect some increase in other income. I would say we're sort of past most of the bigger divestitures and the history, I'd say we're sort of through most of the portfolio reorganization but there may be certain other transactions that happen this year potentially. Thank you, Aradhana. Marc, before you cover the Alexion question. Let me just add a little bit on the propel and next-generation propellant is a sustainability initiative but it's also a business continuity and a business expansion initiative because it's very clear that over the next few years, we don't know exactly when but it's clear that over the next few years, propellant as they are known today will no longer be approved and a lot for market. There's already quite a number of initiatives in many countries to ban those products. So you can imagine that we definitely need to transition our propellant-based products to the next-generation propellant that have no impact on greenhouse gas emissions. Yes. Thank you for the question on iptacopan, Eric. So basically, we have -- I mean, Alexion has many years of data, I mentioned 89,000 years of data on this. So we know that the complete inhibition of the terminal -- the term of complement is absolutely necessary to maintain efficacy, sustained efficacy in PNH -- now it is also true that a small proportion and we -- in our data, we see that it's about 10% to 20% of this population has some extravascular hemolysis -- and the study that several companies have produced, we have produced our own with danicopan and we are also doing other studies with other Factor D, the same for Novartis, have done studies in this extravascular hemolysis patients. And when you do provide a proximal complement inhibitor such as a Factor D or Factor B, you can improve on hemoglobin and you can improve on anemia and so on. So I think these are very interesting data the strategy that we are following is to provide danicopan as an add-on on the backbone of Soliris or Ultomiris; and we have seen very good results there. The question for the treatment of proximal complement inhibitors in monotherapy, they do have short-term efficacy. The question is whether this long-term efficacy will be maintained and whether the patients who, of course, with an oral treatment, you need to ensure the complete compliance of the patient for -- in a therapy where the inhibition of the activation has to be complete and sustained. So that's going to be for long-term data to be proven. I think the overall therapies can open probably in a greater field in PNH for some patients. But of course, we will need -- we will be expecting longer-term data to be absolutely sure of that. Pascal; two questions. One on Dato-DXd, the second one on Farxiga. On Data DSD Tropo, there appears to be a bit of a debate at the moment given the layers to the top line data disclosure which could be positive, it could be negative. But if we look back at PANTumoRO1 and the non-small cell lung cancer, cohort, the PFS was 6.9 months. And I don't believe we've seen an update since the ASCO 2021 data. Clearly, the duration of exposure was quite low, 5 months because these are very fell patients, over 60% of them were third line plus. So as you sort of go forward in these patients a better -- likely to better tolerate mucositis and stemititis and things like that. How should we think about PFS benefit in the second line setting? I think we all well understand that dose should show a 4- to 5-month benefit in this setting. But how should we think about the PFS benefit as you come forward in line? And should we expect these data to present at ASCO or ESMO this year? And then second, in terms of Farxiga, it would be really useful for -- to help us understand how far Sega revenues are split between diabetes and heart failure, obviously, we recognize there's overlap between those but it's more in terms of thinking about the future. When we look at the sort of range of combination opportunities you have on Slide 24, it would be great to understand sort of where the bigger opportunities lie. And based on Phase II data, where you believe you will drive most differentiation versus SGL2 monotherapy. Thanks, Mark. So Susan back to you again. And Ruud, do you want to cover the second one in terms of the potential? So thanks, Marc, for the question. Well, you clearly a very familiar with the lung cohort from [indiscernible]. As you say, it's close to a 7-month median PFS in a more heavily pretreated patient population. So again, 1 would expect that in an earlier line, you might do a little better than that but that's -- we'll have to wait and see for the child date to read out. And then in terms of the timing, it's an event-driven trial. We've guided to the first half that's what we're still expecting to see. And of course, depending on the timing, we'll then make the data available at an upcoming congress dependent on those timing. Okay. And regarding your question about the split market, it's a bit of a difficult question because there are substantial differences across different geographies, primarily in the emerging markets, the international markets is still heavily driven by diabetes. But if you look at the United States and Europe, it's roughly 2/3 of the patients are coming from heart failure and CKD. But rightly mentioning there is a substantial overlap. Moving forward, we truly believe that there is a substantial opportunity for our combinations in the heart failure segment and the chronic kidney disease segment. Both segments are very well underserved and we believe is the excellent profile of Farxiga and potentially also, of course, then the antihypertensive effects of at as well as 997 7, we have a unique opportunity to further expand that population in both CKD and heart failure. About cirrhosis the liver, I think, also has a very high in medical need and the efficacy. The data around that, I think, is pretty interesting. And so I think we'll get a readout there. And just to point out and I know you know this but the price points of diabetes versus heart failure, CKD and some of these different types of CKD because there are obviously various flavors of it. different price points relative to the diabetes price that [indiscernible] has been based on. Two questions, please. One back to Susan. The Avanza trial is only asking an additional fixed question of that on top of carboplatin Postini, not a replacement question of chemotherapy which is a question that longer is asking. Given that the biomarkers being looked at here, just wondering why you wouldn't also ask the replacement question in that Phase III? And then a question or for [indiscernible]. Just wondering what the latest update would be for China given the NRDL process is now a yearly process. Are you happy with the pricing levels qualitatively that you've seen? Do you think it's a stable system that allows you to operate more predictably going forward after what we saw last year? Thanks, Michael. So Susan, if you want to cover this one and we have Leon online. So the China question, Leon can take. So when adding carboplatin onto to DXD we don't see a substantial increased problem with the tolerability of that. And again, you're only giving the platinum for a set number of cycles. So this is a reasonably well-tolerated regimen. And as I said, the replacement question is being asked elsewhere across the program. So I think the question is really that we're focusing on for Avanza is we're going across histologies. We include squamous as well as non-squamous non-small cell lung cancer and across PD-L1 subgroups and then asking the question about the benefit in the biomarker patient population that are positive. Yes. I think this year, we have several major drugs getting to NRDL renewal. And also, we are applying for our Cmax drug from Hamed -- it's a new entry. And also we have some application of new indication of ForSigand also for Lipaza. So right now, I don't think we received the final result of price reduction level and also indication. But based on the latest information, I think the trend of NRDL is quite predictable and transparent, especially on the renewal -- so based on the 2021 result, I think for Cigar, our anti-diabetes drug last year, I think, get quite a good result for revenue. And also, I think this year, we expect no big surprise on renewal and also quite many encouraging news on government encouragement on innovative drugs and also additional indecent and also our reimbursement renewal. So I think the trend on the China NRDL side is quite promising. Thank you, Leon. Michael, the other good thing about the system is that it's becoming more formulaic, more driven by approaches or formulas that we can understand and therefore, Lensel, it's a lot more predictable. Richard Parkes, Exane. First one, just going back to Andrew's comments about risk profile in the Phase III starts and specifically thinking about the bispecifics. Obviously, the CTLA-4, PD-1, you've got very strong Phase II data. The TIGIT, PD-1 seems a bit more speculative based on what we're seeing with other TIGIT antibodies. So could you talk about what you've got in-house and what advantages you think that bispecific might have over PD-1 combinations that would be really helpful. And if you're planning to start data, DXD combinations as well would be helpful there. Then the second question. One of your ambitions is to extend the life cycle of your Lynparza franchise with your Part 1 selective. However, that currently falls outside of Lynparza relationship with Merck. I'm just wondering if you could discuss any plans to bring the asset within that deal and when a decision might be made on that. Okay. Thanks for the question, Richard. So again, the PD-1 element of the bispecific programs that we've got is the same across the assets that we've got -- so that's one element of it. And the PD-1 TIGIT doesn't add a challenge from a safety perspective on the background of PD-1. So obviously, with the PD-1 CTLA-4 dose selection has been important to get that right therapeutic window for the tolerability profile whilst driving the efficacy PD-1 TIGIT, this is a safe combination. And the preclinical data that we have does show some potential for differentiation, although as you're well aware, the extrapolation of that into the clinic is challenging with these models. So what I would just say is that by having both elements of the combination on one molecule, it does help us with a combination philosophy for other things that we want to put into that. And we'll be happy to share more of the plans for that when we start dosing the first patients in the Phase III. Richard, in terms of our plans moving forward around development and commercialization of AZD-5305, it's really consistent with what we had said in the past. We're developing it independently, it's an early development. Now just moving into Phase III, any commercial arrangements, we've really yet to decide and we'll wait for more data. With that said, we're minded to extend the collaboration and build on the joint success that we've had together with Merck on Lynparza. But of course, that depends on agreeing on any terms. But we really have benefited greatly from our collaboration together and the collective work that the 2 teams are doing. Okay, great. So, first question is just on the sort of impact on some of the older products as it relates to the NRDL and the magnitude of the decline that we could see in silicon in China year-over-year. And then also the time when we might see Nexium generics actually introduced in Japan, I know those were 2 fairly large tail products for the company, where we'll see impacts year-over-year. And I just wanted to get a sense of at least the relative profitability of those products because I think it's important to gauging just how robust the overall performance of the company is outside of that. And then the second question, just wanted to better understand the choice of stratifying by Trop-2 expression. And if that is something that you're gaining learnings from in the -- from the second-line study or if you think that would apply in the second-line setting versus some of the disclosures that you made for the new Phase III in the first-line setting today? Thanks, Seamus. So Susan, can you cover maybe first this one? And I will ask Leon to cover the Calquence question. And Ruud, you take the next year in Japan? So thanks for the question, Seamus. So the data to support the TRP-2 biomarker comes from multiple different settings, including the early combination data. But yes, absolutely, we'll be looking at the Coping01 data as well when that reads out. So I do think that, that's important. We do know that TROP2 is highly expressed in many different cancers. But I think optimizing for the expression and heterogeneity of expression is something that can potentially identify the patient populations that are more likely to respond are more likely to get a durable benefit. I think that's an important consideration, not just in lung cancer but across other potential indications. Yes. Silicon is quite a big product getting into repeat tender loss. And I think the last one is the Pulmicort. So actually, we are launching new products speeding up our portfolio and launch to offset these losses. But I think Seneca is a quantic disease product. It has 20 million, 30 million patients, actually the largest number of patients in China of Astrani products in silicon. So actually, the price is low and has 3 indications and the corn hard disease and hypertension and heart failure. So actually, it's a quite a good product in classical and branded. So we will do a lot of consumerization and making sure loyal user of Selten will still be sticky got and also the lens of treatment for silicon is quite good patients stick to it because of the heart rate. So we also will do a lot of digital channel education. And also, we have a quite successful business in China on retail pharmacy. So, I think it will first drop quite significantly but gradually, it will pick up because more and more patients will take the drug for long term and loyal customer will stay with the product. And we will still be promoting a lot of other cardiovascular products within the hospital. And Astronics is the number 1 company total but also number 1 company in cardiovascular renal space. So we have a Rock Forxiga and so many other products still quite active. And also we have a new product in hypertension which is coming. So, I think all in all, I'm not too pessimistic about the Selco future. Thank you, Leon. Just to illustrate to tell on saying, look at the Crestor in China which we have consumerized and the price is low, as Leon said, those are chronic conditions and patients take these products over a long period of time. We have very extensive capabilities online and pharmacy-based activities. So we think we can consume us salon, a little bit like we've done with Cristal. Regarding the next Japan question, we have lost the exclusivity in Japan late last year. And instantly, we have seen generics coming into the marketplace. So the expectation for 2023 is a sharp decline in our exam business in Japan. Thank you. A couple, please. On Tagrisso, I believe, Pascal, you've said that you're confident that you can keep going with that despite IRA, perhaps because of orphan drug elements. I wonder if you could tell us a little bit about that because Tagrisso, I guess, could be mentioned as one of the drugs when they give the list later this year. Aradhana, I wonder if I could ask an earlier question in a different way, just in terms of COVID, if you could give us some sense of how much COVID contributed to your earnings in 2022, we can all then make our decision about what we think will be in '23. It's just that sort of level that there has been today. And my final question is just on your confidence in being able to control your operating costs. They were obviously growing much faster in 2022 and you're expecting them to in 2023. And I'm mindful of the incredible expansion of R&D that you're doing, all of which costs money and you do have new products that need a lot of marketing support. So are you going to be -- are you fully confident that you can provide all the support that you need in '23 with only mid-single-digit growth of your operating expenses? The last 2 question are questions you love, Aradhana, for you. And then the first one, maybe, Dave, you can start with this one, Tagrisso. So Joe, on this, as you know, CMS is still in the midst of rulemaking to determine exactly how both the list of the first 10 which come out later this year, will be determined. And then also how the exclusions are going to be managed. In terms of the list of the first 10 million, we'll see exactly how rulemaking goes through. My sense is that on a gross sales basis that Tagrisso would not likely make the first in in the first go through. But obviously, we'll have to see that. I do think that it would be likely to come in as you move through over the course of the years which gets to the next question. And I think that there is absolutely an orphan drug designation exemption that's clear within the law. And I think that we certainly are minded that, that is one that could very well be applied to Tagrisso and that's work that we'll be continuing to advance. Thanks, Jo, for your questions. So in terms of COVID contribution in 2022. Again, I won't give specific numbers but I can give you some color that may help you. So if you look at our total COVID medicines in 2022, that was about $4 billion. Split almost half and half between Vaxzevria and Eucal. Vaxzevria was -- majority of that, as you know, was initial contracts. So it was not really major contributor. And for [indiscernible] we had guided, as you know, in 2022 that the gross margin for that is lower than our corporate gross margins. And then you also saw from today's results that we did take a charge for the bushels inventory and contract. So I think you can piece all of that together to see what that contributed in 2022. As it relates to your question on operating cost management, that is always an ongoing give and take and push and pull within the company. We are committed to our investment in R&D. And while you can see, obviously, the 30 clinical Phase III that we expect to start this year, we also had 34 approvals last year. So there are some trials that are sort of coming off their main phase of investment and other trials that are starting this year. That being said, we're constantly doing portfolio prioritization to make sure we are able to fund the most promising and the most value-generating assets in our portfolio. Also with those, for example, the 34 regulatory approvals, many of them were already in areas that we're in. So again, we try to get operating leverage in those areas. Some of them are in new areas. So for example, with Himalaya and Topaz, we're building more in spaces that we were not in. But in the case of breast cancer, for example, we are leveraging infrastructure and sales force where we already are present. Thank you, Aradhana. Maybe just one addition on the Vision 2022. The cost base is not that great, really relative to typical pharmaceutical products that you have to launch and promote. So the profitability in '22 was actually pretty good. And in '23, as Aradhana said, it will be very minimal. So you have to piece those elements together. But again, as I said earlier, if you do it, you will see that the underlying profitability of sorry, the profitability of the underlying business is improving very nicely from '22 to '23. Perhaps a follow-up question on margins. Given you finished 22% or 30%, you guided for see our growth of low to mid-single digits for both revenues and OpEx that implies pretty limited expansion in '23. So can you just reconfirm your commitment to the mid- to high 30s margin in the midterm and give us some sense of what the pathway looks like beyond 2023. When do we get to that mid-30s number, for example? And then maybe a second question on Lynparza ahead of the Propel, the delayed PDUFA decision. Could you give us a sense of your current label expectations in light of both EMA decision and that slightly mixed overall survival data you presented us last year where there was an inversion of the early part of the curve. To what extent is that might to be a problem when considering prospects from ComerLabel? And maybe since I'm the last person and I'll try and squeeze in it. Dave, I think you mentioned it, I may have missed it enhertu market shares in second line HER2-positive and HER2 low. Where are they now? Where could they go? Yes. So we are remaining committed to our ambition. Just as a reminder, that is an ambition and not guidance. And you can see we are constantly operating improving our operating margins. You can see that 2022 operating margins were better than 2021. We are continuously working on productivity improvements. But again, there are various elements everything from sort of a mix shift and mix improvement, gross margin improvement and, again, operating leverage on the SG&A line while not compromising on the investment in R&D. So again, it's a balance that we try to strike between steadily improving our operating margin while still investing for that strong growth post 2025. So in terms of the PROPEL data, we are confident in the benefit risk. Across the patient population, so in the ITT, so including the HRR and BRCA wild type. We also have confidence in the biological plausibility of the benefit of interaction between PARP inhibition and androgen receptor inhibition. Because actually androgen receptor signaling is involved in DNA repair in AR-driven cancer cells. And we'll present not just -- we'll present some clinical data looking at this interaction in the ASR prostate cancer meeting which is in March, I believe. So I think you have to understand what the rationale is for why the interaction is relevant in the wild-type population as well as in the HRR mutated population. And then you have to look at the overall clinical benefit which with a 5-month improvement in PFS and a trend to improvement in OS with curves, Yes, they separate late but they look good I think that we're confident in that overall population and we're happy to see that we actually got that reflected in the EU label. So we'll continue to dialogue with the regulators around the world on this. With respect, Emmanuel, to Enhertu, in the U.S., we have gotten to approximately 50% new patient share in second line HER2-positive so in the DBO 3 population. And over 40% in hormone receptor positive HER2 low post chemo new share. So that's the [indiscernible] population. Just 2 things. On your second question for how high could it go. There's still some console use that exists in the marketplace today. There's a decent amount of fragmentation with various utilization of various HER2-directive agents and some chemotherapies. But I expect us to continue to grow in DB03. And if you look at in Europe, Kadcyla had at its peak as much as 70% share. So I think that it's important to note that as you get into marketplaces where Kadcyla actually had a greater percentage of the standard of care. I think that, that certainly represents the next goal that we have for those teams in terms of penetration and then we'd like to go beyond that. In the DB-04 population, I again think that we've got with the overall survival results and the fact that systemic chemotherapy is just, frankly, not delivering adequate efficacy and safety for patients as a second chemo option with advanced breast cancer that we've got an opportunity to continue to grow. I do think you saw that the Q3 growth was aided by symbolus but I think we continue to grow from where we are here. And looking forward, the launches across the globe, not just the U.S. throughout 2023. Thank you and we probably will close for today here. Thank you so much for, again, your interest and your great questions. Let me just close by saying again that we're very much on track with our ambition to deliver a top line revenue that is the best of the -- one of the -- that is an industry-leading growth rate with a double -- low double-digit growth rate to 2025 and continued growth past '25 to 2030. We're working very hard on our pipeline. And importantly, also, we are working very hard on reprioritizing constantly and improving our productivity -- so we deliver also on our ambition to improve our operating margin over the next few years. Certainly, we are very much on track with that, too. In the long run, we'll stay true to it. But of course, we'll have to consider the evolution of the pipeline and the need for reinvestment as we see fit. But for now, we are focused on 2025 as a base camp 1 and very much on track with that.

EarningCall_196

Good morning. My name is Colby, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Patterson-UTI Energy Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Thank you, Colby. Good morning. And on behalf of Patterson-UTI Energy, I'd like to welcome you to today's conference call to discuss the results for the three months ended December 31, 2022. Participating in today's call will be Andy Hendricks, Chief Executive Officer; Andy Smith, Chief Financial Officer; and Mike Holcomb, Chief Operating Officer. A quick reminder that statements made in this conference call that state the company's or management's plans, intentions, Targets beliefs, expectations or predictions for the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties and disclosed in the company's SEC filings, which could cause the company's actual results to differ materially. The company undertakes no obligation to publicly update or revise any forward-looking statements. Statements made in this conference call include non-GAAP financial measures. The required reconciliations to GAAP financial measures are included on our website, patenergy.com and in the company's press release issued prior to this conference call. Thanks Mike. Good morning and thank you for joining us today for Patterson-UTI's fourth quarter conference call. We are pleased to report another quarter of solid financial results with improving profitability. Adjusted EBITDA grew every quarter in 2022, with fourth quarter adjusted EBITDA almost 5x our fourth quarter 2021. Our fourth quarter results were driven by continued improvement in pricing and exceptional execution. Also, during the fourth quarter, we returned $74 million to shareholders through our regular quarterly dividend and $57 million of share repurchases. Additionally, we retired $22 million of long-term indebtedness through open market purchases. As we look ahead, we remain optimistic that we are in a multiyear up-cycle. Tier 1 super-spec rigs and premium pressure pumping equipment are effectively sold out due to the strong growth in activity over the past 2.5 years. The high demand led to a notable increase in leading-edge pricing in 2022, and high utilization continues to support current pricing levels. We anticipate a significant increase in earnings and cash flow during 2023 as we continue to reprice drilling rig contracts higher to current leading edge rates. From a big picture perspective, we expect oil will continue to be the primary driver of our industry, and we expect oil prices to remain at acceptable levels to support activity for the foreseeable future. With respect to natural gas drilling activity, which is a much smaller part of the total industry rig count, our primary exposure is in the Northeast. Due to constraints on gas takeaway capacity in the Northeast, operators have been careful to align their drilling and completion plans with long-term goals and have tightly managed their production growth, making the Northeast less volatile than other gas markets. As a result, our customers in the Northeast are typically well hedged and have our drilling rigs under long-term contracts. In the near-term, we expect some rigs in gas basins outside of the Northeast will be let go while other rigs are reactivated to go to work in the oil basins. This may have the short-term effect of moderating growth in the rig count, but we expect utilization of Tier 1 super-spec rigs to remain very high, positively supporting pricing. Turning now to my review of operations. During the fourth quarter, our average rig count in the U.S. rose by 3 rigs to 131 rigs, and average revenue per day increased by $3,160. Our marketing team deserves recognition for their effort in achieving this growth, which was the sharpest sequential increase in quarterly revenue per day that we have seen. Looking forward, our technology will continue to play a key role in helping customers meet their objectives, whether it's in low-carbon solutions, where Patterson-UTI has a leadership position with our various technology offerings, or in data analytics in forms of automation and remote operations. We expect that our EcoCell lithium battery system and automated engine power management for drilling rigs will continue to see uptake in 2023 and as they have shown to reduce both fuel usage and emissions outputs from drilling operations. We even recently tested hydrogen as a fuel and believe that we were the first to blend hydrogen on an operating drilling rig. We are excited about the potential this has to significantly reduce emissions in the future. In pressure pumping, we saw exceptionally high utilization in the fourth quarter, with limited weather disruptions and minimal downtime during the holiday season, despite the weather. This outcome has achieved through our strategic alignment with key customers and our focus on efficient operations, which allowed us to capitalize on strong demand and secure favorable pricing for our services. We anticipate the demand for pressure pumping services will remain robust, while the supply of equipment will continue to be constrained. The lead times for new equipment, particularly for advanced Tier 4 dual-fuel engines are still longer than usual, which makes it difficult to quickly add to existing capacity. Additionally, as customers' demands for higher flow rates grow, the amount of horsepower per spread is also increasing, which will further limit the availability of pressure pumping spreads. In 2023, we will continue to convert engines to Tier 4 dual fuel so that they can use natural gas as the primary fuel and reduce operational costs and emissions. In directional drilling, we remain focused on technology and service quality, with many new developments to improve wellbore placement and quality. With regards to the downhole tool used by our teams to steer wells, we continue to benefit from the vertical integration of engineering key components for our performance drilling impact motors and our Mpower measurements and data transmission systems. This approach has improved our ability to drill wells faster and with better consistency, and to have better control of our costs and supply chain. We are also benefiting from the strategic shift towards higher margin rotary steerable work. In 2022, revenues from rotary steerable work increased to approximately 20% of our directional drilling revenues, up from approximately 13% in 2021. We expect our rotary steerable work will continue to grow in 2023. With that, I will now turn the call over to Andy Smith, who will review the financial results for the fourth quarter. Thanks. Net income for the fourth quarter was $100 million or $0.46 per share, up from $61.5 million or $0.28 per share in the third quarter. Our contract drilling business had a significant sequential increase in average adjusted rig margin per day in the U.S. of $2,970. This growth was driven by successful contract renewals at more favorable pricing than projected, which resulted in a $3,160 increase in average revenue per day in the U.S. On a year-over-year basis, in the U.S., average rig revenue per day increased $9,800 or 44% from the fourth quarter of 2021 to the fourth quarter of 2022. At December 31, 2022, we had term contracts for drilling rigs in the U.S., providing for approximately $830 million of future dayrate drilling revenue, up from approximately $710 million at the end of the third quarter. Based on contracts currently in place in the U.S., we expect an average of 87 rigs operating under term contracts during the first quarter of 2023 and an average of 56 rigs operating under term contracts for the full year. In Colombia, fourth quarter contract drilling revenues were $15.1 million and adjusted gross margin was $4.9 million. For the first quarter, we anticipate that our average rig count in the U.S. will be 130 rigs. We also anticipate that average rig margin per day in the U.S. will increase by approximately $1,000, which allows for an increase in average rig cost per day related to rig reactivations and cost inflation. In Colombia, we expect to generate approximately $9 million of contract drilling revenue during the first quarter, with adjusted gross margin of approximately $1.2 million. In pressure pumping, revenues and margins improved during the fourth quarter. Pressure pumping revenues increased to $307 million, and adjusted gross margin increased to $86 million. For the first quarter, we are experiencing more weather disruptions than normal, and therefore, expect pressure pumping revenues to be approximately $280 million, with an adjusted gross margin of $72 million. We expect that revenues and adjusted gross margin will improve in the second quarter with fewer weather disruptions. In directional drilling, revenues improved to $59.5 million in the fourth quarter from $58.9 million in the third quarter, and adjusted gross margin improved to $11.2 million from $10.4 million. For the first quarter, we expect revenues of $54 million with an adjusted total margin of $9 million. In our other operations, which includes our rental, technology and E&P businesses, revenues for the fourth quarter were $22.8 million, with an adjusted gross margin of $8.2 million. For the first quarter, we expect revenues and adjusted gross margin to be similar to the fourth quarter. On a consolidated basis, we expect total depreciation, depletion, amortization and impairment expense to be approximately $123 million for the first quarter. Selling, general and administrative expense for the fourth quarter of $34.6 million included $3.5 million of mark-to-market adjustments for incentive-based compensation, which is not expected to recur in the first quarter. Accordingly, SG&A is expected to be approximately $31 million in the first quarter. Interest expense for the fourth quarter of $8.1 million included a $2.5 million gain from the early extinguishment of debt related to the $22 million of debt we repurchased in the fourth quarter. For the first quarter, we expect interest expense to be approximately $10 million. Our effective tax rate for 2022 was approximately 8%. With our significantly improved profitability, we expect our effective tax rate for 2023 to increase to a more normal 20%. However, we do not expect to pay any significant U.S. federal cash taxes in 2023, and so cash taxes should be limited to state, local and foreign jurisdictions. We currently expect cash taxes for 2023 to be approximately $15 million. We expect 2023 CapEx to be approximately $550 million. Most of this CapEx is for activity-related maintenance and reactivation CapEx with growth CapEx focused on high return, quick payback opportunities that we expect to be margin accretive. Contract drilling CapEx is expected to be approximately $320 million in 2023, of which approximately $200 million is budgeted for maintenance CapEx and rig reactivations. $25 million is for customer-funded rig upgrades and the remaining $95 million of CapEx is for items that increase incremental revenue opportunities for our existing rig fleet, including market upgrades and rental equipment, including high margin premium drill pipe. Pressure pumping CapEx for 2023 is expected to be approximately $170 million, including $140 million of maintenance CapEx, with the remainder going to equipment upgrades and the activation of our 13th spread. Of the $140 million of maintenance CapEx, $35 million is for maintenance and support equipment, which has been underfunded in recent years. Directional drilling CapEx for 2023 is expected to be approximately $25 million, the majority of which is for growing our fleet of next-generation mud motors and MWD systems to meet customer demand. We are also continuing our strategic shift towards higher-margin rotary steerable work with the purchase of additional rotary steerable systems. The remaining $35 million of CapEx for 2023 is for our other segment and general corporate purposes. Turning now to our balance sheet. We ended 2022 with $836 million of long-term debt after we repurchased approximately $22 million of debt in the fourth quarter. Our debt to adjusted EBITDA metric improved to 1.2x for 2022, and on a fourth quarter 2022 annualized basis, debt to adjusted EBITDA was less than 0.9x gross or approximately 0.7x net of cash. Our cash balance improved to $138 million at the end of 2022 due to improved profitability and the benefit of a large customer prepayment during the fourth quarter. This prepayment is reflected in our balance sheet as a short-term liability. As we work off the prepayment, the liability will decrease, resulting in increased working capital during the first half of 2023. Thanks, Andy. 2022 was a great year for the company given the rapid growth in margins resulting primarily from improved pricing. In contract drilling, we expect the continued high utilization of Tier 1 super-spec rigs and premium pressure pumping equipment to be supportive of current leading edge rates. These rates provide a strong foundation for earnings growth as we continue to reprice drilling rig contracts higher to current leading edge rates. Looking forward, overall, I am very upbeat for 2023 as I see this as another year for growth in margins and significant growth in free cash flow. Throughout the year, I expect the overall U.S. rig count for the industry will continue to increase, especially for super-spec rigs, driven by increases in the oil basins, and acknowledging that there may be near-term softness in gas basins outside the Northeast. We believe the Tier 1 super-spec rig count continues to increase over the next year, and we expect completion activity to increase as well. Higher activity combined with the tightness of equipment in these markets should protect and support the leading-edge rates for rigs and for services over the next year. Given our outlook for significantly higher profitability and cash flow in 2023, we continue to target a return of 50% of free cash flow to shareholders through a combination of dividends and share buybacks. With that, we would like to thank all of our employees for their hard work, efforts and successes to help provide the world with oil and gas for the products that make people’s lives better. Good morning. Andy, I was wondering if you could shed some thoughts. I know you guys did a survey in October, 70 of your key customers and highlighted a pretty meaningful planned increases in the rig count. Obviously, the gas market has changed quite a bit since that time. But as you do a postmortem on that what’s your thoughts on demand because it is trending lower than you thought just a few months ago? And I have a follow-up on that. Sure. No problem. So yes, we did that survey back at the end of September, early October. At that time, WTI was trading around $85 a barrel and natural gas was certainly much higher. And so I think there was a little bit more enthusiasm from the E&Ps that we talk to about what their rig count was going to do. We’ve certainly seen some changes. Now the interesting thing is, as we work through the year, we have seen changes in the rig count, but when you look at the breakdown of AC rigs, and especially when you look at what we’re doing with Tier 1 super-spec rigs, that market has held steady. So while we’re not seeing overall growth in the rig count, because you’ve seen SCR mechanicals get released over the last few months, the high-end market that we participate in is certainly keeping a very high utilization rate and supporting the leading edge pricing. Great. And just my follow-up, through a decent amount of market observers, including our own, we could see a 30 to 50 rig decline on the gas rig count in terms of trying to – the supply response call it, in terms of the decline in gas prices just to balance the market. Is it your estimation, Andy, there’s enough demand on the oil side to more than offset the declines that potentially could happen on the gas side? Yes. And we’re already seeing that. We’re already seeing where we’ve had two rigs go down in gas, and we’re seeing discussions and requests for rigs to go into oil markets. So I think that while rigs may be coming down, we’re also reactivating rigs. And when you look at net-net, what we’re doing and what we’re seeing with customers, we still expect our rig count to grow in 2023. Remember, we’re not participating in the SCR mechanical market. Those types of rigs aren’t on long-term contracts. They’re easy to release. So outside of the Northeast, we have a large number of rigs in gas, and those are primarily under term contracts with hedged customers. There’s going to be some softness in the natural gas markets outside of that one, and we certainly recognize that. But when we look at what’s happening with AC high-spec super-spec rigs, we still see a very tight market for those rigs. Hey, Good morning, guys. Andy, on the reactivation of the 13th spread, just kind of curious to get your view and decision process when you guys go through that? Just obviously, last year, everything was up and to the right and with the rig count kind of more flattening out from the trajectory we saw… Yes. We’ve been looking at what it would take to reactivate that 13th spread for over a year now since we’ve had 12 running. And what’s happened in the market is as we would start to slowly reactivate pumps and add more pumps to what we have in circulation across all of our spreads between active in the field and maintenance, getting ready for spread 13 and doing the calculation on that, what we’ve been seeing is that existing customers have been absorbing the pump supply. And I believe that’s happening across the industry. The amount of horsepower per spread for the type of high-end work we do in places like the Delaware and the Utica, we’ve seen E&Ps that just want to pump at higher flow rates and higher pressures. And we – those are the high-end markets that we participate in, in pressure pumping. And so we’ve seen that absorb. So in other words, what’s happening with our 13th has just been pushed. And so while we thought there might have been a chance to do it at the end of 2022, we’ve just been absorbing our current horsepower that’s been active into existing spreads. But as we get into 2023, we’ll be able to free up some of that horsepower, and we should have sufficient towards the end of 2023 to activate that 13 spread. Okay. And then just as a follow-up on the share repurchase side, obviously, good to see you guys actually executing on the program during the fourth quarter. Curious how the plan is for that? Is that just kind of as you generate free cash flow over and above the dividend that you’ll buy it kind of periodically across the year? Or is it opportunistic? Or how do you see that? So I’ll start, and then I’ll hand it over to Andy Smith. We’re committed to giving at least 50% of our free cash flow back to shareholders through dividends and share buybacks. As a publicly traded company, we have blackout periods during the year. So there’s only certain windows that we can get into the market and acquire shares, and we’ll do our best at those points, outside of the dividend when we’re looking at buybacks to buy back shares in those windows that are open to us. I’ll hand it over to Andy. Yes, I don’t have a lot to add to that other than to say, again, reiterate that we are committed to our return metrics. So again, that 50% of free cash flow coming back to shareholders in some form or another, we’ll be opportunistic more on the buyback side, but certainly, we’re committed to that 50% return. Andy, how many rig reactivations are embedded in the budget this year? And of those, how many have contracts today? And what kind of line of sight do you have for additional contracts on the reactivations? So right now, we’re planning eight reactivations in the CapEx budget, and we have line of sight on those eight. So we see – we think our rig count still grows. We do recognize there’s some near-term softness with the gas markets. But I think, overall, we’re going to see growth through 2023. Got it. And just circling back to Arun’s question on potential downside risk on the gas side. Just help us think about how do you guys – if the downside case kind of materializes, how do you think about kind of marketing your fleet? I mean do the reactivations kind of replace some older rigs? Or do you modulate those and kind of pull them back? And how do you think about kind of managing the crew count? Just trying to get a better sense of kind of as you think about scenario analysis, kind of what’s the management of the marketed fleet in more of a downside scenario? Yes. And we certainly recognize there’s potential for a downside case, but I think it affects different companies differently. And back to the discussion of Northeast versus the other gas basins, the way that our customers have been behaving, and in discussions with our customers, we believe that market remains relatively steady for us in both drilling and completions. Our customers are well hedged up there. The rigs are working under long-term contracts. So if there’s a downside case materializing, it’s likely happening outside of the Northeast, whether it’s East Texas, North Louisiana, Haynesville, maybe areas of South Texas, Oklahoma, where you still have a lot of gas production. But with the number of rigs we have working in the Haynesville, that’s only 10% of our rig count. So, I think we’re kind of limited in a downside case in those basins. Hi, Andy and Andy. Just quickly following up on the prior question from Scott. I think you said your CapEx budget is baking in eight rig reactivations. I’m just trying to understand, right? I mean, how flexible are you going to be on that approach? If you don’t get the right contract, right duration, right pricing, how willing would you be to say that, okay, I’m not reactivating eight rigs, I’m only doing four rigs or five rigs or whatever the number is, right? I’m just trying to understand the flexibility because, again, I’m looking at the stock. So your stock is down 10% after a fantastic fourth quarter, right? Obviously, people are concerned about demand, and I would appreciate if you can talk to your flexibility in that decision making process? No, we’ve always had flexibility and are available to react, and we’re not going to spend CapEx if it’s not necessary. But one thing I’ll say is there is enough utilization out there to support the leading-edge pricing that we have today. I do not expect any change in leading edge pricing. I see a 2023 that we will continue to reprice rig contracts from early 2022 up to the 2023 rate. And so we’re still projecting steady growth in margins, steady growth in free cash flow throughout 2023 because of that, even if we didn’t activate any rigs, but we will because we do have line of sight. And so we’ve got eight rig reactivations planned in our CapEx budget. We’re certainly not ignoring what can potentially happen in the gas markets outside of the Northeast, but we think it’s a limited effect on what we do because of the strong demand for Tier 1 super-spec rigs. Okay. Now, Andy, I appreciate that. And then quickly in terms of what to expect in terms of how rigs reprice through the course of 2023. Obviously, very solid improvement in average revenue per day. In the fourth quarter, more than $3,000, you are guiding to, I think, if I got the number right, the cash margin increasing $1,000 in the first quarter. First, quickly, maybe you can talk to the split between how much revenue per day is going up versus OpEx, because first quarter tends to be seasonally just a higher OpEx quarter due to a bunch of factors? If you can talk to the split between that. And then just in general, what should we expect through the remainder of the year? How does your book reprice through the course of the year? Yes. I think what’s getting lost in all the discussion right now is our ability to reprice rigs from early 2022 levels to where we are today in 2023. We’re probably going to reprice around 30 contracts in the first half of 2023. Some of those contracts have rigs that are still working at $19,000, $20,000 a day. Those are going to be going up to $35,000 a day, plus when you add in drill pipe and extra people and the other upgrades people want, you’re at rig rates around $40,000 a day. These are still huge movements in revenue per day and margin per day in repricing these contracts. And that’s still going to happen because the overall utilization for Tier 1 super spec is still high despite what’s happening in recent releases of SCR mechanical rigs that just doesn’t affect what we’re doing right now. Andy, do you want to comment more on revenue? Yes. So on revenue per day and cost per day, you can expect revenue up about $1,500 a day and cost up about $500. Hey Andy, it sounds like you guys got a unique line of sight on some opportunities that some of your competitors didn’t seem to kind of discuss on their conference calls today to activate these eight rigs or so. Maybe give a sense of how that cadence may play out? Is it – you mentioned the frac crew coming on could be later in the year. Do you think the same context could hold true with the land rates, were there going to be more of a back-half weighted kind of rollout? So for the activations on the rigs, they’re relatively steady throughout the year. And then, as we discussed, the 13 spread is more of a Q4 event, but five of these we announced back in September, so I don’t know why this is so hard to understand. We’ve got three more on top of five. That’s not a big number. So, we’ve got line of sight on this, and that’s how we see this progress. Okay. Great. And then in the context of the frac crew addition coming up here, is that a situation where you have identified a customer and a contract opportunity for it? And are they waiting on that crew to come out? Are you going to be actively marketing it between now and then? So, we’re in discussions. In the pressure pumping market, we don’t participate or try to compete in the lower end, lower pressure Midland Basin or lower pressure Marcellus. Our crews are set up and working the higher end, higher technology, deep Utica, deep Delaware, higher pressure, higher rates and those areas. And so we’ve got a great reputation for what we do at that level of performance. And so we’ve got a few customers that are looking to expand what they’re doing because they’re going to be adding drilling rigs this year. And so yes, we do have some line of sight on possibilities for our crews. Great. And then last follow-up here. You mentioned repricing 30 rigs in the first half of the year. What point do you think you’ll have the vast majority of your rig fleet on, let’s call it, that $35,000 to $40,000 a day kind of leading edge? It’s certainly front-end loaded in the year, but it will continue throughout 2023. And I’ve discussed this a few times, but just to kind of clarify for everybody. I don’t think we get everything up to leading edge in 2023. I think some of this continues into 2024, but certainly heavily weighted into the first half of 2023. Hi, thanks and good morning. Just wanted to start out. Maybe if you could just take a bit of time here and compare and contrast what you’re seeing between the land drilling and pressure pumping markets? Do you expect one to be stronger than the other in terms of 2023 profitability, ability to move rates or utilization of equipment? So, I’ll start with the pressure pumping. Our teams have done a really good job continuing to push pricing. So, we still – we have a fair amount of – a good percentage of our pressure pumping that’s working at that leading edge pricing. We’re producing top quartile EBITDA per spread right now. I think the real opportunity for us is on the drilling side because of the number of term contracts that we were signing in early 2022. And so we’re – like I mentioned, we’re going to be repricing about 30 contracts in the first half of 2023, and these are big movements on They’ve certainly had a huge benefit over the last year with the rig rates they’ve been paying versus where the market’s been moving to. And so these adjustments are going to happen in 2023. And that’s why I see that – I think that’s the underappreciated part of the story is our ability, even if we weren’t putting out any more rigs, even if I said our rig count was going to be flat, which is not, what we’re projecting, we’re still going to grow margin and grow free cash flow because of the repricing. Got it. Makes sense. And maybe if you can just talk a little bit about what you’re seeing in terms of operating costs on the drilling and the pressure pumping side. OpEx per day was about $18.3 [ph] or so in Q4. Where do you see that going for drilling? And then maybe if you could just comment a little bit as well to the extent you can on the pumping side? Yes. On the drilling side, look, we’re still seeing a little bit of cost creep. We talked about looking in the first quarter with an increase of about $500 per day. So you can do the math there. On the pressure pumping side, same thing, although probably a little bit more – less so maybe on labor and a little bit more on some of the R&M. Inflation is real on that side of the business. So it’s crept up a little bit, but pricing has stayed ahead of it. So, we’re still seeing net pricing gains. Two questions for me. Number one, in the past, you’ve done a lot of work on the overall rig count. I know a lot of the analysts are in print saying that that it could pretty much moderate this year, maybe dip in the first half and kind of build up in the second half of the year assuming that the gas strip comes back. Can you offer your thoughts on how you see the land rig count kind of progressed through the year and possibly where it may end this year? So, I need to kind of parse that into two different types of rig classes because our visibility in our drilling business is really around AC high-spec, super-spec rigs. And then SCRs and mechanicals just kind of do what they do and are treated more on a spot market. But the AC high-spec, super-spec rigs, primarily working on term contracts and getting repriced right now, we’re seeing that market to be tight near 100% utilization today. We expect that our rig count in that sector continues to grow in 2023. Now if you look at SCR mechanicals, those are down probably 30 rigs since the beginning of this year, but that doesn’t affect what we do. That’s just a separate part of the market from where we participate. And so it’s kind of hard to predict what that part of the market is going to do. Those aren’t necessarily the types of customers we work for. And that you’re going to see some movement in the rig count because of what’s happening in natural gas. But I just don’t – we don’t have any visibility that, that’s really going to have any effect on Tier 1, super-spec rigs and the overall utilization and leading-edge pricing there because of the overall demand. We’re still in discussions with E&Ps in the oil basins on increasing activity in the oil basins. Okay. And shifting gears just to the cost side and supply chain, in particular. Rolled steel pricing has come back quite a bit, but pipe pricing really hasn’t moderated at all. Are you seeing – just with a little bit of weakness in the overall rig count, are you seeing the supply chain kind of loosen up a little bit and pricing kind of moderating some? So new drill pipe, which is what we buy, that’s consumed in the way we do it on our rigs. We buy a lot of what we call high torque, double shoulder drill pipe. We rent a lot of that pipe on the market. That’s not the type of pipe that’s used on SCR and mechanical rigs. So when SCR mechanical rigs slow down, it doesn’t change anything in the high-spec drill pipe market. And double shoulder, high tour connection drill pricing has been moving up, lead times haven’t really come down, it’s still around a year lead time for buying pipe. So that market for high-end drill pipe, which we use on Tier 1 super-spec rigs, is still tight. We still have to order a year in advance, and that’s not going to be affected by low end rigs slowing down. No. It’s – these are just very different systems. Ours are AC motor-driven mud pumps that are not the same as what you have on our SCR mechanical rig. Hey, good morning guys. First one for me, not in the modeling right now. The blended hydrogen project that you talked about, Andy, can you just elaborate on what was exactly was involved? And then that’s kind of a long ways off, just the speed of adoption and opportunity center? And how did it go the trial? So overall, the trial went really well. The engines worked successfully on a blend of hydrogen along with the natural gas, really excited about how that test went. It wasn’t a high percentage of hydrogen, but the point was just to try to test the systems, make sure that the spark ignition engines are still going to function properly under that type of environment. And overall, good. I would say that – when you step back, technically, you use success, the next step is to try to increase the percent blend of hydrogen. But overall, the economics for hydrogen, I would say, today still probably presents some challenges. Now I think that market has potential to move quickly. It’s about how do you procure hydrogen, how do you transport hydrogen, storing it and then putting it into the systems? But I think all those things are going to get worked out, and I think over the next year or so, we’ll probably see more of an uptake there. And we’ll be doing some testing on the pressure pumping systems too, and blending hydrogen with the natural gas on there as well this year. Okay, cool. The 13th fleet when it gets reactivated, is it safe to assume that’s a Tier 4 dual fuel upgrade? Okay. And then what type of contract duration are customers willing to entertain today versus, call it, 6 to 12 months ago? Yes. Okay. So I mean that kind of validates, if you will, then [indiscernible] to dumb it down this just the bifurcation of what’s going on. Because when I hurdle everyone is trying to get a sense for where the rig count is going, but the way you describe it, seems to me, you have the scenario where the overall rig count might lead a little bit lower, but those with like you all with high-spec rigs continue to see your market share improve? That’s certainly our view. And I am doing my best to explain today. The SCR mechanical rigs are going to do what they do on the spot markets because they’re not covered with term contracts, and we don’t operate those rigs. So I think it’s going to affect the overall rig count because it’s about quarter of the overall rig count, but it doesn’t affect drilling contractors that are running AC high-spec, super-spec rigs. Fair enough. Last one for me and this not to be a double downer here, but let’s assume that you do see softening in a place like the Haynesville and just make up a number, four to five frac fleets get sort of displaced, if you will. And the owners of those fleets naturally say, "Well, let’s move them to an oily basin." And so you look west, you go to Midland. Is there – is the – do you think the Permian market is tight enough where those four to five fleets plus the incremental ones that are getting reactivated, it can absorb it easily? Or does that then create a headache back half of this year? So I think there’s two things that are happening in the pressure pumping market that are keeping that market type for equipment that are probably underappreciated unless you’re living it day to day, like our teams are. One is this absorption of increased horsepower per spread is straining us and others in the industry as we try to operate more pumps into those spreads. And so the need to have pump cycling back to maintenance is stretched right now. And so equipment still needs to come into our systems to efficiently operate at the higher horsepower per spread rate. So that’s tight, and that’s going to absorb more horsepower. The other is, the projections of how many spreads are potentially coming out in 2023 is either going to be delayed or it’s back-end loaded because the availability of equipment and engines and pumps is still tight coming from manufacturers. And so the forecast for how many spreads are coming in, I think that gets pushed in the year. And so that’s why I think any spreads freed up coming out of East Texas, North Louisiana, are going to – that horsepower is either going to get absorbed into the increased horsepower per spread, or it’s going to go to work in an oil basin where equipment that’s planned to show up is going to be delayed. Hey guys. Not to belabor the point on leading edge, but maybe what would be – Andy, what’s the biggest threat on that $40,000 leading-edge day rate? I mean some investors, the way they look at it, they’ll think a lot of these rigs, the $40,000 supported, the significant CapEx required to reactivate these rigs, they’ve been out for a little bit. They’ve earned their payback. And now given the market churn that you’re seeing, you can move those rigs and maybe doesn’t require that level of leading-edge day rate. I know you talked about utilization being type of maybe what would be the biggest threat in your opinion to see any sort of softening on that $40,000 leading edge? We have a lot of discussion about that. But at the end of the day, our focus is on margin. Our focus and our duty to our shareholders is to maximize our margin. And so on one side, we’re going to try to protect that leading-edge day rate, and that’s what we plan to do. But on the other side, the demand is just still tight. We’re at 100% utilization. And even if something frees up in the short term, over the long term, in 2023, it’s going to get absorbed back into the system. And there’s no reason for us to price a Tier 1 super spec rig at a lower day rate knowing that eventually, it’s going to go back to work at that day rate. So we just don’t see any risk in 2023 on that leading edge rate. Got it. Okay. Switching over to international, Columbia. It seems like the guide was a little weak there. Can you maybe talk about how many rigs are active there? Are there any that are going to idle? And then maybe other potential opportunities in the Latin America region where you could move some of those idle rigs out of Columbia into different countries? And just what are the overall growth prospects down there? Yes. So there has been some changes in the Colombia market. We were working as six, seven rigs, and now our rig count is coming down. It’s – a lot of it’s due to changes in the fiscal set up for the operators down there. The operators are trying to work through that and see how that’s going to affect them. We do expect our rig count to move up again in Colombia. We also see potential for some possibilities in Ecuador as well, and we continue to work on that. Hey, good morning. I wanted to see if you could talk a little more about the $95 million CapEx in your drilling budget for incremental rev opportunities. Andy, you mentioned premium drill pipe, but what else is in this budget and kind of what paybacks are you getting on these investments? I guess maybe some of this is EcoCell, and could you also just kind of refresh us where you are on that initiative? Yes. It’s – look, it’s EcoCell. It’s going to be general market upgrades, third pumps, fourth generators, things like that. Drill pipe is a big one, and they’re all pretty good returns. Obviously, a third pump or fourth gen would go into potentially there putting out a new rig or upgrading a rig that’s out working and getting a little bit more rate. On the drill pipe and the EcoCell, those are sort of a la carte items that pay back pretty quick inside of maybe 1.5 years, two years. There are no further questions at this time. I will now turn the call back over to Andy Hendricks, CEO for closing remarks.

EarningCall_197

Good morning. My name is David, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the WEX Q4 2022 Earnings Call. Todays conference is being recrded. 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, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO and President; and Jagtar Narula, our CFO. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release have also been included in an 8-K we submitted to the SEC earlier this morning. As a reminder, we will be discussing non-GAAP metrics, specifically, adjusted net income attributable to shareholders, which we refer to as adjusted net income, or ANI, and adjusted operating income and related margins and adjusted free cash flow during our call. Please see Exhibit 1 of our most recent earnings press release, and it’s on deck available on our Investor Relations website for an explanation and reconciliation of adjusted net income attributable to shareholders to GAAP net income attributable to shareholders, an explanation and reconciliation of adjusted operating income to GAAP operating income and a reconciliation of adjusted free cash flow to GAAP operating cash flow. The company provides revenue guidance on a GAAP basis and earnings guidance on a non-GAAP basis. The non-GAAP guidance cannot be reconciled without unreasonable efforts due to the uncertainty and the indeterminate amount of certain elements that are included in reported GAAP earnings. We have most recent earnings release and slide deck for more detail about the Company’s non-GAAP measure. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our most recent annual report on Form 10-K and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Thank you, Steve. And good morning, everyone. We appreciate you joining us today. WEX finished 2022 in a strong position with another impressive quarter, beating our guidance for revenue and adjusted net income per share and increasing revenue for the 10th straight quarter. But let me start with a very quick overview of the full year numbers. Revenue increased 27% over 2021 to a record revenue for WEX of $2.4 billion. This is driven by full year total volume process of $212 billion, which was up 45% compared to 2021. Full year adjusted net income per share grew 48%. Our success through market cycles is enabled through our reoccurring revenue model, our diverse earnings engine and our reliable cash flow model. As previously shared more than 80% of WEX’s revenue is reoccurring in nature. Over 20% of our revenue now comes from our health segments, in this year exceeding $1.5 in revenue for the first time. This provides a fast growing profitable and predictable revenue and earnings stream. Our health business further strengthens the stability of WEX, but its revenue from custodian assets, acting as a natural hedge for interest expense. WEX remains well positioned to invest for growth, while opportunistically returning capital to shareholders, as valuations and market conditions warrant. Our combination of growth, scale and cash generation puts us in the enviable position of both returning capital to shareholders, while also investing for the long term future as a business. Now I'd like to give a quick recap of our quarterly financial results released this morning, which Jagtar will provide more detail on later, before diving into our priorities for 2023. I'm pleased to share that revenue in the quarter was $690 million a year-over-year increase of 24%. This growth is primarily driven by volume growth across the business. Normalization of late fees, increased revenue from custodial assets and the benefit of higher fuel prices. On an organic basis, which excludes the impact of fluctuations in fuel prices and foreign exchange rates, revenue in the quarter grew 19% compared to the prior year period. This continues the spring of quarters where we've exceeded our long term growth targets of 10% to 15%. Strong quarterly revenue, paired with the scalability of our business model and a superior funding model resulted in adjusted net income per diluted share of $3.44, an increase of 33% compared to the same quarter last year. Total volume process across the organization in the fourth quarter grew 31% year-over-year to $53 billion, driven by strong performance in each of our segments and reflecting the power of our model. Now I'd like to turn to a recap of our business highlights in 2022. We've had several exciting new product launches and customer wins throughout the year that helped drive our outstanding results. In addition to our large enterprise level wins, we've added more than 100,000 new customers in 2022, the majority of which were small businesses. This speaks the strength of our sales and marketing engine year in and year out. We close the year posting a 73% increase in travel and corporate payment purchase volume adding 1.7 million new vehicles inside our total health SaaS accounts grow 14%. We feel very positive about the progress for the five year 10% to 15% revenue growth plan, we outlined at our Investor day last March. In 2022, we posted an impressive 14% from existing customers, 4% from net new customers, 2% from new products, and 1% from M&A. I am incredibly proud of our performance in 2022 and grateful to our team members who helped us achieve such spectacular financial results. When I look back on the year, it was a year characterized by significant economic and geopolitical events. Overall, WEX remain resilient and well-structured company. Thanks to our diverse earnings engine, and $782 million generated n adjusted free cash flow, setting us up for a strong 2023. I'll conclude my remarks this morning by outlining our strategy as we head into 2023. As we talked about in our investor day last spring, our strategy continues to focus on deepening share of wallet, maintaining our market leading positions by driving customer focused innovation through our strong sales engine and further building out the scalability of our platform that hosts our specialized vertical services. We're doing this by thoughtfully allocating capital across the business to manage through a dynamic economic environment with a balance between reinvestment in the business and shareholder return. The growth scale and cash generation of WEX uniquely situated us to capitalize on our momentum. Our business is characterized by large total addressable markets with structural tailwinds that provide significant opportunities for continued growth. Let me translate this to the segments we operate in and highlight a few priorities for the enterprise. First, let's look at our Travel and Corporate Payments solution segments. We’re unique in the space as we couple wholly owned market leading technology with a global issuing and funding capability. The combination of these two gives us the ability to scale quickly, be more agile responding to customer needs, and leads to strong margins in the segments. In the Travel portion of our portfolio, we are the clear market leader. We're pleased with the rebound in travel and are excited about growth as travel volumes continue to normalize around the globe. As part of travel, we increase investment in sales and marketing, yielding positive results in 2022 and will give us momentum through 2023. Next in health and benefits solutions. Employers are looking for tools to simultaneously manage rising healthcare costs, and provide benefits to attract and retain employees, which create a secular resilient tailwind. Our market leading products allow employers to have a simplified security experience utilizing our payments platform, which also offers their employees an integrated benefit experience, whether they're choosing an HSA account, paired with a high deductible plan, an FSA, traditional PPO plan, taking advantage of lifestyle benefits, or utilizing products like Medicare Advantage or COBRA. As we look to 2023 in the health and employee benefits segment, we'll continue to benefit from our large diverse distribution network, an industry experience and expect to deliver another year of strong account growth. Our ability to distribute broadly, both direct to employer and wholesale partners enhances our ability to penetrate the market. Additionally, our revenue from custodial assets is becoming an increasingly important driver of growth. WEX became an HSA custodian fewer than two years ago, and is now the sixth largest custodian according to Devenir, mid-year update. Finally, our global fleet business, organizations need to control costs. And as a result, there are ongoing opportunities to further increased penetration with our proven sales engine. Growing market share with our leading fleet solution and capturing Greenfield customers represents a significant opportunity. We're also making good progress with our fleet solutions, simplifying the transition to a mix fleet environment with the addition of electric vehicles. While the timing of the transition is uncertain, we believe it is becoming increasingly apparent that we will compete in the mixed fleet world more than the next decade. The transition to EV, introduces a new TAM, that we believe will be valued at $1.5 billion to $2 billion in revenue, and continues to grow recurring revenue for the company through subscription based revenue streams. We've made great strides in EV in 2022. Launching products allowing for the payment of charging at public locations in both the U.S. and Europe, in our building functionality to allow for home charging reimbursement, and energy management at deeper locations, all designed to be integrated into mix fleet offering with our industry leading mobility products. From a growth standpoint, we'll continue to enhance our global commerce platform by adding new offerings for mixed fleet and electric vehicles, further integrate platforms, streamline and add efficiencies through our contact centers and enable speed in our business through the enhanced use of data and analytics across the company. We're also focused on deepening our share of wallet and believe the compelling value of our solutions allows for increased cross-selling, which will take on an even more prominent role in 2023. We have some early success signing up customers for additional services throughout 2022 by adding nearly 100 customers in the second half of the year. We're working with the sales team to apply these learnings to other customers in each segment. From a scale standpoint, we continue to make good progress in capturing $100 million in operating efficiencies by the end of 2024. As I wrap up my comments, we're confident in our ability to deliver on our financial targets, including our long-term revenue CAGR of 10% to 15% and adjusted net income EPS growth of 15% to 20%, as we outlined at our last Investor Day. Regardless of the economic environment, WEX is positioned to benefit from the flexibility and diversity of our business as well as our reoccurring revenue model. We continue to monitor the macroeconomic environment and are staying close to our customers to understand the impact of a potential downturn on their businesses. We will nimbly respond to challenges or capture opportunities for our fan as they materialize. While some companies may struggle with the impact of rising interest rates or limited capital availability in the current macro environment, WEX will take advantage of its low leverage, strong cash flow and superior funding model to invest for the future. I continue to be confident in our path forward in the future of WEX as we remain focused on managing the business through a dynamic economic environment. With that, I'm pleased to turn things over to our CFO, Jagtar Narula, to walk you through WEX' financial performance this quarter. Jagtar? Thank you, Melissa, and good morning, everyone. As you just heard, we again delivered strong financial results while continuing to make progress on our strategic objectives. As with prior quarters, this quarter showed the strength of our global commerce platform, the competitiveness of our offerings and the power of our business model. Now let's start with the quarter results. For the fourth quarter, total revenue exceeded the midpoint of our guidance by $44 million, primarily due to a combination of earnings of custodial assets, fuel price impacts and the normalization of rate fees. Total revenue came in at $618.6 million, a 24.3% increase over Q4 2021 with more than 80% of revenue for the quarter recurring in nature. As a reminder, we define recurring revenue as payment processing and account servicing revenue, revenue from our factoring business, transaction processing fees and other smaller items. In total, adjusted operating income margin for the company was 38.2%, which is up from 37.1% last year. From an earnings perspective, on a GAAP basis, we had a net income attributable to shareholders of $88.7 million in Q4. Non-GAAP adjusted net income was $152.8 million or $3.44 per diluted share. This represents a 33% increase over the prior year. Now let's move to segment results, starting with fleet. Fleet revenue for the quarter was $367.2 million, a 20% increase over prior year, powered by volume growth, higher fuel prices and an increase in finance fee revenue, including the contribution of the new ExxonMobil portfolio on-boarded at the end of Q3. Payment processing transactions were up 5% year-over-year. The growth was led by local U.S. fleets while we saw an expected slowdown in over-the-road trucking fleets due to a recessionary environment in the freight business. As you see in our metrics, the net late fee rate continued to mobilize to pre pandemic rates. Overall, finance fee revenue was up 32% due to increases in volume, steel prices and the number of late fee instances. All of these include the impact of the new ExxonMobil portfolio, which is primarily revolving balance portfolio. The domestic fuel price in Q4 2022 was $4.34 versus $3.42 in Q4 2021. We estimate the year-over-year impact of higher fuel prices increase fleet revenue by approximately $34 million, including a benefit of approximately $6 million for European fuel price spreads. The net interchange rate in the fleet segment was 1.11%, which is down 5 basis points from the prior year. The higher fuel prices compared to last year is the primary reason for the decline in the net rate. The segment adjusted operating income margin for the quarter was 45.2%, down from 50.9% in 2021, primarily due to elevated credit and fraud losses, which I will speak about next. Fleet credit losses were above our expectations at 33 basis points of spend volume, including approximately 6 basis points of fraud losses. Let me first discuss credit losses. While loss rates improved each month through the quarter, they were above expected levels. As I've stated in previous calls, we have a healthy portfolio overall but we have continued to experience increased delinquencies, predominantly in our smaller over-the-road trucking customers. As I mentioned earlier, the freight business has experienced a recessionary downturn, and this has had a more pronounced impact with our smaller customers. We continue to focus on actively managing the portfolio, including adjusting our credit models to tight underwriting standards, reducing credit lines where appropriate and reducing payment terms. Next on to fraud losses. We have seen both our application fraud rates and transactional fraud rates improved sequentially. The actions we have taken to date have slowed the rate of fraudulent activity by more than 50%. We are launching product enhancements and further improving monitoring tools to help us combat scheming activity. We are also in ongoing conversations with our merchant partners to address the sources of fraud and, in some cases, shift the financial responsibility. Turning now to Travel and Corporate Solutions. Total segment revenue for the quarter increased 36% to $110.7 million. Purchase volume issued by WEX was $17.1 billion, which is an increase of 57% versus the prior year. The net interchange rate in this segment was up 9 basis points sequentially, predominantly due to favorable customer and product mix as well as a year-end true-up for incentives based on full year performance. Breaking the segment down further, travel-related customer volume represented approximately 68% of the total spend and grew 69% compared to last year. Revenues from travel-related customers was up 75% versus Q4 2021. This reflects continued strength in consumer travel demand in the U.S. and Europe. We believe that there is more room for recovery as pent-up demand appears strong, and Asia begins to open up its borders. Corporate payments customer volume grew 36% versus last year and revenue was up 12%. This growth was led by continued strength in the partner channel. The segment delivered an adjusted operating income margin of 47.9%, up from 38.8% in Q4 last year. There has been significant improvement in these margins during the year as volume accelerated. We have designed the cost base to be relatively fixed, allowing for a high drop-through of new revenue to margins. Finally, let's take a look at the health segment. We continue to drive strong growth in Q4 with revenue of $140.7 million. This represents a 29% increase over the prior year. Approximately half of the growth is due to earnings from custodial assets and the remainder is from the increases in the account base and purchase volume. SaaS account growth was 14% in Q4 versus the prior year. Health segment purchase volume increased 20%, leading to a 20% increase in payment processing revenue. We had a significant amount of success in 2022 with Medicare Advantage accounts sold through large health plans, which contributed to the volume growth. Custodial assets, which generated interest income over use for working capital were $3.5 billion on average in Q4 versus $2.5 billion last year, representing an increase of 41%. Of the $3.5 billion total, approximately $1.4 billion was held at third-party banks with the remainder held at WEX Bank. We realized approximately $25.6 million in revenue in total from these deposits in Q4 versus $8.1 million last year. This represents a blended yield of 3.4% on the funds that were invested during Q4 this year. The health segment adjusted operating income margin was 28.1% compared to 19.2% in 2021. The high flow-through on the revenue from the invested HSA deposits is the primary driver of the increase in margins. Shifting gears now, I will provide an update on the balance sheet and our liquidity position. We remain in a healthy financial position and ended the quarter with $922 million in cash. We have $899 million of available borrowing capacity on the revolver and corporate cash of $171 million as defined under the company's credit agreement at quarter end. As you expect, we saw a sizable $555 million decrease in our accounts receivable versus last quarter as fuel cost moderated and travel volumes declined seasonally. At the end of the quarter, the total outstanding balance on our revolving line of credit, term loans and convertible notes was $2.6 billion. The leverage ratio as defined in the credit agreement stood at 2.5 times, which is the bottom end of our long-term target of 2.5 times to 3.5 times and down from the end of 2021 due primarily to strong earnings. Next, I would like to turn to cash flow. WEX generates a significant amount of cash. Using our definition, adjusted free cash flow is $782 million for 2022. Note that due to the rapid decline in fuel prices at the end of the year compared to the end of Q3, our deposit balances and as a result, our reported adjusted free cash flow was about $150 million to $175 million more than we would normally expect. This excess will likely reverse during 2023. As Melissa mentioned earlier, we are committed to driving strong cash generation and deploying it by both opportunistically repurchasing our own shares and investing in our business with an overall goal of growing as well as continuing to build further resiliency into the business model. We purchased 1.9 million shares at a total cost of $291 million last year and an additional 103,500 shares so far in 2023. We still have nearly $500 million remaining in our authorization. Finally, let's move to 2023 revenue and earnings guidance for the first quarter and the full year. Starting with the first quarter, we expect to report revenue in the range of $600 million to $610 million. We expect adjusted net income EPS to be between $3.15 and $3.25 per diluted share. For the full year, we expect to report revenue in the range of $2.43 billion to $2.47 billion. We expect adjusted net income EPS to be between $13.55 and $14.05 per diluted share. Let me spend a couple of minutes going through the larger assumptions in our guidance. First, a couple of high-level macro assumptions. We are basing our guidance on a slow growth environment in the U.S. Market surveys suggest a slowing economy and consensus U.S. GDP growth of around 0.5% for the year, which we have taken into account in our growth expectations. We are expecting continued interest rate increases early this year adding another 25 to 50 basis points to the current Fed funds rate target. As a rule of thumb, a 100 basis point increase in interest rates presents a modest $10 million headwind to adjusted net income for this year. Excluding the impact of fuel prices, fleet segment revenue growth is expected to be towards the lower end of our long-term growth target, which is 4% to 8% because of the expected slow economic growth in the U.S. We are assuming an average fuel price of $3.83 for the year, which compares to $4.46 last year. This change is expected to reduce revenue by approximately $95 million. The Travel and Corporate Payments segment is expected to grow between 7% and 11%. Similar to 2022, we continue to expect the net interchange rate for travel customers to remain fairly steady and for corporate payment customers to continue to turn down slightly due to customer mix. We see significant pent-up demand and continued strength in the demand for travel despite indications of a potentially slowing economy. Finally, the health and employee benefit solutions segment is expected to have another strong year with growth of 25% to 30%. We have completed a successful open enrollment season and expect benefits from a significant increase in the custodial balances invested as well as higher interest rates. We are on track to remove $100 million of operating costs on a run rate basis by the end of 2024 as we outlined last quarter. We expect adjusted operating income margins to trend up through the year as we get the benefit of these cost savings measures and reduced credit losses. All of this leads to EPS growth in the range of 0% to 4% due to the significant drop in fuel prices expected. Excluding out fuel price degradation and FX, we would expect adjusted EPS growth to be in the range of 11% to 15%. As I complete my prepared remarks, I would like to emphasize again how pleased we are with our Q4 results. Finally, we have great confidence in our ability to win new customers, expand with existing customers and bring new products to market, leading to the long-term growth targets of the company. Good morning. And thank you for taking my question. I want to do it he just stocked with the healthcare segment. You had a nice step up and saxophones and revenue growth comes in the fourth quarter. And it sounds like you expect that to continue into 2023. Can you just talk about some of the drivers of that? And just remind us the enrollment the current enrollment season numbers, those are not showing up in Q4, right? So we should see that benefit in Q1, is that right? And then just also relatedly, I wanted to ask about just the Benefits Express acquisition. I think this is the first enrollment season where you were going to see some of the benefits. Just an update on that, how that went? Was it in line with expectations, better or worse? And what we can expect from here? A lot in there to unpack on health care. And so, if I take -- I'm going to parse that out in pieces. The account growth that we saw we added 2.3 million SaaS accounts in 2022. So had a really strong growth year. In addition to that, when we went into the enrollment season, we saw more strength than we had anticipated, which is what you're seeing reflected in the fourth quarter and part of what we're picking up in our guidance for next year. So some of the enrollment season numbers, some of our customers who are already started through that enrollment. So that growth that you're seeing in the fourth quarter is really what's going to drive through into 2023. So we feel really good. It gives us a lot of visibility into the numbers for 2023. And then on top of that, we've been able to supplement the account growth, which is about 3/4 of the revenue stream with custodian asset revenue with the investments that we have. And so, we've been able to really maximize the revenue opportunities that we have with the combination of those two things. You also asked about the benefit administration components. We are continuing to sell that into the marketplace. We sell it both on a stand-alone basis and we sell it integrated into the offerings that we have. We've had success also -- I talked a little bit about cross-selling and we've had success with the ability to sell that into some of our existing customer bases within our fleet business. So kind of across the board, I'd say really strong momentum. One of the things that distinguishes us in the marketplace is that we're selling directly. We're also selling through a bunch of different partner channels, which is what we do across the business. But within the health and benefit segment, it's a little bit more unique to what you're seeing competitively happen in the marketplace. And we think that model really works well because we can go through our broker channel directly into the marketplace and meet the needs of that customer segment, but also offer the technology to our partners where they can use that to supplement their offering into the marketplace. And all of those things combined really bringing some really great revenue numbers. Good morning. Thank you for taking my question. First, I just wanted to touch on the cost savings program. Thanks for the update. I was just curious what's embedded in the 2023 outlook? I know that previously, it was said that you thought you could exit the year at, like $65 million, $50 million revenue run rate. Nik, this is Jagtar. Thanks for the question. Yes, we are on track with our cost reduction program. As a reminder, we're expecting about $100 million of operating expense run rate reduction exiting 2024. And as I've previously talked about, we expect to exit the year at about half to 2/3 of that on a run rate basis. So we're continuing to project that in our forward guidance that we've -- that's embedded into our guidance. And just to add a little bit to that, the type of projects that we're working on are really focused around streamlining what we're doing operationally within the company, but also the items that we expose to our customers we think we have this great opportunity to create a twofer. We have the ability to actually create an even better customer experience but to do that at a lower cost structure. And then for my follow-up. Could you guys just provide what you're seeing for trends in the fuel segment, the quarter-to-date and also just expectations for the cadence of growth throughout the year? Because it looks like you should have continued strong organic revenue growth in Q1 based upon the guidance. Any color on that would be helpful? Thank you. Yes, Nik. Sure. So we are seeing good strong growth in the fuel segment, the fleet segment. As I noted in my prepared remarks, we are projecting in our guidance some slowing of the economy as we go through the year. So really, we're forecasting a higher growth in the early part of the year and some moderation as we go through the back half of the year. And as I talked about in my prepared remarks, I mean, we're expecting kind of the lower end of our long-term range for the fuel segment, but really will be higher in the first part of the year and then slow as we get to the back part of the year. In the slowing in the back part of the year, we talked about the fact we're expecting a slow growth environment is a macro environment, which we use when we put together our guidance assumptions. In terms of what we're seeing in the marketplace today, we're seeing continued strength across the -- our fleet portfolio, with the exception of the over-the-road business. So we continue to have really strong sales momentum but same-store sales are down 2% in that segment. So that segment, as we've talked about, is going through a tougher times, particularly with the smaller fleets within the over-the-road marketplace. It is a piece of what we do business with across all the fleet. If you look at the rest of what we have in our portfolio, specifically in North America that had same-store sales growth in the fourth quarter of 3%. So you've got this dichotomy of one particular sliver within the fleet segment is having a harder time but the rest of the portfolio continues to grow nicely. And then on top of that, we have really strong sales pipelines and anticipate to continue to deliver strong growth across that portfolio. Good morning and thank you so much for taking my question. Could you flesh out a little bit the $100 million of operating cost reduction, I think, by the end of '24 is what you said? Just curious, where do you see -- where are you going to get those savings? What types of sort of lower-hanging fruit is now in the organization that you can kind of economize on in order to get there? Yes. So let me start with it and Melissa will chime in if needed. So the cost reduction is primarily coming in several areas. So first, we've looked at our organizational structure and we've looked at the number of management layers and how we better optimize the structure. So we see some of that coming out of that. And you may have seen in our release, some restructuring charges related to that. That reflects what we're doing there. The second piece of it is operating efficiencies. We have a large operating infrastructure, call centers, processing centers, et cetera. And we're making technology enhancements, better optimizing efficiency of those centers that we expect to reduce the cost to be able to process more in those centers. We're doing some areas in our technology development, where we expect to economize where we do development that will lead to cost savings. And then the last area, is better purchasing, right? We've invested in our procurement function. We expect to get better spend out of our existing vendors. And so, those four items are really where we're expecting the bulk of what will happen this year into '24. Yes. And the thing I would add is the headcount changes he's talked about, we announced those a while ago. So we wanted to get ahead of this and did this really proactively. And then the second part I'd say is a lot of the changes that we're making are using more modern technology. So anything from what we would call it super robotics, automation, up to machine learning to AI. And so, as we deploy those tools into our infrastructure, that's creating synergies. And again, it's allowing us to create a more intuitive customer experience. So the combination of the data that we're sitting on, which is just a massive amount of data, with that technology combined is leading to the savings that we're talking about. That's very helpful. One quick follow-up for me. I was wondering if you could comment on your credit loss expectations in 2023. It looks like you're guiding for a decrease relative to the 4Q '22 exit rate. But at the same time, it seems like your guidance implies that sort of a deteriorating macro situation, even though that's not what you're seeing today. I'm just trying to square that in terms of whether you're maybe more aggressively underwriting or you're lying in some additional strategies to control for credit losses. Does that make sense? Yes, Ramsey, let me address those. So we've got some puts and takes there in our guidance. One, from what we're doing with our current book and adjudication of new customers, and the second from what we're just projecting from an economic standpoint, right? So starting with what we're doing in our -- with our current book of customers. We've been taking action. You heard me talk about the elevated credit losses we saw in Q4. As I've said, it's predominantly a small segment of our customers. It's our over-the-road segment, which is a smaller subset of our total loan balances. And within that, it's really the smaller trucking fleets, I think that is like one to two truck fleets that were largely the customers that are new on book for the last couple of years. So it's a small segment of the portfolio. So we've been focused on credit tightening, reducing payment terms, getting paid more often and better adjudication of new customers coming in to control those credit losses. We expect to see the benefits of that over that -- over the course of the year. But on the other side of that is we do see a slowing economic environment in the back half of the year. And so, we've factored in some impact to credit losses. So that's where you see the puts and takes in our guide. Great. Thanks. Good morning. Yes, I wanted to ask on margins in the fleet segment. Obviously, there's some moving pieces there just with fuel prices and the provision, but just thinking if we back out the impact of the provision in 2023, how you're thinking about decremental margins in that segment with the puts and takes of lower fuel, but then some offset from the cost savings? Just any help there would be great. Thanks. Yes. I would say there's two primary things that we've been looking at with -- related to the fleet margins. So one is the lower fuel prices that we expect next year. Then on top of that will also be higher operating interest that we expect. As interest rates rise, that impacts fuel margins. So both of those we expect to bring margins down in the fuel segment and as you mentioned, the higher credit and fraud losses as well. Okay. Got it. Thanks. And then for health, within the -- I think you said 25% to 30% growth for the segment for 2023. Any way you can parse out what you have embedded in that number for the interest income on the custodial assets? Yes, we're expecting that to be roughly 50% to 60% of the growth next year. When you look at it, we ended the year with about $3.5 billion of custodial assets that we're investing. And if you factor in kind of normal growth in that, some SaaS account growth, combined with higher interest rates that we're investing those assets in into this year, we see about half the growth coming from the nonbank custodial business. Thank you. Good morning. Nice results. Question on -- you said you added about 100,000 customers in 2022, mainly SMBs. Just thoughts around the SMB environment, and there's some slowing in, like the smaller truckers. But what are you seeing in SMB broadly? And is any of this related to Flume, and some others are seeing deceleration in the SMB. Doesn't sound like you've seen that outside of trucking. Bob, good morning. We have not seen a deceleration in the small business marketplace and there continue to be strength within our customer segment and certainly within the additions we've had to our portfolio. And we talked about 100,000 new customers that we've added. In total, we added 4% net growth and really strong growth across each of the portfolio. So really geared towards smaller businesses, like Freda, we added new business across each of our segments. And equally, actually, equally small across the segments with the exception of our corporate payments and travel segment. That tends to be geared towards mid-market and larger accounts. But if you look at both our health and our fleet segment, we're adding both large customers but also a pretty large concentration of smaller businesses. Great. I mean your health care business has grown a lot over the years from nothing when you first got into it. You have a pretty good comp in the public markets that has a pretty healthy valuation. Are there any thoughts to that health care segment and finding other ways to get value for shareholders in that business? Does spinning off a part, or I don't know, you certainly highlighted? But just any thoughts around that health care business and maybe getting more attention for it with investors. One way to do that is the spin off a piece or rather just any thoughts around health care monetization? Yes. If you look across the business, the way that we think about what we've developed is the platform -- entertainment platform that sits -- integrated across the different segments that we do business in and we're creating services that are very specialized to many different industries. Health care is one of them. So the connection point to the rest of the business is the underlying technology and increasingly the service levers that we have as part of the synergies that we're talking about. So we like the business and how it actually balances the rest of the portfolio and we think it's an important part of the growth of the company. Great job. And maybe just to ask about travel and corporate a little bit. We often think of corporate being 15%, 20%, sometimes better growth. And then travel being in -- we would think of it still in '23 being in a recovery year with some of the Asia recovery. But you're only guiding to 7% to 11%. And I would have just kind of thought maybe 20% growth. Maybe what's the disconnect? Is there something or yield some part of the business, maybe not growing quite as fast as we would expect? Dave, this is Jagtar. So I would say there's a couple of impacts on the travel and corporate payments business. So we do continue to expect good pent-up demand in travel. So things continue to go well in that business. But like I said in my prepared remarks, we are factoring economic slowness throughout the portfolio there. We also had some true-ups in 2022 related to MasterCard incentives that we're not currently forecast to fully repeat in 2023. So when we combine those two items, that's led to our 7% to 11% growth for 2023. Got you. And that would show up -- would that open the yield in travel or in the yield in -- that was probably corporate, right? Okay. And then just as a follow-up. Segment growth, you gave full year growth, but maybe Q1 growth by segment, kind of what you're expecting? Q1 growth by segment, roughly I would expect, give me a second here, ex-PPG, I'm expecting fleet 10% to 15%. Travel, I'd expect -- the Travel and Corporate Solutions, I'd expect healthy double-digit growth. And health and employee benefits also I think healthy double-digit growth as well. Good morning and thanks for taking my question. Very nice quarter. Congratulations. Melissa, in health care, in particular, the custodial revenue is sort of a nice maybe -- I don't want to say surprise, but maybe it feels like a little bit of a surprise a market. SaaS account growth looked a bit above trend. Can you just elaborate a little bit? Are we seeing -- is that a function of signing more employers? Or is it a function of more employees adopting to self-directed health care? Or is it a combination? I'm just wondering how much of a sort of secular tailwind you might be seeing in that business today? Yes. We do think that the market has a secular tailwind. But in 2022, the growth actually largely came from new accounts. So just really strong sales, so we brought into the marketplace. And as I said, at the end of the year, we actually did a little bit better than we had anticipated going into 2023, which is part of what we're reflecting in the forward guide. So each of the channels that we have when we go into the marketplace, we've got our direct channel, which we go through brokers and then our partner channel. If you take a look across the business in 2023, we really had strengths in each of those, and that really led to the strong account growth. And is there anything to think about if indeed we get a significant change in the employment environment. If unemployment were to go up in a meaningful way, does that sort of inform your growth expectations in that business? If you have a good counterbalance in the fact that we provide COBRA products also and so, what we have seen historically is you might have a migration from one account type to another, which gives us a bit of a buffer even if you did see something happen in the marketplace. It's not what we're seeing in our data. But again, we think we actually have a pretty good buffer if that does happen. Good morning everyone. Thanks for taking my question. Melissa, you mentioned the two percentage points of growth from new products and cross-selling taking a more prominent role in 2023. Can you just talk about where you see the low-hanging fruit? And can you provide a little more detail on how that cross-sell works? And how you're positioning the sales force for that? Thank you. Yes, sure. So we've got growth in our long-term model of 4% to 5% that comes from our existing customer base. We had 14% in '22. So we had a really strong number in '22. A piece of that, we think, will come from just market growth, different markets that are growing. And then on top of that, both pricing actions and cross-selling. From a cross-sell perspective, I'd say it's really early. And our focus, and as I said in the last call, has been setting up the right infrastructure across the business so that we can make that much more seamless. Right now, we're doing it based on inherent relationships and luckily have really strong relationships across the portfolio. So we're bringing those relationships from one segment to another to offer different products. We're focused primarily on the mid and larger customers within our product set right now. And we've had some success so far. We had just under 100 new customers come in from that effort. And we are formalizing that by creating the right infrastructure in place so that can happen more fluidly over time. And also, we're focused around the digital aspects of the offers that we have so that when we think about smaller businesses, we can offer the products much more organically digitally. And so, we're segmenting the marketplace and thinking those larger customers will be an inherent handoff from one sales person to another. And then the far end of the market will happen more digitally. And again, we'd expect us to build into this that we're going to continue to do this handoff now which are happening much more manually. And as we build out that infrastructure have that happen more fluidly and see this pace of cross-selling increase over time. Thank you, so much. I want to dig in a little bit more on kind of some of the weakness you called out, especially in your smallest customers, et cetera. Build out comp, saw some weakness with Divi's most recent earnings. And I know you work with them on payments. So can you remind us what percentage of your mix they make up? And if any other partners are seeing similar issues that we should be aware of? Yes, they'd be less than 1%, a small percentage of the mix that we have. And if you look at like -- if you go through each of our segments, fleet has a pretty heavy concentration in small businesses. The only area that we're seeing weakness is the over-the-road customer. So one micro segment within that segment. The rest of the business actually across the board has actually been quite strong. In corporate payments, there's very little small business that sits in that portfolio. And then in health, there are small businesses that are mixed into that -- into the overall segment. Again, we're not seeing any deviation in trend based on segment size anywhere, but over-the-road small fleet customer. And James, I would just add in that over-the-road customer, I want to remind you that it's at kind of the smaller end of that over-the-road, so -- and kind of newer customers that are at the smaller end of those over-the-road customers. So it's a micro segment of a subsegment of our business. Our overall kind of customers within over-the-road, especially ones that have been with us for a while are actually performing well and stable. It's kind of a subsegment to subsegment. Thanks. When we look at what you've built and put together an assets, whether it's -- some of the other deals, you've obviously done some great acquisitions. So Melissa, when you think about strategically what you have now, specifically in corporate being in corporate and travel, but really across the board, love to hear a little bit more about what you see as the next big step for you guys? Probably inorganically is what I'm looking at, but -- both. And then just a quick follow-up on the travel side. I know eNett brought you a lot more -- a lot more Asia. Maybe just remind us the mix -- the geographic mix of the segment. Obviously, it's important now if reopening China and travel term? Yes. Let me answer that one first, and I'll go back to the M&A question. Asia is only about 10% of the portfolio right now. It was 20% pre-pandemic. So there's still some ability to continue to see rebound there. It did go up a little bit sequentially from quarter-to-quarter. So we did see a little bit of benefit in Q4 of that reopening. And related to M&A, it's clearly something that's important to the long-term growth framework of the company. And the focuses that we've had have been around scale plays around areas that increase product capability for us. We look at build versus buy capability. And then geographic expansion. And so, you have the eNett, we'd like but that is it hit really across all three of those categories, but we continue to be active in the marketplace in identifying assets, working those through the multiples have continued to be a little bit elevated. And so we then deploy our capital opportunistically through share buyback, but we continue to be active in the marketplace and looking for the right assets for us, both strategically and financially. Okay. Great. Thank you. I just wanted to ask you, if you don't mind, giving us an update on Flume? Curious what is the latest there? And I'm realizing that next time we speak, it will be a little bit over a year since the launch. I was just curious if you can kind of walk us through what is happening there? And is there any chance you can give us a little bit of a framework on how to think about revenue and so forth, understanding that you're over $2 billion annual revenue company run out China trying to think through what type of contribution we might have going forward? Thank you so much. All right. I put Flume in the category of our 1% to 2% growth we have in our long-term framework. So we have -- the idea that we want to make sure that we're continuing to introduce new products into the marketplace and that they will be accretive from a revenue perspective. Part of what I'm excited about Flume is the product itself. It's a digital wallet technology. I'm also going to do that the process that we used to create it, and I said this before, but we created a debentures board internally, where we're moving ideas across the company into the marketplace. And Flume, we started with alpha beta and this full launch and said, when you're talking about that, you're going through the life cycle of the alpha, beta launch and then going into the marketplace. It's a chassis that allows us to deliver products and services. So we're not just excited about that, but we're excited about the potential of what it can do in that small business segment. But it's still early and still small relative to the whole size. I think -- when I think about this, it's, in aggregate, the product offerings that we're moving into the marketplace where we're making investments, yielding that 1% to 2% growth that we have in our framework. And this is just going to be one piece of that. So David, I think it's all the time we have right now. I just wanted to make one quick note before we wrap it up. We have a small correction to prior year custodial HSA cash asset KPI that we mentioned in our prepared remarks. The correct number is $2.8 billion, and we'll update that in the slide deck on our website. So with that, we'll wrap it up on our end, and thank everyone for joining us today, and we look forward to sharing our progress again next quarter.

EarningCall_198

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following remarks by the Company, we will conduct a question-and-answer session. [Operator Instructions] Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon’s press release as well as in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities, for his remarks. Ben? Thank you, Jason, and hello everyone. I'm joined by Kevin, Sean and Matt, and after our prepared remarks, we will open the line for questions. As shown on slide 4, from operating results perspective, 2022 was a phenomenal year, and one of the strongest in the Company's history, with 10.9% same store NOI growth and 18.5% core FFO growth. We ended the year with core FFO of $9.79 per share, which just to reflect back, was $0.24 above our initial guidance at the beginning of 2022. On the capital allocation front, we proactively adjusted during 2022 as the environment and our cost of capital changed. In April, we raised approximately $500 million of forward equity at a spot price of $2.55 per share, which is still fully available. As the year progressed, we pivoted from our original expectation of being a $275 million net buyer to ending the year as a $400 million net seller, a shift of roughly $700 million in total. We also ratcheted down new development starts given the shifting environment -- to $730 million from our original guidance of $1.15 billion. Collectively, these moves put us in an extremely strong liquidity position and fully match-funded with capital secured for all of the development we have underway. We also made significant progress during 2022 on our strategic focus areas, three of which I want to highlight today. First, as detailed on slide 5, continue to make very strong inroads on the transformation of our operating model. We captured approximately $11 million of incremental NOI from our operating initiatives in 2022. In 2023, we're projecting an additional $11 million of incremental NOI from these initiatives, and looking further out expect meaningful contributions in 2024 and beyond. This uplift is being driven by a number of initiatives including our Avalon Connect offering, which is our package of seamless bulk internet, and a new developments Managed Wi-Fi, which we have now deployed to over 20,000 homes and expect to be at over 50,000 homes by the end of 2023. During 2022, we revamped our website and fully digitized our application and leasing process. What used to take 30 plus minutes of associate’s time can now be completed digitally in about 5 minutes. We also rolled out our mobile maintenance platform across the entire portfolio, allowing our residents and maintenance associates to interact much more efficiently and seamlessly. As a result of these initiatives, we believe we are enhancing the customer experience while also driving operating efficiencies, which over the past few years has resulted in a roughly 15% improvement in the number of units managed per onsite FTE. Turning to slide 6 as a second strategic area. We are focused on optimizing our portfolio as we grow. Our goal is to shift 25% of our portfolio to our six expansion markets over the next six to seven years. In addition to diversifying our portfolio, this shift reflects the reality that more and more of ABV’s core customer, knowledge based workers are increasingly in these markets. At the end of 2022, including our development currently underway, we increased our expansion market exposure to 7%, and subject to the capital allocation environment this year, we expect to be at 10% by the end of 2023. We're funding a large portion of this shift through dispositions in our established regions, which also allows us to prune the portfolio of slower growth assets and/or those with higher CapEx profiles, which should lead to stronger cash flow growth in the portfolio in the years ahead. Our third strategic focus area has been on leveraging our development expertise in new ways and in ways that drive additional earnings growth. More specifically, as detailed on slide 7, we are expanding our program of providing capital to third-party developers primarily as a way to accelerate our presence in our expansion markets. In 2022, this included a project start in Durham, North Carolina and a new commitment in Charlotte. During 2022, we also successfully launched our Structured Investment business, with over $90 million of preferred equity or mezzanine loan commitments made during the year. We believe that both of these programs will be increasingly attractive to third-party developers in 2023, and we're also fortunate to be building these books of business now at today's economics and bases versus in yesterday's environment. Before turning it to Kevin to provide the specifics of our 2023 guidance, I want to provide some additional context on our underlying economic assumptions for the year. From a forecasting perspective, we are overlaying the consensus forecast from the National Association of Business Economists, or NABE, on top of our proprietary submarket by submarket research data and model. The NABE consensus assumes a significant slowing in job growth during the year, down to about 50,000 jobs per month by the third quarter and a total of approximately 1 million of net job growth in 2023. The output of our modes is a forecast of market rent growth of 3% during the year. In a year in which we will need to be prepared for a wider set of potential outcomes than usual, there are a number of attributes of our portfolio, and particularly our concentration in suburban coastal markets, that we expect to serve as a ballast in a potentially softening economic environment. As shown on slide 8, the cost of a median-priced home relative to median income in our markets continues to serve as a barrier to home ownership and support demand for our apartment communities. This is in addition to the repercussions of today's higher mortgage rates, which make the economics of renting significantly more attractive. The other side of the equation is supply. In softening times, having an existing asset that is in direct competition with a recently built nearby project and lease-up can be particularly challenging. Our portfolio has some of the lowest levels of directly competitive new supply across the peer group at only 1.4% of stock, which we believe positions us well. On slide 9, we provide our operating and financial outlook for 2023. For the year, using the midpoint of guidance, we expect 5.3% growth in core FFO per share driven primarily by our same-store portfolio as well as by stabilizing development. In our same-store residential portfolio, we expect revenue growth of 5%, operating expense growth of 6.5% and NOI growth of up 4.25% for the year. For development, we expect new development starts of about $875 million this year, and we expect to generate $21 million in residential NOI from development communities currently under construction and undergoing lease-up during 2023. As for our capital plan, we expect to fund most of this year's capital uses with capital that we sourced during last year's much more attractive cost of capital environment. Specifically, we anticipate total capital uses of $1.8 billion in 2023, consisting of $1.2 billion of investment spend and $600 million in debt maturities. For capital sources, we expect to utilize $550 million of the $630 million in unrestricted cash on hand at year-end 2022, $350 million of projected free cash flow after dividends and $490 million from our outstanding forward equity contract from last year. This leaves only $400 million in remaining capital to be sourced, which we plan to obtain primarily from unsecured debt issuance later in 2023. From a transaction market perspective, we currently plan on being a roughly net neutral seller and buyer in 2023 with a continued focus on selling communities in our established markets and on buying communities in our expansion markets while being prepared to adjust our transaction volume and timing in response to evolving market conditions. On slide 10, we illustrate the components of our expected 5.3% growth in core FFO per share. Nearly all of our expected earnings growth of $0.52 per share is expected to come from NOI growth in our same-store and redevelopment portfolios, which are expected to contribute $0.50 per share. Elsewhere, NOI from investment activity and from overhead JV income and management fees are expected to contribute $0.19 and $0.03 per share, respectively, while being partially offset by a headwind of $0.10 per share each from capital markets activity and from higher variable rate interest expense, resulting in an expected $0.02 per share net earnings growth from these other parts of our business. On slide 11, we show the quarterly cadence of apartment deliveries from development communities under construction for 2022 and on a projected basis for '23 and '24. As you can see on this slide, new deliveries declined in 2022 and remain relatively low as we begin 2023. This recent decline in deliveries was due to our decision during the early days of the pandemic, to reduce wholly owned development starts to $220 million [ph] in 2020 before resuming higher levels of development starts thereafter in 2021. As a result, development NOI for this year is expected to be below trend at $21 million versus $42 million last year. However, new development communities are expected to increase significantly later in the year and into next year, which should set the stage for more robust NOI growth from development communities next year. Moving to slide 12 in terms of our operating environment. After a very strong first half of the year, we ended 2022 with several of our key operating metrics, including occupancy, availability and turnover trending to what we consider more normal levels. In addition, following two years of abnormal patterns, rent seasonality returned with peak values being achieved during Q2 and Q3 before easing in the back half of the year. More recently, the volume of prospective renters visiting our communities increased in January as compared to what we experienced in November and December, which translated into a modest lift in occupancy, and we do see amount of available inventory to lease as we entered February. Additionally, asking rents have increased about 100 basis points since the beginning of the year, which is beginning to flow into rent change. Based on signed leases that take effect in February, we're expecting like-term effective rent change to be in the low-4% range. Turning to slide 13. The midpoint of our outlook reflects same-store revenue growth of 5% for the full year 2023. Growth in lease rates is driving the majority of our revenue growth for the year, which includes 3.5% embedded growth from 2022 and an expectation of roughly 3% effective rent growth for 2023, which contributes about 150 basis points to our full year growth rate. We expect additional contributions from other rental revenue, which is projected to grow by roughly 16%, about two-thirds of which is driven by our operating initiatives, a modest improvement in uncollectible lease revenue and a slight tailwind from the reduced impact of amortized concessions. We're assuming that uncollectible lease revenue improves from 3.7% for the full year 2022 to 2.8% for the calendar year 2023. Of course, this improvement is more than offset by a projected $36 million reduction in the amount of rent relief we expect to recognize in 2023. The combination of the two reflects a projected 80 basis-point headwind from net bad debt for the full year 2023. Moving to slide 14. We expect our East Coast regions to produce revenue growth slightly above the portfolio average, while the West Coast markets are projected to fall below the portfolio average, and our expansion markets are projected to produce the strongest year-over-year revenue growth for the portfolio. One point to highlight is that the reduction in rent relief will have a more material impact on our reported 2023 revenue growth in certain regions and markets, for example, Southern California and Los Angeles. We have footnoted the projected impact for each region at the bottom of slide 14 and enhanced our disclosure in the earnings supplemental, so everyone has visibility into the impact of the change in rent relief as compared to underlying market fundamentals. Turning to slide 15. Same-store operating expense growth is projected to be elevated in 2023 due to a variety of factors. The first is just the underlying inflation in the macro environment, which is impacting several categories, including utilities, wage rates, et cetera. Second, we're expecting greater pressure on insurance rates, given the increase in the number and severity of various disasters over the past couple of years, combined with a relatively light year of claims activity in 2022. We're rolling all that cost pressure into the organic growth rate of 4.8%, you see on the table on slide 15. In addition to the organic pressure in the business, about 170 basis points of additional operating expense growth is coming from the phaseout of property tax abatement programs, primarily in New York City, and NOI accretive initiatives. The phaseout of the property tax abatement programs is projected to add about 70 basis points to our total operating expense growth for the year. While we'll generate some incremental revenue during the phaseout period, the ultimate benefit will be the extinguishment of the rent-stabilized program for those units in a particularly challenging regulatory environment. The impact from initiatives reflects a few key elements of our operating model transformation, including our bulk internet, Managed Wi-Fi and Smart Access offering, which as Ben referenced is bundled and marketed as Avalon Connect. While we expect to recognize an incremental $5 million profit from this specific initiative in 2023, it's adding about 150 basis points to OpEx growth for the full year. There's a modest impact from our on-demand furnished housing initiative, which is also generating a profit for 2023. And finally, we expect additional labor efficiencies to offset some of the growth in other areas of the business as we continue to digitalize and centralize various customer interactions. And then, if you move to slide 16, you can see the progress we've made to date for each one of these three initiatives and the projected incremental impact for 2023. As I mentioned, our Avalon Connect offering is projected to deliver about $5 million in 2023. Furnished housing is contributing another $1 million. And our digitalization efforts are projected to generate an incremental $5 million benefit in 2023. In aggregate, we're expecting an additional $11 million in NOI from these three strategic priorities in 2023 with a lot more to come in future years from these initiatives and others. Just broadly speaking, development continues to be a significant driver of earnings growth and value creation for the Company. At year-end, we had $2.4 billion in development underway, most of which was still in the earlier stages of construction. The projected yield on this book of business is 5.8%. And it's worth noting that our conservative underwriting does not include any trending in rents. We do not mark rents to current market levels until leasing is well underway. On this quarter's release, only 4 of the 18 projects underway reflect this mark-to-market. But those 4 are generating rents $395 per month above pro forma, which in turn is lifting their yields by 30 basis points. We expect to see similar lift at many of the 14 other deals as they open for leasing over the next two years. And of course, this portfolio is 100% match-funded with capital that was sourced in yesterday's capital markets when cap rates and interest rates were significantly lower than they are today. If you turn to slide 17, we do expect roughly $900 million in development starts this year across 7 different projects with roughly half in our new expansion regions, and we will continue to target yields at 100 to 150 basis-point spread over prevailing cap rates. We expect the majority of the start activity in the second half of the year and are hopeful that we will be able to take advantage of moderating hard costs across our markets as these budgets are finalized. We have started to see early signs of this in a few of our latest construction buyouts as selected trade contractors have become much more motivated to secure new work. As always, we will continue to be disciplined in our capital allocation, and our projected start activity could vary significantly from our current expectations depending on how interest rates, asset values and construction costs all evolve over the course of the year. Turning to slide 18. While our recent start activity has been modest, we have been building a robust book of future opportunities that could drive significant earnings and NAV growth well into the next cycle. We have increased our development rights pipeline to roughly 40 individual projects, balanced between our established coastal regions and our new expansion regions, providing a deep opportunity set across our expanded footprint. Most of these development rights are structured as longer-term option contracts, where we're not required to close until -- on the land until all entitlements are secured. In addition, in the current environment, we are certainly seeing more flexibility from land sellers who are willing to give us more time as costs and deal economics adjust to all of the changes in the market. We continue to control this book of business with a very modest investment of just $240 million, including land held for development and capitalized pursuit costs as of year-end. For historical context, as shown on the chart on the right-hand side of the slide, this is a lower balance than we averaged through the middle part of the last cycle from 2013 to 2016, even though the dollar value of the total pipeline controlled is larger today than it was then, providing tremendous leverage on our investment in future business. Thanks, Matt. To conclude, slide 19 recaps our successes during 2022 and highlights our priorities for 2023. All of this is only possible based on the tireless efforts of our AvalonBay associate base, 3,000 strong. A personal thank you to each of you for your dedication to making AvalonBay even stronger as we continue to fulfill our mission of creating a better way to live. You're the heart and soul of our culture, and we thank you. Thanks. And thanks for the call, presentation. It is always helpful as a lot of additional info. So, I always appreciate that. Maybe just starting on development in the transaction market. You mentioned the 100 to 150 basis-point spread. Can you quantify expected yields on the '23 starts and maybe what the current transaction cap rates are -- you're seeing in your markets? Sure. Hey Nick, it's Matt. As I'm sure you're hearing from others as well, not a lot is transacting in the current environment. So there is -- I think everybody is kind of interested to see how the transaction market evolves over the course of the year. What is trading -- seems to be trading in, call it, the mid to high 4% cap rate range, depending on the market. And there are certainly assets that are not trading. But as best we can tell, that's kind of where most transactions in our markets seem to be settling out today. And just as a point of reference, the development we expect to start this year, those yields are underwriting to around 6 -- low 6s today. So that's very consistent with the spread right -- very solidly in that 100 to 150 basis-point range that I mentioned. Thanks. That's helpful. And then just on the -- I guess, the continued reallocation of the capital into these expansion regions, do you expect any difference in cap rates between the buys and sells or as you reallocate that capital this year? And then, where should we expect any asset sales to occur, from which established markets? Yes. So, I would say, if you look back at what we've done over the last 4 or 5 years, we have rotated quite a bit of capital, and it is kind of overweighted to the Northeast. And I think you can expect that to continue that there will be continued asset sales out of the New York metropolitan area, a little bit out of Boston, some out of the Mid-Atlantic and then, selectively, a little bit on the West Coast as well but, predominantly, that -- kind of that Northeast corridor. The cap rate spread, we'll see. I would say that, that cap rate spread has probably tightened some over the last year or two because there's probably been more movement up in cap rates in the regions where we're buying than that -- in the regions where we're selling. And that's just because those were the regions that had more embedded growth in the rent roll and lower cap rates a year or two ago that -- so as interest rates have risen, basically, a lot of the markets where we're selling, the buyers were already kind of buying for yield as opposed to growth. So, there's probably been a little bit less adjustment there. So I think there might be a little bit of dilution, but I would say probably less than what we've seen in the last couple of years. And then the other part of it is tactically, we have shifted from kind of buying and then essentially doing a reverse exchange by picking an asset off the bench to sell to fund that. Mid last year, we shifted our tactics there to sell first so that we knew where that dispo was pricing. And then that, in turn, informed our view of how much we're willing to pay on the buy side. So, we've shifted to a sell first by second. And Nick, yes, in terms of the environment today, I just want to make sure you have the right expectations for activity now versus later in the year. We're testing the market with a couple of potential asset sales generally on the sideline on acquisitions until we see how those assets, one, if we decide to trade on them and how the pricing is and then we'll evaluate the potential trade into the expansion market through other acquisitions or potentially use those proceeds for other capital allocation decisions. I guess, on page 13, you kind of break out all the drivers of growth. I was just hoping you could maybe tell me the areas where you have kind of the most confidence and the least confidence, where there could be upside, downside and if you also think about that by region. I guess, what areas are you thinking there could be upside in your forecast and potential downside? Yes. Steve, this is Sean. I'll take that one. So in terms of upside and downside, first, across the various categories, reflected on slide 13, there's a couple of things I'd point to. First is, on the lease rent side, as Ben mentioned, we have a certain macroeconomic assumption, job growth, income growth, et cetera, that's reflected in our models from -- that drives that obviously, to the extent that we see either more or less improvement in the economic environment, that's going to have an impact on that and then the timing with which that occurs. So if we don't see much of an impact in terms of a decelerating macro environment until late this year, then it really would impact more '24 than '23. And then, as it relates to the other areas, I'd probably point to bad debt as really being one of the other components that I think we're all trying to estimate the likely impact of what we're going to see in certain markets. But it is one of those items that is a little more challenging to forecast. We're starting the year at roughly 3.1% underlying bad debt here, and we expect to get down to about 2.3% by the end of the year in terms of the pace of improvement and more of the improvement in the second half than the first half just given some of the issues in LA and some of the sluggishness in the courts in the Northeast. That's the other thing I'd point to as a category that would likely move the needle one way or another depending on how things unfold. There could be some upside there since -- while there has been some extensions recently, like in Los Angeles County, the extensions are getting shorter. And I think people see that they're sort of getting to the end of the tunnel on this. So, at the margin, we've incorporated that, but maybe it improves. It's hard to tell. And then geographically, I'd say, certainly, it's been more sluggish in the tech markets in Northern California and Seattle as an example, maybe to a lesser extent here in the Mid-Atlantic in terms of the government not being back in the office and things of that sort. So, depending on how the tech market unfolds here, that would be the likely impact in those regions. And then, the other regions, we're seeing strong performance out of New York City, out of Boston, generally pretty good in Southern California. So, right now, if you look at it, there's probably, I'd say, maybe a little more risk on the tech side of things, really decelerate, but we do have some stabilizers in some of these other regions. So, on par, it probably is kind of a net neutral when you add it all up. Okay. Thanks. And then just on development, maybe for Matt, as you think about construction costs and what's happened with inflation, and I assume that that's starting to moderate. But how did that get factored into the $900 million of starts? And presumably, the yields are somewhere in that 6% to 6.5% range on what you're going to start. But I guess, what kind of cushion or upside could you possibly see if inflation continues to moderate? Yes. I guess, it's a question, Steve, of which slows down more, hard cost or rents. I think at this point, we think hard costs are moderating more. So, I would agree with you that -- it's very hard to know where hard costs truly are today until you have a hard set of plans to bid and you're truly ready to start. So, what we're starting to see is on a couple of projects that we've started in Q3 and Q4. Once we actually start moving dirt and the subcontractors see the deal is real, they are coming back with more growth in pricing, and we are starting to see some savings on the buyout, whereas a year or two ago, we were scrambling. The number was going up 1% a month. That's definitely not happening. And it is starting to move the other direction, and it's regional. So, it really does depend on the region you're in and how much subcontractor capacity there is. Sorry, we got something going on here. But -- so -- but we do -- we would expect that hard costs in many of the regions that we're looking to start business in over the next year -- or this year, I would take the under on where they're going to be relative to where they would have been, say, Q3, Q4 of last year. And so what we -- we mentioned that our starts are back loaded this year. Some of that is just the natural evolution of these deals. But some of that is actually strategic as well on our part to say we think that we'll have a better shot and it will be a better environment to buy out some of these trades over the summer, once they've kind of felt the pressure of running out of work and starts decelerating pretty dramatically. Ben, just going back a little bit to your comments on the capital recycling side. I'm just curious how significant the volume of assets are on the market within your expansion markets that meet your underwriting criteria from a location quality perspective. And also curious if that 6 to 7-year time frame you outlined to achieve that rotation into the expansion markets, is that just a function of what you can sell in any given year? Yes. Thanks for that, Austin. So, on the transaction side, as I mentioned, we're out in the market with a couple of assets for potential sale. Our transactions team is obviously staying close to the buying side of the market, but we're not currently actively underwriting any particular deals. We do have very detailed market-by-market analytics that are driving which submarkets. We have our close eye on type of product across various price points. So once we're ready to -- and if during this year, we decided to get back into our trading activity, we'll be ready to ramp that activity back up. In terms of your kind of broader question, the time period, we've set the broad target of getting to 25% over the next 6 to 7 years, like we've been making some good inroads over the last couple of years through trading, through our acquisition activity and then increasingly through our development funding program. We're hopeful that, in an environment like this, capital less abundant, maybe some dislocation, that there'll be opportunities for us to step in and potentially accelerate that activity. Our cost of capital, obviously, will need to be there to support that. But we could be in a window later this year where those types of opportunities start to present themselves. Yes. That's helpful. And then, I'm also just curious, with the available dry powder that you have exiting this year, I'm curious what's sort of the most development you'd be comfortable starting in a given year? As you guys highlighted, you do have significant deliveries in 2024, which will accelerate the NOI contribution. And I'm just curious what kind of volume we could see you do maybe as you get into next year and beyond if the environment is sort of appropriate for accelerating starts. Yes. Broad strokes, Austin, I'd guide you, this is not a hard and fast sort of area. But in the range of 10% upper enterprise value that we want to have under construction at a particular period of time, we're light of that today, and that's a reflection of that we have retrenched on development starts over the last couple of years given the operating environment. Yes. We've got the opportunity set that's there. Matt described that. So, we have the pipeline. We control that pipeline at a relatively limited cost. We’re spending a lot of time right now restructuring deals to our benefit because the land market has changed. So, that's there. We've got a phenomenal team, has been doing this a long time. So, an element will be how do we think about the spreads, right, how do we think about -- Matt was talking the kind of rental -- the trend lines on rents relative to the trend line on costs; how we think about maintaining a 100 to 150 basis points of spread to underlying cap rates and our cost of capital. That will -- those would be the signals where we start to lean in more fully. Maybe, Austin, just to add -- this is Kevin here. Obviously, as we talked about in the past, the development activity in terms of what we started is a function typically of three variables: the opportunity set, our organizational capacity and then our funding capacity. And on that last point, our funding capacity, we're probably set up to be able to start and self-fund through free cash flow, asset sales and leveraged EBITDA growth somewhere between $1 billion and $1.5 billion worth of new development a year. And of course, if the equity market is there, we can flex that number up. But that's probably what we sort of aim for somewhere in the $1 billion to $1.5 billion from a funding side, plus whatever we can additionally fund from the equity markets to the extent the opportunity set and the organizational capacity is also there. Potentially, if you can find -- yes, certainly, from a leverage capacity standpoint. We're , as you know, 4.5 times net debt to EBITDA. Our target range is 5 to 6 times. So we certainly have borrowing capacity here to be -- to play offense quite a bit. If we see opportunities in the development side of the house or in the transaction markets, of course, we all just have to look at sort of where the cost of debt is for to fund that activity. And fortunately, we have among the lowest costs of debt capital in the REIT industry. And today, we could probably fund 10-year debt somewhere around 4.7%. So, that would be also a relevant factor as we think about the degree to which we want to lean into our leverage capacity to support additional investment. In terms of your outlook for your Structured Investment Program, are you seeing any deals in the market that are in distress or might be in the need for capital and could be opportunities for you? And then, what gives you confidence on generating returns of 12%? Okay. Yes, sure. So yes, it's Matt here. Are we seeing distress? No, but we're not really in that market, I would say, in the sense that the SIP is really targeted at providing mezz capital, either mezz or preferred equity, for new construction, merchant builders building new apartment communities in our markets. So, we're coming at the beginning of the story when they're putting together the capital stack to build the project. And what we're seeing there is given where interest rates have gone and given what's happened to proceeds, their construction loan proceeds is coming down. So developers are looking to fill that gap where maybe they were getting 60%, 65% construction loan before, now they're only getting 50% or 55%. So, we have seen kind of our investment move from maybe 65% to 85% of that stack down to, call it, 55% to 70% or 75%. And the rate has gone up, and we -- there are deals getting done in that 12% range. There are folks out there looking for short-term bridge money who started jobs two and three years ago and their first -- their construction loans are coming due, and they don't have enough refi proceeds to pay that off and their mezz. So there is a little bit -- I don't know if I call that distress, but there's a little bit of a recapitalization of newly built asset opportunity out there. That is not a market that we have gone to at this point. We're pretty much focused on the new construction side of this. And Chandni, this is -- Matt, just to emphasize sort of the broader market, we do expect our capital through the -- through our SIP to be more attractive to developers this year than it has been over the last couple of years, which inherently then means we're going to have the opportunity to be more selective, right, about quality of the sponsor, amount of capital they're putting in, our views on the underlying real estate. And we're not entering into these SIP deals with the prospect of owning the assets to the end, but we do very detailed underwriting to make sure we're comfortable with the prospect of owning the assets if we need to. Great. And then, as we think about tech layoff headlines, obviously, January was a very big month. We saw a big bump in layoffs in January, and that was significantly higher than November, which, obviously, when you think about the impact of November, December, everybody -- you guys talked about sort of seeing a slowdown. But then you talked about towards the end of January rents accelerated a little bit. So, as we think about the fact that we are only sort of just coming off these headlines that keep hitting our screens every day, this morning we saw from Disney, are you seeing any early signs in your conversations with tenants, be it around move-outs or lease negotiations, of any notices? I mean what gives you confidence that things are in -- sort of on the right path, and we are not looking at things just falling off a cliff? Yes. Chandni, that's a good question. I'm not sure there's a notable answer to it. I can tell you about what we're seeing. But in terms of how it unfolds, I think that's what everybody is trying to understand well. What I would say is just based on the data that we collect from residents as it relates to relocation, rent increase, et cetera, et cetera, we're not seeing anything that's material at this point that would indicate that there is a significant issue underlying the economy and some of the tech markets. So, relocation has actually come down in terms of reason for move-out. Rent increase is up a little bit. But not surprising, rents have gone up quite a bit over the last 12 to 14 months. So, I don't think those are indicators that are surprise to us, and there's nothing yet in the data that would tell us that there's a significant underlying issue. Now the question, I think, that a lot of people have is severance, unemployment, et cetera, et cetera, is that sort of supporting people for a period of time. And they are, in fact, transitioning into new roles into other organizations. And there's a little bit of this sort of rotational effect from maybe some of the tech companies that took on more employees that they needed to during the pandemic and now they're rotating into other organizations, more mainstream corporate America. It's hard to tell all that, but we're not seeing anything specifically in the data, and we're not hearing a lot anecdotally from our teams on the ground saying that there is a significant issue there. I was in San Jose last week speaking to our teams, targeted people on the ground. And they're just not seeing it yet. The sandbox and the headlines are there in terms of layoffs, but it's not showing up in terms of the front door yet. So we're being proactive in some of those markets in terms of how we're thinking about extending lease duration, how we look at lease termination fees and other things to hedge a little bit. But thus far, it's not showing up in the data. I just wanted to ask about the same-store expense guide. I think I really appreciate kind of the deck overall but I think specifically that slide in the deck kind of breaking out the different components. Specifically on the tax abatement, just wondering kind of -- if that's a onetimer or if that's kind of going to repeat in future years, and again, just trying to figure out what is kind of the proper recurring run rate kind of same-store expense number to kind of use as a proxy. Yes. Adam, good question. And what I can tell you, because if things do change in terms of the assets that we have in the portfolio, what we trade and sell a lot of , et cetera, et cetera. But for the assets that are contributing to the phaseout of the tax abatements in our '23 same-store bucket, one does phase out by the end of 2023, two phase out by the end of 2024 and then the other four extend out another two or three years. So, you're going to see a little lumpiness over the next few years as some assets slowly drop out of that phaseout. Now, as I mentioned, there are some benefits we get along the way in terms of an incremental fee each year of the phaseout. And then, ultimately, in what people would consider as New York as a pretty challenging market from a regulatory standpoint. Eventually, we just get off that program at the end of the phaseout. And there should be a nice -- a pretty nice lift there in terms of rents. So, that's sort of the way to think about it a little bit. I can't give precise sort of guidance as to what to expect for years beyond 2024 in terms of what the headwind might be from that activity, but there will be some kind of headwind for the next few years. That's really helpful. Thank you. And then just a follow-up, thinking through the expansion markets, recognizing potentially better job growth there. I think that makes a lot of sense. But just thinking about the supply -- the supply side of things, right, and look, I think it's kind of well publicized that some of the expansion markets, Sunbelt broadly, just the elevated supply, call it, maybe for the next 12 months or so. How are you guys thinking through that? Is that kind of just weather the supply storm and probably less supply on the other side, given financing challenges today for kind of development starting today for others out there, or is it maybe the supply thing is overblown? And actually, the next 12 months is not going to have as much supply as maybe people think? Yes. Let me handle it big picture and others can add on. The first comment I'd make, our portfolio allocation objectives, these are long-term objectives, right? We're setting these because we think they're the appropriate allocation to have over the next 20 to 30 years, right, not necessarily based on the supply and demand dynamics out of the next couple of years. With that said, we do expect the next couple of years and potentially with some reversion to the mean on the rent side and the high levels of supply could lead to more muted growth in some of these high-growth markets. We're fortunate we don't have any new deliveries. We have very limited deliveries coming on line over the next couple of years. So most of our activity that you hear us talking about, including our own development, which we're now starting, and our developer funding program, those are projects that are going to be coming on line in 2025, 2026, which currently looks like could be some lighter years from a supply perspective. Yes. I'd just add one other thing to that, which is we are conscious of submarket selection as well as market selection as we build the portfolio in these markets. So, if you look -- and I would point you to Denver portfolio is a good example. It's been a great market. Our portfolio, I think, has done even better than the market. And if you look at where we bought assets, it's mostly been suburban garden assets in jurisdictions where it is more supply-constrained. There's a lot of supply in Denver, but the vast majority of it is within the city of Denver proper. And we have not bought an asset in Denver. We completed one lease-up development deal there in Rhino last year, and we have another one under construction, but we're balancing that out with a suburban heavy acquisition strategy. Thank you. Thanks for all the color and additional disclosure on uncollectible lease revenue. It did strike us a surprisingly high in New York and Southeast Florida. And I was wondering if you can comment on that. Is this due to affordability? And could you see this potentially remaining high, just given what's happening in the economy? Yes. John, it's Sean. Yes, New York certainly has been high in certain pockets. Even pre-pandemic, places like Long Island took forever to get through the court process. So, that's not necessarily a significant surprise. And as you might imagine, the environment is relatively pro resident friendly. And so any opportunity as they get to sort of kick the can down the road through the court system, we've generally seen that happen over the last 12 to 14 months. As I mentioned earlier, I think a lot of that is slowly coming to an end, and things are opening up, but it is moving slowly. And you basically have the same phenomenon happening in Florida. Things are moving along. Obviously, it's not as kind of "pro tenant-friendly" is a place like New York by any stretch. But, courts are back up as a lot of cases that have just been on the docket for months and months, and it's taking time for things to move through the system at this point in time, just much longer than average. So, in terms of is there a particular reason in Florida, I wouldn't say necessarily that's the case. It's a market that has had higher bad debt historically. So, we're not necessarily surprised by that. And John, from an overall portfolio perspective, I know you know this, but just for the broader audience, I mean pre-pandemic, right, our traditional bad debt number was in the 50 to 75 basis-point range. So, still a significant runway from the types of figures we're assuming for this year over the next couple of years. It may take a while, given Sean's comments, but we're hopeful we'll be headed in the right direction. Okay. My second question is on page 11 of your presentation. You show the NOI contribution from development completions, which is very helpful. I'm just curious why you estimate that '23 NOI will be about half of last year's. Just given if you look at the first half of this year's deliveries versus the first half of last year, it looks about the same. Yes. John, this is Kevin. I'll take a crack at this. Others may want to chime in. And essentially, as you build out the model for forecasting, NOI from communities undergoing lease-up, obviously, you have to start with when we began to put shovels in the ground. And as I mentioned in my opening remarks, we did start to ramp back up in 2021. And usually, most developments take 8 to 10 quarters to complete, and then that results in deliveries, and then that then thereafter results in occupancies, which is where you start to see revenue growth. So, there is a little bit of a lag when you play this out. So, this is -- the bar charts here on slide 11 in our deck are not meant to be a coincident proxy for when we expect NOI to ramp. Rather, it's showing deliveries when they ramp. And so therefore, you'll have to have occupancy that follows that an NOI that follows that. So, it tends to create a lag effect as you move it through the P&L. I'm sure the next question will be earn in on deliveries from last year, but I'll save that for a later call. Thank you. Just had two quick questions on the transaction market side. Matt, in regards to the asset sale commentary being out of the Northeast corridor as well as California, when you think about dispositions in California, are they wholly owned dispositions, or would you look to enter into a joint venture for property tax reasons on the West Coast? It's a good question, Alan. We have -- so far, the only partial interest sale we've done was the New York JV that we did back in late 2018. So, the disposal we've done out of California, and there haven't been a lot over the last couple of years of wholly owned disposed, were just fee simple. We have talked about that that obviously, if you sell a 49% interest, you don't suffer the prop 13 reset. The prop 13 overhang or reset was probably a lot larger. Last year, at this time when you think about where asset values were than where they are today. There's been some correction there. So the spread isn't quite as wide as it was. But that is something that we have talked about that we might consider at some point. And then, I'm curious whether you're starting to see a portfolio of premiums -- potentially swing to portfolio discounts with the financing markets becoming a little bit more challenging and whether acquisitions start becoming more attractive to the AVB team there? Yes. I would say there -- the portfolio discount today is 100%, right? Just their own portfolio is transacting today, for the most part, because the debt markets. So -- and what we are seeing is, in general, right now, what's transacting are deals with assumable debt or deals of modest deal size, $100 million or $150 million or less. So, you're right, a year or two ago, the efficiency -- debt was so cheap and the efficiency of being able to buy a large portfolio put a lot of debt on that all at once. That's gone into reverse. I think the expectation is, as the debt markets stabilize, you will start to see some more sizable asset sales come to market later in the year. That's kind of what everybody's waiting for. I know there was a lot of talk at NMHC about, are you going to go, are you going to go. So -- but yes, I would say that I would certainly expect that this year a much higher percentage of the total transaction volume will be one-offs as opposed to portfolios. So, back to slide 11. Can you -- I got what you said about timing to John's question, but the kind of trend upwards in deliveries, does that inform us at all about what you're thinking about in terms of the overall macro environment, the economy and potential recession? I assume you prefer to deliver into strength. So, can you comment at all on this image and what you're thinking broadly about what the overall landscape will look like by the time 2024 rolls around? Yes. Hey Rich, this is Kevin. I'll start here. Others may want to join. So, in terms of slide 11, just to sort of recap, it shows the timing of apartment deliveries from completing development over '22 through '24. And that is really a lagged effect of what happened 8 to 10 quarters previously. And if you kind of just step back and look at the last few years for us and tie it with a comment that I made in Austin's earlier question about kind of our typical start capacity, as you know, we typically try to start somewhere in the $1 billion to $1.5 billion range. If you look over the last three years, on average, I think we started about $700 million or $800 million when you include the $200 million or so in 2020 and $1.7 billion or so last year. So it's been below trend level of starts over the last few years, which with the lag is created in the last year or so and then probably for maybe the better part of the next year, a little bit of a below average trend NOI realization from the lease-up portfolio. So that's just sort of how mechanics work. In terms of your question about what does this say, I think really, our lower levels of starts is more reflective of the volatility and the uncertainty of the environment over the last few years when we were looking to start jobs. As we look at where we are today, certainly, the Company is in a terrific financial position to start not just the $875 million that we have in the plan for this year, which, as an aside, is a below average level of starts generally. But we are in a position to start a whole lot more, not only because our lower level of leverage today, which gives us debt capacity. So, we are looking to lean in and increase development starts in the next two years if the environment is broadly accommodative of our doing so and is a reasonably stable environment from a capital markets perspective and a macroeconomic perspective with respect to the likelihood for realizing decent NOI growth. So, that is kind of our general look at the macro environment, and our capacity is there to sort of ramp things up as we want to do so. As things stand in terms of what's already underway, we are well positioned just on the $2.2 billion of development under construction that's essentially paid for to deliver robust NOI growth irrespective of what we start in the next year or two. So I don't know, Matt, if you want to add. Yes. Rich, just to clarify, those deliveries, the way they show, that die is already cast. So, they'll deliver into the market that it is at that time. We're not smart enough to say, yes, we deliberately plan to have fewer deliveries in '23 because we thought there might be a recession two years ago, just playing out that way because we had less start activity a couple of years ago, as Kevin said. But, those are all underway, and we'll take those deliveries as soon as we can get them. Okay. Fair enough. And the second question is on the developer funding program. Can you talk about the economics of that relative to everything being done in-house, assuming a fee paid to the third-party developer and all the different moving parts there? And if this program is sort of like a stepping stone for you to get into these markets more efficiently in that over the course of time, you kind of would revert back to the more conventional approach to development longer term. Is that the way to think about it? Yes. Rich, this is Matt. I can respond to that, Ben may want to as well. The way we think about that program is the returns are somewhere between a development and an acquisition because the risk is somewhere between a development and an acquisition. So, the developer is taking the pursuit cost risk, the construction risk, we're taking the lease-up and the capital risk. And so, the yields on that are a little bit less than an AVB straight-up development because we are paying fees and then there's an earnout based on how the deal does. But we think it's a good risk-adjusted return. And I guess, it does two things for us. One, it accelerates our investment activity in the expansion regions because it does take time to get the teams on the ground as -- and we're further along in some markets than others. Where we're doing the DFP so far has been more like say, North Carolina, where we just started there a year or two ago, not so much in Denver where we've been there for five years already. But we also view it as a supplement to our own development activity in the sense that it's a dial -- we can dial up or down more quickly and more opportunistically in response to market conditions and our own cost of capital. So, even when we are fully established in these expansion regions, it may well be an additional line of business for us, but it may be a line of business for us that we're more nimble in terms of turning it up and down than our own development. No, it's well put. And the last piece I'd add, we definitely also see synergies within a market. Being able to talk with third-party developers could be something they've just completed and they're looking to sell. It could be a deal they're wanting to develop, need a piece of capital, right, and/or places where they need a fuller capital stack and we have an interest in owning that asset long term. So, that also helps the kind of flywheel accelerate in these expansion markets. Can you talk a little bit about the GAAP and performance trends for your suburban portfolio relative to the urban? And then kind of connected to that, there's a chart that says suburban supply growth is 1.2%, while urban supply growth is 1.8%. How does that compare with historical norms? Yes. So, good questions. As it relates to performance in terms of suburban versus urban as an example, certainly, urban, as we move through the pandemic, took the greatest hit. So, as we've continued to recover from that, we have seen stronger growth to date in terms of our urban assets, but they are recovering, to keep in mind. To give you an example like, in Q4, rent change was a blended 5%. It's about 4.5% in our suburban portfolio but just north of 6% in the urban portfolio. And I think, yes, that's a function of the decline and people coming back to the office slowly and steadily in various urban environments. As it relates to the urban/suburban supply mix, suburban submarkets within our regions have always been difficult in terms of development, more nimbyism, local jurisdictions concerned about impacting school districts, et cetera, et cetera. It's always been challenging. Coming out of the GFC, there was a little more of a renaissance in terms of the urban environment and all of a sudden economics for urban development made good sense, and there was demand there in terms of millennials flocking to urban environments. So, that's why you saw a significant pickup in urban supply over the course of the last cycle. As you look at it today and where we are, from a development standpoint, almost everything we're doing right now is suburban. But given some things that are happening in the urban environments, there will likely be, at some point in time, opportunities to play urban development. Supply is -- right now, if you look at it from an economic standpoint, there's not much of anything that makes sense in an urban environment. So things may overcorrect there, in some cases, and there will be opportunities for us to play there. But the demographic way that sort of supported that is moving on at this point. So, we'll probably be more selective than we were in the last cycle in terms of urban development opportunities. That's very helpful. And as a follow-up, you started a Kanso project in the quarter. How do construction costs per unit differ for this type of development relative to a fully amenitized development? How do the rents compare? So essentially, how does the yields compare? And how has the resident reception been to the Kanso development? Is that a product that will more likely to pencil in maybe just a less certain macro economy? Thank you. Yes, sure. This is Matt. I can speak to that one a little bit. We only have a little bit of it out there. The customer reception has been strong. And the brand really started with customer research insights that there are a lot of customers out there who want a nice new apartment and don't -- we're overserving as an industry today that don't value necessarily all the on-site service, don't value all the amenities and the other pieces of the offering that an Avalon provides and a lot of our competitors provide. So our goal is to be able to bring that offering in at a rent that is 10% to 15% below the rent of a new fully amenitized Avalon or comparable in the same submarket in the same type of location. I think, so far, the little we've done would suggest that the discount might actually be a little bit less than that. It might be more like 7% or 8%. And the costs, there's really -- there's savings in the upfront capital cost because you're not building a pool, you're not building a fitness center, et cetera. And then there's also savings in the ongoing operating expenses because you're not operating and cleaning those spaces and then, ultimately, in CapEx because you're not remerchandising those spaces. The upfront hard cost savings, it's not -- I mean, we might typically spend 7,000 to 10,000 a unit on amenities at a community at a new build, maybe a little bit more than that. So, you're saving most of that. And then on the operating expense side, the savings is at least a couple of thousand a door in controllable OpEx. So actually, the yield winds up being about the same, but it serves a different customer, and it kind of gets us further down the pricing pyramid. So, it expands the market. So, two quick ones. First, initially on the DP, [ph] I think in response to of the questions, you said that your intent wasn’t to own the deal at the end but then in a subsequent question you referenced, it's a good way to accelerate into the market. So maybe I misheard or maybe it's just a way of how you look at deals in different markets, maybe they’re markets that you're looking to more grow in, use DP to actually own the deals versus other markets where it's more of just an investment because you already have an establishment. So I just want to get some clarity. Yes. Alex, it's Matt. I think you're referring to -- we really have two different programs. The DFP, the Developer Funding Program, those are assets that we own really from the beginning. We fund the construction and those we’re taking into our portfolio, day one. The SIP, the Structured Investment Program, that's the mezz lending program. Those are the assets that were -- that's really about generating earnings and leveraging our capabilities, and that's the program Ben was referring to where we do not expect to own those assets, although we're prepared to if we need to. So what's the difference -- I mean, because you guys are pretty thorough in your underwriting and your -- and how you pick deals. Why have two different buckets? It would seem like basically, it's sort of the same bucket you're picking assets that you'd want to own. So why the difference between the 2? It's a very different investment profile. The SIP we're lending 20 to $30 million for three years, call it at 11% or 12% and then we're getting paid back. And we're actually focused on doing that in our established regions, where we're not necessarily looking from a portfolio allocation point of view to grow the portfolio, but we have the construction and development expertise to underwrite it and to understand what it takes to do that kind of lending. The DFP is very similar to the way we would underwrite development or an acquisition that we expect to own for the long term. And that's 100% focused on the expansion regions. Okay. Second question is on the Avalon Connect and the launching of Wi-Fi and other connectivity, obviously, we're all familiar with what the White House said and extra fees, having the regulators look at fees, et cetera, whether it's hotels or apartments, et cetera. Obviously, you guys feel pretty comfortable with what -- these programs. But do you feel like the regulators are going to look harder at these type of additional fees, or your view is that there's already regulation covering this stuff and so it's already sort of covered under existing regulations? Yes. Alex, this is Sean. Happy to take that one, and a good question. What I would say is two things. One is it's hard to know exactly where regulators might go in terms of what they're looking for. But, this has been addressed by the FTC a couple of different times, including last year, in terms of what's appropriate, what's inappropriate with telecom providers and people that are providing this kind of service. So, at least now, I think it has been addressed. That doesn't mean something might not change in the future, but I think we all have sort of a playing field that we feel comfortable with, has been blessed by the regulators. And we're all moving forward under that particular regime, I guess, is the way I'd describe it. I wanted to touch base on that Avalon Connect and furnished housing same-store expenses. I like what you broke out on page 15. How should we think about the associated same-store revenue from those programs? Yes. No, good question. Based on -- and I mentioned this in my prepared remarks as it relates to other rental revenue growth. But if you look at it overall, for 2023, on an incremental basis, roughly 60 basis points or so of our revenue growth is associated with those various initiatives that I identified. Okay. Yes, that makes sense. For the Avalon Connect and furnished housing, are those kind of onetime bumps to same-store expenses, or is that something that kind of carries through on a go-forward basis and you have offsetting same-store revenue growth as well? Yes. No, good question. I mean, the expectation right now is that for both Avalon Connect and furnished housing, and also even on the labor side as well, is that we're going to continue to see additional enhancements to those programs over the next couple of years. So, you'll probably see them stabilize around 20, 25 or so. And at a high level, the way I think about it is our expectation is that these programs overall will probably contribute about $50 million of incremental NOI to the portfolio, of which, if you -- without getting into the detail on the accounting, about $18 million is projected to flow through the P&L for 2023. So, we're about 35% of the way there. There's still a lot to come, but you will see some pressure on OpEx for the next two years, specifically for furnished and Avalon Connect until it stabilizes. But again, it's a highly profitable activity that is contributing meaningfully to earnings over the next couple of years when you look at it in aggregate. I'm on for Tayo today. Just one question. I know your portfolio strategy is to invest in the expansion regions. But just wondering if the rent control and the regulatory, I guess, noise has contributed to any strategic changes in how AVB is thinking about portfolio construction going forward. Thank you. Yes. Thanks, Sam. Short answer is when we arrived at our portfolio allocation decisions a couple of years ago, it incorporated in the prospect of the regulatory environment. And so, it continues to be a motivator on why we want to get our exposure in the expansion markets at a minimum for diversification as it relates to various regulatory dynamics. I guess sticking with rent control, I mean, have you factored in at all any changes in your '23 guidance? And where do you see the most risk, whether at the municipal level or state level? Hey Jamie, this is Sean. That is probably a very long answer. What I would say is that, obviously, housing affordability is a significant issue in the country, mainly as a result of just the lack of new supply. So, we continue -- us, our peers in the industry and the industry associations educate both federal, state and local governments about what will work in terms of trying to ease some of the issues that they are hearing about from the electorate. So, it's going to take continued efforts to make sure that people understand it. In terms of what might happen in 2023 that's purely speculative at this point, and wouldn't be appropriate for us to necessarily go there. And then, if I heard your discussion right, it sounds like you've got the $600 million of unsecured, you plan to take those out and replace with $400 million of new unsecured. Is there a price point -- I mean, we'll probably see some volatility here on rates and pricing. I mean, is there a price point at which you have to think about other sources than new $400 million, or maybe a comment on what do you think of pricing today or where it may head? Yes. I mean I guess, Jamie, at some level, when you've put together a capital plan, you always have that debate about what your uses are and then how -- what's the most efficient source of capital to address those uses. And I think the budget we have today reflects a view that raising that $400 million primarily through the issuance of additional unsecured debt is today and is likely going to be the most cost-effective source of capital for us. Certainly, there could be other sources that might arise, but basically, our choices are relatively straightforward. It's asset sales or common equity, and common equity is unattractively priced today. Asset sales could be a potential source. But as we've just discussed, there's less transparency and liquidity around pricing in that market. So, that's why we ended up with unsecured choice as our likely expected choice. And so, that's -- we've got some time and room to figure that out, and we've got abundant liquidity with potentially nothing drawn on our $2.25 billion line of credit that gives us abundant time and room to figure out what the right source of capital is to take that maturity out. Well, the $600 million is -- it consists of two pieces of debt, $250 million in March and then $350 million in December. And so, their bond offering, that typically can't be prepaid materially before they are due, absent some yield maintenance payment. So, it's just part of our business that, as an unsecured borrower, we typically have $600 million to $700 million of debt coming due in any given year. This is a typical year for AvalonBay. So, it's not a particular concern. It's just part of the business of financing our company, and we typically have two pieces of debt that usually total about $600 million. So, kind of a regular way year from our standpoint where we got the first part coming in March and the second one in December. All right. Thank you. Thank you for joining us today. And we look forward to visiting with you in person over the coming months. 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_199

Good day, ladies and gentlemen and welcome to the Lantronix, Inc. 2023 Q2 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Adams, Investor Relations. Please go ahead, sir. Thank you. Good afternoon, everyone. Thank you for joining the second quarter fiscal 2023 conference call. Joining us on the call today are Paul Pickle, President and Chief Executive Officer; and Jeremy Whitaker, our Chief Financial Officer. A live and archived webcast of today’s call will be available on the company’s website. In addition, you can find the call and details for the phone replay in today’s earnings release. During this call, management may make forward-looking statements, which involve risks, uncertainties that could cause our results to differ materially from management’s current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release which was furnished to the SEC today and is available on our website and it is also in the company’s SEC filings such as its 10-K and its 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Please refer to the news release and the financial information in the Investor Relations section of our website for additional details that will supplement management’s commentary. Furthermore, during the call, the company will discuss some non-GAAP financial measures. Today’s earnings release which is posted in the Investor Relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use. Thank you, Rob and welcome to everyone joining us for this afternoon’s call. I am going to provide the financial results as well as some of the business highlights for our second quarter of fiscal 2023 before I hand it over to Paul for his commentary. For the second quarter of fiscal 2023, we reported revenue of $31.5 million compared to $33.7 million for the second quarter of fiscal 2022. Sequentially, revenue was down 1%. GAAP gross margin was 44% for the second quarter of fiscal 2023 which is consistent with the prior quarter and about a 900 basis point improvement from the year ago quarter. Selling, general and administrative expenses for the second quarter of fiscal 2023 were $9.8 million compared with $8.9 million for the second quarter of fiscal 2022 and $9.2 million for the first quarter of fiscal 2023. Research and development expenses for the second quarter of fiscal 2023 were $5.1 million, compared with $4.3 million for the second quarter of fiscal 2022 and $4.5 million for the first quarter of fiscal 2023. The year-on-year increases in SG&A and R&D were largely driven by headcount we assumed in the September 2022 acquisition of Uplogix. GAAP net loss was $2.6 million or $0.07 per share during the second quarter of fiscal 2023 compared to a GAAP net loss of $2.4 million or $0.08 per share during the second quarter of fiscal 2022. Non-GAAP net income was $1.4 million or $0.04 per share during the second quarter of fiscal 2023 compared to non-GAAP net income of $3.3 million or $0.10 per share during the second quarter of fiscal 2022. Now turning to the balance sheet, we ended the December 2022 quarter with cash and cash equivalents of $6.8 million as compared to $13.1 million in the prior quarter. With our recently announced contract, we expect to receive aggregate prepayments of $20 million during the next 6 months. Working capital was $50.6 million as of December 31, 2022, as compared with $54.5 million as of June 30, 2022. Net inventories were $49.2 million as of December 31, 2022, compared with $37.7 million as of June 30, 2022. The increase was primarily due to the purchase of components to support the recently announced contract, which is expected to ramp during fiscal 2024. Now turning to our annual outlook. For fiscal 2023, we are targeting revenue of $135 million to $145 million and non-GAAP EPS in a range of $0.27 to $0.33 per share. Thank you, Jeremy. We continue to make progress in transforming Lantronix in Q2 and after finalizing the largest contract in the history of the company, which we announced two weeks ago, the pieces are falling into place. For those who didn’t see the announcement subsequent to the close of the December quarter, Lantronix finalized the largest contract in its history, a $40 million smart grid compute platform utilized by one of the world’s leading energy distributors. We expect to ship against the contract substantially over the course of fiscal 2024. This contract validates our capabilities and is but one that provides substantial visibility into our fiscal 2024 growth prospects. Against the backdrop of continued supply chain easing, executing on delivery of the product will accelerate us towards our intermediate goal of $250 million in annual revenue. The opportunity pipeline in excess of $200 million, we are at capacity with our current resources and our longer-term outlook is looking bright. Looking for more immediately at Q3 and Q4, a while our Lantronix classic business has normalized after a strong run post COVID, we are bolstered by a backlog that remains just off all-time highs, a slowly improving supply chain and a decidedly lean inventory channel, implying a return to growth. With that, let’s turn our focus now to December results. In our fiscal second quarter, embedded IoT Solutions totaled $13.7 million, down 9% sequentially and 12% year-over-year, representing 43% of total revenues. The decline in revenues was largely driven by our embedded Ethernet and WiFi solutions where demand was healthy, but supply disruptions continue to gate our ability to shift to customer demand. On the positive side, compute revenues grew nicely quarter-over-quarter. Security and surveillance compute revenues were steady. Enterprise revenues were up and automotive began to contribute. In terms of outlook, we currently see embedded systems strengthening throughout the remainder of the year, driven largely by our compute products with some contribution expected from Ethernet and WiFi supply chain limitations eased. Shipments to electric vehicle customer to continue according to plan, and the factory in Turkey was reportedly unaffected by the recent earthquake in the country. Turning to Systems Solutions, revenues here totaled $14.9 million or approximately 47% of revenues, up 2% sequentially though down 9% year-over-year. Within System Solutions, switches remained a strong contributor, and we continue to see a good funnel of activity that bodes well for the remainder of the year. Remote environment management or REM products also grew in the December quarter thanks in part to the acquisition of Uplogix in mid-September. While we continue to see a good funnel of activity for REM, we have seen weakness in the financial sector resulting in push out of proof of concepts. Also within IoT systems, routers, gateways and trackers were up nicely in the December quarter as we were able to catch up on some opportunities as supply came in. For the remainder of fiscal 2023, we expect to see continued growth led by switches of rebounded in remote management solutions and continued strength in routers, gateways and trackers. Looking at software and services. Revenues in Q2 were approximately $2.9 million, up 41% sequentially and 71% year-over-year. We continue to make progress in selling high-margin recurring revenue with some additional contribution coming from our recent acquisition. ARR from software and services at the end of December quarter totaled just over $5.2 million. In summary, we look forward to a resumption of growth for the remainder of the fiscal year, thanks to solid bookings, a backlog that remains near record highs a strong opportunity funnel and a slowly improving supply chain. While there is still much to focus on for the remainder of the fiscal year, we can’t help but anticipate our fiscal 2024 as we shift to the largest customer contract in history, we have excellent visibility into solid revenue growth and fast-growing funnel with opportunities to keep the ball rolling. Hi, good afternoon. Thanks for taking my questions. Paul, really appreciate hearing a lot of the color and the breakdown of the different business units. Maybe to dive in on the Gridspertise contract that was announced. I was wondering if you could provide a little bit more color in terms of how we should expect that to ramp up? Is that going to extend into fiscal ‘25? And kind of I think this was supposed to be the first phase of that relationship. What do you see color the horizon there as well? And then I’ve got a couple of follow-ups. Yes. I think we have a schedule in the contract that we have, and we have a target by the customer. This should come out of the gate in our Q1 fiscal Q1 quite strong and ramping quite nicely into the December quarter. In terms of follow-on engagement, we are at this point, talking about additional SKUs. And certainly, this is just the first step and the fulfillment of what we’ve been developing over the past couple of years with them. And they have done a phenomenal job bringing this product to market. The market is quite excited. That’s part of the reason for the delay. In fact, as they launch a product, they have been getting a lot of feedback from the DSOs out there, the customers that would use this, and it’s prompted some SKU changes, feature changes that we’ve now shifted direction and started focusing on. So we’ve got a firm product launch at this point, certainly anticipate that this is just the first bit of success that we will have here, and this will certainly take us beyond 2024. Perfect. And Paul, just to emphasize, I think what you just said is that you’ve got firm ship dates here, right? So you’ve got very, very good visibility to fiscal ‘24 at this point. And I think in your opening monologue, you said that this was one contract that provide some visibility. I was wondering if you could give us some details or maybe a little bit more color in terms of what else is giving you comfort as we’re looking into fiscal ‘24. Yes. We have – we really have quite a large pipeline of opportunities. Some of these opportunities we work on for 1.5 years, 2 years before they fulfilled at this point, we’ve been working on quite a few. Not to get into specifics until we’re ready to announce them, but there is quite a few new opportunities in automotive, especially EV platforms. We’ve been doing – we’re taking the success that we experienced at Tag and are parlaying that into other vehicle platforms. Out of band, we’ve been working on some POCs with some new product definition. We’ve got some new SKUs coming out with our recent acquisition on a new technology platform. With a new software tool that we’re deploying. So that’s quite promising. Not quite the needle mover that a Gridspertise would be but certainly up there. And then smart city engagement, still probably early innings, but there is been a couple of discussions on some IoT applications in smart cities that are right up our alley. It’s a little bit of a take off of what we did for the smart grid applications, compute platform along with some distributed IoT devices to help in the management in large municipalities. So – that one is like an 8-digit opportunity over the life of the program. It’s still early innings. We’ve got a lot of work to do there, but it’s nice to be engaged in opportunities that are this large. If I were to reflect on 3 years ago, we didn’t have anything like this in our pipeline. Perfect. And if I could just then shift over to supply chain and then I’ll get back in the queue. But your inventories are up. It sounds like part of that is related to preparation for Gridspertise. But I’m wondering if you could talk about some of the other aspects in terms of how the supply chain is going. It sounds like you’re continuing to see issues on the WiFi front. And what you’re seeing in terms of your customers, it sounds like the channel for your customers that you’re selling is pretty lean at this point in time, so you expect sort of a recovery as we’re going into March and June here. So I wonder if you could give us the kind of holistic view of what you’re seeing in terms of coming in the door and what your customers have on their premise and how we should expect things to ramp over the next couple of quarters? Yes, that’s a great question. I don’t think it’s dissimilar to what you might see if you were paying a couple of CMs or other suppliers. Everybody’s turns have kind of worsened and it’s really an artifact of orders being placed, the demand being there and the supply chain is starting to ease, we can collect probably 95% of the BOM or even as high as 99% of the BOM, but there is one or two problem components that prevent you from going to manufacturing building and then getting that inventory brought down. So if I were to take out a new, that’s kind of a special case, we’re going to receive some prepayments for those components. We acquired a bit of inventory with the Uplogix. So we saw a little bit of a jump in the inventory numbers associated with acquired inventory if I dismiss all that and just look at the rest, if we really do have one or two problematic components that are preventing us from really turning that inventory into sales and thus cash. So Cypress was a bit of a difficult one from a chipset standpoint that slowed down our WiFi shipments. We saw some improvements that came in and had some slightly better shipments of chipsets in December. That allowed us to turn that revenue in this quarter. It’s getting better, but having said that, we still have some problematic components here and there. Some of the critical ones are still 36 all the way up to 52 weeks. But for the most part, supply chain is getting a lot better. In terms of channel inventory, we saw this quarter, I think it’s a little bit of hesitancy in terms of what people think the market might be doing. But as we look at the POS out of the channel versus what we sold into the channel, there was quite a bit of disparity, a lot more product exited the channel. And so it came down about 2 weeks of channel inventory. It’s really good, healthy numbers. So at some point, they are going to have to re-up. Perfect. And I apologize, I got one more follow-up. On the $20 million prepayment, nice to see that, that’s going to kind of make the balance sheet look a lot better. But I expect that your inventory levels are going to start to work down as well. So we should start to see a little bit of a reversal of working capital here over the next couple of quarters to help out on the cash portion of the balance sheet? Thanks. So that money, that prepayment coming in, it will be on the balance sheet as a deposit it won’t offset inventory. So you won’t see those turn quickly. I think we will make marginal improvements, but expect inventory to get better over the next three quarters or so. Do you want to give any color on that, Jeremy? Yes. As Paul mentioned, it will be a customer deposit liability and then we will lead that liability off as we ship against the orders from Gridspertise. And then also the turn kind of also dictate when we will build a bit of inventory and then that will obviously come off the books when we ultimately ship it to them. Great. Thanks for taking my question. And congratulations on getting the Gridspertise deal signed. Just following up on Scott’s questions, can you update us, you’ve shared in the past, just given some of those troubled components, customer-requested product that you couldn’t deliver in the quarter due to the couple of those components you couldn’t quite get? Yes. And so WiFi was a big portion of it. We started to have – we have some problematic components in terms of the ASIC, just waiting for process on a foundry. WiFi is the biggest one of biggest product line that we have a backlog that’s associated with new blocks GNSS, some cellular modems, cellular chipsets, also WiFi cards that we incorporate, subassemblies that we incorporate into our systems business is doing a little bit better. So if I were to look at the suppliers of those problematic components, it does – it’s still mixed signal RF analog mixed signal, I should say, TI is still – we’re still having some issues associated with those, ADI and the like. It’s the same culprits, if you will. Okay. Great. And then just on the Gridspertise contract, it sounds like you expect to ship most of that $40 million in fiscal ‘24. But when you’re working with them, do you think you’ll have follow-on orders to keep growing or keep at least flat levels in the future years? So this is – so the answer to that is just a straightforward yes. And just to give you an idea of the scope of the program, so Gridspertise is a subsidiary that’s now partially owned by Enel. A PE firm purchased roughly a 50% consideration valued at $1 billion. And this is the flagship product for them. So if you look at Enel’s consumption they are talking about 1.2 million substations, approximately 40% of those would use a device like this. And then there are other markets rather than just captive usage. So, they would like to get to a run rate of roughly 100,000 a year. I think it’s safe to say that we wouldn’t participate in all of that business. And eventually, over time, it will take a little bit different shape for us. There is a recurring component of it for us and we are really in the very early innings of this product launch. So, we are pretty excited to see what happens after this. And yes, this contract, we definitely anticipate that we will be fulfilling the bulk of this in FY ‘24 and there could be some upside to that, but certainly we would anticipate some FY ‘25 contribution as well. Great. That’s helpful. Last question for me. I will jump in the queue. Can you update us just on Tag and how that opportunity is going and some of these other car opportunities you talked about in EV, are they similar size or even bigger than the Tag opportunity? Yes. So, Tag is going really well. We shipped in December, and we are shipping this quarter as well. Things are moving along as planned. They had their factory opening on October 29th. That program went off without a hitch. We are still in development mode on that platform. We are still implementing software features. We have not finalized the firmware image yet, but we are we are holding. It’s not daily meetings, meetings at least twice a week, tracking the progress and integrating our hardware and software into the total vehicle platform. It’s going rather well, but we are at a breakneck pace, nose down, head down, I should say, at the moment. In terms of follow-on opportunities, what’s been interesting is I think, with the EV revolution, you are starting to see a lot more players out there and a platform that’s starting to standardize. So, the hardware that we developed for Tag, for instance, is Lantronix IP. We do get to go out there and resell that. The ASIL certifications that we got on the hardware, we will attempt to sell across a broad market, sell license across a broader market. And it has really opened up other automotive opportunities. So, I could name a few half a dozen at the moment, but it’s still a little bit early for us in terms of those engagements. And so we are going to continue to work on those, let them incubate and we will announce those at a later date. But this should be a nice space for us. I think it’s a market that we can exploit without having to become a full-blown automotive supplier with all the infrastructure that’s necessary there for a number of reasons on a partner front. So, expect us to give more details as the automotive platforms continue to mature. Hi. Good afternoon. Thanks for the question opportunity. So, with this upsizing on the Gridspertise deal, how should we think about gross margin puts and takes for ‘24, with the upside, is there a little margin pressure there that we should factor in? Not at this moment. When we kind of look at the business on an aggregate basis, we still feel comfortable with the mid-40s margin through this year. And then I would anticipate as we would continue to grow our ARR at this point, just over $5 million. And just as a reminder, when we talk about recurring revenue, we are talking about 85% plus gross margin revenue. As we grow that number, continue to grow it, we would expect it to offset any scale that might come with a particular opportunity. But this opportunity, in particular, with Gridspertise, we don’t expect it to be margin dilutive to the corporate number, and we expect to be able to offset that with other high-margin areas and hopefully make some improvements in gross margins as we look at FY ‘24. Got it. That’s super helpful, Paul. And on the go-to-market side, it sounds like the companies reoriented a bit around chasing some of these longer – bigger deals and longer sales cycles, I am sure. Can you reflect on any changes you have made either geographically or the types of channels you use to go after these larger deals, and how to fix, how you think about your go-to-market strategy? Yes. It’s been a wholesale overhaul. If I compare against 3 years ago, we roughly had pretty much 100% of revenue that ran through channel. Today, it’s probably on the order of 64% runs through the channel. We are starting to launch on a direct basis, larger opportunities. We would like to strike a healthy balance, but we have reoriented the entire sales team into a channel management sales team as well as a business development team that exclusively targets what we would affectionately refer to as big game hunting. And it’s working out. We are actually looking at ways that we can engage with customers on customized development opportunities become a technology partner extension to their business. And if we look at it, I think the value proposition is the complexity and the skill set necessary to have in-house to unlock the potential of today’s semiconductor ICs is just pretty vast. And most customers don’t have the full talent in order to be able to do that, so they have to parse that out. That’s been an opportunity for us and we need to make sure that we are leveraging our value proposition for return. We still have to make some gains, I think on a go-to-market standpoint in terms of being able to bring more standardized IP R&D reuse, it would allow us to build a bit more of a scalable business model instead of something that’s so customized. But that is the nature of IoT today. Every engagement requires some customization. And we just – we are looking to try to take platforms. We have already developed leverage at least 85% reuse and do a little bit of customization on the top. And that’s the sweet spot that we have been able to exploit. It’s a good question. Thank you. Alright. You’re welcome. A quick follow-up to this also in the relationship with Qualcomm there, how is that evolving, any changes in that regard? Well, it continues to get better. We really see this as a key partner. Qualcomm is a key partner, just like some of our other chipsets, Qualcomm, in particular, is has seen value in what we do. We are able to enable applications where they don’t really quite have the ability to go address a diversified market. And like I said, IoT is pretty young. I think they recognized IoT as their future, but at the same time, it’s pretty fragmented. So, they require partnerships like what we have. And that one just – I believe that it’s going to continue to be important to us. I think we are going to be a bit more ingrained and alongside what their market targets are. We will start to share strategic plans and start to go off and get those – catch those opportunities together. So, expect us to be able to continue to build on that. I might have some news on that on exactly what that engagement looks like over the next couple of quarters. Hey. Great. Thanks for taking my question. Paul, as we think about the business, ex large contracts. What do you think the core business growth rate should be over the next 2 years to 3 years? It’s a great question. So – and I will draw a little bit of contrast. As we kind of talked about before, FY ‘22, it grew far more than what it really should have. And we expected it to moderate shortly after the fiscal year was done, and it has. So, normally, that business, we get a mid maybe high-single digits growth out of it, the markets that it kind of targets, those well-established industrial markets, probably mid-single digit growth CAGR and so that’s really what the business should do. We do have some older product lines that are marching down in its useful product life cycle. But we have got a few of them in sustained mode. We have got a few of them where we are not investing anymore and redirecting funds into higher growth opportunities like the compute business, like REM and like software to be frank. This concludes our question-and-answer session. I will now turn the conference back over to Mr. Paul Pickle for any closing remarks. Alright. Well, thank you for joining us today. I hope you have a great evening and a great week. Thank you.